Weekend Review – 10/26/2013

Barron’s –

The Striking Price column discusses a note by Goldman Sachs that says buying calls on stocks that have underperformed the S&P 500 leading up to their individual earnings reports.  This strategy has proven more successful than buying a call on a stock that has outperformed leading up to an earnings report.  An added bonus is that we are currently in a pretty low volatility environment.  Many pros consider low volatility the equivalent of cheap options.   So it is very possible that the call options could be relatively cheap as well.


Options Action –

The intro music was Jump Jump Jump around – pretty appropriate for the market these days, although there seem to be more jumps higher than lower.

The first stock to be discussed was the always interesting Tesla (TSLA – 169.66).  While discussing TSLA one of the captions on the bottom referred to it as a tech stock.  I think it’s valued like a flyer tech stock, but unless something really changed I believe they make cars.  At least the Tesla in my driveway appears to be a car.  I wasn’t 100% sure since it was pulling in and backing right out as the driver was apparently lost, but my understanding is TSLA makes cars.

After discussing TSLA and concluding that in time it should come back to normal valuations a bullish trade was actually recommended in the form of a call calendar spread using short dated options.  The trade sells Nov 1st TSLA 180 Call at 2.00 and buy a TSLA Nov 8th 180 Call for 9.00 and a net cost of 7.00.  The hope is TSLA under 180.00 on Friday November 1st and over 180.00 on Friday November 8th the stock being above 187.00 which is the break-even price.  Also, be aware TSLA is scheduled to report earnings on November 5th so this trade sells an option that expires before earnings and then plans to hold one through earnings.  As earnings is the catalyst for the trade, selling the November 8th Call after earnings should be part of the trading plan.

The next stock discussed was Facebook (FB – 51.95) as the company reports earnings next week.  It was noted that the market is pricing in a 12% move (higher or lower) going into this report.  There is limited history of FB’s price reaction to earnings and the table below covers it all.  I’m sure many traders can remember back 3 months when FB was up almost 30% on the day.  That may have something to do with the rich valuation for FB going into this earnings report.   The trading idea is a longer term bullish one that takes advantage of the high estimated potential price move for FB.  Another calendar spread is suggested selling a FB Nov 57.50 Call at 2.20 and then buying a FB Nov 57.50 Call for 5.25 and a net cost of 3.05.

FB Reaction