Passage of bailout package unable to overcome concerns about the economy. The Dow ($INDU) fell 817.75 points, or 7.34 percent, to close at 10,325.38. The S&P 500 ($SPX) gave up 114.11 points, or 9.40 percent, to 1,099.23. The Nasdaq ($COMPQ) lost 235.95 points, or 10.81 percent, to 1,947.39.  The declines seen this past week are the largest in seven years.  

We could write a novel about the activities seen in the stock market this past week. Needless to say, traders are worried and this has led to a lot of volatility and uncertainty. The week started with the House of Representatives voting not to approve the bailout package. This led to an 800 point drop for the Dow on Monday, which was followed up by a gain of 500 points on Tuesday. On Friday, the September employment data was weaker than expected, supporting the view that the U.S. economy is already in a recession. However, after the Senate passed a revised bill on Wednesday, the House also voted the legislation into law Friday afternoon. Even so, late day selling sent the major market indices to new multiyear lows.

The fear indices spiked to new multi-year highs with the CBOE Market Volatility Index ($VIX) up 29.94 percent to 45.14 and the Nasdaq Volatility Index ($VXN) up 35.03 percent to 49.76. The question now is whether these high levels of fear will lead to strength for the major market indices or if things are going to get worse, leading to even higher levels of fear. The Fed is expected to continue trying different things to keep the economy from entering a deep recession. A rate cut is likely and probably some sort of extreme measure besides the passing of the bailout package.

High Volatility: AAPL shares have been hit hard the past six weeks, dropping from a price near $180 to its closing price Friday at $97.07 after hitting a low of $94.65 intraday. Weakness in the stock market has led to throwing the baby out with the bathwater. Apple is a huge brand and yet the stock has lost more than half its value this year. One way to take advantage of a possible bounce in the stock, while limiting risk, is to enter a bullish butterfly. IV is high right now on AAPL shares, allowing traders to set up an Oct. 95-105-115 butterfly with a max risk of $215. The profit range would be between $97.15 and $112.85. IV on AAPL options near 95, almost double what it was just a few months ago.

Low Volatility: MYGN shares have been in a trading range for the past few months between $62 and $68, closing Friday at $61.70. With IV low on the MYGN options, a trader might want to buy calls at support and buy puts at resistance. This isn’t a homerun strategy, but allows a trader to make solid profits as the stock moves back and forth in a range. Of course, the stock could easily move out of this range, but this is why buying options with a limited risk is a way to profit.

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

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