On Friday’s Options Action on CNBC I detailed a new trade idea in the XLF for those looking for a sort of “next derivative” trade for the crash in oil I also reviewed a protection trade in Apple from last month that is now in the money. As for the oil price decline, it is my view that sustained low prices will result in job cuts, increased equity and debt volatility, dividend cuts, possibly a few defaults by some oil related companies and ultimately the potential for a corporate credit event. (fears of such an event are already evident in the high yield debt market.) And that’s not even mentioning the potential for a sovereign credit event for countries such as Russia, Brazil and/or Venezuela whose economies are very levered to the price of oil. My trade on the XLF doesn’t even need a credit event to actually occur, merely the potential feat of contagion could cause further downward volatility in equities, and if that is the case, bank stocks will be a very likely target for profit taking.
New Trade – $XLF: Exposure To the Elements
XLF trade idea From CNBC’s Options Action Friday Dec 12th, 2014:
Trade: XLF ($24.40) Buy Feb 24/21 Put Spread for .55
-Buy to open Feb 24 put for .65
-Sell to open Feb 21 put for .10
Break-Even on Feb Expiration:
Profits: between 23.45 and 21 make up to 2.45, max gain of 2.45 at 21 or lower.,
Losses: between 23.45 and 24 lose up to .55 with max loss of .55 above 24
Rationale: If you have the sense that we’re just beginning to figure out who has all the exposure in this commodity collapse and that the risk could spread, the U.S. financial stocks, having just made multi-year highs, seem like a good fade. This structure goes out a few expirations and captures several other events as well like Fed moves and earnings.
For more detail, read here
AAPL reviewed put protection from November 14th on CNBC’s Options Action Friday Dec 12th, 2014:
Initial trade idea and rationale here from November 14th:
Name That Trade – If You Have $AAPL Gains, Read This
TRADE: Against 100 Shares of AAPL long at $114*, Buy 1 Jan15 110 Put for 2.20
Break-Even on Jan15th Expiration:
-gains of stock above $116.20, current price plus put premium
-losses in stock between 114 and 107.80 (the put strike less the premium paid), protection below 107.80
Rationale: This trade gives 2 months protection, down about 6%. A level the stock was trading at 3 trading days ago! I’M NOT HATING ON AAPL HERE. I’m merely pointing out the that the prudent protection available is awfully cheap!
*assumes prior long, pricing mark to market, not suggesting new long stock with long put, which is merely a synthetic call.
SO NOW WHAT? Assuming your are long stock, long Jan 110 put which is now worth about $4 vs the initial purchase price of $2.20 you could look to spread the long put by selling a lower strike put of the same expiration in an effort to reduce the cost of protection. In this example, selling the Jan 100 put at about $1.00 would make you long the Jan 110/100 put spread for $1.20, offering protection between $108.80 and $100 on Jan expiration. Not bad. That’s about 8% potential protection down to what should be a physiologically important technical support level at $100.
Read more here