Steven Sears discusses earnings out of Facebook (FB – 34.01) that catapulted shares higher. A suggestion for participating in continued upside involves buying a FB Jan 35 Call for 2.21 and selling a FB Jan 40 Call at 0.91 for a net cost of 1.30. This could result in a profit of 3.70 if FB is at or above 40.00 a share on the third Friday of January. Recently an analyst took their price target to 46.00 from 40.00, firmly higher than the 40.00 needed from this suggested bull spread.
Options Action –
The guys started out talking about Amazon (AMZN – 312.01) which missed numbers but managed to rally to all-time highs by the end of the trading day on Friday. The feeling is the positive performance out of the stock is due to the long term focus of management and not the short term profits. On a technical basis, the stock has a little more upside before hitting a level of resistance. The positive momentum is not something to get in front of right now for the long run. The trade suggestion is a calendar spread with call options selling a AMZN Aug 330 Call for 3.00 and buying a AMZN Sep 330 Call for 7.50 and a net cost of 4.50. The hope is that AMZN approaches the 330 level in August, but does not trade over, but then trades to 330.00 and beyond between August and September expiration. The payoff diagram below shows an estimated payout at August expiration.
The second trade recommendation was on Herbalife (HLF – 58.45). HLF reports Monday after the close and hold their earnings call on Tuesday morning. The stock reaction to all this will occur on Tuesday. There is a big move expected from the option market with implied volatility around 70 for the August options. The trade here is a call calendar as well selling the HFL Aug 65 Call for 2.50 and buying the HFL Nov 65 Call at 5.75 and a net cost of 3.25. I checked the pricing on this one and saw the Aug 65 Call bid for at 1.85 and the Nov 65 Call offered at 5.75 for a net cost of 3.90. Sometimes market price change between when they decide the trades and the show is broadcast. Also, there are Weekly options expiring August 2nd and August 9th so there may be many other ways to play the drop in volatility that iss expected after earnings on Monday.
The final trade was on the small cap index the Russell 2000 (RUT – 1048.51) and takes the CBOE Russell 2000 Volatility Index (RVX – 16.75) into account. It was pointed out that RVX and the Russell 2000 is moving higher in sync. This can foreshadow lower levels for the Russell 2000. Using the Russell 2000 ETF (IWM – 104.12) the recommendation is to buy a quarter-end IWM Sep 30th 97 Put for 1.15. RVX at 16.75 means options on the Russell 2000 are cheap and the result is a directional bet that involves being purely long an option. The Options Action recommendation was to buy a put on IWM based on an outlook for the Russell 2000 as they move in sync with each other. An index option alternative to this trade would be purchasing a RUT Sep 970 Put for 7.50. The chart below shows RVX versus RUT in 2013 and highlights how RVX is off the lows despite RUT making new highs.