9:15am (EST) What a rough two days it has been. The Dow has dropped 300 points and it is funny how things can change in an instant. Yesterday, I talked about key support levels for all of the major indexes and as I was writing, it felt like Tuesday was going to end up lower. The Dow started off in the green but 10 minutes into the session we were struggling to stay positive. After 10am, I knew the bulls were in for a long day. I mentioned the possibility of us drifting lower into the trading ranges we have been in and it feels like those levels could be just around the corner. I still say 2Q earnings will have a major say on where the market is headed over the summer and perhaps the bears are mounting an attack leading up into this event. Second quarter earnings will hit the second week of July so we could be setting up for some really choppy action. I knew this going into earnings which is why we went longer out with our trades instead of taking the closer month option contracts. I’ve been watching Abercrombie & Fitch (ANF, $25.80, down $1.25) again. I was looking for a good setup after the company announced a 30% drop in May sales on June 4th. The next day the stock fell from $32 to $28. Last Friday, shares hit a low of $26 but bounced back by the end of the day to close at $27.58. There it was, the perfect setup. The stock had run right back up to “resistance” which was the low made right after that June 4th announcement. The “high-roller, big boy, swing for the fence trade” would have been buying the June 25 puts (ZWRRE, $0.40, up $0.25) which zoomed 166% yesterday. The more “conservative” trade would have been a play on the July 25 puts (ZWRSE, $1.35, up $0.35). They “only” gained 35% BUT they hit a high of $1.50 which would have been a 50% gain. Quick, fast money either way you look at it. The key is that the June puts expire this Friday. The July options did not provide as much of a return as the June options because of the time value but they also won’t lose as much if Ambercrombie does a 360 and gains $5 by Friday. However, a break below $25 could lead to further trouble for the stock. If so, the July 25 puts will quickly turn in-the-money. I’ll be back later in the day with some more updates. Rick Rouse Rick@TheOptionInvestor.com]]>
