It was 37 degrees this morning as I ran down the driveway to grab the Barron’s. At least I’m not sleeping outside without a generator for heat.
Steven Sears is back at the helm of the Striking Price column and discusses the market and prevailing bearishness that is still around. In passing buying puts on the iShares Russell 2000 (IWM – 76.03) with January expiration is mentioned. Do keep in mind, if you are looking for market exposure, long or short, index options are always worth taking a look at.
Options Action –
The guys start out with a market recap discussing how far we have come in such a short amount of time. One comment of note was how much of a drop the VIX experienced last week. In that case the feeling is two factors contributed to less premium associated with risk in the SPX options. First, there is the normal contraction of volatility in the SPX option market that goes along with a rally in the S&P 500 index. Second the feeling is the risk premium associated with the European debt situation has dissipated.
The first stock specific recommendation is on Morgan Stanley (MS – 19.25). This is a bearish recommendation and almost a market call based on the overall stock market giving back so of the recent gains and the financial stocks dropping a bit more than the overall market. The trade is a Nov 18 / 17 Put Spread – long the MS Nov 18 Put at 0.50 and short a MS Nov 17 Put at 0.30 for a net cost of 0.20. A 10% drop in MS over the next couple of weeks is needed for this trade to hit the maximum profit of 0.80 based on on MS at 17.00 or lower at November expiration.
The second recommendation is on Coca-Cola (KO – 68.93) and is also bearish. Part of the thinking here is that the more defensive sectors such as consumer staples have outperformed the overall market performance this year. Since there has been outperformance in these more volatile times, there may be some under performance in a less volatile market. The bearish trade is another put spread with a little longer time frame than the first trade. The guys recommended buying the KO Jan 67.50 Put at 1.80 and selling the Jan 65.00 Put at 1.10 for a net cost of 0.70. The target price is for KO to drop down to 65.00 at January expiration where the spread will be worth 2.50 for a profit of 1.80.
The weather is chilly here in Chicago, but the first snow of the season is coming to the East Coast, love them or loathe them, let’s hope the people sleeping outside stay warm and safe.