Using Friday's Options Activity To Get Ready For Monday's Market

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.
Intel (NASDAQ:INTC): I also follow Seeking Alpha contributor Robert Weinstein, in part, to scout for good options plays. Earlier in the week, Robert suggested going long INTC by selling puts.
I've written quite a bit lately about selling puts to collect income and get long. In this type of market, contrary to intuition, the strategy works quite well. You don't, however, have to execute the practice solely on risky high flyers. It works just as well, and comes with less risk in terms of margin and sudden price swings, on stodgier and less volatile stocks such as INTC.
Robert's suggestion to short the INTC September $19 put provides a nice case study. At the time he wrote his article, you would have collected $0.50 in premium income for every contract you wrote. If you end up getting put the shares, you pay an effective price (strike price minus the premium received) of $18.50 for INTC. If you're long-term bullish on the company, that's probably a pretty good entry point.
As I see it, the real "risk" with this strategy lays in the possibility of not getting assigned. If your main goal is getting long - and the premium income serves as gravy - odds are you'll be disappointed. The downside - assuming INTC holds in the high $19s (its price, as of this writing) - you'll end up paying more to buy the stock outright.
On the other hand, if you're patient, odds are another dip will come along for a good entry point. Plus, if you really intend to be in the stock for the long-term and expect real, considerable appreciation, what's a few cents or even a buck among friends?
And speaking of INTC, Fred Ruffy highlighted the stock in his Friday options column:

... the top options trade in the chipmaker today is a 10,000-contract block of Jan 16 puts, sold at 53 cents and tied to 180K shares at $19.86. It's possibly closing and or a bet that shares will hold above $16 (~19.4%) through the January expiration. INTC is up 3.5% this week and has not traded for less than $16 since July 2009.

It appears at least one other trader agrees with Weinstein's sentiment. My guess is that more exist.

Pandora (NYSE:P): Both optionMONSTER and Andrew Wilkinson pointed out bullish options activity in P in Friday articles. Both columns pointed to a big block sale in P September $12 puts. The trader in the spotlight believes P will hold above $12 per share by September's option expiration day or he/she is happy to scoop up shares at that level if assigned.

Given Pandora's strong earnings report and ability to create further disruption in the traditional radio model (i.e. take ad revenue away from terrestrial), I like the trade. I intend to write a separate Seeking Alpha article that discusses Pandora's current position and future.

In terms of playing the stock, despite my lingering concerns over music royalty costs, I am a buyer. I like the idea of selling puts in addition to going long the underlying, but I think executing a buy-write makes sense by writing covered calls on somewhat pricey October out-of-the-money calls.


As mentioned, I remain a big proponent of selling puts in this environment, particularly on high fliers. Consider how things look today had you written puts on the following stocks I highlighted on Monday. I suggested selling September puts in each case.

If you have $10,000 in cash ...
  • Sell Tiffany (NYSE:TIF) Sept $57.50 put for $3.50.
  • Sell Johnson Controls (NYSE:JCI) Sept $28 put for $1.35.
  • Requires $8,550 to secure the puts. $1,450 cash balance plus $485 premium income.
If you have $50,000 in cash, consider all of the above plus ...
  • Sell Apple (NASDAQ:AAPL) Sept $360 put for $15.75.
  • Sell Lululemon (NASDAQ:LULU) Sept $43.75 put for $3.40.
  • Requires $48,925 to secure the puts. $1,075 cash balance plus $2,400 premium income.
If you have $100,000 in cash, consider all of the above plus ...
  • Sell (NASDAQ:AMZN) Sept $175 put for $8.45.
  • Sell Chipotle (NYSE:CMG) Sept $280 put for $13.30.
  • Requires $94,425 to secure the puts. $5,575 cash balance plus 4,575 premium income.
The following chart shows Friday's closing price for each stock, the entry I listed on Monday, the approximate profit you could have banked by closing out the position Friday and the breakeven to consider if you want to ride the wave to larger profits closer to expiration.

Company (Ticker) Friday Close Short Put (Entry) (Exit) Gross Profit Effective Price if Assigned
Tiffany (TIF) $69.01 $57.50 ($3.50) ($0.58) $292 $54.00
Johnson Controls (JCI) $30.25 $28.00 ($1.35) ($0.70) $65 $26.65
Apple (AAPL) $383.68 $360 ($15.75) ($4.02) $1,173 $344.25
Lululemon (LULU)
$52.31 $43.75 ($3.40) ($1.25) $215 $40.35 (AMZN) $199.27 $175 ($8.45) ($2.30) $615 $166.55
Chipotle (CMG) $298.88 $280 ($13.30) ($5.25) $805 $266.70

Assuming you opened the trades Monday and closed them Friday (I used the midpoint at Friday's close), you could have banked somewhere in the neighborhood of $3,165 in profits in just five days. You could not come close to doing that in most lines of work, not even panhandling as the rich and famous drive by on Beverly Drive in posh Beverly Hills.

Disclosure: I am long P.

Additional disclosure: I may open or close positions, most likely via options, in any of the stocks mentioned in this article at any time.