The Striking price column was titled, “Monetizing Fear With GE Puts” and is a good discussion of how to possibly take advantage of a little fear in the marketplace through selling puts. The example used is selling a General Electric (GE – 19.04) put last week when the stock was under pressure. The idea could carry over to any quality stock you would be comfortable owning. The method suggested is when a quality stock is under pressure in sympathy with the overall market take a look at out of the money puts on a stock you would be willing to purchase and sell a put. You take on the obligation to buy the stock, but you get paid a premium to do so.
Options Action –
The first trade was based on Nike (NKE – 109.98) with the thought that the stock is expensive and that a near term pullback is on the horizon. The specific trade is a put spread going out to April expiration, buying the NKE Apr 105 Put at 1.80 and selling the NKE 100 Put at 0.90 which results in a net cost of 0.90. The profit on this trade will be up to 4.10 if the stock is at 100 or lower at expiration. Part of the idea on this trade involves incorporating the next earnings report which will be released before April expiration.
The other recommendation was a bullish recommendation on Las Vegas Sands (LVS – 54.83). The feeling the stock is breaking out to the upside and there is a possibility that the stock may be added to the S&P 500. With a bullish outlook the guys suggested a call spread risk reversal using June options. The spread sells the LVS Jun 46 Put for 1.25, buys a LVS Jun 60 Call for 2.00 and then finally sells a LVS Jun 65 Call at 0.85 for a net credit of 0.10. There are a few potential outcomes for this trade. If LVS is below 46.00 at June expiration you have the obligation to buy shares there. Over 60.00 the Jun 60 Call starts to pay off with the profit being capped at 65.00 due to the short Jun 65 Call. To the upside the best possible outcome would be a profit of 5.10 (0.10 credit for the trade plus 5.00 from the call spread). Finally, between 46.00 and 60.00 the result is a profit of 0.10 – the credit received for putting on the trade.