Weekend Review – 12/22/2013

Options Action –

I felt I was watching a repeat when the discussion began talking about Apple (AAPL – 549.02).  For the longest time it seemed like I could not get through writing a Weekend Review without mentioning AAPL at least once.  The feeling is the stock bottomed out in the summertime and it may be headed for higher levels.   Despite the stock losing 1% last week while the equity markets were rallying a bull put spread using the January 3rd options was suggested.  One reason has to do with all the time off we get in the next couple of weeks with a half day of trading on Christmas Eve, Christmas Day, and New Years Day off.

The specific AAPL trade buys a AAPL Jan 3rd 540 Put at 5.40 and sells a AAPL Jan 3rd 550 Put at 9.40 for a net credit of 4.00.  The payoff diagram below depicts the payout at expiration along with AAPL’s closing price on Friday.  Notes a close above 550.00 results in a net profit of 4.00 and a close under 540.00 would result in a loss of 6.00.

AAPL Payoff

The next trade starts out with an outlook that the price of oil is about to top 100.00.  The Oil Service stocks have historically had their prospects tied closely with the price of oil.  One of the best ways to gain exposure to this market sector is through the Market Vectors Oil Services ETF (OIH – 47.55).  Looking out to April 2014 the trade buys a OIH Apr 48 Call at 1.75 and sells a OIH 52 Call at 0.50 to complete a bull call spread for a cost of 1.25.

OIH Payoff Diagram


Barron’s –

The Striking Price column does not dive into any specific trading ideas, but does mention that buying index options is cheap once again after the drop in VIX, RVX, and VXN last week.  Also, Steven Sears gives away a little floor trader secret of how to convert implied volatility into a single day move expiration.  It’s called the rule of 16.  Basically you take the implied volatility as indicated by option prices and divide that number by 16.  For instance, for implied volatility of 16% the result would be that the market is estimating about a 1% daily move for a stock.  Implied volatility of 32% means the market thinks the stock should move about 2% a day.