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A large trading range developed this past week with large moves occurring seeming every session. Overall, the Dow ($INDU) fell 33.55 points, or 0.29 percent, to close at 11,388.44. The S&P 500 ($SPX) added 3.08 points, or 0.25 percent, to 1,254.78. The Nasdaq ($COMPQ) tacked on 12.63 points, or 0.56 percent, to 2,273.90.  

The week was one for the history books with a number of very important events taking place. Lehman Brothers (LEH), a 158-year old company, filed for bankruptcy and Merrill Lynch (MER) had to proceed with an emergency sale to Bank of America (BAC). Short selling was halted for nearly 800 financial stocks and the Fed intervened with billions to help save insurance giant AIG (AIG). The fact that the government stepped in and plans on helping financials and providing liquidity helped send stocks sharply higher the last few sessions of the week.

Despite the strong recover in the major market indices, the fear indices still ended the week with large gains. The CBOE Market Volatility Index ($VIX) gained 24.98 percent to 32.07 with the Nasdaq Volatility Index ($VXN) up 21.45 percent to 34.26. On Thursday, the VIX spiked to a high of 42 with the VXN hitting an apex above 40. The focus this coming week will be the specifics of the government’s plan to help banks and financials clear bad debts off their books. This is so these companies will be able to start borrowing again, helping the overall economy.

High Volatility: The entire stock market has experienced a lot of volatility and shares of AAPL have participated. The tech giant was trading near resistance at $180 about five weeks ago, but reached a low near support at $120 just this past Thursday. As a result of these moves, IV has spiked and a directional butterfly could be a very profitable trade. Looking at a daily chart of AAPL, we see that the stock bounced off support Thursday and now could move back to a mid-point between its recent highs and lows. Using a 150-160-170 call butterfly, we can set up a trade that has a very high reward to risk ratio. This trade could be entered for $865 per butterfly with a risk of just $135. AAPL shares would have to close between $151.35 and $168.65 at October expiration with the stock closing Friday at $140.91.

Low Volatility: PAY shares have shown some volatility in 2009, not as much as financials in general, but the stock still has a low near $10 and a high near about $21. The stock closed Friday at $17.23, bouncing off support near $16 where the 50-day and 200-day moving averages sit. The daily chart also formed a bullish hammer on Thursday, which could provide a move to recent highs near $21. A trader could use a call due to low IV and the anticipated move and this could provide a solid profit. If the stock moves below its support at its moving averages, one would have to rethink this trade and likely close it.

Jody Osborne
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site

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