The first trade recommendation was on Goldman Sachs (GS – 146.60) and was bearish in nature. The justification was that the financials are extended relative to the overall market and GS has had quite a run on its own. Also, there was mention that in the last couple of years we have had a pull-back in the overall market about this time of year as well. The trade is a straightforward bear put spread buying a GS May 145 Put at 5.00 and selling a GS May 135 Put for 2.00 and a net cost of 3.00. GS at or under 135.00 at May expiration would result in a profit of 7.00 on the trade. Also, it was emphasized again that this idea is as much about potential market weakness as it is about Goldman’s stock price coming under pressure.
The second trade was on Dreamworks Animation (DWA – 18.98) which released a new movie last Friday. The outlook is bullish here using a bull call spread. Looking out to June the trade idea involves buying a DWA June 20 Call at 0.85 and selling a DWA June 22 Call for 0.25 and a net cost of 0.60. This trade works if the stock is over 22.00 at June expiration and the profit coming to 1.40.
The Striking Price column began with noting several brokerage firms have taken their year end target up for the S&P 500 in the past few weeks. The range of targets mentioned is between 1600 and 1625. Friday’s S&P 500 close was 1556.89 so those projections come to about 3 to 4% upside for the stock market for the rest of 2013.
On the trading side of things a suggestion was made to select some stocks you would like to own at lower prices, but think you may not have the chance. Specifically consider selling puts at a level where you would be a happy buyer of shares of quality stocks and use those proceeds to buy call options. If there is a pull back then you will have the obligation to buy stocks at the strike price of the short put. If the market continues higher you may participate to the upside through the long call position.