I type this sitting at Chicago’s Midway Airport with my wife and two small children engrossed in their iTouches. In a few hours I will leave the markets and cold weather behind for the sunny wonderland that is Disney World.
Option Action –
CNBC’s option specific program was full of commentary and recommendations this past Friday.
The traders usually focus on specific stocks, but did spend a little extra time pointing out the significant drop in the VIX this past week which fell from 24.44 the previous Friday to 17.91 this past Friday. That’s a drop of almost 27%. They also mentioned CBOE NASDAQ-100 Volatility Index (VXN), just above 20, which is a technology heavy index. With VXN higher than VIX, and the VXN trading higher while the VIX was lower on on Friday, they attributed this to continued concern over the situation in Japan and the impact it may have on components that are supplied to technology companies in the United States.
There was a quick review of the price reaction in Research in Motion (RIMM) stock on Friday. RIMM dropped 11% on Friday based on the company’s earnings release the previous evening. The traders had recommended a bearish spread in front of earnings that turned out to be a pretty successful trade. Also, they suggested there may be more downside in RIMM stock, but cautioned that the company may be a takeover candidate. This is usually a pretty painful situation for short sellers. Remember, with certain bearish option spreads the worst case scenario or maximum loss is known when the trade is initiated. When a trader shorts a stock with the anticipation of lower stock prices in the future, the potential risk of a rise in the stock is theoretically unlimited.
They also discussed Apollo Group (APOL) stock and recommended a near-term long strategy based on the stock rebounding in value.
Finally, they talked about Sprint (S) which has come under pressure based on the AT&T announcement that they will be purchasing T-Mobile to increase market share. Sprint has been a consistently rumored buyout stock and this removes one of the potential suitors. The traders recommended a long term bullish strategy using options that expire in January of 2012. Their feeling is the stock should recover to above 5.00 a share which is where it was trading before the deal was announced.
In the Striking Price column Steven Sears recommends two bullish plays.
First, if you believe the market may come under pressure over the near term, consider buying VIX call options. A couple of suggested scenarios that would result in a dip in the stock market (and higher VIX index) include further negative developments in Japan or a rise in oil to the $120 range. A couple of weeks ago it was suggested that $110 was going to be the trigger for lower stock prices, maybe stocks are becoming desensitized to triple digit oil prices.
The other bullish play involves buying call options on the SPDR S&P 500 ETF Trust commonly known buy the ticker SPY. This strategy works if you believe stocks are going to work higher from current levels.
As for me, warmer weather!