As stated in Friday’s blog post, the Volatility Index (VIX) is below 25 which shows signs of the market stabilizing, however I still believe this market could sell off. Usually as the market sells off the Volatility index increase as the amount of put options surge. However, the market could also continue this rally as earnings may continue to surprise. In either case volatility could increase substantially (as many of the stocks in this analysis will report earnings by August options expiration). So in the case that the volatility increases, a good option strategy to know is the option straddle play.
With the next options expiration being August 22, 2009, I decided to blog about this option strategy. I use the straddle often, but don’t blog about it too much. The option straddle requires a solid background in options, as you’ll need to know how to purchase both call and put options.
To learn more about opening this type of option position and other option strategies click here.
As we all know the stock market can change greatly over a months time, and using this strategy allows us to capture both the upside as well as the downside. In either case a continuous trend is needed. For this analysis I chose 20 higher Beta stocks, with market caps greater than $1 Billion.
Understanding the Table
The table below has each of the following components:
- Companies listed
- Their ticker
- The last price as of Friday July 17, 2009
- The Call and Put option strike price
- The % move up required to break even from the position
- The % move down in order to break even from the position
The first stock from the table below is AK Steel Holding Corp (AKS) and would be interpreted as:
Buy the AK Steel (AKS) August 20 Call option, and August 20 Put option. The required move up from the closing price is 18.81%, and the required move down from the closing price is 18.71% in order to break even from opening this option straddle position.
|Company||Ticker||Price||Call/Put Strike||Move up||Move Down|
|AK Steel Holding Corporation||AKS||19.99||20||18.81||-18.71|
|American Express Company||AXP||28.03||28||12.38||-12.59|
|Barclays PLC (ADR)||BCS||20.5||20||13.41||-18.29|
|Genworth Financial, Inc.||GNW||6.24||6||50.64||-58.33|
|ICICI Bank Limited (ADR)||IBN||30.46||30||14.58||-17.60|
|ING Groep N.V. (ADR)||ING||11.04||10||9.60||-28.44|
|Intuitive Surgical, Inc.||ISRG||155.54||155||0.59||-1.28|
|Joy Global Inc.||JOYG||35.92||36||13.03||-12.58|
|Las Vegas Sands Corp.||LVS||8.59||9||20.49||-10.94|
|Prudential Financial, Inc.||PRU||39.03||39||7.48||-7.64|
|Teck Resources Limited (USA)||TCK||21.06||20||7.79||-17.85|
|The Cheesecake Factory Incorporated||CAKE||17.54||17.5||22.01||-22.46|
|The Dow Chemical Company||DOW||16.99||17||25.66||-25.54|
|United States Steel Corporation||X||37.42||37||13.58||-15.82|