Using Limit Prices 09-27-2011

Cusick's Corner
The market had a nice run but was unable to hold the impressive midday gains. I was considering a small bearish swing trade in metals, but did not get my price on a GLD spread -- these are not the type of markets in which I am willing to chase a price. This is an important take away, do not chase price in this market. Place your limits with defined risk and when your measured move happens, whether through price movement or volatility crush, you pull it off according to plan. It's easier to implement if you do the prep work (we have trade plan templates, you can request one by e-mail at education@optionsxpress.com). See you Midday.

Stock market averages rallied for a second day on hopes for a European debt deal, but finished well off session highs Tuesday. The table was set for morning gains on Wall Street after stocks moved broadly higher across the Eurozone. France's CAC 40 led the advance with a 5.8 percent surge after EU officials discussed various ways to increase the size of rescue funds and to recapitalize European banks. Events overseas again overshadowed the domestic economic news, which included a disappointing reading on Consumer Confidence. The index edged up .2 points to 45.4 in September. Economists were looking for an increase to 46.6. There was a modest negative reaction to the data, but it was short-lived. After a 273 point rally Monday, the Dow Jones Industrial Average was up more than 300 points in afternoon trading today. The Dow slipped during the final two hours, however and closed with a 147-point gain - down 178 points from session highs. The tech-heavy NASDAQ gained 30 and has added 66 points on the week.

Bullish
Hewlett Packard (HPQ) rose 3.6 percent to $23.59 and was the best gainer in the Dow Jones Industrial Average Tuesday. Shares hit new 52-week lows of $21.50 Friday after the computer-maker announced that former EBAY head Meg Whitman was replacing Leo Apotheker as CEO of H-P. Shares have rebounded 5.6 percent so far this week. Options on Hewlett Packard were actively traded again today. 65,000 calls and 32,000 puts traded on the stock. The top trades were part of a spread, in which the investor apparently bought 5,000 January 27 calls on HP at $1.53 and sold 5,000 January 35 calls at 25 cents. Therefore, a Jan 27 - 35 call spread was initiated for a $1.28 debit, 5000X. It's a bullish play with an upside breakeven at $28.28 at the expiration, which represents a 19.9 percent rally through mid-January. Shares were trading just north of $30 on 8/18, but then came under fire when earnings were reported.

Bullish trading was also seen in Potash (POT), Research In Motion (RIMM), and Interdigital (IDCC).

Bearish
Shares of Deutsche Bank (DB) have been on a tear over the past few days on diminishing worries about European debt problems. DB gained $2.10 to $37.25 today and has rallied 25.9 percent since Thursday! Options on the German bank have been seeing brisk trading as well. Today, for example, 15,000 puts and 4,290 calls traded on the stock. October 35 puts, which are now 6 percent out-of-the-money and expiring in 24 days, were the most actives. 5,587 traded and, with 71 percent trading at the ask, it appears that put buyers were dominating the action and possibly taking positions on the view the rally won't last much longer. Shareholders might have initiated the trades to protect recent gains in the stock.

Bearish trading was also seen in Star Scientific (CIGX), Skechers (SKX), and Career Education (CECO).

Index Trading
Overall options volume was relatively light in the index market today, with 707,000 puts and 467,000 calls traded across the S&P 500 Index (.SPX), the CBOE Volatility Index (.VIX) and the other cash indexes, which is only about 78 percent of the recent average daily volume, according to Trade Alert data. The S&P 500 Index gained 12.43 points to 1,175.38. Meanwhile, VIX, which tracks the expected volatility priced into S&P 500 Index options, finished down 1.31 points to 37.71. Yet, while anxiety levels may have eased a bit, the top index options trades of the day seem to be targeting another big move lower in the S&P. One strategist apparently bought 5000 Oct 1,100 puts on the SPX at $14.80 and sold 10,000 October 1,050 October 1050 puts at $8.30. A $2 credit was collected on this 1X2 put ratio spread, which they keep if the index holds above 1,150 through the October expiration. However, they can make an additional $50 from the spread if the index falls to 1,100 through the October expiration, which represents a 6.4 percent market decline over the next 23 days.

ETF Action
74,000 calls and 5,000 puts traded on the PowerShares Bullish Dollar Fund (UUP) Tuesday. Shares, which track the performance of the dollar against a basket of other currencies, lost 13 cents to $22.05. Morning trades on the ETF include a morning seller of 14,900 December 24 calls at 11 cents per contract. At the end of the day, more than 40,000 had changed hands. Open interest in the Dec 24 calls on the UUP fund is 57,691. Some investors might be liquidating positions on the view shares aren't likely to rally beyond $24 through the December expiration, which represents an 8.8 percent move northward over the next 60 days.