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

by: SA Editor Rocco Pendola

In addition to my own scans and watch lists, I use three main sources to follow options-related news: Daily Seeking Alpha columns by Frederic Ruffy, Andrew Wilkinson and optionMONSTER.

While I get great use out of these sources and have even made money thanks to them, you have to be careful not to chase the stocks or options they mention. Occasionally, you can find examples to capitalize on. Below I detail options brought to my attention by these sources and how investors might consider playing them - or the underlying security - if at all, during the trading week.

My attention spans most of Friday's trading day, including early in the session, so some information may change. Lately I have found it useful to go back and review past selections. I do this not to tout my record but to, hopefully, create learning experiences for myself and Seeking Alpha's audience. As with all of my articles, use my suggestions and analysis as the impetus for future research.

Ford (NYSE:F): Ford's most recent plunge provides a nice lesson in put selling. Here's what I suggested heading into Ford's earnings report on July 18th:

Consider an example of how to pull this trade off: 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.

I still believe strongly in the long portion of that trade, therefore I would be willing to average things out with the F March 2012 $15 calls trading in the $0.50s.

As for the short put position, when I suggest the possibility of writing puts, I always say something to the effect of "pick a strike you would be happy owning the stock at ..." That's not just CYA, boilerplate-type stuff. I stress the point for a reason.

There's a chance if you sold August $13 puts on F, you have been or will be assigned the shares at $13 a pop, even though F traded as low as $12.00 post-earnings. If this reality bothers you, you should have never sold the put in the first place. When selling a put in this situation you have to be so bullish that you are willing to (a) buy more shares to average out your long position from the assignment or (b) just wait things out.

Advanced Micro Devices (NYSE:AMD) and Sprint (NYSE:S): In the above-linked article, I suggested what turned out to be an excellent speculative long play on the AMD August $8 calls. A $100 investment could have opened a position of 20 contracts. You could have turned around and sold them the day after earnings for somewhere just north or south of $400, depending on your timing.

If you lost, you would have been in a position similar to the one I found myself in with my S August $6 calls. I had a modest 28 contract position, which, assuming the calls expire worthless, will cost me $272.12. That's within my risk tolerance. It qualifies as a small loss that I am willing to take on a speculative play.

Expedia (NASDAQ:EXPE), Research In Motion (RIMM), Qualcomm (NASDAQ:QCOM) and Open Table (NASDAQ:OPEN): Expedia's blowout Q2 earnings prompted me to go back and review a tech/Internet options portfolio I suggested back on March 28th:

Executing the Technology/Internet LEAPS Portfolio with $20,000

Contract Quantity Cost Initial Target Initial Profit
RIMM Jan '12 $55 Put 5 $3,250 $8.50 $1,000
EXPE Jan '13 $20 Call 8 $4,080 $8.00 $1,300
QCOM Jan '12 $50 Call 10 $7,150 $10.00 $2,850
OPEN Jan '12 $105/$125 Bull Call Spread 8 $5,360 Full Profit $10,640
Click to enlarge

As of mid-day Friday, the RIMM puts have absolutely blown away the profit target. If you sold them Friday for about $29.75, you would have realized a profit of roughly $11,625. Excuse me while I walk outside and impale myself in a bee hive for not going short RIMM as I was the lead play-by-play guy calling its demise.

The EXPE calls have more than doubled in value. With a Friday early afternoon bid of $12.00, the investment noted in the table would have yielded about $5,520.

The QCOM calls are up modestly. Because of commission charges, we'll just call it breakeven at this point. I suggested them at $7.15. As of early afternoon Friday, you could have unloaded them for $7.30.

OPEN has been the stinker in this otherwise successful options portfolio. Back when I suggested the Jan 2012 $105/$125 bull call spread, it cost $6.70 to get into. Today, it's only worth $1.30. Assuming you would have held onto it through the carnage, that's a loss of about $4,320, as of Friday midday.

Taken together - and rolling without a stop out in OPEN while calling QCOM a wash - the $20,000 portfolio is worth more than $32,000 today, thanks to landslide victories in RIMM and EXPE.

To continue to part two of this week's options article, please click here.

Disclosure: I am long F, S.