Weekend Review – 1/5/2014

Options Action –

The first show of 2014 started out talking about the financials as Bank of America (BAC – 16.41) is trading at five year highs.  It was noted that earnings season is around the corner and we will see if the fundamentals support higher stock prices.  Regardless of earnings a final bullish point was made that the bank stocks look fairly inexpensive on a valuation basis which could provide a floor to the stocks.  The one bearish indication is the headwind that may be on the horizon is higher interest rates.

The recommendation focuses on the financial sector as a whole using the Financial Select Sector SPDR (XLF – 21.89).  It was noted that four of the five biggest components of the XLF report their earnings before January expiration.  So the timing of the trade is to buy a XLF Jan 22 Call for 0.18.  This is a straightforward trade, but makes a lot of sense if you are bullish on financials.  Also, it was noted that implied volatility of XLF option pricing is at a two year low.  When implied volatility is low a long option can make sense, in times of high implied volatility usually a spread trade would be the best route to take.  XLF needs to rise about 1.7% to get to break even.  The payoff diagram below highlights where XLF was trading on Friday along with the payoff at January expiration.

XLF PO Diagram

The next trade took a look at the gaming stocks as it appears there will be geographic expansion both within the US and globally.  One specific area that was mentioned is the potential legalization of casino gambling in Japan.  There is a feeling this may already be priced in and that gaming stocks are a bit overvalued.  The specific stock is MGM Resorts International (MGM – 23.45) and the trade is a put spread.  Looking out to March expiration a MGM Mar 23 Put is purchased for 1.20 and a MGM Mar 19 Put is sold for 0.20 and a net cost of 1.00.   A drop to 22.00 results in a break even trade and the best case scenario is for MGM to trade to 19.00 or less where the result is a 3.00 profit.

Barron’s –

Steve Sosnick from Timber Hill stepped in for Steven Sears and started out talking about what has been commonly referred to as the Fed Put.  This is basically a belief that market catastrophes will be averted through actions from the Federal Reserve.  His point is that the Fed Put may not be as prevalent as the economy appears to be recovering.  Also, with Janet Yellen taking over as the new chair of the Fed, the Fed Put is a little less tangible than in the past.


Some other things I found interesting this weekend –

A good discussion of using VIX and VVIX to as market signals by Ophir Gottlieb –


A brief interview with two professors from the University of Kent regarding a study using VIX and VSTOXX Futures –


The full paper referenced in the previous article – Investment Strategies with VIX and VSTOXX Futures


StockTwits listed the 100 most mentioned stocks on Twitter in 2013 –