Russell’s Round-Up – Weekend Review

Options Action –

The guys mentioned that we are 10 trading days removed from a 52 week low in the equity markets and are now in the green for the year. For those of you that don’t speak trader that means the market is up on the year for 2011. 

The first trading recommendation involved Apple (AAPL – 422.00) into their earnings report this week. The trade recommendation is a put spread using the 405 and 390 October contracts that expire this coming Friday. The trade is long the AAPL Oct 405 Put at 5.60 and short an AAPL Oct 390 Put at 2.30. The net cost of the trade is 3.30 with a maximum profit of 11.70 if the stock moves down by 7%. Currently the options are pricing in approximately a 5% move higher or lower in the stock this coming week. So the stock needs to move down and overshoot what the market is predicting by about 2%. Being an earnings junkie, I expect I will follow up on this one as the week goes along.

The second trade involved Goldman Sachs (GS – 96.73) into earnings. GS option contracts are implying a 5% move off of the company’s earnings report. The call on GS is bullish as the stock is considered overdone to the downside. This is almost a ‘reversion to the mean’ trade for a cheap stock. The guys are recommending a ‘risk reversal’ on GS shares. These are complex strategies that result in a naked short option contract. The naked short position results in this trade not necessarily being appropriate for all traders. This trade sells the GS Nov 80 Put at 2.20, buy the GS Nov 105 Call at 2.20. If held to November expiration the result may be long GS at 80.00 if the stock continues to trade lower or long GS at 105.00 if the stock rallies. Between those two price points, the trade is basically break-even, excluding commissions.


Barron’s –

A great friend of the CBOE, Larry McMillan, was the substitute writer for the Barron’s Striking Price column. He did an excellent job laying out why the VIX futures disconnect from the VIX index market. For those that are interested in the price action of VIX futures and options versus the underlying index this is a must read.

Also in Barron’s the cover highlights a bullish piece about financial institutions in theUnited States. The feeling is the stocks are overdone on the downside as bearish concerns about the futures prospects of this sector are overdone.