Weekend Review

Option’s Action –

The first stock recommendation is a bearish one on Priceline (PCLN – 762.39). The stock appears to be expensive and may be breaking an uptrend. The idea is to use a put spread buying a put and selling a put with a lower strike. This trade involves buying the PCLN Jun 750 Put at 38.00 and selling the PCLN Jun 700 Put for 20.00. The net cost is 18.00 with a potential profit of 32.00 if the stock trades down to 700.00 or lower at June expiration. Above 750.00 the result would be a loss of 18.00 or the premium paid to initiate the trade.

The second trade discussed was on Citigroup (C – 33.49). This is another bearish trade with the expectation that C trades below 30.00 by July expiration. The trade is a put spread as well and involves buying the C Jul 32 Put at 1.55 and selling the C Jul 27 Put for 0.55 with the result being a net cost of 1.00. The result is a trade that may lose 1.00 if the stock is over 32.00 at July expiration and make up to 4.00 if the stock is at 27.00 or lower at July expiration. 

Barron’s –

The Striking Price column discusses how missing a market rally is water under the bridge, but still frustrating to individuals. Steven Sears introduces an option strategy that allows investors and traders to get long exposure to the market and overcome some of the uncertainty that goes along with buying a market that has already had a bull run and looks like it may be a bit toppy. The suggested method is selling a vertical put spread, taking in premium that would turn into profit if the market continues higher, and having limited long exposure if the market pulls back. 

A specific strategy for the cautiously bullish is mentioned. With the SPY at 138.83, Stephen Solaka of Belmont Capital suggests selling a SPY Jun 128 Put for 0.95 and buying a SPY Jul 110 put for 0.41. The result is collecting 0.54 per spread of premium and also having the obligation to get long 100 shares of SPY at 128.00 over the next seven weeks. The July option gives the trader protection against a dramatic market drop over the next eleven weeks. To end up long the market the move would be a pullback in the S&P 500 of about 7%. You would be protected if the market drops more than 20% over the next eleven weeks. As long as the market does not drop 7% and both options expire then the credit received ends up being a profit. 

When I see suggested trades using the SPY I think one thing – SPXPM. There are distinct benefits to index options with regard to notional value and potential taxation differences. This in not only true for SPY trades as when I see trading recommendations made with broad based exchange traded funds I automatically think of comparable index options. For individual traders SPXPM is a great substitute for SPY ideas. The S&P 500 settled at 1403.36 on Friday so at 7% drop takes the market down to around 1310 and a 20% drop results in the S&P 500 at about 1120. In this case if you agree with Solaka’s trading idea you could try selling a SPXPM Jun 1310 Put at 9.20 and buying a SPXPM Jul 1120 Put for 3.80 which results in net income of 5.40. SPXPM options represent ten times the value of SPY contracts so a 5.40 credit is very comparable to a 0.54 credit on the SPY trade. 

Investor’s Business Daily – Monday Edition

The Options Institute is teaming up with IBD in June for a very special class. More information may be found at –


IBD has a systematic approach to evaluating stocks and providing a list of stocks showing good technical and fundamentals for purchase. A stock highlighted as being poised for a breakout in the Monday edition of IBD is Genuine Parts (GPC – 65.71). An option strategy to consider if you agree with the bullish outlook for GPC might be a risk reversal selling an out of the money put and buying an out of the money call. If you think GPC is going to rally from current levels over the next few months and want to get paid if you are a bit early you might consider selling a GPC Aug 65 Put at 2.40 and buying a GPC Aug 70 Call for 0.90. The trade would be initiated for a credit of 1.50.  This trade results in the obligation to buy the stock lower than current levels at 65.00 and the right to buy the stock at 70.00. If GPC is between 65.00 and 70.00 at August expiration the 1.50 credit received when the trade was initiated would be your profit. Below 65.00 you would be assigned on your obligation to purchase shares and over 70.00 you would exercise your right to buy the stock.