EOT Position Update – October 12, 2011

| October 12, 2011

October 12, 2011

Market Snapshot

Let’s face it… it’s a tough option picking market.

Option premiums are off the charts.  And stocks aren’t trending enough in either direction to meaningfully drive up intrinsic values.

Let me explain…

First, look at this chart of the S&P 500 below…


As you can see, the large cap index is trapped in a trading range.  It’s moving between 1,100 on the low end and 1,220 on the high end.  And I don’t see that changing… I believe stocks will remain in this trading range going forward.

But the truth is, stocks haven’t done much over the last eight weeks.  And over the same time, volatility and fear have increased.  And here’s the worst part… it’s not going away.

The VIX is still above 30, even after the markets rallied all week.  The VIX is still twice as high today as it was back in June.  And when stocks begin falling, the VIX is going to skyrocket again.

Here’s the problem…

When implied volatility (what the VIX measures) is high, it makes buying options more expensive.  That’s not good for us… we want to buy undervalued options, not overpriced ones!

At times like this, we need to be patient and choose our options carefully.

Look, the last thing we want is to make the correct call about the direction the stock is going to move… yet the option doesn’t move because it’s losing value because of volatility and time value.

The bottom line is we’ll continue making money with options no matter which way the markets move.  But it’s more challenging when markets are choppy and investors are fearful.

Let’s move onto 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.

  APD November 2011 $70 Puts
APD is up a little from when our trade alert went out.  Now it’s running into resistance near the previous high around $83.  I’m expecting APD to move lower along with the rest of the stock market.  Continue holding… Resistance is at $83 and $85.  Support is at $72 and $65.

   GOLD December 2011 $80 Puts
GOLD is trading in lock step with gold and silver prices.  And over the last week, precious metals have moved higher.  But the rally lacks conviction.  Don’t forget, all of the turmoil in Europe should drive the US Dollar higher.  And a strong dollar should pressure gold and silver prices lower.  Continue holding… Resistance is at $105 and $111.  Support is at $85 and $70.

  CNH December 2011 $40 Calls
CNH began moving higher recently after falling dramatically over the last few weeks. I’m not surprised.  Retail farm equipment sales in the US continue to outpace expectations.  I think CNH will beat earnings estimates when they report later this month.  Aggressive traders should continue holding… Resistance is at $40 and $45. The next support is at $21.50.

Category: EOT Update

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