I often write this blog at a Starbucks close to my home in suburban Chicago. Today I sit outside (in November!), but from south Florida on semi-vacation for the Thanksgiving week.
The striking price column touches on combining a short put and long call when you have a bullish outlook on a stock for a trade that is cleverly called the “combination”. The example offered was involves Checkpoint (CHKP – 53.92) and the April contracts. Earlier this week, with CHKP at 58.89 the Apr 60 Call could have been purchases at 4.20 and the Apr 57.50 Put sold at 4.10 for a small credit of 0.10. Now that the stock is around 53.92 almost the identical trade may be done using the 52.50 Put and 55.00 strike call.
Another suggestion to enhance returns is selling premium. Normally a covered call is the method to do this for individuals, but a cash secured put is suggested here. Selling a put will give you the obligation to purchase shares so this should be done when you would be a ‘happy owner’ if the stock drops to the level where you would be obligated to buy it. The example Steven Sears uses involves a recent recommendation by Goldman Sachs on shares of Microsoft (MSFT – 25.30). The trade we structured when MSFT was trading at around 26.50. At that price the MSFT Jan 24 Put could be sold for 0.40. The result is the obligation to buy shares of MSFT at January expiration or if the stock is above 24.00 at expiration, a profit equal to the premium received. With MSFT a little lower in price as of Friday 0.65 could be taken in for selling the Jan 24 Put.
Options Action –
The first recommendation is a bullish one on Citigroup (C – 26.28). The stock appears to be in a pretty defined downtrend, but may be ahead of itself moving to the downside. With an outlook that the stock can return to higher levels and maybe get back into the 30’s. The stock is also considered cheap at current levels. To get some bullish exposure into the end of the year, the C Dec 28 Call may be purchased for 1.00. This is a very direct and straightforward initial recommendation. However, there is a second piece to this. It is suggested that if the stock does rally quickly instead of selling the Dec 28 Call for a profit a higher strike call may be sold with a bull call spread resulting.
The second recommendation was on Hewlett-Packard (HPQ – 27.99). The company reports earnings Monday and is Meg Whitman’s first earnings call since taking over as CEO. Also, the stock is up 25% since she joined the company. With this, there is a feeling all the good news may already be in the share price. As a trade a put spread is suggested using the Weeklys that expire on Friday. Buying the Nov 27 Put and selling the Nov 25 Puts that expire on Friday would cost 0.45. If the stock hits the lower strike price a profit of 1.55 could be gained and the maximum potential loss is limited to the 0.45 premium paid to initiate the spread.
For me, its warmth, turkey, and very little attention paid to the markets this holiday shortened week. Happy Thanksgiving to all!