Steven Sears’ column highlights a trade that occurred on Wednesday in VIX Options. There was a buyer of 108,000 VIX 28.00 Calls who also sold 108,000 VIX 37.50 Calls for a net cost of 0.60. When the 100 multiplier and number of contracts are figured into the equation the result is a cost of close to $6.5 million. VIX was in the 17’s when this trade was executed on Wednesday and the August futures were quoted with a 19 handle all day. Whoever initiated this trade is looking for a much higher VIX over the next few weeks. Remember the inverse relationship with stocks means that by default their opinion is pretty bearish on the S&P 500 as well.
Options Action –
The guys started talking about earnings season which will kick off after this coming holiday shortened week. They listed three companies that have recently released less than stellar earnings – Nike (NKE – 63.68), Accenture (ACN – 71.96), and BlackBerry (BBRY – 10.46) – noting there were different reasons behind weak conditions at each of these firms.
The first trade recommendation was on the largest employer in my original hometown, FedEx (FDX – 98.58). Based on slowing global business activity, especially in Asia and the stock being at a resistance point a put butterfly with a downside target is being recommended. Looking out to August the trade buys 1 FDX Aug 90 Put at 0.65, sells 2 FDX Aug 95 Puts at 1.60 each (3.20), and then buys 1 FDX Aug 100 Put at 3.55 for a net cost of 1.00. This trade makes a profit between 91.00 and 99.00 with a maximum loss of 1.00 if FDX is over 100 or below 90 at expiration. This is a pretty nice risk reward, but also a trade that needs to have the stock close right at 95.00 at August expiration in order for a trader to realize the maximum profit potential of 4.00.
The next trade was on a market that has gotten a ton of attention lately, gold. For individuals one of the best ways to get exposure to gold price changes (bullish or bearish) is the SPDR Gold Shares ETF (GLD – 119.11). The price of gold is down 48% from its highs and it was noted that the bear market for gold in 1980 saw a drop of 63% from the highs. With a bearish outlook a bear put spread was recommended. Going out to October a GLD Oct 120 Put is purchased at 7.40 and a GLD Oct 117 Put would be sold at 5.90 for a net cost of 1.50. If GLD is under 117.00 at expiration the net result is a profit of 1.50.
The final trade was on BlackBerry (BBRY – 10.46) based on the possibility that BBRY is a takeout candidate over time, but not over the near term. The idea was to sell 1 BBRY Aug 12 Call for 0.45 and buy 1 BBRY Jan 12 Call for 1.30 and a net cost of 0.95. Selling the August option helps pay for the high premium of the January contract. The idea here is that BBRY is under 12 on the third week in August, but well above that level in January.