Finally a little snow is making Chicago seem like Chicago should in January. My two choices this morning are shovel or write a blog. I’m going with blog writing, may be the show will shovel itself (it didn’t)….
Options Action –
The guys started out talking about the overall market and expressing a little skepticism regarding the current market. The question asked is, “Is it time to get in?” and the feeling is waiting for a better entry point may be prudent. As everything with the markets, time will tell. The did note that there appeared to be some active option selling in VIX Feb 19 Puts which is a bet that the overall stock market may drop between now and the middle of next month.
The first trade recommendation was on Apple (APPL – 420.30) which reports earnings on Tuesday this coming week. It is a short term trade focused on current holders of the stock protecting profits. The recommended trade is a collar to protect against the downside, but also sacrificing some upside. The trade sells the Feb 440 Call at 6.80 and at the same time buys an AAPL Feb 400 Put at 6.80. Remember these two positions are to be combined with a current holding of AAPL stock. You gain protection below 400, but give up profits above 440.
The other stock related trade focuses on Starbucks (SBUX – 48.15) and is bearish going into their earnings report on Thursday. Although the stock usually trades up, a bear put spread is recommended as the stock may be ahead of itself going into their report. This trade buys the SBUX Feb 48 Put at 1.45 and sells the SBUX Feb 44 Put at 0.40 for a cost of 1.05. The idea is risking 1.05 to make a little under 3.00 (2.95) if the stock drops to 44.00 on earnings.
Bernie Schaeffer stands in for Steven Sears with the Striking Price column and discusses what he refers to as the “volatility illusion” in the stock market. He cites three factors that make the markets appear a bit more volatile than they truly are. First, high European market volatility gives the impression that our markets are volatile as well. Second the volatility of the 10 year US Treasury note has been higher than the S&P 500. Finally, a higher VIX does not appear to concern investors as it has in the past.