The winning streak for the major market indices lasted just one week, with stocks falling sharply this past week. The Dow ($INDU) gave up 473.27 points, or 5.35 percent, to close at 8,378.95. The S&P 500 ($SPX) lost 63.78 points, or 6.78 percent, to 876.77. The Nasdaq ($COMPQ) fell 159.26 points, or 9.31 percent, to 1,552.03.  All three major market indices closed Friday at new 5 ½ year lows, but only the Naz has moved below the intraday lows seen on October 10.

Earnings news was one of the focuses this past week, but disappointing results and discouraging outlooks left traders in the mood to sell. Comments from former Fed Chairman Alan Greenspan that he made mistakes while the Chairman also left a bad taste in traders’ mouths. The fact is, many mistakes have been made and traders would rather see steps to fix problems, not place blame. This week could be key for the stock market with the FOMC meeting and statement due out Wednesday and the advanced report on third quarter GDP set for release Thursday.

With stocks falling this past week, fear picked up, moving to more new highs. The CBOE Market Volatility Index ($VIX) closed at 79.13 with the Nasdaq Volatility Index ($VXN) at 78.82, gains of 12.51 percent and 10.61 percent on the week. On Friday, these two fear indices hit all-time intraday highs at 89.53 and 86.52 respectively. Fear tends to rise when uncertainty is present in the market place and this is definitely what we have right now. The hope for the bulls now is that the SPX and Dow will hold the lows hit on Oct. 10 so that a bottom can form at this level.

High Volatility: The financial sector has obviously been a focus of traders for several months now. Of course, the stocks in this sector have taken a real beating, but the XLF did bounce off of 13 back on October 10. Now this financial sector ETF is nearing this level once again. With IV elevated on XLF options, traders play a bounce off this level by entering a bull put spread. This strategy would profit as long as the XLF stays above a given level, set up by which strikes are chosen. A November 11-13 bull put spread would profit as long as the XLF stays above 12.50 at the close of trading the third Friday in November. The risk in this trade would be maxed out at $144 per spread with a max profit of $56 per spread.

Low Volatility: IV has come down on the options for BBT, but IV remains high on a longer term basis. Shares of BBT have been volatile with the financial sector in general, but the 200-day moving average line has flattened out and sits just below $32. We can enter a November 27.50, 32.50, 37.50 call butterfly that has a max reward of nearly $400, leaving the risk at just $100. The profit zone is found between $28.50 and $36.50 with BBT shares closing Friday’s session at $32.25.

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

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