Analysis from Quick Takes Pro’s Michael Kahn:
S&P 500 (SPX) – at the time of this broadcast, SPX was around 1,350.24 down about 2.22 from Monday. SPX is in a rising wedge formation. Meaning the tops and bottoms start converging. The index has been trading around a horizontal trendline at 1,350.50 mark and we see it there again today. If invested in the SPX since the beginning of the year investors have received very little return. In this the election year the choppy trend seems to be staying the course with the path of least resistence being lower. If it does make the big break down the 1200 level may be in play.
Russell 2000 (RUT) – at the time of this broadcast, the RUT was trading around 802.45. This pattern is a little different than the SPX. It has had a break out of sorts recently. It is currently above both its 50-day and 200-day moving averages of 777.87 and 767.36 respectively. Although, this may be attractive to Bulls, Michael thinks even the small cap market needs “a lot of work before it’s a bull market on its next leg up.”
Discussion from TradeKing Options AnalystBrian Overby:
VIX – at the time of this broadcast, VIX was about 18.16, up about 0.18 from yesterday. It’s relatively low compared to where it has been. It is currently trading below its 100-day and 200-day moving average of 18.84 and 23.11 respectively. We had expected it to stay in between those levels, but a week or so again it touched the 16 level. It has came back to 18.16 today, closer to the 100 and 200 day moving average. This could be due to a bit of complacency in the market. After Friday’s big drop in the market, the VIX too had a big drop (opposite of what would be expect). A result of what could be interpreted as investor overconfidence.
Going out further, the VIX future contracts are higher, with September expiration trading around 22.25. So the market longer term is still expecting higher volatility.
Michael Kahn’s Chart of the Day is Adobe – symbol ADBE
Adobe symbol ADBE – At the time of this broadcast, ADBE was 30.48, unchanged from yesterday. It has an overall decline for the last couple months, but it has also had some rising bottoms. Overall it looks to be forming a triangle pattern, but Monday it had a big breakdown on high volume which suggests that the market for Adobe is not healthy. If we took a measurement from the top of the triangle pattern and place it where it is trading today, it could see a level as low as 27.27. It might not get that low, but it could be a long term slide, don’t expect it to drop to those levels quickly. The pattern took a few months to form. To sum it up, adobe has broken down from a control zone. Sector looks week. Overall Bearish feeling here.
Brian Overby’s potential strategy based on Michael’s chart – ADBE at $30.48 – Backspread with Puts
ADBE – The Implied Volatility of around 27 is rather low compared to the historical volatility. Part of the reason could be there is no major news on the stock and earnings are not until late September.
The lack of volatility and being sort of “caught” between the July and August expirations (July is 11 days to expiration, August 39 days). Based on Michael’s thought that it would break down slowly would lead us to the August expirations. However, with Backspreads with Puts, the further out you are, the harder it is to get a net credit.
ADBE – Speculative Strategy – Backspread with Puts (aka Pay Later Put)
– Sell 1 ADBE July 32 Put
– Buy 2 ADBE July 31 Put (market was Bid 0.09, Ask 0.17, Mid .13)
– 11 days until expiration
– Total net credit is .09 if we hit the bid
– Maximum potential loss for combined position is difference in the strikes 1.00 (32 – 31) less the credit received.
– Total commission to enter this trade is $6.90
– Maximum potential gain is substantial if the stock drop below $30.09
ADBE – Longer term strategy – Long Put
– Buy 1 ADBE 30 Put
– 39 days until expiration
– Total debit is $0.87
– Maximum potential loss for this position is $0.87
– Total commission to enter this trade is $5.60
– Maximum potential gain is substantial if the stock drop below $29.13
**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.
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