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Russell’s Round Up – Weekend Review by Russell Rhoads

by rrhoads on 03-28-2011 12:49 PM

 

I type this sitting at Chicago’s Midway Airport with my wife and two small children engrossed in their iTouches.  In a few hours I will leave the markets and cold weather behind for the sunny wonderland that is Disney World. 

 

Option Action –

 

CNBC’s option specific program was full of commentary and recommendations this past Friday. 

 

The traders usually focus on specific stocks, but did spend a little extra time pointing out the significant drop in the VIX this past week which fell from 24.44 the previous Friday to 17.91 this past Friday.  That’s a drop of almost 27%.  They also mentioned CBOE NASDAQ-100 Volatility Index (VXN), just above 20, which is a technology heavy index.  With VXN higher than VIX, and the VXN trading higher while the VIX was lower on on Friday, they attributed this to continued concern over the situation in Japan and the impact it may have on components that are supplied to technology companies in the United States.

 

There was a quick review of the price reaction in Research in Motion (RIMM) stock on Friday.  RIMM dropped 11% on Friday based on the company’s earnings release the previous evening.  The traders had recommended a bearish spread in front of earnings that turned out to be a pretty successful trade.  Also, they suggested there may be more downside in RIMM stock, but cautioned that the company may be a takeover candidate.  This is usually a pretty painful situation for short sellers.  Remember, with certain bearish option spreads the worst case scenario or maximum loss is known when the trade is initiated.  When a trader shorts a stock with the anticipation of lower stock prices in the future, the potential risk of a rise in the stock is theoretically unlimited. 

 

They also discussed Apollo Group (APOL) stock and recommended a near-term long strategy based on the stock rebounding in value.

 

Finally, they talked about Sprint (S) which has come under pressure based on the AT&T announcement that they will be purchasing T-Mobile to increase market share.  Sprint has been a consistently rumored buyout stock and this removes one of the potential suitors.  The traders recommended a long term bullish strategy using options that expire in January of 2012.  Their feeling is the stock should recover to above 5.00 a share which is where it was trading before the deal was announced.

 

Barron’s –

 

In the Striking Price column Steven Sears recommends two bullish plays. 

 

First, if you believe the market may come under pressure over the near term, consider buying VIX call options.  A couple of suggested scenarios that would result in a dip in the stock market (and higher VIX index) include further negative developments in Japan or a rise in oil to the $120 range.  A couple of weeks ago it was suggested that $110 was going to be the trigger for lower stock prices, maybe stocks are becoming desensitized to triple digit oil prices.

 

The other bullish play involves buying call options on the SPDR S&P 500 ETF Trust commonly known buy the ticker SPY.  This strategy works if you believe stocks are going to work higher from current levels.

  

As for me, warmer weather! 

 

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About the Author
  • Mr. Bittman is the author of two books, Options for the Stock Investor, (McGraw-Hill, 1996), and Trading Index Options (McGraw-Hill, 1998). He teaches courses for public and institutional investors, and he has presented several custom courses throughout the U.S., Europe, South America and Southeast Asia. In 1980 Mr. Bittman began his trading career as an equity options market maker at the Chicago Board Options Exchange. From 1983 to 1993, he was a Commodity Options Member of the Chicago Board of Trade where he traded options on financial futures and agricultural futures. Mr. Bittman received a BA, magna cum laude, from Amherst College in 1972 and an MBA from Harvard University in 1974. In addition to his responsibilities at The Options Institute, Mr. Bittman is also a member of the faculty of The Illinois Institute of Technology, where he teaches in the masters level Financial Markets and Trading Program.
  • Mr. Kearney began his long association with the CBOE when he became an independent Market Maker in early 1981. Mr. Kearney traded options full time on the trading floor until 1992 and periodically thereafter until 1996. In early 1992 he became a founding partner and Registered Options Principal of a brokerage firm based in Chicago, a member firm of the CBOE. Mr. Kearney’s responsibilities included development and implementation of hedging and trading strategies using listed options for their institutional clients as well as their retail investors. Mr. Kearney is the co-author of Understanding LEAPS®, published by McGraw-Hill, September 2002. He has been a regular contributor to many news services including Reuters, Derivatives Week, BARRON’S, CNBC, Bloomberg, Group W, The CBS Radio Network, FORTUNE, Ticker Magazine, Stock Futures and Options, BBC TV and Radio, NPR, and others. Mr. Kearney served on various committees at the CBOE, including the Arbitration Committee from 1984 to 1996. Prior to joining the CBOE Mr. Kearney was a marketing director for NCR Corporation. Mr. Kearney is a graduate of St. Mary’s University (MN), BS, 1971, and pursued his MBA at Lake Forest Graduate School of Management. In 2006 he completed a 3-year SII/SIA program at the Wharton School of the University of Pennsylvania.
  • Peter B. Lusk is an instructor at the Options Institute, the educational arm of the Chicago Board Options Exchange. He teaches option courses for public and institutional traders and has contributed educational type articles to various financial publications. Peter has spoken to thousands of investors across North America the past few years including over 200 webinars for the CBOE and member firms on trading options. He can also be seen each week on CBOE-TV with his show, Strategy of the Week. In addition to his responsibilities at the Options Institute, Peter serves as an Instructor for the Options Industry Council – an organization representing the options industry in the U.S. Prior to working at the Options Institute, Peter was a highly successful market maker for many years on the floor of the CBOE trading equity options. He was also involved in options training for new market makers at Lakota Trading in Chicago. As a professional trader, Peter enjoys sharing his knowledge of proven option strategies and risk management at the Options Institute.
  • Russell Rhoads, CFA, is an instructor with the Options Institute at the Chicago Board Options Exchange. He joined the Institute in 2008 after a career as an investment analyst and trader with a variety of firms including Highland Capital Management, Caldwell & Orkin Investment Counsel, TradeLink Securities and Millenium Management. He is a financial author and editor having contributed to multiple magazines and edited several books for Wiley publishing. In 2008 he wrote Candlestick Charting For Dummies. Since joining the Options Institute he authored Option Spread Trading: A Comprehensive Guide to Strategies and Tactics which was released in January 2011 and recently finished work on Trading VIX Derivatives: Trading and Hedging Strategies Using VIX Futures, Options, and Exchange Traded Notes which was published in August 2011. In addition to his duties for the CBOE, he instructs a graduate level options course at the University of Illinois – Chicago and acts as an instructor for the Options Industry Council. He is a double graduate of the University of Memphis with a BBA ('92) and an MS ('94) in Finance and also received a Master's Certificate in Financial Engineering from the Illinois Institute of Technology in 2003.
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