Weekend Review – 10/6/2013


Barron’s –

Steven Sears points out in the Strike Price column that despite all the potential land mines out there for the stock market, investors continue to buy stocks with small hedges here and there.  He notes that stocks that have underperformed are popular as the long side of relative value trades.  One specific example he noted was a recent recommendation to buy Bank of American (BAC – 14.05) and short Fifth Third (FITB – 18.19) and BB&T (BBT – 33.67).

I have been in the middle of a very hectic schedule that had me representing CBOE from California to Europe over the past 10 days.  One of those questions that I got periodically involves shorting volatility.  I often say that the time to get short volatility is when VIX spikes up.  One of those spikes occurred on Thursday and Steven Sears notes that with VIX up a Credit Suisse client bought 60,000 VIX Oct 14 Puts.   That would be a hefty bet that VIX is going to collapse in the next couple of weeks.

Options Action –

The initial discussion was on Tesla (TSLA – 180.98) and the You Tube video that showed one of their cars in flames.  This viral depiction of the destruction of an expensive battery run car added volatility to the stock this past week.   After talking about whether the traders would be more comfortable with being in a gasoline power or battery powered car that is on fire (battery was the consensus) there was a bearish trade recommendation on TSLA in the form of a put calendar.  This trade sold 1 TSLA Nov 160 Put at 9.50 and buying a Jan 160 Put at 15.50 for a net cost of 6.00.  The short put expires after TSLA’s earnings release which comes out on November 4th.  The idea is for the stock to grind down to 160.00, but close above that level by the third Friday in November and then continue lower after the short put expires.

The second trade was on Chipotle (CMG – 434.12) which has rebounded from a dramatic drop to test making new highs.   The feeling here is CMG is going to stall out and move lower.  So the trade recommendation involves a bear put spread selling a CMG Jan 400 Put at 12.50 and then buying a CMG Jan 375 Put at 7.00 for a net cost of 5.50.  The stock at 3.75 or lower at expiration results in a profit of 19.50.  The payoff diagram below shows this risk reward.