The striking price column discussed mutual funds this week. No, the column has not changed its focus. The discussion was about mutual funds that have an option component to their strategy. It was noted that covered call strategies can underperform in strong market environments like we are experiencing in 2013. However, it is also noted that on a risk adjusted basis consistent covered call strategies have strong risk adjusted returns. One fund that was highlighted is the YCG Enhanced Fund (YCGEX) – they sell options on about 25% of their holdings. It was noted that the fund sells call options against long positions and will sell put options to enter a new position.
Options Action –
The discussion kicked out with analysis of Apple (AAPL – 520.03) and the new iPad being launched on Friday. The feeling was that sentiment will be bullish for AAPL into the holidays which results in a recommendation for a bullish call fly with a target price of 550. Using December options 1 AAPL Dec 525 Call was purchased at 15.00, two 550 Call were sold for 7.00 each and then 1 AAPL 575 Call was bought for 3.00. The net cost for this trade is 4.00, which is also the maximum loss. If AAPL is right at 550.00 at expiration then the result will be a profit of 21.00. As there are several moving parts, a payoff diagram appears below to clear up the risk and reward for this trade.
The second trade focused on a city I get to visit in a few weeks (Las Vegas) for Trader’s Expo. The specific stock was Wynn Resorts (WYNN – 167.70) which is trading at 52 week highs and is well above any trend. Basically the thought is the stock needs to come down a little as it may be ahead of itself. The trade is long term in nature and uses some time decay to lower the cost of a bearish outlook. A WYNN Dec 160 Put is sold for 3.50 and the WYNN March 160 Put is purchased for 8.25 and a net cost of 4.75. The idea is for WYNN to top out, but not start moving below 160.00 until after December options expire.