Weekend Review

Barron’s –

The Striking Price column starts out talking about my favorite topic, VIX. The discussion here is about VIX as a market indicator. As an indicator, low VIX can be interpreted as complacency in the market. Too much complacency can be considered a sell signal. On the flip side, a high VIX usually indicates too much fear in the market which may be a good time to buy. 

Also citing the low VIX, the article talks about put options on financials being fairly cheap these days and some buying of protection going on.  Put buying ahead of earnings for Bank of America (BAC – 11.63) and JP Morgan (JPM – 46.14) along with the generic Financial Select SDRP (XLF – 17.11) is also mentioned. 


Options Action –

The guys started out talking about the low VIX as well, but took things a step further and mentioned that the futures curve indicates higher volatility in the next few months. This is typical, but the slope is a bit steep which indicates the market is a bit nervous a bit farther out. The graphic stated, “Calm Before The Storm?” which is the environment we are experiencing. The question is how long with the calm before we see the next storm. I was asked that a couple of times this week and if I knew the answer to that one I would be the proud owner of a working crystal ball. 

The first trade was based on the rally that we have witnessed from the large financials. The specific stock in this case is Morgan Stanley (MS – 20.17). The trade is a direct bearish purchasing a near term put. The MS Jan 20 Put could be purchased 0.40. This option expires at the end of the coming week so it is definitely a low risk trade. A market selloff or weakness in the financials would be needed to push MS under the breakeven point of 19.60. Also, note the direct option purchase as opposed to some sort of spread trade here. This is common in low volatility environments, options are cheap so there is no need to put on a spread to lower the cost of a trade.

The second trade was on Boeing (BA – 75.16) which has had some bad press regarding the 787 recently. As a side note, I flew on one recently and to use the words of Ferris Bueller, “It is so choice. If you have the means, I highly recommend picking one up”. Looking at the charts 75.00 appeared to be a pretty significant resistance for several years, note the stock is just above that level as of Friday. The feeling is the stock is poised to take off to the upside and that any problems that put pressure on shares is a buying opportunity. The trade is a risk reversal selling a put and buying a call using the proceeds to pay for the call option. In this case using February options the BA Feb 70 Put is sold taking in 0.70 and the BA Feb 80 Call is purchased for 0.40.  A net credit of 0.30 is received on the trade. If the stock is above 70.00 at February expiration the profit from the trade sits a 0.30. Beyond 80.00, to be corny, the sky is the limit. 

Russell Rhoads


Eight year old Maggie Rhoads using the time on a 787 to study princesses when she should be studying the markets –