Weekend Review

Options Action –

Looking backward it was noted that on Friday the S&P 500 closed at its highest levels since the financial crisis of 2008 – 2009. Looking forward this coming week is a big earning week and it was mentioned that 20% of S&P 500 component companies release earnings over those four days. 

The first trade mentioned was on Apple (AAPL – 500.00). Before the trade idea it was mentioned that AAPL has been going in the opposite direction of the overall market with shares down on the year while we are making five year highs. Looking at the options market a 7% move is indicated for AAPL shares this time around, almost double the average move of 3.9% over the last eight quarters. With expectations so low the feeling is a rally post earnings on Wednesday. For guys like me that are more interested in the markets than sports Wednesday is more exciting than today’s NFL conference championship games. 

The AAPL trade is fairly surgical in the form of a Call Butterfly. Using the weekly options that expire on January 25th the trade buys 1 AAPL Jan 25th 525 Call at 8.80, sells 2 AAPL Jan 25th 550 Calls for a 7.25 credit, and finally buys a Jan 25th 575 Call at 1.45 for a net cost of 3.00. Below 525.00 this trade loses the 3.00 cost of the butterfly. The trade makes money if AAPL is over 528 on Friday which a maximum profit if AAPL is up 10% on the week to 550.00. Profits start to go down from 550.00 to a break-even point on the upside of 572.00. If AAPL manages to return to its glory days and rallies over 575.00 the maximum loss is again 3.00.

The second trade was on Nokia (NOK – 4.43) which is a stock that has been moving in the opposite direction of AAPL this year. The feeling here is NOK may be ahead of itself and it is time to fade the bullish move of early 2013. As another contrast to the AAPL trade this is a very straightforward put purchase. The specific trade involves buying a NOK Feb 4 Put for 0.15. A drop below 3.85 would result in a profit for this trade. A near term catalyst for NOK is the company’s earnings release which is this coming Thursday. 

One of the trade recommendations last week was on Boeing (BA – 75.04) which had quite a ride last week based on issues around the 787. The trade recommended last week was to sell the BA Feb 70 Put taking in 0.70 and the BA Feb 80 Call is purchased for 0.40 with the result being a net credit of 0.30. That trade is at break even and it was suggested to close it out and look out further for BA to recover from 787 issues. Buying the BA May 80 Call was an idea to benefit from BA stock moving higher once the 787 is all clear to return to the skies.

Barron’s –

Jim Strugger of MKM Partners took over The Striking Price column and offered a long term perspective on where the market is relative to volatility or VIX. He mentions that market volatility tends to move in 5 ½ year cycles and the markets may be coming to the end of a cycle of high volatility. Evidence that the markets are entering a low volatility environment comes from a low VIX in the face of potentially market moving events such as the fiscal cliff scenario from late last month. Another pending situation that may offer more evidence of a new normal for VIX will be the debt ceiling scenario.

Russell Rhoads