Weekend Review – 2/2/2014

Options Action –

The show stated out showing the performance of a few of the very popular stocks.  I found it interesting when Melissa Lee noted that Facebook (FB – 62.57) has a bigger market capitalization than The Walt Disney Company (DIS – 72.61).  It was also noted that more defensive stocks have not performed well in the recent pullback.

The first trade was a combination of a call spread and short put also referred to as a call spread risk reversal in Twitter (TWTR – 64.50).  The spread sells a TWTR Mar 55 Put 3.00 and then buys the TWTR Mar 65 Call for 7.00 and then sells the TWTR Mar 70 Call at 3.50 for a net cost of 0.50.  If TWTR is under 65.00 but above 55.00 at March expiration the result is a loss of 0.50 – there is significant risk if the stock is below 55.00 based on the short put and the best case scenario involves TWTR at 70.00 or above at expiration.  Do keep in mind that TWTR reports earnings for the first time as a public company this week.  A payoff diagram for this trade at expiration appears below –

TWTR

The next trade focused on a sector not mentioned too much on Options Action, the biotech sector.  A chart showing that this market sector is pretty extended relative to the rest of the market.  The trade focuses on the overall sector and uses options on the iShares Nasdaq Biotechnology ETF (IBB-245.91).  Despite the implied volatility being high the trade suggestion was to buy the IBB June 240 Put at 15.00.  Keep in mind that despite buying a put, if IBB moves lower a farther out of the money put would be sold to offset the high cost.

Barron’s –

The third part of the Barron’s Roundtable was in this past week’s issue.  Brian Rogers from T. Rowe Price was bullish on emerging markets in 2014 and suggested the T. Rowe Price Emerging Markets Stock Mutual Fund (PRMSX).  I have a personal interest in emerging markets due to the two tradable emerging market volatility indexes quoted at CBOE (VXEEM AND VXEWZ) so that caught my eye.

The Striking Price column noted that put premiums are higher than they have been in some time.  If you have quality stocks you may considering buying lower then take a look at selling relatively expensive puts and taking on the obligation to purchase shares at a discount.

Other things I came across –

Here is an Op Ed from Washington Post on problems in Argentina.  This could create an emerging markets buying opportunity at some point –

http://www.washingtonpost.com/opinions/argentinas-economic-crisis/2014/01/30/a35d1818-878f-11e3-833c-33098f9e5267_story.html

A little more on emerging markets from Bloomberg –

http://www.bloomberg.com/news/2014-01-31/emerging-markets-victimhood-narrative.html

Finally (warning – shameless self promotion) – I decided a quick explanation on the conventional wisdom behind tapering being bad for emerging market economies was worth discussing in this space –

http://www.cboeoptionshub.com/2014/01/30/tapering-may-bad-emerging-markets/

And a Superbowl Pick –

It’s not too late to place bets on the Superbowl – my daughters are rooting for Seattle as they love their colors and are big fans of Sea Horses – I believe they are in their rooms making ‘Go Sea Horse!’ posters as I type…the jury is out if that means I’m a good or bad father…