Weekend Review

Options Action –

A big focus of the opening discussion was about the JP Morgan (JPM – 36.96) issues that came out late this past week. A trade came out of this discussion that assumes JPM continues to move down over the near term. Using a put spread to take advantage of the high implied volatility that exists in JPM options. This trade buys the JPM Jun 36 Put at 1.00 and sells the JPM Jun 34 Put at 0.50 for a net cost of 0.50. If the stock drops about 3 points from current levels or more at June expiration the result is a 1.50 profit on a cost of 0.50. The basic idea here is that JPM is going to continue move lower over the next few weeks.

The second trade idea is on Zynga (ZNGA – 7.48) and based on a derivative play with Facebook coming public next week. With the expectation of a small bounce in the shares and the implied volatility being elevated in front of the Facebook offering the trade recommendation is to sell a put. A short put position results in the obligation to buy shares at the strike price. The ZNGA Jun 7 Put could be sold for 0.50 which would be the resulting profit as long as ZNGA is above 7.00 at expiration. 

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

On page B5 of the Monday Edition (that comes out Saturday morning) there is a good article about finding an early buy point on stocks that are at the beginning of a breakout. The sample stock is Intuitive Surgical (ISRG – 558.95) and the time frame discussed was from back in 2004. It is a good tutorial on how to go about picking an entry point on a stock that is in the process of coming out of a long term base.

Barron’s –

Steve Sosnick from Timber Hill was the guest author for the Striking Price column and hit on my favorite topic – VIX. The article is a great description of how the VIX is considered a fear gauge, but also how this term may be misunderstood. The VIX is a measure of risk being priced in by SPX option contracts. Steve illustrates how the VIX should be compared to current recent market volatility when deciding whether the VIX is truly indicating more or less risk in the stock market going forward. For VIX followers and traders it is definitely a good read. I know a couple of new studies that I am going to perform have popped into my mind while reading this column.