The Striking Price column is a must read for anyone that trades or is interested in trading VIX futures or options. The title is BlackRock: Volatility Is An Asset with the whole column discussing recent reports issued by BlackRock. The common theme is that volatility can be used as an effective portfolio diversification tool with the suggestion of being short volatility as opposed to long. Also, one of my favorite topics to talk about, the column addresses how volatility behaves like a rubber band. I personally like to say volatility oscillates around a mean. The chart below is something I have been using in VIX presentations over the past few months. It shows VIX versus a 10 day moving average from July 1, 2012 to June 30 2013. Note VIX is over the moving average about half of days and below about half of days covered in this chart.
Options Action –
The guys started out talking about the bond market, specifically higher interest rates and the potential impact on the homebuilding industry. It was also noted that higher rates will hit consumer spending as well. A great quote during the discussion was, “Higher rates are great for banks, but terrible for banks customers.”
The first trade recommendation focuses on the homebuilders and uses options on the SPDR S&P Homebuilders ETF (XHB – 29.45). Looking out to September the trade is a bear put spread buying the XHB Sep 29 Put for 1.40 and selling a XHB Sep 26 Put at 0.50 for a net cost of 0.90. The best case scenario here is XHB down over 10% and at 26.00 or lower in September.
The next trade idea was on the Gold market using the SPDR Gold Shares ETF (GLD – 118.09). Technically it appears that GLD may be finding support around current levels and appears oversold on longer term charts. With the belief that GLD has little downside from here and much more upside a bull call spread is recommended using near term option contracts. Looking to weekly July 26th options a GLD Jul 26th 113 Call is purchased for 5.90 and a GLD Jul 26th 121 Call is sold for 1.40 and a net cost of 4.50. If GLD is at or above 121.00 on Friday July 26th the result is a profit of 3.50.
The final trade looked to the media stocks and the strong performance of certain individual stocks in that area. The trade is a bearish one on Lions Gate Entertainment (LGF – 30.92) which hit a 52 week high on Friday. Using a bear call spread that expires before LGF’s next big release in the fall, a LGF Aug 31 Call is sold for 1.50 and the Aug 32 Call is purchased for 1.10 with the trade bringing in a credit of 0.40. This is the maximum profit for the trade if the stock is under 31.00 at expiration while the worst case scenario has LGF over 32.00 at expiration which would result in a loss of 0.60.