Lift for oil services, while managed health swoons on Wellcare woes
by Option Review - October 29th, 2007 8:19 am
Today’s tickers: VIX, BEAS, MSFT, HAL, TSO, WCG, HUM, EWJ, IVV
VIX – The VIX pulled back more than 7% to stand at 19.63 heading into the close, but a look at options price positioning indicates that the pull below 20 is likely just a momentary respite and that investors are by no means resolved over the score of factors – turmoil in the financial sector, high oil prices coupled with low dollar – that caused its elevation in recent weeks. Heaviest volume lay in the November calls at strikes of 20 and 25, the latter strike bought heavily today as traders may have taken advantage of an 18.5% decline in call-side premiums to wager on a new campaign past 25 in coming weeks. Elsewhere we noted that a trader opened a 4,000-lot long position in the January 20 straddle – a non-directional play that profits from dramatic volatility in the underlying share price – in anticipation of volatility carrying over into 2008. The combined price of the straddle, $5.50 today, implies a break above $25.50 or below $14.50 by January’s expiry.
BEAS –Implied volatility in BEA Systems options jumped 20% to kick off the session at 44% against a 5% decline for shares to $16.50. A turbulent day for BEA’s share price comes amid reiterations from the company that a $17-per-share takeover offer from Oracle –an offer due to be taken off the table on Sunday – is unacceptable. Oracle, meanwhile, is showing no signs of upping its bid. A look at the option action shows put-side premiums sharply higher today, which looks to have instigated a selloff in the November 15 puts. Some of this selling may have been involved in spread positioning against a purchase of November 17.50 puts in a marginally bearish play. Bulls looking for a quick rebound for BEA Systems made their mark, as well, taking advantage of a 50% decline in premium to scoop up a bargain on November 17.50 calls.
MSFT –Banner sales for Windows Vista in the third quarter of this year spelled bumper profits for world’s leading software maker Microsoft. Shares in the company, which are otherwise fairly nonplussed by bullish tech news, lifted to a 6-year high, sending options to 3 times the average volume. With shares up 9.6% to $35.09 this afternoon, more than twice as many calls moved as puts, with a surge in call-side…
Facebook
Twitter
LinkedIn 
del.icio.us
DiggYipee for Yahoo
by Phil - October 29th, 2007 8:10 am
I’m going to be the first on the street to call YHOO $50!
That’s right I’m putting a $50 price tag on Yahoo, not because I think they’re a great company and not because I think they have anything on the ball but because they are good investors.
YHOO owns 39% of a Chinese company called the Alibaba Group, which is a holding company for various Chinese Internet stocks (Softbank owns 29% too). The Alibaba Group is doing an IPO for Alibaba.com, an Amazon-type site for business and personal shopping, which is ONE of it’s subsidiaries and it looks like they raised $1.5Bn for a 17% stake in the company. Yahoo paid $1Bn in 2005 for their 40% stake in the company so this subsidiary alone should be worth $3.6Bn to Yahoo.
Alibaba Group also owns and Ebay-like auction site called Taobao (don’t you just love the common sound rip offs?) and AliPay, a pay-pal clone as well as Yahoo China, Alisoft (software), Alimama (maketplace) and Koubei.com, a Craig’s list-type service. All these businesses are in the world’s fastest growing country in the world’s hottest stock market and analysts way undershot the value of Yahoo’s stake. Alibaba fetched closer to $1.50 a share for 850M shares ($1.5Bn) than the $1.10 a share figure that was being used but even that is irrelevant as Yahoo still holds 1/3 of the remaining shares (about 2Bn) through the holding company. Assuming this is a typical Chinese IPO, those 2Bn shares should be worth $5Bn within a week – and this IPO has more buzz than almost any other one this year.
With 2 more strong IPO candidates under the Alibaba Group umbrella, Yahoo should pick up another $5Bn in value off their $1Bn investment for a total of $8.6Bn or more money than Yahoo has earned in the company’s combined history! How do we value that?
Yahoo’s entire market cap is "just" $45Bn but a big footprint in China should give them quite a buzz and the next thing we’ll be hearing about is the mini-Google aspects of Yahoo as they are suddenly seen as a growth stock. Rather than cashing in on this IPO, Yahoo seems to be bidding on the Alibaba.com IPO, picking up another $100M worth ahead of the retail release next week. Like I said, smart investors!
So, with $8Bn more value from an investment in a stock market that jumped 4%…
Weekly Wrap-Up
by Phil - October 28th, 2007 7:42 pm
I am starting to LOVE this market!
Now I know what all the fun is about in China – these wild swings are a trader’s paradise and it’s been a busy, but rewarding, couple of weeks. Practicing our best James Bond investing techniques we went long, we hedged down, we went short, we hedged up, we went long, hedging down again and then we went short. Then it was Tuesday! 
We are embracing the insanity of the market, enjoying the fiscal buffoonery practiced by our leaders and dancing to the manipulated tune of the commodity markets – pure bliss!
This is how the rich get richer in America folks, turn the system into a parlor game that the average person can’t afford to stay in, forcing them to walk away with half their money (if they’re lucky) until the next time the "institutional investors" need fresh cannon fodder to line their pockets. Mixing metaphors? Sure I am but what the hell, may as well throw all the rules out the window along with the economic ones that have already fallen by the wayside.
We’ve decided not to complain about it as, not only does it get us nowhere, but it makes us miss the party. This poor guy made a great point about how ridiculous values for top stocks were in October of 1997. He makes an excellent point but, as I’ve said before, while he was bellyaching about the stocks, the market went up another 50% before finally heading back to his top call only in September of 2003! So we’ve decided to rock on and toast the Plunge Protection Team for as long as they can keep it up (no Viagra jokes please) as we party like it’s January 11th 2000 (one week before the crash).
I will continue to point out the true economic picture as it unfolds and, unfortunately, it’s very depressing but keeping our wits about us even as we enjoy the party is the difference between waking up in the morning with a slight hangover or waking up stripped naked in an ally with your eyebrows shaved off. Last weekend we decided 2 things; Thing 1 was that we could spot a correction well in advance. Thing 2 was that we would get a little more aggressive AND hedge a little more.
I’m happy to report both strategies paid…
Is Your Company Overvalued?
by OptionSage - October 28th, 2007 6:24 pm
Fundamental analysis is that mysterious component of investing that is cloaked in obscure financial terms such as PEG ratio, Levered free cash flow and EBIDTA. While some ignore the fundamentals entirely in favor of rigorous technical analysis and some focus exclusively on sentimental analysis, Phil and I tend to focus heavily on fundamental analysis as the foundation of our investing philosophy.
…
Making 30% Profit on 30 Stocks in 30 Days
by Phil - October 28th, 2007 10:18 am
As we have a lot of new members I’m going to repost the September 26th post where we decided the Dow was going to rally and we made a new virtual portfolio comprised of Dow components.
I decided to close the virtual portfolio last week as it was dull and I thought the Dow was going to turn down (it did) and all we left in for the past week were our protective DIA puts, which worked out well. I strongly encourage new members to look at my original takes on these components, the original plays and how we adjusted them (although we adjusted few as the goal was to have an easy virtual portfolio). Also, now that earnings are coming out – it’s a fun way to see how good my predictions were!
Take a look at the one-month chart and think about the times you would have panicked as the stock moved up and down and pay particular attention to the prices on Expiration Day, October 19th (all contracts discussed without a date in the below article were Octobers).
PLEASE DO NOT take this as being new plays – this is a repost of our article from the 26th which I never finished as we already had plays on WMT, UTX and XOM in other virtual portfolios (and VZ didn’t thrill me as I liked T much better). Anyway, it’s a good chance to look back while the month is still fresh and think about how we trade our options in a volatile month:
REPRINT – REPRINT – REPRINT – REPRINT – REPRINT – REPRINT -REPRINT – REPRINT
Whee! Here we go again!
All aboard the market train as the GM strike ends, oil prices rebound (XOM, another Dow component) so we’re in for a retest of 14,000. I’m going to dispense with the news today as it doesn’t seem to affect the market anyway and let’s take a look at our 30 Dow components – perhaps we can find some bargains as the tide of index buyers lift all ships (plus they are nice and liquid so we can get our when it all hits the fan!).
Just for fun I’m going to make a Dow page, as it should be a fun group to watch if the global market catches fire. We can allocate $3K per position in a $100K virtual portfolio and see how…
Your Questions Answered!
by Stock and Option Trades - October 27th, 2007 11:42 pm
When we began trading we found it near impossible to find knowledgeable option traders willing to help answer our questions and with a genuine interest in making others better traders. We often refer to trades as being ‘just for fun’ but if we can help answer questions and take each member to a level of trading competence they never dreamed possible than we will feel like we really achieved something special. We received some interesting questions from one of our members, Don, and decided to share the answers in the hope that it might be somewhat helpful to you.
Selling calls against either stock or LEAPS is an easy concept. Here’s what I don’t get…Let’s say we own the AAPL LEAPS at 36.00 and we start to sell the calls against it starting this NOV. I would sell slightly out of the money to receive premium hoping that we don’t get to that higher strike. If we do I see that as trouble since I would then have to use some of my money to buy back the sold call-it seems as if you easily adjust trades either out in time or up in strike (getting a reduced premium) at an additional cost to us…conceivably if a stock continued rising we would be incurring cost while the LEAPS wouldn’t be rising fast enough to keep up with us.”
Another way to view the trade is to break down the cost and the credit separately over time. For example, in 20 days I can generate $4.20. It’s not a big stretch at all to argue that, conservatively, I could get at least $5 over any 30 day time period for entering short options just out of the money on a regular basis. So, after 8 months I pay myself back $40 – more than the cost of the long option! Still, I would have at least half a year before the Jan09 options would expire worthless!
…
Friday Virtual Portfolio Moves
by Phil - October 26th, 2007 6:20 pm
October 26th, 2007 at 9:25 am | Permalink edit
DELL – I like them long-term and I do think it’s good the Dell is back from his little vacation.
BIDU benefitting from MSFT numbers. MSFT benefiting from pent-up upgrade cycle (how long have we waited for this damn thing) as well as catching the wave on the XBox (gotta hand it to them for sticking with it until they got it right). Also, MSFT is the definative exporter so they were in the sweet spot for the kind of US companies that should do well in a dead dollar environment. Best of all, they don’t even really make anyting but CD’s, and those can be done anywhere – it’s the perfect business!
Long-term, the more people that convert to Vista the more MSFT will start to make on other things like office as Vista has some nasty copy protection which will force many corporations to double and triple the number of copies of other software licenses they have.
TSO – THAT should finally kill our putter! (not much fun for our longer puts though).
CFC – be patient, massive short covering if they stay over $15 as many had bet them bk…
October 26th, 2007 at 9:30 am | Permalink edit
MSFT trade – probably sell the $35s against a longer $35. Just over $36 should be the max gain but I’d be thrilled to get $2 for the current $35s against the Apr $35s at $4 or less. XXX
BIDU’s earnings were pretty good.
October 26th, 2007 at 9:35 am | Permalink edit
Woo hoo – gold $780!
Rolling up BIDU putters at $10 for a $20 roll!
October 26th, 2007 at 9:48 am | Permalink edit
Nas 2,800, Dow 13,700, S&P 1,530 – I don’t think we’ll hold them, there are huge issues still unresolved and MSFT is giving us the same kind of boost that AAPL did on their earnings – it’s too specific to lift the whole market for long.
Of course that’s my brain talking, not generally a good predictor of short-term market behavior, especially around a Fed meeting!
October 26th, 2007 at 9:55 am | Permalink edit
TIE going well (but then again, what isn’t?).
Actually that’s a good idea, we should be looking at who is NOT doing well in a crazy rally like my BEN puts, GLW, FAF, DO, TASR!, ACAM, BC,…
Lift for oil services, while managed health swoons on Wellcare woes
by Option Review - October 26th, 2007 8:28 am
Today’s tickers: MSFT, HAL, TSO, WCG, HUM, EWJ, IVV
MSFT –Banner sales for Windows Vista in the third quarter of this year spelled bumper profits for world’s leading software maker Microsoft. Shares in the company, which are otherwise fairly nonplussed by bullish tech news, were lifted 11% to set a 6-year high, sending options to 3 times the average volume. With shares up 11% to $35.54., more than twice as many calls are moving as puts, with a surge in call-side premiums contributing to what looks like profit-taking in the November 32.50 calls – its premiums are up 275% on the session. Evidence of what looks like a new era of liquidity in Microsoft options is apparent in November call strikes as high of 37.50, and in the January contract, where buyers and sellers have swapped calls at strikes as high as 40.
TSO – Tesoro – Options in oil explorer Tesoro are moving at more than 3 times their usual level today, as shares gain 11% to $63.59 following the announcement of a $1.4 billion tender offer from billionaire investor Kirk Kerkorian’s Tracinda Corp. The offer, which values Tesoro shares at $64 apiece, would add an additional 16% to the 4% holding Kerkorian already holds. With premiums higher on the surge in share prices, we were interested to see traders flock to sell November 65 calls at prices 283% higher than yesterday. These calls sold on a volume of 12,000 lots – nearly 3 times the prior open interest. Buying interest was seen in the January calls at strikes of 65 and 75, implying a massive move higher for Tesoro shares in January. The share is currently trading at within a buck and change of its 52-week high.
HAL – Halliburton shares are 0.8% higher this morning at $41.35 and just a shade below the 52-week high at $41.95 11 days ago. A large amount of calls appear to have been bought in Friday’s session at the 45 strike where 52,000 lots have gone through at a premium of close to 0.33. That gives a buyer the right to buy stock before expiration in November at a fixed price of $45 while the trade would make money at prices above $45.33.
Halliburton’s shares slid last weekend shortly after crude oil recoiled from a record high above $90 per barrel. At the time the fear surrounding the price spike…
Federally Fueled Friday
by Phil - October 26th, 2007 8:24 am
Will Bernanke bless us with bushels of bucks?
The market has already priced in a 100% chance of a .25% cut in both the Fed Funds rate and the discount rate yet the financials are surprisingly lethargic. The general consensus is that the Fed will drop rates a full point between now and January and that is crushing the dollar, fueling oil to record highs (with gold right on its tail) and boosting the market all the way to 13,671 already, just 100 points below were we were the last time the Fed decided that inflation was the least of our worries.
We have a 2-day meeting next week that starts on Tuesday but we don’t get a statement until Wednesday at 2:15. While the last meeting gave us a 330 point gain on the day as the Fed went from being a respected institution to what Barry Rithotz calls "Wall Street’s Bitch" in the space of an afternoon, expectations are far different now as investors now expect the Fed to roll over and do tricks on command, whatever monetary credibility Paul Volker and Alan Greenspan built up over the previous 20 years was tossed out the window as the Fed leapt in to save a market, that had run from 11,000 to 14,000 in 12 months, from making a perfectly normal 30% correction.
By depriving us of a consolidation period, the Fed has effectively built a market rally on a very poor foundation, leaving us subject to wild swings up and down that are great for Goldman Sachs (our Treasury Department) but bad for the bottom 99% of the country as they watch the value of their savings and homes go up in smoke while the costs of goods and services skyrocket. As I have often said: "If our government pursues Asian-style Central Banking policies they will subject our markets to Asian-style market swings."
But we’re not here to worry about economic policy today – we’re here to party like it’s January 10th 2000, when the market had just closed above 11,500 for the first time and had just recovered from a huge sell-off the week before and was looking indestructible. Indeed we were in for another week of nice gains before, for no reason in particular, sentiment changed and the party quickly ended, with the market quickly dropping 20% in the next 30…
Thrilling Thursday Wrap-Up
by Phil - October 25th, 2007 11:35 pm
Wheee, what a week!
Down 350 points on Friday, up 200 points Monday, down 100 points by 11:30 on Tuesday and back up 100 points by the day’s end, down 200 points to open Wednesday but getting it all back at the close and then today was down 50, up 100, down 200 and back up 150 all to end up right where we were (13,650) the whole week after the last Fed meeting.
The above chart is one that we use to talk about a stocks movement over time, usually that time is more than 8 hours! Every day the market seems to take us on this roller coaster ride and it is just a little exhausting and that may be a dangerous thing because it’s a little harder to be bullish when you’re exhausted. We know that is true because even the best parties we’ve ever been to ended at some point (otherwise we’d still be there right?). Of course the current non-stop party king is China and that rising tide continues to lift our ship as global growth is the highlight of Q3 earnings, even as the US crawls to a standstill.
This morning we looked at the less than Durable goods orders, which were off sharply from last month and later in the day we go the New Home Sales Report that showed September home sales rose 4.8% from the previous month. There are several problems with this; Problem 1 is that August was revised down close to 10% and August already sucked at 795,000 (now 735,000) so September is up 4.8% to 770,000 – that is less than August was supposed to be a month ago. Problem 2 – the margin of error on the government statistics (not really known for their accuracy at the best of times) is +/- 10.3%, this is about the same margin of error you would get if you polled 5 people standing in line at the 7-11 about economic activity. Problem 3 – last year the annualized rate of new home sales was 1,004,000, 23.3% more than this year. Problem 4 – cancellations – the Census Bureau does not count cancellations yet here are the current RECORD cancellation rates:
Firm . . . Cancellation rate for Quarter
Centex (CTX) 35%
MDC Holdings (MDC) 57%
KB Homes (KBH), 50%
Lennar Homes (LEN) 32% …
German
Spanish
French
Italian
Portuguese
Japanese
Korean
Russian
Chinese
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
(