3 March Madness Option Trades

Basketball HoopHappy Thursday! It’s time for March Madness, otherwise know as the NCAA men’s basketball tournament. Throughout corporate America, betting pools are being drawn up and bracket selections are being made. Even President Obama has made his March Madness picks, and if there’s one thing the President knows, it’s college hoops. In fact, in 2009, the president picked the University of North Carolina to win it all—and that’s exactly what happened.

Now from a business perspective, the NCAA tournament is a marketing and cash-generating machine. In fact, March Madness is the biggest money-making sporting event each year, with the exception of the Super Bowl. The money spent on advertising during the games is huge (an estimated $738 million in 2011), and the increased viewership is very good for the profile of many of America’s biggest companies.

For options players, March Madness presents an opportunity for us to take advantage of the increased exposure that certain companies enjoy this time of year. Here are three options trades that could have you hoisting a championship profit trophy.

1) CBS April 2012 32-strike call

For the past three decades, broadcast giant CBS Corp. (NYSE:CBS) has been the station capturing the bulk of the tournament’s sizable advertising revenue. Historically, the stock has done quite well in April, and it is no coincidence that this relative outperformance comes right after March Madness. Options players can take advantage of this seasonal bounce in the stock by buying the CBS April 2012 32 call.

2) KO April 2012 72.50-strike call

In 2011, iconic beverage maker Coco-Cola (NYSE: KO) spent some $26 million in advertising during the tournament. And while that amount is a mere drop in the fiscal Coke bottle for the global behemoth, its ads do place its products right in the face of b-ball fans throughout the country. Options players who want to take advantage of this seasonal fizz can do so via the KO April 2012 72.50 call.

3) GM Apr 2012 27-strike call

American auto giant General Motors (NYSE:GM) has made a big comeback since it nearly went bankrupt just a few years ago. Last year, the auto industry enjoyed its best year since the Great Recession, and along with those revved-up sales came some high-octane profits. This year, GM is poised to take advantage of a confluence of positive metrics in the space, and part of its plans to do so will be to up its profile during March Madness. Last year, the company spent nearly $58 million in advertising during the tournament, and a similar surge in exposure this year could help the shares step on the gas. Options players who want to ride a potential GM surge can do so via the GM April 2012 27.00 call.

All three of these options are slightly out-of-the-money and have just over a month until expiration. Long calls have unlimited profit potential if the underlying shares rally, and losses are capped at 100% of the premium paid (in addition to commissions). The breakeven price for these positions is calculated as the strike price plus the debit paid to enter the trade.

At the time of publication, Jim Woods held no positions in any of the stocks mentioned in this article. 

Article printed from InvestorPlace Media, https://investorplace.com/2012/03/3-march-madness-option-trades/.

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