Hope you had a great long holiday weekend. As long as it was legal, may you have enjoyed celebrating the 235th birthday of our nation by blowing up a small part of it.
This weekend there was no rest from thumbing through Barron’s and taking in a recorded episode of Options Action so here goes…
This weekend’s issue had three pieces worth interest –
First, the cover story screams with a forecast of $150 a barrel oil prices. There is a compelling argument for a continued rise in oil prices that should commence this coming fall. The result, if the article’s forecast is correct, will be prices closer to $200 than $100 this time next year. The economic impact is discussed stating that this sort of rise in the price of oil could take 1.5% out of 2012’s gross domestic product growth. The feeling is, our economy can handle higher energy prices without going into a new recession. As far as trading goes, if you agree with the outlook for much higher energy prices, take a look at energy related stocks. Also, a more direct play can be the United States Oil Fund (USO) exchange traded fund. The USO also has a very active options market with Mar 2012 and Jan 2013 expirations currently listed.
The Striking Price column discusses how low implied volatility for individual stock options series is as we enter earnings season. Next week is the first of three weeks where a majority of S&P 500 companies report their earnings for the quarter ending June 30. Steven Sears focuses in on Google (GOOG) which reports July 14, the day before July option expiration. He relays a recommendation by Goldman Sachs to buy a straddle in front of earnings. This recommendation was based on the options discounting a move of 5.7% on earnings late last week. The average price move after earnings from GOOG over the last eight quarters has been 6.1%. I do plan to check pricing again and follow up in a day or two on this idea.
Finally, there is a brief interview with Liaquat Ahmed. He was the author of Lords of Finance: The Bankers Who Broke the World which won the 2010 Pulitzer Prize for history. His book is a look at policies in the 1920s that somewhat parallel today’s economic conditions. Remember those who do not learn from history are always bound to repeat mistakes. Maybe it’s too late to mention that…
Options Action –
The show started out talking about the overall market and the 650 point rise in the Dow Jones Industrial Average that occurred last week. The low level of the VIX was also noted. In addition to the strength of the overall market, the low VIX was also attributed to Friday being the day before a three day weekend. Being Independence Day weekend the theme is bullish positions on American companies.
Brian Stutland discussed Oracle (ORCL) feeling that the stock under performed relative what it should have to their earnings report. Brian recommends a bull call spread on ORCL. He feels the stock should be above 34.00 at August expiration so he is recommending purchasing the Aug 32 Call at 1.80 and selling the Aug 34 Call for a credit of 0.65. The net cost of this spread is 1.15 and the break even on this trade is 33.15, close to the closing price of ORCL on Friday.
Mike Khouw has a bullish recommendation on American Express (AXP) based on the company’s strong fundamentals and current valuation relative to the market and competitors. The recommendation is to buy a call and sell a put. This is known as a risk reversal. The Aug 55 Call could be purchased for 0.70 and the Aug 49 Put could be sold for 0.75 late last week. The result of this trade is either buying AXP on a dip below 49.00 or on a break out above 55.00.