Options Action –
The discussion started out talking about the tech sector which took it on the chin Friday. Google (GOOG – 896.60) was lower and shares of Facebook (FB – 25.88) were down in sympathy. In addition there were some massive bearish option trades that came into the market on Friday. Despite this action and those trades there was actually a bullish trade recommendation in the form of a bull call spread. Using August options the spread buys a FB Aug 25 Call at 1.75 and sells a FB Aug 29 Call for 0.25 and a net cost of 1.50. FB at 29.00 or higher on the third Friday of August results in a profit of 2.50, also the break even on the trade is at 26.50 – just 0.62 higher.
The second trade is based on anticipated higher gas prices that may result in consumer discretionary stocks getting hit. The idea is if gas costs more consumers have less to spend in other areas. One of the stocks that may experience some weakness on this trend might be the casual dining chain Cheesecake Factory (CAKE – 43.29). The chart was brought up showing that the stock is over extended based on several time frames. With a bearish outlook an August 40 / 42 Put spread is recommended. This trade buys a CAKE Aug 42 Put for and then sells a CAKE Aug 40 Put at for a net cost of 0.50. If the stock dives below 40.00 into August the result could be a profit of 1.50. It was also noted that CAKE reports their earnings next week so the move lower may come sooner rather than later.
A recommendation was made on Apple (AAPL – 424.95) with part of the analysis being based on the CBOE Equity VIX on Apple (VXAPL – 30.20) showing a little too much concern about the prospects of AAPL stock. With a bullish outlook buying the AAPL Aug 425 Call for 13.50 and selling an AAPL Aug 450 Call for 4.00 and a net cost of 9.50. Break even in August for this trade is 434.50 and the maximum potential profit is 15.50 if AAPL is at 450.00 or higher at that point and time.
Finally there was a bullish trading recommendation on Netflix (NFLX – 264.58) in the form of an August call spread. Looking for the stock to trade to 280.00 the idea is to buy a NFLX Aug 250 Call for 30.00 and sell a NFLX Aug 280 Call for 15.50 and a net cost of 14.50. The stock at 280.00 at August expiration results in a profit of 15.50. Note on the payout diagram below that the break-even price on this trade is pretty much where it closed on Friday. This is an inexpensive way for traders to mirror a long position in NFLX between 250.00 and 280.00 over the next few weeks.
The Striking Price column discussed the current season – earnings season. Steve Sosnick from Timber Hill gives traders a helpful reminder to remember implied volatility changes when considering an option trade around earnings. Typically option pricing is higher before an earnings announcement based on implied volatility moving up in anticipation of the stock’s reaction to earnings. Regardless of the stock price reaction after earnings, the implied volatility usually contracts very quickly.