Russell’s Round-Up – Weekend Review

Here’s hoping you and yours had a wonderful holiday. Although we got a long weekend, money never sleeps and there was no rest for option discussion this past weekend –

Barron’s –

The Striking Price column discusses the total return outperformance of dividend stocks versus non-dividend paying stocks. Year to date the S&P Dividend ETF (SDY – 54.03) has outperformed the SPDR S&P 500 ETF (SPY – 126.39) by about 5%. The column continues on to discuss the potential to generate portfolio income through covered calls. For more information on this I like to point people to the CBOE S&P 500 BuyWrite Index (BXM). This index tracks the performance of a consistent covered call program using S&P 500 index options. More information is available at


Options Action –

During the macro discussion it was mentioned that there was some bearish activity on Mastercard (MA – 378.15) in the form of put purchasing late last week. On a macro basis, the feeling is this may be an indication some traders believe Christmas sales may come in a bit light. At minimum MA may be a stock to keep on your radar screen as some option traders are looking for a downside move in MA in the near term. Of course another very comparable stock that would come under pressure along with MA would be VISA (V – 102.48). Finally, the guys mentioned that foot traffic is high at the malls, but anecdotal evidence has been pointing to this traffic not resulting in abundant retail sales.

Sticking with the retail theme, the first option recommendation was on shares of Amazon (AMZN – 177.28). The trade is a collar which was suggested by Brian Stutland a trader from the floor of the CBOE. The idea behind a collar is to protect from near term weakness, while sacrificing some upside to fund this protection. Brian’s trade involves selling a AMZN Feb 195 Call at 4.60 and buying a AMZN Feb 160 Put at 5.60. In addition, shares of AMZN are owned at the current price. For the cost of 1.00 you get protection against a dramatic downside move below 160.00 in AMZN off any bearish Christmas news and their next earnings release. However, you are also giving up some upside on AMZN above 195.00 through the sale of the call option.

The next recommendation revolved around a bearish outlook on McDonalds (MCD – 100.15). Basically the feeling is the stock has come too far too fast and that the share price is a bit ahead of trend. This trade does suggest stepping in front of a strong uptrend and stepping in front of a trend can always be a dangerous trade that should involve risk controls. A good counter trend trade is often a vertical spread and the recommendation here is for a bear spread using put options. The trade involves buying the MCD Mar 97.50 Put for 2.50 and selling the MCD Mar 92.50 Put at 1.20. The net cost is 1.30 and potential reward, with the stock at 92.50 or lower at March expiration, is 3.70. Again, this is a counter trend trade so a put spread makes sense as the maximum potential loss is known going into the trade. In this case that loss is 1.30 if the stock is over 97.50 at March expiration.

Finally, last week there was a bullish recommendation on Oracle (ORCL – 26.06) into the company’s earnings report. The stock lost over 3.00 points last week as the reaction was opposite of what was expected. A summary of the trade from last week is below –

The trade recommended is a bullish call spread combined with a short put. The call spread involves buying the ORCL Mar 30 Call at 1.70 and selling the ORCL Mar 33 Call at 0.70. The final leg of this trade takes a short position in the ORCL Mar 26 Put at 0.85. The net cost of this trade is 0.15. With ORCL at 26.00 or lower on March expiration a long position would result from the short put and the net effective cost of shares would be 26.15 (26.00 assignment price plus 0.15 cost of spread). 

Well shares are very close to that 26.00 level and there is still about 3 months to go so a trading decision may need to be made. The feeling is that the earnings release caused a breakout to the downside on the charts and that the thesis was wrong and now it is time to walk away. Walking away results is exiting the trade and closing it out for a loss. There is a nice lesson from seeing the pros own up to a wrong trade and showing that being wrong is ok as long as you don’t stick with the wrong trade and make things worse. Sometimes the best managing trade is to get out, take your lumps and move on to the next trade.