On Friday’s Options Action on CNBC I detailed a bearish trade idea on the Industrial Select etf, the XLI, and offered up a portfolio hedge, or a trade structure that could be an outright bearish bet in small cap stocks, specifically the Russell 2000 etf, the IWM.
Cornerstone Research’s Carter worth gave his technical take on MSFT prior to this upcoming’s earnings announcement, and Mike Khouw offered an options trade on how to play elevated earnings prices into the print.
We also updated trade ideas from the prior week in NFLX and XOM.
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XLI: Industrial stocks could be vulnerable in the coming months
GE has rallied 15% in the last two weeks, masking a lot of poor performance from many of its peers, specifically in the Industrial Select etf, the XLI (of which it is the largest component at 11%). I fully expect most earnings and guidance from XLI components yet to report to closer resemble those of Honeywell (HON) as opposed to GE, as a lot of what’s going on with GE appears to be stock specific, and not exactly reflecting an improvement in fundamentals. The XLI also has its share of transport stocks like FDX, UPS and rails which act like death. The combination of poor fundamentals of its components, deteriorating technicals of the XLI, and relatively cheap options prices lead me to make a defined risk bearish bet over the next couple months that the XLI will re-test its August lows:
Trade: XLI ($52.50) Buy Dec 52/48 put spread for $1
-Buy to open 1 Dec 52 put for 1.40
-Sell to open 1 Dec 48 put at .40
Break-Even on Dec Expiration:
Profits: up to 3 between 51 and 48, with max gain of 3 at 48 or lower, break-even down about 2.5%.
Losses: up to 1 between 51 and 52 with max loss of 1 above 52, or about 2% of the stock price.
Read original post here from RiskReversal.com and watch from Friday’s Options Action on CNBC:
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IWM: Small Cap Underperformance sticking out like a sore thumb
Had a few problems getting the words out at the onset, it happens:
The fact that the IWM is down most (11% vs S&P 500 & Nasdaq down about 5%) from its all time highs made earlier in the year, has already broken its August 24th flash crash lows, and is now below the uptrend line that has been in place since late 2012 may make the IWM the best U.S.equity index to use as a hedge, or to make an outright bearish bet in for those who think the recent rally is getting long in the tooth and that a retest of the August low in the S&P500 is still in the cards this year. Here was my trade:
Trade: IWM ($115) Bought Dec 18th 115/100 put spread for $3
-Buy to open 1 IWM Dec 115 put for 3.50
-Sell to open 1 IWM Dec 100 put at .50
Break-Even on Dec Expiration:
Profits: of up to 12 between 112 and 100, max gain of 12 at 100 or lower
Losses: up to 3 between 112 and 100 with max loss above 115
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Carter’s Technical take and Mike’s Trade on MSFT into Fiscal Q1 earnings on October 22nd:
MSFT ($47.15) Buy Oct weekly / Jan 48 call calendar for .90
-Sell to open 1 Oct weekly 48 call at 60 cents
-Buy to open 1 Jan 48 call for 1.50
Max profit on Oct 23rd weekly expiration at $48.
Mike is basically selling the implied earnings move playing for a less than expected move and likes the idea of financing the purchase of longer dated calls for Carter’s expected breakout.
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Trade Updates XOM & NFLX:
Mike and I updated trades from the prior week. I touch on a Nov Put Spread in XOM that in one week has lost almost 50% of its value(ugh), and Mike offers some trade management on a calendar call spread that he did in NFLX prior to Q3 results this past week.