For the second time in three weeks, the major market indices saw solid gains as economic data came in better than expected. For the week, the Dow (DJI) added 240.94 points, or 2.33 percent, to close at 10,566.20. The S&P 500 (SPX) rose 34.21 points, or 3.10 percent, to 1,138.70. The Nasdaq (COMP) tacked on 88.09 points, or 3.94 percent, to 2,326.35. It was only a month ago when the Dow tested support near 10K, so the bulls have to be pleased with these results.
There were several reasons for strength this past week, but the most notable was better than expected economic news. Most reports during the week were above estimates, including data from the ISM Mfg. Index , productivity and costs and chain store sales. Friday's release of the February employment data topped things off with a nice bow. Though the U.S. economy continues to lose jobs, nonfarm payrolls were down by just 36,000, which was better than expected. Despite all the good news a gains in stock prices, volumes remain light, showing that there still are a lot of traders on the sidelines.
With strength in the major market indices, the fear indices fell sharply, and this is a concern. In fact, the CBOE Market Volatility (VIX) fell 10.90 percent to 17.42 with the Nasdaq Volatility Index (VXN) down 9.40 percent to 17.92. These fear indices have fallen for the past four weeks, putting them near the lows they hit back in mid-January. Unfortunately, these declines in January led to a mild correction for the major market indices, so traders should be aware of the risks associated with short term bullish strategies.
HIGH VOLATILITY RANKING 3-07-10 |
SYMBOL | COMPANY |
DF | Dean Foods Company |
PEP | PepsiCo Inc |
HRB | H&R Block Inc |
AMLN | Amylin Pharmaceuticals |
CF | CF Industries |
ARO | Aeropostale Inc |
IMAX | IMAX Corp |
KCI | Kinetic Concepts |
ITMN | Intermune Pharma |
KR | Kroger Company |
High Volatility: Shares of ITMN soared Friday, up 59.34 percent Friday to a price of $23.28. The biotech company got good news when the FDA announced it would review the company's Pirfenidone drug. This is a treatment for idiopathic pulmonary fibrosis. The review meeting is set for March 9, which is Tuesday. Implied volatility on ITMN options is extremely high, above 200 percent, making it possible to enter a nice bear call spread strategy. With IV so high, we can enter a March 25-30 bear call spread for a credit of $232. Yes, there is risk the stock could move above the higher strike of 30, but after rising 60 percent Friday, gains could be subdued even on a positive review. We also could see the event pushed back or comments on the drug delayed, which would crush IV and send the stock back down, allowing for us to profit quickly.
LOW VOLATILITY RANKING 3-07-10 | |
SYMBOL | COMPANY | |
SPY | SPDR Trust ETF | |
BAC | Bank of America | |
F | Ford Motor Company | |
XLF | SPDR Financial Sector | |
EEM | iShares MSCI Emerging Markets | |
GE | General Electric | |
PFE | Pfizer | |
QQQQ | Powershares QQQ Trust ETF | |
CSCO | Cisco Systems | |
MSFT | Microsoft Corp | |
Low Volatility: In the past year, shares of Ford are up more than 750 percent, closing Friday's session at a multi-year high of $13. Though this has been rather impressive, now might be a good time to benefit from some retracement. With the VIX at support and volumes so light of late, we could see some short term selling and the stocks that have been showing the strongest moves could be in jeopardy of seeing the hardest fall. With IV low, we can enter a straight put for a lower prices, which would allow traders to see a double in on the trade with a day or two of profit taking. For those wanting to be a little less aggressive, a bear put spread could be used to offset losses if the stock were to continue its impressive rise.
Jody Osborne
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
Visit Jody's Forum
[ 
