Options Action –
The show started off noting that on Friday stocks, bonds, and gold were all higher. The only thing that went down was VIX. I’m sure there were other markets or stocks that dropped as well, but you get the point. Despite all markets (except VIX) liking the employment number there was some skepticism about how truly good the employment number was. However, it was also noted that the drop in VIX makes taking a position (think SPX puts) based on bearishness on the equity market much cheaper.
The first trade is based on some market bearishness in the form of a put spread on the SPRD S&P 500 ETF (SPY – 179.68). There are quarter end options on many broad based indexes and ETFs. This trade uses the quarter end options that expire on March 31st. The SPY Mar 31st 175 Put is purchased for 2.30 and the SPY Mar 31st 165 Put was sold for 0.80 and a net cost of 1.50. Best case scenario is a big drop in the equity market that takes SPY down to 165 over the next few weeks.
The second trade was on a company I am probably too personally familiar with – Zynga (ZNGA – 4.53) which is basically one of the few Internet related IPOs that has not performed particularly well over the past few years. The idea is a little complex in the form of a Call Butterfly which was implemented as a Broken Wing Butterfly. Looking out to April a ZNGA Apr 4.50 Call is purchased, two ZNGA Apr 5.50 calls are sold and then finally a ZNGA Apr 6.00 Call is purchased. The net result of all these trades is a cost of 0.25 and a profit of 0.75 if the stock is at 5.50 and then a diminishing profit over 5.50 that actually goes no lower than a 0.25 gain at or above 6.00. It’s complex, so here’s a payoff diagram at April expiration.
The striking price column discussed strategies on two different strategies surrounding two very different companies. The first was Netflix (NFLX – 429.88) which has been a great performer up 9% this year alone. A stock replacement trade is suggested as a way to get long exposure to NFLX, but not shell out over $400 a share. Looking to January of 2015 a NFLX Jan 425 Call was trading at 69.25 last week, still kind of expensive for an option position, but a fraction of 429.88. The other trade was on Microsoft (MSFT – 36.56) which hasn’t had much growth, but does generate a ton of cash. If you want to get paid to try to buy MSFT on weakness you may consider looking at the MSFT Jul 33 Put which could be sold for 1.34. If MSFT is above 33.00 at July expiration the premium received for selling the put is a profit, if below 33 then you become the proud owner of MSFT shares at a net effective cost of 31.66.
Some other things I came across this weekend –
Interesting article about potential threats to the markets –
The National Stock Exchange of India is planning on introducing trading on the India VIX by the end of the month –