It's all about the now. You've got to have what's in, not what's out. Today, it's all about having the best phone, the best TV, the best of everything. If there is hype surrounding it, you've got to have it. The stock market isn't much different. When things are going bad, you've either got to be short, or be in value names that won't drop as much and have nice dividends as a cushion. When things are good, it's all about growth, growth, growth. We've seen stock fads just as much as we've seen product fads. They come and go, but some are here to stay.
For those of you that believe in the hype, here are five options trades for you. These are based on a particular "hype" that will form the basis for each trade. Now remember, options trading involves a significant amount of risk, so before starting, always know the specifics of your trade, especially what your profit/loss scenarios are, any type of margin that may be required, and anything else that may be important to that specific trade.
1. The World Revolves Around Apple (AAPL):
These days, doesn't that statement seem true? Who cares what the weekly jobless claims numbers are, who cares what is going on in Europe. Right? At times, it seems that way. Two weeks ago, it was all about the new iPad. Last week, it was all about the dividend. This week, it could be window dressing as the quarter comes to a close. And soon enough, it will all be about Apple earnings, or an Apple suppliers' earnings. Then it will all be about the new iPhone. Since Apple has the largest market cap, the markets will generally do well if Apple does well. Apple is up more than 47% this year, which is part of the reasons why US markets have done so well in just three months.
So what's my best play on Apple right now? Well, remember, I'm talking about options here. If you believe in the Apple hype, you want to be long Apple stock. But for those who follow my writing, you know that I maintain a theoretical options portfolio for this site. For that portfolio, selling Apple puts has been an extremely good strategy, and it will be if Apple stays flat or rises over time.
So what's a good strategy here? Well, there are two I could recommend. The first involves selling a $575 January 2013 put, which currently would fetch you about $59. If Apple stays above $575 by expiration (and the option wasn't exercised before then), you pocket the $59. If Apple is below $575, or the option is exercised prior to then, you are forced to buy Apple at $575 (so you better have the cash ready to do so). However, because you collected the $59, you are really buying Apple at $516. It might turn out to be a very good deal if that happens.
Now, the second school of thought says that because volatility is so low right now (we are currently at 4-5 year lows), you wouldn't want to be in longer term options. The reasoning is that you don't receive as much of a premium, because volatility is one of the metrics involved in calculating option prices. If that is the case, you could always sell the August 2012 expiration $575 put for about $38, and then when that trade finishes set up a January expiration one.
Remember, we're talking about options here, not about just owning the stock. Some may ask why I wouldn't advise buying calls here. That's a good question. Simply put, I just don't see it being worth it at these levels. For instance, let's take August 2012 expiration. If you were to buy an at-the-money call, we'll say $595 strike is the closest, it would currently cost you $49.50. That means, just to break even, Apple has to be above $644.50 by expiration for you to make money. Yes, that is certainly possible, but I'm just not a fan of it right here.
Yes, I like Apple, and I think there is plenty of room to grow. I'm just not sure how fast or when it will rise, which is why I'm not willing to say buy calls. Put sales have been working this whole way up, so why not stick with them. Even if the stock declines, and you are forced to buy at $575, the premium you collected gets you in a bit cheaper, and in the long run, that seems like the way to go.
2. The Green Mountain (GMCR) growth story is intact.
Green Mountain has been one of the best battleground stocks between bulls and bears, and it will continue to be going forward. Green Mountain had a huge rally after last quarter's earnings report, then the stock pulled back a bit and was crushed after Starbucks (SBUX) launched a single serve espresso machine. Initially rumors that the machine was a direct competitor to Green Mountain sent shares down, but after this weeks news that the companies have extended their partnership, shares rallied back a little.
This one is a bit more simple. If you believe in the growth story, buy calls. I am targeting May expiration, because the company should come out with earnings during the first week of that month. Even if they come out in the second or third week, expiration is the 18th so there is plenty of time for them to report. With the stock at $53.51, the most sense is to buy the $52.50 strike or lower strike calls. This allows you to get long the stock at a fraction of the price. The lower strike you go, the most expensive it is to own, but you have less of a premium to pay. My personal opinion is go for the $50 calls, which currently would cost about $7.25. If this stock soars and gets back to $70, you'll triple your money.
3. The Facebook (FB) IPO Hype:
Yes, Facebook is going public. It hasn't yet, so my best play involves Zynga (ZNGA), the social gaming company behind hits such as FarmVille and Words With Friends. If you believe in the Facebook hype, you would think that when the name goes public, Zynga will rally.
I executed a similar trade for my theoretical options portfolio. I went with the October expiration, but if you think Facebook will definitely go public before June expiration, June might be the better way to play this. This is my suggestion. Buy a call, sell a higher strike put. For instance, buy the $12 June calls for $2.40 and sell the June $14 puts for $2.10. If the stock rallies, you are set up to make a killing, however, if the stock falls, you can lose a bit too. It is a risky proposition, but very profitable if it works.
4. The Netflix (NFLX) is For Real (Or Not):
For this one, I'll give you advice for both sides. We all know about Netflix. It was over $300, raise its prices, lost subscribers, collapsed to nearly $60, then things got better and it doubled. We'll, about a month from now, Netflix will report earnings again. It will certainly be a must see event, and the future of this company could come down to this quarter (as we seem to say almost every quarter).
I'll start with the bull case, and for both, I'm using May expiration since Netflix will probably report towards the end of April. If you are really bullish, but don't want to put a ton of money behind Netflix, buy somewhat deep in the money calls. For instance, buy the $100 call for $24.80 currently. This allows you to roughly be long the stock, at about 1/5 of the cost, and you only need Netflix to rise about $5 from here to make money. That's not a bad trade. If the stock collapses, your calls could be worthless, or have some value left, but you can't lose more than $25. If the stock heads back towards that $60 low, you could lose a ton more owning the actual stock. For bears, a similar trade would work. You could buy $140 puts for about $25, which allow you to be short the stock at a fraction of the price, and again, only need the stock to drop about $5 to make money.
5. I Believe in John Chambers:
For those of you who don't know who that is, John Chambers is the CEO of Cisco Systems (CSCO). Cisco has been called dead money for a while, but the stock is back above $20 and at 52-week highs. Some are even saying this could be a $30 stock soon. The company just announced a large acquisition, and they are buying back stock. They also started paying a dividend last year as well.
If you are a fan of Cisco for the long term, you can get long the stock here at a fraction of the price, and thanks to the low volatility I mentioned earlier, fairly cheaply as well. First, you can buy the January 2013 $17.50 calls for just $3.80, meaning the stock only needs to rise about 4 percent from here for you to make money. With nearly 10 months to expiration, that seems like a decent possibility. Or, you could go out another year, to the January 2014 $15 calls, which will cost you about $6.45. That gets you into the name, for about 30% of the current price, and you only need the stock to rise $1 in about two years. Either of these trades seem to make sense to me. If you are a believer in Cisco, you can get long here.