by OptionSage - January 20th, 2008 10:04 pm
Context is everything. Since the beginning of 2007, Citigroup has dropped approximately 50%, Bear Stearns has dropped approximately 55%, Under Armour and Macy’s are down approximately 40%, the Bank Index is down over 30% and yet the S&P 500 is down about 7%.
When you read about the calamity of recent stock market declines, keep in mind that despite these massive drops in specific stocks, the overall market has held up relatively well. Although many may attribute this relative strength to the increased weighting of energy companies in the S&P 500 (on the back of higher oil prices), the the result remains the same.
In the midst of negative reports and declining stock prices, sometimes it’s comforting to console oneself by seeing how others are doing. For example, the severity of the decline in the Irish stock market over the past few months was such that its collective valuation has been eclipsed by that of IBM this week! The famed Celtic Tiger appears to be endangered as the Irish Stock Exchange dropped over 30% in recent months.
So, as bad as many will purport the situation to be, it can always be worse! More importantly, money can always be made!
When I began trading the stock market, I received a piece of advice that I have never forgotten "You should never make a trading decision based on emotion". We often talk of greed and fear in these articles but we don’t often discuss BOREDOM!.
From the time we are young, most of us hate doing nothing. It’s sooooooo boring! As we grow up, we learn the value of working hard and we are conditioned to believe that the harder we work the better we will do. While this is generally true (just look at how much effort Phil puts in and how well he does!), there is often value to doing nothing!
Most traders feel they need to be clicking buttons every day to make money. Not true! Phil has often espoused the value of his long-term virtual portfolio, which requires very little effort indeed and yet has produced fantastic returns. That philosophy is central to the core approach undertaken by Stock and Option Trades also. In our search for instant gratification, boring long-term trades are generally ignored by most – often to their peril!
by Phil Davis - January 19th, 2008 7:21 pm
We had an exciting week last week until the last day, when I had to post a picture on Friday morning entitled "Descent into Hell."
"Stop the Week, We Want to Get Off" I said on Friday and we’ve been calling for cash since early December so I won’t get into the "I told you so" thing… Those of you who left money in the markets could use something more constructive than that!
To that end, in addition to starting a new $25,000 Virtual Portfolio for members, I’m going to initiate a $100,000 Bargain Basement Virtual Portfolio on the new Basic Membership site that will begin hunting for stocks that we consider irresistible at these prices. As we approached 12,000 on the Dow yesterday, I found myself leaving many positions open, hoping for at least an interim bounce. After all, even the Titanic (pictured) had an end that rose up while the rest of the ship sank!
As I predicted last Friday: "This is the depression stage in our 5 stages of grief and it’s healthy. We’re well covered, well in cash and ready for action. Of course if 12,500 doesn’t hold it may be time to panic a bit but there is nothing today that is fundamentally different than there was 30 days ago, when the markets were 1,000 points higher. They were wrong at 13,800 and they’ll be wrong at 12,500 – I maintain my target range of 13,000 to 13,300 for the Q1 consolidation but it’s going to be a wild, wild ride!"
We held out some slim hope that our wise leaders would come up with a plan to avert a crisis but, now that I look back on the actual events – what kind of schmucks were we? These are the same people who wrecked the economy in the first place by spending money like drunken sailors, fighting the most pointless AND most expensive war in history (we passed WWII spending last year), depleted the treasury and unlocked the box of Social Security and drained that too and have set us on a path to a deficit that will be 100% higher than when they took office. That’s right, in the last 6 years we have amassed more debt that this country had in the first 225 years of operation – and we started out with a big war debt!
by Phil Davis - January 18th, 2008 9:18 am
GE has already given the markets a nice lift this morning with in-line earnings (up 4%), a revenue beat and 5 of 6 units coming in with raised guidance for Q1. If not for the expected drop in the finance arm, these guys would have beat by a mile!
That’s the global economy in a microcasm, most of the economy is strong and expanding and there’s a problem in the financial industry but it’s not the end of the world. Despite my very depressed take on yesterday’s action we ended the day very bullish as most of our poor callers lost pretty much all of their value yesterday. As we expected, the markets are back to MANIC this morning as the bail-out no one seemed to care about yesterday is suddenly going to save us today.
Of course, there is nothing I hate more than sitting around waiting for George Bush to solve all my problems, but we’ll take whatever we can get right now, if only to give us a nice boost to sell more calls into next week. Any "solution" that involves tax breaks will be a bad idea. Any solution that randomly injects money into the system, in hopes that it will "trickle down" to the people who actually need it, will also be a bad idea, but the Dems are backed into a corner and will have to approve whatever nonsense the Administration shoves down our throats.
I just did the LTP Review for the members and I was shocked at how few stocks I was able to recommend for a new play. The LTP is our all-star list, they should always be good to buy but I am really worried now. A joke going around the trader floor yesterday was: "I like small caps like INTC, AAPL, DELL and GOOG" and the other guy says "Those are not small caps" and the trader says "Just wait." That’s known as gallows humor and it will take more than a sprinkling of tax rebates to actually SOLVE this problem.
Asia finished flat but BOY was it exciting this morning. The Hang Seng gapped down 1,000 points but took it all back in a day of steady gains while the Nikkei fell 400 before what must have been one hell of a lunch break, after which they drove the market up 500 points in 90 minutes!
by Phil Davis - January 18th, 2008 8:24 am
Well it’s 7:15 and the Dow is up 150 points pre-market so we’ll see what happens.
This is on of those times when I find myself accidentally bullish as we had a ton of dead callers the last 2 days and I just couldn’t bring myself to cover at some of these lows. Frankly I would have been pretty screwed if we opened down 150 points! I will cover if we head down again, I’d rather give up a month out of 12 (or 24 mostly) than let myself get flushed out of position. That’s what happened with the BSX plays and they’ve been uproductive for months and now they are dead!
I have to go with the other format on these as there are just too many positions to review the other way. I will include which plays I like as new entries as there are a lot of them in here. For the most part, I do absolutely, unequivocably LOVE my LTP plays:
|Description||Type||Cost Basis||Opened||Sale Price||Closed||Days||Gain/Loss $ %|
|10 APR 08 160.00 AAPL CALL (APVDL)||LO||$ 4,220.00||7/25/2007||$ 19,050.00||177||
|20 APR 08 160.00 AAPL CALL (APVDL)||LO||$ 39,610.00||12/18/2007||$ 38,100.00||31||
|20 JAN 08 160.00 AAPL CALL (APVAL)||SO||$ 5,960.00||1/16/2008||$ 12,390.00||2||
|10 JAN 08 160.00 AAPL CALL (APVAL)||SO||$ 2,980.00||1/16/2008|
by Phil Davis - January 18th, 2008 7:20 am
Yesterday was a tough day to sit through.
There simply wasn’t much we could do about it and I lost my taste for rolling down, even though RIMM and SHLD would have been good candidates for it. INFY is killing us on both ends and India went bust overnight so we’ll have to see if there’s any way to wiggle out of this one. We have plenty of cash to roll it back but I’m not sure if I love them enough. That’s what I said at the beginning of the week: If you don’t LOVE your positions enought to roll them down and out then what the heck are you doing in them?
Don’t forget all these plays move to the STP this weekend and we start a new $25KP on Tuesday. There’s a lot here so I’ll go in order:
AIG – We’re 2/3 covered, assuming the government spikes the market we’re going to want to stop out the caller and wait but resell the same ratio of Feb calls if we get back near $60, otherwise I wouldn’t mind doing a 1/2 cover with whatever we finish at today.
CAKE – No cover
INFY – have to see how the day goes, this play is our loss for the week!
LVS – Crazy premium on the Jan $75s, wait for it to burn off for sure. We’re going to keep the 2/3 sell at whatever strike we’re at and use that money to roll back to June, which looks like about $4.
NEM – These were deeper in the money than the $10KP calls so I left them. That was stupid! I’m thinking whatever the stimulus package is, it will be inflationary and should punch gold back over $900. The BOE is also considering a rate cut now (no surprise as they need to support us), also inflationary.
PFE – Very disappointing but I’m not going to cover them.
QID – I will no longer have positions to protect in this folder so I’m killing them.
T – Who’d have thought that caller would expire worthless? I’m willing to wait until next week to see what happens with these. After taking out this caller we’re about even.
CFC – I’m just sick of this trade, it needs to die.
by Phil Davis - January 18th, 2008 6:19 am
On the whole the $10KP held up quite nicely for the week.
Getting out of NEM gave us a little bit of cash and let us roll our RIMM calls down, hopefully they’ll come back at some point. BUD killed us yesterday and we can’t get a good price on CFC for the roll so I’m leaning towards taking the $200 net loss and getting out of that annoying position.
AMGN looks pinned, not going to take a new caller until next week. RIMM as well. BUD will be what will be at this point, I’m shocked at how hard they fell yesterday. So, other than taking out our callers, our only move here is killing CFC.
|2 Long Calls|
|BUDCK||Mar 55 CALL [BUD @ $49.75 $-1.84]||5||11/30/2007||(64)||$760.00||$1.50||$-1.00||$0.50||$-0.40||$-510.00||-67.1%||$250.00|
|DLQBF||Feb 30 CALL [DELL @ $20.86 $0.18]||10||11/29/2007||(29)||$1,210.00||$1.20||$-1.20||$0.00||-||$-1,210.00||-100.0%||$0.00|
|1 Long Put|
|CFCPB||Apr 10 PUT [CFC @|
by Phil Davis - January 17th, 2008 7:49 pm
11,939.61 – That was the March low!
11,670.19 – That was the 2006 high! We may find out tomorrow whether or not we can hold the March low, after that it’s going to be all about 11.670.19 and then 11,500 and then we’ll start hearing some very nasty numbers as this entire planet starts to unwind.
The last time the Dow was below 12,000, the Hang Seng was at 18,659 – that’s 6,456 points (35%) down from here! I thought we were in pretty good shape as the Hang Seng bounced off the 200 dma last night and closed back over 25,000 but Bernanke just flat out terrorized the nation with his very, very, very poor use of the microphone in our nation’s hour of need. As I said to members this morning, you can’t have a crisis of confidence when you have a fiat currency (not backed by…. well, anything) and Bernanke is certainly no Greenspan. In fact, he’s no Volker either. Actually, he’s more like the parking lot attendant who just dented your car and has no possible way to pay for it.
- Before we discuss the mess in Congress today, let’s review the mood when we got there:
- Ahead the bell we got Building Permits and Housing Starts that were 10% below consensus
- We got terrible but expected numbers from MER
- We got terrible and "unexpected" numbers from ABK
- My comment at 9:38, while we were still positive, was: "No lovin’ from Apple and Goog but the other shoe is dropping on Financials and, unfortunately, I think that shoe belongs to a centipede so it is far from the last!"
- We bravely bought some calls in the morning – so far, so bad!
- At 10:01 we got a hold of Ben’s statement and I quickly said: "Ben with major mixed messages in his statement AND Philly Fed sucks!!! So much for this rally for now."
- 10:11 - "Things must be bad, Ben sounds like he’s going to cry!"
- For those of you playing the LVS home game, we rolled down to the Mar $75s and covered with Jan $75s at that point.
- 10:19 - We went for Feb QID calls to stop some bleeding.
- 10:33 – "Uh, but, uh, ummm… Holy cow I’m buying more gold as he speaks!"
- 10:36 –
by Option Review - January 17th, 2008 12:36 pm
Today’s tickers: GOOG, TIBX, AMD, HLTH, JPM, JDSU, EBAY, INTC, RHT, BEAS, TASR
GOOG – Investors were spooked by this morning’s tempestuous share price action in Google. With whipsaw action characterizing much of the day’s trading, Google shares opened around $640 before taking a $38 dive around 11 a.m. and retracing quickly, closing 3.2% lower at $617.25. This was still triple the decline on the Nasdaq Composite. The move was enough to send implied volatility 17.7% higher to 47.7%, which is 1.6 times the historic reading and the highest level on our books. Moving volume as of this dispatch is equivalent to nearly 1 of every 4 contracts in play. What’s more, most of this appears tied up in fresh volatility plays in the January contract, which is due to expire Friday, with buyers and sellers generating fresh volume in puts at strikes as low as 580 and up to 630, combining these with calls between strikes of 610 and 640 as traders brace for more manic share price action in the final days of the January contract.
TIBX – Options in Tibco Software traded at nearly 12 times the normal volume today as its shares closed 11% higher at $7.51. Tibco was the topic of takeover speculation in late-November, which was never resolved, and which may be a good part of the explanation behind the extremely elevated 60% implied volatility reading. Dashed expectations of a takeover bid may also explain the fact that Tibco’s densest option position by open interest is the January 10 call, which has twice as many open positions as the at-the-money January 7.50, and appears likely to expire worthless on Friday. Still, our attentions were seized by a a wave of fresh call buying in 7.50 calls at the August contract, which at $1.00 piece imply a move to $8.50 by late summer.
AMD – It stands to reason these days that bad news out of Intel is good news – or at least, a relief of its misery – for AMD. Indeed, as its chip rival-cum-overlord trades 12% lower this afternoon after yesterday’s earnings report missed the mark, AMD found itself trading 6.7% higher at $6.53 on the eve of its own earnings report. The price of the front-month, $6 straddle shows option traders anticipating a 14% price move on back of earnings. But with 2.6 calls moving for every put, and…
by Phil Davis - January 17th, 2008 9:19 am
It’s looking kind of iffy out there today (7:45).
I thought we’d get a stronger open on pre-Ben exuberance but MER came out with earnings at 7 that didn’t win any fans and the markets are still trying to suss out what will happen if ABK goes under. Way back on Dec 19th I said in member comments: "ABK and MBI downgraded to junk! I can’t even begin to outline the repercussions of that move… Rolling AIG callers to Jan now – all financials must be covered. Cash is very important here as I’m not quite sure the financial markets can even function if theis kind of thing spreads and it sure isn’t worth risking." Since that day, this is the chart of the XLF.
See, investing isn’t that hard, it’s just a matter of paying attention to some news and thinking about how it might affect the markets… The affects of Ambac, a now $12.97 stock projecting net losses of $32.83 a share this quarter are far too devastating to be contained by this company, which makes it’s living backing structured financial products for other financial companies as well as bonds. More shocking than the loss is the fact that a Thompson Financial poll of the 18 analysts, who are paid to follow this company, showed they were expecting the company to earn $1.68 a share. Even after over 6 months of studying the sub-prime crisis, THESE PEOPLE ARE STILL CLUELESS!
As of yesterday, Yahoo finance still listed the mean price target for ABK at $44.56 or 44 BAZILLION times earnings – keep that in mind next time you see a stock move on an up or downgrade…
To the extent that we survive this mess, we can expect a lot of consolidation in the financial industry as there are clearly winners (GS, JPM, LEH) and losers (C, MER, BSC). We can also expect a tech rally to be kicked off by deals, like yesterday’s acquisition of BEAS by ORCL fueled by a combination of great tech value, cheap money and investment banks who are going to be very hungry to get some deals going. There is a real fire sale going on at the Nasdaq and it’s going to end very soon – we’re even getting a little impatient and bottom fishing already.
by Phil Davis - January 17th, 2008 6:57 am
Up 100 from the opening dip by 9:44, then down 130 an hour later, then up 135 by noon, another 90 point drop between 12:45 and 2:00 followed by a 140-point gain at 2:45 after which we dropped 150 into the close. Somebody is trying to shake retail investors out of the markets! There was a time when a 100-point Dow move made headlines, now it doesn’t raise an eyebrow. Way back in August I warned: "that if our government pursues Asian-style Central Banking policies they will subject our markets to Asian-style market swings" and now we reap what the Fed has sown.
It’s been a crazy week so far, I had intended to make more picks for the free site in order to demonstrate the value of our new subscription service but, as I said last Wednesday, when the Dow opened at 12,590 – "Sometimes, the only winning move is not to play." When you see a trade in the main post it means I feel pretty good about it as those are trades I can put up that do not require perfect timing or that I feel are subject to intra-day nonsense, the fact that I put it on the main post means I expect the trade to be valid up to 12 hours ahead of time so, by default, they are more fundamental trades than momentum trades.
On Tuesday morning I finally saw a pick I liked (although, as I said at the time, risky) and I said "Oil should take a big hit this morning and I still like SU puts. The Jan $110s at $5.80 have almost no premium and can be played as a momentum trade as we watch for a break below $103.50. You have to keep tight 10% stops on or you can get burned. The $100 puts at .45 are a fun gamble if you can be happy with .65 as it flashes down. OII also has potential to tumble and $70 puts are .55."
The SU $110 puts are now $15.75, the SU $100 puts are $6.10 and the OII $70 puts are $3.20. Those were my only "in column" picks for the week and they won’t count but, starting on Monday, I’m going to run another "Free Picks" virtual portfolio for members on the basic subscription site as our first new member virtual portfolio. There won’t…