Using Friday's Options Activity to Get Ready for Monday's Market (Part II)

|
Includes: AAPL, F, MCD, PSS, S, SIRI, VZ
by: SA Editor Rocco Pendola

>> Return to Part One

Collective Brands (NYSE:PSS): Andrew Wilkinson explained two notable bouts of put activity in PSS options in his Friday column:

Optimists were the first to arrive on the scene. It looks like traders sold around 3,000 puts at the August $13 strike to pocket an average premium of $0.43 per contract. Put sellers keep the full amount of premium as long as shares in Collective Brands exceed $13.00 at expiration next month. The stock has fallen hard and fast over the past several months, dropping roughly 45.0% since the end of February, but has thus far managed to exceed $13.00 since September 2010. Traders short the put options could wind up having shares in PSS put to them at an effective average price of $12.57 each should the options land in-the-money at expiration.

Meanwhile, bearish put buyers pumped up put volume at the August $13 strike by purchasing around 1,900 contracts at $0.43 a pop. Investors long the puts profit if shares in Collective Brands slide 4.8% lower to breach the breakeven price of $12.57 by expiration day. In total, investors exchanged 5,740 puts at the August $13 strike against open interest of 1,902 contracts. The I-win/you-lose nature of options come expiration day indicates only one of these strategies may prevail in the end. Options implied volatility on PSS dropped 10.8% to 36.66% in early-afternoon trade.

I pull this excerpt because I think it does a great job illustrating two important points. First, Wilkinson reminds us that options trading is a zero sum game by noting its "I-win/you-lose nature." If you buy a put that means, for all intents and purposes, somebody else sold it to you. That somebody else could be me or a hot shot hedge fund manager. It could be an old lady in a nursing home or a whiz kid in an Ivy League dorm room.

Second, in the put selling scenario, the traders Wilkinson highlighted have essentially called a bottom in PSS. You might share that sentiment, but, as Wilkinson notes, be prepared to buy PSS shares for $13.00 (minus the premium received for writing the put) if they breach that level by your contract's expiration date. Not only do you need the will to own the shares at that level, you need enough account equity to (a) put the trade on in the first place and (b) not get caught up in margin trouble if things go south in a hurry.

As for my sentiment toward PSS, I owned the stock late last year when it ran. Right now, I would not touch low- to middle-end retailers with your 10-foot pole. As discussed here and in part one of this week's options article I tend toward the companies targeting the high-end in retail.

Sirius XM (NASDAQ:SIRI): Writing about Sirius XM has become a tiresome chore. I will see my long position in the stock and the September $2.50 calls through, updating the status of the options as needed, but beyond that I am done.

The discourse that follows in the comments of most SIRI articles falls below the lowest standards our society sets for such conversation. Here's why: Ardent SIRI longs, with some exceptions of course, have no business discussing the stock. Or, more so, they appear to lack the ability to do it in an intelligent way. The discussion most often reverts back to absurd themes of manipulation, conspiracy, no competition and obscene price predictions.

As Jim Cramer recently noted, the people in SIRI stock are "penny stock guys." I'll be the first to admit that I kick myself for passing up SIRI at pennies a share. If I were a SIRI millionaire (or 'hundred thousandaire') today, however, the last thing I would do is spend my time trolling message boards and such. Taking a flyer on a penny stock and winning does not make a person an expert on a company or its underlying stock. Instead, the resultant - and understandable - permanent euphoria makes ardent SIRI longs - the ones who are millionaires as well as those who hold onto dreams of doing likewise - more like diehard sports fanatics on seemingly endless, unintelligible rants.

Simply put, the loyal longs failed to make the transition from penny stock message board trash talk ("slap the ask!") to actual conversation. At day's end, this type of empty noise hurts the prospects of investors who have shown up late to the party.

Anyhow, maybe we'll see the pre-earnings run finally take place. Based on SIRI's history, it should. While Friday's weak close of $2.16 inspires no confidence, SIRI CEO Mel Karmazin does. Regardless of what does or does not happen over the next several weeks, I am banking profits when and if the opportunity presents itself. I will begin scaling out of the position from $0.15 per contract if we get there over the next several weeks. If things go much further south than the present $0.10 bid, I will find an exit that limits the damage.

Verizon (NYSE:VZ): Frederic Ruffy pointed to bearish activity in VZ options in his Friday options article:

Verizon reported a quarterly profit of 57 cents per share on $27.54 billion in revenues. The Street was expecting 55 cents on $27.43 billion. The whisper number might have been higher because shares were up 2.3% in the three days leading up to the report, but have given back those gains and a bit more today. Meanwhile, the top options trades in VZ today are part of a spread, after an investor bought 4,500 VZ Jan. 31 puts at 64 cents and sold 4,500 Jan. 30 puts at 49 cents. 15 cents was paid for the Jan 30-31 put spread and this might be a roll or exit, as open interest is sufficient to cover in both contracts. On the other hand, it might be an opening play targeting a move to $30 (-18 percent) or less through the Jan. expiration.

What happened to the hype surrounding Verizon landing Apple's (NASDAQ:AAPL) iPhone? It was short-lived. I was long VZ when it took off late last year, but, at this point, I see no reason to play it aside from collecting dividend income while you write covered calls against your shares.

If limited funds curtail the number of stocks you can play this way, I would choose McDonald's (NYSE:MCD) over Verizon. When the market gave one of its bearish head fakes in mid-June, MCD bullishly persisted. That was about $7.00 ago, based on Friday's closing price of $88.56.

If you can afford 100 or more shares of MCD, it can't hurt to go long and sell covered calls against your position regularly. As of Friday's close, the MCD August $90 calls fetch roughly $0.66 per contract. You might want to up your strike and/or go further out if you're concerned about getting your shares called away.

Ford (NYSE:F) and Sprint (NYSE:S): Two beaten down stocks. Two bullish options plays. Both companies report earnings next week. Ford reports before the open on Tuesday and Sprint reveals its results on Thursday prior to the opening bell. The options plays I have discussed on both companies are still on.

My take on Sprint is purely speculative. I am looking to average down my position in the S August $6 calls. If you decide to go bullish on Sprint ahead of its report, however, you might consider the less risky $5 calls or even deeper in-the-money $4 or $4.50s. In any event, it's a small position and, clearly, you have to agree that the report will impress.

The intent on Ford tends toward more long-term bullishness. Here's what I suggested earlier in the week:

Sell a F August $13 put for roughly $0.48 and buy a F March 2012 $15 call for about $0.76, resulting in a net debit of approximately $0.28 for each spread executed.

As of today, that combo costs a bit more - about $0.43 - as the value of the puts has decreased considerably. This is exactly what you want to see happen on a trade like that. You want the puts to tend toward a worthless expiration, while the call slowly appreciates alongside the anticipated upward trend in the underlying stock.

Disclosure: I am long SIRI, S.

Additional disclosure: I may initiate a long position in F on prior to its July 26th earnings report.