Weekend Review – 11/10/2013

Things are a little light for me this week, I got hit by the flu bug for the first time in a decade and am still in recovery mode.  However, I did manage to get to watch Options Action between power naps this weekend –

The discussion started out focusing on Facebook (FB – 47.53) which had a tough week losing about 4.5% while Twitter (TWTR – 41.65) took the social media spotlight.  The weakness was attributed to a lack of justification of the current valuation along with some overdue profit taking.  The trade on FB is geared toward holders of FB shares that have a profit in their position and want to protect that profit.  Based on Friday’s pricing a collar could be created by selling 1 FB Dec 52.50 Call at 1.00 and then buying 1 FB Dec 44 Put for 1.00.   The payoff diagram below shows that profits are protected if FB is below 44.00 at December expiration, but any gains above 52.50 are given up as well.

FB PO

The second trade focused a little on the housing sector through Home Depot (HD – 75.48).  With a bearish outlook a put calendar was recommended selling a Dec 67.50 Put at 0.35 and then buying a HD Feb 67.50 Put for 0.95 and a net cost of 0.60.  If the trade works out as planned the December option should expire with no value and the February position will be open to benefit from a drop in HD.  The alternative of possible selling another HD put after the December option expires may exist depending on the market and outlook for the stock.

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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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