Options Action –
Although we ended June on a very positive month and this was the best June since 1999 for stocks, the panelists started out taking a bearish stance toward the market. Using the header, “Canaries in the Coalmine” it was noted that Nike (NKE – 87.89), Ford Motor (F – 9.59), and Yum! Brands (YUM – 64.42) were all lower last week based on earnings outlooks. Earnings season kicks off in about a week and if these three companies are an indication of results then the market may be in for a rough ride.
Sticking with this bearish thesis for earnings and the overall market a bear put spread was recommended on Starbucks (SBUX – 53.32). The feeling is that consumer companies that cater to the high end may be seeing slowing business activity. This trade uses August options to give it some time to work out and incorporate their next earnings release into the time frame of the trade. This trade is actually pretty aggressive buying a NKE Aug 50 Put for 1.35 and selling the NKE Aug 45 Put for 0.45 and a net cost of 0.85. If the stock drops to 45.00 at August expiration the net profit comes in at 4.15. Note that is a drop of over 15% from current levels.
The next trade is on Best Buy (BBY – 20.96) which has been an unloved stock this year. The idea here is bullish and based on a potential buyout for BBY which would come at higher levels. The trade is a risk reversal which sells a BBY Jan 18 Put at 1.75 and buys a BBY Jan 24 Call for 1.50. A 0.25 credit is received and would be the profit with the stock above 18.00 at January expiration. If the stock runs over 24.00 then profits could run as well.
Bernie Schaeffer of Schaeffer’s Investment Research substituted for Steven Sears and wrote an excellent piece on the continued acceptance of volatility as an asset class. The discussion focuses on buying VIX calls to hedge against tail risk or the risk of a large drop in the overall stock market. Open interest for VIX calls continues to grow as more institutions realize the value of gaining long exposure to volatility.
One final note – early bird pricing for our next Saturday VIX Class on July 21 is available through Tuesday. Enrollment for this one has been strong already and seats are filling up fast! Online attendance is available as well. More information –