Volatility Alert: Rough Week for Stocks Pushes Fear Higher

The fear indices soared during the week especially following the 367 points loss for the Dow on Friday.  The CBOE Market Volatility Index () added 29.5 percent to close at 22.96 with the Nasdaq Volatility Index () up 22.36 percent to 25.94. The fear indices have had a wide range this past year with the VIX showing a 52-week range from 8.60 to 37.50. The VXN has a range from 13.68 to 34.75.

On Friday, stocks tanked on the 20^th anniversary of Black Monday, due to disappointing earnings reports and continued worries about the contracting housing sector. Despite this decline, the feeling is that the economy is still in moderately good shape outside the housing sector. This coming week will see another round of earnings reports, as well as data on new and existing home sales.

 
High Volatility: AMLN announced earnings last week and the stock has shown a decline as a result. On Monday, the stock closed at $44.09 and the company’s options are showing high IV. As a result, we can enter a butterfly that offers a very nice reward/risk ration. Using a November 40-45-50 butterfly, we can set up a trade that has a possibility of making $395 with a max risk of just $105. This puts the profit range between $41 and $49. This means the stock would have to move more than 10 percent higher and 7 percent lower before a los would be incurred.
 

Low Volatility: JRJC has shown a lot of volatility the past few months, trading from a low near $10 to a high above $45. On Monday, the stock closed with a gain of a dollar to $35.13. Though Optionetics Platinum shows the stock’s options have low IV, the actual IV is still very high near 125. The odds are that IV is most likely to continue lower, not move higher. As a result, we can use various strategies to profit on JRJC. It seems the stock is going to see some profit taking after rising so sharply, so quickly. Using a direction butterfly or calendar could be profitable strategies to use. As is always the case, create a risk graph to see which strategies provide the best reward to risk ratio given you outlook.

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