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TradeKing Midday Market Call Recap - SPX, T

Options Trading TradeKing

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Recap for Tuesday, September 30th 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 of S&P 500 from QuickTakesPro’s Michael Kahn:
 
S&P 500 (SPX) – At the time of this broadcast, SPX was around 1980.01 up 2.21 today. The upward trendline going back to November 2012 is still intact, even though it’s been over a week since it has been at its high. The long-term trend for bigger companies still indicates it is in a bull market, but the small cap companies that are in the Russell 2000 index (RUT)  are struggling. The RUT relative performance versus the SPX just hit a 52 week low. This is not a good sign for the market. Overall it is hard to see any trending action for this market, but one thing that’s very likely is that the volatility should be picking up. Indeed, this is shown by the VIX index now above 15.

It is above its 50 day moving average of 1976.77 and its 200 day moving average of 1899.66.


The Chart of the Day is AT&T Inc. (T) -
 
At the time of this broadcast, T was at 35.31 up 0.08 today. There isn’t a whole lot of trending in the T chart, remaining mostly flat. Michael noted that even its 200 day MA is flat. There are some smaller patterns looking at narrower time frames. Right now, T appears to be forming a bull flag pattern, from which it is attempting to breakout. If it does break out of the flag, using the “flagpole” as an upward gauge, the next level of resistance could be somewhere above 36. Michael actually turned toward a non-technical event, an upcoming relatively large dividend of 0.46 next week on ex-date October 8th. T currently has a 5.21% dividend yield, and even though the stock price will be reduced by 0.46 on October 8th, Michael believes the stock could see a small pop leading into this, potentially escaping the flag.

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Analysis of T Volatility Chart and Dividends from TradeKing’s Brian Overby -

Despite the upcoming dividend (Oct. 8th) and earnings announcement expected (Oct. 22nd), T’s volatility levels are relatively low. The 30-day historical is just above 7.5%. Its 30-day implied volatility has been rising as we near the two events, but even so, with a year range of 11.5% - 21.0%, the 30-day implied is still on the low end of that range at 14%.

Options prices will be affected by the upcoming dividend. Brian reviews how, at least in terms of implied volatility, you can already see this viewing TradeKing’s options chains, under the IV column.


Technical tools used:
- Moving Averages
- Trendlines


Brian Overby’s paper trade strategies based on Michael’s analysis -

Michael's analysis is short-term bullish. With volatility levels relatively low and probable to rise, Brian discusses two strategies: an October 24th Long Call, and a For-Veterans-Only Diagonal Spread with Calls. Note that both strategies include BOTH the Dividend and Earnings announcement.

With the long call, Brian notes that the call is relatively inexpensive because of the pending dividend, the decrease in price on the ex-dividend date is something that needs to be understood and prepared for. He also noted implied volatility levels being in the low end of the range even though the anticipate earnings date is right around the corner (10/22).

Brian emphasized the complexity of managing the Diagonal Spread position, especially when the calls become near- or in-the-money because of Dividend Risk. Brian also reviewed this last month, when the Midday Market Call reviewed SLB’s volatility charts. It’s a high-touch, involved trade concept, where the trader needs to be in tune with news and stick to his/her trade plan, particularly around each upcoming event date.


Brian’s First Potential Trade Strategy -
Long Call

- Buy 1 Oct 24 2014 T 35.50 Call

- 24 Days to Expiration

- Bid 0.27, Ask 0.29 for the call option

- Debit is 0.29. If we execute at the Ask.

- Maximum potential loss is $0.29

- Maximum potential gain is unlimited if the stock goes to infinity (not likely to happen).

- Total commission to enter this trade is $5.60


Brian’s Potential Trade Strategy - Diagonal Spread with Calls

- Sell 1 Oct 10 2014 T 35.00 Call
- Buy 1 Oct 24 2014 T 35.50 Call

- 10 days to Expiration on short Call.

- Net Bid 0.11, Mid 0.14, Ask 0.18 for the strategy

- Net credit is 0.14. if we can execute at the Mid. (may not be possible)

- Maximum potential loss is $0.36

- Maximum potential gain is limited to the premium received for the back-month call minus the cost to buy back the front-month call, minus the net debit paid to establish the position. NOTE: You can’t precisely calculate your risk at initiation of this strategy, because it depends on how the back-month call performs at the front-months expiration date.

- Total 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:

- Detailed Quote
- TradeKing Back Spread with Calls
- TradeKing Long Call
- TradeKing Volatility Charts
- TradeKing Options Pricing Calculator
- TradeKing P&L Calculator

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Regards,

Kevin Corrigan, PMP
VP Content and Social Media
www.tradeking.com


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