Weekend Review

I love this time of year when all the fun stats from the previous year get thrown around. The best tweet I read this weekend was that the S&P 500 index moved 3240 points to close unchanged on the year. Lots of volatility for nothing…

Options Action –

The guys started off talking about the increased volatility for 2011 and how although the market moved around a lot we finished the year basically unchanged. One interesting comment was that although the S&P was flat for 2011, the VIX is actually about 1/3 higher than where it settled at the end of 2010.

The first trade recommendation was based on the price of gold. Specifically using options on the GLD ETF (GLD – 151.99) and creating a bear put spread. The spread involves buying the GLD Jan 156 Put for 4.40 and selling the Jan 151 Put at 1.90 for a net cost of 2.50. If the GLD is at or below 151.00 at expiration this trade results in a profit of 2.50. In fact, if the price of gold does not move between now and January expiration (very unlikely given the volatility we’ve seen in gold lately) this trade would still result in a profit. A maximum loss of 2.50 would be incurred if the GLD rallies and is at or above 156.00 at January expiration.

The second trade is bullish and involves shares of Morgan Stanley (MS – 15.13). A bull call spread using the MS Feb 16 and MS Feb 18 Call options. The MS Feb 16 Call is purchased for 0.85 and the MS Feb 18 Call is sold for 0.30 and the net cost is 0.55. If MS rallies up to 18.00 or above at February expiration then the trade turns out to be a winner to the tune of 1.45. At any price below and including 16.00 this trade turns out to be a loser to the tune of the premium of 0.55 that was paid for the spread.

Barron’s –

The Striking Price column starts out talking about the success of buy-write strategies relative to buy and hold in 2011. A review of the performance of several indexes in 2011 appears in the blog entry below –


Steven Sears column finishes up discussing 2012 and the VIX – the feeling is since Wall Street has been on vacation the past two weeks so the resumption of market volatility may start to occur in the near year. More volatility may lead to a higher VIX.