The Striking Price column discusses the pending Facebook IPO and how those with bullish and bearish outlooks will approach the stock. Steven Sears states that options should start trading six days after the shares begin trading. As of this weekend, the date of the IPO as well as exactly which exchange shares will trade on is up in the air. Once calls and puts may be traded bullish and bearish outlooks will be traded in this market. It is also noted that due to the small number of publicly available Facebook shares, those interested in taking a short position may not have the opportunity to borrow shares to sell them short. The alternative is going to be taking along position in put options. If there is large demand for Facebook puts, combined with the stock being hard to borrow, the result may be high implied volatility and higher premiums for Facebook puts. For the bulls on Facebook, or those that want to own shares at a lower price, this may be an opportunity to sell puts if the high premiums are available.
Options Action –
The first recommendation is a unique trade to play a potential retracement in shares of Bank of America (BAC – 7.84). It was noted that the stock is up 40% in 2012 already and that a large part of any potential good news may already be in the stock. The bearish trade is a ratio put spread which involves selling one put and buying two lower strike puts. This trade buys one of the BAC May 7 Puts at 0.40 and then sells 2 of the BAC May 6 Puts at 0.35 for a net cost of 0.05. The ideal situation would see BAC at 6.00 at May expiration with the result being a 0.95 profit as the long May 7 Put would be worth 1.00 and the May 6 Puts would expire with no value. Below 6.00 you would be obligated to buy 100 shares of BAC as you are short one more put than you are long. However, it was noted, you are obligated to buy 100 shares at 6.00, but you also have a 0.95 profit from pairing off the long BAC May 7 Put and short May 6 Put. So effectively, if the stock is below 6.00 at May expiration you would be long 100 shares with an effective cost of 5.05 a share.
The next recommendation is on my kid’s favorite stock, The Walt Disney Company (DIS – 40.00). DIS reports earnings after the close on Tuesday of this week and shares have moved 6% on average based on the last 8 earnings releases. It was noted that although the Dow Jones Industrial Average (DJIA) was making new 52 week highs this week, DIS has lagged a bit. DIS is a component of the DJIA. Although the stock reports this week, the trade recommendation is more of a long term bet. The recommendation is buying the DIS Jul 40 Call at 2.45, which allows you to benefit from a higher price in DIS, but have limited downside exposure if the earnings report results in the stock trading down. Also, the idea has a follow up. The traders were non-specific, but it was stated that they would consider turning this long call into a spread if the stock rallies very quickly. Most likely this would involve selling a higher strike call option that expires in July or possibly an earlier month.