Options Action –
The conversation started out with the bull market we are experiencing without Apple (AAPL – 439.88). An interesting graphic showed over the last 52-weeks AAPL is down 1.6% while the S&P 500 is 13.34% higher. Many stocks that were lagging around for the past year are now the market leaders. The low level of VIX was mentioned as well with a suggestion that if you think you want some market protection over the next few months, now is the time to take a look at index options and buy when they are cheap. It was also noted that calls are cheap as well so a bullish stance could be played cheaply as well. The options are cheap at least for a couple of months until we address the debt ceiling again.
The first trade recommendation was on Facebook (FB – 31.54) which has been quite the resilient stock since November. The feeling is there may be some more upside from current levels. The idea is also a method for those long from higher prices, like those who purchased shares on the deal to recoup some of their money without extra downside risk. We often refer to this as the stock repair trade at The Options Institute. If you are long 100 FB you could also purchase another call and sell two calls. The result is bull call spread plus a covered call. The specific idea was to combine an existing long position in FB with buying 1 FB Apr 35 Call at 1.20 and selling 2 FB 38 Calls for 0.60 each (1.20 credit). The option part of this trade is done with no debit or credit involved, just commissions. At 38.00 profits are capped as your shares would be called away and the long 35 strike call would be offset by the one of the short 38 strike calls. ON the risk side, if FB returns to the 20’s or high teens your risk is just being long 100 shares.
The second trade is on Amazon (AMZN – 283.99) which is up 15% in just two months, outpacing a slew of major retailers and the S&P 500 which is up 6% over the same period. The feeling is that strong stock price trend is unsustainable. The bearish recommendation here is a bear put spread buying the AMZN Apr 265 Put at 10.75 and selling an AMZN Apr 245 Put for 5.30, a net cost of 5.45. The best case scenario would be that AMZN is below 245.00 at April expiration with and a resulting profit of 14.55.
Several weeks in a row now The Striking Price column has mentioned VIX in on fashion or another. This weekend’s edition talks about how to take advantage of a cheap VIX. I find this ironic because I just proposed doing a webcast on this next month for CBOE. I guess great minds think alike. A low VIX indicates cheap option plays are available for both the bullish and bearish of traders.