Remember the Flash Crash back on May 6th 2010? I do. The S&P 500 opened at 1164, unchanged from the prior session, traded down nearly 100 points to 1065, and rallied back intra day to close at 1128, down 3.25% on the day:
The causes for the precipitous decline on May 6th, 2010 have been debated ever since, with no shortage of scapegoats… high frequency trading, fat fingers, poor liquidity and a deeply bruised investor base all suspect. Regardless if there was a main culprit or it was a combination of all those things, the one day price action was not natural. The crash came and went in a flash, (flash crash!) with many trades near the lows forced to be broken afterwards, leaving investors with the sense that the flash crash was a mirage.
But what’s interesting is what happened afterwards. The losses of the flash crash were made up within three trading days, but over the next few weeks the Flash Crash low was violated:
The Flash Crash low became a target.
Which leads me to last week’s low of 1867 in the S&P 500. The panic opening last Monday quickly reversed. Eerily similar to the Flash Crash. But once again, those lows seem like a target, now just 3% below current levels. The bounce in the major indices started fierce, but since reversing, now seems tepid at best.
The moves of some of the largest stocks in our market on Monday Aug 24th was staggering. Apple (AAPL) opened down 15%, Disney (DIS) opened down 9%, Home Depot (HD) opened down 20%, and Starbucks (SBUX) opened down 20%. All but HD are above their Friday Aug 21st close. What I find most interesting about last Monday’s price action in these stocks is that two months ago these would have been the last 4 stocks in the entire world investors would have expected to see this type of panic in.
But investors have shown their hands. If the downward volatility is to continue I could see the Monday Aug 24th opening as a decent target for these stocks: AAPL $95, DIS $93.50, HD $110 and SBUX $48.
I suspect the SPX to break last week’s lows in the coming weeks. And I expect that the large cap stocks that made last week feel so panicky will retest at least their Aug 24th opening prices (maybe not the session lows). Targets have been placed.
The other thing is I would be very surprised if the SPX were to make a new high this year. There’s just too much uncertainty and rallies seem to be finding aggressive sellers. With that factor combined with the heightened levels of implied volatility, call sales against existing stock holdings, call spread sales to express bearish views, or risk reversals where one sells an upside call and buys a put makes a ton of sense either against stock as a collar or an outright bearish play. All that said in a few of these names I like the risk reward, even with heightened options prices of placing long premium bets in the event of a retest of the Aug 24th lows.
Its hard to make bearish long premium bets into a long weekend on a day that the SPX is down 1.6% as I write, and down 3.6% on the week, which is why I am going to wait for a little bounce.
But gun to my head today, this is the trade in SBUX playing for a retest of $48 over the next 6 weeks:
Trade: SBUX ($54.50) Buy to Open Oct 52.50 / 47.50 Put Spread for $1
-Buy to Open 1 Oct 52.50 put for 1.50
-Sell to Open 1 Oct 47.50 put at .50
Break-Even On Oct Expiration:
Profits: gains of up to $4 between 51.50 and 47.50 with max gain at 47.50 or lower.
Losses: up to 1 between 51.50 and 52.50 with max loss of 1 above 52.50
Rationale: SBUX is down less than 10% from its recent all time highs, and still up more than 30% on the year. Aug 24th open of $48, which is also just below its 200 day moving average looks like a reasonable target on further broad market weakness.
I’ll wait to enter on an up day in the market.