Weekend Review – 8/11/2013

Barron’s –

On the cover along the left side where the feature articles are highlighted two things caught my eye.  First toward the top of the list was, “Could the S&P 500 hit 1800 this year?”   On the bottom of this list was, “Why crude might slide under $80” – if both of those predictions are correct VIX is going to be headline grabbing for the rest of 2013.

The Striking Price column mentions tapering in September and the current low level of VIX.  I did note in my VIX review that the September contract behavior this past week was a little unusual relative to August with more risk being priced in.  In Steven Sears column is it suggested that SPY put options for September and October are pretty cheap based on a low VIX.

Here’s the shameless link to the VIX review I posted on Saturday –


Options Action –

The show started out talking about J.C. Penny (JCP – 12.87) and the continued saga related to the board room and upper management.   Whatever the outcome for personnel, the feeling is the stock will probably move down to lower levels.  The chart shows a pretty strong downtrend as well with the stock matching multiyear lows which is a reflection of poor fundamentals.   The trade involves selling a call spread which is a bearish play, with defined risk.  The defined risk part is important when playing a stock that is in the news because each headline can push shares higher or lower so knowing the maximum loss going in will help a trader avoid getting whipsawed out of their position.  This trade sells a JCP Sep 13 Call at 1.35 and buys a JCP Sep 14 Call for 0.95 and a net credit of 0.40.  If JCP stays under 13.00 into September expiration the result will be a profit of 0.40, a rally in JCP to 14.00 or beyond results in a loss of 0.60.


After the first break a tape of Marc Faber was played with him spreading his latest prophecy of a market crash.  He has recently been comparing the current market to 1987.  Admittedly the chart of the equity market in 1987 and the current chart of stock prices do have a similar look.  Based on being a bit uneasy about the stock market a pretty exotic idea was suggested.   The trade idea involves trading SPDR S&P 500 ETF (SPY – 169.31) options that expire on the last day of December (quarterly options).   The trade sells a SPY Dec 31st 175 Call for 2.50, buys a SPY Dec 31st 165 Put for 5.00 and then sells a SPY Dec 31st 154 Put for 2.50.  The net of all this is no dollar cost beyond commissions.   The result is negative exposure to an upside move for SPY over 175.00 between now and the end of the year and a benefit of the market begins to drop.  At 165 the long put gains with the maximum return capped at 11.00 if SPY is at 154 or lower.   Finally I would be remiss if I did not mention this strategy may be replicated with SPX options which will give a trader the same sort of risk / reward with the result being cash settlement as opposed to settlement in SPY.