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Week and month end negatively as traders take profits following huge gains since the March lows. The Dow ($INDU) fell.259.45 points, or 2.60 percent, to close the week at 9,712.73. The S&P 500 ($SPX) lost 43.41 points, or 4.02 percent, to 1,036.19. The Nasdaq ($COMPQ) gave up 109.36 points, or 5.08 percent, to 2,045.11. For the month, the Dow was flat, but the SPX fell 1.98 percent and the Naz lost 3.64 percent.

Economic news this past week was mixed with earnings reports continuing to exceed expectations. Nonetheless, the bears took control of stocks, pushing the SPX and Nasdaq down this past month for the first time since February. There have been signs that the economy is not in a recession any longer, but weakness in the jobs market continues to be the major concern for traders. This means that the coming week could be very important, given the fact the October employment data is set for release Friday and the FOMC meets to discuss the economy and monetary policy in the middle of the week.

The fear indices have risen sharply this past week with the CBOE Market Volatility Index ($VIX) up 37.81 percent to 30.69 and the Nasdaq Volatility Index ($VXN) rising 31.79 percent to 29.81. The VIX closed above 30 for the first time since July and VXN also testing this key resistance point. In fact, both fear indices have tested this area on a couple of previous session in the past few months, but have been unable to continue their bullish ways. Economic data this week will be the key as to whether fear continues to rise and stocks continue to decline. The fact is many traders have been waiting for another chance to get into the stock market and this might be the decline they are looking for.

High Volatility: We discussed TEVA last week, but the stock is still showing a pattern that is conducive to using a butterfly trade. The stock has been trading between $49 and $53 for nearly three months. The company is set to report earnings on Tuesday and this is why IV is high on TEVA options. However, the stock entered its current trading range following its last earnings report. Volumes have been average, showing few clues that the company's report will provide information that will result in a large move in either direction in the near term.

Low Volatility: Shares of MFE fell four percent on Friday after the computer security company reported its quarterly earnings. MFE announced that revenues in the quarter fell short of expectations, which led to large volumes and a lot of volatility in Friday's session. The stock did come off its lows Friday, but looks poised to move down to prior support near $38. Traders could take advantage of low IV on MFE options by entering a put that would best profit from this move. Other possible strategies to consider would be a directional butterfly. As is always the case, it is best to view the different risks graphs to see which strategy and set up would provide the best reward to risk ration.

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

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