Russell’s Round-Up – Weekend Review

Barron’s –

The cover story for Barron’s this weekend reads “Best and Worst Run States”. As a citizen ofIllinois I shuddered a bit when I saw that. Then I quickly turned to the story to see where we are relative to our peers. The only tables showed the credit ratings of a variety of states with one showing states with the best credit ratings (it’s alphabetical so Delaware was at the top of the AAA list). At the bottom of the list showing states with the worst credit ratings sits California with an A- rating. Illinois was one step higher at A+. A special thanks to California for keeping us out of the cellar. 

Steven Sears Striking Price column talks about Warren Buffet and Berkshire Hathaway stepping up to invest $5 billion in Bank of America (BAC). This is the second week in a row that Buffet’s name has appeared in this column along with the statement that Buffet is willing to step up with a cool head when others are running in fear. Also it was noted that Buffet made this decision while soaking in the tub. I may have to start taking more baths.

Options Action –

The show started out with a bunch of weather related puns as big thunderstorm Irene approached New York City. In their discussion of the overall stock market the panelists believe they may be seeing a bottom in the stock market. The feeling is players (see Buffet note above) are starting to pick away at value.

The Oppenheimer technical analyst was brought in early and he mentioned possibly buying Boeing (BA) if you believe the market is poised for a rebound. The option strategy that was offered up was a call spread risk reversal. This complex strategy involves buying a call spread and selling a put option to help pay for the call spread. With BA at 62.75 the trade involves selling a Jan 57.50 Put at 3.80, buying a Jan 62.50 Call at 5.40 and selling a Jan 72.50 Call at 1.75. The net result is a trade initiated at a small credit (0.15). At January expiration the stock below 57.50 results in buying shares at 57.50. The trade profits from 62.50 to 72.50, with profits capped with the stock at 72.50 or higher at expiration. 

The hurricane was discussed relative to an increase in volatility in energy stocks. Brian Stutland talked about Chesapeake Energy (CHK) and buying a straddle based on the stock moving around excessively during hurricane season. He recommends an October straddle on CHK buying both the October 30 Put and 30 Call for a net debit of 4.70 with the stock trading at 30.58. The idea here is to try to trade around the CHK with a spike resulting in exiting the call side and a big drop in the stock giving you a chance to sell the put side. This is a pretty dynamic trade that involves keeping up with movement in CHK on a daily basis.