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Play Updates

Need to be Nimble

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Play Editor's Note: This remains one of the most volatile markets in U.S. history. The Dow Jones Industrial Average delivered not one but three different 300-point moves on Friday. The last half of the day saw two 400-point moves. The lack of follow through on Thursday's bounce is bearish and as a trading newsletter we need to adapt to market conditions quickly. We're dropping our new call plays from Thursday night and adding new put plays.


PUT Play Updates

Volatility Index - VIX - cls: 66.31 chg: + 6.48 stop: n/a

The VIX put together back to back 10% moves on Thursday and Friday. Unfortunately, Friday's was a 10% gain and that's bad news for our bearish play. We only have two days left before November VIX options expire and it would appear that these speculative positions will end as a loss.

If you bought puts then your loss is limited to the amount paid. If you sold calls then your loss potential is technically unlimited. Once again I am suggesting that traders cover any short call positions since it looks like the VIX is poised to move higher.

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.

Annotated Chart:
VIX

Picked on September 16 at = 30.30 first position
Change since picked:       +36.01
Picked again Sept. 29 at =  46.72 second position
Changed since picked:      +19.59
Picked again Octo. 08 at =  57.53 third position
Changed since picked:      + 8.78
Earnings Date            00/00/00
Average Daily Volume =        --- million  


Strangle & Spread Play Updates

SPDR GOLD Trust - GLD - close: 73.30 change: +1.15 stop: n/a

Rumors that China might be or planning to buy gold to diversify their reserves sent gold prices rising on Friday. I'm not convinced that the GLD has turned bullish since Friday's rally couldn't get past its trendline of lower highs.

Remember that we don't care what direction the GLD moves as long as it picks a direction and goes. We're not suggesting new 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 one week. 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.

Annotated Chart:
GLD

Picked on November 09 at $ 72.50
Change since picked:      + 0.80
Earnings Date           00/00/00
Average Daily Volume =      19.3 million  


Ultra S&P500 ProShares - SSO - close: 25.43 change: -2.67 stop: n/a

It looks like Thursday's bullish reversal in the S&P 500 is failing. The market is poised to retest its October lows yet again and this time they may not hold.

If you want to open new positions anywhere in the $25.50-24.50 zone is a good entry point.

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.

Annotated Chart:
SSO

Picked on November 12 at $ 24.84
Change since picked:      + 0.59
Earnings Date           00/00/00
Average Daily Volume =           million  


CLOSED BULLISH PLAYS

Apple Inc. - AAPL - close: 90.24 change: -6.20 stop: 89.90

There was absolutely no follow through on AAPL's rally from Thursday. Friday was so bearish that AAPL actually gapped open lower at $93.76 (our first opportunity to buy calls) and eventually closed with a 6.4% loss, which almost completely erased Thursday's gains.

We have to be nimble in this market and Friday is telling us that stocks may have farther to fall and that Thursday was a one-day fluke. We're suggesting readers exit any bullish positions immediately. If AAPL breaks down under $85 it will be time to open bearish positions.

Chart:
AAPL

Picked on November 13 at $ 93.76 /gap down entry/originally 96.44
Change since picked:      - 2.44
Earnings Date           01/22/09 (unconfirmed)
Average Daily Volume =        53 million  


Freeport McMoran - FCX - close: 24.34 change: -1.67 stop: 22.90

FCX also gave us a gap down entry. Shares opened at $25.37 and eventually settled with a 6.4% loss. The stock rallied twice intraday over the $26.00 level and failed both times. We are suggesting an early exit to cut our losses since the market is clearly telling us that FCX has further downside here.

Chart:
FCX

Picked on November 13 at $ 25.37 /early exit/gap down entry
Change since picked:      - 1.03 /originally listed at $26.01
Earnings Date           01/22/09 (unconfirmed)
Average Daily Volume =      23.7 million  


CLOSED BEARISH PLAYS

SPDR Gold ETF - GLD - close: 73.30 change: +1.15 stop: 73.25

We tightened our stop loss to $73.25 on Thursday night to reduce our risk in GLD in case the ETF kept rising. Without fail the GLD did post a gain. It actually gapped open higher at $73.39 and hit $74.26 before paring its gains. Our stop loss was at $73.25 so the play was over at the open. Unfortunately, Friday's spike might be a head fake. There were some rumors on Friday morning that China might be buying (or planning to buy) gold in an effort to diversify its currency reserves.

If GLD trades back under $72.00 or $71.50 it might be an entry point to buy puts again. Keep an eye on the U.S. dollar (watch the UUP) since GLD will do the opposite most of the time.

Chart:
GLD

Picked on November 11 at $ 72.05 /stopped out 73.39 gap open exit
Change since picked:      + 1.25
Earnings Date           00/00/00
Average Daily Volume =      19.3 million  


CLOSED STRANGLE & SPREAD PLAYS

CBOE Volatility Index - VIX - cls: 66.31 chg: + 6.48 stop: n/a

We have two days left before November VIX options expire. The Volatility index has reversed higher again after Thursday's failed rally and looks poised to climb even higher. At this point, if you have not exited already, traders need to exit.

Why exit now? Honestly, the VIX could be 10 points higher or 10 points lower (or more) by the end of business on Tuesday. That would make a HUGE difference on our Profit or Loss for these positions. It would be tempting to call it a coin toss on what direction it will go but the trend has reversed higher again so momentum is against us. If you're still short the November 30 or 35 calls would you want to exit now or ten points higher?

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
Update 11/14/08 open 28.43, high 32.70, closed 32.40bid

-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
Update 11/14/08 open 8.77, high 11.60, closed 13.60ask

Picked on October 12 at $ 69.95
Change since picked:     - 3.64  
 

-

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
Update 11/14/08 open 26.10, high 27.00, closed 27.10bid
-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
Update 11/14/08 open 3.30, high 5.00, closed 5.30ask

Annotated Chart:
VIX

Picked on October 12 at $ 69.65
Change since picked:     - 4.37 
VIX spread #4 with November options (published 11/08/08):

This play (VIX Strangle #4) was closed on Thursday 11/13/08.


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