Option Bulls Buy Calls to Celebrate New Coverage of NuVasive Spinal Treatment
by Andrew Wilkinson - February 26th, 2010 5:49 pm
Today’s tickers: NUVA, TRE, FXE, BBY, DECK, LEN, AA, ESRX, JDSU & UNH
NUVA - NuVasive Inc. – The spinal surgery equipment maker’s shares are up sharply today by more than 32.50% to $39.38. NuVasive’s shares surged on news health insurance company, Aetna, is changing its policy to allow reimbursement for surgical spine treatment know as lateral interbody fusion. Bullish posturing in call options was observed today following the news about extended coverage for the treatment, which was previously excluded for being an experimental procedure. Plain-vanilla call buyers picked up nearly 2,000 contracts at the March $40 strike for an average premium of $1.34 apiece. Investors long the calls are prepared to pocket profits if NUVA’s shares rally above the effective breakeven point on the calls at $41.34 by expiration day next month.
TRE - Tanzanian Royalty Exploration Corp. – British Columbia, Canada-based gold mining company, Tanzanian Royalty Exploration Corp., attracted heavier than usual two-way trading traffic in put options today. The firm, which explores and acquires gold properties in Tanzania, realized a 2.30% rally in its shares during the session to $4.05. More than 25,000 in-the-money put options changed hands at the October $5 strike with the majority of the volume trading to the bid. Approximately 14,200 puts were sold for an average premium of $1.31 per contract, while 5,200 put contracts were purchased at that strike for roughly the same amount of premium. In-the-money put sellers are perhaps anticipating continued bullish movement in the price of the underlying by October expiration. Investors short the puts keep the full $1.31 premium per contract if TRE’s shares rally above $5.00 by expiration day. Put sellers stand ready to have shares of the underlying stock put to them at an effective price of $3.69 apiece in the event that the put contracts remain in-the-money through expiration day.
FXE - CurrencyShares Euro Trust – Shares of the FXE exchange-traded fund, which reflects the price of the Euro, are up 0.45% to $135.88 in afternoon trading. A decent-sized put butterfly spread on the fund indicates one investor does not expect the current rally to continue. On the contrary, the parameters of the spread benefit the trader most if shares decrease roughly 2.25% in value by April expiration. To enact the bearish butterfly play, the investor purchased 5,000 puts at the April $134 strike for a premium of $1.50 apiece [wing 1], and picked up 5,000 puts at the lower…
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Wild Weekly Wrap Up - Only Halfway Through January!
by Phil - January 16th, 2010 8:29 am
Wheee, what a ride!
The week can be neatly summed up by my 1:35 comment to Members in yesterday’s chat, summed the week up quite nicely as I said: "So funny, a whole week of gains I thought were ridiculous wiped out in 4 hours." Of course it’s easy to laugh when you play the market correctly - as I had said in the morning post, we had cashed out into Thursday’s run up and planned on going bearish through the weekend but it turned out we got our sell-off early, jumping the $100K Portfolio, for example, up 12% in one day - enough to send us back to cash rather than risk a weekend reversal.
We laid the groundwork for this little sell-off in last weekend’s posts as we put up an aggressive Buy List for Members but in my regular weekend post we emphasized the need to cover our buys with "Disaster Hedges" as we were heading to the tops I had predicted when I published the "Last Charts of the Decade," where I set resistance target of Dow 10,457, S&P 1,135, Nasdaq 2,314, NYSE 7,389 and Russell 638. As you can see, I pretty much hit them on the head, other than the Dow but that’s because our year-old 5% rule calculations did not account for the change in the Dow that replaced C and GM with TRV and CVX, who added about 100 Dow points since their inclusion so we started using 10,549 this month and we’ll make it 10,557 for today’s chart, which makes perfect sense looking at this group (I added the Transports as they are fell right off our 2,000 target, giving us the early warning that things were not right):
As you can see, the 5% Rule rules! I will apologize for being such a grump this week but the rally was really starting to annoy me as it was so blatantly forced up through our levels without a proper test that is was really getting me down about the markets. I don’t mind that the markets are manipulated, that’s been going on since markets were invented - it’s stupid and destructive manipulation that bothers me, the kind that, long term, destroys more investor confidence than it builds and squanders capital resources on the "wrong" companies (and now, ETFs!).
In this case, very precious investor capital is being steered into commodities, which is a very poor use of recessionary capital as is inflating the money supply to…
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Option Implied Volatility on JPM at Lowest Level Since Oct. 2007 Following Q4 Earnings
by Andrew Wilkinson - January 15th, 2010 4:21 pm
Today’s tickers: JPM, MNKD, CHK, BIDU, PFE, FXE, AA, SHFL, IBB & INTC
JPM – JPMorgan Chase & Co. – Profit-taking measures employed on the banking institution today show keen foresight by one investor who walked away from the table today with a nice chunk of change in his pocket. Shares of JPMorgan are currently trading 1.80% lower this afternoon to $43.89 even though the firm posted fourth-quarter earnings of $0.40 per share, which exceeded average analyst expectations by a margin of $0.13 a share. It looks like the investor banked gains on a previously established short put position in the February contract today by buying back the contracts at a discounted premium. The trader originally sold 20,000 puts at the February $42 strike for an average premium of $1.02 per contract this past Wednesday January 13, 2010. Today the same individual appears to have purchased-to-close the position by paying a lesser premium of $0.67 per contract. Net proceeds on the transaction amount to $0.35 apiece. The decline in shares of the underlying today certainly cut into the trader’s available profit, but the significant reduction in option implied volatility perhaps benefited the investor by weighing down option premiums. Option implied is 17.94% lower to stand at 25.13% – the lowest level since October of 2007 – as of 2:45 pm (EDT).
MNKD – MannKind Corp. – Shares of the biopharmaceutical company increased 7% in the first half of the trading day, but reversed direction in afternoon trading, falling 2.5% to stand at $10.10. Options activity in the May contract indicates lower volatility in the price of the underlying through expiration. It appears one investor initiated a short straddle play on the stock by selling 5,000 calls at the May $10 strike for a premium of $2.41 apiece, in combination with the sale of 5,000 puts at the same strike for $3.22 each. The straddle-seller pockets a gross premium of $5.63 per contract, which he keeps if MNKD’s shares settle at $10.00 by expiration. The transaction could be the work of an investor selling volatility. Implied volatility is currently up 8.4% to 122.16% with 90 minutes remaining in the session. The investor need not hold the short straddle through expiration in order to profit. Perhaps the trader is looking for a reduction in option implied volatility, which would likely result in lower premiums on both the calls and the puts. Lower option premiums allow the…
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Investor Initiates Volatility Play on Alcoa Ahead of Earnings
by Andrew Wilkinson - January 11th, 2010 4:13 pm
Today’s tickers: AA, GLD, MGM, NXY, INTC, NDAQ, ANDS, F, EEM, MMR & MELI
AA – Alcoa, Inc. – A short straddle play on the largest U.S. producer of aluminum today implies one investor anticipates Alcoa’s shares will remain range-bound through January’s expiration on Friday. Alcoa’s shares appreciated 1% to a new 52-week high of $17.20 (as of 12:40 pm EDT) during the session. According to one Bloomberg article, the firm may report fourth-quarter profits of $0.06 per share today. The sold straddle strategy also indicates the trader expects lower volatility in the price per share. Perhaps this individual is taking advantage of the typical drop in option implied volatility, which tends to accompany earnings announcements. The investor sold 10,000 calls at the January $17.50 strike for a premium of $0.59 apiece, and sold 10,000 puts at the same strike for about $0.69 each. The gross premium pocketed on the trade amounts to $1.28 per contract. The full $1.28 premium is safe in the investor’s wallet if the contracts expire worthless at a share price of $17.50 on Friday. The short call and put positions established today leave the investor vulnerable to potential losses in the event that Alcoa’s shares swing outside of the breakeven boundaries. Losses accrue if shares edge beneath the lower breakeven price of $16.22, or if shares rise above the upper breakeven point at $18.78.
GLD – SPDR Gold Trust ETF – Shares of the exchange-traded fund, which mirrors the price of gold bullion, may be up more than 1.25% to $112.82 today, but option traders populated various contracts with bearish strategies. A hefty put spread appeared in the June contract. The transaction involved the purchase of 17,000 puts at the June $105 strike for a premium of $3.50 each, marked against the sale of 17,000 puts at the lower June $95 strike for roughly $0.52 apiece. The net cost of the pessimistic play amounts to $2.98 per contract. If the investor is holding a long position in GLD shares, the spread provides downside protection in case shares slip beneath the breakeven price of $102.02, by expiration in June. Additional bearish indications appeared in the September contract. One trader initiated a risk reversal by selling 5,000 calls at the September $130 strike for $4.55 each, spread against the purchase of 5,000 puts at the lower September $100 strike for $3.60 apiece. GLD’s shares must trade beneath $130.00 through expiration in…
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Testy Tuesday Morning
by Phil - January 5th, 2010 8:27 am
Wow - what a lot of work to get back to last Tuesday’s high!
As usual, the vast majority of gains came in pre-market trading and the rest came in light-volume, early morning trading while the rest of the day was dominated by every buyer finding a willing seller for 75% of the day’s volume. We saw what happened on Thursday when someone big wants to sell and there are no buyers so we’ll see how long the bull’s luck (manufactured or otherwise) will hold out as we begin to get economic data along with some early earnings reports.
The Ag sector popped 2% yesterday ahead of tonight’s earings from MOS with MON checking in tomorrow morning so we’ll see how wise those last-minute bets were in short order. SONC also has earnings tonight and we like those guys long-term. SONC makes a decent buy/write candidate as you can buy the stock for $10.29 and sell June $10 puts and calls for $2.25 for a net entry of $8.04 with a very nice 24% profit if called away at $10 and an average entry of $9.02 (a 12% discount) if more stock is put to you below $10 in June.
FDO and WOR also report tomorrow morning. FDO will be interesting but a weak dollar probably hurt them last quarter. Tomorrow night we hear from BBBY, BLUD, OHB and Sonic competitor RT, who seem a bit pricey at $7.50. Thursday we get our first real builder, LEN along with STZ and TXI. After the bell on Thursday we hear from APOL, CRI and SCHN with GBX and PSMT on Friday. AA officially kicks of earnings season next Monday with GAP, INFY, KBH, BGG, SCHW, SHFL, INTC and JPM highlighting the reporters.
We have plenty of data this week including Factory Orders and Pending Home Sales at 10 am along with December Auto Sales throughout the day (did you get a new car for Christmas?). Tomorrow is jobs day, with the ADP Report and Challenger Job Cuts ahead of the bell followed by ISM Services (yesterday’s ISM was a nice beat) and, of course, Crude Inventories at 10:30 which are unlikely to sustain $82 oil (USO Jan $40 puts for .80 are a good way to play this). We talked about the other stuff yesterday so I won’t repeat it - suffice to say we have plenty of data this week to see if we justify these lofty levels.
Everyone is talking about AAPL’s new "Slate" computer so I’m not going to. …
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Caterpillar Optimist Buys Bullish Risk Reversal
by Andrew Wilkinson - December 21st, 2009 4:04 pm
Today’s tickers: CAT, EEM, CHK, AAPL, AA, UUP, MNKD, LVLT, CHTT, WTR & WAG
CAT - Caterpillar, Inc. – Near-term bullish options trading on the machinery manufacturer today suggests some investors are positioning for a rally in CAT shares by expiration day in January 2010. The stock edged 0.75% higher during the trading session to $57.56. One investor initiated a bullish risk reversal on Caterpillar by selling 6,000 puts at the January 55 strike for a premium of 95 cents each, spread against the purchase of 6,000 calls at the now in-the-money January 57.5 strike for 1.67 apiece. The net cost of the reversal play amounts to 72 cents per contract. The investor accumulates profits on the transaction if CAT’s shares rally above the breakeven price of $58.22 by expiration.
EEM - iShares MSCI Emerging Markets Index ETF – Shares of the emerging markets exchange-traded fund increased 0.10% today to $40.41. Option traders established long-term bullish and long-term bearish positions in the January 2012 contract during the session. A bullish risk reversal took place at the January 2012 40 strike where one trader sold 6,500 puts for 7.80 apiece to buy 6,500 calls for 7.50 each. The optimistic investor pockets a net credit of 30 cents per contract on the transaction. The full 30 cent credit is safe in the trader’s piggy bank if shares of the EEM trade at or above $40.00 through expiration in two years. The investor is positioned to accrue additional profits as shares increase above $40.00. The other transaction observed in the January 2012 contract appears to be bearish. The trade involved the sale of 10,000 calls at the January 2012 45 strike for a premium of 5.30 each, marked against the purchase of 5,000 puts at the January 2012 35 strike for 5.50 each. The investor takes in a net credit of 5.10 per contract due to the 2-to-1 ratio of calls sold to puts purchased. EEM’s shares must trade below $45.00 in order for the investor to keep the 5.10 credit.
CHK - Chesapeake Energy Corp. – Natural gas and oil exploration and production company, Chesapeake Energy Corp., experienced a 1.75% rally in the price of its shares to stand at $26.52 in afternoon trading. Some investors are anticipating a significantly higher share price for CHK by expiration in July 2010. Chesapeake-bulls bought roughly 4,000 calls at the July 30 strike for an average premium of 1.86 per contract.…
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Human Genome Call Options Active Ahead of Phase 3 Trial Results
by Andrew Wilkinson - October 29th, 2009 4:54 pm
Today’s tickers: HGSI, MSTR, INTC, FXI, EFA, AA, AVP, RDC, PLL, FSLR, MOT & AKAM
HGSI - Human Genome Sciences, Inc. – Shares of the biopharmaceutical company made a miraculous recovery since yesterday’s slaughter by exploding 13.25% higher during the session to $20.40. Traders populated various contracts with bullish plays after HGSI was raised to ‘overweight’ from ‘neutral’ with a 12-month target share price of $25.00 at JPMorgan. Heavy call volume in the November contract was likely driven by traders anticipating results of Phase 3 trials employed to evaluate the efficacy of HGSI’s potential drug treatment for lupus, Benlysta. Trading at the November 20/25/30 strike prices mimicked the butterfly spread strategy, and suggests perhaps that traders expect shares to rise to $25.00 by expiration. Investors bought at least 3,500 calls at the November 20 strike for 1.88 apiece as well as purchased 3,500 calls at the November 30 strike for 60 cents each. These contracts effectively mimic the wings of the spread while the 9,000 calls sold at the central November 25 strike perhaps represent the body of the spread. Call spreads were initiated in both the December and January contracts. The December transaction, for example, involved the purchase of 1,000 calls at the December 25 strike for 2.60 each, spread against the sale of 1,000 calls at the higher December 30 strike for 1.00 apiece. The net cost of the trade amounts to 1.60 per contract. Thus, the investor may accumulate maximum potential profits of 3.40 per contract if shares of HGSI rally up to $30.00 by expiration day in December.
MSTR - Microstrategy, Inc. – The software company appeared on our ‘hot by options volume’ market scanner this afternoon due to bullish options activity. Investors initiated optimistic plays on the stock despite the 1% decline in shares to $73.03. Profit-taking action appeared in the January 2010 contract while fresh positions were taken in the April 2010 contract. It looks like one investor originally purchased 3,600 calls at the now in-the-money January 70 strike for an average premium of between 3.00 to 3.50 per contract back on July 31, 2009. Today the trader sold the calls for a whopping 7.20 apiece. Net profits enjoyed on the closing sale amount to a minimum of 3.70 up to 4.20 each. Thus, total potential profits earned by the trader are anywhere from $1,332,000 to $1,512,000. In the April contract a bullish risk reversal suggests investors expect…
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Weekly Wrap Up - Double Up or Double Top?
by Phil - October 10th, 2009 8:37 am
Not such a good week!
Last week was FANTASTIC and we had 28 winning trades out of 36 with an average gain of 42% on the winners and an average loss of 12% on the losers - now THAT’s A GOOD WEEK. We were stopped out of most of our bearish trades on Monday but we took a lot of new ones, which I’ll get into later… Of course, since we are rangish and play both ends, the good news is we still had our "losers" and puts that we sold on long positions and those turned into huge winners in just 5 days:
- AA at $13.30, out at $15 - up 12.7%
- AAPL Jan $165 puts sold for $7.40, now $4.70 - up 36%
- BAC Oct $17 puts sold for .97, now .28 - up 71%
- DIA Nov $92 calls at $5.40, now $7.30 - up 35%
- MHP 2011 $25 puts sold for $5.20, now 5.10 - up 2%
- RIMM March $100 calls at $1.45, now $1.25, down 13.7%
So, of the 6 that were not working last week, 5 are winners this week. As I mentioned at the end of last week’s wrap up, we were more than satisfied with our 5% drop that week and we did expect a bit of a bounce but we made the mistake of thinking The 250 points we gained by Tuesday morning was the end of it, but here we are at the end of the week, another 100 points higher and right back where we started from when we shorted into the rally in mid September.
Last weekend we were at a great point in our range as all our put plays had just paid off, this will be an interesting contrast as we have serious problems with our new short plays and we have a little less conviction than we had in mid September that we will get our correction - not after such a sharp turn off the 5% line this week. Nonetheless, we did stay 55% bearish into the weekend overall - still playing for our range. But, I’m getting ahead of myself, so let’s go back to Monday and see how we got here….
Monday Market Manipulation - Goldman’s CIT Bonanza
I was not at all pleased with the scam GS was running on CIT and neither were many in the press but their attention span lasted all of 24 hours as the markets mysteriously began to take off, neatly drawing people’s attention elsewhere….
Our concern over falling tax…
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Potash Attracts Option Plays as Shares Increase
by Andrew Wilkinson - October 6th, 2009 4:30 pm
Today’s tickers: POT, EWZ, USO, C, NTRI, GFI, AUY, AA, & WYE
POT - Shares of the Canadian producer of potash rallied more than 5% during the trading session to break through the $90.00-level. The stock tempered this afternoon, however, and stands just 2.5% higher for the day at $87.89. We observed interesting bullish plays take place in the December contract. One investor established a 2,000-lot buy-write strategy, also known as a covered call. The covered call involved the purchase of shares of the underlying stock for approximately $90.74, and the simultaneous sale of 2,000 call options at the December 110 strike for a premium of 1.80 per contract. The cost of buying the stock is reduced by the value of the premium received on the sale of the calls, resulting in an effective price per share of $88.94. Additionally, the short call position serves as an exit strategy for the trader if shares of POT trade above $110.00 by expiration. If the December 110 strike calls land in-the-money, the investor will likely have the underlying shares called from him, and he will be left with net profits of 24% on the rally in the stock. The other strategy employed by POT-lovers this afternoon was a call spread. Investors purchased 5,000 calls at the December 115 strike for 1.25 each, and sold 5,000 calls at the higher December 120 strike for 85 cents premium apiece. – Potash Corp. of Saskatchewan, Inc. –
EWZ - Shares of the Brazil exchange-traded fund are slightly higher this afternoon by less than 0.5% to stand at $69.58. Option traders expecting continued bullish movement in the price of the fund initiated optimistic plays across several contracts. One nearer-term indication of bullish sentiment is a call spread in the November contract. The trade likely involves the purchase of 2,000 calls at the November 71 strike for a premium of 3.23 apiece, spread against the sale of 2,000 calls at the higher November 77 strike for one dollar each. The net cost of the transaction amounts to 2.23 per contract. Thus, maximum potential profits of 3.77 are available in the event that shares of the EWZ rally 11% to $77.00 by expiration next month. Plain-vanilla call buying is another tactic employed by bullish investors today. Some 2,500 calls were purchased at the March 2010 80 strike for a premium of 2.70 each. Finally, 1,000 calls were coveted by a long-term…
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Weekly Wrap-Up, How to Make Money in a Down Market
by Phil - October 3rd, 2009 8:27 am
Wow. what a fantastic week!
Well, not for the markets but for us as we totally nailed it. It’s hard to believe that it was just two weeks ago, on Monday, the 21st, after I posted the "Wrong Way Weekly Wrap-Up" as the Dow rose from 9,600 to 9,800, that I had to apologize to members, saying: "I’m sorry because I don’t like being bearish - I’m an optimistic guy usually but I can’t just sit here and tell people what they want to hear. It’s just too irresponsible not to be cautious here. We make plenty of bullish picks but I maintain a very wary outlook until we get some real fundamental improvements."
That’s the funny thing about fundamentals, they don’t matter until they do - and then they matter a lot. It’s funny how I get labeled a perma bear when I’m shorting the market at the top and a perma bull when I’m buying the maket at the bottom. Gee, I always thought that’s what you’re supposed to do but it turns out that few people have the patience to work a market trading range and I don’t blame them, I blame the mainstream media, who encourage this destructive herd mentality to investing that culminates in Jim Cramer and his sound-board, where all the complexities of the market are supposed to boil down to either BUYBUYBUY or SELLSELLSELL.
It makes me seem downright wishy-washy when I said to members on the 21st: "I don’t have all the answers, but I do have a lot of questions - too many to get comfortable buying at these levels." On the whole, as I explained in detail way back in late July, I am neither bullish nor bearish, I am Rangeish. Yes, it’s a made-up word and I have to make it up because no other analysts these days seem to believe the market can go up AND down, everyone seems compelled to stick to one or the other AND THEY DO IT TO THE DETRIMENT OF THEIR READERS - I WILL NOT DO IT!
There are strong stocks and there are weak stocks and I can’t believe I even have to write this out but the best strategy is to short weak stocks and ETFs that have gone too high and buy strong stocks and ETFs that have gone too low. As I explained in my LiveStock appearance back on March 6th (when I was called a "perma-bull" for calling a bottom), the market is like a huge tanker being pulled by individual stocks that are like tugboats. If all the…
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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...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(