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Overall Market Volatility:  After sharp declines in the prior week, the major market indices recovered nicely this past week. The Dow ($INDU) tacked on 284.68 points, or 2.11 percent, to close at 13,806.70. The S&P 500 ($SPX) gained 34.65 points, or 2.31 percent, to 1,535.28. The Nasdaq ($COMPQ) added 79.03 points, or 2.90 percent, to 2,804.19.

The fear indices did decline this past week as stocks advanced, but the losses were small compared with the prior week’s gains.  The CBOE Market Volatility Index ($VIX) fell 14.81 percent to close at 19.56 with the Nasdaq Volatility Index ($VXN) giving up just 3.59 percent to 25.01. This puts the fear indices in the middle of their 52-week range. This past week shows that day to day volatility doesn’t necessarily mean that the volatility indices are going to show large movements.

Though energy prices sit at record highs and earnings have been mixed at best; the fact that the Fed is likely to cut rates this coming week has kept stocks from falling. With a rate cut all but done, it will be interesting to see if traders continue to buy stocks to start the week ahead of the FOMC meeting Tuesday and Wednesday.

 

High Volatility: MHS shares have been on a nice uptrend and is trading not far from a 52-week high. However, IV is high for MHS options and this narrows down some of the strategies that make sense. One strategy that takes out IV risk is a butterfly and a trader can use a butterfly that is neutral, bullish or bearish. If you think MHS is going to continue to rise, using a butterfly that uses a body above its currently price of $92 would be advisable. For example, a Nov. 90-95-100 call butterfly could be set up that would provide a max profit of about $385 with a max risk of $115. This would put the profit zone between $91.15 and $98.85. Of course, the price of MHS could change before you look at this possible trade, so make sure, as always, to view a currently risk graph before entering a trade.

 

Low Volatility: VSEA shares fell this past week after the semiconductor equipment maker reported earnings. Though profits were better than expected, the company’s outlook disappointed traders. However, the stock found support at its 200-day moving average and Microsoft’s (MSFT) raised projections for personal computer sales could benefit the chip sector going forward. With IV low for VSEA shares, traders could look at a bull call spread or a riskier, but possibly more rewarding straight call purchase.

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

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