Dogs of doom sniffing at General Motors

by Andrew Wilkinson - November 11th, 2008 2:03 pm

Today’s tickers: GM, XLF, GE, HIG, SBUX, FMCN & LBTYA

GM – General Motors – Trading in options on the ailing auto manufacturer was robust with close to 90,000 contracts changing hands by 11:30. Shares made a fresh 52-week low and at the time of writing have shed 17% to $2.80 as option traders piled on more bearish bets against the company. Call options granting rights to buy the stock at prices now above the share price were sold aggressively at the November and December 3.0 and 4.0 strikes. At the November 4.0 strike puts investors bought over 3,000 lots and so reserved rights to sell shares at a healthy premium to the current trading price.

XLF – Select Sector Financial SPDR – With no signs of a let-up in the financial sector, shares are once again taking a beating and stand 3.3% lower at $13.33. However, there could have been some signs of optimism playing out in the deferred expiration dates this morning through XLF options. In the January 2009 contract investors sold around 5,000 put options at the 12.0 strike at a premium of 1.10. Meanwhile they bought similar amounts of out-of-the-money calls at the 21.0 strike for a tiny 10 cent premium. The strategy appears to be a reversal style in the expectation that sometime during the next couple of months the sellers will burn themselves out leaving no option but for a rebound of the survivors. In the January 2010 contract 6,000 call options granting rights to purchase shares at a price of $15.00 were bought at 2.35, while the same amount of puts were traded at the middle of the market at a richer premium of 4.15. While this combination isn’t crystal clear, it does smack of a reversal type strategy with t…

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Testy Tuesday Morning

by Phil - November 11th, 2008 9:15 am

Can we hold S&P 900 today?

It didn’t take us long to go negative yesterday.  My opening comment to members at 9:36 was: "I don’t think I’d want to be rushing in to chase things at the moment, that was a big gap up and strains credibility as the Dow leaps to 2.5% ahead of everything else."  We set some watch levels like NYSE 6,000, Russell 515, S&P 950 (see David Fry’s Chart) - all of which quickly failed and left us with a negative bias.  4 minutes later we shorted USO, which I thought was some low-hanging fruit at $53 and the $61 puts quickly hit our 25% goal (and $50 target) for a day trade.

By 9:46 we were back in the DXD Dec $65s at $11.75, which finished the day at $14.95 and remain excellent protection since the Nov $78s can be sold to cover at $5 if the market turns (and we can only hope it does).  Obviously they were much higher during the day as DXD topped out at $78 before pulling back.  We ended the day still bearish and my 3:41 comment was: "…

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Chinese stimulus creates entry to CAT bear play

by Andrew Wilkinson - November 10th, 2008 3:27 pm

Today’s tickers: CAT, HMY, GE, ACAS, BWLD, GM & GS

CAT – Caterpillar Inc. – The Chinese government’s fiscal stimulus helped inspire a rally in commodity and construction related companies. Heavy equipment manufacturer, Caterpillar saw its shares rally to $40.88 before having to make do with a 1% gain to $38.83. Our market scanners honed in on a large and opportunistic bearish put spread in the December contract where a 15,000 lot transaction went through at a premium of a net 95 cents to establish limited downside protection. The trade involved a long position in the 35 puts and a short position at the 30 strike aimed at providing as much as 4.05 per contract should shares in Caterpillar reach or fall beneath the $30.00 price level by expiration. The recent 52-week low at $31.95 was established on October 24. It would appear that this investor is taking advantage of a market rally to reach for downside protection and has the view that there is only so much that governments can do to stop the rot.

HMY – Harmony Gold – Two large and possibly related option trades were recorded earlier in options on this gold miner. The January 2.5 strike puts were sold at a nickel 26,600 times, which possibly marked the closing sale of a long position of similar size at three times the premium on October 17. At the same time an investor plumped for a fresh position at the May 2.5 strike puts on volume of 13,500 contracts at a premium of 30 cents. It’s likely that the investors was rolling forward downside protection perhaps inspired by the rebound in metal prices today.

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Monday Market Aid - 4 Trillion Yuan!

by Phil - November 10th, 2008 9:23 am

Wow - We expected an up move in the FXI but this is incredible!

The Chinese government rolled out a massive $586Bn stimulus package that amounts to roughly 16% of China’s entire GDP - that would be like the US dropping a $2Tn check on the economy (which is actually the exact amount I recommended for Obama’s New New Deal package so maybe they are onto something). The plan includes spending in housing, infrastructure, agriculture, health care and social welfare, and features a tax deduction for capital spending by companies.  That’s right conservatives - capital spending tax cuts are now communist!

This is an exciting start to this weeks G20 meeting on Saturday as the 20 largest economies of the World converge on Washington to discuss ways to turn the global economy.  Actually, to tell you truth, they only seem to know one way and, if China’s action today is any indication, we can expect Trillions of bailout dollars to rain down on the global economy.  The image on the left is the same image I used on Thursday morning when the BOE turned on the money faucet with their 1.5% rate cut, sending us into bullish energy and commodity plays that should follow through nicely this week as the G20 seems perfectly content to inflate their way out of this crisis. 

China’s financial system remains largely unscathed by the global credit squeeze, but prospects for the country’s continued rapid growth have quickly …

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Wild Weekly Wrap-Up

by Phil - November 8th, 2008 11:55 pm

Well that was a lot of work to lose 400 points for the week!

On the brighter side we’re up 500 points since October 10th and it’s starting to look a little bit like some healthy consolidation forming a bottom around 8,500.  8,500 is close enough to 40% off 14,000 for us to use the rounded numbers for a top and bottom and, as we form a new base, I’ll be adjusting our upside expectations accodingly but it’s pretty clear that we’ll be testing the 9,000 line next week and Robin Hood’s Dow chart gives us a pretty clear indication of the very hard road to recovery that lies ahead of us.

We had a fantastic week with many great trades as we were right on top of the market moves all week.  In last weekend’s wrap up I said: "We have the election to distract us on Tuesday and that is also keeping a lid on the financial news as most papers are concentrating on the election so it may go unnoticed on Monday that no additional funding is pouring into the markets.  We have a lot of data hitting the wire… after which the market mood may change quite a bit."  Well, that was pretty much exactly what happened, with the marke…

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Good news for cancer drug maker creates calendar play at OSI Pharma

by Andrew Wilkinson - November 7th, 2008 4:21 pm

Today’s tickers: OSIP, TLB, GM, YHOO, FLR, KBR, DIS & GS

OSIP – OSI Pharmaceuticals – Option traders appear to spy an opportunity for higher prices at cancer-prevention drug-manufacturer, OSI, which would build on today’s 14.4% gain to $40.46. Its Terceva lung cancer treatment is already approved for cases where patients fail to respond to chemotherapy. But a report today shows that when used as an early pre-chemo treatment the drug is successful in slowing the progress of lung cancer. In addition a negative report about a competitor’s drug helped sentiment surrounding the stock. Option traders appeared to play the situation cautiously by entering what appears to be a calendar spread. We note similar fresh volume at the November and December 45 strike calls where around 3,000 lots were sold in the front month and bought in the December contract for a net premium of 85 cents. This reduces the outlay on the far contract by half and makes a lot of sense since the company along with its partners is looking at the steps necessary to seek approval for the early approval, which will undoubtedly take weeks to secure. The risk is that the stock continues to rally sooner rather than later.

TLB – Talbots Inc. – Shares in women’s apparel retailer continued to decline Friday after a poor earnings report yesterday and withdrawal of 2009 guidance. Shares are down almost 20% at $5.38 and it appears that one savvy trader is banking gains on positions taken out during October. The November 7.5 strike put and the December 5.0 strike put traded to the middle of the market, but the sale of 3,000 January 7.5 put options gave the game away. These traded at a pre…

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TGIF!

by Phil - November 7th, 2008 9:13 am

It’s all about the Qs today.

As David Fry’s chart indicates, we are down in that channel below our much-watched 32.50 line that makes or breaks our rallies and just above (as of yesterday’s close) the death line at 30.  If the Qs go below 30, we have to throw up our hands and sadly go back to weighted bearish but I just can’t see it as even these terrible earnings reports we’ve been getting this quarter do not justify a 5-year retrace in stock prices for the index, 45% off last year’s highs.  I laid out my technical case in last night’s Big Chart review so I won’t go back into it here but we are as comfortable as we can be using options spreads to give ourselves a 20% discount on entries at this point as we feel that the 50% line (off the highs) will be holding and we’re very comfortable holding long-term at that level and generating an income selling calls every month for as long as we remain in what would have to be a very prolonged recession to keep the markets at that level.

We have no intention of giving up that 30% on the bear side that will guard us against a Great Depression-style sell-off should a major bank, GM or a country fail in the next 6 months but, hopefully, every week we go without such an event we will see a few more investors move some cash off the sidelines.  We get to, hopefully, move past GM and F earnings today and they are expected to be a disaster.  A lot of yesterday’s selling was based on rumors that GM was not likel…

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