Recap for Tuesday, October 22nd
Analysis of S&P 500 from QuickTakesPro’s Michael Kahn:
S&P 500 (SPX) – At the time of this broadcast, SPX was around 1,753.28 up 8.62 from Monday’s close. The upward trendline going back to November continues on. The recent breakdown appears to be a false one. However, the Relative Strength Index (RSI) is low, which could suggest there’s not a lot of momentum in this recent run. It is a bullish pattern until proven otherwise, according to Michael.
It is above its 50 day moving average of 1682.81 and the 200 day moving average of 1612.19.
Analysis of Volatility Index from Trade King’s Brian Overby
S&P 500 Volatility Index (VIX) – The VIX is around 13.66 up .50 from yesterday. As the new highs in the SPX have been hit, the VIX has been dropping below all of its moving averages. It’s 50 and 100 day moving averages have converged at about 15.20. The 200 day is at 14.39.
The large December VIX trade discussed last week on the 13 strike put seems to be working out for the trader. The underlying for the December contract (VIXDEC) is now around the around 15 level, down from 17 last week, probably the result of the government choosing not to default on its debt. The VIX is not at that yearly lows (11 – 12 range) yet, but as the market has been rising, the VIX has been falling precipitously.
The Chart of the day is Diamond Offshore Drilling, Inc. (DO) – At the time of this broadcast, DO was at 64.23 up .93 from yesterday. It has hit lower lows in price and higher highs in RSI, which could suggest this is a change in trend. It has broken through all 3 “fan lines” to the upside, which might be interpreted as the stock no longer being “dead in the water.” This could potentially be on the rebound, according to Michael. It is be below its 50 day moving average of 68.52 and right near its 200 day of 64.16. Next possible level of resistance could be at 67.
Brian Overby’s strategy based on Michael’s analysis: DO is to release earnings on 10/24, which seems to have caused a jump in implied volatility recently (about 24%). The options for this stock are not very liquid and dealing with large spreads between the bid and the ask makes trading options challenging. To avoid the headaches involved with illiquid options we will look at a strategy that aims to have both options expire out of the money. Brian discusses a Short Put Spread. With this strategy we have to deal with the spreads upon entry of the position, but if options expire worthless, the bid/ask spread of the options contracts should not come into play.
Brian’s Potential Trade Strategy – Short Put Spread
- Sell 1 Nov 16 2013 DO 62.50 Put
- Buy 1 Nov 16 2013 DO 60.00 Put 25 days to expiration
- Bid .50, Ask .60, Mid .55 – Credit is .50 if we take the bid.
- Maximum potential loss is $2.00
- Maximum potential gain: $.0.50
- Total commission to enter this trade is $6.25
Brian’s Potential Trade Strategy -Buy stock outright
- Buy 100 shares of DO @64.10
- Maximum potential loss is principal paid
- Maximum potential gain is technically unlimited if DO goes to infinity (not likely to happen).
- Total commission to enter this trade is $4.95
**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.
Don’t miss the next TradeKing Midday Market Call. Get solid market analysis and potential trading ideas. Every Tuesday midday from 12:00 – 12:15pm ET. Regards, Brian Overby TradeKing Senior Option Analyst