What's On Our Minds...

Options Action –

Guess what stock they started off talking about?  Facebook (FB – 38.23) of course.  It appears options on FB will be listed after Memorial Day, but this very large (not the largest ever) IPO had everyone’s attention on Friday.  An interesting comment alluded to the appearance that the market shrugging off all news and focusing on FB for the last couple of week.  The news that has been ignored has been mostly bad.  It may just be that attention to the bad may return reality to the stock market. 

As a derived play on FB, a bearish recommendation was made on Google (GOOG – 600.40).  The idea here is based on money flowing into FB and coming out of GOOG.  The structure of the trade is a put spread looking out to June expiration.  The detail involves buying a GOOG Jun 585 Put at 14.00 and selling a GOOG Jun 560 Put for 7.50.  The net cost of this trade is 6.50 with a potential profit of 18.50 if GOOG is below 560.00 at June expiration.  Below 579.50 and above 560.00 the trade makes a partial profit. 

The second trade was on Wells Fargo (WFC – 30.94).  The trade ides is based on the stock setting up for a technical breakout along with bullish fundamentals.  The trade is pretty straightforward purchase of a call based on the expectation of higher prices over the next few weeks.  The specific trade recommendation is to buy the WFC Jul 33 Call for 0.95.  This trade works with a 3.01 gain (from Friday’s closing prices) in WFC by July expiration.

Investor’s Business Daily – Monday Edition

The Investor’s Corner column on Page B5 is a great history of how the CANSLIM investing methodology approach would have worked with SolarWinds (SWI – 44.05) over the past few months.  The focus shows how the stock reached a plateau for some time and then continued on with a new leg up.   

The Options Institute is teaming up with IBD in June for a very special class dubbed the Investor Training Camp which is going to be held June 13 – 14.  More information may be found at www.cboe.com/camp

Barron’s –

Although FB options don’t list for another week or so, the Striking Price column covered some significant events that will be on the horizon for FB.  In three months FB will be eligible for addition to the Nasdaq 100 Index which is the basis for the PowerShares QQQ Trust (QQQ – 60.81).  Also, be aware that the first lock-up for insiders expires in 91 days – this means that an extra 171,000,000 shares will be available for sale in the market. 

  The $SPX chart has turned bearish, with the breaking of the 1340 support level. 

However, it is oversold in that it is more than 4 standard deviations below

its 20-day moving average, which is currently at about 1370.

  Equity-only put-call ratios remain on sell signals, but they are so
high on their charts that they are in an oversold state, too.

  The breadth indicators have now reached extremely oversold levels,
but they are also on sell signals.

  Volatility indices ($VIX and $VXO) have started to move higher this week,

and $VIX finally has broken out of its trading range on the upside. 

The move above 21 is bearish for stocks, so the $VIX chart is bearish at this time.

  In summary, nearly all indicators are on sell signals.  Oversold conditions are calling for

a short-term, but perhaps strong, rally. But true buy signals will take a while to form.

Larry McMillan

optionstrategist.com

Volatility as an asset class
 
 Gap (GPS) in pre-market was up 64c to $26.95, but is now at $25.60, down $0.70 after reporting Q1 EPS 47c, consensus 46c. Overall option implied volatility of 50 is above it 26-week average of 35. 
 
Applied Materials (AMAT) is down 3c to $10.45 in the premarket after reporting Q2 adjusted EPS 27c, consensus 24c. Overall option implied volatility of 37 is above its 26-week average of 32.
 
 Salesforce.com (CRM) was up $8.90 to $142.70 in the premarket following the release of Q1 adjusted EPS 37c, consensus 34c. CRM now up 13 points. Overall option implied volatility of 70 is above its 26-week average of 49.
 
 
Puts with volume increases at CBOE;
 
BAC 5/19/2012 7 13K contracts

AAPL 5/19/2012 535 11K

RDN 1/19/2013 2 5K

SYY 5/19/2012 28 5K

TWO 6/16/2012 9 4K

CBOE Volatility Index-VIX is off 1.07 at 23.42, after closing at 24.49.  Its 10-day moving average is 20.65 and its 50-day moving average of 17.54.

SPX traded 1.773 million contracts yesterday, VIX with over 432k and SPXpm with 22,123.

U.S. equities opened higher but have moved to unchanged.  Fitch lowering Greece to CCC and Moody's lowering 16 Spanish banks in background as Facebook opens for trading in the next hour.

G-8 meeting this weekend. Chicago Nato meeting (streets are empty of workers this morning) and Cubs - White Sox in local news.

Volatility as an asset class
 
Advance Auto Parts (AAP) is down $13.48 to $68.64 on 6.3 million shares after reporting Q1 revenue of $1.96B; below consensus estimates of $2B. June put option implied volatility is at 37, September is at 36; above its 26-week average of 32.
 
Boyd Gaming (BYD) is up 14c to $7.17 on the acquisition of Peninsula Gaming for $1.45B. June call option implied volatility is at 60, September and December is at 59; above its 26-week average of 55.
 
Limited (LTD) is recently down $1.87 to $46.10 on 5 million + sharesafter reporting Q1 revenue of $2.15B, near consensus estimates of $2.14B. June put option implied volatility is at 33, August is at 35; compared to its 26-week average of 35.
 
VIX methodology for Apple (VXAPL) +6.8% to 36.71.
 
 
CBOE Volatility Index (VIX) is at upper end of five-month range as stock index’s and Apple (AAPL, $531.75) trending lower.
 
CBOE Volatility Index (VIX) is recently up 15c to 22.42. VIX June 30 and 35 calls are active on total option volume of 279K contracts.

Bring on FB.

The stock (or soon to be stock) in the news for the last two weeks is Facebook.  The pricing on the Facebook IPO should be announced after the close today, Thursday May 17^th.  The symbol is expected to be FB.

The Options Institute has received more than a few phone calls and e-mails about Facebook options, and when they’ll be listed.  Let’s make a few assumptions and come up with an educated guess as to when Facebook options will be available to trade. 

If the Facebook IPO is successful and trading on the shares begins tomorrow, Friday the 18^th, the first trading day for Facebook options will be Tuesday the 29^th (the 28^th would actually be the first day the options would be eligible, but that’s Memorial Day).   

I have not seen any contracts specs yet, as we usually release info as to which Options Cycle (June-Sep, July-Oct or Aug-Nov), the DPM, strike prices, would Weekly’s or LEAPS be available, etc. after the IPO but a few days before the option listing. 

Qualifiers in our rules that dictate when we can list any new option:

•       Minimum of 7,000,000 shares of the underlying security which are owned by persons other than those required to report their stock holdings under Section 16(a) of the Securities Exchange Act of 1934.

•       Minimum of 2,000 stockholders

•       Trading volume has been at least 2,400,000 shares in the preceding 12 months (FYI, the security does not have to be trading for 12 months; if they hit that volume level in a day, or two or three, etc., that would qualify).

•       Market price per share has been at least $3.00 for the previous 5 consecutive business days preceding the date on which the Exchange submits a certificate to the Options Clearing Corporation for listing and trading.

  I don’t think Facebook will have any problem meeting the requirements for listing.  If all goes as planned, We’ll blog more about Facebook options next week.

Marty Kearney

Volatility as an asset class
 
Wal-Mart (WMT) is up $1.97 to $61.20 in the premarket after reporting Q1 EPS of $1.09, compared to consensus $1.04.  Q1 revenue was $112.3B, consensus $110.54B. Overall option implied volatility of 19 is near its 26-week average of 19.
 
Sears Holdings (SHLD) is higher by $5.13 to $56 in the premarket after reporting Q1 adjusted EPS (31c), consensus (67c). Overall option implied volatility of 69 is above its 26-week average of 53.

Dollar Tree (DLTR) is down $5.15 to $96.15 in the premarket after reporting Q1 EPS $1.00, consensus 98c. Overall option implied volatility of 36 is above its 26-week average of 28.
 
 
Calls with volume increases at CBOE;
 
C 9/22/2012 33 35K contracts

VALE 6/16/2012 20 25K

AAPL 5/19/2012 555 10K 264

ETFC 7/21/2012 10 10K
 
GLD 9/22/2012 180 9K 845

CSCO 6/16/2012 17 6K
 

Puts with volume increases at CBOE;

FCX 5/19/2012 34 26K contracts
 
MSFT 5/19/2012 32 21K
 
AAPL 5/19/2012 550 11K

U.S. equities are lower on concerns about Greece and a story about bank withdrawels by customers in Spain.  Weekly jobless in line.
 
CBOE Volatility Index-VIX closed at 22.27, 10-day moving average is 19.95, 50-day moving average is 17.43.

Volatility as an asset class
 
Abercrombie & Fitch (ANF) is recently down $6.72 to $38.66 on weak European sales and guidance. June call option implied volatility is at 48, August is at 51; compared to its 26-week average of 47.
 
General Electric (GE) is recently up 72c to $19.11 after GE's Capital board declared a $475M dividend to its parent. June call option implied volatility is at 28, July and August is at 25; near its 26-week average.

SINA (SINA) is recently up $6.79 to $58.49 on better than expected Q1 results and optimism surrounding the launch of its Weibo displayed advertising system. June call option implied volatility is at 57, September is at 60; compared to its 26-week average of 67.
 
U.S. stocks mixed to lower on Greece political issues affecting European banks.
 
CBOE Volatility Index-VIX is up 22c to 22.19.

May 23rd – European Summit

The European debt crisis has continued to be an on and off again pain for global markets for a few years now.  Leaders of European nations will formally meet to discuss economic growth and job creation.

June 1st – Monthly Jobs Report

This has always been the most important date on my calendar aside from my wedding anniversary.  Not planning for either one can put me in a fast market condition.  Hiring was strong during the winter months but has slowed since February.  If this continues with the June report it will certainly raise concern that the recovery is waning.

May VIX Futures and Options settle at 21.46 this morning.  Near month is now June.

In the pre-market, US Stocks higher.   In foreign markets Asia was down big on growth concerns, Europe mixed.  The UK lowered growth forcasts for the balance of 2012, but Greek bank withdrawels slowed.

U.S. Housing Starts surprised to the upside, but Permits were soft.  Target beat estimates handily, and was up $0.95 in pre-market activity.

Facebook IPO priced after the close tomorrow.

VIX settlement for May later this morning.  VIX closed 21.97 last night.

Recap for Tuesday, May 15

Analysis from QuickTakesPro founder and Barron’s columnist Michael Kahn, CMT:

S&P 500 (SPX) – at the time of this broadcast, SPX was near 1342, up about 3 points from Monday. The neckline pattern that formed from the head and shoulder pattern on the SPX is broken to the downside. Also, the 50-day moving average has broken down. The support level of 1352 has been broken within today's trading day, will be interesting to see if stays broken at the close.  The MACD (Momentum) is also negative for the SPX.

Discussion from TradeKing Senior Options Analyst BrianOverby:

VIX  - at the time of this broadcast, VIX was around 21 down about a point on the day. VIX had been trading between the 50 day and 100 day moving average for weeks now, which is 17.38 and 18.49 respectively. It also broke hard out of this range when the SPX broke through the trendline that Michael mentioned. The jump to the 21-22 level has sustained since. The VIX futures for June and July are anticipating that these levels are here to stay through most of the summer or at least until some of the uncertainty within the Euro-zone gets cleared up.

Quick Takes Pro “Chart of the Day” - Visa (V)

Visa (V) at the time of this broadcast was 117.45 up 0.73 on the day. It is below its 50-day moving average of 119.01. It recently has tested what appears to be a support level a few times in the previous sessions at approximately 115.60. A trendline below that may also prove to be a support level at the 108.50 mark. The MACD is also negative for V. If V breaks down through current support level of 115.60, we could see it dip all the way to 108.50 because that is where it was before the jump in the stock back in February. Stock is looking kind of weak right now.

Macy’s (M) is a related stock to Visa. It too has broken down through it’s 50-day moving average, has negative momentum and is a consumer stock. At first glance Macy’s chart is very similar to Visa’s except the pattern has already broken to the downside and this may be an indication as to what is next for Visa.

Technical tools used:

- Moving averages

- Support / resistance

- Trendline

- Volatility Chart

Options Guy’s options trade based on “Chart of the Day” – V - Short Call Spread

V – Has had a lot of upside resistance against that 50 day moving average (119) and with the implied volatility and history volatility on the stock in the middle of the trading range (about 25%-28%), based on Michael's neutral to bearish forecast a Short Call Spread with using june options was discussed. June option expiration was chosen because earnings will be released in July and we would prefer to avoid the volatility the news event may create. 

Short Call Spread:

- V at the time 117.73

- Sell 1 V June 120 Call

- Buy 1 V June 125 Call

- Bid/Ask was 1.40 x 1.43

- Max gain is 1.40 credit.

- Max potential loss is 3.60 debit if executed at the current bid price.

- Multi-Leg Commission to enter is 7.55.

TradeKing Options Tools used:  Detailed Quote/Earnings Calendar, Multi-Leg Quote Box, TradeKing Short Call Strategy, TradeKing Volatility Charts, TradeKing Options Chains

Don’t miss the next TradeKing Midday Market Call, every Tuesday midday from 12:00 - 12:15pm ET with Barron’s columnist and Chartered Market Technician, Michael Kahn of Quick Takes Pro, and TradeKing Option Guy Brian Overby. Register here:www.tradeking.com/events

Regards,

Kevin Corrigan

VP - Content and Social Media

www.tradeking.com

May VIX Settlement will take place tomorrow, May 16th.

Marty Kearney

Anyone who has heard of swing trading knows what’s involved: open positions on exaggerated price swings, wait for the correction and then close. A swing trader generally expects to see the round trip within three to five sessions.

The signals are well-known, too: narrow-range days (NRDs) often signal the end of momentum. A reversal day, of course, is the turn. And a volume spike is the third of three popular swing trading reversal signals.

Of course, there is more: candlestick reversals, momentum oscillators, and any technical signal occurring at or near resistance or support. But swing traders face a problem: Using shares of stock limits any ability to diversify just because of portfolio and capital limitations. And many swing traders get in at the bottom of swings with long stock but avoid the top because they don’t want to go short.

Options solve both of these problems. The great leverage possible with options increases potential many times while each contract controls 100 shares for a fraction of the cost.  Risks are also lower if you use only long options, because maximum loss is limited to the relatively small cost of the option. Finally, you can play the bearish swings with long puts, helping avoid the risks of going short on either stock or options.

Going beyond the basic swing trade with long calls and puts, you can also use short side trades including covered calls; collars; calendar spreads; and synthetic long or short stock. The synthetic alternative is quite interesting because net cost is close to zero, but the position duplicates movement in the underlying.

There is even more. You can weight the trade with ratio writes or variable ratio writes, making the favorable movement more profitable than with a straight one-to-one.

Swing trading with options opens many doors beyond the traditional use of shares of stock and reduces risks while expanding diversification. This is one of many ways that options just make sense.

Michael C. Thomsett

www.MichaelThomsett.com 
www.ThomsettPublishing.com

About this week's Heavy Hitter:  Michael C. Thomsett is a widely published options author, with six options books in print, published by John Wiley & Sons, FT Press, Amacom Books, and Traders Library. He blogs at FT Press, Minyanville, Benzinga and Seeking Alpha.