Recap for Tuesday, August 7th 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 1,405.42 up 11.19 from Monday’s close. We had a false breakdown recently in the SPX and main reason was because the European Central Bank (ECB) actual decide to act. Since that news about 5 days ago the trend for the index has been to the upside. On the upside we have drawn a trend line at about the 1,422.80 mark which is the most recent high. That line should provide some resistance. Other things to point out on the chart is the low volume that started the rally and the choppy nature of the rally. It just means there does not seem to be a lot of convection around the move. The rally is really unsupported by any other technicals, it seems to only be getting momentum from the hope for more stimulus.
Russell 2000 (RUT) – at the time of this broadcast, the RUT was trading around 804.07. This pattern is a little different than the SPX. The upside tread is still going in the big stocks, but it has broken down in the little stocks of the Russell. The relative performance vs S&P 500 on the bottom chart is obviously trending down and when the small stocks are not in the lead that is generally not a good thing.
Discussion from TradeKing Options Analyst Brian Overby:
VIX – at the time of this broadcast the CBOE volatility index (VIX) was about 15.50, down a little on the day. It’s relatively low compared to where it has been. It is currently trading below its 100-day moving average of 18.81. The news from the ECB has driven the VIX back down towards the yearly lows and we are finally seeing the futures come in along with the VIX spot index. The October future was at 20.85 below the 200-day moving average of 21.21.
Michael Kahn’s Chart of the Day is Google – symbol GOOG
Google symbol GOOG - At the time of this broadcast, was 640.97, down a little on the day.
From July into August Google has had a nice rally. The price on the upside normally will follow the upper bollinger band, recently we see a high outside the band and then a higher high right after that but inside the band. This is what Michael calls a divergence. It is a sign of waning momentum. On bottom chart of RSI we see that has the RSI has flattened out even though the stock has made a higher high. Which is another confirmation that the stock is tired. Overall Bearish feeling here.
Technical tools used:
- Support / resistance
- Relative Strength Index (RSI)
Brian Overby’s potential strategy based on Michael’s chart – GOOG – Long Put Spread
GOOG – The Implied Volatility (IV) of around 20.30 is rather low compared to its historical implied volatility. Part of the reason is they recently announced earnings and after the earnings there has been a solid rally in the stock price, which also tends to drive IV lower. This would lead us towards an outright purchase of a put option, but google is obviously an expensive stock and the absolute cost of the stock will make the option contract prices expense irregardless of what the IV is doing to the option contract price. So we would like to lower the overall cost by spreading off the long option.
GOOG – Speculative Strategy - Long Put Spread
- Buy 1 GOOG Aug 640 Put (Bid 7.80, Ask 8.10)
- Sell 1 GOOG Aug 615 Put (Bid 2.00, Ask 1.80)
- 11 days until expiration
- Total commission to enter this trade is $6.90
- Bid, Mid and Ask for the spread is (Bid 5.80, Mid 6.05, Ask 6.30)
- Total net debt if we paid the Ask price is 6.30
- Maximum potential loss for this trade is the net debit paid, 6.30.
- Maximum potential gain for the position is width between the strikes 25 (640 - 615) less the net debit paid 6.30 or 18.70 (25 - 6.30).
GOOG – Longer Term - Less Speculative Strategy - Long Put Butterfly
- Buy 1 GOOG Sep 640 Put (Bid 17.00, Ask 17.30)
- Sell 2 GOOG Sep 615 Put (Bid 8.30, Ask 8.50)
- Buy 1 GOOG Sep 590 Put (Bid 3.80, Ask 4.10)
- 46 days until expiration
- Total commission to enter this trade is $7.55
- Bid, Mid and Ask for the butterfly is (Bid 3.80, Mid 4.30, Ask 4.80)
- Total net debt if we paid the Ask price is 4.80
- Maximum potential loss for this trade is the net debit paid, 4.80.
- Maximum potential gain for the position is width between the strikes 25 (640 - 615) less the net debit paid 4.80 or 20.20 (25 - 4.80).
**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 Options Chain
- Detailed Quote / Earnings Calendar
- TradeKing Volatility Charts
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