Weekend Review

Options Action –

The guys started out talking about the overall market action (which wasn’t so hot) from Friday. Apparently the market high in 2011 was on May 2 and the market environment was pretty much the same as it is currently. The question is will the market head lower (as it did last year) from here.

The first stock recommendation was on IBM (IBM – 204.99) and, reflecting a negative outlook on the overall market, of the bearish nature. The trade is a put spread buying one put and selling a put with a lower strike price. Specifically the recommendation buys the IBM Jul 200 Put at 5.00 and sells the IBM Jul 185 Put at 1.70 for a net cost of 3.30. IBM at or below 185.00 at expiration would result in a profit of 11.70. July was chosen to give the trade some time to work out along with incorporating IBM’s second quarter earnings report. 

The second trade was on a favorite company in the Rhoads household, Walt Disney (DIS – 42.93). The company reports earnings Tuesday and the options are projecting a move of 4% which is in line with the average over the past eight quarters of 3.8%. The strategy for this trade is pretty direct, buying a call. Based on a bullish outlook for several business lines buying a DIS Jul 45 Call at 0.85 is recommended. It appears that even though earnings is on the horizon these calls are relatively cheap and a good way to play a bullish outlook on Disney.

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 –

http://www.cboe.com/LearnCenter/ViewSeminar.aspx?SeminarId=67

Page A6 of Monday’s IBD has an article about Shuffle Master (SHFL – 17.19) which is a producer of gaming machinery for the casino industry. Domestic growth in this area is sluggish, but SHFL sees strong opportunities overseas and plans on expanding their business activities in these areas. Options are available on SHFL with expirations as far off as November of this year. If you agree with the bullish scenario laid out in the article you may want to take a look at in the money November calls. The SHFL Nov 13 Call was offered at 4.90 on Friday. Based on SHFL closing at 17.19 there would be 0.71 of time value. Time value will work against a long option position so the more you can avoid too much time value the better.

Barron’s –

This week’s Striking Price column was guest authored by Pat Neal of TreePoint Capital Management and focused on Currency Options for trading a macro economic outlook. He mentions that in time of turbulence stocks, bonds, and even currencies all move dramatically. As a hedge against future volatility he suggests calls on the Rydex CurrencyShares Yen ETF (FXY – 123.15) which will rise in value if the yen appreciates against the US Dollar. Also he recommends puts on the Rydex CurrencyShares Australian Dollar ETF (FXA – 101.89) which will increase in value of the Australian dollar increases versus the US Dollar. 

Also, congratulations to Steven Sears, the regular author of the Striking Price column, who received a proclamation from the CBOE in recognition of his coining the term ‘fear index’ as a reference to the CBOE Volatility Index or VIX.