Options Action –
Options Action started out talking about my favorite topic – VIX. Of course when they lead off with VIX that means the stock market was under pressure. It is tough to only get attention when things are going bad…
The first comment really put things in perspective and that was that we just made an all-time high on the stock market a few days ago. It’s not like the Dow Jones Industrial Average dropped 300 points while we were testing lows. Also, VIX is at 18, not 40. If you are continued about further market downside from here protection is still not expensive when you take a long term perspective.
It was noted that the high flyer stocks were sources of profit taking this past week and with that led to the first trade which was a bearish one on Google (GOOG – 1,123.83) and using February options. The trade buys a GOOG Feb 1100 Put at 23.00, sells 2 GOOG Feb 1000 Puts at 4.50 each (9.00) and then buys a GOOG 900 Put at 1.00. The net cost of 15.00 which is the maximum potential loss. Between 1,085 and 915 the trade results in a profit. If the needle gets threaded perfectly the result could be a profit of 85.00 if the stock settles at 1000 upon February expiration. All this is covered in the payout diagram below. Also, do note GOOG is set to report earnings this coming Thursday after the close.
The second trading recommendation started off discussing the small cap sector and the Russell 2000 Index (RUT – 1144.13). The RUT is down about 6% since making an all-time high in late 2013. There is an expectation of a major break in an uptrend in the near future. The Russell 2000 ETF (IWM – 113.45) is the trading vehicle for this idea and the focus is for a longer term move to the downside. Based on this bearish outlook buying a IWM Jun 110 Put for 4.40 is recommended.
The Striking Price column discussed the quick risk in VIX on Friday, but put a positive perspective on this. The result of a higher VIX is inflated option premiums. As Steven Sears notes this results in an increase in premiums on individual stock put options which translates to more income when selling a put on a quality stock. He is a big proponent (and I do not disagree at all) of selling puts on stocks that you may want to acquire at lower prices. The article finished up noting a big VIX trade from earlier in the week. On Wednesday last week there was a big buyer of the VIX May 23 Calls at 0.95. This would be considered a very bearish bet on the S&P 500.
It was part two of the Barron’s 2014 Roundtable and Marc Faber was still wearing some weird red thing on his head. Abby Joseph Cohen from Goldman Sachs recommended a handful of stocks for 2014, but also has a bullish outlook for Mexico and recommended buying the iShares MSCI Mexico Capped ETF (EWW – 62.61). It is kind of interesting that Marc Faber took the other side of that trade.
Other stuff I came across this weekend –
10 Minute Video of Noriel Roubini and Ian Bremmer being interviewed at the World Economic Forum by Tom Keene of Bloomberg –
Thought Provoking Blog by Bruce Krasting on stocks and the economy –