Jim Strugger from MKM Partners subbed for Steven Sears in the Striking Price column and started out mentioning that based on longer term cyclical work he believes the low volatility environment has more time to run. He then runs through a handful of examples where a trader could sell a put or a put spread and use the funds to purchase out of the money calls. One example of selling a put and buying a call involved Akamai (AKAM – 48.58) which is involved in cloud computing and Internet media usage. I took his example, but used Friday’s closing prices. Looking out to May expiration, which will include two earnings reports from AKAM a AKAM May 45 Put could be sold for 2.64 and the AKAM May 52.50 Call could be purchased for 2.79 and a net cost of 0.15. The result is a cheap bet on the upside over 52.50 and the obligation to buy shares on a dip below 45.00.
This issue also had the first part of the 2014 Roundtable where several high profile and successful investors get together to take funny pictures and discuss their best ideas for the year. A pick that matches up with my areas of interest include Felix Zulauf who likes buying the Market Vectors Gold Miners ETF (GDX – 23.33).
Options Action –
The traders started out noting that consumer related companies that have released earnings have performed miserably. Despite the apparent weakness of the consumer the rest of the stock market has held up for the moment. It was also noted that the bulk of earnings announcements are yet to come. A final insightful comment was that the consumer is weak and eventually the consumer may be dealing with higher interest rates.
The first trade is based on the weakened consumer and targets the homebuilders. SPDR S&P Homebuilders ETF (XHB – 31.84) is the instrument being used here and since implied volatility is pretty low the trade involves just buying a put. Looking out to March this trade idea is to just buy a XHB Mar 32 Put at 1.00.
The second trade was based on the continued bullishness of the casino stocks, specifically companies that operate casinos in Asia. The actual feeling is that the bullishness may have reached an overdone level. Again since options are cheap the idea is to just buy a put and the stock targeted here is Wynn Resorts (WYNN – 215.70). Looking out to June and being pretty aggressive on the downside a WYNN Jun 200 Put is purchased at 8.90. It was also noted that if the stock begins to move down legging into a spread. Also, it was noted that if WYNN drops dramatically the holder of the put may benefit from a combination of a lower stock price and a move up in implied volatility.
What else I came across –
Friday afternoon I got an email saying the final agenda for the 30th CBOE RMC Conference to be held March 17 – 19 was posed on the RMC site – check out www.cboermc.com – for more information.