Weekend Review

Barron’s –

The Striking Price column discusses QE3 and the impact on the markets. First, I love the opening reference to QE 1, 2, and 3 as being the biggest most dynamic put traded ever. It was noted that the markets have traded higher for about a month following QE1 and QE2 with the expectation being this sort of performance will repeat itself for QE3. The S&P 500 climbed around 5% on QE1 and QE2 and VIX dropped 13%. However, beyond a month there is the fiscal cliff that the United States continues to move toward. The suggestion in the article is that option traders should focus on shorter dated positions (think Weeklys) until there is more long term clarity on the markets.

Another article in Barron’s worth interest is an interview with Jason DeSena Trennert. Jason is a Managing Partner at Strategas Research Partners. He is also one of the best market analysts and forecasters around.

Options Action –

The discussion kicks off talking about the well telegraphed QE3 and market’s reaction. The feeling is we may see some near term consolidation before moving higher. This would be typical market activity after a quick move higher is often followed by a rest before the next market move. Also VIX was discussed and the guys found VIX being higher on the week of interest, but it was noted that VIX was already at a pretty low level going into the week and still is at 14.51. Something to always focus on regarding VIX is what the futures have done. September futures climbed a bit along with VIX, but all other futures dropped indicating a drop in a risk premium for longer dated SPX option contracts.

The first recommendation was on Wells Fargo (WFC – 36.13) which is assumed to be one of the beneficiaries of QE3. The trade is bullish focusing on a move over the next few months. The trade is a risk reversal that buys a WFC Jan 38 Call for 0.90 and covers most of the cost of that call through selling a WFC Jan 33 Put for 0.80 for a net cost of 0.10. The result is the right to buy WFC at 38.00 or the obligation to sell WFC at 33.00. Between 33.00 and 38.00 both options would expire with no value and the loss would be 0.10. Since this is an unusual structure, a payout diagram at expiration for this trade appears below –

The second trade is one the most discussed stock over the past 24 months, Apple (AAPL – 691.28). The trade is bullish and very straight forward buying a call and helping pay for the call by selling a higher strike call which is known as a bull call spread. This trade goes out to January buying a AAPL Jan 675 Call at 53.00 and selling a AAPL Jan 715 Call at 33.00 for a net cost of 20.00. The break even for this trade is 695.00, just a few points higher than where the stock is currently trading. Profits would be capped at 20.00 with AAPL at 715.00 or higher at January expiration.

If you have further interest in VIX – I posted two reviews of trading last week in VIX options, ETPs, and futures –

VIX Options and ETPs –


VIX Futures –