TradeKing Midday Market Call Recap: SPX, DJI, NDX, VIX, MRK

Recap for Tuesday, July 3 by Nicole Wachs

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Analysis from Rob Smith of Smith’s In The Black:

S&P 500 (SPX) – at the time of this broadcast, SPX was around 1373 up about 7.5 from Monday. SPX is at the top of a broadening formation. This is a concern, as this trendline could act as resistance. Also, we are cautious since unemployment numbers come out this Friday. A pullback could result depending on the news.

Nasdaq 100 (NDX) – at the time of this broadcast, NDX was near 26.41 up over 16 points from yesterday. NDX looks slightly better than SPX because there is more room for it to travel higher before hitting up against the upper trendline of the broadening formation.
 
Dow Jones Industrial Average (DJI) – at the time of this broadcast, DJI was 12933, up almost 63 points. DJI also shows some potential to go higher, possibly to the 13000 area. However, that could be temporary, if this up move proves to just be a retracement before continuing to the downside. If that happens, it would squeeze out the short sellers at the highs, and then fall sharply to the ‘end of the world’ all over again.  For all three indices, they may hesitate at the top of their broadening patters before deciding which way to move.

Discussion from TradeKing Options Analyst Nicole Wachs:

VIX – at the time of this broadcast, VIX was about 16.6, down about 0.18 from yesterday. The VIX cash is down strongly from the last few sessions, with July and September futures contracts following suit. This time last week, July was 22, and September was 25. Today July is 18 and September is 22. Looks like the market is becoming more comfortable with lower volatility as the summer continues, as this was also the case a few weeks before. Unemployment numbers on Friday will be interesting. We could see a sharp move up in the VIX if the market does not like the report.

Smith’s In The Black chart for today is Merck – symbol MRK

Merck - At the time of this broadcast, MRK was 41.75, down .10 from yesterday. Merck has broken strongly to the upside, through its broadening formation, and continuing higher. Huge volume, likely massive accumulation, occurred in the beginning of June. This is a breakout looking back several months and more. Over the next few months, MRK could hit anywhere between 45 to 46. It could take awhile, since MRK is not a sexy mover. Ideal entry points are between 38 to 40, but you might want to enter here with a small position, and manage or scale in as the trade unfolds. If it pulled back to 37, you might want to add to the position if it shows signs of stabilizing after a pull back.
 


Technical tools used:

- Support / resistance
- Trendlines

Nicole Wachs’ potential strategy based on Rob’s chart – MRK – Protective Put (Married Put)

MRK – With Rob’s analysis as longer term bullish for MRK, the stock seems somewhat extended at the current level of 41.75. If this is still an attractive setup for you, you would not enter with an ‘all-in’ position. You would start with a smaller position. That way if it pulls back, you won’t get hurt on a large position. On the other hand, if it goes higher, at least you will participate with part of the move, albeit with a small position. Could it continue much higher before pulling back again? Yes, of course, but you are always trying to go with a higher probability setup. If you get a pull back before initiating a position, you might decide to enter with a slightly larger position than you would take right here. As always, you must take risk and manage risk that is in line with your personal financial situation and comfort level.
 
To learn how to do this analysis on your own, please check out my webinar series on How to Choose Your Strategy.
 
-        Part 1: Your Outlook on Direction and News;
-        Part 2: Your Outlook on Implied Volatility;
-        Part 3: Aligning Your Outlook with the Greeks;
-        Part 4: Option Strategy Cheat Sheet (download Playbox handout)

We are in earnings season. MRK earnings are expected to be released on July 27. Keep in mind, this will be after the monthly options expiration of July. A dividend was paid in June; the next payment would be in September. I don’t expect the dividend to be a factor for this potential trade, but it’s always good to check these things in advance.
 


Looking at the Volatility Charts, you can see the yellow line is very close to its low for the year. It’s around 15, with the low just under 13. With earnings coming up in the next few weeks, you would likely expect volatility to increase from here. A decrease is possible, but unlikely with earnings coming up.
All things considered, add up to:
 
-        Bullish strategy
-        Longer term, several months out, possibly longer
-        Low implied volatility today, with the expectation of an increase due to earnings release
 
This points to the Protective Put strategy or Married Put strategy.
Protective Put is when you buy a put on a stock you already own.
Married Put is when you buy the stock and the put at the same time.
MRK – Married Put (could also be Protective Put)

- Buy 100 MRK $41.80
- Buy 1 MRK Aug 42 Put (market was Bid 0.96, Ask 0.97)
- you may decide to hold the long put only between now and just after earnings release (July 27) to provide some protection if the stock pulls back.
- 46 days until expiration
- Total debit is $42.77 (41.80 + 0.97)
- Maximum potential loss for combined position is 42 – 41.80 + 0.97 = 1.17
- Other maximum potential loss for adjustment: if you decide to sell out the long put and continue to hold the stock after the earnings are released, you would likely recoup about $0.60 by selling the put. However, if the stock went to zero at this point, your total exposure would be $41.80 for the stock, in addition to the $0.37 loss on the closed put position.

- Maximum potential gain is unlimited after the stock climbs above $42.77
- Multi-leg commission to enter is $10.55
**NOTE: option prices are given as a per contract amount. Multiply loss and gain figures by 100 shares and by the number of contracts traded to determine the amount of the full potential loss or full potential gain. No additional calculations are needed to determine commission costs.

TradeKing Options Tools used:

- TradeKing Options Chain
- Detailed Quote / Earnings Calendar
- TradeKing Protective Put
- TradeKing Volatility Charts

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Regards,
Nicole Wachs
TradeKing Option Analyst and Director of Education
www.tradeking.com


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At the time of publication and in the preceding month, TradeKing and/or Rob Smith did not have ownership greater than 1% in any stocks mentioned; did not have any other actual, material conflict of interest known at the time of publication; have not received compensation from a public offering nor from investment banking services related to any companies mentioned within the past 12 months, nor expect to receive any in the next 3 months; nor engaged in market making in the securities mentioned.

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Any strategies discussed and examples using actual securities and price data are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell securities. Past performance is not a guarantee of future results. Consider the following when making an investment decision: your financial situation, your risk profile and transaction costs.

Market timing is a complex investment strategy which involves risk and may incur additional commission costs.

While implied volatility represents the consensus of the marketplace as to the future level of stock price volatility, there is no guarantee that this forecast will be correct.
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