Weekend Review

Option’s Action –

First thing discussed….drum roll….Apple (AAPL – 509.79). The first neat statistic was that AAPL is down 27% in just 3 months. The feeling is there has been some tax loss selling, but there is more to the story than this sort of selling. The fundamentals point to a potential slowing of growth rates and pressure on profit margins. Neither of these factors would be a positive for the stock price.

The first trading idea is on Qualcomm (QCOM – 59.83) which was under a little pressure on Friday losing almost 5%. QCOM has some pretty solid fundamentals and was down a bit in sympathy with AAPL. It was noted QCOM has AAPL exposure, but only 6% of QCOM sales come from AAPL. The trade is a buy one weakness trade using a bull call spread. The trade buys a QCOM Jan 62.50 Call at 0.90 and sells a QCOM Jan 65.00 Call at 0.35 for a net cost of 0.55. If the stock were to rebound and close over 65.00 by January expiration then the result is a profit of 1.95 on the cost of 0.55. The worst case scenario is a loss of 0.55 if QCOM is at or below 62.50 at January expiration.

The second trade was on Peabody Coal (BTU – 27.68) which has high exposure to China. There appears to be resurgence underway in Chinese stocks and the guys feel BTU may be a bullish derivative play on China. The trade is fairly complex in the form of a call spread risk reversal. The trade sells a BTU Mar 24 Put for 1.10, buys a BTU Mar 29 Call for 2.00, and then sells a BTU Mar 32 Call for 1.00. The net of these three trades is a credit of 0.10 and some unusual exposure. Selling the BTU Mar 24 Put results in the obligation to buy shares at 24.00 and long exposure under 24.00. Between 24.00 and 29.00 the trade results in all options expiring with no value and the trade profit equal to 0.10. Over 29.00 and up to 32.00 the trade would have long exposure again to BTU with a maximum profit of 3.10 if the stock is at 32.00 or higher at expiration. With all the moving parts I created a payoff diagram to show how this trade works at expiration –

BTU Payout.jpg