Weekend Review

Barron’s –

Since we are just a couple weeks from pitchers and catchers reporting, the Striking Price column discussed hitting singles. This is discussed in market terms through selling calls on stocks owned and selling puts on stocks with a strike price equal to where you would be a willing purchaser of the stock. As evidence the performance of CBOE S&P 500 BuyWrite Index and CBOE S&P 500 PutWrite Index last year were cited. In addition, it is mentioned that over longer periods of time both strategies have performed well. More information on the two indexes can be found at the links below –




Options Action –

The first recommendation is on Apple (AAPL – 493.92) which was higher on Friday while the rest of the market was under a bit of pressure. The next generation of iPad is expected by the market in early March. Since the feeling is that the good news associated with this new product may be mostly priced in the stock the recommendation is based on lower share prices next month for AAPL. A Butterfly using Put options is the trade. The spread buys 1 AAPL Mar 480 Put at 11.50, sells 2 AAPL Mar 460 Puts at 5.40 each, and buys 1 AAPL Mar 440 Put at 2.30 for a net cost of 3.00. The best outcome for this trade is AAPL at 460 at March expiration where the profit at expiration would be 17.00 on a cost of 3.00. The worst outcome is the stock above 480 or below 440 at expiration with the maximum potential loss being equal to the 3.00 premium paid on the spread.

The second trade is on Nike (NKE – 105.41) and bearish as well. This recommendation is a combination of the stock being overbought when checking the chart and the stock being expensive on a fundamental basis. A bear put spread using April options is suggested. This trade buys 1 NKE Apr 100 Put at 2.25 and sells 1 NKE Apr 90 Put for 0.90 for a net cost of 1.35. If NKE backs off in price down to 90.00 in April the reward is a profit of 8.65 on a cost of 1.35. The risk side of the equation is a loss of 1.35 if the stock is over 100.00 at April expiration.