Options Action –
The focus this week was on what the market managed to do (or not do) on the 25th anniversary of Black Monday. The blame was placed on earnings results and the discussion was on the reaction of the stocks to their earnings reports, something I am always more interested in that what the companies actually reported. It was noted the selloff was very broad based including doggy stock (their words) along with the high flyers. Finally, it was noted the S&P 500 is right at a key support level so next week may have some added importance relative to the health of the stock market.
The first trade was Amazon (AMZN – 240.00) which reports next week. The options are pricing in a move of 8% off earnings which is less than the recent average move of 11%. The trade recommendation is bearish based on earning along with the pending announcement of the iPad Mini which will be a direct competitor to the Kindle. The trade buys an AMZN Nov 230 put at 7.70 and sell an AMZN Nov 210 Put at 2.70 for a net cost of 5.00. If AMZN is at or below 210.00 at November expiration the result is a profit of 15.00 on the spread.
The second trade was on the company that delivers Amazon products to your door – UPS (UPS – 72.30). I guess if you are bearish on a company you are also bearish on the company that brings their products to you. The feeling is the stock can drop about 10% from current levels to the mid 60’s. The short trade involves buying a put. Not the most exotic option trade, but it can be effective, and in this low volatility environment this makes sense. The UPS Nov 70 Put can be picked up for 0.85 and that is the trade recommendation here.
The Striking Price column focuses on a stock that was in the news last week, Citigroup (C – 37.16). A shake up at the top was announced last week as the CEO resigned. The result was call buying on C as the feeling may be all the bad news is priced into the stock. Many purchasers showed up in the C Nov 40 and Dec Nov 40 Call options. However, it was also suggested that savvy option traders may also consider selling puts on shares at a slightly lower price to have time decay work for you. Of course there is substantially more risk in selling puts, but in exchange for taking on that risk a trader will have time decay working for them.
Finally, VIX review Blogs have been posed over the past couple of days –
VIX Options and ETPs –