Steven Sears’ column starts off with a suggestion of how to hedge an equity portfolio if you are concerned about the lofty level of the stock market. The suggestion is to buy a SPY Mar 150 Put and sell a SPY Mar 145 Put. It is noted that it would take 32 contracts of each to hedge a $500,000 portfolio. I would be remiss if I did not mention that similar protection could be realized by purchasing a SPX Mar 1500 Put and selling the SPX Mar 1450 Put – however, this would only require about 3 contracts to hedge a $500,000 portfolio.
The next mention in the column was more stock specific. Sears cites a good friend of the Options Institute, Larry McMillan, as noting that trading activity of Hess Corporation (HES – 67.42) has the appearance of a takeover stock. He notes there is strong buying interest in the HES Mar 72.50 Call options. Based on the offer side from Friday afternoon, for those to pay off the stock needs to move 8.5% higher by March 15.
Options Action –
The initial discussion was about Wal-Mart’s (WMT -69.30) announcement that sales are running pretty slow that hit the market on Friday. Wal-Mart is the biggest retailer in the US and can be considered a proxy for US economic activity. One of the factors cited behind slowing sales may be the higher payroll tax, if that hits Wal-Mart that could hit the rest of consumer space as well. It was noted that the casual dining space has been under pressure for a few months, which can be an early indication of a weak consumer market as well.
The first trade goes along with the consumer theme and involves Costco (COST – 102.17) which was actually up in the face of the WMT news on Friday. The trade is a basic bearish bet in the form of buying a put. Specifically buying the COST Mar 100 Put for 1.20. If held to expiration the stock needs to be under 98.80 to get to break even and below that makes a profit. During the discussions it was noted that several other retailers may be good choices for bearish trades. If you want to go the ETF round the SPDR S&P Retail (XRT – 67.47) may be an instrument to check out.
The second trade is a market I have been focusing on through the volatility market. Gold finally broke down from a trading range it has been stuck in for months. The technician on Options Action had been bearish and the break down that occurred is the first step to him being dead on that 2013 will be a negative year for gold. The easiest way for individuals to trade gold is with the SPDR Gold Shares (GLD – 155.76) ETF. The call is for gold to go to 1500 which puts GLD at 150.00. Based on this feeling the trade recommendation is selling a call spread. Looking out to March the trade sells the GLD Mar 155 Call at 3.10 and sells the GLD Mar 160 Call at 1.10 for a net credit of 2.00. If GLD is under 155.00 at March expiration the profit equals the 2.00 credit taken in. If GLD takes off to the upside the worst case scenario is GLD over 160.00 and a loss of 3.00. As a side note, the volatility of gold options rose over 20% last week – it is one of the few spaces where the implied volatility of options is high relative to recent history. High IV usually lends itself to a spread trade as opposed to just buying an option based on your bullish or bearish outlook. More on gold and oil volatility can be seen here –
Also, if you want to watch Options Action on your own, here’s the link I used to watch it –