Recap for Tuesday, July 17 by Kevin Corrigan
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Analysis from Quick Takes Pro’s Michael Kahn:
S&P 500 (SPX) – at the time of this broadcast, SPX was around 1,353.55 down about .09 from Monday. The rising trend that started in June has gotten choppier lately. A key level is about 1335 because it is the top of the inverted “head and shoulders” pattern that started back in May. It is above both the 50 and 200-day moving averages of 1332.57 and 1309.49 respectively. That usually is a bullish formation, but due to the very low volume, Michael Kahn doesn’t think it has too much momentum here.
NYSE Composite (NYA) - at the time of this broadcast, I:NYA was around 7757 up about 14 points. Right now is the only major index that is in the “death-cross” formation. The 50-day moving average crossed the 200-day on the downside. This is a very bad sign. Right now, it is the only index in that pattern, but it does not bode well for other indices.
Russell 2000 (RUT) – at the time of this broadcast, the RUT was trading around 796.53. While this is not in the “death-cross” pattern of the 50-day and 200-day moving averages of 776.25 and 770.64, it is pretty close. It is something to keep your eye on in the near future.
Discussion from TradeKing Options Analyst Brian Overby:
VIX – at the time of this broadcast, VIX was about 16.52, down about 0.57 from yesterday. It’s surprisingly low compared to where it has been especially with many stocks (Yahoo, JNJ, Google) announcing earnings soon. It is currently trading below its 100-day and 200-day moving averages of 18.81 and 22.56 respectively.
Going out further, the VIX futures contracts are higher; August is around 19.25 with September expiration trading around 21.10. So the market longer term is still expecting higher volatility.
Michael Kahn’s Chart of the Day is Potash – symbol POT
Potash symbol POT - At the time of this broadcast, POT was 45.22, up about 1.22 from yesterday. This is a fertilizer company. It is in a bullish flag formation. A cause for this could be the recent drought in the Midwest. Looks like it could head up to resistance levels of around 48 short term.
Technical tools used:
- Support / resistance
- Moving Averages
Brian Overby’s potential strategy based on Michael’s chart – POT – Long Call
POT – The Implied Volatility of around 32.5 is rather low for this underlying, but higher than its historical volatility.This is rather surprising because the company plans to announce earnings July 26th. With a short term bullish pattern and low volatility, the simplest strategy is the Long Call.
POT – Conservative Strategy - Long Call
- Buy 1 POT Aug 45 Call (market was Bid 1.77, Ask 1.80)
- 32 days until expiration
- Total net debit is 1.80 if we take the Ask.
- Possible gain if POT hits the target of 48 in the next week is approximately $1.50
- Maximum potential loss is the debit paid of $1.80
- Maximum potential gain is unlimited if POT goes to infinity (which of course is unlikely)
- Total commission to enter this trade is $5.60
POT – More speculative strategy - Long Calendar Spread with Calls
- Buy 1 POT 45 Aug Call
- Sell 1 POT 45 Jul Call
- Calendar spread market was 1.09 Bid, 1.13 Mid, 1.16 Ask
- 32 days until expiration for the August call; 4 days until expiration for the July call
- Maximum potential loss for this position is 1.13 if we pay the mid point and if POT is approximately higher than 46, or lower than 44, on July expiration.
-Maximum potential loss post July expiration is 1.13 if POT is below 46.13.
-Maximum potential gain is minimal on July expiration.
-Maximum potential gain is unlimited for August expiration if POT is above $46.13 and approaching infinity (however, still unlikely)
Multi-leg commission to enter this trade is $6.25
**NOTE: option prices are given as a per contract amount. Multiply loss and gain figures by 100 shares and by the number of contracts traded to determine the amount of the full potential loss or full potential gain. No additional calculations are needed to determine commission costs.
TradeKing Options Tools used:
- TradeKing Live
- Detailed Quote / Earnings Calendar
- TradeKing Long Call
- TradeKing Long Call Calendar Spread
- TradeKing Volatility Charts
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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.
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