Apologies ahead of time as the weekend review is fairly brief today as I’m racing the clock before boarding a plane to Europe for the CBOE Risk Management Conference that kicks off Monday.
Options Action –
The traders discussed a big trade done in the Russell 2000 Exchange Traded Fund (IWM – 106.58). It was a bearish trade using standard October options on IWM. The Russell 2000 has dramatically outperformed the S&P 500 in 2013. To replicate the trade using IWM options you would purchase 1 IWM Oct 105 Put at 1.10, sell 2 IWM Oct 100 Puts at 0.30 each (0.60 total), and buy 1 of the IWM Oct 95 Puts at 0.10 for a net cost of 0.40. The trade has a maximum profit of 4.40 if IWM settles right at 100.00 at October expiration.
Another trade mentioned on the show was on Northrop Grumman (NOC – 96.25) in the form as a bear put spread buying a NOC Jan 95 Put for 3.75 and selling a NOC Jan 85 Put for a 1.00 and a net cost of 2.75 and a maximum potential profit of 7.25 if the stock is 85.00 or lower in January. It was noted that the scaling down of military activity abroad may have a negative impact on defense stocks.
Steven Sears discussed the pending doom that is a potential government shutdown. In the event of a shutdown the government may not be able to pay their bills by mid-October. The feeling is recent VIX action, where VIX has been moving higher even when stocks are moving up may be a reflection of concern entering the market.