By: Steve Smith
On Tuesday Facebook (FB) ‘Amazoned’ the online dating industry by announcing it would add a dating feature. The news sent shares of IAC Interatcive (IAC) and Match (MTCH) into a tailspin dropping some 20% each and wiping out $4 billion of market capitalization between the two companies. As we’re about to see, this opens up some interesting options trading possibilities.
This is reminiscent of last summer when Amazon announced its purchase of Whole Foods and shares of supermarket and related retailers such as Kroger, Target, Wal-Mart and Costco declined from 10% to 20% and lost a collective $27 billion of market capitalization in a single day.
That day proved to be a great buying opportunity as shares of Wal-Mart, Target and Costco not only recovered but recently hit new all-time before a recent pullback. All are still up some 20% in less than a year since the news.
I suspect shares of Match and IAC will have a similar recovery, making this a great options trading opportunity.
I’m going to focus on IAC it has a more diversified portfolio of properties. It owns 35% stake in Match but also controls sites such as Angi’s List, HomeAdvisors and retains stakes in a variety of home shopping channels.
IAC has dropped its 20 dma at $128 level which is also good support setting up an attractive entry point.
The recent steep sell-off and the upcoming earnings which are slated for next Wednesday, May 9th, have caused the implied volatility of the options to increase dramatically.
I want to sell puts to take advantage of these pumped up premiums to create a bullish position.
My approach is to use a ratio spread in which I’m buying one close to the money put and selling twice as many further out of the money puts for a net credit.
Specifically; Buy the May 130 put and sell 2 May 125 puts for a $2.00 net Credit.
Here is risk graph for the position.
If shares are above $130 at the expiration I keep $2.00 of premium I collected.
If shares are below $125 on expiration I will assigned 100 shares with a cost a basis of just $123, or an additional 5.5% below the already discounted price.
This is a great way to make money on the stock either holding its ground or a means for owning shares at a very low-cost basis.
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Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.
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