Economic data was light this past week following the prior week's deluge of data. However, traders were in a buying mood nonetheless, leaving the major market indices higher. The Dow ($INDU) gained 164.14 points, or 1.74 percent, to close the week at 9,605.41. The S&P 500 ($SPX) added 26.33 points, or 2.59 percent, to 1,402.73. The Nasdaq ($COMPQ) tacked on 62.12 points, or 3.08 percent, to 2,080.90.

The major market indices snapped a 5-day winning streak on Friday, but still remained strongly positive for the week. Friday was the 8^th anniversary of the 9/11 attacks with the Dow finished almost exactly where it was the day before the attacks in 2001. Data last week on consumer sentiment was better than expected and several companies, including FedEx (FDX), provided optimistic outlooks. This coming week's movement is likely to be based on economic news with several top tier reports on tap. Data on inflation will be accompanied by August retail sales report, industrial production and housing starts.

Gains in the stock market pushed the fear indices a bit lower. The CBOE Market Volatility Index ($VIX) fell 4.40 percent to 24.15 while the Nasdaq Volatility Index ($VXN) lost 2.17 percent to 25.29. These fear indices have shown consolidation for the past few months near 25, but are still well above their historic norm below 20. However, we were seeing levels above 70 not that long ago.

High Volatility: BBY will be in the news this coming week with the retailer set to report earnings on Tuesday. The stock has been volatile the past six months, but has seemed to be driven to the $40 level. On Friday, the stock closed at $39.76 with the 50-day moving average a bit below at $37. IV is high on the stock's options mostly due to the company's upcoming earnings release. We can take advantage of this high IV by entering a butterfly trade. Traders could look to enter a 35-40-45 butterfly or could use a lower strike butterfly like a 35-37.50-40. The risk is that the stock will move sharply following earnings, but our risk is limited to the debit to enter the butterfly trade.

Low Volatility: MSFT shares have been following their 50-day moving average high, though the $25 area has provided some resistance. With IV low on MSFT options, now might be a good time to enter a call or bull call spread to take advantage of further gains. The stock could easily hit $28 in the near term, which would be a nice 12 percent move. If the stock closes below its 50-day moving average near $24, it would be a signal to exit the trade. The stock could start to head higher, breaking through resistance at $25 as it moves toward its earnings release Oct. 22. IV could also increase during the next month and this too would benefit a call purchase.

Jody Osborne
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site