Analysis of S&P 500 from QuickTakesPro’s Michael Kahn:
S&P 500 (SPX) – At the time of this broadcast, SPX was around 1,792.20 down 8.70 from Monday’s close. It has been in the rising channel going back to November of 2012 and appeared to be in an accelerated rising trend back to this past October. It has since broken down from the accelerated trend after hitting the top levels of the longer term channel, which is not surprising. It “looks like it is time for a rest and people appear to be sitting on gains” from the recent run up. “This (sitting on the sidelines) is pretty normal,” according to Michael.
It is above its 50 day moving average of 1745.72 and the 200 day moving average of 1652.95.
The Chart of the Day is Home Depot (HD) – At the time of this broadcast, HD was at 78.49 down 0.89 from yesterday. “The major trend is still to the upside, although dominating this chart is this trading range.” It had a “major breakout failure” at a resistance level near 81, recovered a couple days later, only to fail again near 81. It looks like “a stock that has tried and failed, and people appear to be giving up on it now,” according to Michael. It could be headed to the trendline from September to between the 50 and 200 day moving averages of 76.95 and 75.40, respectively. The next level of support could be near 76. Like the SPX, it could be time for a rest on retail and specialty retail stocks.
Analysis of Home Depot’s Volatility Chart from TradeKing’s Brian Overby: The historical volatility is just below 15%. The implied has jumped up of late to about 17.5%, perhaps because the stock price had a bit of a decline recently and the potential for bad news that may follow the “black friday” shopping day. Earnings were announced in mid-November, so the next announcement should not be until sometime in February. Also, HD went ex-dividend today, so the prices of the option contracts that expire in December should not be affected by either of these events. Put prices can be inflated relative to calls until the stock goes ex-dividend. Once it does, the stock price will be decreased by the amount of the dividend which deflates puts prices.
Brian Overby’s strategy based on Michael’s analysis: With Michael having a bearish outlook on HD, implied volatility is in the low end of the yearly range, the stock going ex-dividend today and the company recently reported earnings,
Brian’s Potential Long PUT strategy #1.
– Buy 1 Dec 27 2013 HD 77 strike Put – 24 days to expiration
– Bid 0.81, Ask 0.84 Debit is $0.84 if we take the Ask.
– Maximum potential loss is $0.84
– Maximum potential gain is $76.16 if the stock goes to zero (not likely to happen).
– Total commission to enter this trade is $5.60 Breakeven $26.16
Brian’s Potential Trade Strategy #2 a Long Put but shorter duration
– Buy 1 Dec 13 2013 HD 81 Put – 10 days to expiration
– Bid 2.63, Ask 2.71 – Debit is $2.71 if we take the Ask.
– Maximum potential loss is $2.71
– Maximum potential gain is $78.29 if the stock goes to zero (not likely to happen).
– Total commission to enter this trade is $5.60 breakeven is $78.29
**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. Every Tuesday midday from 12:00 – 12:15pm ET. Regards, Brian Overby TradeKing Options Guy and Senior Option Analyst