EOT Position Update – June 9, 2010

| June 9, 2010

June 9, 2010

Market Snapshot

Trying to distill market action into profitable trades is never easy.  But recently it’s become even more challenging.

Right now we’re getting a lot of mixed signals.  I think the bulls and bears each have compelling arguments.  The bottom line is investors lack the conviction necessary to move the markets up or down.

We’re now entering our third week of choppy, “up one day down the next” trading.  It’s causing the VIX to remain elevated above 30.  (Readings above 30 are associated with high levels of uncertainty, fear, and volatility.)

I’ve heard from a bunch of you wondering how “high readings on the VIX” relates to option pricing.

Here’s how it affects our strategy.

As you know, option prices are determined by a number of variables.  They include the price of the underlying security, strike price, time til expiration, and volatility.

The more volatility there is in the underlying stock, the higher the premium we have to pay to buy the option.  This is the historical volatility of the stock.

When the VIX is high, it impacts the options implied volatility.  The markets are expecting a higher level of volatility than what the stock has seen historically.  More volatility means more risk… and that means higher option prices!

This makes buying options more expensive.  In other words, when implied volatility is high, options can be overvalued.

As you know, we like to buy options that are undervalued!

When the VIX is over 30 (like it is right now), we have to be very selective of the options we buy.  We don’t want to overpay and skew our risk to reward ratio.  In a nutshell, we need to be very choosey right now!

I hope that helps.

If you have any questions or comments, you can email me at customerservice@hyperionfinancial.com.

Now for the updates…

Position Updates

Just a quick note:  Remember, we won’t update every open position every week.  I try to focus on the positions that have some significant news or price movement.

  ENS September 2010 $22.50 PUTS
ENS is a new trade we sent out yesterday.  ENS should have a hard time gaining any traction as long as pessimism in Europe continues.  And if the Euro is any indication, investor pessimism is going strong.  I expect it to get worse from here.  Hold tight for now.  Resistance is at $25.50 and $27.  Support is at $20 and $19.

  WFC July 2010 $28 PUTS
WFC is trending lower.  Our puts are now a full dollar into the money.  I expect further weakness as financial regulation talks heat up in Washington D.C.  Keep an eye on WFC as it closes in on our support levels.  Continue holding for further gains. Resistance is at $29.75 and $30.50.  Support is at $26.25 and $25.

  ASIA October 2010 $30 CALLS
ASIA continues to bounce around $20.  There seems to be plenty of buyers keeping the stock from falling below this level.  But we’re yet to see much conviction from buyers to sustain a rally.  When the markets do move higher, I’m expecting Chinese stocks to lead the charge.  Hold tight for now.  Resistance is at $29.50 and $32.  Support is at $18 and $16.

Category: EOT Update

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