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Showing posts from April, 2013

Playing Netflix Earnings by the Numbers

Today after the close all eyes will be on Netflix, which will report second quarter earnings. The stock is up over 5% today ahead of the announcement, and option traders are betting that the stock trades higher after the release. The biggest trade of the day has been the purchase of 422 180 calls expiring this Friday for an average price of $9.08. This is a bullish bet that has a breakeven of 189.08 at the close this Friday.

The key to trading earnings announcements with options is to understand the implied volatility you are buying or selling. A quick way is to look at the nearest expiring at the money straddle. A straddle is an option spread that is long both a call and put at the same strike and same expiration. Right now the 170 straddle expiring on Friday is trading $26, which means traders are expecting that the stock will be within 15% of 170 at expiration. Most of this move is likely to occur tomorrow, so we can look at Netflix’s historical moves after earnings in order to dec…

Morning Update

One stock under performing the broad market this morning is Boeing. This has enticed one option trader to buy calls on the stock. The trade was the purchase of 294 August 85 calls for $5.25 with the stock at 87.00. This is a bullish bet that the stock will be above 90.25, or 3.7% higher, by August expiration.

Trades like this are a good example of how you can replace a long stock position with a call option. Investors who are uncomfortable with the market volatility this week can sell stock and buy 1 in the money call for every 100 shares sold. The result of this trade is a position that will profit if the stock continues to rally this summer, but will have limited losses should the market sell-off. The cost of this protection is that the stock must overcome the extrinsic value of the calls, also known as their time premium. In this case, a stock position bought at $87 would have a break even at $87, whereas the call position has a break even of $90.25, 3.5% higher.

However, a look at…

Using Options to Trade Season Trends

Today shares of Coca-Cola are over 5% higher after the company reported better than expected earnings per share and revenue, plus a 4% increase in sales volume. Additionally Coca-Cola announced that that they had agreed to create a franchise bottling system with five bottling companies. The stock has seen heavy option trading as a result of its big pop, with the biggest trade of the day being the sale of 5000 August 44 calls for $0.58.

By selling this call, the trader believes that the stock will not be above 44.58 come August expiration, and if it is there he is willing to either get short the stock or take profit on his longs. If this was done against stock, it would create a covered call position for the trader. This is a way to play the seasonal “sell in May and go away” trade without actually going away. Instead of selling stock positions outright, you can sell call options against those stocks to create a downside cushion that will help your portfolio outperform if we see the ty…

Morning Update

The story of the day is the crash in gold prices which are down about 10% right now following Friday’s 4% plunge. Gold continues to rip through levels of support like they are non-existent, suggesting investors are running for the exits no matter what the price. The sell-off in gold has dragged the gold miners down with it, including Freeport McMoran. This stock is down 12.5% from last week’s high and down nearly 7% today. But option traders are continuing to make bearish bets on the stock which suggests that the bottom may not be in yet for gold or the gold miners.

One of the biggest trades today in FCX was the purchase of 3215 August 21 puts and the sale of 3125 August 27 calls for a net credit of $3.82. This position is known as a risk reversal and is very similar to a short stock position. Typically these option spreads are done against a long term, buy and hold stock position to flatten exposure without creating a tax event. This spread, when done against stock, will cap losses …

Taking Advantage of the Panicked Selling in Gold

A poor PPI reading, retail sale, and consumer confidence number appear to have finally brought some sellers into the equity markets this morning. But the real looser this morning is not a stock, its gold. Gold is currently down nearly 4% and has blown through support at its 2012 lows. Early option trading is heavy, with 1.7 puts trading for every call. Demand for out of the money puts has pushed the gold volatility index up 25%, which demonstrates the level of fear in this market right now.

One of the biggest trades this morning on the GLD appears to be the purchase of 3925 May 150 puts for $3.70 and the sale of 3925 March 2014 144 puts for $6.90. This trade is an expression of a short term bearish and long term bullish view. The May 150 put that was bought will be profitable if GLD is below 146.30 at May expiration. To finance the cost of buying this put and expensive volatility this trader then sold a long term 144 put for 6.90. This trade will be profitable if GLD is above 137.10 …

Morning Update

Yesterday refining stocks plummeted after Valero said it expects to pay $300-$400 million to comply with cleaner gasoline requirements expected to be in effect by 2017. This sent a wave of selling through the refining sector as traders, worrying over margins, heavy maintenance ahead of the summer driving season, and the expenses related to the new emissions regulations took the opportunity to take profits in these names. Options volume in Phillips 66 has been heavy the last two days and focused on defensive trades. One of the biggest trades yesterday was the purchase of 1000 April 65 puts for $0.65 with the stock at 67.85, This morning those puts were sold for $2.35 with the stock at 63.93. This trade risked $65,000 in options premium and turned a profit of $170,000 in one day.

The take away from this trade for long term investors who are long the stock should be that these option traders have already switched from buying puts to selling them. This shows they think this move, which …