Weekend Review

Options Action –

The guys started out discussing Friday’s bullish price action. A nice quote was, “You can’t fight the Fed and you definitely can’t fight the Fed and the ECB”. Basically the short realized they were up against too much and ran for cover on Friday. The feeling the equity market should not trade higher based on the global economy, but again you can’t fight against central bank activity. The VIX at 16.70 was cited as being at a higher level than one would expect after Friday’s price action. Finally, the negative performance out of some technology names was mentioned. The feel is a true longer term bull move in the stock market will need participation from the tech sector.

LinkedIn Corporation (LNKD – 103.42) was the subject of the first trading recommendation. The stock has held up despite the performance of close comparable Facebook (FB – 23.71). LNKD reports this week and the trade is a bearish one. The basis is a valuation of $11,000,000,000 (that’s billion) based on revenues of $189,000,000 (that’s million) last quarter. A bear put spread buying a LNKD Sep 95 Put at 5.90 and selling a LNKD Sep 75 Put at 1.30 for a net cost of 4.60. This is a pretty aggressive trade that requires over a 25% drop in the stock price to hit the maximum profit of 15.40 at 75.00 or lower upon September expiration.

The second trade is a bearish call on Green Mountain Coffee (GMCR – 18.04) which reports on Wednesday. The options are actually pricing in a 20% price move (higher or lower) which is actually not that farfetched based on history. The stock is actually already down 84% from its all-time high. The traders suggest a pretty aggressive 1 by 2 put spread. This spread buys 1 GMCR Dec 14 Put at 1.80 and sells 2 GMCR Dec 7 Puts at 0.25 each. If the stock goes to zero or is above 14.00 at expiration the maximum loss is the 1.30 paid for the spread. A payout for this trade appears below –

Barron’s –

The Striking Price column focused on where apparently 45% of stock performance comes from – dividends. Oppenheimer did a study of stocks that pay healthy dividends and also have active option markets. Using puts and calls in conjunction with a stock position can improve returns as well. The list of stocks is below –

ConocoPhillips (COP – 54.97)

Sonoco Products (SON – 30.08)

McGrath Rentcorp (MGRC – 26.15)

Emerson Electric (EMR – 48.03)

Chevron (CVX – 109.26)

Linear Technology (LLTC – 32.46)

United Technologies (UTX – 74.28)

Medtronic (MDT – 39.03)

ExxonMobil (XOM – 87.45)

Lowe’s Companies (LOW – 27.07)

Praxair (PX – 106.00)

Inter Parfums (IPAR – 16.68)

Ecolab (ECL – 67.17)

EOG Resources (EOG – 101.01)

 

VIX Reviews –

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

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

http://www.cboeoptionshub.com/2012/07/27/this-week-in-vix-options-and-etps-by-russell-rhoads-cfa-2012-07-27-8-04/

VIX & VXN –

http://www.cboeoptionshub.com/2012/07/28/this-week-in-vix-and-vxn-by-russell-rhoads-cfa-2012-07-28-10-01/

VXEEM & VXEWZ –

http://www.cboeoptionshub.com/2012/07/28/this-week-in-emerging-market-volatility-by-russell-rhoads-cfa-2012-07-28-8-01/

GVZ & OVX –

http://www.cboeoptionshub.com/2012/07/28/this-week-in-gold-and-oil-volatility-by-russell-rhoads-cfa-2012-07-28-6-08/