Weekend Review

Options Action –

The guys started out discussing the overall market activity this past week and especially on Friday. They noted weakness in Europe bleeding over to the US markets along with the weak employment domestically. The interesting comment was that with the potential of global recession the markets do not seem overly concerned. Finally, it was mentioned that earnings season kicks off this coming week with Alcoa (AA – 8.73) reporting their numbers after the close on Monday. Numbers from AA have significance as their products are consumed by many sectors of the economy. It was noted that earnings expectations for financial stocks may be aggressive. Time will tell beginning with Friday and Wells Fargo (WFC – 33.05) and JP Morgan (JPM – 33.90).

The first trade recommendation was a bearish trade on JPM in the form of selling a call spread. The trade takes a look at selling an August 35/37 Call Spreads. This spread sells the JPM Aug 35 Call at 1.15 and buys the Aug 37 Call at 0.50. The net result is a credit of 0.65 which is equal to the maximum profit at expiration. The maximum potential loss for this trade is 1.35 which would occur if the stock is over 37.00 at August expiration and finally the break-even point is 35.65.

The next trade was based on something many of us have been dealing with this summer – the early summer heat wave. This has an impact on commodity prices as food production is at risk and the result is much higher prices on these concerns. The idea here is to fade (or take the other side in trader’s speak) the spike in commodity prices that has occurred along with the hot weather. As a note of congratulations – a good friend of the Options Institute, Jill Malandrino of OptionsProfits has been banging the drum to be long DBA and was right on the money with that call. I shot an email over to Jill and she is still long and strong DBA from current levels.

However, the OptionsAction guys are on the other side and suggested a bearish trade on PowerShares DB Agricultural Exchange Traded Fund (DBA – 29.00). This trade is a long put – the simplest of bearish trades. With an outlook to August the recommendation was to buy a DBA Aug 29 Put at 0.65. The feeling is implied volatility is low enough that a spread trade is not warranted. If the stock is below 28.35 at August expiration the trade results in a profit. As with all long option trades, the maximum potential loss is limited to the premium paid for the contact or in this case 0.65. Here’s how the payout looks for this long put if held to expiration –

Barron’s –

Stephen Solaka of Belmont Capital Group substituted for Steven Sears.  Solaka wrote a good summary of selling near term call options to pay for portfolio protection using longer dated put options. With weekly options available the ability to benefit from selling near dated options has increased. As mentioned, the benefit of selling four weekly options in succession will provide more premium than selling a single monthly option. The example provided was interesting – with long market exposure and the SPY at 137.15 (this example was created before the market sell off on Friday) an investor could buy SPY Dec 130 Puts for and sell SPY Dec 110 Puts for a net cost of 3.40. To offset the cost of this hedge a July 13th weekly SPY 139 Call could be sold taking in 0.40. With the SPY under 139.00 this coming Friday that income of 0.40 could be applied to the cost of the put spread.

VIX Reviews –

Starting this week I’m starting to share how I track activity in the volatility trading arena. For some time I’ve been keeping a diary and data on weekly activity in VIX related futures and options. This weekend I posted them by ticker check them all out at the links below –

VIX –

http://www.cboeoptionshub.com/2012/07/07/this-week-in-vix-options-by-russell-rhoads-cfa-2012-07-07-11-55/

VXN –

http://www.cboeoptionshub.com/2012/07/06/this-week-in-vxn-by-russell-rhoads-cfa-2012-07-06-8-43/

VXEEM –

http://www.cboeoptionshub.com/2012/07/07/this-week-in-vxeem-by-russell-rhoads-cfa-2012-07-07-4-14/

VXEWZ –

http://www.cboeoptionshub.com/2012/07/07/this-week-in-vxewz-by-russell-rhoads-cfa-2012-07-07-6-47/

GVZ –

http://www.cboeoptionshub.com/2012/07/07/this-week-in-gvz-by-russell-rhoads-cfa-2012-07-07-8-50/

OVX –

http://www.cboeoptionshub.com/2012/07/07/this-week-in-ovx-by-russell-rhoads-cfa-2012-07-07-10-02/

VIX Options –

http://www.cboeoptionshub.com/2012/07/06/this-week-in-vix-by-russell-rhoads-cfa-2012-07-06-6-38/