Apple (AAPL, $91.07, down $6.00) is below $100 and is tanking along with the rest of the market. The Dow is down 454 points to 9,871 and is below 10,000 for the first time in four years. I’ve been mentioning over and over that the market could be headed lower and that September and October could be brutal. Here we are with the good possibility of going even lower.

While everyone runs for cover, it’s important to remember what type of market we are in. We have had success by shorting the market and we’ve protected ourselves by leveraging our trades. With Apple, I mentioned on September 29 that we could see another big move as the stock was sitting right at $100.

The October 120 calls (QAAJD, $0.52, down $0.33) were at $5.85 and traded as high as $9.00 the very next day as Apple rebounded to $115. They should have been closed then which allowed us to wait for another breakdown in Apple.

The October 100 puts (QAAVT, $13.00, up $4.80) were at $5.35 and are up nearly 60% today as Apple has continued its breakdown. The puts have traded as high as $15.20 when the stock hit a low of $87.54 earlier this morning and should also be closed sometime today.

Even if you left the calls open, with today’s big gain in the puts the trade is still profitable. The total cost to enter the position was $11.20 for one call and one put. I was hoping for a 10%-20% gain so the trade has reached our target. If you closed out the call at $9.00 and if you close the puts at $13.00 today your return is nearly 100%. Either way, it’s nice to know some of you are making money.

I’ll be back tonight with a recap of the market. I’ve been mentioning the VIX (^VIX, 53.45, up 8.31) for a few weeks now and I said the index could be headed to the 50’s and maybe even the 60’s. We are getting close to a market bottom but calling a “bottom” is usually pretty tough. The market can get cheaper if people continue to panic which signals that we are going to be bargain hunting here shortly.

As I go to post this, Lehman Brothers CEO is testifying before a House Oversight Committee. This ought to be interesting…

Rick Rouse
Rick@OptionsMentoring.com

After holding strong for much of the morning the market slowly gave in and drifted lower for the remainder of the day. The Nasdaq (2,438.49, down 44.82) and S&P 500 (1,392.57, down 25.69) both fell 1.8%. The Dow (12,814.35, down 206.48) lost 1.5% for the day but all three are failing to break through key resistance levels.

The S&P 500 will have to make a run past 1,425-1,450 and hold before we can seriously consider the April rally. The Nasdaq will need to test 2,600 and hold while the Dow will need to make a run at 13,500 or better to get me in the bulls camp.

The VIX (19.73, up 1.52) traded higher (remember the VIX increases as the market goes down) and tested 20 today. With first quarter earnings winding down, a weak dollar, and higher oil and food prices, I just don’t see any “good” catalysts to hang my hat on for an extended rally.

Although I could care less about market direction, I do like to follow the tug-of-war between the bulls and bears. However, some people follow market direction and tend to buy put options in a bear market and call options in a bull market. Knowing these things can help with your overall trading performance as you gain valuable knowledge on what signs the market is giving you.

Rick Rouse
Rick@OptionsMentoring.com