Change text size

• Email This Article
• Print This Article
• Digg This
• Delicious
• Subscribe

Despite mixed trading this past week, it seems traders are starting to feel a bit more confident about the stock market. The Dow ($INDU) gave up 74.42 points, or 0.63 percent, to close at 11,659.90. The S&P 500 ($SPX) rose 1.88 points to 1,298.20. The Nasdaq ($COMPQ) was the strongest, up 38.42 points, or 1.59 percent, to 2,452.52.

For the most part, economic news has been at least in line with expectations, which has eased some fears. However, maybe the biggest benefit for stocks is the recent decline in oil prices and subsequent drop in gasoline prices. This drop has been for several reasons, mainly strength in the dollar and a lowered forecast for oil demand going forward. Of course, a decline in energy prices eases pressure on the Fed to raise rates and this too has benefited stock prices.

Though the Naz was the only major market index to see strong gains, fear fell during the week. The CBOE Market Volatility Index ($VIX) lost 14.88 percent to 19.50 with the Nasdaq Volatility Index ($VXN) down 15.43 percent to 22.52. These two indices are below both their 50-day and 200-day moving averages with the VXN just a few points from key support at 20. As the summer trading period comes to an end, volumes will pick up and we could see a more definite trend develop, which the bulls hope is to the upside.

High Volatility: GG shares have fallen sharply the past month from a high above $50 to Friday’s close at $29.56. However, GG shares might find support at $30, which it did at the end of 2007. With the recent volatility in gold prices, GG options are sporting high IV, which provides traders a nice trade using a butterfly. We can set up a 25-30-35 September butterfly for $170 with a max profit at $330. This puts the profit zone between $26.70 and $33.30. If GG can move above $30 a share on Monday, it might be a time to enter a butterfly trade. Of course, check both the call and put versions, as well as an iron butterfly to see which offers the best reward to risk ratio.

Low Volatility: JASO has been trading in a range between $14 and $17 for more than a month, closing Friday at $16.50. The solar energy company announced earnings that were met with buying Friday, but the stock has remained in its trading range. With IV low on JASO options, traders might want to take advantage of a breakout by entering a strangle. The stock has a 52-week high near $27 and a low near $10, leaving the stock with plenty of room to move. Of course, strangles are not intended to be homerun hitting strategies, but to provide consistent base hits. Most the time, traders are looking to make a profit of about 50 percent using a strangle strategy.

Jody Osborne
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site

• Email This Article
• Print This Article
• Digg This
• Delicious
• Subscribe

Recent Articles by Jody Osborne, Optionetics.com

• November 19, 2008
  Economic Watchdog, November 19
• November 19, 2008
  Closing Wrap-Up, November 19
• November 19, 2008
  Morning Watch, November 19
• November 18, 2008
  Economic Watchdog, November 18
• November 18, 2008
  Closing Wrap-Up, November 18