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Losses continued to pile up for stocks this past week, but at least support held for the major market indices. Optimism about Barack Obama’s inauguration didn’t translate into higher stock prices as earnings results disappointed the Street. The Dow ($INDU) fell 203.66 points, or 2.46 percent, to close the week at 8,077.56. The S&P 500 ($SPX) lost 18.17 points, or 2.14 percent, to 831.95. The Nasdaq ($COMPQ) gave up 52.04 points, or 3.40 percent, to 1,477.29.

The inauguration was the story this week, although the stock market suffered its largest loss ever on an inauguration day. There is optimism about the new administration, but traders also realize the President Obama is stepping into one of the toughest economic situations ever for a new leader. Earnings releases for the fourth-quarter have shown just how difficult things are with results across all sectors suffering. Earnings will continue to be a focus this upcoming week, as will the FOMC meeting on Tuesday and Wednesday.  

The fear indices did see minor gains this past week, but once again, the gain was not in line with the losses seen in the major market indices. The CBOE Market Volatility Index ($VIX) gained 2.52 percent to 47.27. The Nasdaq Volatility Index ($VXN) added 5.45 percent to 46.60. Fear is avoiding moving to the highs it hit late in 2008, showing that traders have priced a large amount of upcoming weakness into stocks. This is evident also by the fact the Dow held support at 8,000 and the SPX remained above 800.

High Volatility: Unless you have just returned from a trip to Mars, you are firmly aware of the carnage found in the banking sector. Almost all banks have fallen to multiyear lows with KBE shares at less than a third of their year ago value. The KBE is a SPDR on the banking sector and closed Friday’s session at $14.17. With IV so high on KBE options, traders can enter a butterfly that has a nice reward to risk ratio. In fact, a 12-14-16 call butterfly can be entered for about $160 with a max risk of just $40. The profit zone would  be from $12.40 to $15.60, meaning that KBE shares would have to move more than 10 percent in either direction for a loss to occur.   

Low Volatility: Shares of HK have been trading in a range between about $12 and $20 for several months, closing Friday’s session at $19.36. The energy stock has mostly stayed above $16 a share this past month and looks poised to break through resistance at $20. Volumes have increased and if $20 is broken, it could easily rise to its 200-day moving average at $25. With IV low on the stock’s options, buying a straight call could be a profitable choice with a move below Friday’s low at $17.11 a possible exit point. It is always smart to have exit points set up ahead of time to avoid making emotional decisions.

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

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