1:05pm (EST)
We often get asked why we don’t recommend options on stocks like Apple (AAPL, $345.21, up $1.77), Google (GOOG, $609.59, down $0.56) or IBM (IBM, $163.46, down $0.07). These stocks show tremendous price action and there are numerous, other, momentum stocks we do follow but shy away from trading options on.
Trust us, we would love to trade options on the “high-flyers” and we have in the past and do from time to time but one thing these companies all have in common is that their shares trade in the triple-digits. This means option premiums are expensive and instead of buying options that are $1, you are paying $5, or even $10 for a near-term slightly out-of-the-money call or put. So, if you like to buy 10 contracts for every trade then instead of spending $1,000, you are spending $10,000. Big difference.
We like to use 5% moves in a stock to make 100% on our option trades and it is a lot easier doing it on stocks that are under $100.
To give you an example, Google call options are/were very popular for years after the company became public. Our editor-in-chief, Rick Rouse, use to recommend these types of trades back in the day and here is a breakdown of one of his trades.
In October 2005, Google was just under $300 a share heading into earnings and of course, they knocked the cover off the ball as they were smashing estimates quarter after quarter back then. The November 310 call options were at $10 when he profiled the trade and by mid-November the stock was at $400. The options were at $90 and the return was 800%.
You could also buy just 1 option contract on the higher priced stocks but most of the times the bid/ask is wide enough to drive a tank through and volume is light. By playing options on stocks under $100 there is more liquidity and closer strike prices to where the stock is currently trading at.
Although we do occasionally play options on the high-flyers, we were glad to see Freeport-McMoRan (FCX, $56.89, up $0.63) do a 2-for1 stock split this week. We love playing this name and you will see over the years we have used calls AND puts when it comes to trading Freeport. It just depends on the trend.
While it is so true that stocks splits don’t mean a thing – instead of owning 50 shares of a $100 stock, you now own 100 shares of a $50 stock on a 2-for-1 – stock splits are helpful when it comes to playing options.
Freeport has become a pure-play on copper (and gold to a degree) and has just become another candidate for our Watch List. We aren’t profiling any options just yet because we want to do a little chart work over the weekend but you can bet our subscribers will be seeing this name in the future. Now, if we could only get Apple or Google to do a 10-for-1 stock-split.
Next week should be busy and we have few high-profile earnings announcements we are watching. Cisco Systems (CSCO, $22.05, up $0.14) and Walt Disney (DIS, $40.52, up $0.02) will report earnings, as well as Akamai Technologies (AKAM, $47.84, down $0.27) and Advanced Auto Parts (AAP, $63.72, up $1.24) just to name a few.
We are also working with a new auto-trading partner, Stifel-Nicolaus, and we will be posting more information in the coming weeks on how you can sign up through our website to have our option recommendations filled for you automatically. For those of you that want a head start, go here.
We are excited to bring them on board and we are working with a few other partners (OX) to cover some of the other brokerage firms our subscribers use. If you have a request, please let us know and we will look into it.
As we head to press, the market is mixed but is showing signs of moving higher into the closing bell. The Dow is down 3 points to 12,059 while the S&P 500 is off less than a point to 1,306. The Nasdaq is higher by 6 points to 2,760.
We released 2 new trades earlier today and we are closing another one to lock in profits. This brings our track record for 2011 to 10-out-of-11 winning trades with 3 triple-digit winners! If you wanna see the results, trade by trade with exact entry and exit prices and on what day they were opened and closed, email us.
We will be back on Sunday night with the Weekly Wrap. Until then, have a great weekend!
