The weekend was much less eventful around the Rhoads household than the markets were last week. Of course trying to match the roller coaster ride in the markets in my personal life would probably get me expelled from the Rhoads household….
Options Action –
The show started with Melissa Lee making the statement, “Days and weeks like the ones we just lived through are why you need options in your portfolio”. She did not expand on that statement, so I would like to. Options are financial instruments that may be used to control individual equity and market risk. The majority of strategies we discuss in the educational materials we create at the Options Institute have defined risk and reward associated with them. Riding out a week like last week is a little easier when you are aware of your maximum risk associated with a position.
During the market review, the traders noted that the bank stocks seem to be leading the market in both directions. The VIX was discussed extensively and it was noted that the index was down 7% on Friday. This 7% drop was depicted as not being enough of an expected drop indicating more volatility to come in the near term. Taking the VIX analysis a step further, there is still high implied volatility priced in the options on the VIX. This is an indication that traders that focus on VIX options continue to price in larger than normal moves for the VIX index over the near term.
The first stock discussed was JP Morgan Chase (JPM) and the recommendation was bearish. A bear put spread, which has a defined risk and reward if held to expiration, was the specific trade. This involves selling the JPM Sept 30 Put at 0.80 and buying the JPM Sep 34 put at 1.70. The net spread result is a cost of 0.90. The maximum risk on this trade is the cost of 0.90 while the maximum reward would be 3.10 if the stock is at or below 30.00 at expiration.
The second recommendation is based on playing a rebound in the price of oil. A bullish trade on Conoco Phillips (COP) is recommended. The specific trade is a risk reversal, which pops up often on the show, but is unfortunately not an appropriate strategy for the majority of option traders due to the trade involving a naked short option position. The trade involves using November option contracts, so I plan on following up later this week with bullish spreads that may be a bit more appropriate for individual investors.
Smart Money –
To change things up a bit, I’m going to discuss an interesting article in the September issue of Smart Money magazine. To give credit where credit is due, the article was pointed out to me by my boss, the lovely Mrs. Rhoads. “Some Surprising New Options” appears on page 16 and is a summary of using options to protect positions or increase income. It is a very high level article that discusses why individuals would want to consider adding option positions to their portfolio. In addition, a few mutual funds that implement option strategies in their portfolios are also listed in the article.
After a calm relaxing weekend, it’s back to the markets this Monday. I won’t venture to guess what is going to happen in the markets other than to say I bet the ride is not over.