The guys started out talking about the market as a whole and the message is to not believe the hype. Despite the S&P 500 being close to all-time highs a weaker than expected GDP number from Friday could be considered a warning sign. The next big number to focus on is this coming Friday’s Non-Farm Payrolls number. People don’t hire if they do not have a good feeling about the future direction of the economy and that’s why this number gets so much attention each month. It was also noted many companies have been reporting what on the surface appears to be positive results, but the majority of stocks that have reported earnings sell off after. Finally, the low level of VIX was noted as there not being too much concern about a market drop. The low VIX also shows that hedging against some sort of market drop is pretty cheap right now if you choose to buy some SPX puts.
The first trade recommendation was on the House of the Mouse better known as The Walt Disney Company (DIS – 61.87). There is a bearish outlook on this stock and the trade is a bear call spread where a call with a lower strike and higher premium is sold relative to a call that is purchased. In this case looking out to May expiration the trade idea is to sell a DIS May 62.50 Call at 1.10 and buy a DIS May 65.00 Call for 0.35 which is a net credit of 0.85. As long as DIS is under 62.50 at May expiration the trade will realize a profit of 0.85 or the credit received. The worst case scenario is that DIS closes over 65.00 at May expiration which would result in a loss of 1.65.
The second trade was on a stock that the guys all seem to like – Facebook (FB – 26.85) – at least for the short term. With a bullish expectation into earnings the trade idea is to buy a call spread or a bull call spread. This bullish spread buys the May 28 Call for 0.90 sells May 31 Call at 0.20. The goal here is for the stock to be at or above 31.00 at expiration with the maximum profit being 2.30. In a case where the stock does not move at all the maximum loss is the 0.70 premium paid.
After the break the guys came back and discussed a market I have been spending a ton of time monitoring lately – Gold. The GLD broke down from 151 to 131 recently and has worked back up to the low 140’s. A surgically bearish suggestion is to buy a GLD Jul 140 / 130 / 120 Put Butterfly. Using Friday prices a GLD Jul 120 Put was purchased at 0.60 and a GLD Jul 140 Put was bought at 4.80 and finally two GLD Jul 130 Puts were sold at 3.60 for a net cost of 2.00. The best case scenario is for GLD to be at 130.00 at July expiration for a profit of 8.00. Also this spread makes a profit as long as is GLD is between 122.00 and 138.00 at July expiration.
Larry McMillan, the master of options education, took over for Steven Sears this week and wrote a very nice piece about a 40th Birthday that was celebrated last Friday. My employer of four years the Chicago Board Options Exchange celebrated 40 years of operation. Much more than I could ever cover in this space is discussed on this site. More info on our 40th can be found at