Weekend Review

Option’s Action –

The show started out discussing the number 14,000 which the Dow Jones Industrial Average topped for the first time since 2007 on Friday. Dan Nathan was on fire about how much complacency there is in the market and specifically cited VIX and VIX futures pricing (low pricing) as a reason why he is worried about there being much more upside in this market. Some sector performance was discussed. Home builders and energy are both up 8%, the financials are up only 6%, while technology is only up 2% for the year (not sure how Apple (AAPL – 453.62) impacts that drag on tech).

The first recommendation was on Yahoo (YHOO – 19.76). The idea is an attempt to get long exposure if the stock pulls back a little. The strategy is a call spread risk reversal which will sell a put and then use funds to buy a call spread. This trade goes out to July expiration selling the YHOO July 18 Put for 0.65, buying a YHOO July 20 Call for 1.25 and then selling a YHOO July 22 Call for 0.60. The net of all these trades is no cost, excluding commissions. Fast forward to July expiration and there are a handful of outcomes. First if the stock is under 18.00 the short put is assigned and the result is a long position in YHOO with a cost of 18.00. If YHOO is between 18.00 and 20.00 at expiration all options expire and there is no position. Over 20.00 and below 22.00 the long 20.00 strike call option is exercised and the shares are owned with a cost basis of 20.00. Finally is the stock is over 22.00 at expiration the long 20.00 call is exercised and the short 22.00 call is assigned for a profit of 2.00. This trade is sort of a buy on weakness or participates in a breakout.

The second trade was on Netflix (NFLX – 164.80) which I believe my household is the last in America not to have a subscription to. I told my wife to let me know when she signs up as that will be the end of the growth for NFLX. She did the same thing to Facebook a while back. The technician pointed out that since the big move in NFLX, it has been in a narrow range and that is common of stocks that make a move like NFLX’s 65% jump. It was noted that the stock is trading at an extraordinary multiple. The trading idea is to sell a call spread. The trade recommendation uses a short dated option series that expires on March 1, 2013. NFLX is one of a handful of stocks that has options expiring each week for the next five weeks. Using the March 1st Call the trades Sells 1 March 1, 2013 170 Call at 11.30 and Buys 1 March 1, 2013 175 Call at 9.20 for a credit of 2.10. As long as NFLX is not over 170.00 on March 1st the trade makes the 2.10 credit taken in when the trade was initiated. The maximum loss is 2.90 if NFLX rallies to higher levels and closes over 175.00.

Barron’s –

A consistent theme in the Striking Price column over the past few weeks has been the low volatility environment. The focus is usually on market related options such as SPX or SPY options. This week the focus is on buying cheap calls to participate in bullish moves out of your favorite stocks. An impressive statement came out of Goldman Sachs which is telling clients that this looks like one of the top three quarters for call buying in the past 40 years. I would love to know how the market did during those other quarters.

The Emerging Markets column caught my eye with the title – “A Lost Year for Brazil”. The article notes the Brazilian equity market has moved up recently with strong expectations of a rebound in their economy. However, the article is fairly bearish citing inflation popping up in the Brazilian economy. This has often been a precursor to a pullback in the stock market. Brazil has been a focus of mine since the market collapsed back in early summer 2012 with the result being a huge spike in VXEWZ. I noticed that although the MSCI Brazil Index gained last week, VXEWZ was also higher along with the underlying market. I discussed this a little more in the posting below –

http://www.cboeoptionshub.com/2013/02/02/this-week-in-emerging-market-volatility-by-russell-rhoads-cfa-2013-02-02-9-23/