Options Action –
The discussion started out talking about rumors swirling around in the markets regarding a potential Netflix (NFLX – 69.58) buyout that sparked big call buying. The stock also traded up over 13% on Friday. Part of the rumor was that Microsoft (MSFT – 28.21) would be the buyer. As of Sunday nothing has been stated about a deal other than rumors, both stocks will be worth keeping an eye on this week.
The first trade was based on Apple (AAPL – 604.00) which has been under a little pressure as of late. The idea here is what we like to talk about at the Options Institute as the stock repair trade. The idea starts out with having bought a stock that has lost value. If you own the stock at current levels the stock repair trade involves buying a call and selling two calls with higher strikes to pay for the single call purchase. The specific idea here uses December options, buying 1 AAPL Dec 600 Call at 25.00 and selling 2 AAPL Dec 630 Calls at 13.50 each (total of 27.00) for a net credit of 2.00 – again this is combined with a long position in 100 shares of AAPL. From around current levels and below this trade has the same exposure as owning 100 shares of AAPL. Between 600 and 630 there is leverage from the long call and the performance is equal to owning 200 shares. Profits are capped at 630 as the short call options start to impact the spread.
The second trade was on Ralph Lauren (RL – 152.52) and was bearish. This outlook is based on some technical analysis (charting) and a comparison of RL with the recent performance of some competitors. This is a fairly aggressive bearish trade buying 1 RL Dec 145 Put at 5.40 and selling 1 RL Dec 135 Puts for 2.60 with the results being a net cost of 2.80. Part of the thesis here is based on earnings which come out Wednesday so there’s a limited amount of time to act on this idea.
The Striking Price column takes a bearish view on things citing recent breaks of support by the S&P 500 along with VIX starting to tick higher. Looking forward the feeling is the presidential election and December’s fiscal cliff could propel VIX higher. Despite the bearish market sentiment, it was noted that financials and energy sectors appear to be hanging in there and earnings results support this. Buying Financial Select Sector SPDR (XLF – 15.80) Calls has been a popular trade with heavy volume pointed out in XLF Nov 16 Calls recently along with bullish option activity in Exxon Mobil (XOM – 90.62) and Energy Select Sector (XLE – 71.96) options.