Russell’s Round Up – Weekend Review

Barron’s –

In the Striking Price column Steven Sears focuses in on the financial stocks. The two specific stocks that are mentioned are Goldman Sachs (GS – 92.69) and Bank of America (BAC – 56.90). Due to increased put buying, the implied volatility of options on both stocks has increased dramatically. BAC saw some support after reports of Berkshire Hathaway making an investment a few weeks ago, but the stock has been under pressure for the past few weeks. As for Goldman, the indication from the option market is that there may be a disappointment from earnings on the horizon. Goldman is set to release their earnings on October 18.

This issue of Barron’s included the quarterly mutual fund review. In this section there is a ranking of top performing funds over a variety of time periods. I found it interesting that the top five quarterly performers were volatility related exchange traded notes that give an investor exposure to the VIX. The table below summarizes this performance –

 

Fund Name

Ticker

3Q Perf

VelocityShares Daily 2x VIX Short-Term ETN

TVIX

+420.48%

CVOL C-Tracks ETN Citi Volatility Index Total Return Portfolio

CVOL

+173.80%

VelocityShares Daily Long VIX Short-Term ETN

VIIX

+156.77%

iPath S&P 500 VIX Short-Term Futures ETN

VXX

+156.71%

ProShares VIX Short-Term Futures ETF

VIXY

+154.26%

 

 

Options Action –

The show opens with a focus on the financial stocks, mentioning the negative performance from Friday where Bank of America, Goldman Sachs, and Morgan Stanley all were down 5% on the day. Both Barron’s and the option guys have their eye on the financials. Finally, there’s a mention that third quarter earnings kick into high gear this week. Alcoa gets us going Tuesday before the open and can be considered a barometer of the overall economy and the earnings prospects for the overall market.  

The first stock specific discussion was around Google (GOOG – 515.12) which reports earnings on Thursday afternoon. Currently the options contracts are discounting a 7% move off the earnings report which is in line with the average price movement out of shares from the past eight quarters. The feeling is the stock is going to have a bullish move off of earnings and a bullish spread is being recommended. The bullish spread in this case is selling a put spread which involves selling a put and buying a put option with a lower strike price which results in taking in a credit. If the stock closes above the strike price of the higher strike contract both options expire out of the money and the premium taken in results in a profit. 

The trade recommendation is to sell the GOOG Jan 500 Put at 36.00 and buy the GOOG Jan 480 Put at 27.00 for a net credit of 9.00. If GOOG stock is still above 500 at January expiration then the 9.00 credit result in a profit. It was noted that although GOOG reports their earnings on Thursday and this was discussed a bit, this is not necessarily an earnings play. In fact going out to January expiration and planning on holding the position that long results in this spread being implemented over two earnings announcements.

The next trade is on shares of Wynn Resorts (WYNN – 129.06) which is down 20% over the past few weeks. The feeling is the potential slowing of the Chinese economy may have an impact on WYNN. This stems from WYNN owning a property in Macau which is the only part of China that has legalized gambling. What is also interesting is that recent results from Macau casinos indicate that there continues to be stellar growth in this part of the gaming world. These results are contrary to investor concerns which have resulted in lower WYNN share prices. Finally as a side note, always keep in mind that Macau is also the largest gaming market in the world, not Las Vegas, so you can now impress your friends with unique trivia.

With some bullish new about Macau out the stock did rebound a bit giving those that are bearish on WYNN or China and opportunity to put on a short biased trade. The recommendation is for a short term out of the money bearish put spread on WYNN, buying the WYNN Oct 120 Put at 3.60 and selling the WYNN Oct 110 Put at 1.60 for a net cost of 2.00. If the stock drops down to the 110 price level by this Friday, the result is a profit of 8.00. At any price above 120, the trade loses the 2.00 premium paid to initiate the trade. Keep in mind the stock closed just about 129 a share last Friday, so plenty of price movement to the downside is needed for this one to turn a maximum profit.