Two bearish trades, two winners, one strategy. That more or less sums up last Friday's Options Action.
After last week's historic rally in stocks, our traders took advantage of lower options prices and bought put spreads on Morgan Stanley and Coke . The first trade was a bearish hedge against some sort of negative news out of Europe. Of all the U.S. financials, Morgan Stanley appears the most correlated to the turmoil in Europe, often moving in tandem with names Deutsche Bank . The stock had rallied some 55% off its lows, and it was the view of Riskreversal.com's Dan Nathan that all it would take is one bad headline from Europe to send MS shares significantly lower. He suggested buying the November 18/17 put spread for $0.20. It's now worth $0.70, or more than three times his money. Although if he waits until November expiration, he can make the full $0.80 (that would be four-times his money).
So is he taking it off? "Yes"
His trade and breakdown are below:
DAN'S MORGAN STANLEY OPTIONS TRADE - Stock was at $19
- BUY NOV 18-STRIKE PUT FOR $0.50
- SELL NOV 17-STRIKE PUT FOR $0.30
HOW DAN'S MORGAN STANLEY TRADE MAKES MONEY
- LOSSES ABOVE $18
- PROFITS BETWEEN $17.80 - $17.00
- PROFITS CAPPED AT $17
The other bearish bet was on Coke. The stock has been on a massive run courtesy of its nice dividend, strong earnings and status as the ultimate safety play. But as Oppenheimer's Carter Worth and Cantor's Mike Khouwpointed out, defensive names can't work in both good markets and bad, and if there is a recovery, investors will rotate out of consumer names and into growth stocks. On the flip side, if the market's going to tank, Coke will not be spared. Said Mike Khouw: "You can't have it both ways."
His trade and breakdown are below.
MIKE'S COKE OPTIONS TRADE- Stock was at $69
- BUY JAN 67.5 STRIKE PUT FOR $1.80
- SELL JAN 65-STRIKE PUT FOR $1.10
HOW MIKE’S COKE TRADE MAKES MONEY
- LOSSES ABOVE $66.80
- PROFITS BETWEEN $66.80 - $65
- PROFITS CAPPED AT $65
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