Weekend Review – 6/23/2013

Barron’s –

Larry McMillan, author of the ‘bible’ for options traders Options as a Strategic Investment and President of McMillan Analysis (www.optionstrategist.com) took over The Striking Price column for Steven Sears this seek.  The topic was a favorite of mine – VIX as a stock market indicator.  Basically, when VIX spikes up and then spikes down the spike down should be taken as a buy indicator for the overall stock market.  This last occurred in April and the result was a 100 point run to the upside for the S&P 500.  This past week with VIX quickly rising, the first half of this buy signal occurred.  Now we wait for the spike down.

Options Action –

The show began with discussion of emerging markets which have been under pressure due to the strength of the US dollar.  The feeling is that the stocks of multinational companies may be the next group of financial assets to suffer due to the higher dollar.  Basically if the dollar is strong, when a multinational company takes their profits in other currencies and exchanges them for dollars they will receive fewer dollars.

The first trade is on Pepsico (PEP – 80.13) and is bearish based on PEP getting a large percentage of sales from international operations.  The feeling is the stock could trade down to 75.00 over the next month.  Using July options the Jul 80 Put is purchased at 1.50 and Jul 75 Put is sold for 0.30 for a net cost of 1.20.   A profit of 3.80 can be realized if PEP is at 75.00 or under at July expiration.

PEP PO

The second trade was based on the Chinese market which appears to be experiencing contracting growth along with a recent rise in interest rates.  The feeling is that some stocks that have Chinese exposure may be experiencing too much pressure.  One stock that fits this mold is Freeport-McMoRan Copper and Gold (FCX – 28.16).  This trade is a pure short put position which is usually most appropriate when a trader has a price where they are a willing owner of shares.  The suggestion is to sell a FCX Aug 26 Put at 0.85.  If FCX is under 26.00 at expiration the result could be a long position in FCX with a net cost of 25.15.   Is should be noted that there was a ton of debate about this trade with some of the traders actually disagreeing with the idea.  The final statement on this trade, “This is not a trade for the faint of heart”.

FCX PO

The last trade was on Viacom (VIAB – 65.72) which is cheap, but the feeling is the stock can get cheaper.  The idea is a bear call spread selling a VIAB Jul 65.00 Call for 2.20 and buying a VIAB Jul 67.50 Call at 1.10 for a net credit of 1.10.  If the stock is 0.72 lower at or below 65.00 at expiration the net result is both options expiring out of the money and a profit equal to the credit of 1.10.  On the other side of the equation if the stock moves up to 67.50 or beyond the net result would be a loss of 1.40.

VIAB PO