A quick review of Barron’s and Options Action from this past weekend –
Options Action –
The show kicks off discussing the positive performance of some tech stocks and negative performance of some other names last week. Intel (INTC), Amazon (AMZN), and Apple (AAPL) were winning names while Research in Motion (RIMM) and Netflix (NFLX) were the underperformers. What it all comes down to is which companies are doing things right and which ones are not quite keeping up. RIMM continues to lose share to AAPL while NFLX introduced a new pricing model that resulted in the company. The new pricing model at NFLX resulted in the company losing more subscribers than was projected. In both cases of underperformance the result is company specific.
The first stock discussed was INTC. Although the stock performed well last week, the feeling is the stock may be headed for a drop between now and October expiration. A bear put spread is the suggested trade, specifically the October 20 – 21 Put Spread. Intel closed just under 22.00 on Friday. Selling the INTC Oct 20 Put and buying a INTC Oct 20 Put would cost about 0.25. If INTC trades below 20.00 at October expiration the gain is 0.75. Any between 20.00 and 20.75 results in partial gain and any closing price at expiration for INTC above 20.75 results in a loss capped at a maximum potential loss of 0.25 anywhere north of 21.00 at expiration.
The second trade was also technology oriented, but on a more macro basis. The PowerShares QQQ (QQQ) . The QQQ closed at 56.59 on Friday and the recommendation is a little longer term than the INTC recommendation. Using December option contracts the trade involves buying a QQQ Dec 56 Put for 2.40 and selling a Dec 51 Put at 1.05 for a net cost of 1.35. The payout at December expiration for this trade involves a maximum profit of 3.65 if the QQQ is below 51.00 at expiration. Partial profits may be realized if the QQQ is below 54.65. At expiration the QQQ over 54.65 results in partial loss up to 56.00. At and above 56.00 the trade results in a loss of the premium paid 1.35.
The Striking Price column continued on last week’s theme of focusing on stocks with high European exposure (mostly based on sales). Last week, paired trades were suggested, while this week a list of stocks to consider taking a short position was highlighted. The list came from a report by Goldman Sachs that suggested bearish put spreads (over the counter put spreads to be specific) on the following list of stocks –
Amgen (AMGN) Celgene (CELG)
Xilinx (XLNX) Gilead Sciences (GILD)
Conoco Philips (COP) DuPont (DD)
Biogen Idec (BIIB) Altera (ALTR)
Priceline.com (PCLN) Paccar (PCAR)
Johnson Controls (JCI) Lexmark International (LXK)
Southern Copper (SCCO) Agilent Technologies (A)
Electronic Arts (ERTS) Owens-Illinois (OI)
Goodyear Tire and Rubber (GT) Manitowoc (MTW)
Walter Energy (WLT) SunPower (SPWRA)
The time frame suggested was three months, which would coincide with December expiration for those of us that do not trade option spreads over the counter (just about all of us). This is a good shopping list (Barron’s words) to work from if considering getting some short exposure in your portfolio.
Finally, as everything in this blog has been bearish, Steven Sears also gave a nice nod to the Options Institute at the CBOE in his column. We recently created a tool to determine the appropriate number of S&P 500 (SPX) Index Puts needed to hedge a portfolio. He says it’s worth bookmarking and can be found at www.cboe.com/portfoliohedge.