12:45pm (EST)
The market is on the south side once again as the bears look to plant the flag on the hill heading into the weekend. Futures were already pointing towards a lower open and without much earnings or economic news to go on, it appears investors are a little nervous going into the close.
At current levels, the bears are looking to take the market lower for the second consecutive week and probably can’t wait until Monday to get here. We can’t either.
It’s no secret we have been building short positions as the market was rising although we are still actively looking for a few long plays. However, as we often mention, 75% of stocks move in the overall direction of the market so picking options on the long side has been tricky.
Two stocks going in opposite directions, Akamai Technologies (AKAM, $46.81, up $1.80) and Research In Motion (RIMM, $48.28, down $2.19), are a good example of what we are talking about.
Akamai is hot again and has hit 52-week highs on takeover chatter. We have recommended call options on this stock quite a few times this year and we often mention the water cooler talk surrounding this stock. We recently listed some call LEAPs on our Watch List and we take another look at them again today inside our Members Area.
Meanwhile, RIMM continues to feel the wrath of analyst downgrades as a lot of them are jumping on our band wagon. We have been warning of a breakdown in RIMM and it appears all signs are pointing towards new 52-week lows.
One option strategy we would like to talk about before we go today is the strangle option trade. We know our website says we don’t do them but they can be so profitable. We had the perfect candidate yesterday as we were looking at the options on Salesforce.com (CRM, $109.17, up $12.77).
The company was announcing earnings after the close on Thursday and we knew there would be a big move in shares one way or the other. As you can see, the stock is up 13% and there was a way to play this move although it was risky.
Shares were near $100 going into the close yesterday and we were figuring a $10 move in the stock, or 10%, because it is a hot stock and Wall Street was expecting a lot out of the company when they reported. We knew there was a chance they would beat but we didn’t want to go long because we have been expecting the market to go lower. However, we didn’t want to go short because we knew there was a chance they would smash earnings (they did).
The Salesforce August 105 calls (CRM100821C00105000, $4.40, up $3.90) were at 50 cents going into the close and are expiring today. They are up 780%.
The August 90 puts (CRM100821P00090000, $0.01, down $1.04) were at $1.05 before the closing bell and have lost 99% today and will expire worthless if the stock stays above $90.
If you had bought 10 contracts of each option, your total cost of the trade would have been $1.55, or $1,550. You could close this trade right now and walk away with a return of 186%. You would close the call options at current prices and collect $440 per contract, times 10 because you had 10 contracts, which gives you $4,440.
The risk would have been that shares stayed flat and there was no reaction. You would have lost the entire premium on both sides of the trade if the stock stayed between $90 and $105. This is one of the main reasons strangle option trades are so risky but you could have also gone out to the September options to buy some more time.
In the future, we will start adding these types of trades to our Watch List and if there is a demand there (say yes!), we may make them official recommendations.
It remains to be seen if the market stays in this trading range but right now it appears like it will test our lower level targets which is fine with us. We don’t need a market meltdown (but one could be looming) and if support holds then we will be looking to close out some of our current, profitable trades.
As we head to press, the Dow is down 101 points to 10,169 while the S&P 500 is lower by 9 points to 1,066. The Nasdaq is lower by 13 points to 2,165. We will be back with the Weekly Wrap on Sunday evening and we are excited about next week. We have updated our current positions and we have an important decision to make for one of our trades which is up over 130%. We talk about closing half of the position but we are still on the fence as we type.
Have a good weekend and we shall see everyone Sunday evening!
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Akamai (AKAM) Hits New High, RIMM Nears 52-Week Low
Friday, August 20th, 2010
12:45pm (EST)
The market is on the south side once again as the bears look to plant the flag on the hill heading into the weekend. Futures were already pointing towards a lower open and without much earnings or economic news to go on, it appears investors are a little nervous going into the close.
At current levels, the bears are looking to take the market lower for the second consecutive week and probably can’t wait until Monday to get here. We can’t either.
It’s no secret we have been building short positions as the market was rising although we are still actively looking for a few long plays. However, as we often mention, 75% of stocks move in the overall direction of the market so picking options on the long side has been tricky.
Two stocks going in opposite directions, Akamai Technologies (AKAM, $46.81, up $1.80) and Research In Motion (RIMM, $48.28, down $2.19), are a good example of what we are talking about.
Akamai is hot again and has hit 52-week highs on takeover chatter. We have recommended call options on this stock quite a few times this year and we often mention the water cooler talk surrounding this stock. We recently listed some call LEAPs on our Watch List and we take another look at them again today inside our Members Area.
Meanwhile, RIMM continues to feel the wrath of analyst downgrades as a lot of them are jumping on our band wagon. We have been warning of a breakdown in RIMM and it appears all signs are pointing towards new 52-week lows.
One option strategy we would like to talk about before we go today is the strangle option trade. We know our website says we don’t do them but they can be so profitable. We had the perfect candidate yesterday as we were looking at the options on Salesforce.com (CRM, $109.17, up $12.77).
The company was announcing earnings after the close on Thursday and we knew there would be a big move in shares one way or the other. As you can see, the stock is up 13% and there was a way to play this move although it was risky.
Shares were near $100 going into the close yesterday and we were figuring a $10 move in the stock, or 10%, because it is a hot stock and Wall Street was expecting a lot out of the company when they reported. We knew there was a chance they would beat but we didn’t want to go long because we have been expecting the market to go lower. However, we didn’t want to go short because we knew there was a chance they would smash earnings (they did).
The Salesforce August 105 calls (CRM100821C00105000, $4.40, up $3.90) were at 50 cents going into the close and are expiring today. They are up 780%.
The August 90 puts (CRM100821P00090000, $0.01, down $1.04) were at $1.05 before the closing bell and have lost 99% today and will expire worthless if the stock stays above $90.
If you had bought 10 contracts of each option, your total cost of the trade would have been $1.55, or $1,550. You could close this trade right now and walk away with a return of 186%. You would close the call options at current prices and collect $440 per contract, times 10 because you had 10 contracts, which gives you $4,440.
The risk would have been that shares stayed flat and there was no reaction. You would have lost the entire premium on both sides of the trade if the stock stayed between $90 and $105. This is one of the main reasons strangle option trades are so risky but you could have also gone out to the September options to buy some more time.
In the future, we will start adding these types of trades to our Watch List and if there is a demand there (say yes!), we may make them official recommendations.
It remains to be seen if the market stays in this trading range but right now it appears like it will test our lower level targets which is fine with us. We don’t need a market meltdown (but one could be looming) and if support holds then we will be looking to close out some of our current, profitable trades.
As we head to press, the Dow is down 101 points to 10,169 while the S&P 500 is lower by 9 points to 1,066. The Nasdaq is lower by 13 points to 2,165. We will be back with the Weekly Wrap on Sunday evening and we are excited about next week. We have updated our current positions and we have an important decision to make for one of our trades which is up over 130%. We talk about closing half of the position but we are still on the fence as we type.
Have a good weekend and we shall see everyone Sunday evening!
Tags: Akamai (AKAM), RIMM, salesforce.com, strangle option trades
Posted in Company Commentary, Hot Stocks, Market Analysis, strangle option trades, Trading Tips | Comments Off