Steven Sears discusses the poor state of the US Treasury market and how yields are under pressure while there is also the risk of losing if and when rates begin to move higher. The recommendation to find some yield from the market involves my favorite market – options. Specifically the idea is to use positions in Treasuries as collateral for short put positions on quality stocks. By quality stocks the idea involves stocks that you would be happy to own 5 to 10% lower than current prices. Sell out of the money puts and collect premium along with the obligation to buy shares of stocks such as Coca-Cola (KO – 39.22) or Exxon Mobil (XOM – 88.97) at lower prices. If the stocks do not drop, eventually the options expire with profit being equal to the premium received when the options were sold.
Options Action –
It was noted the stocks posted their second best week of the year. Dan Nations came out and said he’s pretty skeptical of the rally and he mentioned that one of the biggest mistakes individual investors make is doing the wrong thing at market highs and lows – I found this pretty eloquent. It was also noted that the last time DJIA was at these levels unemployment was under 5% as opposed to 7.7% as of last week. The term ‘new-normal’ got thrown out there relative to unemployment after this stat was thrown out there.
The housing sector was discussed and it was noted this sector has been on a run for some time. One stock that has outperformed the other home builders is Toll Brothers (TOL – 35.12). The trade suggested is a put calendar and for TOL the idea is based on TOL sticking around 35.00 through April expiration then selling off afterward. Sold 1 TOL Apr 35 Put at 1.35 buy 1 TOL Apr 35 Put at 2.40 for a net cost of 1.05. The June option will capture the next earnings release for TOL so that put would be held after April expiration with the intent that TOL sells off on the next earnings announcement.
The next trade suggestion was on Facebook (FB – 27.96) with a bullish outlook and an expectation of a 20% move to the upside. The trade is pretty complex in the form of a call spread risk reversal. For FB a FB May 25 Put is sold for 0.90, a FB May 29 Call is bought for 1.50 and finally a FB May 32 Call sold at 0.60 with the net result being no credit or debit. At April expiration the trade has an obligation to buy the stock at 25.00, right to buy the stock at 29.00 and obligation to sell shares at 32.00. One would either buy on the dip or buy a rally with possibly selling shares at a higher level depending on the extent of the rally.
Finally – I just want to mention for just under a year I have been posting blogs on the weekend. I am fairly certain this may be the first time I did not mention Apple (AAPL – 431.72). Well, now I guess I did. I guess I have to keep the streak alive.