The beginning of Steven Sears’ column is a follow up to the timely suggestion of hedging your portfolio with SPY options that appeared in last week’s column. He states that he got several emails requesting information on how to go about determining the number of put options needed to hedge a portfolio. Of course he turned to the best source on the Internet for information on options – www.cboe.com. The link below can be used to determine how to go about hedging a portfolio.
He finished up talking about how with VIX at such low levels the cost of hedging is still fairly cheap.
Options Action –
The market discussion starts out focusing on some sectors that had a tough week – retail, home builders, and the autos. The feeling is that the economy has some headwinds in higher taxes and higher gas prices and if the fed does not continue to pump liquidity there could be some slowing of economic activity. Wal-Mart (WMT – 70.40) cited this in a recent announcement regarding slowing sales that hit the stock. A market positive that was cited was some skepticism seen in higher VIX and lower gold prices last week. Think of it this was – if everyone is bullish and has bought, who is left to buy and push the stock market up?
The first recommendation is a bearish on the housing sector via the SPDR S&P Homebuilders Exchange Traded Fund (XHB – 27.94). The idea is to buy a put spread going out to April expiration the spread buys 1 XHB 27 Put for 0.70 and sells 1 XHB 25 Put for 0.25. This is a net cost of 0.45 which is the full risk for the trade. The best case scenario here is for XHB to be at or below 25.00 at April expiration and the result being a profit of 1.55.
The next trade was on Time Warner (TWX – 52.99) with the feeling that the stock is ahead of itself on the upside and due for a pullback. The valuation story is not quite as bearish, but the technical argument wins out for a bearish trade. Using April options another put spread is recommended, buying a TWX Apr 50 Put at 0.80 and selling a TWX Apr 48 Put for 0.45. The result is a net cost of 0.35 and a potential reward of 1.65 if the stock goes down to 48.00 at April expiration.
Finally there was a discussion of Apple (AAPL – 450.81). Apparently I can never get through a weekend without mentioning that stock. There was a debate about whether AAPL has reached a floor at current prices or not. The feeling is all negative news and lower valuation metrics are priced into the stock. One comment was that the shareholder base is turning over to more valuation minded players and this may take some time and that any rally may result in more current long term holders taking advantage of strength to sell. There is a suggestion to sell a put spread that will profit as long as AAPL does not go down from here. One idea is selling a AAPL 450 Put for 19.00 and buying a AAPL Apr 440 Put for 14.50. This is a credit of 4.50 and as long as AAPL stays over 450.00 the result is a profit equal to the 4.50 credit. If the stock falls apart and is at or below 440.00 at April expiration the maximum risk is a loss of 5.50.