Option Investor
Play Updates

Intraday range and stops

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Play Editor's Note: It would be easy to think that stop losses are pretty much worthless when the DJIA has a 900-point intraday range. That would be especially true today since many stocks were so volatile that they hit both our downside stop on our bullish plays and upside stops on our bearish plays. No one can predict a 900-point rally in the last three-hours of trading, especially after a breakdown to new lows in the S&P 500.

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.


CALL Play Updates

None


PUT Play Updates

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.

Picked on November 11 at $ 72.05
Change since picked:      + 0.10
Earnings Date           00/00/00
Average Daily Volume =      19.3 million  


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:
http://www.cboe.com/Products/indexopts/vixoptions_spec.aspx

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.

Picked on September 16 at = 30.30 first position
Change since picked:       +29.53
Picked again Sept. 29 at =  46.72 second position
Changed since picked:      +13.11
Picked again Octo. 08 at =  57.53 third position
Changed since picked:      + 2.30
Earnings Date            00/00/00
Average Daily Volume =        --- million  


Strangle & Spread Play Updates

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?
A strangle involves buying both an out-of-the-money call and an out-of-the-money put. We don't care what direction the stock goes as long as it moves one direction. If the stock moves far enough one side of our trade will rise in value and pay for the entire trade and make a profit.

-November Strangle-

Summary:
We suggested readers buy the November $75 call (GVD-KW) and the November $70 puts (GVD-WR). Our estimated cost was $3.10. We want to sell if either option hits $5.25. There are only two weeks left before November options expire.

-December Strangle-

Summary:
We suggested readers buy the December $75 call (GVD-LW) and the December $70 puts (GVD-XR). Our estimated cost was $6.30. We want to sell if either option hits $12.00.

Picked on November 09 at $ 72.50
Change since picked:      - 0.35
Earnings Date           00/00/00
Average Daily Volume =      19.3 million  


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-
We suggested readers buy the December $30.00 call (SOJ-LD) and the December $20.00 put (SOJ-XT). Our estimated cost is $3.75. We want to sell if either option hits $6.00.

Picked on November 12 at $ 24.84
Change since picked:      + 3.26
Earnings Date           00/00/00
Average Daily Volume =           million  


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:
http://www.cboe.com/Products/indexopts/vixoptions_spec.aspx

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.

Position Summary:

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:

SELL CALL NOV 30.00 VIX-KF.
Monday 10/13/08 open 8.60, high 9.80, closed 8.40
Update 10/15/08 open 10.00, high 13.00, closed 13.00 
Update 10/16/08 open 13.70, high 16.20, closed 13.25
Update 10/17/08 open 15.55, high 17.70, closed 17.50bid
Update 10/20/08 open 16.30, high 17.20, closed 15.00bid
Update 10/21/08 open -----, high 15.50, closed 14.40bid
Update 10/22/08 open 16.40, high 19.20, closed 18.10bid
Update 10/23/08 open 17.50, high 21.40, closed 20.30bid
Update 10/24/08 open 25.00, high 26.50, closed 25.80bid
Update 10/27/08 open 26.32, high 26.45, closed 29.30bid<-high
Update 10/28/08 open 29.00, high 29.00, closed 23.70bid
Update 10/29/08 open 25.60, high 25.60, closed 26.20bid
Update 10/30/08 open 24.06, high 27.32, closed 25.20bid
Update 10/31/08 open 25.20, high 25.20, closed 24.30bid
Update 11/03/08 open 24.50, high 24.50, closed 21.50bid
Update 11/04/08 open 19.00, high 19.00, closed 16.80bid
Update 11/05/08 open 17.56, high 20.60, closed 20.20bid
Update 11/06/08 open 26.90, high 28.00, closed 27.50bid
Update 11/07/08 open 26.30, high 27.00, closed 24.70bid
Update 11/10/08 open 23.30, high 27.00, closed 25.70bid
Update 11/11/08 open 29.27, high 29.27, closed 28.20bid
Update 11/12/08 open 31.00, high 33.60, closed 33.30bid <- new high
Update 11/13/08 open 33.10, high 37.10, closed 26.60bid

-and-

BUY CALL NOV 50.00 VIX-KJ.
Monday 10/13/08 open 1.61, high 2.10, closed 1.50
Update 10/15/08 open 2.00, high 3.60, closed 3.60 
Update 10/16/08 open 3.70, high 5.50, closed 3.65
Update 10/17/08 open 4.50, high 5.30, closed 5.50ask
Update 10/20/08 open 3.90, high 5.30, closed 4.40ask
Update 10/21/08 open ----, high 4.70, closed 3.80ask
Update 10/22/08 open 4.30, high 6.60, closed 6.40ask
Update 10/23/08 open 5.70, high 7.70, closed 7.30ask
Update 10/24/08 open 10.10, high 11.00, closed 11.00ask
Update 10/27/08 open 11.43, high 13.80, closed 14.20ask<-high/suggested sell
Update 10/28/08 open 11.00, high 13.30, closed  9.40ask
Update 10/29/08 open  9.23, high 10.70, closed 11.00ask
Update 10/30/08 open  8.69, high 10.90, closed 10.00ask
Update 10/31/08 open 10.30, high 10.30, closed  9.00ask
Update 11/03/08 open  8.34, high 8.34, closed 7.00ask
Update 11/04/08 open  3.50, high 3.70, closed 4.00ask
Update 11/05/08 open  4.20, high 5.90, closed 5.60ask
Update 11/06/08 open  6.00, high 12.00, closed 11.20ask
Update 11/07/08 open  9.80, high 9.80, closed 8.00ask
Update 11/10/08 open 6.00, high 9.25, closed 8.50ask
Update 11/11/08 open 10.60, high 12.10, closed 9.90ask
Update 11/12/08 open 10.95, high 14.50, closed 14.70 <-new high
Update 11/13/08 open 13.40, high 17.20, closed 8.30ask

Picked on October 12 at $ 69.95
Change since picked:     -10.12  
 

-

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:

SELL CALL NOV 35.00 VIX-KI
Wednesday 10/22/08 closed at 14.00 bid
Update 10/23/08 open 14.00, high 17.00, closed 15.30bid
Update 10/24/08 open 19.40, high 21.50, closed 20.60bid
Update 10/27/08 open 23.00, high 23.00, closed 23.90bid <-high
Update 10/28/08 open 22.93, high 24.70, closed 18.60bid
Update 10/29/08 open 19.59, high 21.13, closed 20.90bid
Update 10/30/08 open 18.50, high 22.00, closed 20.30bid
Update 10/31/08 open 21.10, high 21.10, closed 19.20bid
Update 11/03/08 open 19.31, high 19.31, closed 19.10bid
Update 11/04/08 open 14.80, high 14.80, closed 11.80bid
Update 11/05/08 open 13.05, high 14.40, closed 15.30bid
Update 11/06/08 open 17.60, high 23.90, closed 22.00bid
Update 11/07/08 open 21.40, high 21.40, closed 19.30bid
Update 11/10/08 open 17.30, high 21.74, closed 20.30bid
Update 11/11/08 open 23.90, high 25.00, closed 22.60bid
Update 11/12/08 open 25.25, high 27.48, closed 28.20bid <-new high
Update 11/13/08 open 28.05, high 28.05, closed 21.30bid
-and-

BUY CALL NOV 60.00 VIX-KN
Wednesday 10/22/08 closed at 3.70 ask
Update 10/23/08 open 3.00, high 4.50, closed 4.10ask
Update 10/24/08 open 7.00, high 7.00, closed 6.90ask
Update 10/27/08 open 6.91, high 8.80, closed 9.00ask <-high/suggested sell
Update 10/28/08 open 7.60, high 8.60, closed 5.50ask
Update 10/29/08 open 5.40, high 6.30, closed 6.50ask
Update 10/30/08 open 4.90, high 6.20, closed 5.80ask
Update 10/31/08 open 5.90, high 6.10, closed 4.90ask
Update 11/03/08 open 4.60, high 4.81, closed 3.50ask
Update 11/04/08 open 1.15, high 1.60, closed 1.75ask
Update 11/05/08 open 1.66, high 2.70, closed 2.45ask
Update 11/06/08 open 2.80, high 6.90, closed 6.30ask
Update 11/07/08 open 5.70, high 5.70, closed 3.30ask
Update 11/10/08 open 2.80, high 4.20, closed 3.70ask
Update 11/11/08 open 4.40, high 5.50, closed 4.00ask
Update 11/12/08 open 5.20, high 6.60, closed 6.90ask
Update 11/13/08 open 5.00, high 8.40, closed 2.70ask

Picked on October 12 at $ 69.65
Change since picked:     -10.85 
VIX spread #4 with November options (published 11/08/08):

Update
Ouch! It was an amazing volatile day for these VIX options. The intraday changes in these options were in the 50% to 70% ranges. Our gain/loss on the play could vary significantly depending on when you covered.

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.
A total loss of $1.90.

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:

SELL CALL NOV 50.00 VIX-KJ
Update 11/10/08 open  6.00, high  9.25, closed 7.90bid
Update 11/11/08 open 10.60, high 12.10, closed 9.50bid
Update 11/12/08 open 10.95, high 14.50, closed 14.20bid
Update 11/13/08 open 13.40, high 17.20, closed 7.60bid
-and-

BUY CALL NOV 65.00 VIX-KO
Update 11/10/08 open 1.75, high 2.65, closed 2.35ask
Update 11/11/08 open 2.65, high 3.50, closed 2.50ask
Update 11/12/08 open 2.91, high 4.40, closed 4.40ask
Update 11/13/08 open 2.95, high 5.50, closed 1.40ask

Picked on November 08 at $ 56.10
Change since picked:      + 5.34


CLOSED BULLISH PLAYS

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.

Chart:
APOL

Picked on November 10 at $ 70.55 /stopped 66.45
Change since picked:      + 0.01
Earnings Date           10/28/08 (confirmed)
Average Daily Volume =       4.0 million  


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.

Chart:
FDX

Picked on November 09 at $ 64.58 /stopped 61.95
Change since picked:      + 2.56
Earnings Date           12/18/08 (unconfirmed)
Average Daily Volume =       4.0 million  


CLOSED BEARISH PLAYS

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.

Chart:
GILD

Picked on November 12 at $ 43.57 *gap down entry point/stopped 46.05
Change since picked:      + 3.73
Earnings Date           01/22/09 (unconfirmed)
Average Daily Volume =      13.1 million  


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.

Chart:
JOYG

Picked on November 12 at $ 24.75 */exiting early 
Change since picked:      + 1.79
Earnings Date           12/17/08 (unconfirmed)
Average Daily Volume =       4.1 million  


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.

Chart:
MICC

Picked on November 11 at $ 36.80 /early exit
Change since picked:      - 2.01
Earnings Date           02/12/09 (unconfirmed)
Average Daily Volume =       1.5 million  


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