Thursday Wrap-Up
by Phil - May 31st, 2007 11:46 pm
![[Downshifting]](http://online.wsj.com/public/resources/images/NA-AN030_ECONOM_20070531210429.gif)
There’s the consolidation we’ve been looking for.
Nothing to worry about but nothing to get excited about either. We held our critical levels and survived a disappointing GDP report at just .6%, our lowest level of growth since Q4 ’02. Rising imports and a decline in business inventories each shaved a percentage point off first-quarter economic growth. But continued strength in consumer spending carried the economy forward. Consumer spending, which accounts for more than two-thirds of GDP, jumped 4.4% after gaining 4.2% in the fourth quarter.
The main culprits for the poor report were the bloated trade deficit and businesses cutting investment in supplies of the goods they hold in inventories. “We are still keeping our head above water — barely,” said economist Ken Mayland of ClearView Economics.
This data seemed to take the Fed further off the table but at the same time the Chicago PMI came in a little stronger than expected and in the confusion the yield on the 10-year note snuck up to 4.89%, the highest level since August which sounds bad until we remember that August was pretty much the beginning of this 1,000-point rally.
It’s OK though, we just need to embrace the fact that America has slipped from first to worst on this planet and accept our place as the ball and chain that is dragging down the global economy. India is expanding at a comfortable 9.4% clip while the Philippines are growing at 6.9% and Malaysia clocked in with 5.3% growth among reporting countries this week.
We’ve been talking about the housing crisis, the one the Fed thinks will be "contained" all week but let’s remember that some of the really bad housing data we’ve seen lately – the rising inventories, the drop in home prices, the explosion of delinquencies – have been in data reports that have come to light since the last Fed meeting. I find it impossible to believe the Fed really thinks housing is not a huge problem, the fact of the matter is that they need ANY excuse not to cut rates, because the thing is – they can’t. Our rising deficit (we just approved another $100Bn we don’t have for the war that was "off budget") and declining dollar are simply making our Treasury notes downright unappealing and it really would be the straw that breaks the camel’s back if all that "non-core" inflation were to slip into the core.
The problem with having…
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DiggThursday Virtual Portfolio Moves
by Phil - May 31st, 2007 11:27 pm
GOOG – don’t panic, if you intend to roll then you can always roll, the postion you will roll to will go up more than the one you intend on buying out so there is no hurry. If the Nas doesn’t hold 2,600 then I doubt Google will hold $500 but watch Apple at $120 too.
DNDN – what a nightmare for complacent shorts!
DNDN out of $7.50s at $3, might be too early but WOO-HOO!
I will enter DNDN July $10s if they hold $9 and sell the June 10s on a bounce so 10 for the $10KP but only if it holds $9 and starts moving back up. I placed the spread order at .20 to see if I get a bite for now, if that fills I may still buy 10 more on mo.
RDS.A July $75 puts at $1.97 are the only new ones I’m buying. The OIH July $165 puts for $4.35 are the mo play and otherwise it’s a DD on my existing positions. I have no positive plays lined up but I suppose the XOM July $85s at $2 should move well with the stock.
Market does not look good to me though..
OK so oil inventories were not that bullish and I’m looking at this as a head fake but it’s a big one. Let VLO show us the way and don’t try to outthink it, if they break $75.50 then there will be no stopping the push but I’m accumulating $75 puts at $1.40 with a .20 tstop after my first DD at $1.10 (basis $1.25, stop at .90 for a pretty nasty loss if I blow it). XXX for crazy people!…
Thrilling Thursday Morning
by Phil - May 31st, 2007 9:26 am
Another exciting day in the markets!
We have lots of data including the GDP and Jobless Claims at 8:30, the Chicago PMI at 9:45 followed by Construction Spending and oil inventories at 10:30. I’d say by 11 am we should have a pretty good indication of which way we’re going from here.
Asia didn’t need to wait for our data, the Hang Seng shot up 340 points while the Nikkei rose 287 points but South Korea is the month’s hottest market, breaking the 1,700 mark today, up 10% for the very merry month of May. Shanghai A shares rose 1.4% after taking a 9% plunge the day before and my regular readers will take note that this is less than a 20% bounce, leaving us unimpressed. The B shares dropped another half a point but made a strong recovery from an 8.5% drop at the open – possibly a bottom test over there. From our list of "Duh" stocks (stocks you can just buy based on the name): China Petroleum & Chemical and Shanghai Pudong Development Bank rose the daily 10% limit. Industrial & Commercial Bank of China gained 3%, while Aluminum Corp. of China (huge Duh) jumped 7.4%.
The World Bank, in an incredible (as in NOT credible) case of fortunate timing, picked this morning to raise its forecast for China’s growth this year to 10.4%, from 9.6%, down slightly from last year’s 11.1% rate. Moody’s said it may raise China’s credit rating (now A2), which would be a big stamp of approval for the government. The World Bank expects China’s exports to rise 20.6% this year. It also raised its projection for China’s current-account surplus to $340 billion, or 10.8% of GDP. White House economists have assured the President that running a country with a surplus is a fairy tale, much like evolution, and should not be taken seriously.
The World Bank said the current-account surplus continues to boost China’s foreign-exchange reserves, and it raised its end-2007 foreign-exchange reserves forecast to $1.389 trillion, from $1.066 trillion at the end of last year. In February, its forecast was $1.334 trillion. The bank said growth in M2, China’s broad gauge of money supply, will likely be 17% this year, compared with its previous forecast of 16%. While saying that inflationary pressure isn’t an imminent problem, the bank raised its forecast for consumer prices to a 3.2% increase this year from the…
What, Me Worry Wednesday?
by Phil - May 30th, 2007 11:52 pm
I wasn’t worried, were you?
Well, OK, maybe a little worried but we quickly got over it. It took us all the way until 9:44 to dump out of our QQQQ $47 puts and another 10 minutes to give up on the DIA $136 puts. We flipped the FXI calls from sold to owned right out of the box as planned and we hoped for a Daily Double but we had to settle for just 57% on the COH July $52.50s and 71% on the CHL June $45s, which were a very nice pick for the free site this morning..
Needless to say we had a very fun morning and Optiondragon called it at 1:38 when he said we were having a pullback into the Fed minutes. We were all a little cautious ahead into the release but Dragon once again nailed it 4 minutes ahead of the Fed by predicting "The Fed will say the same that ” inflation is the main worry for the committee and that the economy looks strong.”" and so it was written, so it was done and we were off to the races again just a few minutes later!
As much as this followed my game plan for the day I have to tell you I was stunned by the power of the response to minutes which revealed pretty much nothing new about the economy or the Fed’s thinking. I spent too much time reading the minutes and not enough trading and didn’t follow my own advice to buy DIA calls, which I had tee’d up earlier in the morning. Luckily, ZMan and Happy Trading were there to carry the ball with a slew of excellent picks!
ZMan had NE June $90s, NFX June $45s and HK June $12.50s,all huge winners on the day as were EOG, CHK, GRP and PQ. Happy Trading predicted the moves in the Nasdaq, the S&P and the BTK early this morning but his GRMN July $65 calls this morning made everyone money as that stock promptly took off after giving us an easy entry. GOOG was another big winner at Wang’s World with the July $500s yielding a quick 28% but it was AAPL that gave us all a reason to celebrate as we wished Apple a very happy $100 Billion (market cap) on this amazing move that Happy predicted back on April 1st with this chart:
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Wednesday Virtual Portfolio Moves
by Phil - May 30th, 2007 7:57 pm
ICE $140 puts at $2.75 as a mo with a .50 Tstop. XXX
Nuts – post broke out of QQQQ $47 puts at .97, will roll to july if it heads down. XXX
I was saying that RIMM was holding up, AAPL is a gift after the MER upgrade, GOOG looks strong, MRVL is also a gift as it comes down to $15.60… markets just don’t look that bad yet.
Watching 2,550 on Nas (and grabbing QQQQ July $46 puts, now .88) and 1,510 on the S&P and a lack of 13,500 on the Dow as big danger signs (1 of 3 so far). Add gold $660 to the bench and $480 as a level the SOX must retake and 2,900 on the TRANQ for good measure.
Happy to get $2 for my DIA $136 puts, moving to July $135 puts at $2.40 XXX
NOVC huge deal not optionalble but a mo buy at $14!
Oops! Went up $1.20 as I posted it… LOL
COH – nice one, worth a chance on the July $52.50s for $1.15 XXX
FWLT – watch the $100 puts if you sold them as this is a chance to buy them back at yesterday’s lows if they fail at $103 again. Double top means we can wait and sell the $95 puts later but if they break up we’ll be really glad we sold the $100s. XXX
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Worrisome Wednesday
by Phil - May 30th, 2007 9:20 am
Shanghai Surprise?
Hardly. We’ve been saying for weeks that there are forces aligned trying to take down the China markets and yesterday the Chinese government tripled the "Stamp Tax" on stocks in a move to "cool off" the market. While much is being made of this, it’s still only a .3% tax ($3 per $1,000) on each end of the transaction, so I think this may be much ado about nothing. Steven Sun, an equity strategist at HSBC in Hong Kong, said in a note that the government is "clearly worried about the A-share bubble" but isn’t aiming to substantially hurt stock prices. "Hence the grand ‘strategy’ is to gradually deflate the bubble but not to prick the bubble," he said.
Notice they are worried about "the A-share bubble," not the B-shares they sell to us foreign devils. As I’ve been saying for weeks now, the growing disparity between the A and B shares is not sustainable. B-shares continued their decline, down another 9% yesterday to 302 after peaking out at 371 on the 21st, the same day I warned:
"Even Hong Kong tycoon Li Ka-shing, one of the richest people in Asia, expressed concerns this week over the stock gains, saying he is worried about high price-to-earnings ratios that have created a "bubble." What is troubling is that most of these investors are new to trading stocks, yet they are going after lower-quality shares without considering the downside risk. "In the case of a severe correction, this could lead to social instability," warned Credit Suisse economist Dong Tao, in a report to the investment firm’s clients this week."
We put our money where our mouth was last week, by pulling our long-held FXI leaps at what turned out to be a nice top, leaving just the covered play of the Jan $120s (basis $4.90) against the June $110s, which we sold for $3.70 and should get a nice payoff today. That being said, I may be flipping to a buy if Europe holds up as I think this sell-off is a bit of an overreaction to a tax that is less than a broker’s fee to small players but let’s see how our own markets hold up and, much more importantly, how they react to the 2pm FOMC minutes.
China’s trade surplus is projected to almost double this year, to $300Bn and there is no denying the underlying…
Tuesday Tear-Down
by Phil - May 29th, 2007 11:09 pm
Well that was disappointing!
We had a good start but declining energy and commodity stocks dragged down the markets. The Dow fell back from 13,550 despite a good run in the transports, who were thrilled with the $2 drop in oil (and 5% drop in gasoline).
Kudos to Rockaintdeadyet for identifying today’s daily double as he caught the change in China’s stock trading stamp duty at 1:26, leading me to call for the FXI $109 puts at $2.55, which haven’t doubled yet but will tomorrow! Another member who was on the ball yesterday was Msquare who’s prescient 12:04 comment was: "Something doesn’t ‘feel right’ about today’s rally – May be one of those afternoon sell off days? e.g. Many stocks I track (non-Energy) like EWZ, Indian ETFs etc. started day very strong but seem to be fading now…" Great job guys!
That pretty much summed up the day, we saw little to buy and no reason to lift our protections although we did load up on some more oil puts as energy stocks made a silly run in the morning but, on the whole, it was a very mediocre day:
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Day’s |
Must |
Comfort |
Break |
Next |
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Index |
Current |
Move |
Hold |
Zone |
Out |
Goal |
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13,521 |
14 |
12,468 |
12,600 |
13,000 |
13,500 |
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Tuesday Virtual Portfolio Moves
by Phil - May 29th, 2007 6:07 pm
GENZ – I still have some $67.50s left but I sure wasn’t expecting to get my nickel back at this point.
FWLT $10KP- in 3 at $8.20 on the Jan $95 puts, sold 3 June $100 puts for $2.25, will roll to the $95 puts if it backs off from here.
DIS DISturbing but I still believe.
FWLT – might have been too early selling June puts but should be ok if the market stays strong.
AMHY is no trade because the premiums aren’t coming in. Unless I see a sale for $2 or more on the July $7.50s I have no reason to own this stock at $8.23 XXX
DIS – made offer of .40 on 20 July $37.50s for the $10KP XXX Intent is to sell half at .55 or .60, possible DD if it drops but that would have to be a nasty drop I think.
FIZ – offering to sell 4 July $15s at $2 in $10KP XXX
GOOG – $490 was my expected run-up this morning so don’t get too excited. If the market doesn’t hold up then Google won’t either so we execute the second leg of the trade up here as we have no issue rolling to the upside but big problems if it drops out on us. XXX
So much for shorting AMZN!
MU giving us a good entry.
FWLT – Good play MJ! I’m deciding now that I am stuck with the $100 puts. Most likely I will just wait and roll to July $95 puts if it keeps going down (might bounce off…
Take Off Tuesday???
by Phil - May 29th, 2007 9:15 am
Wow – we made it through the weekend!
Yet another day where I wake up and almost regret my insurance but then I realize I don’t have that attitude about my life insurance not cashing in every day, so I shouldn’t cry over my virtual portfolio insurance not being triggered either.
While I’m not surprised to wake up every day (I’m not that old yet!), I am surprised to wake up to find the markets up 3 out of 4 days since mid-March. We’ve had 14 down days since March 14th vs. 38 up days and 4 of those down days came last week otherwise it would be a 4:1 trend. As I said last week, I expect consolidation into the June 15th expiration at this point so we will check in on my predicted range between 13,400 and 13,600.
What we didn’t have much of last week was market data but we will be making that up in spades this week as the Briefing.com calendar looks very active:
| Date | ET | Release | For | Actual | Briefing.com | Consensus | Prior |
|---|---|---|---|---|---|---|---|
| May 29 | 10:00 | Consumer Confidence | May | 105.0 | 104.5 | 104.0 | |
| May 30 | 10:30 | Crude Inventories | 05/25 | NA | NA | 1969K | |
| May 30 | 14:00 | FOMC Minutes | May 9 | ||||
| May 31 | 08:30 | GDP-Prel. | Q1 | 0.7% | 0.7% | 1.3% | |
| May 31 | 08:30 | Chain Deflator-Prel. | Q1 | 4.0% | 4.0% | 4.0% | |
| May 31 | 08:30 | Initial Claims | 05/26 | 315K | NA | 311K | |
| May 31 | 09:45 | Chicago PMI | May | 54.5 | 54.3 | 52.9 | |
| May 31 | 10:00 | Construction Spending | Apr | -0.2% | 0.0% | 0.2% | |
| May 31 | 10:00 | Help-Wanted Index | Apr | 30 | 30 | ||
| Jun 01 | 08:30 | Nonfarm Payrolls | May | 130K | 140K | 88K | |
| Jun 01 | 08:30 | Unemployment Rate | May | 4.5% | 4.5% | 4.5% | |
| Jun 01 | 08:30 | Hourly Earnings | May | 0.4% | 0.3% | 0.2% | |
| Jun 01 | 08:30 | Average Workweek | May | 33.8 | 33.8 | 33.8 | |
| Jun 01 | 08:30 | Personal Income | Apr | 0.5% | 0.4% | 0.7% | |
| Jun 01 | 08:30 | Personal Spending | Apr | 0.3% | 0.4% | 0.3% | |
| Jun 01 | 08:30 | Core PCE Inflation | Apr | 0.2% | 0.2% | 0.0% |
…
Calendar Strangle – Google Play
by OptionSage - May 28th, 2007 11:40 am
OptionSage submits:
When I travel around the country to teach options trading, I have the opportunity to chat with all sorts of students, from conservative investors to the trading gunslingers! When I introduce strategies that involve stock ownership, I am often asked: "Is there a way to use options in such a way that it effectively replaces stock ownership?" Indeed there is – though there are some ‘gotchas’ to be aware of!
Stocks vs. Long Calls
As a novice options trader, one of the easiest landmines to fall into is to believe that long calls move in the same manner as stocks i.e. as a stock rises $1 so too does a long call increase in value by a $1. In fact, most long call options purchased do NOT move dollar for dollar as a stock rises.
Most options purchased in fact tend to be at-the-money (stock price equal to strike price) or out-of-the-money (stock price < strike price for call options). As a stock moves up $1, a long call at-the-money might initially increase in value by $0.50 (perhaps more if it is further out in time). Another feature to be aware of is that options at-the-money tend to have higher extrinsic value than options in-the-money or out-of-the-money. This becomes a really important factor when considering the similarities and disparities between stocks and options.
For example, if you had a stock and sold call options at-the-money you would still be profitable if the stock gapped up unexpectedly and your short calls were assigned – you always get to keep short call premium upon assignment. However, if instead you had a long call (longer term, say 6 months) covering your shorter term short call as part of a calendar trade, the massive rise in the stock could actually cause the trade to appear as a loss initially.
The reason for this is that the purchase of the long call involves the purchase of comparably more extrinsic value than is received through the sale of the short call. As the stock gaps up, both options are deep in-the-money (and most of the value of each option is intrinsic value). Since each…
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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...
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