Weekend Review

Barron’s –

The Striking Price column had the attention getting title – Options Point to Big Market Move. The discussion is about the pending first quarter earnings season which is sneaking up on traders and will be here with Alcoa (AA – ) announcing their results on April 8. Although the stock market is higher on the year, 101 of the 500 stocks in the S&P 500 have guided estimates lower while only 23 have guided higher. This is the worst ‘pre-announcement’ season since the third quarter of 2001. The negative news announcement occurring while the stock market continues higher is being cited as an example of market complacency. Thrown into the mix as a measure of complacency is the persistent low level of VIX which is making post 2008 crisis lows. I always like to remind traders that VIX was last quoted in early 2007 around current levels. VIX also managed to trade into the low 30’s before that year was over.

Barron’s had a special pullout section on the exchange traded fund industry. On the back page there is list of nineteen new exchange traded funds that have come out in 2013. Of the nineteen on the list six are option related or volatility related. Here is the condensed list of those six funds –

  • US Equity High Volatility Put Write Index Fund – HVPW
  • SPDR Russell 2000 Low Volatility ETF – SMLV
  • SPDR Russell 1000 Low Volatility ETF – LGLV
  • PowerShares S&P Mid Cap Low Volatility Portfolio – XMLV
  • PowerShares S&P Small Cap Low Volatility Portfolio – XSLV
  • Gold Shares Covered Call ETN – GLDI

Options Action –

The discussion started out on Apple (AAPL – 443.66) as opposed to the overall market. The feeling is that the concerns about AAPL losing market share may be overblown. Of course time will tell. Also, it was noted that AAPL use to be a buy the rumor, sell the news kind of stock. Now it seems to be buying the news and sort of ignoring the rumor.

The first trade was on AAPL and a pretty interesting one. The trade is a calendar call spread that is just as much neutral as bullish. The trade sells 1 AAPL Apr 460 Call for 8.00 and buys 1 AAPL May 460 Call for 15.00 and a net cost of 7.00. The goal of a trade like this is for the stock to be at the strike price at expiration of the near dated options. At that point the April option expires with no value and there continues to be value remaining in the farther dated option.

The second trade was on LinkedIn (LNKD – 177.50) which has been on a tear over the past year and on a valuation basis is very expensive relative to competitors. With a bearish outlook the traders suggest selling a call spread to take in premium with a bearish forecast. The specific trade here is to sell 1 LNKD May 180 Call at 11.80 and buy 1 LNKD May 190 Call for 7.70 and a net credit of 4.10. As long as LNKD is under 180.00 at May expiration the result is a profit equal to the credit taken in. If the stock continues moving higher and is over 190.00 at May expiration the result would be a loss of 5.90.