OCTOBER'S MARKET

Hello my fellow friends.

Well the Dow is acting not so funny. In fact, the VIX, or the Volatility Index says there will be several days of movements, say, up 100 or so, then down 100 or so.

Here is my current thinking. This week was negative. I think some money wants to get into the market in advance of October. Yes, October has historically been an erratic month, but usually on the upside---as long as the news is good. There will be plenty of good news in the form of earnings, but also a lot of commentary and hedging on each companies' future.

It will give us a lot of movement. So here is a good practice/paper trade. I offer this here in the learning context to see the movement of the Dow and the options. Here's why:
1) As stated above, it's October. It feels like it wants to move up.
2) Thursday was Rosh Hashanah. Many people were on the sidelines on Thursday and Friday.
3) The Greek Tragedy might be ameliorated.
4) It's October. Oops, I already said that. Note that there are three weeks to the main option's expiration date.
So Molly jumped back in. I don't know if these are real or practice trades. What I do know is these prices are real. And beating the Autumnal Dog to death---it's October.
She bought the DIA (yes, that's the ticker symbol of an ETF trust that owns all of the Dow 30 stocks, and mirrors the Dow at 1/100). Options are in $1 increments. She bought 5 contracts or the DIAs $112 call options for $2.57, and 5 contracts of the DIA $114 call options for $1.69. Molly then put in orders to sell the $112s at $5, and the $114s at $3.40. This represents a double of the money.

Back-Up. One reason I like this trade is this: Even though this is designed to be a 2 to 3 day trade---not counting the weekend---if it doesn't work, she can get out and cut her losses or wait. It's October, with many days to go. I'll put in my projection. I think the Dow will go to around $11,600, maybe push up to $11,800. It's not a prediction, but a projection. We all do the best we can. But think about the potential. If you owned the right to buy a stock at $112 and the stock went to $118, the option would have to be at least worth $6, plus a little more if there is time left to expiration. Six dollars is in the money---above the strike price. Her $2.57, or $1,285 for the five contracts (each contract represents 100 shares), could turn into nothing if it goes down, but if it goes up to the $118 range, she would make $5 or $6 times 500. I think it was smart for her not to get too greedy and sell these for $5. That would be $2,500 is she gets filled, and that represents a net of $1,215. She'll make more on the $114 if the Dow goes up.

Back to our test. Watch the Dow on Monday and Tuesday. Ascertain how accurate our 50 cent rule of thumb is. If the Dow goes up 100 points, the option goes up 50 cents. The Dow would have to go up 400 to 500 points to make this kind of money. There is no guarantee We'll watch and learn. She can always change the order, sell it at a lesser profit, and get back in on the next dip. Too much fun.
And one last thing, this is all done with a back-up of more time in October for it to work out. Yes, it was designed as a two to three day trade for cash flow purposes, but it's nice to have some time if the trade doesn't work out right away.
Keep reading wadecook.blogspot.com and invite your friends.
More later, Wade