Range Bound Stocks to Capitalize On

Playing the Expiry: June 8, 2012

I will make this short and simple. Amazon [AMZN:NSD] has been trading in a range between $205 and $220 since it fell below $220 support on May 18, 2012; the support was the initial low price after earnings. With the market looking to recover from a near correction, the market could start heading sideways before traders and investors build confidence in the world's economy and market.

Taking a look at the Amazon June 8 weekly options, the 220 calls are selling for $1.00 and the 215 puts are selling for over $1.50. The stock is trading in and around $217 at the moment, so a credit spread looks promising. Total premiums received per contract would be at minimum $250 with margin required at no more than $6,300. Total earnings potential is at least 3.97 per cent with a break even range of $212.50 to $222.50. This provides downside protection of 2.07 per cent and a rise of 2.53 per cent.

In the event either options are in-the-money on Friday, consider rolling out the option or taking assignment, as it appears the stock will be brought back into the range determined above.

Another range-bound stock has been Baidu [BIDU:NSD]. The shares have had trouble rising above $120 while giving good support around $115. The weekly options are not as juicy as Amazon's, but a trader with less margin could consider Baidu instead. The 120 call is trading around $0.82 while the far out-of-the-money puts are only $0.34. This would provide income of $116 per pair for the next two days. Note that Baidu is most likely at 50% margin, so margin required is about $6,000. This would earn about 1.93 per cent return if both options expire worthless. The break even range is $113.84 to 121.16 or a drop of 4.33 per cent to a rise of 1.82 per cent.