The $700 Club: gPhone talk sets Google calls, share price on track for new highs
by Option Review - October 31st, 2007 8:17 am
Today’s tickers: IR, EWM, SWHC, DO, VIX, GOOG, LIZ, FMCN, ANR
IR – Options in industrial truck maker Ingersoll Rand are trading at more than 12 times the average volume, according to our “Hot by Options Volume” scanner. Shares in the company lost 3.7% today to $50.01, one week after raising its earnings guidance for the year as a result of the July divestiture of its Bobcat construction equipment unit to Doosan Infracore Inc. Today’s option volume looks to have been tied up in strangle selling in the December contract at strikes 50 and 52.50, a play wagering on a decline in volatility for Ingersoll Rand shares heading into the close of the year. While the share price has remained fairly reliably above $50 for most of October, the upper strike in play in this strangle is still 6% below its 52-week high, making it the bias of the trade modestly, but not overly optimistic, in Ingersoll Rand’s performance ultimo 2007.
EWM – For a second consecutive session today, options in the iShares MSCI Malaysia Index ETF have been tracked by our “Hot by Options Volume” scanner, with contracts trading at more than 50 times the average frequency. The ETF’s underlying share price mimicked the Kuala Lumpur composite’s performance earlier today, closing flat-to-lower on the session at $12.86 – still within 13 cents of its 52-week high, and it looks like option traders are positioning for the break into record territory to extend into next spring. This bullish view was expressed through an 8,000-lot risk reversal trade at the April 13 line, where a trader sold puts and bought calls in anticipation of added upside.
SWHC – Smith & Wesson, the holding company behind the fabled handgun maker, cocked our “Hot by Options Volume” scanner with a 20-fold increase in active option volume. The move followed a near-40% gutting in Smith & Wesson’s share price to $12.15 as the company cut its earnings guidance for 2008 on higher marketing costs and a curtailed fall hunting season. Most liquidity was found in the December 17.50 calls, which traded heavily on sharply depressed premiums. A writer of this call one week ago would have opened the transaction with a credit of $4.20 – buying the calls back today costs just a quarter. The hunt has indeed been bloody this autumn in Smith & Wesson shares, which have nearly halved in value…
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DiggTuesday Tear-Down
by Phil - October 30th, 2007 11:31 pm
I’m not going to do the normal wrap-up as it’s pre Fed so nothing matters.
Instead we’re going to do a few virtual portfolio posts with comments. We had a really good couple of days doing momentum plays and rolling positions so I did a weekend’s worth of work last night so members can have a look at where we stand on our positions.
Quick market comments are WYNN came in good but not good enough for expectations. CMG also could not match the growth in share value. DELL looks good the dollar is still dead and, although we are mainly covered, we need to keep stops on our callers ahead of tomorrows rally and get ready to do the same to our putters if they get knocked out of the box.
Consumer confidence was terrible but terrible is good as it increases the liklihood the Fed will ease (which is actually bad, as in stupid, but for the markets – we’ll call it good). Oil crashed yesterday but bounced off $90 and should hold it into inventories. We took our profits and ran on our oil puts, ready to reload into any silly rally today.
The S&P/Case-Shiller home price index showed a 4.4% decline in home prices – AND THEY’RE STILL NOT SELLING! The Dow is up from 13,500 last Wednesday to 13,800 today (after touching 13,900 yesterday) and the S&P is up from 1,490 to 1,530. If we hold these levels we are poised for a very nice rally, deserved or not and our strategy is to take off our covers and roll our puts up to keep a tight rein on the market. Hopefully we can establish a nice bearish position at a higher level (14,200 was the big top so far) but let’s not try to guess it!
Energy stocks dropped 3%, accounting for most of the market’s overall losses but the financials were no help. Google had an amazing day, touching $700 and MSFT kept ramblin’ on but that was no reason not to cover them.
Our MER play never needed a cover as they went down all day and never retraced past our stops and we had amazing luck with our DRYS and BIDU puts as well as, of course our Focus Puts on XOM, WYNN and LVS, members were doubling up all over the place – that’s the kind of day I love!
Tuesday Virtual Portfolio Moves
by Phil - October 30th, 2007 7:54 pm
October 30th, 2007 at 9:44 am | Permalink edit
TSO – very dicey! We need to take our naked puts off the table this morning and reposition later if they break $60.50 because we reached our primary goal of getting even and there’s no way we want to blow that! I’m not sure what play will be appropriate and earnings aren’t until after inventories tomorrow so we could go back to $65 or down to $55 between now and then.
YHOO – event day is Nov 5th so I’m scaling into the position (Apr $32.50) and will roll down if my $30 caller (1/2) gets crushed.
October 30th, 2007 at 9:52 am | Permalink edit
GOOG blasting off, can they take the markets up with them or is this another one of those days when they are going to focus on pumping the horsemen in order to incite a rally?
BA flying! AAPL looking good, let’s watch 1,540, 13,850, 2,800 and SOX 460 as break outs. 3 of 4 and we go bullish until they turn. XXX
TSO flirting with our danger zone, watch VLO at $71 to confirm that it’s time to cover. XXX
October 30th, 2007 at 10:02 am | Permalink edit
Bought GS Dec $240s as a mo play $18. XXX
Consumer confidence 95.6, NOT 99.6 expected!!! Down from 99.5 in Sept.
October 30th, 2007 at 10:05 am | Permalink edit
GOOG going for $690! If you can afford it, this is the best time to roll up your callers that have less than $5 premiums to $680 calls that have $13 in premiums at $20 XXX
October 30th, 2007 at 10:11 am | Permalink edit
BA – yes, I think selling the $100s is a good move, you can scale into it whenever you think it looks weak. Your worst day should be having to give your $100 caller his money back with BA over $102!
October 30th, 2007 at 10:15 am | Permalink edit
Oops, downside targes look more important: 13,800 (obviously), 2,800 and 1,530 would be bad along with SOX 455 and RUT 815.
Oil sector taking a dive. Woo hoo on XOM puts and SU puts! GOOG plowing through 690 but GS going nowhere so I’m keeping a tight stop on that one.
I think we’ll hold the downside otherwise GOOG wouldn’t be doing this…
October 30th, 2007 at 10:25 am | Permalink…
Two Step Tuesday Morning
by Phil - October 30th, 2007 9:03 am
I am so happy we loaded up on TSO and XOM puts!
We’re not out of the woods yet but I’m very glad that we pressed, rather than panicked out of our positions on Friday’s ridiculous run-up based on the Kirkoren news. On Friday morning, as I was advocating shorting the hell out of TSO at $65 I said: "I’ll tell you what bothers me about TSO – why would he announce he wants to buy 28M shares at $64 with the stock at $55. That is irrational behavior, he’s not buying the whole company, just 16% of it (and now he’s paying for 17.3% worth). The scam is that Tracinda already owns 5.5M shares and now all he has to do is say they couldn’t come to an agreement, dump his 5.5M shares ahead of earnings and he gets away clean while everyone else eats the stock. That’s my theory and I’m sticking to it! Earnings are on the 1st."
This was a follow-up to the $10KP and $25KP virtual portfolio review from the 19th, where my comment on TSO was: "TSO (11/1) – I will drink the gasoline if these guys have a good quarter!" TSO is a west coast refiner and crack spreads on the west coast are down 60% from last year – I don’t think this makes for a complicated thesis… That’s the difference between being a fundamentals trader and a momentum trader, fundamentals traders can make huge returns, if they can stick to their guns when the momentum swings against them!
Things could not have gone better yesterday as we were able to get the YHOO Apr $32.50s we wanted for just $4 (we hedged then with a 1/2 sale on the Nov $30s at $2.60) and our new Focus Put candidates, XOM and WYNN, both gave us fantastic entry positions for our puts. This is a good pair trade as oil is at the point where it will break the economy so either oil pulls back or frivolous spending (like travel and leisure stock WYNN) will suffer.
Asia suffered a very mild pullback this morning with the Hang Seng gaining just 51 points (anything less than a 200-point gain is considered a bad day for them) and the Nikkei went down all day long, finishing at the low of the day but down just 47 points overall. PTR got Yahoo-like sell on the news…
DIY traders seek Home Depot calls on Buffett chatter
by Option Review - October 30th, 2007 8:06 am
Today’s tickers: HD, RGNC, HUM, VIX, MER, CFC, YHOO, UA, AMT
HD – Rumors are circulating this afternoon that Warren Buffett’s Berkshire Hathaway company is keen on a stake in DIY empire Home Depot. The Buffett chatter appeared to be the only driver behind a rush to buy calls in the November contract at the 35 strike. These were bought heavily today at premiums up 150% on the session. Of note here is the oddity that the Buffett rumors, if true, failed to make an appreciable dent in Home Depot’s share price, which closed flat this afternoon at $31.25, having been tamped down throughout much of the month of October since last trading at $35 in late September. Is the Buffett talk all blether?
RGNC – Shares in Regency Energy Partners, the midstream natural gas processor owned by General Electric, gained 3.75% today to $32.09. The gain followed news on Friday of the imminent retirement of CEO Jim Hunt, accompanied by a cut in year-end profit guidance. Fresh short strangle positioning in the December contract exceeded prior open interest in the ticker, sending options volume to 300 times the daily average. The position, which cost $0.75 to enter on today’s deflated premiums, is indicative of a trader that, despite the outlook for declining profits and the hunt for a Hunt successor, is looking for Regency shares to remain bound within the $30-35 price range, or within 10% of the standing 52-week high, into December.
HUM – Shares in managed health care provider Humana gave back early gains posted after it reported a near doubling in Q3 profits from a year ago, thanks in large measure to income from government-sponsored programs. Late last week, Humana shares look to have suffered from a bitof “guilt by association” after an FBI raid on the Florida offices of its sector peer Wellcare Group. Today its shares closed 2.3% lower today to $73.81. Calls at the November 80 strike traded at more than twice the open interest today, primarily selling to the bid. Given that the calls are significantly out-of-the-money, we venture to suggest that this may be covered call selling against stocks already owned. Elsewhere traders were eager to buy the November 60 puts for 0.45 apiece.
VIX – With leading U.S. indexes trading flat-to-higher this afternoon, we were surprised to see a pronounced 1.6% jump in the volatility index, which tends…
North Face of Everest or Hang Seng?
by OptionSage - October 30th, 2007 3:57 am
Seeing the Hang Seng up again intra-day I thought I would have a little fun comparing the North Face of Everest to the Hang Seng! Remarkably close correlation all the way to Everest’s summit! As the air thins let’s see who brought their oxygen masks to keep climbing?! Listed below is a potential bear call candidate that offers almost a 15% return on risk if the FXI stays flat, falls or fails to rise more than 15% in the next 52 days. Dangerous or Courageous?
A Late Start for Retail?
by Stock and Option Trades - October 29th, 2007 11:45 pm
It is just 8 Weeks to December 25th! From ‘star-performers’ such as Abercrombie and Fitch (ANF) to ‘star-wannabes’ such as Hot Topic (HOTT), October has been simply awful for retail stocks. Does this mean we should avoid the retail sector completely?
Certainly not! But (Big But!) we should be careful about our choice of company. One interesting trading candidate is Abercrombie and Fitch. Abercrombie and Fitch is a star in the retail sector! ANF has historically been a winning 4th quarter play and, unlike so many other retailers, trades well above its 52 week low.
From a technical perspective, ANF bounced nicely off the $75 level and is seeking to reclaim its 20-day EMA. This is an important test because its 20-day EMA typically acts as support and resistance. Aggressive traders should keep a close eye on the stock price relative to this line to signal a potential bullish play. In conjunction with the EMA, the RSI is on the verge of crossing the 50 level, which is a further bullish sign. A potential strategy that may mitigate some of the risk is a May $80.00/$85.00 Bull Call and that would facilitate a lower risk trade than a more aggressive long call. The risk in a bull call spread is limited to the debit spent while the maximum profit potential is defined as the difference in strike prices ($5) – any debit spent.
Moving on to “Electronics King” Best Buy (BBY)… BBY bounced off its 50-day EMA last week. The stock seems destined to test the $50 level, which was resistance just 3 weeks ago and indeed in January and February of this year. A break above $50 resistance would be a strong bullish indicator. A similar strategy such as a March $50.00/$52.50 Bull Call could profit over time yet mitigates risk in the uncertain interim. The lengthy timeframe offers the trader opportunities to modify the trade in the event that the stock market takes a tumble at some stage. This holiday season should be driven by electronics and BBY is the Best at it!
Another interesting apparel stock is American Eagle Outfitters (AEO), which has a lower price point than ANF. AEO stores
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Monday Mop-Up
by Phil - October 29th, 2007 11:40 pm
Ho hum!
Yadda yadda Fed, yadda yadda the dollar, yadda yadda oil.
Nothing matters until tomorrow at 2:15, when we get the real Fed move and the statement and the reaction to the statement. Meanwhile, we’re getting our perfunctory rally but I’m not feeling the giddy heart we had to it before the last Fed meeting when the band was playing "Happy Days Are Here Again" and Cramer was foaming at the mouth for a cut which was very interesting because he points to Bear Stearns as the warning sign the Fed must act on but then tells us NOT to worry about BSC’s problems spilling over – can you really get away with manipulating both the regulators AND your audience with opposite messages in the same week? Apparently you can!
Is Cramer right or is he wrong about the economy, either way he’ll be able to show you the clip where he called it! I’m not here to bash Cramer, he just happens to be recognizable but this is the kind of BS we are getting from the MSM every single day and it’s no wonder our markets fly up and down 100 points a day like it’s nothing, the signals are confusing and dangerous and we’ve been forced to become momentum traders in order to keep our virtual portfolios moving forward. The only thing buy and hold gets you in this market is an ulcer!
With fundamentals out the window and a market driven by fear and greed all we can do is fasten our seatbelts and keep an eye on the road, trying to anticipate the curves ahead.
As we expected, the dollar continued to move down to our target of 76 that I set way back in August. It’s at this point that we anticipate at least some effort to prop up the dollar before we’ll be begging the Fed to raise rates before our savings accounts get wiped out by devaluation (and anyone who’s traveled to Europe this summer knows exactly what this would mean in our daily lives). I was about to post an article about prices in Europe this summer when I came across this one from 1972 – read this and think about the prices, like the room at the Ritz going from $54 to $65, and think about the pricing now ($700) and then tell me…
Monday Virtual Portfolio Moves
by Phil - October 29th, 2007 9:53 pm
October 29th, 2007 at 9:39 am | Permalink edit
YHOO – I just commented that there’s some sell the news action this morning but I’m not sure how long it will last. I’m glad to be covered and we’ll try to take 1/2 off when the selling abates.
As someone mentioned the last $10KP went down 40% at some point so I do get very uncomfortable having people just follow whatever trade is in there as very few people can gut out a loss like that.
Selling, puts – answered in last post but there’s no protection in it for you so it’s just gambling.
Wow, Yahoo with a huge sell-off, this is great!
October 29th, 2007 at 9:43 am | Permalink edit
Oh this is great assuming people paid attention to my weekend comments and cashed the naked Yahoo positions this morning! For those of you with covers, this looks like it might be a nice bottom but I’d rather see it test $33 before buying in (Jan $35s, now $2.56 are my favorite new entry). XXX
October 29th, 2007 at 10:02 am | Permalink edit
LVS – taking out putters here, will wait a bit to resell. Rolling up Jan $135 puts to $145 puts for $4 XXX also, rolling Dec $125 calls to 2x Dec $140s (+$3.50) and rolling Nov $120 caller to 2x $135s (-$2.50) XXX in $25KP and $10KP
October 29th, 2007 at 10:04 am | Permalink edit
Don’t forget if you are stuck with the YHOO Nov $30 caller, now is a great time to roll him to the Dec $32.50s for .40 or less (assuming you have April $30s).
October 29th, 2007 at 10:18 am | Permalink edit
AAPL – I wouldn’t toss out the insurance just yet unless you want to go to Apr $175s at $29.50 and roll the caller to the Dec 180s for $14, that’s a net cost of about $4 but well worth it to buy 2 months of space and put your caller into a higher premium.
SLB still doggin it.
YHOO – as above, I can’t wait to buy more but I’m also very patient.
WFR – a little complicated so we should discuss at night. To me it was very clear that those calls would go way past $6 so I was thrilled to take them out at $4, I do realize that seems contrary…
Monday Market Madness
by Phil - October 29th, 2007 9:04 am
Up up an away!
Super Market is back in action. Faster than an accellerating debt crisis, more powerful than the Wall Street bears, able to leap rational skepticism in a single bound.
Unfortunately, that S on the maket’s chest stands for the dollar, which is down 1% today in foreign trading as a .25 Fed cut seems to be a sure thing and many bets are being placed on .50 OR MORE as the United States seeks to become this decade’s Brazil, where the market looked like a really great investment too, right up until it collapsed.
But there’s no sense in dwelling on that now or on the $93 oil or the dollar at 76 (all-time low) or the Euro’s all-time high or the possible unwinding of the carry trade or gold punching through $800 or the fact that earnings (with 57% of the S&P reporting) show shocking weakness in the US that is being offset by foreign growth. Nope, we’re not going to talk about any of that as it’s time to party like it’s Jan 13th 2000 (5 days before the collapse). This is kind of like 11:45 on New Year’s eve when we’re all a little tired (those of us who are parents that is) but we pull it together for the big event (in this case the Fed on Wednesday) but, once that ball drops and the band goes home, that party ends really fast!
No, today is a day for investing in YHOO (got ‘em) and seeing what else gets a good run on a day when the markets should gain a full point based solely on the decline of the dollar. Even Warren Buffett left the country last week to spend his money before it became worthless. Buffett also said to CNBC that the chance of us heading into a recession at this point is "fairly significant," something that has been ignored by the MSM so far.
Well what does Buffett know? We’ve got stocks to buy! The Hang Seng flew up almost 4% today (mainly a gap up) led by financials who rejoiced on the good news by CFC that the mortgage crisis is over. Sure it’s BS but. just like any good party, anything is an excuse for another toast! The Hang Seng ended the day at 31,586, up 50% in…
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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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