Weekend Review

Barron’s –

The Striking price column focuses on the Bank stocks and option pricing on the large banks. Steven Sears mentions that although the stock market reacted positively to the results of the stress tests last week, the option market may be looking at more potential risk for these stocks going into next year. The option pricing factor that is used to measure risk in stocks is implied volatility. Looking at longer dated options on the banks, the implied volatility of options on the large banks remains high. This is pricing in risk of a bearish move for the sector. If you believe the worst is behind these stocks, then the high implied volatility for these stocks would represent opportunity.  

Options Action –

The guys started out talking about the overall market and the new highs that have been reached over the past few weeks and days. It was noted that although the S&P 500 closed above 1400 and at the highest level since May 2008 that the number of individual stocks making new highs is actually low. This indicates that the S&P 500 is being propelled higher by a small number of stocks.

The first stock specific trade was on Apple (AAPL – 585.57), which is probably the stock that has the most recommendations on this show. I’m not keep statistics on this, but it seems to come up pretty darn often. Although the stock continues to be on a run and is relatively cheap based on some metrics, the trade recommended is a bearish one in the form of selling a call spread. The trade uses the June options and sells the AAPL Jun 600 Call @ 30.50 while buying the AAPL Jun 630 Call @ 20.25 for a net credit of 10.25. This credit is the total maximum profit for this trade is AAPL is under 600.00 at June expiration. The breakeven level for this trade is 610.25 and finally the maximum loss here is 19.75 if the stock is at 630.00 or any level above this at June expiration.

The other trade recommendation is a bearish trade on Wal-Mart (WMT – 60.84) with a big part of the idea being lower consumer spending based on higher gas prices this summer. The trade is a put spread buying a WMT Apr 60 Puts for 0.45 and selling a WMT Apr 57.50 Put for 0.10 for a net cost of 0.35. The result could be a profit of 2.15 if the stock is at 57.50 or lower at April expiration. The maximum loss is 0.35 with the stock above 60.00 at expiration and the breakeven level is 59.65. A couple of the trades did note that by selling the WMT Apr 57.50 Put for 0.10 the maximum profit is being capped at 2.15. His thinking was based on the low premium of this option traders may also consider just buying the WMT Apr 60 Put for 0.45 and forgoing selling the other contract. We will see what would have worked better three weeks into April.