Buying a straddle is a simple strategy that only involves buying the ‘at the money’ put and call. The combination of these two options create a spread and risk profile of extreme gains if the underlying product moves a lot. The risk to this trade is that the underlying product does not move or does not move enough to break even. This risk can be mitigated by looking at the relative price of options; implied volatility. Implied volatility can be used to determine the probability of moving a significant amount, along with the relative price of the contract. When one is looking to buy straddles, the optimal scenario is that implied volatility is low, however one has a strong thesis and conviction that the underlying is going to move a lot.

CBOE’s VIX, S&P 500 Volatility Index, is at three-year lows. This index is a measure of the aforementioned volatility. Over the last three years the VIX has had a range of $45, on the upside and $13, on the downside. Considering the VIX is currently trading at $16-ish, the low implied volatility criteria is checked, but what about conviction of a move?

The SPX dropped 16% during the debt-ceiling debacle. This precedence could be the foundation for the fiscal cliff trade. The chart below displays the SPX before and after the debt ceiling, and the chart below that displays the current SPX trend. With a few exceptions…the two charts mirror each other. Before the crash, the SPX rallied up to prior highs, or the highs established in the down channel. Perhaps if the SPX reaches there that would be the opportune time to put on duration straddles. Buying duration will increase the premium outlay, but if one could bet on anything it would be that government takes too long to figure things out under pressure.

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Starting back in the beginning of February we saw a top at $133.43, and since then we have seen a 35% decline. As we slowly made our way down to the lows, the MACD seemed to find a bottom and started to show a change of momentum. This lines up nice with the 5 waves printed off the highs and gives me more confidence going forward to see the $100 mark.

If you look at the beginning of the month for August, September, and October we saw a triple bottom where the price action bounced off of $52. You rarely will see this if bears are in control…

Since then, Netflix has been trading within a nice channel that seems to be currently working on its wave (v) of 3. This is a big moment for the bulls to step up and hold the support lines. The first big one is the $75 region and the second line of defense is $68-$70. If these can hold on the next pullback, then the bulls have only one more obstacle to overcome. There is gap resistance right up ahead starting at $90.60, and ending at the big $100 mark.

In the next month going forward, I expect Netflix to complete its wave 3 targeting the $108 region, before we see a bigger pullback in the movie monster.

The iPad, and the different variations of it, has proven to be yet another AAPL product that has created frenzy amongst consumers. Sameer Singh, an analyst from Finvista Advisors, has projected that AAPL will ship between 24 to 26 million iPads during this quarter.

The iPod lineup recently received a makeover from AAPL, which made the new devices available September 12^th, 2012. The list of upgrades includes a new 4 inch Retina display for the iPod touch, a redesigned iPod Nano with Bluetooth technology, and voiceover capabilities for the shuffle. AAPL announced October 21^st, that sales of the new and improved iPods had exceeded 3 million units.

Since reaching the September high, AAPL’s shares have lost nearly $130.00 in value. AAPL shares closed at $575.85 on Tuesday, December 4, 2012. This loss in share value is typical of AAPL. Once the initial buzz of a newly released product dies down, investors start to wonder if AAPL has anything else left in their pipeline. This is when the sustainability of AAPL’s stock starts to generate fear on Wall Street. The chart below displays AAPL’s stock history vs. different product release dates.

Despite the loss in share price, AAPL has always beaten the odds by unveiling new technology, thus setting the trend within the industry. Even with the dips in its share price, AAPL has continued to grow and set new benchmarks. During a conference call with analysts, AAPL’s CEO, Tim Cook, responded to their concerns stating, “We’ve seen, again and again throughout the years, that…these type of periods are where we distanced ourselves further from people that don’t innovate, and it increases the gap between us, and so that’s what we’re focused on.” Year after year AAPL has wowed consumers with new products, each more revolutionary than the last.  AAPL, using its impeccable marketing strategies, creates hype around its next product, driving AAPL’s share value higher. Through innovation and an established brand loyalty, AAPL will bounce back to the $700 level.

Chart provided by OVM Group LLC

Author: Tyler Sciortino

Current Student at Roosevelt University, Majoring in Finance.

Contact for questions or inquiries at tsciortino@mail.roosevelt.edu