Russell’s Round-Up – Weekend Review

Before getting going on a typical suburban weekend of soccer (we lost 2-1) and birthday parties (one princess theme, one at a bouncy house) I was able to beat the crowd in my house, watch Options Action on the DVR and fetch Barron’s off the doorstep…

Options Action –

The guys start out with a review of the overall market and commented on two major themes – what is going to happen inEuropeand corporate earnings. The feeling is many long term investors are positioning themselves for how to be positioned when the European situation finally rights itself. Earnings came in fairly strong, but the stock reactions were mixed (Apple lower / Goldman Sachs higher) based on what was priced in the stocks before the reports (Apple near all time highs / Goldman Sachs near 52 week lows). A final comment focused on the VIX still over 30. It was noted that even though the VIX rallies when the market goes lower, the level of the VIX is an indication of how much movement is expected in the S&P 500. The VIX over 30 is pricing in more market swings or a depiction of the magnitude of expected market movement, not necessarily a directional indication of things to come.

Hansen Natural Corporation (HANS – 92.61) is the first stock mentioned. For full disclosure, this is a name I was not familiar with and was surprised to find out it is not the public company formed by a former boy band. HANS is actually a distributor of a wide variety of specialty beverages. The trade is a put spread buying one put and selling a lower strike put with the goal of having the stock at or below the lower strike at expiration. For HANS the feeling is earnings that are released in November may result in a little weakness in shares so a November put spread buying the HANS Nov 85 Put at 2.70 and selling the HANS Nov 75 Put at 1.00 for a net cost of 1.70 is the trade. If the stock reverses course and drops to 75.00 or lower the results would be a profit of 8.30 on a cost of 1.70. For the technical analysts out there, the 200 day moving average is right around 75.00. I checked HANS website and did not see a confirmed reporting date, but is should come in early November.

The second recommendation is on (BIDU – 122.16). It was noted that this is a stock that continues to trade lower despite the bullish direction of the over all market. As of Friday the options are implying a 10% move (higher or lower) on earnings which slightly more than the average move over the last 8 quarters of 8.25%. BIDU reports earnings this coming Thursday and the recommendation uses the weekly options that expire this coming Friday. As the stock appears to be breaking down, the trade in this case is also a bearish put spread buying the BIDUOct 28th 115Put at 3.75 and selling the BIDUOct 28th 100Put at 0.75 for a net cost of 3.00. If the stock breaks down to 100.00 by Friday (an 18% move – remember the options are pricing in a 10% move) then the result is a profit of 12.00 on a 3.00 cost. This one is going to require some follow up later in the week as the earnings date reports.

There was a review of the Goldman Sachs (GS – 102.09) trade from last week that was partially based on the earnings results that were released last week. The trade was a risk reversal that benefited from a move higher in shares and is a slight profit as of Friday. Although the trade is using November option contracts and there is still some time to go, the feeling is it’s time to exit the trade. I plan on checking the opening prices on Monday and seeing how following up on their exit call could work out.

Barron’s –

John Marshall, a derivatives analyst at Goldman Sachs, took over the Striking Price column duties this week. He discussed the other E (earnings, not Europe) mentioned that a Goldman Sachs study of earnings found that on average stocks tend to outperform the S&P 500 around the time of earnings reports. Also, he noted that stocks rose an average of 3% during the week of their earnings report when the VIX is between 35 and 45 so the result is investor call buying in front of earnings during these times of high volatility. 

He also discusses what is referred to as ‘relief rallies’ off earnings reports. A relief rally occurs based on three factors; bearish sentiment in front of earnings, shares at support levels near the report, and potential catalysts on the horizon that encourage share purchase. Put those together and you may have a candidate for a long trade into earnings. 

Finally, he mentioned some stocks to at least watch for a big move this coming week. Based on option pricing and implied volatility levels Netflix (NFLX – 117.04) indicates a 16% move on earnings, First Solar (FSLR – 53.77) options are pricing in a 14% move, Sprint (S – 2.77) should move 12% and Radio Shack (RSH – 13.32) options are pricing in an 11% move. By Friday we will know just how good the option market was at estimating the post earnings price move on these four stocks.

Another area of interest in Barron’s comes from the cover page article on technology stocks. Technology tends to lead and outperform in the early stages of an economic recovery. If there is a feeling things may start to look brighter in 2012 then investors should consider exposure to this area. The article lists ten stocks to own complete with 12 month targets. Eight of the ten stocks have LEAPS available so I plan on checking the opening prices for these eight stocks along with 2013 LEAPS and following up in the CBOE blog Monday morning.