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

|
Includes: AAPL, AMZN, BAC, NFLX, P, SIRI
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, Interactive Brokers 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. As with all of my articles, use my suggestions and analysis as the impetus for future research.
Apple (NASDAQ:AAPL): I've said repeatedly that Amazon.com's (NASDAQ:AMZN) foray into the tablet (or enhanced e-reader) space does not represent a competitive salvo at Apple. I was delighted to receive several comments nicely summarizing that sentiment in a recent Seeking Alpha article where I reiterated the point. The notion of a fierce battle brewing between the two companies amounts to little more than media-generated hype. It's easier to produce and it's even easier for most readers to sink their teeth into.
Even if I am correct and Amazon only wants to further its e-commerce strategy with Kindle Fire, the noise still puts pressure on AAPL. After fighting broader market headwinds to a new 52-week high, AAPL pulled back, closing Friday's session at $381.32. That leaves the question of how to play AAPL as the company prepares to deliver quarterly earnings after the market close on October 18th.
While I have had success trading Apple in the $10,000 portfolio, I consider this a time to steer clear of the stock. Don't take this as bearishness; rather, I have a concern that even a small misstep might hurt the stock. At the same time, a blowout quarter in the light of the recent weakness could send AAPL hurdling well past $400. At this juncture the only way I would play AAPL, if at all, is with an options strangle ahead of the upcoming report.
Sirius XM (NASDAQ:SIRI) and Pandora (NYSE:P): After SIRI's Thursday collapse - and I am starting to think it's best defined as a permanent correction - it's interesting to take a look at a comparison chart, courtesy of Yahoo Finance, between SIRI and P.
Click to enlarge

Click to enlarge

It's telling that you now have two stocks trending in opposite directions.

As I have outlined in my writings on both companies over the last several months, Sirius XM represents the slow-growth firm that appears hesitant to throw itself into the innovative new media/Internet/tech space its competitors run in. The similarities between how Sirius XM carries itself today and how terrestrial radio has carried itself over the past decade - with a lack of aggression and innovation - are striking. Pandora, of course, is a hyper-growth company that continues to pioneer the Internet radio space.

This past week I predicted near-term profitability for Pandora. And I am beginning to think it might come sooner rather than later. I would not be shocked to see Pandora report a profit in its next report (the company reports in mid-November), but I would bet a 12-pack of Canadian that if it does not, it will for Q4.

Word is obviously reaching Wall Street with regard to the traction Pandora is seeing with ad agencies. It's truly a game-changing shift that's taking place. While it will not kill terrestrial radio, it will produce numbers for Pandora that will probably shock bears over the next six months. I am usually not this explicit - in fact the last time I was this explicit was with the contention that Netflix (NASDAQ:NFLX) would split in two - but I am telling you right here and now - mark it down - Pandora is about to blow the doors off of earnings estimates.

In terms of playing the stocks with options, I would be a buyer of Pandora calls, however, I am opting to take a more long-term approach by dollar-cost-averaging into the stock.

I have received a considerable number of messages from people with pretty high cost bases in SIRI. These "bagholders" ask me what to do. Short of cutting losses - and some are quite substantial - all you can realistically do with options is squeeze something out of the position by writing covered calls. By the looks of action in SIRI $2.00 calls, you won't be alone. Of course, if the stock continues its freefall, the income from the calls will do little to offset mounting losses.

It's a tough spot to be in. And I feel for anybody who is there. I've been there and it's no fun. This represents the main reason why I think it's important to be aware of, and do your best to avoid falling victim to, the investor psychology that can take over in stocks like SIRI.

Bank of America (NYSE:BAC). In his Friday column, Ruffy pointed to some bullish options activity in BAC:

Two noteworthy prints in BofA Friday morning – both are bullish plays on the battered bank. Shares are down 14 cents to $6.21 and set to finish the third quarter not far from a 52-week closing low of $6.06 set on Sep 22. The top options trade on the bank today is a 19,000-block of Jan13 7.5 calls, bought at $1.52 per contract. The investor is likely buying calls (to lock in the right to buy the stock at $7.50 through Jan 2013) rather than take a position in shares. 20,122 Jan13 7.5 calls traded on BAC early Friday against 126,345 in open interest. Separately, a Nov 4 – 7.5 risk-reversal trades at 12 cents, 9000X on ISE. Looks like a bullish r/r was initiated and ISEE data indicate an opening trade.

This counters the bearish put activity Ruffy brought up and I expanded on in this article last week:

In the BAC example, it looks like one trader took roughly $5.3 million in profits from BAC February $9 puts and rolled about $960,000 of them into what one could call a lottery ticket - BAC February $3 puts. While I could easily see the $3 put trade becoming another wildly profitable one, let's just call it a long shot for the sake of argument. From that perspective, this move represents playing with the house's money, but sticking with the sentiment that full-scale implosion has a reasonable chance of taking place.

This is exactly the kind of situation I do not want to involve myself in as a trader or investor. While none of us really "know" what will happen with any stock we pay attention to, we can make stronger cases for sentiment on some over others.

To me, the tug of war between bulls, who must see "value" in beaten down BAC, and bears, banking on a "full-scale implosion," is akin to Game 7 of an NHL playoff game. Typically, they're just too tough to call. I prefer to go where I at least feel like I can make a sound case, based on technicals or a company's current place in its space, to be bullish or bearish. I think I have done that with SIRI, NFLX and Research In Motion (RIMM), in particular. The danger lays in trying to recreate success with little to go on. That's how I feel with respect to BAC so I prefer to remain indifferent.

Disclosure: I am long P.