ONN’s Take on FAS and FAZ Pick and Corresponding Option Plays

ONN’s Take on FAS and FAZ Pick and Corresponding Option Plays

July 1, 2009

Mad About Options takes a look at the stocks getting coverage from Jim Cramer, Fast Money casts and other heavy hitters in the financial press and reviews strategies option traders might have used if they agree or disagree with these assessments of the underlying stocks.

The Pick – FAS and FAZ

Chief Investment Strategist Jud Pyle tells investors that if they are bulled up on FAS, then be beared up on FAZ. FAS was trading at around $9.20 when Pyle described this strategy, and FAZ was trading about $4.70.

Bullish Option Traders:

Option traders who were similarly bullish on FAS could simply employ a bear put spread on FAZ, as FAS is down 78% year-to-date. Investors could buy Aug. 8 puts for $3.50 to sell Aug. 5 puts for 90 cents, paying $2.60 for the spread. This trade will be profitable if FAZ shares expire below $5.40. Maximum gain on this spread is 40 cents minus commissions, which is at 15% return, and maximum loss is $2.60 plus commissions.

Bearish Option Traders:

Options traders choosing to go bearish on FAS because they are bullish on FAZ could employ a bear put spread on FAS. Investors could buy Aug. 15 puts for $6.10 and sell Aug. 9 puts for $1.30, which would cost them $4.80 per contract. The spread will be profitable if FAS shares expire below $10.20. Maximum gain is $1.20 minus commissions, which is a 25% return, and maximum loss is $1.20 plus commissions.

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