Russell’s Round Up – Weekend Review

Here’s a quick recap of the news from this weekend


Larry McMillan, a good friend to the Options Institute and fellow CBOE blogger, substituted for Steven Sears this week in the Striking Price column. His discussion focuses on the put-call ratio. There is not just one standard put-call ratio. Several versions of this indicator exist. In fact two are charted every week on the page that the Striking Price column appears in Barron’s. The focus of this article is the ratio of the volume of all exchange traded equity puts to equity call options. McMillan is an astute market observer and often has excellent insight based on past performance of certain indicators. He has a pretty bullish outlook based on the price action he’s witnessed in this ratio.

Options Action –

The panelists started out focusing on the financial sector. They noted that even though JP Morgan (JPM) and Citigroup (C) reported what should have been considered good earnings late last week, the stocks were under pressure on Friday. This negative outlook on financial stocks also carried over to the Financial Select Sector ETF (XLF) which was down 4% last week. The feeling is the continuing financial issues in Europe are putting pressure on the sector even though the fundamentals appear to be improving.

The first trade mentioned involved Apple (AAPL) in front of their earnings report this week, due Tuesday after the close. The recommendation by Dan Nathan was a bullish risk reversal which involves buying a call and selling a call and a put. The result is a naked put option position which may not be appropriate (or may require special approval from your broker) for some option traders. The feeling is in addition to earnings news we will get some insight into the iPhone 5 which may come out in the fall. AAPL stock has traditionally moved up as a new product release date approaches. The feeling is this is what AAPL’s stock would do over the next couple of months.

Using September contracts Dan is selling a Sep 330 Put, buying a Sep 370 Call and selling a Sep 390 Call. Using Friday afternoon prices the cost of this spread was about 0.50. At September expiration this trade makes money above 370.50, has a small loss between 330 and 370, and exposes traders to downside risk below 330.

The second recommendation is for a trade on Microsoft (MSFT). As of Friday the options were indicating a move of 4.1% relative to MSFT’s earnings release due this Thursday. This 4.1% move is interesting as the average price move has been 4.1% over the last two years. Michael Khouw made a bullish September option recommendation based on the long term valuation of shares. .

A Final Note –

Something to watch out for – on Thursday heads of European governments are going to get together to try to work out a solution for the continuing debt crisis. Keep an eye out for increased market volatility later this week in anticipation of or in reaction to the meeting.