by phil - December 16th, 2007 10:44 pm
I think this image from last week's wrap-up kind of says it all:
Last week we talked about why we were going to go down, we even talked about when we were going to go down but I sure didn't expect the suddeness and severity of the reaction to the Fed on Tuesday. We thought we'd have two more hours! How can we have confidence in a market that can drop over 350 points in 100 minutes over something Warren Buffett was just quoted as saying is meaningless in his investing decisions?
I have little of note to add this week as I said it all last week when I felt it was important to warn people to take the money and run ahead of the Fed no matter what nonsense the mainstream media was trying to shove down your throat. This week all we can really do is perform an autopsy at what is very possibly only the midpoint of a major correction.
Monday morning I asked, as the markets continued higher and higher: "Am I being a Scrooge or just a cautious investor?" It's hard when I'm trying to write for a broad audience as I know some people are more bullish than others and every strategy has it's own merits but, on the whole, I have to go with my gut and, after dissecting the Paulson Plan, I decided I didn't like it which meant at least half of the 1,000-point rally we just had was a sham. We were ready for Monday's gains as I said prior to the day's 100-point gain: "In my weekend reading I find my negative sentiment has a lot of reenforcement which makes me think there are still some bears left to capitulate before we head back down so let’s look for this rally to continue, probably through the Fed."
By the end of the day on Monday I was already disgusted and we started shorting early. We found a great video (part 2 here) that echoed my feelings about the crisis and I closed that day with: "I think there’s a lot more money to be made on the short side of this Fed meeting and I’m willing to say now it’s going to be literally 2,750 or BUST on the Nasdaq this month so tune in…
by OptionSage - December 16th, 2007 8:56 pm
For those of you who haven’t seen Phil’s excellent article this weekend on maximizing time, I highly encourage you to invest a little time reading it (it could save you a lot of time later!). Speaking of Phil, I am not quite sure how he manages to juggle five careers (it’s probably eight but I can count at least five) and still produce interesting articles and outstanding results. Well that is until I saw this video on "The Tenth Dimension". It was clear from his article that he has studied Einstein’s work so I am sure in his spare time he expanded upon it and figured out how to operate in a parallel universe to accomplish twice as much!
Well enough of the introductions, let’s get to making money!
In recent articles, I discussed the major advancement needed to trade options over and above trading stocks; learning how to be correct in both direction AND time. Applying that concept to spread trades, it is quickly evident that entering bull call or bear put spreads is a low-probability game.
In both spreads you are losing right away due to commissions, slippage and time-decay. You could easily argue that this is also the case when trading long calls or long puts. The difference is that when trading long options, you can easily make up the loss due to commissions or slippage with a small stock movement in the intended direction. With a spread you are immediately at a disadvantage due to the inherent hedging associated with the trade.
In a bull call spread, as the long call makes you money the short call loses you money and, similarly, in a bear put spread, as the long put gains the short put loses. The key aspect to pay attention to when trading bull calls or bear puts is the DIFFERENCE between how much you are making and how much you are losing. Usually the difference is a lot smaller than you might think. This means that as the stock makes a big move, you can often find yourself making very little.
And remember, in order to make this "little" amount of money, you need to be correct in both direction AND time. As a result, these spreads should not comprise a major part of your trading methodology.
by phil - December 16th, 2007 8:37 am
At Friday's close Dan asked about why deep in the money calls are for suckers and I thought it would be good to put up a general post regarding the LTP strategy as we have a lot of new members and it is a critical part of what we do here.
We were discussing AMZN '09 $80s but AMZN '09 $80s are not "Deep" in the money. When I say deep in the money I am talking about owning, let's say the '09 $45s, which tie up $47.50 and have $3 in premium vs. owning the $75s, which cost $27.12 and have $13 in premium.
Since you have the expectation of selling at least $3 in premium per month for 12 months you will generate the same $36 in premium sales from $47.50 as you will from $27.12 so there's no fancy math genius involved in this, just the obvious fact that if you can make the same money with less at risk, you should do so and use the other $20 to diversify yourself rather than place a much larget bet on the same exact position.
Again let's remember that I invest with price targets. Most option systems on the market treat the strike prices as random events and their strategies are based on statistical relationships between the contracts which is why so many of you are focused on the greeks but I'm buying AMZN because I am better than 75% confident that by Jan 2009 the stock will be above $100 meaning the premium I am paying for my option is irrelevant and also why I don't mind if my callers make a profit.
With my price target I expect my callers to "make" at least $11 on me over the course of the year otherwise my price tartget is wrong isn't it? Every dollar they make puts my call deeper in the money and reduces my own premium (I am losing $1 per month at the outset on those Amazon $80s) so it's more like me reducing my own premium rather than "losing" money to my callers.
If you think about it, I end up paying $40 over time, not too much less than I would have paid to go "deep in the money" at the outset, but that extra $13 was paid out of the premiums I got from my callers, not out of…
by phil - December 15th, 2007 7:01 am
Albert Einstein said "the only reason for time is so that everything doesn’t happen at once" but what I’ve noticed about time is that most people waste a lot of it. As a business consultant, I often find the number one thing I can do to make a company more productive is to make better use of their time. Companies look at rents, utilities, manufacturing expenses, distribution costs… but, other than being buried in productivity reports, they don’t often think about the time they have.
A company with 400 employees is paying for 16,000 hours a week of time. Anyone who’s actually worked in a company will not be surprised to hear that an average of 20% of that time is spent not working. I’m not talking about lunch, chatting etc, I mean time spent going from one place to another, waiting for meetings (and the meetings themselves), sitting on hold, looking for things, filling out forms, waiting for web pages or other data to load (my pet peeve with cheap bosses who don’t upgrade). A company with 400 employees wastes enough time in a month to fully staff an 80 employee competitor. Getting just 10% more efficient translates into 8 people’s salaries in extra profit per year.
I find that rich people tend to value their time much more so than poorer people. Perhaps it’s because we get paid so much per hour that we think in terms of hiring a gardener rather than spending 4 hours doing yard work or taking the direct 4-hour flight rather than the 7-hour connection for $150 less. The richer you are the more those numbers work for you and, sadly, the older you are the more you realize how valuable each moment is.
But even rich people do dumb things and one of the dumbest things rich people do is worry about money. Assuming you have the money to invest in the stock market, the last thing you should be doing is sitting glued to a computer on a day like Friday (or Tuesday or Wednesday – what a rotten week!) worrying about protecting your assets. I want you to be spending that time looking for and taking advantage of opportunities!
by phil - December 14th, 2007 11:28 pm
RTP off a cliff, AGAIN!
KO getting bought, CSCO doing well, VLO getting action, XOM holding up, FCEL still going..
POT getting smoked, IBM not good, DRYS a mess, SBUX NEW LOWS…
APPL is the sign that we’re going to hell, although the Dow down 113 is a hint too! Watch 13,400 of course and 1,475 and 2,650 (already gone) to see which way we’re going.
YHOO may hold $24, that will be very telling if they do in this weather.
Someone big is buying down here!
Take out Apple callers, I’m willing to stick my neck out on those! XXX
BUD – sell only executed in one for some reason. Oh well… I still like them as a superbowl play.
We might get that silly oil rally to short into!
DNDN moving like they mean it now!
LOL Kahn, good trade!
FWLT is acting like a lost sheep again but I barely got out even last time and I’m back on the wagon with them.
C – patience. We will buy them on the way up and sell to cover at the top of the channel. If they break $31 they are good to go to near $32 but there are dividend cut worries and we have to wait for all the income dependent investors to clear out.
Dollar at 77.25, that’s a squeeze zone for bears!
DELL coming back from the dead. We held up nicely there and now the buying is spreading. We’re being led by energy so let’s watch them for a reversal but let’s also stop out of our callers in accounts where we can day-trade back into them. XXX
RTP Apr $420 puts at $47.50, selling the $420 puts for $14.20 ($13 premium) and then rolling to Jan $410 puts ($23.50 premium). If the first part wasn’t so expensive I’d put it in the small virtual portfolios but XXX
by Option Review - December 14th, 2007 11:03 am
Today’s tickers: JBLU, NWA, BBH, BIIB, RIGL, C, LEH, WM, COST, VIX
JBLU – Consolidation-mongerers finally got their fix today on news that Europe’s second-biggest airline, Lufthansa, bought a 19% minority stake in discount carrier JetBlue. Trading was halted on JetBlue shares earlier in the day, but stocks quickly advanced 14% on the report, closing at $7.15 this afternoon. Options in the airline traded at more than 9 times the average volume, and we observed plenty of fresh longs, not just in calls but in puts. A wave of buying in the December $7.50 on volume surpassing existing open interest by some 60% suggests bullish implications for its share price for the next couple of weeks. But we also noted a wave of fresh put buying at the distressed January 5.0 strike – a bitter reminder of the battering JetBlue’s share price has taken this year as the company struggled to hedge against rising fuel prices. JetBlue shares were coasting at around $12 to start this year, declining to a $9 plateau from August to late October, and then dipping below the $7 mark until today’s news out of Lufthansa.
NWA – Let it be said that the airline space continues to search in vain for a lift these days, and the Lufthansa-JetBlue report had little in the way of significant positive follow-through for other major carriers. Option volume in Northwest Airlines accelerated to more than 12 times the normal level as a trader appeared to roll over an existing position in the December 15 puts into the same strike in the January contract. The move occurred as Northwest shares closed 1.23% lower at $16.00. The price of the January put position requires a test of the $14 level – that’s the existing 52-week low – just to break even, and current premiums reflect a one-in-three chance at that coming true. At least one major investment bank agrees with this dour outlook for major airlines, with a Morgan Stanley downgrade of Northwest, Delta and US Airways citing eroding prospects for leading carriers as long as upside catalysts in the form of consolidation or lower fuel prices continue to elude the industry.
BIIB – Biogen Idec – Option volume in Biogen Idec, the maker of drugs for non-Hodgkin’s lymphoma and multiple sclerosis, tripled on premarket news that Biogen will withdraw plans to pursue a buyer, as no possible suitors…
by phil - December 14th, 2007 9:31 am
AAPL – We need to roll down if they keep going. If $188 doesn’t hold then get ready for a major test at $187.50 and they wil follow the Nas down if things are bad. Watch GOOG too but rolling down is safer.
Same notes on AMGN, GE, NEM and XMSR.
DIA – let’s roll up to the $132 puts if we can.
GOOG – we’ll watch closely, as we have March we can afford a small gamble guessing the bottom, hopefully $680.
HMY – I want to take them out.
LVS – What a break! We’ll set a stop and be glad we got away with this one.
SHLD – another one we may want to guess a bottom.
T – Huge break if we get a drop.
TSO – I’m confident with my target.
|Description||Type||Cost Basis||Opened||Sale Price||Closed||Days||Gain/Loss $ %|
|5 JAN 08 170.00 AAPL CALL (APVAN)||LO||$ 6,710.00||11/13/2007||$ 6,615.00||11/19/2007||6||
|5 NOV 07 165.00 AAPL CALL (APVKM)||SO||$ 135.00||11/13/2007||$ 2,190.00||11/16/2007||3||
|10 DEC 07 160.00 AAPL PUT (APVXL)||LO||$ 6,310.00||11/15/2007||$ 1,590.00||11/28/2007||13||
|10 DEC 07 165.00 AAPL PUT (APVXM)||SO||$ 2,710.00||11/15/2007||$ 12,740.00||11/28/2007||13||
by phil - December 14th, 2007 9:15 am
I have little time so quick notes:
AAPL – I wish we had taken it off the table rather than covered but we’re stuck now and we’ll have to see what happens, if things go really south we can flip the $195 caller to the $185s and turn it into a bear call spread but I don’t want to get into a situation that may trigger a day trade if I can avoid it.
AMGN – We’ll see if they hold $50, lots of time.
BUD – was uncoverable as they are between wide strikes and hopefully we won’t regret that but they are the ultimate safety stock and we have lots of time.
NEM – I want a stop on the caller at $1 as I’d be buying some gold looking at these inflation numbers. What’s keeping gold down right now is the rising dollar based on the Citibank deal but that will fade at 5% global inflation is really unpalatable to the super-rich.
XMSR – we’ll have to play by ear.
|Description||Type||Cost Basis||Opened||Sale Price||Closed||Days||Gain/Loss $ %|
|2 DEC 07 150.00 AAPL PUT (APVXJ)||LO||$ 870.00||11/19/2007||$ 710.00||11/20/2007||1||
|2 DEC 07 180.00 AAPL CALL (APVLP)||LO||$ 880.00||11/19/2007||$ 1,450.00||11/29/2007||10||
|2 DEC 07 170.00 AAPL PUT (APVXN)||SO||$ 810.00||11/20/2007||$ 2,440.00||11/28/2007||8||
|2 DEC 07 160.00 AAPL PUT (APVXL)||LO||$ 910.00|
by phil - December 14th, 2007 9:01 am
Well, I'm ready for the weekend – how about you?
I think in 3 out of 4 days this week we've made end of day comments about how exhausting the session was and I'd love to look forward to a nice, quiet Friday but we're already down in pre-markets (7:30) and oil has gone from up $1.70 to down .30 in the last hour so we can expect expectation to be all over the place today.
I wrote an overview of the week ahead last night so we won't go into that again except to say that: If I were a fund manager with Billions of dollars coming into a holiday quadruple witching, end of year, expiration week where we get earnings from the volatile financial sector as well as the nations' 2 main electronics retailers and a cross section of other industry leaders – I might not be leaving myself out on a limb today…
Don't go by me though, I tend to be rational and that has certainly been no way to identify with the psychopaths who seem to have taken over the markets. Psychopaths is Joe Ponzio's term not mine, so write him letters, but I mention Joe because he has been writing some great articles on options basics over at Seeking Alpha, where we are both contributors and I highly recommend them to people newer to trading and anyone who's Blog is called F Wall Street is OK in my books!
Pre-markets don't matter much but it looks like they are already expecting a depressing CPI report, which makes it very difficult for the Fed to keep cutting rates as banks hate inflation almost as much as they hate having people not pay them the usurous rates they were counting on getting from ARMs. CitiGroup stepped up to the Federal trough and moved $49Bn worth of SIV loans onto their books, funded by the Fed's new free money plan and I think they are brilliant to take advantage of this rather than join up with the other banks in the SIV not-so-super-anymore-fund. This is the same move already made by UBS and HBC to clean up their own mess and…
by phil - December 13th, 2007 11:37 pm
Whee, what a ride!
We went up, we went down and then we went up again and we had fun doing it but, after taking out callers in the afternoon, we were forced to re-cover at 3:37 which kept us very busy right into the close. Non-members can take a look at the day's action on the free site as part of this month's promotional leading up to the weekend announcement regarding new services.
The nice thing is, that saves me reviewing it and we can talk about what I didn't like about the run. A) It was forced, led by popular momentum stocks in a pointless burst of buying. B) It was narrow, same thing but really a lack of confirmation from the broader indices C) It was on low volume, down 20% from yesterday. D) If we throw out the closing spike we were at 13,450, just 100 points above the non-spike bottom and 300 points below the non-spike triple top we put in prior to the fall – a 25% bounce is certainly nothing to get excited about and the Dow was our BEST performer.
Oil is still around $92, the dollar is still weak, gold is still strong, inflation is out of control and we have the CPI coming up tomorrow, which was (if you believe the lies) just 0.3% last month (Oct.) when oil was $83 a barrel so what do you think is going to happen in a November report with oil at an average of $95? Really I don't see why they thing this forecasting stuff is so complicated. Not only was oil up in November but housing prices made a small recovery and the meltdown in home values was a big contributor to keeping a lid on what our government laughingly calls our key inflation indicator.
We're also going to get Industrial Production, which was negative last month and should improve, as well as Capacity Utilization, which should be flat as productivity was way up as were inventories last month. Next week we get a ton of exciting (well to me, anyway) data to look at on the Briefing.com calendar: