Editors Note:

If you bought the first flash crash in 2015 and sold a week later you were a winner. In May 2010 the first flash crash erased -1,000 points off the Dow and then rebounded sharply over the next five days. We just had the second flash crash with a -1,600 point intraday dip on the Dow.

There is no guarantee the market will explode higher on Tuesday and actually we could move lower once again at the open. There is no guarantee that it will even rebound this week but more than 80% of the time, whenever there is a very big volatility event, the market does rebound sharply in the days that follow.

The Dow is now -2,271 points below its record high on January 26th. That is an 8.5% decline. Historically, when the indexes hit the 10% level there is a strong rebound on the idea that the "correction" is over.

Buying good companies on a market dip is normally a sound strategy. There is always risk that the dip could continue lower. Buying companies with good relative strength tends to reduce losses if the markets continue to decline. I am recommending some high risk positions today.



NEW DIRECTIONAL CALL PLAYS

These are not going to be a regular play setups. I am going to recommend quite a few in a short form and I will add in all the boring details after the smoke clears tonight. It was very tough trying to find something to buy. It was not because great stocks were not down significantly but the option prices were obscene.

As an example, a stock at $150 could be showing an April $160 call for $10 with a $4 bid. Market makers and investors do not know what is going to happen so they are offering to buy and sell options at what they believe is a ridiculous number just in case somebody decides to trade in those options.

I looked at option montages on more than 100 stocks and the stocks listed below are the only ones I could find that were anywhere close to reasonable.

I wanted to sell a call spread on the VIX but the premiums were impossible. The first graphic is the call premiums for the VIX for March. The bid ask spreads were ridiculous. So I looked at buying puts. The second graphic is the put premiums starting at the $27 strike and they were worse than the calls.

Strike, bid, ask

$27 strike on top.
Strike, bid, ask

I looked at buying some calls on the QQQ and those premiums were also crazy. This is the March call montage with the QQQ at $158. It might be worth buying the $162 call at $5.19 but not with the bid at $2.25. If you wanted to use a stop loss you would lose 60% of the premium on the stop.

Strike, bid, ask

I elected to just use equities. Even the premiums on the SPY were crazy. Everyone knows all these stocks so I am not going to give a big description of the underlying. I am betting the 8.5% decline in the market is going to reverse over the next couple days. We could dip again on Tuesday with the futures up +15 at the beginning of the afterhours session but down -20 as I type this. There could be a big move at the open and a retest of the Monday lows. Anything is possible.

The Hong Kong Hang Seng Index opened -3.2% lower as the sell off spread across the ocean.

There will not be stop losses on these positions so be aware we are flying naked until the volatility evaporates.

I tried to cover multiple sector and mostly Dow stocks. I would expect the Dow to rebound the strongest and drag all the components along for the ride. It may not be on Tuesday but then it could happen at any time.

Don't play all of these recommendations. These are high-risk entries with high premiums. Just pick a couple and take a ride on the wild side.


CAT - Caterpillar - Company Profile

CAT declined to the 100-day average and bounced significantly. They had good relative strength on Friday and I would expect them to rebound significantly as soon as the market turns positive.

Buy APR $160 Call, currently $5.40, no initial stop loss.


FB - Facebook - Company Profile

Facebook fell -$9 or -$14 from the record high last week. This is an earnings juggernaut and unlike most other stocks it has not even reached its near term support yet.

Buy Mar $190 Call, currently $5.00, no initial stop loss.


WMT - Walmart - Company Profile

Walmart declined to rest on the support of the 50-day average at $100. Until today the stock was showing great relative strength.

Buy Apr $105 Call, currently $2.99, no initial stop loss.


INTC - Intel - Company Profile

Intel soared to a new high after earnings but has retraced -10% in the weak market. Their outlook is good and support at $43 should hold on any further market weakness.

Buy Apr $47 Call, currently $1.60, no initial stop loss.


HD - Home Depot - Company Profile

This Dow stock has been rock solid up until last week. Home Depot and Boeing have the most buy recommendations of any other Dow stock. Support at $181 should hold.

Buy Apr $190 Call, currently $6.35, no initial stop loss.


MCD - McDonalds - Company Profile

McDonalds rebounded $10 from the intraday lows. Their business is strong and they are the leader in their sector. Recent guidance was very positive.

Buy Apr $170 Call, currently $4.30, no initial stop loss.


MRK - Merck - Company Profile

McDonalds rebounded $10 from the intraday lows. Their business is strong and they are the leader in their sector. Recent guidance was very positive.

Buy Apr $60 Call, currently $1.05, no initial stop loss.


MSFT - Microsoft - Company Profile

Microsoft has declined nearly 10% from its strong earnings and the stock normally respects the support of the 50-day average. Microsoft will sell significantly more windows software as users upgrade to get away from the Meltdown and Specter hacks in the older processors. Expect a surge in software sales for Q1.

Buy Apr $90 Call, currently $3.40, no initial stop loss.


V - Visa - Company Profile

Visa did not get a big bump from earnings but the business is still booming and the global economic expansion is increasing card purchases overseas. The stock fell back to rest on the 50-day average with additional support at $112.

Buy Mar $120 Call, currently $2.75, no initial stop loss.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays