Strike price selection can be tailored to our covered call writing and put-selling trades based on overall market assessment. In bear and volatile market conditions we favor in-the-money calls and deeper out-of-the-money puts (lower than current market value). In this article, we will evaluate defensive trades for Smith & Wesson Hldg (SWHC) as of 1/11/2016, the day after the worst week to start a stock market trading year ever in the history of US stock markets.
Options chain as of 1/11/2016
With SWHC trading at $22.09, the $21.00 in-the-money February 19, 2016 call generates $1.85 and the $21.00 out-of-the-money put generates $0.75. These are 6-week returns.
Next let’s turn to our calculators:
Call calculations for SWHC: Multiple tab of the Ellman Calculator
The advantages of in-the-money calls in bear market environments are readily noticeable:
- A 6-week initial return of 3.6%, 31.2% annualized
- A 4.9% protection of that initial profit
- A breakeven of $20.24, $1.85 less than current market value, an 8.37% protection to breakeven
Put calculations for SWHC
The advantages of out-of-the-money puts in bear market environments are readily noticeable:
- A 6-week initial return of 3.70%, annualizing to 34.66%
- If exercised, shares are purchased at a 8.33% discount from current market value (breakeven)
In bear and volatile market conditions we can tailor our option-selling strategies by utilizing in-the-money calls and out-of-the-money puts. Using the Ellman and BCI Put Calculators will help guide us to the most appropriate strike price selection based on our overall market assessment, chart technicals and personal risk tolerance.
***For free copies of the Basic Ellman Calculator for covered call writing and the BCI Put Calculator, click on the “Free Resources” link on the top black bar of our web pages. Or click here.
May live events
Caesar’s Palace- Las Vegas
- The US Federal Reserve’s Federal Open Market Committee made no move on interest rates this week and sent mixed signals on the timing of its next hike
- The Fed removed a reference to global economic and financial conerns from the first paragraph of its statement, which some interpreted as an aggressive stance sign
- The Fed highlighted that while labor markets have continued to improve, economic activity appears to have slowed
- Japanese shares tumbled and the yen soared against major currencies as the Bank of Japan declined to add additional monetary stimulus despite slumping inflation data and a strong yen
- US gross domestic product rose just 0.5% in the first quarter, the third consecutive anemic start to a new year. Sluggish net exports and weak corporate profits were significant developments in this first quarter
- The eurozone economy grew by 1.6% year over year in the first quarter, the same rate of growth as the final quarter of 2015. Inflation failed to keep pace, however, sliding 0.2% year over year. Falling inflation will keep the pressure on the European Central Bank to seek innovative ways to spark growth and inflation
- A new plan from Saudi Arabia known as Vision 2030 calls for the floatation of a stake in Saudi Aramco, the state oil producer. Proceeds from asset sales, as well as other state-owned assets, will be held in a sovereign wealth fund worth as much as $2 trillion
- GDP growth in the United Kingdom held steady at 2.1% year over year in the first quarter but economists are concerned that growth could slow in the second quarter
THE WEEK AHEAD
- Manufacturing purchasing managers’ indices are globally released Monday, May 2nd
- Service sector PMIs are released globally on Wednesday, May 4th
- Eurozone retail sales are reported on Wednesday, May 4th
- US employment data are released on Friday, May 6th
IBD: Uptrend under pressure
GMI: 5/6- Buy signal since market close of March 2nd
BCI: Cautiously bullish, favoring out-of-the-money strikes 3-to-2. The markets finally succumbed to the mixed earnings signals (see AAPL, AMZN, FB).
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US