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Tuesday, September 30th, 2008
The Chicago Board Options Exchange Volatility Index (^VIX, 40.93, down 5.79) rose sharply on Monday as the stock market closed substantially lower.
The VIX measures “fear” on Wall Street and moves higher as the market moves lower. When Wall Street and traders get scared, they tend to trade more and volatility, along with the VIX, soars. When traders grow complacent and content, they tend to trade less and the volatility tends to trend lower.
As you can see, the market is higher this morning which means the VIX is trading lower. Yesterday’s jump marks the highest level of the VIX since 2002 and is only the fourth time the index has been this high. I had mentioned that the VIX could be headed for the 40′s a couple of weeks ago and now that we are here, we could go much higher.
The VIX spent 10 trading sessions in the 30′s and has now jumped into the 40′s basically overnight, suggesting Wall Street anticipates dramatic price swings in market. Although we are 52-week highs for the VIX, who’s to say we can’t head into the 50′s? If the bailout bill continues to drag, it will put even more pressure on the market to get something done.
Rick Rouse
Rick@OptionsMentoring.com
Tags: Chicago Board Options Exchange Volatility Index, VIX, volatility
Posted in VIX | No Comments »
Tuesday, September 30th, 2008
The market posted is worst ever point decline after Congress rejected the $700 billion bailout plan that looked like a sure thing to everyone on Wall Street. That was the problem. As the day wore on it was apparent that the market was nervous and about 1:30 p.m. all hell broke loose after it was clear that the bill would fail.
The Emergency Economic Stabilization Act lost by a vote of 228 (against) to 205 (for). A total of 218 votes were needed to pass. This sent the market into panic mode because the plan was expected to get approval.
By the end of the day, the Dow was down a staggering 777 points and finished at 10,365. The 7% decline was the biggest for the Dow in over 20 years. The Nasdaq fell 9%, or a whopping 200 points, and closed at 1,983. The S&P 500 dropped 9% as well, falling 107 points and ended the session at 1,106.
Talk about getting beat like a rented mule. A sell-off was expected if the bill got shot down but no one on Wall Street expected 10% across the board. They were so sure that the bill would get passed but the market kept giving us great signs that a deal would not get done quickly. Wall Street simply ignored the signs and is now left to deal with the uncertainties. Yes, there will be another meeting on Thursday and yes there is a chance something still gets done.
Look. Something will get done but it will be modified and it will get done when Congress wants to get it done, not Wall Street. I think it was a good move but I still also believe Congress is doing this for the publicity. To be honest though, it is looking like the “good ‘ol buddy” system is in play here because there are too many companies failing at a time when something should have been done by now. It’s like the government is picking and choosing which companies survive and which ones don’t.
Not that it matters, but I would like to see no bailout and let nature run its course. The companies that got into this mess are the ones that should go under for not doing their due diligence. Or, if someone has to pay for it, why not some of the bigger corporations in Amercia? Geez, what did Exxon (XOM, $74.06, down $6.59) make in profits in one quarter? $10 billion. There’s a study out there that shows if the top 20 banks cut their dividend it would pay for the bailout. So yes, there are better ways of doing this.
As far as the market goes, the rest of the week will be crucial if the market hopes to regain any footing.
Rick Rouse
Rick@OptionsMentoring.com
Tags: Emergency Economic Stabilization Act, Exxon
Posted in Market Analysis | No Comments »
Monday, September 29th, 2008
Part of options trading has to do with “a gut feeling” and there are some trades you make based on what you really believe will happen. And there are some you don’t make because of that same feeling. For the past few months, we have done a lot of trades with financial stocks as we have bought call options on sell-offs and put options on rallies in hopes of riding the stock higher or lower.
Wachovia (WB, $1.84, down $8.16) was one of the stocks we played after it sold-off but for some reason I had a feeling Wachovia was in trouble and wasn’t going to bounce higher again. The stock was down 20% Friday and I mentioned the heavy option put buying as a reason not to go long. At the time, I didn’t think Wachovia would fall that hard, that fast but it has. The October 5 puts (WBVQ, $3.20, up $1.70) were going for 85 cents and hit a high of $4.50 when the stock traded as low as a penny. Wachovia shares did not open until much later in the trading session and when they did, the stock reached a low of $0.01. Wow.
The October 7.50 puts (WBVY, $5.70, up $3.20) stood at $1.50 on Friday when we went to press and they have also done well. The put option activity that was going on in Wachovia was a clear warning signal that something was up. In fact, it almost makes you wonder if Wall Street knew this was coming.
Most stocks go up when they are bought out. However, when the company’s not worth as much as its stock you will see these types of things. I was a big believer in Wachovia getting bought and that came true. Thankfully, I still did my research and knew about Wachovia’s trouble mortgage business.
Citigroup (C, $17.75, down $2.40) agreed to acquire Wachovia’s banking operations in a deal that was helped by the Federal Deposit Insurance Corporation. Citi got a great deal and will be able to expand its business while the FDIC could be responsible for loan losses. Sounds like a win-win for Citigroup as Wachovia’s shareholders are left holding the bag. Wicked game this Wall Street, huh?
Citigroup was actually positive at one point today but collapsed with the rest of the market when the $700 billion bailout failed. More on that Tuesday.
Rick Rouse
Rick@OptionsMentoring.com
Tags: Citigroup, option trading, Wachovia
Posted in Financial Stocks | No Comments »
Monday, September 29th, 2008
Apple (AAPL, $109.88, down $18.36) is down sharply this morning after a couple of analysts downgraded the stock. RBC Capital lowered Apple’s stock from “outperform” to “sector perform” while Morgan Stanley (MS, $22.41, down $2.34) shifted gears from “overweight” to “equal weight”. Morgan’s price target for the stock was also lowered from $178 to $115. RBC Capital dropped its target from $200 to $140.
It seems both analysts believe that a weaker economy will hamper the consumer which will lead to less demand for Apple’s products. Hmmm. I’m not sure demand for Apple’s products will suffer as much as its stock is today but the downgrades have hurt. Today’s whipping is the biggest drop in Apple’s stock in seven years.
I have written about Apple for quite some time as well as Research In Motion (RIMM, $66.48, down $4.28). Both stocks have been huge winners in the past and normally go through these wild price swings a few times a year. They have been leaders in the past and will be in the future but the current climate is punishing both stocks.
RIMM recently reported lousy numbers and its outlook scared Wall Street. The stock also got a downgrade this morning. Some of you may have put on an option strangle trade for RIMM based on your comments and emails and that trade has done extremely well.
The October 120 calls (RULJD, $0.03, down $0.01) were going for $1.20 the day earnings were announced and the October 80 puts (RFYVP, $14.85, up $3.50) were going for $2.06. The calls will obviously expire worthless but the puts are up seven-fold. The total cost to buy 10 calls and 10 puts would have been around $3,250. Even if the calls expire worthless, you would still have nearly $15,000 if you sold the puts today. Talk about ROI…
I don’t expect Apple to keep falling as low as RIMM but it could. The market is very irrational right now which means these types of options trades are working. If you wanted to look at Apple as a strangle trade you could follow the October 120 calls (QAAJD, $5.85, down $7.65 and the October 100 puts (QAAVT, $5.35, up $4.55). I think there will be enough movement in Apple that the trade could return 10%-20% over the next few weeks.
Rick Rouse
Rick@OptionsMentoring.com
Tags: Apple, Morgan Stanley, RBC Capital, Research In Motion downgrades, strangle option trades
Posted in Company Commentary | No Comments »
Monday, September 29th, 2008
The market is down sharply this morning as concerns related to the government’s $700 bailout package continue. Congress and the White House did reach an agreement over the weekend but it seems that Wall Street is disappointed that is still has to go to vote. The House is slated to vote later today and there is some nervousness in the market.
This is a difficult vote because it comes in an election year and there is a chance that the unpopular bailout package is not approved. President Bush was cheer-leading lawmakers to pass the bill, saying it is needed to “keep the crisis in our financial industry from spreading” across the economy.
There are many provisions that are unknown but one that is known is that the government will be authorized to purchase the assets from some of these financial firms and will help financial institutions to resume lending to individuals and businesses.
There is some heavy skepticism with this bill and that is why the market is being jittery. The Dow is down 275 points to 10,868. The Nasdaq is slipping 85 to 2,100 while the S&P 500 is lower by 40 points and is at 1,172. We should know something in a couple of hours concerning the status of the bill but I don’t expect we are going to see the big rebound everyone was hoping for. In fact, if the bill fails we could get a huge drop in the market.
Rick Rouse
Rick@OptionsMentoring.com
Tags: $700 bailout package, Market Commentary
Posted in Market Analysis | No Comments »
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Apple Downgraded, RIMM Continues Lower
Monday, September 29th, 2008
Apple (AAPL, $109.88, down $18.36) is down sharply this morning after a couple of analysts downgraded the stock. RBC Capital lowered Apple’s stock from “outperform” to “sector perform” while Morgan Stanley (MS, $22.41, down $2.34) shifted gears from “overweight” to “equal weight”. Morgan’s price target for the stock was also lowered from $178 to $115. RBC Capital dropped its target from $200 to $140.
It seems both analysts believe that a weaker economy will hamper the consumer which will lead to less demand for Apple’s products. Hmmm. I’m not sure demand for Apple’s products will suffer as much as its stock is today but the downgrades have hurt. Today’s whipping is the biggest drop in Apple’s stock in seven years.
I have written about Apple for quite some time as well as Research In Motion (RIMM, $66.48, down $4.28). Both stocks have been huge winners in the past and normally go through these wild price swings a few times a year. They have been leaders in the past and will be in the future but the current climate is punishing both stocks.
RIMM recently reported lousy numbers and its outlook scared Wall Street. The stock also got a downgrade this morning. Some of you may have put on an option strangle trade for RIMM based on your comments and emails and that trade has done extremely well.
The October 120 calls (RULJD, $0.03, down $0.01) were going for $1.20 the day earnings were announced and the October 80 puts (RFYVP, $14.85, up $3.50) were going for $2.06. The calls will obviously expire worthless but the puts are up seven-fold. The total cost to buy 10 calls and 10 puts would have been around $3,250. Even if the calls expire worthless, you would still have nearly $15,000 if you sold the puts today. Talk about ROI…
I don’t expect Apple to keep falling as low as RIMM but it could. The market is very irrational right now which means these types of options trades are working. If you wanted to look at Apple as a strangle trade you could follow the October 120 calls (QAAJD, $5.85, down $7.65 and the October 100 puts (QAAVT, $5.35, up $4.55). I think there will be enough movement in Apple that the trade could return 10%-20% over the next few weeks.
Rick Rouse
Rick@OptionsMentoring.com
Tags: Apple, Morgan Stanley, RBC Capital, Research In Motion downgrades, strangle option trades
Posted in Company Commentary | No Comments »