Weekend Review

Options Action –

The guys were back after taking a week off for the Good Friday holiday last week. The show started with a discussion of the overall market with fingers being pointed at the tech sector which saw its first weekly loss in 2012. Tech stocks have traditionally been a good indicator of the direction of the overall market and were one of the areas that led the overall market higher. 

The first stock specific recommendation was on Morgan Stanley (MS – 17.28) which is down 18% off its highs this year. MS reports earnings on Thursday and the option market is pricing in a 4.7% price move which is in line with the stock’s average move over the last eight quarters of 4.5%.  The feeling is that the stock continues lower post earnings. The outlook goes beyond just earnings and uses May options to allow the move to play out. The structure is a complex Put Fly – Long 1 MS May 12 Put @ 0.04, Short 2 May 14 Puts @ 0.13 each (0.26 total) and Long 1 MS May 16 Put at 0.45. The net cost here is 0.23 not including commissions. If the stock trades down to 14.00 at May expiration the profit would be 1.77 and at any price between 12.23 and 15.77 this trade will make some sort of profit. With the stock lower than 12.00 or above 16.00 at expiration the trade will be a loser of 0.23. 

The next recommendation was on Chipotle (CMG – 440.40) which also reports on Thursday. The trade recommendation is a bearish one based on the coming earnings report. It was pointed out that the stock has not been very strong around earnings the past few quarters which also reflects some slowing fundamental growth trends. This trade is a bear put spread buying a CMG Jun 420 Put for 15.50 and sell a CMG Jun 390 Put for 7.50. The net cost is 8.00 with a potential profit of 22.00 if the stock trades down to 390 over the next few weeks. 

Barron’s –

Steven Sears column talks about the replacement for the Greenspan / Bernanke put of the past. Today there’s a belief that there is a ‘smart money’ put. Smart money doesn’t necessarily mean smart investors, but means institutional investors who are judged by beating the performance of the S&P 500 over certain periods of time such as quarterly or annually. When these smart money investors are under invested and the market moves higher they are more motivated to buy any market pull back. This is the sort of situation many of these money managers find themselves in this year. The result has been a sort of put on the stock market that kicks in and saves the market through fresh buying on weakness. 

IBD Monday Edition –

The Monday Edition of Investor’s Business Daily is always available at my newsstand on Saturday mornings. The Options Institute is teaming up with IBD to offer classes over the next few months so it stands to reason that I’m spending a bit more time reading IBD on a daily basis.

The Investor’s Corner column on page caught my eye this weekend with the title, “Know the Unique Risks of Trading Stock Options”. This is a great overview of what you should really know before trading options on individual stocks and a quick example of the leverage you gain from buying options is given using Lululemon Athletics (LULU – 73.51) stock. Also, there is some discussion of how option trading activity can be used as a market indicator through focusing on put and call volume.