Weekend Review – 3/16/2014

Barron’s –

The Striking Price column was all about the financials with discussion of potential post-stress test rallies that could come to the money center banks.  If those banks, such as Bank of America (BAC – 16.80) and Citigroup (C – 46.88) raise their dividends the result could be a boost to the whole sector.  A way to play that may be a bullish trade on the Financial Sector SPDR (XLF – 21.80).

Options Action –

The show started out noting that the momentum stocks had a pretty tough week along with the S&P 500.  It was also noted that VIX is at pretty high levels as SPX Put buying has accelerated which indicates, “healthy skepticism” regarding the stock market.

The first trade discussed was sort of dubbed the next momentum stock to crash.  This was a bearish trade on Facebook (FB – 67.72) using April options.  The trade buys 1 FB Apr 55 Put for 0.30, sells 2 FB 60 Puts at 0.85 each (1.70 total), and then buys 1 FB Apr 65 Put for 2.20.  The net cost here is 0.80 which is also the maximum potential loss if the position is held to April expiration.  The best case scenario is for FB to trade to 60.00 and stick at that level which would result in a maximum profit of 4.20.  Anywhere between 55.80 and 64.20 would result in some sort of profit for this trade.  All of this is depicted in the payoff diagram below –

FB Payoff

The second trade focused on the biotech sector which has been on a tear to the upside over the past few months.  The specific stock is Celgene (CELG – 149.41) which was called a “canary in the coal mine” for the whole group as the stock seems to be breaking down from an uptrend.  Looking out to July the recommendation is to buy a CELG 145 Put for 9.50 and then sell a CELG 125 Put for 3.50 and a net cost of 6.00.  CELG at 125.00 or lower would result in a profit of 14.00 and the break-even level for this trade is 139.00 or just over 10 points lower.

  • Carl Moslener

    So, let’s see if I understand this. We want FB to decline to exactly 60 at expiration, but will probably close the trade if it reaches a predetermined profit target. As FB declines the IV and options prices will increase; however, the time decay will work in our favor – so it will be a race between vega and theta. would a put calendar be a better trade to make a bearish trade and a call butterfly for a bullish trade? Thank you