I won’t go so far as to say "let’s do it again" but we are already doing it again as I had pointed out to members yesterday that this is not even as bad as our Wednesday wipe-out of October 15th, when the Dow dipped 733 points to 8,577 or Wednesday Oct 22nd, when the Dow fell , 526 point to 8,519 or Wednesday, Nov. 5th, when the Dow fell 486 points to 8,695 or even last Wednesday, when the Dow fell 411 points to 8,282.  Sometimes you need to be a market historian to get perspective.

Last Wednesday I talked about the official global recession and yesterday the Fed made it officially official in the US but there really wasn’t anything in the minutes that was very surprising:  They are ready to cut rates further (0% anyone?) and do not expect a rebound until Q3 and are bringing down their growth forecast to next year to 0.3% (from 1.3%).  The Fed does seem out of touch with an unemployment forecast of just 6.5% and that worries me but none of this is new so we will see how well our bottom tests out today but I’m expecting us to at least test back to 8,200 - anything less than that will be a real disappointment. 

It was hard to buy things yesterday, even though we planned to be more bullish between 8,200 and 8,000, actually seeing that 8,000 mark fall is simply depressing!  Of course the XOM puts from yesterday’s morning post did as expecte… (more…)

JPM – JP Morgan Chase & Co. – With the market in meltdown mode, investors are once again departing all shades of financial shares. There are new lows today at several major financial institutions including blue-blooded JP Morgan. The 52-week $28.87 low is a radical shift from the $50.50 52-week peak set three days into October. We’re not sure many financial companies can claim to have traded annual peaks and lows in such a short space of time, but this underscores the negative outlook for the economy and companies regardless of shade. Options on JPM are in play today with large buying of this week’s expiring 30 strike puts at 1.40 premium. Today’s investor interest at that strike is equal to the outstanding number of puts at the strike and shows how investors are desperate to hedge exposure or how speculators are targeting immediate profits in what is truly a desperate environment. However, a bullish play makes up the majority of today’s overall 136,000 volume and involves call activity at the March 37 and 47 strikes. The trades were both marked as purchases at price of 3.30 and 1.15. Given the lack of open interest at either strike, this jumps out at us and makes us wonder if such large positions are indeed naked longs. It’s likely that an investor has paid a net 2.15 premium in a bull call spread that could achieve a maximum gain of 7.85 per contract should JPM recapture $40.00 by expiration in four months.

BBY – Best Buy Co. Inc. – An S&P downgrade to Best Buy’s debt rating sent its shares to a six-year low and created healthy demand for puts. The warning that the… (more…)

I called it "Testy Tuesday" in the morning post and we tested both our upside (3 times) and downside (once) levels during a wild trading session.  Our patience paid off as we got to our 8,200 goal where we did a little more bottom fishing, including a perfect flip to short on the SKFs right at our $200 goal on that ETF.  In the morning post, I said to watch Dow 8,400, S&P 860, Nas 1,500, NYSE 5,400 and 455 on the Russell as the levels we wanted to break over for the day - while we touched those levels around noon, we were skeptical, even as we played the upside as I had told members that the mythical Plunge Protection Team would try to make Paulson look good during his testimony (and here’s the CNBC clip discussing it yesterday).

Sure enough, once Paulson was done we finally got our dip and we played the market like a fiddle in our intra-day chat - hitting pretty much every turn on the nose as we stayed predictably range-bound all day.  At 11:56, as the Dow and the Nasdaq tested our levels, I warned members: "Do not forget to ignore the Dow and focus on the NYSE, RUT and S&P in that order as they are less manipulated than the Dow and the Nas, we need real breakouts across the board for it to be real(ish)" and, an hour later, we went bearish again … (more…)

The portfolio is up 67% since September 2nd and 719% this year.

During that period, we closed 31 trades. 23 of them were winners, for 8 losers. That’s a 74% winning rate.

The average win was 1.35. The average loss was 2.39.

Our expectancy was 0.999-0.623=0.37R

I am not very happy with the size of our average loss. We let some losers run too far, mostly because we were keeping the calls to balance our puts. In the next weeks, we will focus on cutting losses short.

Still very happy with the performance, and I hope everyone managed to trade successfully in this crazy market.

To learn more about the swing trading portfolio (strategy, membership etc.), please click here

- Optrader

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YHOO – Yahoo Inc! – Perhaps now that Jerry Yang has stepped aside as CEO of ailing Yahoo! we’re seeing the ‘yeehaw!’ effect in play. Investors bought shares in the second largest Internet search engine in hopes that the shift of management might spur fresh talks with Microsoft. Since Yahoo! under Yang has shed some $20 billion in market cap since those talks failed, investors are now prepared to bet that a new leader will present a more affable proposition to Microsoft. With shares 13.6% higher at $12.08 there is no shortage of optimists who believe that a partial MSFT bid might achieve a bid as high as $18.00 per share. Judging by the option strategy employed by one investor in the deferred April 2009 contract, a floor is in place for Yahoo!’s shares now that Yang is gone. An investor sold 5,500 put options at the 10.0 strike for a 2.09 premium while purchasing upside risk at the 13.0 strike for 2.75. The upside potential is unlimited and effectively costs the investor just 66 cents per contract.

HPQ – Hewlett-Packard Corp. – The company managed to deliver earnings growth in a poor environment, which makes an 11.6% share price gain to $32.67 quite understandable. Sales grew 19% on the quarter and the company beat expected earnings by 3% proving just how competent it is in dealing with a tougher economic environment. Options traders focused on both the December and January contracts. The 1.70 premium at the December strike shows investors believe that HPQ could trade as high as $36.70 before the options expire in a month. They added 16,000 calls to established positions amounting to 8,352 lot… (more…)

The market took on some bad news yesterday as Paulson said he won’t be doling out the second $350Bn of TARP money as fast as the first as criticism finally built to critical mass over the weekend.   In an interview Monday, Mr. Paulson said the financial system is stabilizing, and he is thinking about how the remaining $410 billion could be best utilized, but that he doesn’t plan to tap it unless a further need arises. "I’m going to do what we need to do to keep the system strong and to react the ways we need to react during the nine weeks I’m here, but I’m not going to be looking to start up new things unless they’re necessary or it’s just clear that they need to be done or [that they] make great sense," Mr. Paulson said. "I want to preserve the firepower, the flexibility we have now and those that come after us will have."

This sounds like a very responsible statement actually.  My fear was they were going to overstimulate the market and spur inflation but this sudden restraint on the part of Paulson is a good sign and the Dollar shot up to 88 before settling down near a 3-year high at 86.80.  Of course, the markets didn’t like this one bit and it pushed the S&P within 2 points of the closing low of 848 although the spike low of 827 was set just last Thursday.  We are within 1.5% of the closing low of the S&P when priced in Euros, so lets say that a close below 848 would be bad but a close below 837 would be catastrophic.  The dollar is likely to continue gaining ground as the rest of the world loses it.  Th… (more…)

ROST – Ross Stores Inc. – In early option trading on Monday several retail companies has shown a slight glimmer of hope despite a still downwards bias for share prices. Shares at Ross Stores are now higher at $26.42 while option traders have put into play a 20/25 put spread involving 3,000 lots at a net premium of 1.50. The trade is mildly bearish and would begin to make money for investors if shares settled below $23.50 at expiration. The maximum gain occurs if shares slip to the lower strike price or beyond at which point the biggest profit is 3.50 per contract.

TGT – Target Inc. – Same store sales volume slipped in the current quarter by 3.3% at stores open at least one year, which gives the impression that Target is losing market share to WalMart where volumes grew 2.2%. Today’s news that net income shrank by 24% didn’t please investors and shares are lower at $32.80. Investors played the scenario by deploying long put positions in the November contract, which expires this week. The greatest volume occurred at the 32.50 strike where put volume of 10,000 lots adds to investors current outstanding positions of 11,202 contracts. At today’s 1.50 premium an investor buying puts would make money below a share price of $31.00.

BJ – BJ’s Wholesale Club Inc. – Option volume of six times the average pricked our ears this morning. Shares have reversed earlier losses perhaps inspired by several bearish plays and stand at $34.93. Option traders used the Novemb… (more…)

The market has been, on the whole, pretty well behaved in a range between 8,200 and 9,200 with occasional breaks up and down of equal proportions and timing, which balance each other out quite neatly.  That has to lead us to wonder if 8,500 is the new 12,500, which is about our mid-point of the past 18 months.  Did stocks really lose 1/3 of their value this year or were they, perhaps, never worth 12,500 in the first place?  I’ve said before, in November of 1929, I’m sure there were tons of people telling you what a great opportunity it was to get into stocks at 40% off the highs AND IT LOOKED GOOD FOR A WHILE - that was before they then fell from 240 to 40 just 2 years later…

While I’m not predicting another Great Depression, I have been telling members for a while now that I can believe we’re possibly down to a high range of 10,500 - which was about the range we were in before the irrational exuberance of 2006, when the great con that is CNBC managed to convince America that $80 oil meant we had a strong economy rather than a runaway asset bubble.  You can’t blow bubbles without a lot of hot air and CNBC and much of the financial press was spewing it for years and had all of us conv… (more…)

On the whole, it was a lot of work just to get back to Monday’s open but what fun it was riding the market down 900 points for 3 days and 4 hours, only to have it all reversed in the next 180 minutes.  Were we oversold then?  Are we overbought now?  Both David Fry and I thought the rally was, in David’s words "too pat" where "every trading desk, hedge fund and not doubt the  government had their fingers on the BUY button as soon as 8,000 on the DJIA was breeched."  Ahead of Bush’s speech yesterday afternoon, I had said to members: "Bush is speaking a little later so maybe the PPT is standing by to try to buff up the legacy a little…  I liked what we saw on that run to 8,400 before - just because we got rejected there doesn’t mean they won’t go again."

We had been, as I mentioned in the morning post, taking our short side profits even as the Dow broke below our 8,200 target and we added another round of positive plays as we flipped 60/40 bullish at 8,400.  That went, of course, amazingly well already but I quickly raised our goals and, as it stands now, we are not going to be happy with anything less than a test of 8,900 this morning and holding 8,800 is now a must otherwise we’ll be upping our short-side positions ahead of what may be a disappointing G20 meeting. 

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URBN – Urban Outfitters Inc. – On July 22 shares in retailer, Urban Outfitter closed at $32.57. the same day an investor put into action a 40,000 lot put spread through the purchase of 30 strike puts expiring in January 2010 and selling the same amount of puts at the 15 strike expiring at the same date. The net cost of doing this at the time – the difference between the premiums – was $450 per 100 shares. We’re not sure why the investor focused on such a long expiration date, but clearly was of the volition that the retail sector if not the entire economy was heading south. Today was payday as this investor closed the trade out at $1100 per 100 shares. The fact that Urban’s shares had reached the lower strike price meant that the maximum profit potential from the trade was met. Given the magnitude of the position, it’s unlikely an investor was playing this size of position naked. In other words, he probably held a long underlying position in the stock - perhaps not as big as the underlying option position, but whatever happened, today looks like a pretty nice pay day for this investor.

GE – General Electric – We always try to use our views on the option market to illustrate the forward thinking nature of investors who use them. Sometimes call and stock buying reinforce one another, which sometimes helps our analysis. At other times we find ourselves trying to piece together a jigsaw. The fact that options offer leverage is a major appealing factor since it offers the investor the ability to put on a position and leave it there instead of having to worry too much about… (more…)