Weekend Review

Options Action –

The current market was described as a battle between US earnings (good) and the continued concerns regarding the Euro (bad). I kind of liked that description of what is going on. US earnings appear to be coming in a bit ahead of (lowered) expectations. The areas that do seem to be doing well in the US are companies that do not have much exposure to Europe. Both are tied together and eventually one will win out. It was also noted that the low level of the CBOE Volatility Index (VIX – 16.27) is pointing to good winning over bad.

The first specific stock discussed was Facebook (FB – 28.76). Options are pricing in a move of 10% higher or lower on earnings. Of course we do not have much history to compare this 10% prediction to as this is their first earnings release as a public company. The idea here is to sell a short term option to benefit from the elevated implied volatility into earnings and buy a longer dated option contract. The longer dated option expires in August after a significant lock up period for FB shares expires. After the lock up period expires many holders of the stock will be allowed to sell shares which may push the price lower.

This trade buys a FB Aug 27 Put at 1.20 and sells a FB Jul 27th (Weekly) 27 Put at 0.75 for a net cost of 0.45.  The goal is to have FB over 27.00 on Friday and the Weekly expire with no value. The August contract will then be held to expiration with the hope that the stock comes under pressure due to the lock up period expiring before August option expiration.

The next trade idea is on Whole Foods Market (WFM – 84.03) which reports earnings next week. The suggestion is bullish as the stock is in a long term uptrend. The stock has consistently done well off earnings and the feeling is this trend will continue. A bullish call spread is the trade idea here buying the WFM Aug 87.50 Call at 2.85 and selling a WFM Aug 92.50 Call at 1.25 for a net cost of 1.60. If the stock continues on its march higher and is over 92.50 at August expiration the net result is a profit of 3.40. Any price level below 87.50 would result is a loss of the 1.60 paid for the spread. The p/l diagram below shows how this would work out if held to expiration –

Barron’s –

The Striking Price column focused on Interactive Brokers (IBKR – 13.38) and the potential that there may be a special dividend in the future. Based on a potential change in tax laws in 2011 regarding dividends the company paid a special dividend back in 2010. The feeling is this may repeat in 2012. A method of potentially getting long and getting paid to get long IBRK would be selling a put. A suggestion is selling the IBKR Sep 13 Put at 0.35 and taking on the obligation of buying shares at 13.00.

As a note of full disclosure – I have been working with Interactive Brokers to create a series of monthly educational webcasts for IB this year. Recordings of the first seven can be found below –

http://individuals.interactivebrokers.com/en/general/education/priorWebinars.php?ib_entity=llc

VIX Reviews –

Over the past couple of days I have posted a few brief reviews of the behavior of the tradable volatility indexes from last week –

VIX Options and Exchange Traded Products (ETNs and ETFs) –

http://www.cboeoptionshub.com/2012/07/20/this-week-in-vix-options-and-etps-by-russell-rhoads-cfa-2012-07-20-6-46/

VIX & VXN –

http://www.cboeoptionshub.com/2012/07/21/this-week-in-vix-and-vxn-by-russell-rhoads-cfa-2012-07-21-3-50/

VXEEM & VXEWZ –

http://www.cboeoptionshub.com/2012/07/21/this-week-in-vxeem-and-vxewz-by-russell-rhoads-cfa-2012-07-21-2-27/

GVZ & OVX –

http://www.cboeoptionshub.com/2012/07/21/this-week-in-gold-and-oil-volatility-by-russell-rhoads-cfa-2012-07-21-11-09/