Derivatives Day: Getting Naked and Other Options Trades This Week

by Paul Springer

Below is a survey of options ideas and strategies culled from what’s out there so far this week. Some are specific to a single underlying or a specific technique, while others are based on a broader view.

The big picture is presented in this detailed article by contributor Simon Kerr, who explains why zero-cost options sometimes sound like a good idea – but not necessarily the best. A small part of the argument:

Further it is plain that in order to put them on portfolio managers or traders are quite conceivably having to compromise their own market view in some dimension to accommodate the implied view of the zero-cost option strategy. So the real cost of the zero-cost strategy is not the premium expended, which by definition is nil, but the potential for a significant compromise with the actual market view of the risk taker.

The OptionsInsider recaps SPX activity last week and considers what might be instore during expiration week: possibly another decline after an oversold bounce.

ResourceInvestor develops a strategy to avoid a “potentially devastating” SPX trade in the near future.

Seeking Alpha takes a look at the Alpha Index options for Apple Computer (AAPL). Nasdaq’s Alpha Indexes measure the performance of a single stock against a relevant index, and a variety of options strategies are evolving around the Apple/SPY index.

Playing in Chinese company stocks is a lot like playing Russian roulette these days, but this Business News Network piece describes using a straddle to profit from Sino-Forest Corp.’s grief from analyst/research service Muddy Waters.

Tobacco monger Reynolds American (RAI) may be poised for a resurgence, according to Schaeffer’s Options Center’s analysis of near the money put writers activity after Morgan Stanley upgraded Reynolds and downgraded competitor Lorillard (LO).

Never was the word ‘naked’ scarier than in the term “naked option,” but a SeekingAlpha contributor explains how to get naked without exposing oneself unnecessarily.

Bloomberg notes that Best Buy call option rose four-fold after activist investor Bill Ackman’s Pershing Square Capital was said to have bought a stake in the company. Some might regard that as a sell signal.

Trading in GM is a snoozer according to InvestorPlace, but OptionsMONSTER data indicates that Harley Davidson (HOG) may be poised to take a ride.

And for those who hoped to start trading S&P options electronically on a proposed CBOE platform this month – fuggedabout it. The exchange said in a release that the Securities and Exchange Commission wants more information before letting the new platform get started.

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