Weekend Review – 10/13/2013

Options Action –

The initial discussion focused on the retail sector which seems to be under pressure as the consumer seems to be tapped out.  Consumer sentiment is under pressure and retailers will suffer unless consumers start to spend.  This led to the first trade recommendation in Home Depot (HD – 76.32) using a put calendar with a bearish outlook.

The trade sells a HD Nov 75 Put for 1.10 and buys a HD Dec 75 Put for 2.30 and a net cost of 1.20.  The November option will expire before HD’s earnings release and then the December option would be held based on the belief that there is a negative reaction to HD’s earnings.  As a final note it was pointed out that there were several large bearish option trades on HD on Friday and put volume was twice that of call volume.

The next trade was on Gold and also bearish.  The SPDR Gold Trust ETF (GLD – 122.60) appears to be on track to make a break to new lows.  Based on this another put calendar spread was recommended.  This trade sells a GLD Nov 120 Put at 2.60 and then buys a GLD Mar 120 Put for 6.00 and a net cost of 3.40.  Note that there will be plenty of time after the November option expires to possibly sell another put to lower the cost of the trade.  Finally, there are serial options on GLD so you may choose to sell a nearer dated 120 put as opposed to the November contract recommended here.

A final trade recommendation was on Johnson and Johnson (JNJ – 89.45) and again bearish (there’s a theme here).  This one is another put calendar spread (there really is a running theme to this week’s show) selling a JNJ Oct 87.50 Put at 0.870 and buying a JNJ Nov 87.50 Put for 1.10 for a net cost of 0.40.

Barron’s –

The Striking Price column discussed my favorite topic, VIX, and how traders have been using VIX Options or Futures based on their attitude toward the most recent developments in Washington, DC.  It is mentioned that many VIX trades have been reactionary.  This is considered a positive as the problems are expected to be short lived and not a long term problem for the financial markets.  Also, there was a little discussion around Facebook (FB – 49.11) and bullishness into their next earnings release.  Selling puts, buying stock, or combining the two in a more aggressive trade were ideas being kicked around for those that think this year’s momentum in FB stock will continue to the upside.

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Russell Rhoads, CFA

CBOE Options Institute

Russell Rhoads, CFA, is a Senior Instructor with the Options Institute at the Chicago Board Options Exchange. He joined the Institute in 2008 after a career as an investment analyst and trader with a variety of firms including Highland Capital Management, Caldwell & Orkin Investment Counsel, TradeLink Securities and…

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