On Friday’s Options Action on CNBC I detailed a short dated bullish trade idea in Microsoft (MSFT), a slightly longer dated bearish trade in Micron (MU) and gave a quick update the bullish Ford (F) trade idea from the prior week.
Additionally, my friend Mike Khouw shared a trade idea to express a bullish view on the XLE, the Energy Select etf that I included in this post.
The stock declined 9.25% a couple weeks ago after reporting disappointing results and offering downbeat forward guidance. Since then there have been a handful of large cap stocks that also reacted similarly to poor results, but have just recently filled in their earnings gaps (see BIDU, CAT, EXPE, JPM & QCOM). I suspect that if the broad market breaks out to new highs, a stock like MSFT could also fill in the earnings gap. Options are cheap, offering a very reasonable defined risk way to express a near term bllish view.
TRADE: MSFT $43.65 Bought to open March 44 calls for .62
Break-even on March Expiration:
Profits: above 44.62, up 2.2%
Losses: of up to .62 between 44 and 44.62 and max loss of .62 below 44 or about 1.5% of the underlying stock price.
New Trade – MU Shu Put
After a monster 2014, up more than 60%, MU has lagged the broad market, and its peer group, down 9% in 2015 as the Semiconductor Index (SOX) is approaching new 52 week highs. In the video I also noted some hefty put buying in the SMH (the Semi etf) late in the week in March expiration that could merely be a hedge against a basket of long stock or an outright bearish play:
Thursday: When SMH was $55.64, a trader paid 1.03 for 45,000 March 54 puts to open
Friday: when SMH was $56.28 a trader paid 1.02 for 50,000 March 55 puts to open
Total Open interest in the SMH is now 220,000 Puts to 19,000 Calls
The lack of participation of INTC and MU, two large components of the index/etf, lead me to believe that pressing weakness on the short side is the way to play.
TRADE: MU ($31.75) Bought the April 31/26 put spread for 1.30
-Bought to Open 1 MU April 31 put for 1.68
-Sold to Open 1 MU April 26 put at .38
Break-even on April expiration:
Profits: between 29.70 and 26 of up to 3.70, max gain of 3.70 below 26
Losses: up to 1.30 between 29.70 and 31, max loss of 1.30 above 31
Rationale – If the stock fails here the chart suddenly looks precarious and if semis saw some broader weakness the stock going back to the October lows is not out of the realm of possibility. This structure has a nice payout profile if that occurs.
Read more here
XLE – Energy Select etf:
Mike Khouw took a look at short interest in the energy sector, declining options premiums, and rising short interest and looked out to June to express a bullish view that oil and related stocks have bottomed, watch here:
I think it is safe to say that Mike has a sort of guarded bullish view, and would not be buying energy stocks hand over fist after the sharp bounce they just had, but for those who think there is more upside in the next couple months, and want to express a bullish view in some of the largest oil companies (XOM, CVX and SLB make up 37% of the etf’s weight), buying the June 82 call for $4 (stock reference $82, risking 5% of the underlying etf price is a decent way to do it:
My View: I think the recent rally off of the lows is a bit a suspect. While I am not surprised by the sharp reversal, as oil and related stocks got severely oversold to start the year, I am not in the camp that a sector like this would put in a V bottom on no news. Yes the commodity and energy stocks might have overshot on the downside, but this move back may merely be a head fake as it is my belief that the initial reasons for the decline, oversupply, may be giving way to a longer term, potentially more damaging issue of weaker demand. But if you are in the camp that the bottom is in, and think we see $70 oil in the coming months, than this looks like as good of way as any to play for continued strength. I would add that these calls look expensive to me in both premium and vol terms, and I see it as sort of risk one to make one situation. Not exactly my cup of tea.
Lastly, we took a look back at the prior week’s trades, my bullish idea in Ford (F), and Mike & Carter’s bearish trade in Coca-Cola (KO), watch here: