We could have just as easily broken support and kept falling to a 900-point loss. People were expecting the worst when the S&P 500 was trading at new five-year lows around 820 today. That's why we have to play with stops in case the market moves against us. If we knew what stocks were going to do beforehand there wouldn't be any risk or need for stop losses.
Trading after this sort of rally can be even more challenging. If you're opening new positions today, where do you put your stop loss?
Unfortunately, it is becoming somewhat cliche that the sharpest rallies happen in bear markets. We remain in a bear market. Today was fueled by plenty of short covering and once the rally was under way it got stronger on fears that investors might "miss the move". Can the market move higher from here? Absolutely! Will it breakout of its trading range? We'll have to wait and see.
SPDR Gold ETF - GLD - close: 72.15 change: +2.15 stop: 73.25*new*
We have to make a decision on our gold put play. The U.S. dollar reversed lower into what looks like a potential bearish double top. In perfect unison the GLD has reversed higher into what looks like a possible bullish double bottom.
Is this a one-day fluke? Or is this the beginning of a trend change so quickly following the recent bearish breakdown in GLD's consolidation?
We can't tell today. Obviously we all have our own bias. More conservative traders will want to seriously consider exiting this put play immediately to limit or avoid any losses. We are not suggesting new put positions. We'll try to limit our risk by adjusting the stop loss to $73.25. If the GLD breaks out past the $75.00 level I might be tempted to go long.
Volatility Index - VIX - cls: 59.83 chg: - 6.63 stop: n/a
The Volatility index has produced a bearish reversal as the stock market delivers a bullish reversal. This is good news if the two can build on their new trajectories.
We do not see any changes from our previous comments. We are not suggesting new positions in the VIX at this time.
Note: The VIX options, which are European style options, have a unique expiration date. November VIX options expire on November 19th, 2008. The last day of trading for these options is the Tuesday before expiration. For more information check this link:
The highest spike in the VIX in history has ruined our chances for success with these put positions. Now after a sharp correction the VIX is climbing again. Our September 16th put position (suggested entry at 30.30) has a 25.50 target. In all honesty this position is dead. The September 29th position (suggested entry at 46.72) is also dead and had two targets at 36.00 and 31.00. Our October 8th position (entry 57.53) has two targets at 40.00 and 35.00. Right now we'd be happy with breakeven on the Oct. 8th position.
SPDR GOLD Trust - GLD - close: 72.15 change: +2.15 stop: n/a
We do not care what direction the GLD moves as long as it picks a direction and runs. At the moment we have six trading days left for November options. It looks like the GLD may have produced a bullish double-bottom pattern following a bearish double-top in the U.S. dollar. We need to see some follow through and a rally past $75.00.
We are not suggesting new strangle positions at this time.
We listed two strangles to take advantage of what appeared to be an imminent breakout, up or down, in gold prices.
The first strangle uses November options, which expire in two weeks. Thus it's much more risky. The second strangle uses December options.
What is a strangle?
Ultra S&P500 ProShares - SSO - close: 28.10 change: +3.26 stop: n/a
The SSO opened at $25.09 providing a great entry point for us to open strangle positions. After the open it was all over the place with a low of $22.72 and a high of $28.19. Given the bounce near its October lows this might be the beginning of a multi-day rally.
We're not suggesting new strangle positions at this time.
Note: The SSO is an ultra-long ETF that typically moves twice the daily performance of the S&P 500 index.
What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.
-December Strangle Details-
CBOE Volatility Index - VIX - cls: 59.83 chg: - 6.63 stop: n/a
Thankfully the VIX has produced a bearish reversal as stocks soared higher on Thursday. If stocks can continue to climb then the VIX could see another serious contraction. We only have three trading days left for November VIX options.
Please see the CBOE website for details on margin requirements for selling VIX options. Link:
Note: VIX options are European style options that settle for cash at expiration. Furthermore VIX options have unique expiration dates. November options expire on Wednesday, November 19, 2008 and will stop trading on Tuesday, November 18th.
VIX spread #2 with November options (date Oct. 12th):
We wanted to SELL the November 30 calls (opening price 10/13/08 was $ 8.60) and BUY the November 50 (opening price was $1.61) as a hedge against the VIX remaining elevated.
Hypothetically we have sold the November 30 calls at $8.60 (credit). We bought the Nov. 50 calls for $1.61 (debit). Based on these numbers we would need the VIX to close under 37.00 for us to be profitable. If it closes higher than 37.00 then the intrinsic value of the Nov. 30 calls will be higher than what we paid for it and we'll have to come up with the difference. Example: if the VIX is at 40.00 another $1.40 will be taken out of our accounts when the VIX options are settled because the Nov. 30 call will be worth $10.00.
Now, if you sold the higher-strike call (Nov.50) when we discussed it a couple of weeks ago you could have gotten $9.00-11.00 for it. Let's say you got $10.00 for it. Now our "credit" to our account is $8.60 for the Nov. 30 calls and $8.39 ($10.00 for selling Nov. 50 call minus the $1.61 we paid for it) for a total income of $16.99. This gives us a much wider margin for error. With this scenario, the VIX would have to close over 47.00 before we lost any money.
Alternatively if you sold the Nov. 50 call around $5.00 then our breakeven point is a VIX settling at 42.00.
In a different format the play is:
VIX spread #3 with November options (published 10/22/08):
We wanted to SELL the November 35 calls (10/23/08 opening price was $ 14.00) and BUY the November 60 (10/23/08 opening price was $3.00) as a hedge against the VIX remaining elevated. We'll fill in the prices Thursday morning. Our account will be credited with the amount for selling the November 35 calls, while it the price paid for the 60 calls will be deducted.
Hypothetically we have sold the November 35 calls at $14.00 (credit). We bought the Nov. 60 calls for $3.00 (debit). Based on these numbers we would need the VIX to close under 46.00 for us to be profitable. If it closes higher than 46.00 then the intrinsic value of the Nov. 35 calls will be higher than what we paid for it and we'll have to come up with the difference. Example: if the VIX is at 50.00 at settlement another $6.00 because the Nov. 35 call will be worth $20.00.
Now, if you sold the higher-strike call (Nov.60) when we discussed it a couple of weeks ago you could have gotten $5.50-6.50 for it. Let's say you got $6.00 for it. Now our "credit" to our account is $14.00 for the Nov. 35 calls and $3.00 ($6.00 for selling the Nov. 60 call minus the $3.00 we paid for it) for a total income of $17.00. This gives us a much wider margin for error. With this scenario, the VIX would have to close over 52.00 before we lost any money.
Alternatively if you sold the Nov. 50 call around $3.00 then our breakeven point is a VIX settling at 49.00.
In a different format the play is:
Last night, after the VIX broke out higher, we suggested readers cover the short November 50 call. This call opened at $13.40.
The next step was to decide on either selling the Nov. 65 call or letting it ride. This option was $2.95 at the open. If you sold it the play ended like this:
Sold Nov.50 call (13.40 - 6.00) = $7.40 - Bought Nov.65 call (2.95 - 1.75)= $1.20 = $6.20 increase in short call value.
If you did that same move at today's close it would look like this:
Sold Nov.50 call ( 7.60 - 6.00) = $1.60 - Bought Nov.65 call (1.40 - 1.75)= +0.30 = $1.60 increase in short call value + 30-cent loss on long call.
This play (VIX Strangle #4) is now closed. I'll leave the previous comments up for reference:
We wanted to SELL the November 50 calls (11/10/08 opening price was $ 6.00) and BUY the November 65 (11/10/08 opening price was $1.75) as a hedge against the VIX remaining elevated. Our account will be credited with the amount for selling the November 50 calls, while the price paid for the 60 calls will be deducted.
In a different format the play is:
Apollo Group Inc. - APOL - close: 70.56 change: +2.51 stop: 66.45
We warned readers yesterday that if the S&P 500 sank to new relative lows that APOL would also be targeted for selling. Shares of APOL hit $64.59 intraday before the market's 10% bounce from its lows sent APOL back above $70.00. APOL hit our stop loss at $66.45 closing the play although readers may want to reconsider new bullish positions on a move over $71.40.
FedEx Corp. - FDX - close: 67.14 change: +4.04 stop: 61.95
FDX completely erased yesterday's losses with a 6.4% gain but not before plunging to $60.63 intraday. The stock hit our stop loss at $61.95 closing the play.
Yesterday we discussed some different alternatives. One of the more aggressive ones was to widen your stop loss under $60.00. If you did you're looking pretty good here but I'd tighten that stop now.
The move in FDX over the last couple of weeks almost looks like a bullish flag pattern. Readers may want to reconsider new bullish positions on a rally over $68.00 or its November peak.
Gilead Sciences - GILD - close: 47.30 change: +2.85 stop: 46.05
GILD proved to be resilient today. During the market's intraday swoon shares of GILD only dipped to $44.00. When the market's short-covering rally ended GILD was up 6.4% and nearing resistance at $48.00 and its exponential 200-dma. We did not get the best entry point with yesterday's gap down entry and now the stock hit our stop loss at $46.05.
Joy Global Inc. - JOYG - close: 26.54 change: +2.99 stop: 27.31
The technical signals are mixed on JOYG following a 17% rally from its intraday low today. This reversal back above what should have been resistance at $25.00 is a good reason to abandon ship. We're suggesting readers cut their losses here.
Millicom Intl. - MICC - close: 34.79 change: +0.73 stop: 40.25
We are suggesting an early exit on MICC as well. The stock under performed the broader market. MICC only added 2.1% versus a 6.9% rally in the S&P 500 index. I think the overall trend will remain lower but we would rather exit now and wait for a new entry point than see this play turn into a loss.
Watch for a failed rally near $40.00 as a possible entry point for new bearish plays.