Russell’s Round Up – Weekend Review By Russell Rhoads

My daughter was invited by a boy to come watch his little league game on Saturday night so I tagged along to see what this fella was all about. I ended up being more concerned with staying warm and dry than Tyler’s intentions toward my six year old daughter. Nothing screams baseball like 50 degrees and misty rain on a Saturday night. 


Like baseball, another summer tradition is the Midyear Roundtable in Barron’s. This recaps what suggestions were made for the year along with recommendations for the rest of 2011. From a high level, the tone is pretty cautious regarding stocks with most recommendations being on the defensive side. 

The striking price column discusses potential hedges for those that may be concerned about the directions of stocks as the round table members. Buying index related puts was recommended based on a potential quick drop in the stock market.

Finally, there was an article on Twitter about those that spread the word about the markets via tweets throughout the day. The article finishes up with a list by topic of some of the better tweeters listed. I say ‘some’ as the CBOE was left off the list. Feel free to check out @cboe via twitter where we already have over 765,000 followers.

Options Action –

Discussion of the overall market was the leading topic. It was noted that we are in the midst of a six week losing streak for the major indexes. What was also noted that the bank stocks in the form of the XLF exchange traded fund continue to outperform. The financials holding their own was considered a little encouraging for the direction of all sectors. Another piece of information that was thrown out there was that it appears some market participants were buying calls on financial related stocks to get some long exposure. Using long calls to benefit from a rally in the financials is also a method of having limited risk as the most a long call owner may lose is the premium paid for the contract.

The first stock specific trade involved Citigroup (C). The recommendation was bullish and based on the financial sector rising and C stock rising more as it catches up with the rest of its peers.

The next recommendation was on Research in Motion (RIMM). RIMM reports earnings this week and the option contracts are pricing in a 10% move. This pricing involves the magnitude of the stock price move off of earnings, not the direction of the price move. This 10% is consistent with the last eight quarterly earnings reports where the stock has moved an average of 9% the first trading day after earnings have been released. The panelists have been pretty bearish on RIMM for some time, but the trading recommendation is actually bullish. 

The fundamental opinion on RIMM is still pretty bearish. However, the feeling is the price is reflecting all the potential bad news and more. A call spread using options that expire this Friday. The specific trade involves buying the 40.00 strike call and selling the 42.50 call. Using Friday pricing the stock needs to trade up by 4.00 to break even, which is over a 10% bullish move on earnings and outside the average earnings move over the past couple of years.