Trade Summary: April 13, 2015
April 13, 2015
Trade Rationale
Volatility has drained out of the equity markets over the past month or so. We may get some action in the coming weeks as earnings season has kicked off. At the moment though, the stock market is locked into a sideways trading range.
That can be a challenging period for options traders, who tend to thrive on bigger moves and higher volatility. (That is, unless you’re an options seller, but that’s a whole different ballgame.) You’ll hear a period like this called a stock picker’s market.
Basically, it means your trades are less dependent on broad market moves, and more focused on the action of single equities.
We’re going to do our own version of stock picking this week by focusing just on mega-cap stocks. These are the 20 or so largest stocks on US exchanges. We’re looking to buy calls on two mega caps and buy puts on another.
First off, we’ll go with calls on General Electric (GE). GE had been a fairly boring company for many years, until last week. The industrial giant is selling off its massive real estate holding to focus on industrials and share buybacks. It’s major step in the right direction for GE, and investors loved the news.
Another mega-cap I like is Exxon Mobil (XOM). While XOM is down along with lower oil prices, the company is still making plenty of money. Even if oil prices don’t rebound anytime soon, the company has multiple sources of revenues, and plenty of cash to diversify even more. Technically, the stock also looks due for a turnaround.
Finally, we’re going to take the opposite position in pharmaceutical giant, Pfizer (PFE). There’s nothing all that wrong with PFE, it’s just been running hot for quite a while and is due for regression. Of all the mega caps I looked at, PFE was trading the highest above its 200-day moving average. Also, it gives us a hedge of sorts if the broad market experiences a selloff.
Trade Details
#1) Buy General Electric (GE) June 19th 28 Calls up to $1.00
For this trade, we’re looking for an upward move in GE. Our first profit point for conservative traders is at $31. For aggressive traders, you can hold up to $34. For risk control, the conservative exit level is $25. $23.50 is the final exit level for aggressive traders.
#2) Buy Exxon Mobil (XOM) June 19th 87.50 Calls up to $1.75
With this trade, we’re also looking for an upward move. Our first exit point for conservative traders is at $92. For aggressive traders, you can hold to $95. For risk control, the conservative exit level is $82.50. And, $80 is the final exit level for aggressive traders.
#3) Buy Pfizer (PFE) June 19th 35 Puts up to $1.50
Finally, we’re looking for a down move in PFE. Our first profit-taking exit point for conservative traders is at $32.50. For aggressive traders, you can hold to $30. For risk control, the conservative exit level is $36.50. $38 is the final exit point for aggressive traders.
Category: AOA Trade Summary
