TradeKing Midday Market Call Recap: SPX, VIX, COMP, CAT, LVLT
Published June 06, 2012
Recap for Tuesday, June 5 by Kevin Corrigan
Did you miss Tuesday’s TradeKing Midday Market Call? Here’s a quick recap. Don’t miss another session, register here
today!Analysis from QuickTakesPro founder and Barron’s columnist Michael Kahn, CMT:
S&P 500 (SPX
) – at the time of this broadcast, SPX was near 1278, flat from Monday. We’ve been discussing the “Head and Shoulders” pattern for some time now. The height of this pattern, taken from its peak to the neckline, when dropped down from the highest point of the pattern’s neckline, matches the level of the former peak from mid-October. If we drop that same height again from the October high, it gives us a possible downward target for the SPX from 1210 to 1230.
SPX is below its 200-day moving average of 1285.65, with it acting as a type of speed bump to the downside for the index. It could pop to 1300 short term, but overall, looking like a downtrend.
Nasdaq Composite (COMP / I:COMP) - Very similar to the SPX. Nasdaq seems to be sitting on its 200-day moving average of around 2763. This is also around its level of support from the October peak. The previous level of support (hit 5 times between March 2011 and December 2011) before the rally started in 2012 is about 2600. We could be looking at that level as a downward target going forward.Discussion from TradeKing Senior Options Analyst Brian Overby:
– at the time of this broadcast, VIX was 25.27 down about 1 point on the day.
VIX has been trading in a range between the 100 day and 200 day moving averages, between about 18.75 and 25 respectively. It spiked up through the 200 day level. Once that happened, the VIX futures markets retracted. June, July and August were trading as high as 28, 29 and 30 but dropped to 26.05, 27.65 and 28.25 respectively. From the looks of things, the market expects it to remain around 25 volatility going forward, with all the uncertainty in the Eurozone.Quick Takes Pro “Chart of the Day” - Caterpillar - symbol (CAT)
CAT - At the time of this broadcast, CAT was 83.56 up .30 from yesterday. CAT is a chart I look at often since it is considered by many to be a bell-whether for the economy. Big downtrend in CAT since March. The price of 83.56 is way below the 200 day moving average of 96.64. So it’s possible to think the 200-day MA can act like a leash, and the stock can snap back up, reverting to the mean in some way. It is a bit extended to the downside. The RSI index is indicating that “the bears are getting tired”. It is not out of the long term downtrend, but we could see a short term rally on any kind of positive surprise in the market (i.e., federal reserve easing or some good news out of Europe). If it has this short term rally, we could be looking at a level between 86.42 and 90, maybe 92.26. Again, I am not saying CAT will return to its highs any time soon. The overall trend is still on the downside. Technical tools used:
- Moving averages
- Support / resistance
- Fibonacci retracementOptions Guy’s potential options trade based on “Chart of the Day” – CAT Long Call Spread (AKA Bull Call Spread)
CAT –You can see from the volatility chart there is some nervousness as a result of CAT’s big downtrend. There is a significant difference of 10 percentage points between the 30-day historical volatility of 30% and the implied volatility mean of 40%. This is a significant difference for CAT. With that uncertainty in the market, and the elevated level of implied volatility around 40%, we are looking at a slightly in-the-money Long Call Spread (AKA Bull Call Spread) to go along with Michael’s short term view that CAT is headed higher. This is a more appropriate strategy than other bullish plays like a Short Put Spread (AKA Bull Put Spread) or just a Long Call. Also, time decay will be accelerating as we are less than 2 weeks from expiration. This would be particularly harmful to a long call strategy. CAT Long Call Spread (AKA Bull Call Spread):
- Buy 1 CAT Jun 82.50 Call
- Sell 1 CAT Jun 87.50 Call
- Long call spread market was Bid 2.14, Mid 2.16, Ask 2.18
- At the time CAT was 83.63
- 11 days till expiration
- Max potential loss is $2.16 debit (mid price) if CAT is at or below 82.50 at June expiration.
- Max potential gain is $2.84 if CAT is at or above 87.50 (calculated by the $5 difference between the strikes, less the net debit paid of $2.16)
- Multi-leg commission to enter is $6.25CAT - Earnings-based trade: Diagonal Spread with Calls:
Consider this trade if CAT moves up in the near term, ahead of the earnings release on July 25.
- Sell 1 CAT July 85 Call
- Buy 1 CAT Aug 87.50 Call
- Diagonal call spread market was Bid .05 credit, Mid .07 debit, Ask .20 debit.
- The goal is for the July 85 call to expire worthless.
- If the July 85 Call expires worthless, it significantly reduces the cost of owning the Aug 87.50 Call.
- This trade will have a margin requirement of $2.50 because the call you are short has a lower strike price than the call you are long, determined by the difference between the strike prices.
- Max potential loss is $2.57 (debit of mid price plus margin requirement of 2.50)
- Max potential gain if spread is exited on July expiration is approximately $2.50 using TradeKing’s P&L Calculator
- Max potential gain after July expiration with remaining long August call exited by August expiration is unlimited (though unlikely)
- Multi-leg commission to enter is $6.25TradeKing Options Tools used:
- Detailed Quote / Earnings Calendar
- Moving Averages
- TradeKing Long Call Spread
- Diagonal Spread with Calls
- TradeKing Volatility Charts
- TradeKing Options ChainsUnusual Option Activity in Level 3 Communications Inc. (LVLT) on 6/4
-Level 3 Communications, Inc. engages in the communications business in North America and Europe. It offers network and Internet services, including transport services, high speed Internet protocol services, dedicated Internet access, virtual private network services, and dark fiber services, as well as managed modem, an outsourced, turnkey infrastructure solution; and colocation services.
At the time of this broadcast, LVLT was at 19.78 unchanged from yesterday. The unusual activity was 7,000 July 19 Puts traded on the ask yesterday at $1.40. The stock is up so the puts are cheaper today. CBOE TV confirmed that the buyer was opening or increasing the put position.
Get solid market analysis and potential trading ideas. Take 15 minutes of your lunch with Barron’s columnist and Chartered Market Technician, Michael Kahn of Quick Takes Pro, and TradeKing Option Guy Brian Overby, as they analyze the market during this live online session. As an added bonus, Michael shares the Quick Takes Pro “Chart of the Day” and Brian discusses at least one option trade. This might be the most valuable thing you do all week! Every Tuesday midday from 12:00 - 12:15pm ET.
Don’t miss the next TradeKing Midday Market Call. Register here: www.tradeking.com/events
VP - Content and Social Media
Learn new trading strategies from the Options Guy
, hone your skills at TradeKing All-Stars
, or catch up on TradeKing’s latest with our CEO
. You can also follow us on Twitter
or fan us on Facebook
At the time of publication and in the preceding month, TradeKing and/or Michael Kahn did not have ownership greater than 1% in any stocks mentioned; did not have any other actual, material conflict of interest known at the time of publication; have not received compensation from a public offering nor from investment banking services related to any companies mentioned within the past 12 months, nor expect to receive any in the next 3 months; nor engaged in market making in the securities mentioned.
Options involve risks and are not suitable for all investors. Prior to buying or selling options, an investor must receive a copy of Characteristics and Risks of Standardized Options, sent to you in previous communication. Additional copies may be obtained by calling TRADEKING at 877-495-KING or by visiting www.TradeKing.com/ODD
System response and access times may vary due to market conditions, system performance, and other factors.
Multiple leg options strategies involve additional risks and multiple commissions
, and may result in complex tax treatments. Please consult a tax advisor.
Any strategies discussed and examples using actual securities and price data are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell securities. Past performance is not a guarantee of future results. Consider the following when making an investment decision: your financial situation, your risk profile and transaction costs.
Market timing is a complex investment strategy which involves risk and may incur additional commission costs.
While implied volatility represents the consensus of the marketplace as to the future level of stock price volatility, there is no guarantee that this forecast will be correct.
TradeKing charges $4.95 for online equity and option trades, add 65 cents per option contract. TradeKing charges an additional $0.35 per contract on certain index products where the exchange charges fees. See our FAQ for details. TradeKing adds $0.01 per share on the entire order for stocks priced less than $2.00. See our Commissions + Fees page
for commissions on broker-assisted trades, low-priced stocks, option spreads, and other securities.
The projections or other information generated by TradeKing's tools regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. The calculations do not take into consideration all costs, such as commissions and margin interest which may impact the results shown. It is the user's sole responsibility to select the criteria to enter in the TradeKing's tools, or to choose among the pre-defined screens, and to evaluate the merits and risks associated with the use of the tools before making any investment decisions. TradeKing is not responsible for any losses that occur from such investment decisions.
TradeKing Webinars and All-Star Blogs are provided for educational and informational purposes only. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. TradeKing provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. You alone are responsible for evaluating the merits and risks associated with the use of TradeKing's systems, services or products.
TradeKing Webinar guest speakers and TradeKing blog authors are solely responsible for their content. TradeKing may maintain a cross marketing relationship with TradeKing guest speakers and TradeKing blog authors. In some instances, TradeKing compensates guest speakers and authors for their participation.
TradeKing selects and defines as All-Stars certain independent market commentators who are recognized industry personalities and experienced traders and who provide timely market commentary via the TradeKing All-Star Blog
and/or TradeKing Webinars
. Each All-Star commentator's bio, related qualifications and disclosure as to their relationship with TradeKing can be found on the All-Star Roster
. The selection of All-Star commentators is solely based on the quality and style of the content provided. TradeKing does not measure, endorse, or monitor the performance or correctness of any statement or recommendation made by independent All-Stars commentators. Supporting documentation for any claims made by TradeKing All-Stars will be supplied upon request by the author of the post, who is solely responsible for the views expressed. Contact TradeKing All-Stars by sending an email message to TKallstars@tradeking.com.