The Hammer Continues On The Nasdaq

In early morning trading,
the NASDAQ is continuing its decline to near the 2900 level. Option
volatilities in most stocks came down last week, but are still high compared to
September levels. The VIX (volatility index) is +2.83 at 30.68. As
long as pressure remains on the downside, option volatilities will stay heavy.
Normally, today marks the beginning of the holiday season and this tends to mean
that option volatilities will begin a slow grind downwards.

Here’s what we’re looking at today:

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– Down over 10% today to 25. The six-month
stock range is 23 1/2 – 46 1/2. Downside pressure may continue for awhile
longer. Some traders like ORCL, but think that near-term pressure might
continue, so they may look at Bull Call Spreads in March. This would be a
good strategy if they think that the stock will go to $30 by March. We are
looking at the 25-30 Call Spread for around 1 1/2. This spread maximizes
at $5 at expiration, if the stock is at $30 or higher. If the stock is at
$29 at expiration, the spread would be worth $4, and if the stock moves to $28
by March expiration, the spread would be worth $3.

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For those traders who don’t believe that CMGI is going to 0 (it’s currently trading at 11 3/4
and the 12-month high is 163), a Call Spread in March might be interesting. Even
if they only thought that the stock might rally to 15 by March expiration, the
March 12 1/2 – 15 Call Spread is something they’ll be looking at. This spread
will cost about 5/8, and will maximize at $2 1/2 at expiration.

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