Weekend Review – 8/4/2013

Barron’s

Sometimes, despite expecting them, things will surprise you and take your breath away.  I knew at some point I would see the word, “Goldilocks” in print being used to describe the current equity market and economy.  So despite the lack of quality jobs being created in this recovery, consistent dysfunction in Washington, a credible threat from Al Qaeda shutting down several US embassies around the world this weekend, continued questions about the state of the Chinese economy, pending Fed tapering of bond purchases, high energy prices with oil at 107.00, and the persistent headwind of how much time US workers waste on Facebook (FB) every day I saw Goldilocks on the top right of the cover of Barron’s this weekend.

Also in Barron’s my favorite weekend read, The Striking Price, discussed my favorite topic – Volatility and VIX.  Jim Strugger from MKM Partners discusses the low VIX environment for 2013.  He notes that VIX has averaged about 14.00 for and the spikes have only taken VIX to the low 20’s on a few occasions.  He believes the low volatility environment should persist for some time.  If you agree with this assessment he suggests taking a look at the VelocityShares Daily Inverse VIX Short Term ETN (XIV) and ProShares Short VIX Short-Term Futures ETN (SVXY) both of which would perform very well in a low volatility environment.

Options Action

Options Action starts out with a focus on Internet stocks.  A comparison was made to the market in 1999 (that may be overdoing it a bit) and there was even a reference to Pets.com, although the statement was that we do not have any of those types of situations in the current market.

The first trade recommendation was a call calendar spread on Facebook (FB – 38.05) buying the FB Oct 38 Call at 2.50 and paying for some of this purchase by selling a FB Aug 38 Call for 1.20 and a net cost of 1.30.  The goal here is for FB to close below 38.00 at August expiration and begin to move to the upside after the short option expires.  For those that have forgotten, 38.00 was the IPO price that held for a day last year.

The second trade was on the electric car producer Tesla Motors (TSLA – 138.00) which has run pretty quickly from 30.00 to 130.00 in a four month period.  A very interesting historical study of Amazon in 1999 to Tesla in 2013 showed some interesting parallels.  The feeling is that TSLA is up for a long term bullish move.  With that outlook a calendar call spread is also recommended for TSLA buying a TSLA Jan 150 Call at 17.75 and selling a TSLA Sep 150 Call at 8.50 for a net cost of 9.25.  This allows for 12 points of upside in TSLA before worrying about dealing with the September call being in the money and also lowers to cost of a longer term bullish outlook.

No Comments
Russell Rhoads, CFA

CBOE Options Institute

Russell Rhoads, CFA, is a Senior Instructor with the Options Institute at the Chicago Board Options Exchange. He joined the Institute in 2008 after a career as an investment analyst and trader with a variety of firms including Highland Capital Management, Caldwell & Orkin Investment Counsel, TradeLink Securities and…

Tags

,