Recap for Tuesday, September 25 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 on SPX :
S&P 500 (SPX) – at the time of this broadcast, SPX was around 1,461.86 up about 5 from Monday’s close. The SPX has been kind of quiet lately. It has been defying the “September Seasonal” where usually, the month of September is not a particularly good month for the SPX. It has been drifting down over the past week. This is not unusual because there is another “Jewish Holiday Seasonal” pattern that tends to head down from Rosh Hashanah to Yom Kippur.
Analysis on DJI:
Dow Jones Industrial Average (DJI) - at the time of this broadcast, DJI was around 13,585.48 up about 26 from Monday’s close. After QE3 was announced the DJI hit a new high for the year. It has been going sideways since in a tight channel. It is well above its 50 and 200 day moving averages of about 13,167.82 and 12,837.62 respectively. Overall the market has been in a rising trend.
Discussion from TradeKing Options Analyst Brian Overby:
VIX – at the time of this broadcast, CBOE Volatility Index (VIX) was about 14.28 up about 0.13 from yesterday. The VIX has been very boring lately. Although it has pulled back up a bit off its recent lows, it is still well below its 100 and 200 day moving averages. One thing to note is yesterday there was a lot more call buying than put buying in the VIX options, about 188k calls vs. 33k puts with the largest open interest positions showing up in on the out-of-the money calls in October and November. September and October traditionally are volatile months in the market. This has not proven to be the case so far in September, but it seems with the VIX near yearly lows traders seem to be positioning for a potential spike in the VIX within October/November time frame.
Brian recently blogged about what to know when trading VIX options here.
Quick Take Pro Chart of the Day is Barnes and Noble - (BKS)
Discussion from QuickTakesPro’s Michael Kahn - At the time of this broadcast, BKS was 12.80 up about .07 from yesterday. The reason why Michael chose this was the bullish RSI divergence near support and the fact it was coming off its lowest lows. It looked like it could be a bullish day for BKS and it started off that way. Being that it pulled back, and the options are fairly illiquid, we are not going to use this chart for possible trades.
Trading illiquid options is one of Brian’s Top Ten Option Trading Mistakes.
Alternative Quick Take Pro Chart of the Day is 3M - (MMM)
Discussion from QuickTakesPro’s Michael Kahn - at the time of this broadcast, MMM was trading at about 93.65 There is a lot going on with this chart. The stock is trading above both its 50 day and 200 day moving averages of 91.67 and 87.71 respectively, as well as its actual trendline (in purple, also around 91.67). However, it is bumping up against resistance levels of around 94. On the upside if it does break through that, the target could be around 98. 98 was a resistance previously hit around April and in July. On the downside, we see a trendline close to the 50 day moving average, we see it on the chart around 91.90 area. If we can break down through that level we may have even a larger move to the downside. So we are kind of in a wait and see mode for the short term.
Technical tools used:
- Support / resistance
- Moving Averages
Brian Overby’s possible short term strategy based on Michael’s chart – MMM – Long Straddle
Both the Historical and Implied Volatilities are near their lows near its year lows around 14% to 15% respectively. MMM is also scheduled to announce earnings in late October. Since we are in a low volatility environment and if a stock move in either direction could happen, we are going to look at a long straddle. This is a speculative trade because we have to be mindful of how much time we have until expiration and we don’t see the move in a one to two week period it would wise to close out the trade and move on.
Possible Speculative Strategy - Long Straddle
- Buy 1 MMM Oct 95 Put (Just In The Money)
- Buy 1 MMM Oct 95 Call (Just Out of the Money)
- Bid 2.86, Mid 2.90, Ask 2.95
- 25 Days to Expiration
- Total net debit is 2.95 if we take the Ask
- Maximum potential loss is the debit paid of 2.95 (if the stock closes at 95 on expiration).
- Maximum potential gain is is theoretically unlimited if the stock goes up to infinity. If the stock goes down, potential profit may be substantial but limited to the strike price minus the net debit paid (95 - 2.90 = 92.01) neither of these cases are likely to happen.
- Total commission to enter this trade is $6.25
If we follow Michael's final advice and do the wait and see approach, we would be waiting for MMM to break through the trendline either to the upside (94.00) or the one on the downside (91.90). The alternative trade considering the low implied volatility environment would be to just buy an individual call or put outright.
Possible alternative trade - Long Close-to-the-Money Put or Call depending on price move
Buy a call or put with a strike price close to the current stock price.
The expiration would be either the October or November depending on when the trendline was broken.
- Maximum potential loss is the debit paid for the call or put
- Maximum potential gain for a long call is theoretically unlimited profit potential, if the stock goes to infinity. (Please note: We’ve never seen a stock go to infinity. Sorry.)
- Maximum potential gain for a long put is substantial. If the stock goes to zero you make the entire strike price minus the cost of the put contract. (Keep in mind, however, stocks usually don’t go to zero.)
- Total commission to enter this trade is $5.60
**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:
- Detailed Quote
- TradeKing Long Straddle
- TradeKing Long Put
- TradeKing Long Call
- TradeKing Volatility Charts
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