Options Action –
The initial discussion usually focuses on the overall market, but this time there was more of a focus on Facebook (FB – 18.06). An interesting comment was that Facebook is not over priced there are just too many shares available. There was much discussion of pending earnings and more shares being freed up to sell in the open market through lock up periods expiring. This discussion led to the first trade recommendation.
The suggested trade was a calendar call spread selling a near dated call and buying a longer dated call. On Facebook the trade was selling a FB Nov 22 Call @ .60 combined with buying a Jan 22 Call @ 1.05 for a net cost of 0.45. The feeling is FB stays under pressure through the lock ups and then starts to trade a bit more on fundamentals after the lock up periods have all expired. This is a pretty bullish spread that risks 0.45 and takes coming events into consideration for FB.
The second trade was on Boeing (BA – 71.40) which appears to be at an inflection point on charts that should result in a move to the upside. BA is also underperforming the overall market and the feeling is there may be some catch up in the near future. Based on a bullish outlook and the low level of implied volatility in the overall market on individual option contracts the trade recommendation is a straightforward call purchase. The trade looks out to November expiration and suggests buying a BA Nov 75 Call for 1.25.
Steven Sears discusses the series of pending market moving events that we face in the next couple of weeks. September 6th the ECB meets, September 7th gives us US employment data from August, September 12th there is a German courts rule on the legality of the European Stability Mechanism, and finally September 13th is the final day of a 2-day Fed meeting. All this and VIX is sitting in the mid-17’s? Of course September futures went out Friday at 18.95. September VIX expiration comes less than a week after the end of these news events and the futures are predicting a little bit more volatility in the markets than the spot index over the next two and a half weeks. Just a little.
With the low volatility environment, there have been some purchasers of protection against a move to the downside. A specific instance invloved a buyer of 100,000 SPY Nov 140 Puts combined with selling 100,000 SPY Nov 130 Puts last Monday for a net cost of 2.47. What boggles my mind when I read this is why would a trader buy and sell 100,000 Put options on SPY when they can get the exact same sort of protection through buying and selling 10,000 SPX option contracts.
For more information on VIX futures, options, and ETP trading this past week check these blog entries as well –