Posts Tagged ‘Options Trades’

Unusual Trading Activity: Selling a Straddle in Starbucks (SBUX) Before Earnings

Thursday, April 22nd, 2010

Earnings are typically perceived as volatile events since they are often a catalyst for a stock to move higher or lower in a dramatic way. Even though earnings can be volatile, they don’t always have to be and sometimes the announcements do little to create market movement.

The fact is that if you’re only investing in stocks, you’re exposed to risk that is directly dependent on the stock’s movement in the market. However, options strategies can help you manage risk and potentially profit when the stock performance remains relatively flat.

An example of a stock that is expected to remain relatively flat during earnings season is Starbucks (NYSE: SBUX).

SBUX will report earnings tonight after market close. Analysts are expecting earnings per share of about $0.24, with the high and low estimates being $0.27 and $0.22, respectively.

The coffee giant is trading at $25.22 as of midday Wednesday, and options traders are probably not expecting too large a move, based on how expensive the options are at this time.

There is $1.40 of time value built into the at-the-money straddle with 30 days before expiration. This places implied volatility at about 28%, compared to the stock’s 10-day observed volatility, which is at about 14%. (more…)

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Dissecting Event-Based Options Trading in Caterpillar (NYSE: CAT)

Thursday, April 22nd, 2010

Earlier this month, Robert Baird upgraded Caterpillar (NYSE: CAT) to “outperform” (buy) from “neutral” (hold) and said the shares could advance as high as $88 over a 12-month period.  Baird upgraded a number of diversified industrial names that day, citing increased hopes for continued macroeconomic recovery.  CAT shares have gained roughly 33% since the first week of February and are currently trading at $67.72.

There is a strong bullish sentiment surrounding CAT, as 11 of the 23 analysts covering the shares name it a “strong buy” in addition to one “moderate buy.” The company is expected to release its earnings report Monday morning ahead of the open.  Analysts expect per-share results of 39 cents, equal to last year’s earnings for the same time period.  CAT has topped analysts’ expectations in each of the past four consecutive quarters by a healthy average margin of (coincidentally) 39 cents.

Investors who want to include CAT in their portfolio but do not wish to devote the nearly $7,000 required to buy 100 shares could consider option-trading alternatives (as could contrarian investors who want to take a more neutral stance).  Here are two hypothetical trades that are not recommendations, just examples how two different strategies might play out. (more…)

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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 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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