Archive for
July 14th, 2008
by Phil - July 14th, 2008 11:11 pm
Well, I said the morning excitement was manic but I never thought we would go straight back to depressive by lunch.
Never has our rule of "Always sell into the initial excitement" been more useful than yesterday. Unfortunately, the initial excitement dispersed so quickly we were left inadequately covered as sentiment changed and the long-term volatility of calls got crushed. There is not much to do but ride out a downturn like this (and sell calls of course) and the temptation mounts to go to cash and just wait for a turnaround rather than press our bets.
Despite the market being up 100 points at 9:49, I was already worried saying to members: "Very unimpressive move so far. Oil still at $145, moving up is still bad there let’s not forget." I didn’t mention oil yesterday morning as I’m sick of talking about it but I have not changed my opinion that $145 oil is destroying the world so how are we going to have a recovery with oil at this price? You would think that is not the case listening to the MSM, who blame everything else in the world but the runaway price of oil, which is interesting as the same Conservative pundits who take every opportunity to say that taxes are destroying the American way of life seem not to be bothered that rising energy prices represent a $5,365 tax on every single U.S. household ($70 extra per barrel x 21Mbd x 355 / 100M households, rich or poor) and rising food prices nearly double that total to create a flat Bush Commodity Tax of nearly $10,000 per American household.
There are your credit card defaults, there are your mortgage defaults, there is your consumer slowdown. The economic policy of this administration is choking the life out of the American consumer, as well as the global consumer, and we cannot survive continued inaction!!!
I don’t want to make this a political rant, Bush is out the door and we can pretend he’s blameless and we can let Bernanke and Paulson BS Congress tomorrow and pretend that these factors were unforeseeable when they let the dollar’s value fall 40% (yet another phantom tax on the American people) or when they started a government subsidized program of using food for fuel or when they lowered rates (which were never passed down to the consumer) or when they threw $168Bn of free money onto the fire rather than…
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by Phil's Favorites - July 14th, 2008 10:53 pm
Update on Daniel’s market thoughts (oil’s run getting "tired"… hopefully) and a new trade idea - RIG puts - courtesy of Daniel Jones at Options Notions.
Last week was an absolutely wonderful week to be an options market participant. We hope you’ve been enjoying the market’s manic-depressive mood swings as much as we have - euphoria one day; doom and gloom the next. Market participants need to sometimes turn that sort of noise off and focus on the bigger picture. So the Fannie Mae’s (FNM) and Freddie Mac’s (FRE) of the world are now thought of as insolvent? Interesting. That would have been unthinkable a year ago - we published reports with put spread recommendations on FNM and FRE starting back in February of 2007, and were soundly roasted on the pages where we posted them. We made a bunch of money on those positions though, all the way through 2007.
We’re looking now at the next 18-month cycle of waves. In that line of thinking, we’d like to be contrarian and position ourselves for a surprise - although with a little forethought and a look at the numbers, can anyone REALLY be surprised about the FNM and FRE debacle?
Today’s pick is in the oilfield services sector, and its a company we’ve traded to the upside before - Transocean Offshore (RIG). We saw good news on the stock last week with the award of a contract of significant size, although the stock reacted downwards. That piqued our curiosity - something doesn’t jibe. We think the market could be telegraphing that the price of oil is about to turn - that commodity’s run is tired. We’re already positioned to benefit from an expansion in the refining spreads with calls on VLO and TSO (see last week’s picks) and now we’d like to hedge those picks with a put spread on RIG.
Is this a contrarian call? Yes, it is. Once again, we’re positioning ourselves in front of a potential wave of change that will be pretty dramatic if it comes. Those are the kind of bold plays that get rewarded in the options markets. 
The chart to the left shows RIG shares for the last six months. The stock has risen strongly this year, as rental rates for offshore oil rigs and drilling platforms have been solid.
The Relative Strength Index (RSI) and Moving Average Convergence / Divergence (MACD) stochastic lines are both slowly deteriorating though, and given last…
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by Andrew Wilkinson - July 14th, 2008 4:39 pm
Today’s tickers: KRE, WB, M, VIX, XLF, WM, AMZN, CCE, PGB, CMG
KRE- With much of today’s selloff in the markets rooted in the regional banks, the KBW Regional Banking ETF sustained its share of downside, closing 9% lower at $23.16. Our option scanners detected a 10-fold increase in option trading volume, with traders turning to more economical put spreads as opposed to naked puts to express a defensive view. This occurred in the August and December contracts, implying a long-term bearish view on the sector, particularly in the latter spread, where a 4,000-lot position was opened between strikes 17.50 and 22.50. This appears to have been a long spread, with the trader buying the upper strike at $3.30 and selling the lower at $1.30 for a position that breaks even at $20.50 – another 12% to the downside from current levels. This compares to the 18% decline that would have been required to break even had the trader bought a 4,000-lot position at the 22.50 puts outright – deploying spreads can mitigate some of the cost burden here, especially when premiums are high due to elevated implied volatility.
WB- Shares in Wachovia shed more than 13.8% of their value to $9.95 today amid broader anxieties in the banking sector and conjecture about which banks, if any, might be next to collapse. Implied volatility is ticking in at more than 193% today, this against a historic reading of 98% on the underlying stock – which suggests to us that the options market is currently pricing in 96% added risk to its options over the next 30 days than Wachovia shares have shown historically. With twice as many puts trading as calls the consensus today appeared to favor vulnerability to the downside, with heavy buying pressure in August puts as low as 5.00 – the 60-cent premium on this position indicates about a 9% chance of Wachovia shares trading below $5 by August 15, but the elevated implied volatility on this position (286% on this contract versus 189% for all Wachovia options) suggests keen demand for these protective positions nonetheless.
M- In somewhat cheerier news, Macy’s shares advanced 74.5% to $16.28 on an analyst upgrade from JP Morgan Chase. This panned out in an 8-fold increase in option trading volume that showed calls trading more frequently than puts by a factor of 2.5. Traffic was most crowded in the August contract between strikes…
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by Phil's Favorites - July 14th, 2008 1:49 pm
Anyone own/following MRVL? 
Avian Securities is out this morning reiterating their positive opinion on Marvell Tech (NASDAQ:MRVL) specifically putting into perspective some of the fears with regard to RIMM. Also they are once again outlining where they believe there is upside to their and street numbers, and why MRVL remains one of their favorite ideas.
Amtech is out indicating this morning that FSL has displaced MRVL in its 2.5G "Javelin" product due mid ‘09. While Avian is still trying to confirm whether MRVL won or lost this socket they would note that the Javelin product appears to be a lower end, lower cost, product aimed at less advanced networks. Losing such a socket to a lower end FSL product would not be as significant for MRVL which is focusing on higher end portion of the smart phone market and where MRVL is strongly entrenched within RIMM. In the next few months, RIMM has 3 updates scheduled kicking off with the "Bold", followed by "Thunder", and "Kickstart". They believe the Bold is positioned as RIMM’s primary offering for enterprise users and expect 3G capabilities to expand RIMM’s traction in Europe. Avian expects the touch screen Thunder (available in both CDMA and GSM versions) to target the high end consumer market with 3G capabilities again making this offering more attractive to European consumers than RIMM’s previous portfolio. Finally, they see the Kickstart flip phone launching with an extremely attractive price point and targeting the lower end of the consumer market, previously an area where Marvell has not had significant traction. This diversification of RIMM’s product portfolio should 1) create significant growth opportunities for Marvell at RIMM, 2) increase MRVL’s ASP per part due to the ramp of 3G based products, while 3) mitigating the loss of any single design.
Thus, while Marvell may have lost the "Javelin" product, (note: speculation around potential design losses at RIMM has weighed on the name in varying degrees since they picked up coverage of Marvell in 2007 with the current speculation already having already helped cause nearly a 10% decline), the impact is far less significant than it might have been a year ago as RIMM’s product portfolio has become far more segmented than it had been previously, particularly with Javelin likely appealing primarily to customers of carriers that have been slow to roll-out 3G capable networks (e.g. T-Mobile). Finally, with MRVL…
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by Phil's Favorites - July 14th, 2008 11:09 am
Some positive comments on the Govt’s plans for Fannie and Freddie, by James Hamilton, courtesy of Econbrowser.
I see much to like about this.
From the New York Times:
the Bush administration will ask Congress to approve a rescue package that would give the government the authority to buy billions of dollars in stock in Fannie Mae and Freddie Mac and also lend to the companies to meet their short-term funding needs….
Separately, the Federal Reserve voted on Sunday to also open a lending facility for Fannie Mae and Freddie Mac, if they need emergency capital. The two companies would be able to post their own securities as collateral.
The plan calls on Congress to give the government the authority over the next two years to buy an unspecified amount of stock in the two companies. Over the same period of time, it would permit the companies to have greater access to the Treasury, by expanding the credit line that each company has from the Treasury. Each company now has a $2.25 billion credit line, set nearly 40 years ago by Congress. At the time, Fannie had only about $15 billion in outstanding debt. It now has total debt of about $800 billion, while Freddie has about $740 billion….
As part of the plan, the administration will also call on Congress to raise the national debt limit, people briefed on the plan said. And it will ask Congress to give the Federal Reserve a role in setting the rules for how big a capital cushion each company must hold.
The first thing I like about this plan is the fact that the ultimate determination of the level of risks to be absorbed by the federal government is being left to Congress. How much risk there is to the taxpayers in the various new lending facilities introduced by the Fed is subject to some debate, but that there is some risk, and that new loans from the Fed to the GSEs would increase this risk, is indisputable. One of the clearest lessons from history is that the fiscal and monetary functions of the government must remain separate. Pretending that we can deal with these problems with money creation rather than tax increases is too tempting to allow that door to be opened any further.
The second thing I like about the plan is that such action by Congress would take the form of a dollar limit– here’s how much…
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by Andrew Wilkinson - July 14th, 2008 9:54 am
Today’s tickers: BUD, TAP, FRE, FNM, VIX, LEH, WB, AIG, XLF
BUD- There’s no denying that many a market professional will turn to beerier, cheerier pleasures to polish off the memory of a very volatile trading week…shares in Anheuser-Busch gained 9% to $66.80 Friday afternoon on news that it and would-be buyer InBev are in amicable last-stretch talks for a takeover bid that has reportedly valued Anheuser-Busch at $70 per share. This is a $5 premium to InBev’s original $65 offer, which closely held Anheuser-Busch rejected as too low. The impact of the news has been a shrink-back in implied volatility, down nearly 25% to 19.6%. Heaviest option action has occurred in the July 65 calls, which are trading more often to sellers than buyers as the price hits $1.90 – an 1800% increase from yesterday’s levels, and probably a very tempting inducement to traders who bought into these positions in mid-June when they were trading at 45 cents apiece. We’re also seeing heavy volume in front-month puts at strikes 55, 60 and 65 (the latter strike trading at 5 times the open interest), in what could indicate traders playing the volatility. Traders appear to be steering clear of the $70 line in calls, confident that this is the absolute highest that InBev will bid.
TAP- Shares in rival Molson-Coors Brewing also rose today, up 2% to $54.25. Implied volatility at 40% weighs in more than 30% above the historic reading on Molson-Coors stock – a six-month high – which strikes us as unusual, given that its earnings announcement isn’t due out until August 5. Elevated implied volatility tends to puff up the price of option contracts – especially those rich in time value – and in that environment, many traders resort to spreads – sacrificing a little reward in exchange for more palatable trade-costs and a more realistic break-even. So it was with a 1,900-lot out-of-the-money call spread in the October contract between strikes 60 and 65. We have no confirmation of the directionality of this trade, but let it suffice to say that the $2.10 price of the lower-strike, if bought alone, would require a 14% rise from current share price levels to break even. Selling a strike higher cuts this outlay almost in half. Granted, a trader could play the other side of the bet and sell the call spread, taking in $2.10 in premium in the expectation…
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by Phil's Favorites - July 14th, 2008 9:53 am
Update on Paulson, Fannie Mae and Freddie Mac, courtesy of Mish.
Earlier today I posted Operation "Rescue Fannie" Underway - Paulson a Blatant Liar. Since then, additional details are trickling out.
Consider Paulson’s Statement on Freddie Mac, Fannie Mae.
First, as a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn.
Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed.
Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer.
Third, to protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator’s process for setting capital requirements and other prudential standards.
Previously reports were that the Treasury would provide $15 billion to Fannie and Freddie. That did not last but a half day as we shall see in the report Paulson Puts Treasury’s Weight Behind Fannie Mae, Freddie Mac.
Paulson, speaking on the steps of the Treasury facing the White House, asked Congress for authority to buy unlimited stakes in and lend to the companies, aiming to stem a collapse in confidence. The Federal Reserve separately authorized the firms to borrow directly from the central bank.
"They appear to be crossing the Rubicon," Sean Egan, president of Egan-Jones Ratings Co., a credit-rating company based in Haverford, Pennsylvania, said, referring to Caesar’s invasion of Italy to set up a dictatorship.
Paulson’s proposal, which the Treasury anticipates will be incorporated into an existing congressional bill and approved this week, signals a shift toward an explicit guarantee of Fannie Mae and Freddie Mac debt. The shareholder-owned companies are government-sponsored enterprises, giving investors the indication of an implicit federal backing.
In the course of a few days we have seen Paulson go from saying Financial Institutions Must Be Allowed To Fail to requesting Congressional "authority to buy unlimited stakes in and lend to the companies".
Paulson now seems to be acting on the principle that as long as one is telling lies there is no additional harm in doing it with gusto. Otherwise…
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by Phil - July 14th, 2008 8:52 am
Oh I love the manic-depressive market sentiment!
Today we are going to be happy because the government says every little thing’s gonna be alright so don’t you just feel good about the markets today? I shouldn’t complain, we played for this last week but it makes me nervous to see the market go straight from "despairing, negative, fatigued and negative" straight to "elevated, hyperactive, suddenly escalated and deluded."
Here’s my problem - I’m a fundamentalist, so I believe a company has value and an economy will do X and not Y and I don’t believe that changes from day to day to any great degree. Our basic investing strategy is that, when we see a stock deviating from our percieved "value" of a company and we feel the risk/reward is justified over the time frame - we buy some options looking for a return to the norms.
So it disturbs me when, for example, a massive financial institution like FRE or FNM can, through the wisdom of Wall Street and the "efficient market," lose 1/2 it’s value at 9:30 and then get it all back at the end of the day. When the Dow goes up and down 200 points 6 times in one week and makes 20 100-point reversals in 5 days, then we know fundamentals have simply been thrown out the window and we are now playing stock market roulette.
The market wants to tell me that CROX, with $1Bn in sales and $168M in profits is worth just $648M and that BAC, who pay a $2.56 dividend on a $21.67 stock (11.8%) have somehow lost $150Bn in market cap since October despite the fact that they have not posted a negative quarter and earnings simply slumped from a 2006 high of $21Bn back to the normal range of $15Bn. I can’t buy that TASRs move from a $4M loss on $67M in sales in ‘06 to a $15M profit on $100M in sales in ‘07 merits their value cut in half (and down 75% from last year’s highs) and I guess we’ll find out what crime GOOG committed on Thursday as they have given up $60Bn in market cap this year (and it was much more in March) despite the fact that they have never missed estimates and have been growing well over 20% and no one seems to dipute that that will continue for the foreseeable future.
Is HOV really worth just $4.51 a share? $368M might…
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January 7th, 2009 2:20 pm
Somber Thoughts for the New Year
Will There be a Recovery?
Courtesy of PAUL CRAIG ROBERTS writing at CounterPunch
Economists will scoff at the question in the title. But that’s because they are trying to fit the present into the past.
In the past recoveries were routine, because recessions were temporary restraints resulting from the Federal Reserve putting the brakes on an overheating economy. By restraining the supply of money and credit, the Fed caused inventory buildup, layoffs, and a halt to price rises and union wage demands. With the economy cooled by unemployment, the Fed would take off the brakes. Interest rates would decl...
more from Ilene
January 6th, 2009 4:08pm
The alternative energy sector has been heralded by many as an investment opportunity in the US over the next four years. The rationale:
1. Fossil fuels are declining in supply and are environmentally destructive. While there are those who dispute this, there seems to be enough of a "green movement" that demands alternative energy.
2. Because fossil fuels are declining in supply, they will rise in costs,thus fueling an economic need for alternative energy solutions. This seems to be questionable of late, as gas prices have fallen sharply in the US.
3. US President-elect has made government investment in alternative energies a priority.
While there are scientific arguments for and against alternative energies, the "green movement" seems to be quite strong, suggesting strong consumer demand, and Barack Obama's stimulus plan suggest this the US government will look to feed this demand.
How can investors profit from this?
GEX: The Alt...
more from Goddess
By Andrew Wilkinson
January 7th, 2009 1:34 pm
Today's tickers: LAMR, WFC, HBC, MON & FDO
LAMR – Lamar Advertising – The fact that a recession is eating away at advertising revenue doesn’t seem to worry an investor today who sold a strangle on Lamar, which operates outdoor billboards in the U.S. and in Canada and Puerto Rico. The company’s share price is already well off its $44.48 peak and indeed has rebounded from an $8.69 low recently, which is possibly what this option investor has his or her eye on. The trade involved the simultaneous sale of July calls with a 17.5 strike and puts with a 12.5 strike for a gross premium of 4.50 per contract. Both contracts saw volume of 9,775 lots as the investor appears to be selling volatility, which currently registers a reading of 85%. Such volatility boosts the value of option contracts and in this case the invest...
more from Andrew
January 4th, 2009 8:16 pm
Let's start the new year with a new post and a new portfolio.
2008 was an amazing year for us with the portfolio up 725.49%. We have to be thankful for all this volatility! Let's hope 2009 is very good to us as well.
Thank you to everyone who participates in the comments in the optrader's section, we have a smart group of people, with great ideas.
Live portfolio and comments are only available to members of the swing trading portfolio.
To learn more about the swing trading portfolio (strategy, membership etc.), please click here
- Optrader
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more from OpTrader
January 5th, 2009 1:37 pm
-“Volatility is lower evidenced by the VIX in the mid 40s. The chart indicates the same with narrowing of the bollinger bands and the formation of a symmetrical triangle. Volume has been extremely low for the most part due to the holiday season. I feel that we will go up to test the 9000 area. Note how the market reacts at that level to give you clues on further movement.”
The DOW closed last Friday 12/26 at 8515 and finished this week at 9035.
Middle East turmoil translated to a DOW drop of 32 points to open the week. It was a light volume affair primarily due to the holiday season.
Stocks rose Tuesday amidst a $5 billion capital infusion into GMAC. It now appears unlikely that GMs demise is imminent. The DOW posted a 184 point gain.
The market closed 2008 on a positive note with the DOW moving up 108 points. The VIX continued to drop and Initial Jobless Claims improved. 2008...
more from Robin Hood
December 20th, 2008 2:19 pm
As 2007 drew to a close, Phil predicted ‘Asian-style’ moves in US indexes and I wrote an article projecting 2008 would be a very difficult year to trade due to ‘unprecedented volatility’. As 2008 draws to a close it looks like both predictions were realized but pleasure does not necessarily accompany vindication. As John Maynard Keynes wrote:
“It is usually better to be conventionally wrong than unconventionally right”
In short, when you are right about bad news, little benefit is experienced because so many will have suffered whereas being wrong with the crowd means comfort in numbers.
As I watched CNBC’s Year in Review last night I was struck by how many times the commentators noted that nobody could have foreseen the carnage. In fact, many were anticipating a recovery in the middle of the year including Hank Paulson! When history judges such projections unfavorably, credibility quickly diminishes.&...
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About Phil:
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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