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

Includes: AAPL, DISH, GE, MSFT, S, VZ
by: 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.

In part one this week, I cover options activity highlighted by Ruffy, Wilkinson and optionMONSTER. In part two, I look at how to play six different stocks with options in a post-crash market.

DISH Network (NASDAQ:DISH): optionMONSTER and Wilkinson think alike. Both highlighted the same put activity in DISH in respective Friday articles. Here's Wilkinson's illustration of the action:

Shares in the provider of direct broadcast satellite subscription television service in the U.S. plunged 9.1% to an intraday low of $24.28 this morning. The trader likely purchased around 1,000 puts at the September $27 strike for an average premium of $1.09 each on Wednesday, and sold those puts today for an average premium of $2.40 a pop. Net profits on the transaction amount to $1.31 per contract.

Next, the investor extended bearish sentiment on the stock, buying a 1,500-lot September $22/$25 put spread at a net premium of $1.00 per contract. The fresh bout of pessimism on DISH yields profits to the trader in the event that shares slip beneath the effective breakeven price of $24.00 by September expiration. Maximum potential profits of $2.00 per contract are available on the spread should DISH’s shares fall another 9.4% to trade below $22.00 at expiration next month. The trader may be bulking up on puts ahead of the company’s second-quarter earnings report this coming Tuesday ahead of the market open.

It's important to note, as I often do, that this call-out represents the work of one trader. Beyond the trades mentioned, there was barely any other volume in the contracts noted. We like to think of the options market as offering clues to broader sentiment. While that's often the case, proceed with caution when making these types of extrapolations.

Sprint (NYSE:S): I don't think the future for Sprint is as dismal as its current sub-$4.00 stock price suggests. Several options traders seem to agree. Wilkinson notes heavy volume in the S November $4.50 call options, with most of it on the long side. S represents a more speculative bet than ever. Because every portfolio should make room for speculation, it's worth giving Sprint a look.

Warren Buffett-mention alert aside, fellow Seeking Alpha contributor Walter Gault makes a sound case for Sprint. If nothing else, getting the iPhone should spring shares of Sprint past $4.50.

I tested the validity of that statement by thinking back to how Verizon (NYSE:VZ) performed as it forged its partnership with Apple (NASDAQ:AAPL) to sell the device. The official announcement, after months of speculation and not-all-that-accurate rumors, came in early January.

I was long VZ heading into its iPhone launch. Most of the appreciation in the stock came ahead of the official announcement. While it was not quite "buy the rumor, sell the news" investors priced a good chunk of upside into VZ prior to the January 2011 iPhone deal confirmation. The post-iPhone euphoria did relatively little for VZ. In fact, the stock pulled back and ranged, before taking another leg up.

There's a big difference between S and VZ, pre-Apple love affair. Investors are not treating Sprint like a company that's about to seal a deal with Apple. That said, the rumors continue and they appear to have at least some legitimacy attached to them.

Investors have hardly priced an iPhone into Sprint's stock price. Instead, they seem to have, at least temporarily, dismissed the possibility. If an iPhone on Sprint becomes official, it could send the stock soaring harder and faster than VZ, largely because the Verizon announcement ended up being a mere formality. A Sprint iPhone should trigger slightly more shock.

General Electric (NYSE:GE): Wilkinson's discussion of bearish options activity in GE got me thinking:

Shares in GE currently trade just 0.30% lower on the day at $15.42 as of 12:20 pm ET. It looks like investors purchased around 20,000 puts at the November $15 strike for an average premium of $0.81 apiece, and sold the same number of puts at the lower November $12 strike at an average premium of $0.24 each. Premium paid for the spread amounts to an average of $0.57 per contract, which positions traders to profit should GE’s shares drop 6.4% to breach the average breakeven price of $14.43 by November expiration. Bearish players could make as much as $2.43 per contract in the event that shares in GE plunge 22.2% to trade below $12.00 at expiration day.

Throughout the entire downturn and subsequent crash, I was bored. The lack of excitement even triggered some melancholy in me. In honor of the late Elliott Smith's August 6th birthday, the singer-songwriter sums up my feelings nicely: The monologue means nothing to me.

We've seen this whole story play out before. There's always uncertainty. The sky's always falling. The market inevitably turns down - sometimes hard - then it bounces back again. And, then, without fail, CNBC flashes charts six months to a year later telling you that had you invested your money in stocks back when they were scaring the hell out of you, you would have a lot more money today than you did back then. Yawn.

All of this to say, on market rebounds, I would tend to think stocks like GE do well. Investors with weak hands who got shook out of the market often return to blue chip names as they cautiously get back in the game. In any event, while I can't say I am bullish, I just don't have a whole lot of confidence that GE drops below $12 per share. However, stranger things have happened.

Microsoft (NASDAQ:MSFT): Speaking of boring, if you're a Microsoft shareholder, you must be must bored to tears. On the bright side, the stock did not get totally decimated this week, opening Monday at $27.51 and closing Friday at $25.68. Here's the options trading Ruffy highlighted in MSFT in his Friday column:

Looks like 15,000 Oct 30 calls sold at 16 cents to buy 10,000 Oct 20 puts at 20 cents. Sentiment data indicate an opening trade and does not appear tied to stock. A shareholder might have initiated the trade to hedge or “collar” MSFT shares.

I've got to think it was a collar. If you hold MSFT shares, something of the sort is about all you can do to spice things up a bit. If you're not long the common stock, take a look at a bull call spread.

Consider buying the MSFT September $25.00 call for $1.42 and selling the MSFT September $28 call for $0.25. This trade allows you to profit from limited upside on a rebound, while taking advantage of a likely near-term ceiling on MSFT.

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

Disclosure: I am long S.