Support fails for major market indices, leaving stocks vulnerable for further declines. The Dow ($INDU) fell 450.89  points, or 5.31 percent, to close the week at 8,046.42. The S&P 500 ($SPX) gave up 73.26 points, or 8.39 percent, to 800.03. The Nasdaq ($COMPQ) lost 132.50 points, or 8.74 percent, to 1,384.35. If wasn’t for strong gains on Friday, these losses would have been much worse.

Worries about the auto sector and continued problems in the financial sector left stocks sharply lower this past week. Traders were hoping some sort of bailout would be passed by Congress for the Big Three auto makers, but it wasn’t and might not be until Congress meets again in December. At the same time, Citigroup (C) shares fell off a cliff this past week on concerns it is in need of more capital. Earlier in the week, the company announced it would cut more than 50,000 jobs. Due to these problems, stocks sold off, breaking below the lows hit on Oct. 10 and Oct. 24.

The drop in stock prices did push the fear indices higher with the CBOE Market Volatility Index ($VIX) up 9.59 percent to 72.67. The Nasdaq Volatility Index ($VXN) gained 7.80 percent to 71.20. However, despite stocks hitting new multiyear lows, the fear indices did not spike to their highs from October. We could continue to see volatility during the holiday shortened weekend with several key economic reports on tap and comments expected from several Fed leaders.

 

High Volatility: BAC is in the financial sector, which tells us without even looking at a chart that the stock has been very volatile. Implied volatility on BAC options is extremely high, above 182 for December options. On Friday, BAC shares traded to a low of $10.01 before bouncing to close with a gain of 1.96 percent to $11.47. Volume was heavy on the move, a possible sign of strength in the days to come. With IV so high and a possible bottom forming at $10, we can enter a bull put spread to bring in a credit. A 7.50-10 bull put spread would profit as long as BAC closed at $9.10 at December expiration. This means as long as BAC doesn’t fall more than 21 percent, this trade makes a profit. Besides the techincals of this trade, BAC could be supported by its dividend yield.

Low Volatility: CHL shares saw strong gains on Friday, rising 12 percent to $44.90 on the session. The stock closed just below $45, which is the site of its 50-day moving average. Volume picked up on Friday, exceeding the volume seen the bearish sessions leading up to Friday. IV is still high on a longer-term basis, but has come off its recent highs. The options for CHL were seeing IV near 100, but currently, the 30-60 day IV averages about 78. Traders could buy a call or a bull call spread to benefit from further gains in shares of CHL. Not only is the stock at its 50-dma, but this is also resistance at a descending trend line. For those more risk averse, waiting for a break of resistance would be advisable.

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

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