Weekend Review – 9/22/2013

Options Action –

The guys started out talking about the reversal in the markets on Friday and laid the blame on the markets suddenly anticipating Fed tapering sooner rather than later.  The Wednesday move was called a knee jerk reaction to the surprise announcement.  It was noted that if you are afraid of lower stock prices puts are still cheap.  The easiest illustration of this is VIX which finished the day at 13.12 on Friday and was actually a tad lower on the day.  Finally, it was pointed out that yield paying stocks took it on the chin based on the renewed fear.  Does this mean we only believed Bernanke for less than 48 hours regarding what was said about tapering?

The first trade suggestion was based on a market environment that could be less than friendly to cyclical stocks.   The timing of this is October which coincides with the next fed meeting at the end of the month and some budget wrangling in Washington, DC – both of which could be negative for the markets.   The specific stock is Johnson & Johnson (JNJ – 89.68) and the trade uses standard October option contracts.  With puts so inexpensive on an implied volatility basis this trade just buys 1 JNJ Oct 90 Put at 1.35.  The break even on this trade is just 88.65 which is basically just one point lower than the current market price for JNJ.


The second trade was based on a stock that seems to be a market by itself, Apple (AAPL – 467.41), but not directly on AAPL.  We will get a glimpse into how the new iPhone sales went over the weekend as AAPL will release a sales tally Monday morning.   A number that was mentioned as a potential disappointment was six million units.  Also, there will be a tally of users that upgraded to ios7 and the expectation mentioned was one hundred million upgrades.

The trade recommendation was on Qualcomm (QCOM – 69.06) which along with Broadcom (BRCM – 27.34) supplies chips for the iPhone.  For future reference watch these stocks each time there is a new product announcement at AAPL.   On a technical basis it appears that QCOM is about to break out to the upside and the trade involves buying a call.  Once again the low volatility market environment makes this sort of trade logical.  Looking out to January the idea is to buy 1 QCOM Jan 70 Call at 3.25.



A final trade was on DryShips, Inc.  (DRYS – 3.50) and is based on potential improvements in shipping rates.  Options for this trade were actually a bit expensive.  As I was taught by Marty Kearney at the Options Institute when I joined the staff – “if you have to buy an expensive option, sell one too”.  That logic results in a December bull call spread buying 1 DRYS Dec 3.50 Call at 0.50 and then selling 1 DRYS Dec 4.50 Call at 0.25 and a net cost of 0.25.  A rally out of DRYS to 4.50 or beyond by the third Friday in December results in a profit of 0.75.


Barron’s –

Larry McMillan, the dean of option educators and author of the bible on options, was the guest author of the Striking Price column this past weekend.  He discussed sentiment that can be discerned from trading activity in the options market.   He specifically focused on the equity put-call ratio and noted that it typically moves opposite of the overall stock market.   This has not been the case as of late which shows some skepticism about the strength of the stock market.  He finishes up by noting similar behavior in the options market in late 1999 and early 2000 in the QQQ which came crashing down in April 2000 coinciding with the crash of the tech bubble.