Weekend Review

Barron’s –

The striking price column gives a brief mention to the continued complacent level of VIX (around 16). The article mentions with VIX at a historically low level the cost of protection of options based on the performance of the S&P 500 is low as well. SPY options are mentioned, but any of the SPX options can do the trick as well.

An interesting stock specific mention was on CVS Caremark Corporation (CVS – 46.84) which has an analyst day this coming Thursday. Apparently last year the stock reacted very positively to their analyst day and the stock rallied by 9%. A noted derivatives strategist is suggesting buying a CVS Dec 47 Call to benefit from any big move that may occur around this event this week.


Options Action –

The guys started out talk about…Apple (AAPL – 533.25). Imagine that. The stock is below the ‘death cross’, which is a term that indicates the 50 day moving average has closed below the 200 day moving average. One comment that was interesting to me was Dan Nathan noting the S&P 500 was higher this week, despite what happened in shares of AAPL. To him (and this makes a ton of sense) that pegs the issues with AAPL as being company or stock specific. The one stock specific issue mentioned that may be of concern was that margins may compress in the tablet space as more competing products are hitting the shelves. The big question was is the stock priced accordingly which time will tell us. 

The trade recommendation is pretty bearish, but is not on AAPL but on the PowerShares QQQ (QQQ – 64.93) exchange traded fund. 17% of the QQQ performance is attributed to AAPL. The feeling is that AAPL option premiums are a bit rich based on the recent stock volatility and because of this a good surrogate play is in the QQQ. 

The specific trade is a put spread using options that expire on the last day of the quarter (and year in this case). The trade buys the QQQ Dec 31st 64 Put at 0.95 and sells the QQQ Dec 31st 62 Put at 0.40 for a net cost of 0.55. The net results is a cost of 0.55 and a potential return of 1.45 if the QQQ is pulled lower by AAPL and the rest of the tech sector.

The second trade recommendation was on another stock that has had pretty dramatic moves in the past, Netflix (NFLX – 85.98). The stock appears to have bottomed out and may be poised to breakout to the upside. With a bullish outlook the recommended trade is to sell a put. Shorting a put is considered a risky strategy, but can also be thought of as getting paid for a limit order. When you sell a put you take on the obligation to buy a stock. If you like NFLX at a certain price you can get paid to possibly buy the stock at that price. The put recommended for sale here is the NFLX Jan 80 Put which could be sold for 4.10. If NFLX is under 80.00 at January expiration the net result is long NFLX with an effective price of 75.90 (80.00 – 4.10). With NFLX over 80.00 at expiration the put expires and 4.10 is kept as a profit.