Weekend Review

Barron’s –

The Striking Price column touches on a new proposal CBOE is working on. They are referred to as Super Options in the article, but I believe a better term would be Super LEAPS as an option with more than 9 months to expiration is by definition a LEAPS contract. The new proposal discussed in Barron’s this weekend would result in expirations as far as 15 years out. Currently if an institution would like to take an option like position that expires in 15 years, they would need to turn to the OTC market. These new Super options will be exchange traded and cleared by the Options Clearing Corporation (OCC) which makes them preferable to OTC options which have counterparty risk that does not exist with exchange traded options.

Not mentioned in the article, but worth noting, a longer dated expiration option was introduced with the underlying as the S&P 500 Index back in March. CBOE Holdings Super LEAPS are available on SPXpm options already with expirations as far out as December 2016. Also, FLEX options are available to create expirations beyond the reach of LEAPS. More information can be found through the links below –

SPXPM – www.cboe.com/spxpm

FLEX Options – www.cboe.com/flex

Options Action –

The guys opened up with a discussion of the overall market and the discussion mirrored the market – all positive. A nice comment was that you never fight the Fed in trading, are you going to fight the ECB and Bank of China as both made moves to boost markets last week. Finally, it was noted that this past week’s strength was much more broad based than what we’ve seen in previous weeks. Broad based means several sectors are participating in the move higher.

The first stock specific recommendation was on Bank of America (BAC – 8.80) which has participated in the bullish market move and the expectation is that this will continue. The expectation here is for BAC to reach double digits (10.00) by October expiration so purchasing an October call spread is the trade. The trade buys one Oct 9 Call 0.30 and sells one Oct 10 Call 0.05 at for a net cost of 0.25. BAC over 9.25 at October expiration results in a profit and profits are capped at 0.75 with the stock at 10.00 or higher. One issue here is selling the Oct 10 Call at 0.05 with a result capping profits.  An alternative may be to just purchase the Oct 9 Call for 0.30 and possibly let profits run. The payoff diagram below shows the bull call spread and long call alternative side by side –

 

The second trade involves a stock I feel I have mentioned as an Options Action trade more than any other, Apple (AAPL – 680.44). This trade is based on AAPL announcing new products next week. The trade here is a bullish calendar call spread which takes advantage of elevated implied volatility in front of AAPL’s announcement.  This calendar spread sells 1 AAPL Sep 700 Call at 6.10 and buys 1 AAPL Oct 700 Call for 16.60 which is a net cost of 10.50. The idea here involves AAPL not reaching 700 by September expiration, but continuing marching higher into October.

VIX Reviews –

Posted over the last couple of days –

VIX and VXN Futures –

http://www.cboeoptionshub.com/2012/09/08/this-week-in-vix-and-vxn-by-russell-rhoads-cfa-2012-09-08-9-01/

VIX Options and Exchange Traded Products –

http://www.cboeoptionshub.com/2012/09/07/this-week-in-vix-options-and-etns-by-russell-rhoads-cfa-2012-09-07-6-30/