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1:05pm (EST)
There has been a flurry of economic news this morning that has moved the market and the bears were able to push the major indexes lower at the open. However, the bulls got some “better-than-expected” news and have fought back to take a slight edge heading into second half of action.
Here were the numbers:
The Consumer Confidence index for August came in at 53.5 versus estimates for 50.5, Chicago PMI for August was 56.7 compared to expectations for 56.0 and S&P Case-Shiller for June was up 1%, month over month.
The other big event to watch for today will be the release of the FOMC minutes at 2pm (EST).
And now for the good stuff…
This morning we profiled a strangle option trade and little did we know we would be doing an update 4 hours later. We mentioned shares of Freeport-McMoRan (FCX, $72.54, up $2.18) are capable of big moves and we targeted a quick trade to show you how you can use them in volatile markets. The stock opened at $69.87 this morning and this is what the options have done:
The September 65 puts (FCX100918P00065000, $0.50, down $0.31) opened at 87 cents while the September 75 calls (FCX100918C00075000, $1.51, up $0.56) opened at 80 cents. Your total cost of the trade was $1.67 or $1,670 for 10 call options and 10 put options.
Shares of Freeport are only up 3% but as you can see, the call options are up 60% and have traded as high as $1.72. In other words, they more than doubled.
This was the PERFECT scenario as you could have quickly sold the calls at $1.60+ by setting a limit order to close the calls when they hit this price in your brokerage account or by our Trade Alerts if this had been an official trade. This would have put $1,600 back into your trading account in less than 4 hours.
Now, here is the beauty of this trade folks. You would still own the September 65 puts which are at 50 cents so you could close them right now and put another $500 into your account. This would give you a net of $2,100, or a 26% return…in 4 hours.
You could also roll the dice and play the puts for the rest of the week. You could also close half of the puts and let a little ride. They would do well if shares stalled and retreated back below $70 but we would pull a Steve Miller by taking the money and running.
We are going to start covering more of these trades in our Members Area but we aren’t going to go overboard. We may, from time-to-time, do a strangle option trade or straddle option trade because it is our job to make you money but a lot of investors have trouble understanding these trades or putting them on.
As we head to press, the Dow up 26 points to 10,035 while the S&P is up a couple of points to 1,050. The Nasdaq is down 3 points to 2,144.
There is a lot to cover in our Members Area today so let’s get on it. We will be back in the morning with another full update.
Futures Showing Strong Start
Wednesday, September 1st, 2010
9:10am (EST)
When we left you yesterday at 1pm, the market was slightly higher, and we were waiting to hear the “minutes” from the latest Federal Open Market Committee (FOMC) meeting. Once the language started to hit Wall Street, the market quickly surrendered its gains and headed south.
There was nothing new in the Fed’s minutes as they revealed the pace of the economic recovery has slowed in recent months. Although there were some Fed members that wanted more supportive measures, many agreed the recovery is not clicking on all cylinders.
The cautious comments pushed the market back into negative territory before the bulls battled back to make it a respectable fight. Yesterday also marked the end of the month and the August numbers weren’t pretty.
The Dow managed to hold the 10,000 level after dropping below it at the start of trading. The index added 5 points and finished at 10,014 but traded to a low of 9,941. The gains were capped at 10,073 and current resistance remains 10,100-10,200. Our downside target for the Dow is 9,800 and then 9,500. For the month of August, the index fell 4.3%.
The S&P 500 stayed below our 1,050 target but added a half-point to finish at 1,049. The index traded to a low of 1,040 and support held (for now) as we mentioned this would be a popular battle ground yesterday. A break below this region sets us up for a test down to 1,020 and then 1,000. From there we are looking for 950. As for August, the index dropped 4.7%.
The Nasdaq once again lagged its counterparts and slipped 6 points, finishing at 2,114. For the month, the index tanked 6.2% but is still finding support at the 2,100 level.
Look for resistance to be tested at the open as futures are showing a strong start this morning despite a worse than expected ADP jobs report.
Dow futures are up 102 points to 10,108 while the S&P 500 futures are higher by 12 points to 1,061. The Nasdaq 100 futures are showing a 26 point pop and are at 1,792.
There is more economic news on the way today and we are expecting another wild and choppy session. Subscribers, check for the updates in the Members Area this morning.
Tags: FOMC, option picks, stock options trading
Posted in Market Analysis, Market Commentary | Comments Off