Weekend Review

A few interesting market and option related tidbits from Barron’s and Options Action –

Barron’s

Vito Racanelli writes in The Trader column about the performance of the stock market last week. Most focus is given to large cap stocks which comprise the membership in the S&P 500 or Dow Jones Industrial Average measures. Last week large cap stocks were basically unchanged while small cap stocks lost 3%. This sort of divergence between small cap and large cap stocks is an indicator often used by market technicians. 

In the Striking Price column Steven Sears discusses the market’s continued climb higher using the old term, “Wall of Worry”. He states due to low implied volatility in the overall market, options are fairly cheap relative to historical standards. Being cheap, they offer traders a chance to take directional bets on stocks they like without having to pay exorbitant premiums. One consistent trading approach investors seem to be using is to buy calls that expire three or six months out from today with the intent of re-examining their market outlook as we get more fundamental information through earnings reports over the next couple of quarters.

Options Action –

The guys began the show talking about the overall market and noted the divergence between small cap and large cap stocks that also showed up in Barron’s. They noted in February the Russell 2000 was down about 3% while an old favorite at the CBOE the S&P 100 was up 3% over the same time period. 

The first trade recommendation was on Microsoft (MSFT – 32.08) which is up 24% year to date and is definitely defined as a large cap stock. The recommendation is bearish and looking out April expiration which will incorporate an earnings release the trade is a bear put spread. Buying the MSFT Apr 31 Put at 0.60 and selling the MSFT Apr 29 Put for 0.20 and a net cost of 0.40. At April expiration, if MSFT retreats to 29.00 the result is a profit of 1.60 while at any price above 31.00 at expiration the net loss is the premium paid of 0.40 for the spread. Finally break even comes at 30.60.

The second trade involves an outlook for the price of Gold and trading this outlook using options on the SPDR Gold Trust (GLD – 166.34) which is an excellent proxy for the price of gold. The feeling is lower gold prices are on the horizon. With this outlook and low volatility on option prices buying a GLD May 160 Put for 2.75 is suggested. Also as a follow up, if gold starts to move lower or there is an increase in option volatility being prepared to leg into some sort of spread in the form of selling another put on the GLD.