Weekend Review – 5/19/2013

Options Action –

The guys started out talking about the new stock that everyone loves to talk about Tesla Motors (TSLA – 91.50).  TSLA appears to be undergoing a short squeeze where short sellers have taken so much pain and then had to buy shares back or cover their shorts.  The stock has gone up over 100% over the last month and the thinking is that some of this is the fundamental story and some of the move may be attributed to short sellers buying back shares.    The idea here is to get some long exposure to TSLA and overcome high option premiums.  The way suggested to go about this with TSLA is a calendar spread using call options.  Specifically this trade sells 1 TSLA Jun 100 Calls at 5.00 and buys a TSLA Jul 100 Call for 10.00.  The net cost here is 5.00 which is also the max risk for this trade.  There was some debate about whether a bullish outlook for TSLA makes sense after a stock has moved 100% in a month and is up 170% this year.  Time will tell.

The second trade was a bullish suggestion on Exxon Mobil (XOM – 91.76) based on the stock playing catch up to the rest of the market.  The trade is a risk reversal selling a put and buying a call with the intent of ending up long shares.   Using October options, this trade sells 1 XOM Oct 87.50 Put at 2.10 and buys a XOM Oct 95 Call for 1.60.  The net credit here is 0.50 and the payoff diagram below shows the profit or loss on this trade looking out to October.   If held to expiration the worst case scenario is ending up long shares with a net cost of 87.00 and the stock trading under this price.  If XOM rallies over 95.00 the position would be long shares with a net effective cost of 94.50.  Also, in passing it was suggested in passing that short the market and long XOM may be a good pair trade as well.


Barron’s –

The Striking Price column combines two of the 2013 market trends into a trade suggestion.  So far in 2013 stock prices have basically just moved higher and implied volatility has stayed low.  This results in cheap call options that offer an inexpensive way to benefit from higher stock prices.  One interesting suggestion was to buy calls that expire six months down the road with strikes that are 5% higher than current stock prices.  Specific stocks mentioned for this strategy were Freeport-McMoran (FCX – 32.68), Qualcomm (QCOM – 66.61), Marathon Oil (MRO – 36.15), Dow Chemical (DOW – 35.82), and Schlumberger (SLB – 75.74).

  • Wouldn’t a calendar spread be hurt by TSLA high volatility which is on 78% percentile considering last 52 weeks?