Slide in price of gold hurts South African Gold Fields

by Andrew Wilkinson - October 2nd, 2008 3:12 pm

Today’s tickers: GFI, SPLS, NSC, BG, GE, POT, MOS, RIO, MAR, PTEN, NSM & MET

GFI – Gold Fields Ltd ADR. – The slide in the price of gold (down 5.2% to $840 per ounce), has helped drag down ADR shares in Gold Fields. There was also sizeable activity on the call side in its options where the January contract is in play. The 15 calls witnessed heavy action and appear to have been sold 32,400 times at a 25 cent premium. The existing open interest of 86,123 contracts could be behind what might be a closing sale, but we can’t tell. The delta on the call indicates a one-in-eight chance of shares reclaiming the $15.00 price by expiration. The price at which these calls recently traded was 60 cents in the last two weeks. Higher up at the 22.5 and 25 strikes it appears that a seller was behind volume of 5,000 lots at each strike.

SPLS – Staples Inc. – With economic data weakening seemingly by the minute, option traders seem to be leaving clearer footprints in the option market. Office supply retailer Staples saw its shares down 3.3% to $21.40 today while the October 20 strike put has been purchased on relatively heavy volume of 15,217 contracts. The stake represents 11% of overall open interest on Staples, while it towers the prevailing open interest at the strike of 1,184 contracts. In the November contract it appears that there was also plenty of buying interest at both 17.5 and 20 strikes were total volume of around 3,900 lots was evident at both strikes. This looks like fresh buying judging by the lack of existing open interest.

NSC &nda…

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Thursday Morning

by Phil - October 2nd, 2008 9:06 am

Yesterday went as well as could be expected.

In the morning post I said: "We’ll be looking to hold test levels today that were breakout levels yesterday: 10,650 on the Dow, 7,400 on the NYSE and 1,135 on the S&P" and, right at 10:03, my comment to members was: "Construction spending unchanged but ISM down to 43.5, that is terrible!!!  TERRIBLE!!!  50 is the contraction line and last month was 49.9.    Now we’re going to test those levels so be careful…."  The Dow hit 10,650 on the nose at 11:10 and the NYSE went as low as 7,372 around the same time but the S&P never went below 1,144 and that kept us bullish, along with our observation that the big banks were keeping the faith, despite the downturn.

As quickly as 10:19 the drop looked questionable and I noted: "Nice hard level test there and we actually may be holding it, don’t get too attached to your puts if this is all the down they can muster…" and soon after that we heard from GE’s Immelt that their capital position was strong etc. as rumors on GE were a big part of the market’s weakness.  By 11:24 we were back to bottom fishing, using the same bullish plays that worked Tuesday and, true to form, they worked again as the market rallied back into the af…

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Insurers options see rise in implied volatility

by Andrew Wilkinson - October 1st, 2008 1:46 pm

Today’s tickers: ALL, MET, VIX, BSX, GE, MYL, MAS, C, BAC, JPM, XLF, & SNDK

ALL – Allstate Corp. – Implied option volatility rose by around one-third on multi-line insurer Allstate today and reached 57.4% by lunchtime. This marks its highest reading by far in the last 12 months despite a relatively orderly share price slip from $59 to $43.12 in that time frame. Option traders forced put prices higher by leaning on puts across the strip, which resulted in close to five times as many puts in play as calls. The January contract saw volume equal to around one half of its current open interest as investors sought protection against potential share price erosion beneath the 42.50 strike. The premium rose by 40% to 4.0 per contract implying a break even share price at $38.50 at expiration.

MET – Metlife Inc. – Demand for insurance against the insurer saw implied volatility on Metlife options rise 43% to 110% by lunchtime. That compares to a 70% reading on the volatility of the share price, which today has fallen 12.5% to $49.05. Activity in the option series was less pronounced than in Allstate, but notable was that demand for protection from a declining share price was taken in the October contract at strikes as low as $20.00. In fact at strikes from 20 through 35 today’s volume is clearly fresh judging by the fact that it is in excess of existing open interest. In recent days shares in this company hit a fresh 52-week low falling through $45.00.

VIX – CBOE Volatility Index – The bias towards call buying is apparent in…

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Which Way Wednesday - Hedging for Disaster?

by Phil - October 1st, 2008 9:03 am

They are messing with the bailout again.

Now the Republicans in Congress are crafting an "alternate" plan that includes a provision to eliminate capital gains for 2 years and provides massive business tax refunds.  Talk about an earmark!  Now I am outraged and demanding my representative vote this down.  Effectively, what this means is that, now that the value of our homes is at a 5-year low and loan portfolios are being written down 50%, the people who come in and buy them at fire-sale prices can do so, double up in 2 years and pay no taxes.  Talk about a land grab for the rich!

At the same time, some House members have signaled they are against allowing changes in mark to market accounting rules that will allow the banks to carry distressed assets long-term, rather than being forced to liquidate them at fire-sale prices.  Does anyone see a pattern here?  No wonder David Fry asks in his S&P chart: "Where are the adults?"

This statement from Congressman David Davis, who co-sponsored the alternate bill, gives you a pretty good idea of how far apart these new provisions are from what was originally proposed.  Davis says of the oirginal bill: "Make no mistake about it, this legislation provides a taxpayer financed bailout of those who have acted irresponsibly. It federalizes and s…

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How to lower your break-even point without increasing your risk

by Phil - September 30th, 2008 8:50 pm

We all know that averaging down is a losing proposition: you throw good money after bad and increase your risk. Also, cutting your losses short is one of the most important rules of trading.
However, there is a strategy, using options and vertical spreads, that allows you to lower your break even point on a position that went against you. And to do it without increasing your risk.
If you own a call option and have an unrealized loss in this position, you can improve your chances of breaking even by "rolling down" into a vertical spread. You do it by selling 2 of the calls that you are currently long (the one that you own plus another one), and buying one call at the next lower strike, ideally for even money.

Let’s see how it works through the use of an example:

AAPL is at $114 and you buy Oct $115 call for $3
Stock drops to $112, you now need a $6 move before expiration to breakeven. You need the stock at $118.
Now, let’s say that at that time the Oct $115’s are trading at $1.50 and the $110’s at $3. You then sell 2 of the 115’s (the one you own plus another one) and buy one of the $110’s for even money.
You now own a 110/115 vertical (Long the $110’s and short the $115’s). And your risk is the same as the original risk ($3)
Let’s say the stock goes to $113 at expiration. The $110’s will then be worth $3 and the $115’s will be worthless, leaving you with a net $3.
You just lowered your breakeven point from $118 to $113 increasing significantly your chances of turning a profit on this trade.
But more importantly, you did not increase your risk.

Of course, some potential reward had to be sacrificed. Your potential profit is now limited to the stock going to $115. But if it goes to $115 by expiration the 110 call will be worth $5 and the 115 will be worthless, and your pro…

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Tuesday Top Off

by Phil - September 30th, 2008 8:49 pm

Wow, what a week and it’s only Tuesday!

From record drops to record pops in one day is no way to run a market and it’s still a day trader’s paradise as what works one day is poison the next and vice versa.  This morning we started out looking for better than 20% bounces off yesterday’s drop and it didn’t take too long for us to get on track.  We started out cautious but it only took until 10:04 to decide we were on an uptrend as we noticed the big banks leading the charge and I called for covers on the SKFs.  We got a nice Consumer Confidence number an a better than expected Chicago PMI at 10 and by 10:13 our indexes were testing the 2.5% rule.

The momentum picked up at 10:18 when I saw on CNBC: "Now Kudlow is talking about what the Fed, FDIC and Treasury can do without Congress that I talked about above, this is going around and may give us some traction to the upside so watch out for those financial puts!"  That led to a very large amount of bullish trade ideas which obviously worked out on an up 485 day and we ALMOST started looking at full covers at 3:17 but, just 6 minutes later, we got the word the SEC would be changing the mark to market accounting rules which al…

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House Republicans help send fear soaring

by Andrew Wilkinson - September 30th, 2008 3:57 pm

Today’s tickers: VIX, CTX, POT, XLF, NCC, SOV, GD, AAPL, RIMM, C & BGG

VIX- CBOE Volatility Index – The failure of the house to pass the $700 billion bailout bill has sent stocks into freefall this afternoon. As a result shudders have been sent up the backbone of the financial system. Treasury yields have slumped to 3.66% from 3.80% last week, but the ugly impact has been delivered to the fear gauge, which at a reading of 46.16 is up some 33% on the session. The options market is reasonably busy, but it’s the character of today’s trading that is more important. The Oct 30 strike calls are most voluminous as the fear gauge easily takes out the recent 42.50 peak and so on to another 52-week high. Most of the 30,000 lot volume traded early in the session to either the mid or the bid price of around 3.10. The current bid on the same calls is 5.00. The same month 35, 37.5 and 40 strikes all appear to have been bought as investors look for higher strike prices as the VIX increases and maintains its vigor. At the January strike an investor has sold a previously unpopulated 55 strike call for a premium of 20cents.

CTX- Centex Corp. – Homebuilder Centex has dropped 10.3% today to $15.52 while put options at the money have been popular. At the October contract an investor appears to have ditched 10,125 lots at 80 cents while in the January contract an investor bought around 25,000 lots at 3.0. The trades could be related with prior open interest at least matching the size of the sold puts, while the January position appears to be fresh. The investor here is looking for Centex to decline below $12.00 by expiration (delta argues a one-in-three chance) or could be a hedge against a long position in the u…

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