Mid-Day Market Call for 3.18.14

(Editors Note: Brian Overby sent us the TradeKing Market Call yesterday afternoon.  We’ve been concentrating on the CBOE Risk Management Conference for the last three days.  Since the S&P 500 is basically unchanged in the last 24-hours, we thought we’d share their insightful commentary)

Analysis of S&P 500 from QuickTakesPro’s Michael Kahn:

S&P 500 (SPX) – At the time of this broadcast, SPX was around 1,870.70 up 11.87 from yesterday’s close. It had a pretty steep decline last week sparked by the Crimean crisis, but rebounded yesterday and today. Even though the 1850 level was violated, it rebounded and is still acting as support. There is reason to be cautious because yesterday and today’s rally is on pretty low volume. But, it is still in the long-term upwards trendline going back to November of 2012 and “the market is still in its bullish ways,” according to Michael.

It is above its 50 and 200 day moving averages of 1,830.13 and 1,739.68, respectively.

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The Chart of the Day is T-Mobile US, Inc. (TMUS) -

At the time of this broadcast, TMUS was at $31.28 up $0.57 from yesterday (Monday). It appears to be “coiling and in a triangle pattern.” It has been headed sideways with no real sign which way it could potentially break out from the pattern. If it breaks above $32 on the upside, the old highs (near $34) may be reached. If it breaks below $30.65, it may not see its next support until around $26.

TMUS is right below its 50 moving average and above its 200 day moving averages of $31.50 and $27.01, respectively.

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Analysis of TMUS Volatility Chart and Dividends from TradeKing’s Brian Overby:

Like the recent “coiling” stock price waiting to find a direction, both 30-day implied and historical Volatility have converged to near 40%, in the middle of the chart range. Earnings are expected to be announced on April 23rd, which could bring increased volatility levels for the contracts that expire after the announcement. With that in mind, Brian talks about two different strategies, one with an expiration that avoids the event and one that includes it.  T-Mobile does not currently pay a dividend.
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           Brian Overby’s strategy based on Michael’s analysis -

With Michael’s “wait and see” approach that is awaiting a breakout either to the upside or downside, and being aware of the upcoming earnings event, Brian discusses a short-term Long Straddle (with an expiration before the earnings announcement) and a directional Long Call Calendar Spread with an expiration that includes the event.

Brian’s Potential Trade #1  (More Speculative) – Long Straddle

- Buy 1 April 4 2014 TMUS 31.50 Call

- Buy 1 April 4 2014 TMUS 31.50 Put

- 17 Days to Expiration

- Net Bid 2.10, Mid 2.21, Ask 2.31 for the strategy

- Net debit is 2.31, if we execute at the Ask.

- Maximum loss is $2.31    Breakeven at $29.19 or $33.81

- Maximum potential gain is technically unlimited if the stock price rises to infinity (of course, not likely to happen)

- Total commission to enter this trade is $6.25

Brian’s Potential Trade #2  –  Long Call Calendar Spread

- Sell 1 Mar 28 2014 TMUS 33.00 Call

- Buy 1 Apr 25 2014 TMUS 33.00 Call

- 10 days to March 28 Expiration, 38 days to April 25 Expiration

- Net Bid 0.71, Mid 0.85, Ask 1.00 for the strategy

- Net debit is 1.00, if we execute at the Ask.

- Maximum potential loss is $1.00

- 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 max gain at initiation of this strategy, because it depends on how the back-month call performs at the front-month call’s expiration date.

- Total commission to enter this trade is $6.25  **NOTE: option prices are given as a per contract amount.

Get solid market analysis and potential trading ideas every Tuesday midday from 12:00 – 12:15pm ET.  Brian Overby

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Brian Overby

As Senior Options Analyst for TradeKing, Brian Overby is a widely sought-after resource for his option trading knowledge and market insights. He has contributed to numerous articles for the Wall Street Journal, Reuters and Bloomberg and has had frequent appearances on CNBC Fast Money and Fox Business News. With nearly 20 years…