Options Action – The guys start out discussing the European debt downgrades and how the market reacted to the rumor and then truth that came out on Friday. The feeling is that a lot of the news that came out appeared to already be in the stock market. Also, it was noted more defensive and or stocks of stable companies appeared to hold up better than the overall market. Finally the guys turned to the CBOE Volatility Index (VIX – 20.91) in the low 20’s as an indication that the market is not anticipating much more in the form of volatility over the near term.
The first stock recommendation is a pretty direct one. The stock price for Goldman Sachs (GS – 98.96) has lagged competitors recently so the feeling is it may be time for the stock to play some catch up. The thought is the stock could reach 120 over the near term and the recommendation is to buy a GS Feb 110 Call at 1.15. The nice piece of this is that as always the maximum risk behind a long option position is the premium paid for the option. In this case the potential loss is 1.15. If the stock reaches the mentioned target price of 120 then the outcome could be a nice profit of almost 9.00.
The next stock discussed was Ebay (EBAY – 30.62) which reports earnings on Wednesday. A bullish trade in the form of a call calendar spread was recommended. Specifically, the trade is to buy an EBAY Feb 32 Call at 0.85 while selling an EBAY Jan 32 Call at 0.40 for a net cost of 0.45. The best outcome for this trade is EBAY trading at 32.00 at January expiration. At January expiration, you may choose to sell the February call or possibly hang on to it if you believe EBAY may continue higher after January options expire.
Barron’s – Michael Santoli has an interesting article about the stocks that comprise the Dow Jones Industrial Average and the dichotomy of performance that occurred with some stocks up big and some having a pretty difficult 2011. He mentions that often investors will take a look at the underperformers and look for bargains. This strategy would not have worked too well in 2011 and the top performers from 2010 continued to perform well in 2011. Among the underperformers from 2011 the feeling is Alcoa (AA – 9.80) may be the best bet. However, the stock is already up a little over 13% in 2012.
Steven Sears Striking Price column discusses resources that may be of use to those interested in the option market. He gives a nod to the CBOE’s website as a spot to brush up on the basics of options.
This issue of Barron’s also includes the first part of their annual roundtable discussions. For those curious about potential investment ideas for 2012 investments this is definitely worth a read.