Weekend Review – 9/1/2013

Options Action –

The guys kicked the show off talking about my favorite topic – VIX.  It was noted that the VIX is up 40% since mid-August.  It was also noted that VIX over 17 was even more impressive since it rallied in the face of a three day weekend.  My thought is sometimes that is the norm, but when you have a three day weekend when the US is considering bombing a new country in the Middle East elevated VIX should be no surprise.

The first trade centers on protecting a portfolio in front of three risks to the markets (Syria, Tapering, Debt Ceiling).  A 20% drop in the S&P 500 is the benchmark for a market being in a bear phase.   This trade protects against a drop that goes beyond this sort of price action by purchasing a SPY Jun 2014 130 Put for 2.65 and the selling SPY Jun 110 Put for 1.00.  The net result is a far out of the money put spread at a net cost of 1.65.  The payoff diagram below shows the payoff at expiration on June 21st of next year.


The break-even level for this trade involves the S&P 500 losing 21.5% and the maximum gain of 18.35 occurs if the S&P 500 gives up almost 33% closing at 110.00 the third Friday in June.

The second trade was on Wal-Mart (WMT – 72.98) and a bearish theme based on higher energy prices.  Higher gas prices means less to spend at the store.   Wal-Mart is not a terribly volatile stock and looking at the last 52 weeks it appears implied volatility has oscillated between 11% and 20%.  Currently implied volatility is around 14% and with options being so ‘cheap’ the recommendation is to buy a WMT Nov 70 Put for 1.00.

Wal Mart PO


The final trade was on Ford (F – 16.19) and sticking with the theme of the show based on bearish outlook.   The feeling is many consumer discretionary stocks have been rolling over and the auto stocks are the next group to break trend and trade lower.  Finally, like Wal-Mart shares of Ford are not particularly volatile.  This makes options fairly cheap so the trade recommendation is to buy 1 F Nov 15 Put for 0.45.


Barron’s –

With everything going on in the world Steve Ballmer leaving Microsoft (MSFT – 33.40) quickly became yesterday’s news.  The Striking Price column notes that despite the stock being in a 33.00 to 35.00 range since the announcement the implied volatility of MSFT is a relatively high level when compared to other technology stocks.  High implied volatility means traders want to be sellers of premium and that’s just what is suggested in this case.  A MSFT Jan 32 Put could be sold for 1.39 when the stock was trading at 33.49 last week with the result being an obligation to buy MSFT shares if the stock is under 32.00 on the third Friday in January.  If MSFT stays in this 33.00 – 35.00 range or trades higher the result would be a profit of 1.39 based on the income taken in.