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

Includes: AAPL, BB, CBS, F, NFLX, P, SIRI
by: Rocco Pendola

>>Return to Part One

If history continues to guide us, it's safe to say that many of the stocks decimated by this week's market crash will be worth considerably more six to 12 months from now. In part two of this week's options article, I offer six crash-inspired options plays on stocks that I think will either rebound nicely or continue to flounder. I pulled these prospective trades throughout the course of Friday's session. (*Any prices mentioned are subject to change).

Apple (NASDAQ:AAPL): I won't take credit for predicting AAPL's most recent pullback. Extraordinary market forces deserve a pat on the back for knocking the stock back from a tryst with $400 to as low as $362.57, intraday Friday. Irrespective of the cause, it's not crazy to think that AAPL will lead the way, at least temporarily, when the market turns back up (or at least stops getting killed).

There might not be a better play than selling an AAPL put right now. Possibilities abound, but the September $350 puts look mighty attractive. As I wrote this you could collect $10.05 (that's $1,005) in premium income. Worst case scenario - AAPL breaches $350 between now and September 17th and you get put 100 shares of AAPL at $350 apiece for every contract you sold. Factor in the premium you collected and your effective cost for the shares comes to $339.95 each. Even with lower premiums on a rebound, this strategy remains incredibly attractive.

Ford (NYSE:F): I'm not one to pay attention to P/E ratios, but F with a P/E of 6! I don't mind inflated P/Es, as long as the company that underlies the stock can grow earnings and revenues at a brisk pace. At the same time, I don't buy the notion that low P/Es automatically equate to an undervalued security. Instead, investors have little confidence in a company's ability to grow earnings and revenues when they let it flounder with a low P/E.

In Ford's case, I think it's clear that the company can and will expand the top and bottom line. I like practically every single thing Ford has to say about the future of its business and its stock. That said, with F hitting an intraday low of $10.32 on Friday, just about every call option from March 2012 out looks like fair game to me. In fact, I will buy a buyer of F calls even if the stock makes it way back toward $12 a share.

CBS (NYSE:CBS): I just love CBS here. The market downturn and subsequent crash sucked the life out of CBS this week, just as it was setting up to knock out $30 per share. The company's long-term story remains intact. It turned in an impressive Q2 report. And, as it noted on its conference call, it's doing it on the backs of companies like Netflix (NASDAQ:NFLX), which keep paying for digital content.

By year's end, CBS is a $30 stock. You can play that sentiment via options by going long calls with ITM, ATM and OTM contracts. To play it safe, I prefer the March 2012 or January 2013 expirations. Both put time on your side and give you the ability to stay long for even further upside.

Netflix (NFLX), Research in Motion (RIMM) and Sirius XM (NASDAQ:SIRI): Each of these stocks serve as post-crash sucker bets as far as I am concerned. Across all three, we have a case of each showing signs of weakness even before the downtown slapped longs with full force. Bulls, of course, will chalk the last several weeks worth of floundering up to macro events. I beg to differ.

Consider the price history in NFLX, courtesy of Yahoo! Finance.

Click to enlarge

If nothing else, the price history reveals that "NFLX shorts" aren't "getting killed" anymore. I have written weighty tomes about the lack of sustainability in Netflix's business model. Now, it's finally starting to come to. The next several quarters could prove almost as bad as the recent experience of ...

RIMM longs adhere to the absurd notion that because the company has finally, sort of, gotten around to releasing its new phones the public will remember BlackBerry and buy enough of them for it to matter. Not so, the brand is dead, at least when considered in the context of competition against Apple and Android.

Even more insane is the contention that if anything goes right for RIM, the stock will go up. Further warped logic creeps in when longs start spewing comparisons to Apple. Bottom line: Apple stock rebounded because the company killed it and became the market dominator over the last several years. Apple beat estimates consistently and put out one game-changing product after another. Does anybody honestly believe RIM will do anything close?

Even after I denounced them in this column two weeks ago, SIRI loyalist longs keep emailing me asking for my take on the stock. I'm flattered, but I really prefer not to be part of these conversations anymore. Let me set the record straight once and for all.

I held short-term SIRI September $2.50 calls because I, along with gaggles of others, believed the stock would make one of its pre-earnings runs. When it was obvious that the pattern snapped, I got out. I took a tiny loss and moved on. I am not a SIRI suicide bomber long. I refuse to figuratively give my life for the cause. I have enough of a social life that I do not need to be part of a club of longs who will defend their stock to the death.

Throughout the entire time I was long the calls and the stock, I voiced concern over the long-term prospects of Sirius XM. I wrote a whole series of articles that detailed what I wanted to hear on the company's Q2 conference call.

Not only did the company miss revenues (a sign that it's discounting to keep subscribers from leaving?) on the call, but, more importantly, it inspired little confidence that it's prepared to come out of its shell and compete with Apple, Internet radio and even terrestrial radio, for that matter. Simply put, on several counts, the quarterly report was less of a victory than the bulls contend.

On the surface, having a button for your service in the dash of two-thirds of all new cars sounds great. And it is. No doubt. But, I sense an over-reliance on this. It's the same crutch that did terrestrial in - all people have to do is push a button! And we're there. Unfortunately, Sirius XM has one less thing going for it than terrestrial: It's not free. And, for the record, terrestrial is in 100% of all cars. All that's done is allow the industry to hang on. It did not get back on its feet until it started to get aggressive, particularly on the digital/online front.

As such, Sirius XM stands by its subscription model levered directly to the fate of the auto industry and the broader economy. The company does not appear set to look into generating advertising revenue beyond where it already does. It does not seem ready to diversify its revenue stream or its audience. SatRad 2.0, for the foreseeable future, looks to be little more than a Pandora (NYSE:P) knock-off and a way to capitalize on the burgeoning Hispanic market. It's not a game-changer. The company's moving too slow with SatRad 2.0. That won't cut it up against fast moving firms like Apple and Pandora.

Given the lack of aggressive and dynamic plans, I don't see an exciting future. If I am long SIRI, I hope for some type of M&A/takeoever activity. While macro concerns played a role in knocking the stock below $2.00 per share (to as low as $1.73 intraday Friday), micro concerns will help it persist at or around that level.

The biggest mistake I made with SIRI was not flipping from the September $2.50 calls to the puts of the same month and strike. At this point not doing anything probably makes sense. If you're enough of a high roller to be able to open a large enough position to make it worthwhile, selling SIRI $2.50 calls makes a lot of sense. Selling $2.00 calls and buying $2.00 puts represents a much riskier, more aggressive bet.

As for NFLX and RIMM, I advocate ATM and slightly OTM put buying on both names. Of course, a long shot on a complete and total implosion makes sense as speculation on both. Again, you've got to be fairly well-stocked account equity- and experience-wise, but selling OTM NFLX and RIMM calls could generate considerable income assuming you believe the respective stocks are capped at a level meaningful enough to justify call selling.

Disclosure: I am long F.