Options Market Update: The Dogs Explode Higher

 

Below is an excerpt from Cabot Options Trader, your guide to quick profits using puts, calls, spreads, straddles, iron condors and other options trades. Analyst Jacob Mintz explains and recommends diverse investing strategies for big gains with controlled risk.

After retesting August lows on Monday and Tuesday, the market spiked higher the rest of the week, and all three indexes closed the week higher. For the week, the S&P rose by 1.04%, the Dow added 0.97% and the Nasdaq gained 0.45%

For the bulls, the market seemed on the verge of a major collapse on Monday and Tuesday as the growth leaders joined the rest of the market under real selling pressure. Then the indexes held their August lows and exploded higher. Also, Motor Vehicle Sales again blew away expectations and Consumer Sentiment was in line.

For the bears, bearish sentiment from hedge fund titans Carl Icahn and Jeffery Gundlach was extreme this week as both warned of significant downside risks in the economy and markets. Also, Friday’s Jobs Report badly missed expectations and previous month’s jobs reports were revised lower. In response to the disappointing jobs number, the odds of a Fed rate hike later this year have dropped significantly and the 10-year Treasury fell to 1.91%.

Volatility

The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 21, lower by 11% for the week. The VIX had been trending lower all week as the market held its August lows. Then on Friday, the VIX selloff accelerated to the downside after the market rebounded from early losses.

Events for the Week to Come

Last week was full of economic data releases, most of which were disappointing. Also, traders heard from many members of the Federal Reserve, who continued to send mixed messages. This upcoming week is much lighter on economic data, but again full of Federal Reserve speeches and the release of the FOMC Minutes on Thursday. Also, Alcoa kicks off earnings season on Thursday.

What Traders are Saying

The possible rotation that I wrote about at the end of the quarter played out in the first couple of days of the new quarter. The “dogs” of previous months exploded higher as oil stocks, MLPs and semiconductor stocks led the rally into the end of the week. For example, the Energy Sector ETF (XLE) gained 6.5% since Wednesday.

The bullish price action was also accompanied with big call buying. For example, on Friday a trader bought 40,000 Exxon Mobile (XOM) November 77.5 Calls, and call buying was brisk in nearly every oil stock. We have seen this type of action many times this year, as traders rush to try to buy the bottom in oil stocks, only to see them fail and go lower. If this price action continues again today, we may enter into a new oil stock long, though with a tight stop in case the rally fails again.


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.

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