Losses were not as large this past week, but the fourth consecutive week of declines left January with severe losses. The Dow ($INDU) fell 76.70 points, or 0.95 percent, to close the week at 8,000.86. The S&P 500 ($SPX) lost 6.07 points, or 0.73 percent, to 825.88. The Nasdaq ($COMPQ) was flat, down just 0.87 points to 1,476.42. Support did hold for the major market indices at 8,000 on the Dow and 800 on the SPX, but the month saw record declines. The Dow gave up 8.84 percent; the SPX lost 8.57 percent and the Naz giving up 6.38 percent. Things were even worse for small cap stocks with the Russell 2000 ($RUT) losing 11.20 percent.

This past week was highlighted by the passage of the stimulus plan in the House of Representatives, although traders were disappointed that the vote was party line. Traders are also waiting for a "bad bank" plan announcement, which has left financial stocks in a state of extreme volatility. Economic was obviously weak this past week, but this was expected and some data was actually better than anticipated. Nonetheless, traders remain focused on the jobs market with the January employment data due out this coming Friday. Once again, more than 500,000 payrolls were likely lost during the month and this is a huge concern for economists and traders alike.

Despite further losses for the major market indices, fear actually fell during the week. The CBOE Market Volatility Index ($VIX) lost 5.14 percent to 44.84. The Nasdaq Volatility Index ($VXN) gave up 3.58 percent to 44.93. Support has held for stocks and this though earnings have been weak, they have mostly matched expectations. In the month of January, the fear indices did spike, up 12.10 percent and 10.15 percent on the VIX and VXN respectively.

High Volatility: With financial shares seeing such large moves the past six months, implied volatility is extremely high on these options. Shares of JPM closed Friday's session at $25.51 with a 52-week range from $17.70 to $50.63. IV has fluctuated drastically as well with the current ATM IV in the mid 80s. Just six months ago, IV was near 50 and a year ago it was closer to 30. We might have already seen the worst in the financial sector, but this doesn't mean volatility won't continue in the months to come. As a result, traders can profit from using either a buy-write on JPM shares or a calendar spread. The Feb-June 29 call calendar would cost about $275 to enter for one spread with a maximum profit of $241. Of course, if the stock remains near $29 at February expiration, another call could be sold against the longer term option to bring in more profits. For those wanting to pay down a longer term option on JPM, an even farther out expiration month could be used.

Low Volatility: Shares of HK have been consolidating near resistance at $20, closing Friday's session at $19.71. In the last week, HK has formed an ascending triangle formation that seems likely to be broken to the upside. If this were to occur, the stock could easily rise to its 200-day moving average near $25. With IV low, traders can enter a straight call purchase on HK looking for a $5 a share move. Energy prices remain low due to a negative outlook on the economy, but once these outlooks temper, we are expected to see a spike in oil prices and energy shares.

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

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