Russell’s Round Up – Weekend Review

Summary of pieces of interest from CNBC’s Options Action and Barron’s this past weekend.

Options Action on CNBC –

The guys started out with a market recap, which I normally skip, but there was an interesting bit of information splashed in a graphic and covered in three sentences. This past week was the beginning of earnings season and it was noted that some of the larger companies that have reported earnings this past week had poor stock performance. Specifically, Alcoa was down 7%, JP Morgan stock was down 3% and shares of Google had lost 8% since reporting their results. This coming week is a short one, with the markets closed on Friday, but the four days we are open will be choc full of earnings reports.

As part of their review, a quick reference was also made to the VIX trading with a 14 handle on Friday. For those that do not speak trader, this means the VIX quote started with a 14, such as 14.99 had a 14 handle. This is only the second time the VIX has had a 14 handle in 2011, the last time was on February 8 when the S&P 500 closed at 1324.57. Finally, the VIX closing on Friday at 15.32 was the lowest VIX index close since July 2007.

The first forward looking piece discussed Apple (AAPL) into earnings this coming week. They report on Wednesday. The recommendation was of the bearish tilt using a Put Spread with May options which, based on Friday prices, would involve buying the May 320 Put for a debit of 8.70 and selling the May 305 Put for a credit of 4.20. The net result is a cost of 4.50 with a potential return of 15.00 if AAPL is at or below 305 at May expiration. The motivation behind the trade is twofold. The first is based on the potential of a lack of positive forward looking statements out of AAPL on earnings. Second, there will be a rebalancing of the components of the Nasdaq index with AAPL’s weighting going from 20% to 12%, the result may be selling by index funds and pressure on AAPL stock. This is scheduled to occur on May 2. If you are considering a very short term play on AAPL stock using options, do remember Weeklys that expire on Thursday this week (due to the holiday) are available for trading on AAPL, along about 60 other index, exchange traded funds, and equities.

The next stock discussed was IBM (IBM). IBM will report earnings results Tuesday after the market close. Not exactly an exotic recommendation, but a bullish call was made on IBM and purchasing a 165 Call that expires on Thursday was suggested. The cost of this option was 3.00 on the close Friday, but IBM closed at 166.21 so there is 1.21 of intrinsic value in the option. 

Barron’s –

The cover story is a bullish outlook on Boeing (BA). Another bullish story, this one on Research in Motion (RIMM), this stock has been under pressure since releasing earnings a couple of weeks ago. However, RIMM releases their iPad competitor this week with fairly low expectations in the stock price. 

An interesting list to go through appears in an article on page 21. This list contains 27 companies that are candidates to be taken private through a leveraged buyout. This would often occur at a premium to the current stock price.

Steven Sears’ Striking Price column contains references to the low level of the VIX and notes this translates into inexpensive option contracts through historically low implied volatility. His column also discusses a neutral to bullish spread using SPY option contracts. This spread involves buying a May 130 Put at 1.69 and selling three 123 Puts at 0.64 each for a credit of 0.23. Results could be favorable as long as the market does not lose more than 6% between now and May expiration. 

The European Trader column discusses an IPO of Glencore which is a Swiss based commodity trading firm. Seeing this, my first thought was, could this signal the top of the commodity cycle? This fourth paragraph in this article mirrors my first thought. Finally, the Current Yield column discusses lower treasury yields from last week and how the iShares Barclays 20-Year Treasury ETF (TLT) traded higher. Although we are mostly equity traders, keep in mind the TLT, and very active option market on the TLT, if you have an outlook for the direction of interest rates.