The Striking Price column highlighted some large trades that have occurred recently. These trades appear to be funds positioning for a pull-back in the overall market. Specifically big put buying on the Select Sector SPDR-Financial (XLF – 17.60) and iShares Russell 2000 Index (IWM – 90.80) exchange traded funds. Also it was noted that despite the CBOE Volatility Index (VIX – 13.02) being a low levels, it is off its lowest point in January. VIX is a bit higher even though the market is up as well. Many observers consider this sort of divergence a bearish signal.
Options Action –
The discussion started out with a macro discussion regarding the stock market. There were many comments saying we appear to be overdone to the upside. I liked the comment stating that stocks with high short interest (those that have big bearish bets on them) have out-performed stocks with low short interest by about 2.5% this year. The thinking here is that the ‘quality’ of this rally could be questioned since it may be being fueled by short covering.
The first trade recommendation was on Procter & Gamble (PG – 75.75) which has a pretty high valuation and appears to be overbought (too high) on charts. With a bearish outlook the trade here is the basic long put. Focusing on April expiration the idea is to buy a PG Apr 72.50 Put at 0.60. A pull back below 71.90 would result in a profit on this trade.
The second trade had sort of a Nemo theme and was on Home Depot (HD – 67.01). This is partially a warning that buying HD based on increased sales related to repairing storm damage. The stock is at the high end of a trading range and like PG fairly expensive with the P/E ratio at a 10 year high. Both those factors lead to a bearish trade in HD. Instead of just buying a put, this trade is to buy a put spread. Using the May options the put spread was initiated through buying a HD May 65.00 Put at 2.10 and selling a HD May 60.00 Put for 0.85 with the result being a net cost of 1.25. The best case scenario here is for HD to trade under 60.00 at May expiration which would result in a profit of 3.75.