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Posts Tagged ‘Trading Ideas’

Wal-Mart (WMT) scores an upgrade

Tuesday, March 16th, 2010

Watch for … rising prices? An analyst with Citigroup expects an improving outlook in shares of Wal-Mart Stores (NYSE: WMT) and boosted the stock’s rating to “buy” from “hold.” Citigroup also upped its 12-month price target to $65 from $54. WMT closed at $53.90 on Friday but gained nearly 3% on Monday to $55.42.

From a long-term perspective, Wal-Mart shares have been sideways trending for over a decade, bouncing between the 42 and 62 levels for the past 11 years (note that Citigroup’s new target price is above the upper rail of this range). On a closer scale, the stock is sitting in the middle of this broad range and appears as though it could break higher in the short term.

Whether you think WMT will move higher, drop lower, or stay in a range, there is likely to be an options strategy that corresponds with your view. Below are two examples of some ways options investors could trade WMT right now. These are not buy-sell-hold recommendations – just a pair of potential strategies in the bullish and bearish camps.

Bullish Option Strategy:  Long Call

Investors who expect Wal-Mart to move higher could buy the September 52.50 calls for $4.30 a piece (the price in mid-afternoon trading on Monday). These calls currently have $2.98 in intrinsic value and roughly six months in time value. The stock would need to be trading at $56.80 or above when these options expire in order for the call buyer to be profitable at expiration. Call buyers can lose as much as 100% of the premium paid for the option but can book unlimited profits if the underlying stock rallies.

Bearish Option Strategy:  Synthetic Short Stock (Split-Strikes)

Traders who believe Wal-Mart is poised to move lower could consider a synthetic short stock (split strikes) position, created by buying a January 2011 50 put for $1.90 and simultaneously selling a January 2011 60-strike call for $1.50 (prices as of late afternoon, Monday). The net debit for this spread is 40 cents apiece. Losses are theoretically unlimited if the stock rallies above 60, but gains are significant if WMT drops below the 50 level.  Between the 50 and 60 strikes, the loss is limited to the debit paid for the spread.

Profit/Loss of Wal-Mart (WMT) Synthetic Short Stock

Think Wal-Mart is destined to continue in its range, or is a breakout due in the short term? Let us know what you think and how you might consider trading the shares of the world’s largest retailer.

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Aeropostale (ARO) Challenges Resistance

Friday, March 12th, 2010

Thursday night, apparel retailer Aeropostale (NYSE: ARO) announced earnings that topped analysts’ estimates by four cents per share, while revenue was in line.  The company also lifted its guidance for the first quarter and for fiscal year 2011.  Following this upside surprise, Piper Jaffray upgraded its rating to “neutral” (basically a hold) from “underweight” (essentially a sell).

In terms of price action, ARO is up nearly 18% since March 3rd and is coming up on the 30 level.  At Friday’s close, the stock was up 4.2% for the day at $28.18.  The 30 area rejected the stock’s advances last fall, but ARO bulls are hoping the shares can power through this time around.

Unlike a stock trader (or a brokerage house), options traders aren’t limited to simply bullish, neutral, or bearish paths.  The wide variety of options strategies available means investors can trade based on volatility expectations or any number of projected scenarios.  Below are two examples of some ways options investors could trade ARO shares.  These are not buy-sell-hold recommendations – just a pair of potential strategies in the bullish and bearish camps.

Neutral-to-Bullish Option Strategy:  Long Call Spread

Investors on the side of Piper Jaffray – who think ARO may be looking up – could consider buying the July 24-29 call spread (buying the 24 call, selling the 29 call), which was priced for roughly $3.40 per spread in mid-afternoon trading on Friday.  This net debit is equal to the maximum potential loss, while the maximum potential gain is $1.60, or the difference in strike prices minus the credit collected.

The maximum profit is achieved if ARO is above 29 when these options expire (note that it doesn’t have to break the 30 level); maximum loss occurs if ARO breaches 24 to the downside.  If ARO is trading above $27.40 at July options expiration, the spread will be profitable.

Bearish Option Strategy:  Long Put

Those who disagree and prefer a bearish outlook could consider scooping up October 25-strike puts for about $1.80 apiece, where they were trading midday on Friday.  The put buyer will lose 100% of the premium paid if ARO stays above 25, but a move below breakeven ($23.20) could mean significant gains.  In the unlikely event that ARO drops all the way to zero, put buyers could realize a maximum theoretical gain of $23.20.

Whether or not you like the fashions at ARO, you may have an opinion on the stock.  Think it’ll take out the 30 level once and for all?  Or, like Aeropostale’s target demographic, is it likely to stay in the 20s for a while?

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Is Walter Energy (WLT) destined for greatness?

Friday, March 12th, 2010

In last night’s edition of CNBC’s Mad Money, Jim Cramer said he thinks Walter Energy (NYSE: WLT) is the way to play China’s insatiable appetite for coal. The company’s shares were trading at $86.83 at the time of Cramer’s bullish call.  When a market pundit sends out comments like this, investors who use options can try many different strategies, as opposed to just buying or selling the shares outright. Below are two examples of some ways options investors might follow or rebel against Cramer’s opinion.  These are not buy-sell-hold recommendations – just a pair of potential strategies that fall into the bullish and bearish camps.

Bearish Option Strategy: Long Call Spread

Those who agree with Cramer and expect upside (or at least limited downside) in WLT might be trying to buy call spreads with the September 60/90 call spread (buying the 60 call, selling the 90 call).  This spread is currently trading near $20, and that debit plus commissions is the maximum risk to this strategy, while the maximum reward is $10 minus commissions (a return on risk of 50%).  This spread will be profitable at expiration if WLT shares are trading above $80 when these positions expire on September 17th.

Bearish Option Strategy: Long Put + Short Call Spread

On the flip side, investors who don’t agree with Cramer’s bullishness could be buying puts and simultaneously selling call spreads.  Investors would do this by, for example, buying June $75 puts for $4 each, and simultaneously selling the June 95/120 call spread (selling the 95 call, buying the 120 call) for $4.  The net debit is $0 at the outset.  The maximum amount that investors can lose with this strategy is capped at $25 (the difference in call strikes) and occurs if the stock is above $120 at June expiration.  The maximum profit is $75 per spread in the unlikely event that the stock is trading at $0 at June expiration.  This strategy will be profitable at expiration if WLT shares are trading lower than $75 when these options expire on June 18th.

Profit/Loss Chart of WLT Long Put, Short Call Spread

Options give people options, and these are just two of the many strategies that people might employ to reflect their investment opinion.  Cramer thinks a lump of coal may be a good thing for Walter Energy … comment below to let us know if you agree or disagree.

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Citrix (CTXS) Celebrates its Anniversary with a New 52-week High

Wednesday, March 10th, 2010

One of technology’s high-fliers from 10 years ago, Citirix Systems (NASDAQ: CTXS), tagged a 52-week high today, though it remains about 30% below its own March 2000 peak. Today’s high bounce was spurred by a brokerage upgrade; MKM Partners upped its rating to “neutral” from “sell.” The firm also lifted its 12-month price target to $47 from $37, noting that their quarter is tracking in line with expectations and projecting a possible extension of its June promotion date, which could help build its customer base.

If March 10th sounds familiar, it’s because 10 years ago today, the NASDAQ Composite reached an all-time high of 5,132. Little more than 18 months later, it was trading at 1,329; a thundering drop of almost 75%. While the COMP has made a solid recovery since then (hitting a new 18-month high today, in fact), it is still a far cry away from its year-2000 peak.

MKM can only shift ratings between “buy,” “sell,” and “hold/neutral,” but options traders have a variety of different strategies that can be altered for different purposes. Whether an investor expects upside, downside, or even minimal movement at all, there is frequently a corresponding options strategy. Outlined below are two strategies: one bullish-to-neutral and one bearish, that can be used by fans (or critics) of the tech sector and Citrix shares.

Neutral-to-Bullish Option Strategy: Iron Condor

Investors who agree with MKM’s “neutral” outlook, at least for the next few months, could look at an iron condor strategy. A June-dated short iron condor essentially combines a bull put spread and a bear call spread (both credit spreads) would consist of:

  • One short June 45 put
  • One long June 40 put
  • One short June 50 call
  • One long June 55 call

A total credit of $2.45 (as of midday on Wednesday) can be collected for this four-legged spread trade. The maximum profit for this spread is $2.45, while the maximum loss is $2.55 (return on risk is roughly 96%). If CTXS is trading anywhere between $42.55 and $52.45 when these options expire, the iron condor seller will make money. Maximum profit is achieved if MKM closes between 45 and 50 at June expiration.

Bearish Option Strategy: Bear Put Spread

For those who think CTXS should have remained a “sell,” a bear put spread might be more to your liking. Consider buying the June 45 put and simultaneously shorting the June 40 put, paying a net debit of $1.50 for the spread. The maximum loss for this strategy is 100% of the debit paid, or $1.50, and the maximum potential gain is $3.50 per spread, for a return on risk of 233%. If CTXS is trading at or below $43.50 when the options expire, the spread buyer will make money.

Is Citrix fairly priced, or was MKM’s upgrade a bit premature? Does one of the options plays above look intriguing to you, or do you have your own idea? Let us know in the comments section below.

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Is U.S. Steel (X) Strong Enough to Make a Comeback? Potential Trades for the Bullish and Bearish

Monday, March 8th, 2010

Friday afternoon, Argus Research upgraded U.S. Steel (X) shares to “buy” from “hold,” setting a 12-month target price of $71. The firm said they believe the recent sell-off in steel stocks is overdone, and they expect to see improved fundamentals in the sector over the next few months. At the time of this upgrade, X shares were trading around $58.30.

Unlike brokerage and research houses, options traders can do much more than just “buy,” “sell,” or “hold.” The wide variety of option strategies available allow investors to place trades based on predictions for price action, volatility shifts, or other market influences. Below are two ways – one bullish, one bearish – that options investors might trade U.S. Steel. These are not buy-sell-hold recommendations, just potential strategies for bulls and bears.

Potential Trades in U.S. Steel (X) for the Bullish

For those who might agree with Argus analysts, you might consider selling a bull put spread. This morning with the stock trading at 60.50, the April 60/40 put spread can be sold for about $3.50 each (by shorting the April 60 put and buying the April 40 put simultaneously). The maximum profit is this credit collected; the maximum loss is $16.50, putting the return on risk at about 21%. If X shares are trading above $56.50 when these options expire in six weeks, the trade will be profitable. X needs to be trading at or above 60 in order to yield the maximum profit.

Potential Trades in U.S. Steel (X) for the Bearish

Investors who disagree with Friday’s upgrade might consider selling a bear call spread, by selling the October 65 call and simultaneously buying the October 75 call, collecting a credit $3 for each short spread. This net credit is the maximum potential profit, and the maximum potential loss is $7 (the difference in strike prices minus the credit collected). Return on risk, therefore, is 42% between now and October options expiration. In order to earn the maximum profit, X shares need to be trading at or below $65 when these options expire. Breakeven for this strategy is $68.

So, options traders, are you with Argus Research or against them? What are your thoughts on U.S. Steel’s next move? The comments are yours.

Photo Credit: monkeyc.net

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What Does Morgan Keenan’s FedEx (FDX) Upgrade Mean to Options Traders?

Thursday, March 4th, 2010

This morning FedEx Corporation (FDX) was upgraded to “outperform” from “market perform” by brokerage firm Morgan Keenan in anticipation the company could enjoy stronger earnings leverage as its volumes bounce back. This upgrade comes ahead of earnings, which are expected from FedEx before the open on March 18th. Analysts are expecting per-share results of 71 cents, a vast improvement from the company’s year-ago loss of 15 cents per share. At the time Morgan Keegan issued this upgrade, FDX was trading around $86.14.

While brokerage houses such as Morgan Keegan are limited to “buy,” “hold,” and “sell,” recommendations, investors who trade with options have a broad arsenal of strategies at their disposal. Here’s a look at two of the ways options investors might trade FedEx, whether they share Morgan Keegan’s optimism or wish to trade against the grain. These are not buy-sell-hold recommendations – just potential strategies that fall into the bullish and bearish camps.

Traders who are similarly bullish on FedEx might consider a bull call spread, buying the March 70 call and selling the March 90 call, paying a net debit of $15.45 to do so. The maximum loss for this call spread is 100 percent of the debit paid; the maximum gain is $4.55, or the difference in strike prices minus the debit paid. This trade will be profitable if FDX is trading above $85.45 when these options expire in two weeks.

For those investors who feel FedEx could have some downside in its future, they might consider a split strike synthetic, which is a way to simulate the risk/reward profile of a short stock position through the use of options. An investor might buy January 2011 70-strike puts for $3.55 and sell January 2011 100-strike calls for $3.75 each, collecting a net credit of 20 cents per spread. At expiration, between the $70 and $100 levels, the investor will keep this credit as both options expire out-of-the-money. If the stock declines below $70, upside is theoretically unlimited down to the zero mark. On the flip side, losses are unlimited once FedEx crosses beyond the $100 level.

One of the attractive things about options is that they come in all shapes and sizes and can be calibrated to suit a variety of trading situations. Whether you agree or disagree with Morgan Keegan’s bullish outlook on FedEx, there may be an options strategy that could work for you.

Photo Credit: Ack Ook

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Trading Ideas in JPMorgan Chase (JPM), Cramer’s Big Bank Pick

Wednesday, March 3rd, 2010

Jim Cramer praised JPMorgan Chase (JPM) Chief Executive Jamie Dimon, calling him “The best banker in America,” during the February 24th edition of CNBC’s “Mad Money.” Cramer was also positive on the bank’s balance sheet as well as its overall growth and dividend potential. In short, Cramer is bullish on JPM shares and thinks the stock could rally as high as $50 if the federal government eases up on proposed banking regulations.

Thinking Beyond Buy or Sell

JPM shares were trading at $40.85 at the time of Cramer’s broadcast. When Cramer and other well-known market pundits broadcast their opinions on stocks, investors who prefer to trade options have many different strategies at their disposal, as opposed to just buying or selling the shares outright. Here’s a look at two of the ways options investors might follow Cramer’s opinion (or trade against it!). These are not buy-sell-hold recommendations – just potential strategies that fall into the bullish or bearish camps.

Traders who agree with Cramer and expect upside (or at least limited downside) in JPM shares could consider buying an intermediate-term call butterfly. The investor could buy the June 30/45 call spreads and sell the June 45/49 call spreads, paying an overall net debit of $9.80 per butterfly. Maximum risk for this strategy is 100% of the premium paid (plus commissions). Maximum potential profit is $5.20 per butterfly, minus commissions. This June call butterfly spread will be profitable if JPM is trading higher than $39.80 when the June options expire.

Investors who disagree with Cramer and expect downside in JPM could consider buying bear put spreads. For example, the April 50/40 put spread could be purchased for a net cost of $8.00, which is also the maximum potential risk (plus commissions). The maximum potential profit is $2.00 minus commissions (the difference in strike prices minus the premium paid). This bear put spread will be profitable If JPM shares are trading lower than $42 at April expiration.

Options provide traders with a variety of options, and this call butterfly spread and bear put spread idea are just two of the many strategies you might use to reflect your investment opinion, whether you agree or disagree with Cramer or any other market pundit.

Your Take

Cramer is bullish on JPM. Do you agree with his assertion that Dimon is the “best banker in America” and investors are smart to expect upside in JPM? Or, do you think your money is better spent hedging against expected downside? The comments are yours to add your voice to the conversation.

Image of Jamie Dimon from the cover of the April 3, 2006 issue of Fortune.

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