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
Dendreon Corporation DNDN 22.99 22.5 4.18 -8.44
DryShips Inc. DRYS 5.82 6 25.43 -19.24
Genworth Financial, Inc. GNW 6.24 6 50.64 -58.33
Harley-Davidson, Inc. HOG 18.92 19 123.04 -122.20
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
MGM MIRAGE MGM 6.34 6 32.49 -43.22
Prudential Financial, Inc. PRU 39.03 39 7.48 -7.64, inc. CRM 40.84 40 12.39 -16.50
Teck Resources Limited (USA) TCK 21.06 20 7.79 -17.85
Terex Corporation TEX 12.99 13 14.32 -14.16
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

These option ideas are all extremely dependent on volatility and direction. Remember the risks involved when purchasing both call and put options. To learn more about options click here.

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