Weekend Review

Barron’s

Jim Strugger of MKM Parteners did an excellent job substituting for Steven Sears and I don’t just say that because he wrote about my favorite topic – VIX. He discussed the low relative level of VIX which is currently in the 15 to 16 range. He states that VIX in the mid-teens has been a level that makes professional investors start to have some concerns regarding the direction of the stock market. The phrase I like to use is VIX at these levels is like the quiet before the storm.

Options Action

The discussion started off not taking about the overall equity market, but discussing Facebook (FB – 21.66) which rose almost 7% on Friday. The feeling is FB may continue rising and the trading suggestion is a 1 by 2 call spread combined with long 100 shares of FB. This would involve being long 100 shares of FB purchasing one call option with a lower strike price and selling two calls with a higher strike price. For this trade the guys are using January options, buying 1 FB Jan 24 Call at 1.70 and selling 2 FB Jan 27 Calls at 0.85 each (1.70 total) for no effective cost excluding commissions. There are different pieces to the potential profit puzzle at January expiration. First, from current levels up to 24.00 there is profit from owning shares of FB and no impact from the option prices. From 24.00 to 27.00 we have leverage results as the long FB Jan 24 Call would be in the money. At 27.00 and higher profits would be capped and the shares would be called away. To clear things up a little more, a payoff diagram based on buying FB Friday along with initiating this spread appears below –

The second trade was on the energy company, Halliburton (HAL – 33.69). There was some discussion of the price of oil being at an inflection point. I really liked this statement – if you think geopolitical events push oil prices higher, the best way play this is through the energy stocks. HAL has been lagging the price of oil and other competitors. The result is a bullish outlook for HAL and a bullish recommendation based on the stock moving to 40.00. After all this analysis, the trade recommendation was buying a call. Specifically, buying the HAL Jan 37 Call for 1.00.

Finally if you have more interest in VIX trading a couple of reviews from last week were posted below –

VIX and VXN Futures Trading –

http://www.cboeoptionshub.com/2012/09/29/this-week-in-vix-and-vxn-by-russell-rhoads-cfa-2012-09-29-12-56/

VIX Options and Exchange Traded Products –

http://www.cboeoptionshub.com/2012/09/29/this-week-in-vix-options-and-etps-by-russell-rhoads-2012-09-29-6-59/