Bearish Options Play Paying Off As Abercrombie Shares Lose Their Cool
by Option Review - May 24th, 2013 7:06 pm
Today’s tickers: ANF, XLU & XLV
ANF - Abercrombie & Fitch Co. – Shares in teen retailer, Abercrombie & Fitch Co., are getting hammered today, down 10% at $48.92 in early-afternoon trading after the company reported a wider-than-expected first-quarter loss and missed topline estimates, lowered its full year earnings forecast and said same-store sales would be down slightly for the rest of the year. A review of pre-earnings report activity in Abercrombie options yesterday indicates one trader was prepared for the pullback today. It looks like the strategist initiated a ratio put spread, picking up 500 May 31 ’13 $50 strike puts for a premium of $0.91 each, and selling 1,000 puts at the May 31 ’13 $47 strike at a premium of $0.35 apiece. The bearish trade cost a net premium of $0.21 per contract and established an effective breakeven price of $49.79, with maximum possible gains of $2.79 per contract given a 13.5% move lower (based on ANF’s closing price of $54.37 on Thursday 5/23/13) in the stock to $47.00 by expiration on the 31st of May. The $47/$50 ratio put spread is working today given the sharp selloff in the price of the underlying, and would cost roughly $1.20 per contract, or more than five times as much, to initiate as of the time of this writing.
XLU - Utilities Select Sector SPDR – At the end of April shares in the Utilities ETF were trading at the highest level since the summer of 2008, having rallied nearly 20% during the first four months of 2013 to hit $41.44 on April 30th. Several trading sessions prior to securing the $41.44 high, we noted a large trade in XLU options; the purchase of a block of 50,000 Jun $40 strike puts for a premium of $0.51 per contract. The trade was initiated within 30 minutes of the opening bell on April 25th when shares in the XLU were trading around $40.87. The slide in shares of the XLU during the month of May, including a 1.0% dip…
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Friday’s Fickle Finish – We’ll See How Durable the Markets Really Are
by phil - May 24th, 2013 8:19 am
Durable Goods at 8:30.
Other than that, we're just waiting to see what happens next. As you can see from our Big Chart, we're testing resistance lines from both above and below and today we'll get an idea of which way things are trending but, of course, we are still not ready to go bullish as the Russell STILL is not over 1,000 for two consecutive days (or one, for that matter).
That's what's been keeping us cautious and now we have a genuine concern that the Dow may actually fail it's -5% line at 15,200 – that would be a very bearish signal!
The Nikkei, of course, fell 1,000 points in a day after having run up from 9,000 to 12,500 since October, so a 28.5% pullback, while the Dow has gone from 14,500 to 15,500 since late April and we had a 300-point pullback to 15,200 before bouncing. That's 30% of the short run but the long run in the Dow has been from 12,750 in November to 15,500 on Wednesday (thanks to GS's S&P 2,100 call) and that's 2,750 points and 30% of that is also around 1,000 and we sure hope THAT doesn't happen in a day!
The Russell is up 225 since November (see Dave Fry chart), but we had a nice consolidation move in April as they retraced the 175-point move (at the time) a textbook 35 points (20%) from 950 to 915 and now we're at 1,000 and a pullback to 955 would be very healthy before heading higher. Anything less than that and we're still firmly on our bullish track
This morning we took a poke at shorting the Russell in the Futures (/TF) at 980 and they fell to 976.50 but back to 979.50 already so nothing very exciting so far. Oil got beaten up enough ($92.50) that we flipped long on it yesterday and those contracts are currently +$1,000 at $93.50 but it's gasoline we're excited about as we liked /RB long at $2.80 (our Morning Alert to Members) and they are already at $2.81, for a quick $420 per penny per contract and we are expecting a nice run as the NYMEX traders look to screw as many drivers as possible over the holiday weekend.
That's one thing you can count on in this market – the public will…
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Weekly Options Constructive On Home Depot
by Option Review - May 23rd, 2013 9:38 pm
Today’s tickers: HD, IMAX & DOV
HD - Home Depot – Shares in the home improvement retailer are trading lower on Thursday, off the lowest levels of the session but still down 1.25% at $78.69 as of 11:50 a.m. ET, amid a down day for U.S. stocks. Trading traffic in newly issued weekly options on Home Depot suggests some traders are taking advantage of the dip today and positioning for shares in the name to resume hitting record highs next week. The stock yesterday rallied as much as 3.6% to touch an all-time high of $81.56 after the company reported better-than-expected first-quarter earnings and raised its full-year earnings forecast. Traders preparing for shares in HD to potentially rebound in the near term looked to the May 31 ’13 expiry options contracts, and appear to have purchased calls and sold puts on the stock. Call buyers snapped up roughly 1,000 calls at the May 31 ’13 $77.5 strike for an average premium of $1.27 each, and around 500 lots at the $80 strike at an average premium of $0.28 apiece. These contracts make money at expiration next week as long as shares in Home Depot recover from today’s slight declines. Meanwhile, fresh interest in weekly puts appears to be largely driven by sellers of the contracts. It looks like traders sold around 900 in-the-money puts at the May 31 ’13 $80 strike in the early going for an average premium of $2.09 each. Sellers of the contracts walk away with the full amount of premium at expiration should shares in HD settle above $80.00. Several hundred contracts appear to have been sold at the May 31 ’13 $77.5 and $82.5 strikes as well.
IMAX - IMAX Corp – Put options changing hands on the entertainment technology company this morning look for shares in IMAX to potentially head lower during the next four weeks. Shares in the name are down 1.5% in early-afternoon trading to stand at $27.60 as of 12:20 p.m. in New York. The most traded contracts on IMAX…
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Thrilling Thursday – Dip at Last, Thank God Almighty Dip at Last!
by phil - May 23rd, 2013 7:48 am
Wheeeeeee – what great fun!
We finally got a move in the market that wasn't up yesterday and the thrill is back in the markets all of a sudden. Congratulations to anyone who followed our early morning tweet yesterday at 3:24 am, which was:
Futures Fun: Good Chance for Quick Gains Shorting /CL, /NKD and /TF $$ $IWM $USO $EWJ #Futures — bit.ly/YYHM2c
Those Nikkei Futures ended up dropping a cool 1,000 points for a ridiculous $5,000 per contract gain and THIS is why we love the futures as you can usually stop out with a fairly small loss but, once in a while, you can get some spectacular gains.
We're now looking to go long on a possible bounce over the 14,700 line (now 14,665) in the Futures as the 7% panic may be just a bit overdone. Europe was down about 2.5% earlier this morning but seems to be holding that line and the FTSE is "only" down 1.7% – all because the Fed Governors weren't 100% doveish (only about 80% doveish). What a silly, silly market this is.
As you can see from our Big Chart – it's much ado about nothing, so far as this long-needed correction hasn't even violated our 2.5% or 5% lines. We overshot and now we correct – it's the way of the World, my friends. In fact, last Friday, we made our final adjustments to the $25,000 Portfolio and we expected this drop, as you can see from these adjustments to our main hedges:
- QQQ – May $70s now $3.90 can roll straight across to June $70s at $4.15 for .25 credit. We're $5 in the money on the longs and happy to add a $70/75 bull call spread if we have to roll callers up further but, for now, we're locking in profits on the $67/70 spread which is $5 in the money yet priced at $1.50 so – if we end up paying the callers $4 that's -1.65 against the gain of $4 on the longs – we can live with that but, at the moment, the position shows a $1.45 loss on the short calls vs a .51 gain on the longs. This is why you need to understand how the options work over time and not be ruled by current
…
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Sector Detector: Fed tries to refill bulls’ fuel tank as cyclicals lead
by Sabrient - May 23rd, 2013 1:52 am
Courtesy of Sabrient Systems and Gradient Analytics
The market went through some gyrations on Wednesday in reaction to Fed Chairman Bernanke’s testimony before the Joint Economic Committee. He first defended continued quant easing by warning, “A premature tightening of monetary policy could lead interest rates to rise temporarily but also would carry a substantial risk of slowing or ending the economic recovery.” Stocks dutifully rallied and all major indexes hit new intraday highs.
But alas, consensus is apparently not a given over the longer term. The minutes hinted that a tapering off could start sooner, “A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth.” So … the indexes turned tail and sold off by the close to give back the last few days’ gains. Still, the Fed is clearly prepared to keep the liquidity flowing as long as necessary, which should be giving the market sufficient confidence to continue its uptrend.
Furthermore, with Japan aggressively devaluing the yen, the ECB is likely to take more aggressive action with the euro. As Scott Minerd of Guggenheim Partners has opined in his weekly commentary, it would serve the primary purpose of propping up the EU peripheral economies while avoiding criticism from the core economies of Germany and France by helping them to boost exports.
With this global currency war approaching full participation, the major economies of the world are seeking to devalue themselves into prosperity. So far, it seems like an effective plan. In fact, Goldman Sachs (GS) revised its year-end target for the S&P 500 from 1,575 to 1,750 while anticipating increasing dividends from the S&P 500.
That will require greater leadership from the cyclicals, and indeed sector rotation (or broadening) continues. Over the past month, the new sector leaders have been Technology, Energy, Materials, Financial, and Industrial, which gives further evidence of the broadening we are seeing from new capital entering the market.
We already knew that the outperformance of defensive sectors like Healthcare, Consumer Staples and Utilities, primarily due to investor comfort with their inelasticity of product demand and dividend yields, wouldn’t be sufficient to power the markets forever, particularly as their valuations surged. No, a continuation of the rally will have to be led…
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PragCap’s Strategy Cycle Chart
by ilene - May 22nd, 2013 8:39 pm
The best time for the buy-and-hold strategy is when people are swearing off it. The worst time is when it's back in vogue….
PragCap’s Strategy Cycle Chart
Courtesy of Joshua M Brown, The Reformed Broker
I love this so much I had to nick it from my friend Cullen's site. You're not completely immune to this kind of behavior nor am I, keep it real.
The key is to recognize this happening and to be bigger than it, above it:
- In 2009 buy and hold died.
- Almost everyone became a trader at the trough of the crisis.
- Then it was “buy the dips, sell the rips”.
- Then it was all about high quality dividend names.
- Then it was a “stock pickers market”.
- Now buy and hold is all you hear about from anyone.
- “Stocks for the long run!”
- Then long only via defensive names will be the only game in town.
- Then buy and hold will die.
- Then short strategies dominate.
- Then tactical approaches win, hedge funds are your only savior, etc, etc.
Source:
The Portfolio Manager Strategy Cycle (PragCap)
Cullen: "Although the financial crisis might feel like it was a lifetime ago, the cycle of various strategic approaches to this market is fresh on my mind. We all know the cycle of emotions. You tend to feel euphoric at the peak, panicked at the trough and generally confused all the way inbetween. Don’t worry – portfolio managers are no better. They just express their emotions in varying degrees of active portfolio management with fancier sounding ways to express the rollercoaster ride they’re on."
via PragCap’s Strategy Cycle Chart | The Reformed Broker.
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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