On Friday’s Options Action on CNBC I detailed a new trade idea in the QQQ, a put calendar. The goal is financing longer dated out of the money puts by selling the Dec 31st puts of the same strike in anticipation of what could be quiet (sideways) holiday trading over the next two weeks:
New Trade – QQQ The Crickets
QQQ trade idea From CNBC’s Options Action Friday Dec 19th, 2014:
TRADE – Buy the QQQ ($104.40) Dec 31st quarterly/Feb regular 101 put calendar for 1.45
– Sell to open 1 Dec31st 101 put at .25
– Buy to open 1 Feb 101 put for 1.70
Break-even on Dec 31st quarterly expiration – This trade does best if the QQQ trades sideways or slightly down into year end. A rally higher into year end would mean losses but they shouldn’t be too bad as Feb won’t decay too rapidly. Once Dec expires I’ll look to roll the short put portion of the trade reducing my break-even and lessening my risk. The max risk is 1.45, with max loss with a dramatic move above or below $101.
Rationale – this structure fades a QQQ sell-off by year end, just above the recent lows with the sale of the Dec 31st puts in order to finance what could a play for what could be an early year pullback from recent highs in the broader market. We don’t think the problems that hit the market last week are going away anytime soon and after the holidays and year end positioning it makes sense that the market could see some action in the early months of 2015. It’s entirely possible that that first move is higher in early Jan, so that’s why we like selling the Dec 31st puts to finance Feb. When that expires we’ll have the chance to roll the short put to either Jan or Feb in order to have the bearish bet on for as little risk as possible.
This structure could also work as a hedge against a portfolio but it’s not a pure hedge until after the New Year as there is that chance that we return to selling before year end. We don’t think that’s that likely, but it is possible if oil selling continues or emerging market fears flare up again soon.
For more detail, read here
CSCO – Considering a 2015 Breakout from CNBC’s Options Action Friday Dec 19th, 2014:
CSCO trades at almost 13x current year’s expected earnings that are supposed to grow only 3% on 3% sales growth. The company pays a dividend that yields 2.8%, a monster buyback fueled by a massive cash balance of $52 billion ($31 billion net of debt), equal to 37% of their market cap. If there was ever company that needed to simplify their offerings, get rid of some legacy businesses and get up to speed with some new secular trends it would be CSCO, and John Chambers is NOT the guy to do it. Almost any outsider will do in my opinion. This sort of announcement would have the stock up 10% in a week, and likely 25% in 6 months (in a market similar to the one we are in now).
Wit the stock around $28, long dated options aren’t very expensive in dollar terms even as they are at the mid range of historical vol. For instance, the July 30 calls are offered at about .66, while the Jan16 30 calls are offered at about 1.15. That’s a lot of time for a breakout to occur, and these won’t decay much in the next few months (there is a .19 quarterly dividend). But the issue for me at the moment is entry, $25/$26 area seems like a far better entry than 60c from the 52 week highs. You’ll hear me say this a lot that I don’t want to chase stocks and this is a great example of where I’d rather let it come my way a little bit and then follow up with the trade. Long dated upside calls make sense for this but I’d love to get a better entry and perhaps a lower strike than those Jan 30’s
Read more here