Steven Sears writes about a stock replacement strategy in the Striking Price column. The gist of the strategy is that investors will sell high priced stocks, or stocks that have had a bullish run, and replace the shares with low priced call options. The example he cites is Apple (AAPL – 502.12) which ran to 526.00 last week before backing off to as low as 490.00 before settling in for the long weekend around 500.00. A stock mentioned as a candidate for this sort of trade is Disney (DIS – 41.75) which is up over 15% this year.
Options Action –
In the introduction it was noted that the financial stocks have taken a breather in the midst of the recent market rally. This is a precursor for the first recommendation that is in Goldman Sachs (GS – 115.91) stock. As the stock has advanced nicely in 2012, the suggestion is to initiate a butterfly using April call options. Using the April options is suggested so that the trade may benefit from GS earnings due out in April before expiration. The butterfly would be constructed buying the GS Apr 120 Call at 4.00, selling 2 GS Apr 130 Calls at 1.30 each and buying a GS Apr 140 Call at 0.40 for a net cost of 1.80. To be profitable GS should fall between 121.80 and 138.20 at April expiration. The best outcome would result with the stock at 130.00 at expiration with the resulting profit coming in at 8.20. Finally, the worst case involves GS below 120.00 or above 140.00 at expiration. In either of these situations the result is a loss of 1.80 on the trade.
The next recommendation is on Priceline.com (PCLN – 582.52), a company that has made me personally angry since killing off Shatner from their commercial series last month. Although Shatner is no more, the recommendation is bullish in the form of a calendar call spread. This trade sells the PCLN Mar 620 Call @ 13.80 and buying the PCLN Apr 620 Call at 20.50 for a net cost of 6.70. The goal of this trade is for the stock to trade up to 620.00 around March expiration. Also, PCLN reports earnings before March expiration and the March options are pricing in higher implied volatility than April options so there is a time decay benefit from this trade structure.