I’m running a little late on my weekend review as I returned Sunday morning from New York. On Saturday the Options Institute, Option Pit Mentoring, and The Street partnered for an education day focused on the CBOE Volatility Index and methods to trade an outlook based on the VIX. It was a great event and I want to publicly thank Jill Malandrino of The Street and Mark Sebastian of Option Pit Mentoring for a great day. Also, the students kept coming at us with great questions. Being challenged over the course of a day always makes for a exceptional class!
Steven Sears’ Striking Price price column starts out with a bleak outlook for the overall market. The title is Beware of the Terrible Twenty which refers to the possibility of a flat equity market from the year 2000 to the year 2020. In a flat or neutral market environment a useful strategy is the covered call. The column uses a covered call on IBM (IBM – 189.66) as an example of enhancing returns. His example takes a look at buying IBM trading around 190 and simultaneously selling an out of the money call option against those shares that expires in three to six months. He cites the IBM April 205 Call which is trading at 4.20 as a good candidate. If the neutral outlook proves to be correct and the stock is still trading at 190 you earn a return of 2.7% based on the 4.20 taken in when selling the call option.
Options Action –
The first recommendation is a general bearish call on the banks, but uses options on Deutsche Bank AG (DB – 40.00). The exact trade is a put spread using January options. The spread involves going long the DB Jan 35 Put at 2.20 and selling the DB Jan 30 Put at 1.10 for a net cost of 1.10. If the stock trades down to 30.00 or lower, which would probably be in reaction to some sort of new crisis in Europe, 30.00 appears to be a good support level. If correct, the trade pays off 3.90 for a cost of 1.10.
The second trade is bullish and on Target Corporation (TGT – 52.88) stock. The feeling is the stock is a good value and poised to break out. This spread also uses January options, selling the TGT Jan 46 Put at 0.25 and buying the TGT Jan 57.50 Call for 0.25. The net result of this transaction is a long position at either 46.00 or 57.50 based on the stock under 46.00 or above 57.50 at January expiration. If the stock is between those two prices, both options will expire out of the money and no stock will be purchased.