NDAQ: Trading a Range
Technically, I have NDAQ once again becoming coiled as it did at the end of July. I do not give this round of coiling that much credence as coiling works far better on stocks that coil the first time in a 52-week cycle. Even though 2011 has been the year to set records by doing what it almost or never does, I do not think that higher volatility is in store for NDAQ over the next several months. However, that does not imply that I do not like the stock to trade higher into 2012! In fact, I do think NDAQ has an excellent chance to trade up to its previous 52-week high of almost $30 as we move into the New Year.
Let's review the T3/OP video with Jill and Scott and look at short-term levels on the charts.
For most stocks, lower volatility occurs when they move up and higher volatility occurs when they decline. Thus when I see volatility begin to recede, I think up for most stocks.
At this time for the overall market as well as for NDAQ, I prefer time spreading call options on most stocks. This strategy allows for time to work in the favor of the spreader as the shorter term call sold short could possibly expire worthless. Doing so reduces the cost of the longer term long call side of the time spread. Should the stock rise above the shorted short term call, then the position must be adjusted to account for that event. However, only if that upside move is rather large in percent does the time spread become a losing set up.
This time spread in NDAQ is medium in risk because the spread requires to the stock to stay basically range bound during the time that the shorted call side of the spread is in play. It is medium-to-high in reward potential, either outcome determined from the time of expiry of the shorted side of the spread. Thus, be alert for adjustments as the spread moves toward expiration of the shorted side.
Trades: Sell to open 3 NDAQ December 26 calls at $1.00 and buy to open 3 NDAQ January 26 calls for $1.50.
The total risk for the spread is $0.50, or a half point per spread. As always I will monitor the trade on this site in the comments section below. As a "thank you" for our loyal readers, we're happy to announce an exclusive free event -- "Meet the Real Money Pros: Market Strategies for 2012." The panel, moderated by Action Alerts PLUS co-portfolio manager Stephanie Link and featuring a keynote address by Doug Kass, will be held Thursday at the Nasdaq in Manhattan. Full details here: http://realmoney.thestreet.com/content/nasdaq-event-register-now. For free registration, call 1-866-861-5696.
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