Options Market Update: Stops and Quick Profits

 
The three major indexes closed marginally higher for the week, which gave the S&P 500 its first three-week win streak since May, and the Dow and Nasdaq their first three-week win streak since February. The S&P 500 gained 0.90%, the Dow added 0.77% and the Nasdaq rose by 1.16%.

For the bulls, the market was able to withstand selling early in the week and add to the previous week’s big gains. Also, Jobless Claims matched their lowest level since 1973, Consumer Confidence beat expectations and merger and acquisition activity saw two huge deals when EMC and SABMiller were taken over.

For the bears, there was no lack of negative signals in the market last week. However many of the negative signals turned into positives for the bulls as bad news again turned into good news. For example, many traders attributed Thursday’s rally of approximately 1.5% to a drop in Consumer Prices in September, which raised hopes that the Fed won’t hike rates until 2016. Also, Wal-Mart forecasted disappointing earnings projections on Wednesday and Chinese imports fell dramatically.

Volatility


The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 15.05, or lower by 12% for the week. We took the opportunity to buy “cheap” protection via EEM January Puts when the VIX was trading around 16.

As is always the case when we buy puts for protection and not make pure bearish bets, we hope this trade goes bad. Buying puts against a portfolio of bullish positions is much like buying insurance on your home. You never want that insurance to “pay off,” but you have it just in case you need it.

Events for the Week to Come


This upcoming week is extremely light on economic data, but packed with earnings announcements. We will be active this afternoon and tomorrow, selling new calls against positions whose calls expired on Friday.

What Traders are Saying


Stops are a blessing and a curse. For example, shortly after we initiated a bullish position in Activision Blizzard (ATVI) the market fell apart, and we were stopped on half our position. As I said in my original alert, if my mental stop was tripped, we would sell half the position and then step back and evaluate the stock and the market. ATVI came roaring back in the weeks that followed, and our position turned out to be a great trade. That said, getting stopped for a loss on half the position was annoying. However, a stop was set and we had to stick to it.

Taking quick profits is another blessing and curse. Shortly after we initiated a bullish position in Adobe Systems (ADBE), we locked in a quick profit. Then the market fell apart and ADBE fell with it. However, because we had locked in profits on half the position, we were able to withstand ADBE closing on the razor’s edge of being stopped out. Since then, ADBE has exploded higher and the remainder of our position is at a profit of 35%. 

Headline News

Stock Picks

Tesla Motors

If Tesla ever begins to cut back on development and innovation costs, earnings will soar.

Alibaba

China seems to be raising up its very own version of Amazon in Alibaba (BABA.

Facebook

Roy Ward uses the PEG ratio to determine if the stock is undervalued or overvalued.

Cabot Wealth Advisory

What Fed Speeches Mean for the Stock Market Today

By Chloe Lutts Jensen on September 29, 2016

Four Fed presidents gave speeches yesterday, and every word was digested by the stock market in an attempt to better predict the Fed’s next move. With odds of a December rate hike now about even, how should stock investors prepare?Read More >

The Emerging Market Stock You Ought to Own

By Paul Goodwin on September 27, 2016

The company I’m talking about (the one that you probably don’t own) is the largest Chinese instant messaging company. It is a giant in its own right, with a market cap of $262 billion and annual sales of over $19 billion. The company grew revenue by 28% in 2015 and routinely boasts after-tax profit margins over 30%.Read More >

Tesla Model 3 vs. Chevy Bolt: Which Affordable Electric Car Is Better?

By Timothy Lutts on September 26, 2016

The Tesla Model 3 and Chevy Bolt are the first two affordable electric cars with a driving range of more than 200 miles. Let’s see how they stack up - and what they could mean to Tesla Motors (TSLA) and General Motors (GM) stock. Read More >