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For the first time in a month, the major market indices experienced declines. However, volume figures remained light, despite quadruple witching on Friday. The Dow ($INDU) lost 259.53 points, or 2.95 percent, to close the week at 8,539.73. The S&P 500 ($SPX) gave up 24.98 points, or 2.64 percent, to 921.23. The Nasdaq ($COMPQ) declined 31.33 points, or 1.69 percent, to 1,827.47. In the prior week, the Dow had finally turned positive for the year, but this achievement was short lived with declines on Monday taking this blue chip index back into negative territory.

Economic news was the focus during the week with data on pricing pressures accompanied by housing starts and several manufacturing reports. Overall, this data continues to show that the worse of the recession may be behind us, but that a recovery is still hoped for, but not yet upon us. Jobless claims have come off their highs and even continuing claims fell for the first time this year, but the jobs market remains a huge concern. Inflation pressures are not yet a problem, but economists are concerned about what sort of pricing pressures will develop down the road thanks to billions put into the global economy.

The fear indices did not see gains this past week despite the drop in stock prices. The CBOE Market Volatility Index ($VIX) fell just half a percent to 27.99 with the Nasdaq Volatility Index ($VXN) down 3.12 percent to 28.30. Many traders feel that the stock market needs to climb a wall of worry, which it did the past several months. However, declines in stock prices did not raise fears, and this could result in further declines for stocks. The Dow has seen its 50-day moving average move above the 200-day moving average, but the index is struggling to keep above these key levels.

High Volatility: UNG shares have been trading between $13 and $18 since early March. This range has gotten smaller the past month as the stock has moved above and below its 200-day moving average, only to close right on this moving average Friday at $15.16. Considering that the stock's options are showing relatively high IV, we can enter a butterfly strategy that has a rather nice reward to risk ratio. By entering July 13-15-17 butterfly, we can set up a trade that has a max risk of about $55 with a max reward of $145. The profit zone would be between $13.55 and $16.45, which seems likely given the movement of the stock of late.

Low Volatility: Last week we discussed XLF as a possible strangle candidate and nothing has changed this week. The stock remains in a very narrow range and this has pushed IV on XLF options to relatively low levels. By entering a strangle, we are taking out direction, but do need a rather large move to be profitable. Traders can also use a directional strangle, which would profit more from the stock moving in the expected direction. XLF shares closed right at their 200-day moving average at a price near $12. Since the range has become so narrow for the shares, it is likely that a large move in one direction or the other will occur. This type of strategy is not intended to be a homerun hitting strategy, but one that makes profits of about 50 percent.

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

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