The major market indices saw strong gains this past week, but not strong enough to overcome a rough October. The Dow ($INDU) gained 946.06 points, or 11.29 percent, to close the week at 9,325.01. The S&P 500 ($SPX) added 91.98 points, or 10.49 percent, to 968.75. The Nasdaq ($COMPQ) tacked on 168.92 points, or 10.88 percent, to 1,720.95.  For the month, these three indices fell 14.06 percent, 16.94 percent and 17.73 percent respectively, which happens to be the worst October since 1987.

The economy garnered most of the attention this past week, although earnings news continued to pour in. The FOMC cut the Fed funds target rate by 50-basis points to a level of 1.0 percent on Wednesday. However, stocks rose sharply Tuesday with the Dow up nearly 900 points. Though the major market indices have come well off their lows from October 10, analysts still expect plenty of volatility as stocks try to work through economic problems and a decline in earnings. This week will be very important with the Presidential elections on Tuesday and a number of key economic reports on tap culminating with the employment report on Friday.

The fear indices came off their record highs this past week with the CBOE Market Volatility Index ($VIX) closing at 59.89 and the Nasdaq Volatility Index ($VXN) at 60.30, declines of 24.31 percent and 23.50 percent respectively. However, for the month of October, these two indices rose 52.04 percent and 41.62 percent on their way to hitting record highs at 96.40 and 86.52 respectively. Until this recent spike in fear, a level above 20 was considered high. Nonetheless, it does seem like these fear indices might have topped, although this could change if economic news worsens in the months to come.

 
High Volatility: Shares of CCL saw volatility on Friday following the company’s suspension of its dividend. The cruise line operator stated that it would suspend its dividend following its December payout in order to use the cash to help fund new ships in 2009 without tapping the credit markets. Of course, CCL shares have been falling with the stock hitting a new 52-week low on Friday at $21.92 before closing the session at $25.40. With IV high on the stock, traders could enter a butterfly to benefit from some consolidation in the shares. As always, view the various risk graphs to see a visual of the reward and risk associated with the trade.

Low Volatility: With IV low on airline stocks, now might be a good time to enter a strangle on this sector. The reason being that airlines could see large moves in either direction depending on oil prices and the expected consolidation in the sector. On Friday, the Justice Department approved the merger between Delta (DAL) and Northwest Airlines (NWA) and this could result in more mergers. Oil prices have fallen sharply off their summer highs, but if oil prices turn around and head higher, we would be sure to see recent gains lost in airline stocks. Three different airlines are listed in the low IV list so use risk graphs to choose the best stock to enter a strangle on.

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

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