Yentervention Wednesday – Kan Baffles Bulls
by Phil - September 15th, 2010 8:22 am
As we discussed yesterday, it was meet the new boss, same as the old boss in Japan as Naoto Kan’s re-election sent the Yen to new highs as he was considered the least likely candidate to back intervention. Well surprise, surprise this morning as Japan officially intervened in the FOREX markets and sent the Yen down a full 2.5% as they used their Yen to purchase an undisclosed basket of currencies.
Since the Dollar is up today against both the Pound ($1.55) and the Euro ($1.29), we can assume the dollar is one of those currencies and demand for Dollars means upward pressure on rates so that should be the end of the TLT bounce for the moment. Stock boys want bonds to die so the money can come this way and bond boys want you to fear the stock market so you will let them hold your money (and charge you fees) at ridiculously low rates of interest. That’s they Yin and Yang of the markets.
“Investors were starting to doubt the government’s commitment to its pledge that it would take bold action,” said Yoshimasa Maruyama, a senior economist at Itochu Corp. in Tokyo. Kan and Noda in recent weeks repeatedly said that Japan was ready to take “bold” measures to stem the currency. The Japanese government official said European and U.S. officials were informed of the move in an effort to avoid a negative reaction. It took a while to convince Europe because authorities there didn’t like the idea, the person said.
We’ll see if the stronger Dollar today puts pressure on commodities but we’re in pretty good shape as this rally, for a change, has not been led by commodities as the market is now flat to the August despite an 8% drop in oil prices (see USO on chart):
I often complain about rallies that are led by Financials and Commodities as those are things that suck money OUT of the economy and are not long-term drivers of growth. The entire 2006-7 rally was this kind of rally and I bitched about it all the way up. We also had housing back then, another type of commodity, but that’s so dead now it’s hardly worth mentioning, is it? Actually housing is where we used a lot of commodities like lumber and copper etc. 33 months after the onset of the Great Recession, new home sales are still down 70% and non-residential construction is down 36% – that market is dead, dead, dead.
We get housing starts next week but who really cares? …
Facebook
Twitter
LinkedIn 
del.icio.us
DiggGoldilocks and the 300,000,000 Bears
by Phil - August 14th, 2010 3:43 am
Talk about feeling outnumbered!
As the guy in Airplane kind of said – "Looks like I pricked the wrong week to get bullish!" Of course, as I often tell people I am neither bullish nor bearish – I’m rangeish – and our range is the 5% band between around Dow 10,200 and S&P 1,070, which takes us as low as Dow 9,690 and S&P 1,016 and as high as Dow 10,710 and S&P 1,123 before I really "flip flop" my positions. Despite the fact that this is the range we predicted last October and is the range we’ve been in (other than a brief trip to 11,200, which we shorted the hell out of) all year – people still seem to find it necessary to call me either bullish or bearish as we navigate the channel.
I suppose I have been HOPEFUL for the month (now heading into day 14) that we will finally make a little progress and establish a higher floor at our usual mid-points while, at the same time, the MSM have decided that we are all going to die. That does make me kind of bullish by comparison doesn’t it? We are mainly in cash and we are well hedged to the downside so, unless we are REALLY heading much, much lower, there is little profit in speculating to the downside, other than our quick trades. As PT Barnum once said:
"A man who is all caution, will never dare to take hold and be successful; and a man who is all boldness, is merely reckless, and must eventually fail. A man may go on "’change" and make fifty, or one hundred thousand dollars in speculating in stocks, at a single operation. But if he has simple boldness without caution, it is mere chance, and what he gains to-day he will lose to-morrow. You must have both the caution and the boldness, to insure success."
Balance is the key to long-term success and we’ve had many conversations about that in Member Chat. Our goal is to be neither bullish or bearish but rather to sell premium to both the bulls and the bears when conditions permit us. As Ravalos said Friday in Member Chat:
"Ever since I became member (actually before I became member I was already following your newsletter for quite some time) I find it hard for me to BUY PREMIUM. Over time, I’ve realized that buying the
…
Bullish Strategists at Work Ahead of Arena Pharmaceuticals’ Earnings Report
by Option Review - August 3rd, 2010 5:03 pm
Today’s tickers: ARNA, GENZ, HL, CY, JCP, FR & XLB
ARNA – Arena Pharmaceuticals, Inc. – Options on the biotechnology company are active ahead of the firm’s second-quarter earnings report slated for release after the closing bell this afternoon. Shares rallied as much as 5.15% earlier in the session to an intraday high of $7.54, but are currently trading a lesser 1.95% higher on the day at $7.31 as of 3:35 pm ET. One optimistic investor hoping to see Arena’s shares appreciate ahead of October expiration enacted a bullish risk reversal. The trader appears to have sold roughly 9,000 puts at the October $7.0 strike for an average premium of $2.40 each in order to buy the same number of calls at the October $12.5 strike for an average premium of $0.60 apiece. The investor reels in a net credit of $1.80 per contract on the risk reversal, and keeps the full amount received on the transaction as long as Arena’s shares exceed $7.00 through October expiration. Additional, and potentially unlimited profits, start to accumulate for the trader if Arena’s shares surge 71% to exceed $12.50 by expiration day in October. The credit $1.80 credit pocketed by the investor provides limited protection against losses should Arena’s shares nosedive ahead of expiration. The trader starts to lose money if the price of the underlying stock falls 28.9% to trade beneath the effective breakeven price of $5.20 by expiration day. Options implied volatility on Arena Pharmaceuticals is up 5.5% to 197.15% ahead of earnings.
GENZ – Genzyme Corp. – The biopharmaceutical company, which is currently knee-deep in merger negotiations with Sanofi-Aventis, attracted bullish options investors during the trading session. It looks like one trader initiated a plain-vanilla debit call spread in the January 2011 contract to prepare for the sharp increase in the price of Genzyme’s shares that’s likely to occur if Sanofi-Aventis winds up purchasing – or at least confirming plans to purchase – the drug maker before January 2011 expiration. Genzyme’s shares inched up 0.25% this afternoon to $70.52 as of 3:15 pm ET. The options player picked up approximately 6,000 calls at the January 2011 $70 strike for an average premium of $4.42 each, and sold the same number of calls at the higher January 2011 $75 strike for an average premium of $1.72 apiece. The net cost of putting on the bullish transaction amounts to $2.70 per…
Another Manic Monday – Greenspan Finally Agrees With Me
by Phil - August 2nd, 2010 8:14 am
Wow, Alan Greenspan and David Stockman both came to my side of the debate in the same weekend and the market rockets – very interesting.
First, we had Alan Greenspan on Meet the Press, regurgitating my "Tale of Two Economies," which was our theme for 2010 investing and, of course, is something I have been carping about for many years as income disparity has become critical in this country. Somehow though, it sounds more official when a crotchety octogenarian says it – so we’ll give the Chairman his due:
Our problem, basically, is that we have a very distorted economy in the sense that there has been a significant recovery in a limited area of the economy amongst high-income individuals who have just had $800 billion added to their 401(k)s and are spending it and are carrying what consumption there is. Large banks, who are doing much better, and large corporations, whom you point out and the--and everyone’s pointing out, are in excellent shape.
The rest of the economy, small business, small banks, and a very significant amount of the labor force, which is in tragic unemployment, long-term unemployment, that is pulling the economy apart. The average of those two is what we are looking at, but they are fundamentally two separate types of economy.
Another conservative darling who turned on his masters this weekend is Reagan’s OMB Director, David Stockman, who eviscerated current Republican fiscal policies in a NY Times Op-Ed this weekend, summing it up neatly with the title: "How the GOP Destroyed the US Economy," which is a must read but here’s a few juicy tidbits:
IF there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing. The nation’s public debt — if honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015 — will soon reach $18 trillion. That’s a Greece-scale 120 percent of gross domestic product, and fairly screams out for austerity and sacrifice. It is therefore unseemly for the Senate minority leader, Mitch McConnell, to insist that the nation’s wealthiest taxpayers be spared even a three-percentage-point rate increase…
…This approach has not simply made a mockery of traditional party ideals. It
…
Arena Pharmaceuticals Options in High Demand as Shares Rally to New 52-Week High
by Option Review - July 30th, 2010 4:19 pm
Today’s tickers: ARNA, EXPE, LPX & NLY
ARNA – Arena Pharmaceuticals, Inc. – Shares of the biotechnology firm surged 14.6% this morning to a new 52-week high of $8.00 inspiring options investors to establish near-term bullish stances on the stock as the battle royal between the firm and its competitors to get an obesity drug on the market continues to rage. Arena’s shares are currently up 7.90% to stand at $7.53 as of 12:35 pm ET. Investors positioning for continued upward movement in the price of the underlying shares picked up 1,900 now in-the-money calls at the August $7.0 strike for an average premium of $0.93 apiece. In-the-money call coveters make money if Arena’s shares are trading above the average breakeven price of $7.93 at expiration. Buying interest spread to the higher August $8.0 strike where bulls purchased approximately 2,600 calls for an average premium of $0.58 each. Arena’s shares must rally 13.95% over the current price of $7.53 in order for August $9.0 strike call buyers to start to accumulate profits above the breakeven point to the upside at $9.58 by expiration day in August. Other optimists paid an average premium of $0.27 per contract to take ownership of 1,000 calls at the August $9.0 strike. Traders long the higher-strike calls profit as long as ARNA’s shares jump 23.1% to surpass the breakeven price of $9.27 by August expiration. Options traders exchanged more than 46,900 calls on the stock by 12:42 pm ET. Approximately 2.35 calls changed hands on Arena for each single put option in action thus far in the trading session.
EXPE – Expedia, Inc. – Online travel company, Expedia, popped up on our ‘hot by options volume’ market scanner in the first half of the trading day due to near-term activity in both calls and puts. Expedia’s shares surged 9.5% to touch an intraday high of $23.08 on news the firm reported earning second-quarter net income of $0.44 a share, which exceeded the average analyst forecast of $0.42 a share, after the closing bell on Thursday evening. EXPE’s shares are currently up 7.40% on the day at $22.63 as of 12:50 pm ET. Bullish players hoping to see Expedia’s shares extend gains scooped up approximately 1,100 now in-the-money calls at the August $22.5 strike for an average premium of $0.95 each. Call buyers stand ready to profit should the largest online travel company’s shares rally another…
Bull Buys Call Spread as Arena Pharmaceuticals’ Shares Soar
by Option Review - July 23rd, 2010 4:25 pm
Today’s tickers: ARNA, CQB, GAP, KWK, MCD & FL
ARNA – Arena Pharmaceuticals, Inc. – Shares of the clinical-stage biopharmaceutical company shot up 10.7% today to an intraday high of $5.89, inspiring one options strategist to purchase a debit put spread in the October contract. Arena’s shares have increased significantly since an FDA advisory panel said it does not recommend rival Vivus’ obesity drug, Qnexa, receive FDA approval. The bullish options investor prepared for continued upward movement in Arena’s shares by purchasing 3,000 now in-the-money calls at the October $5.0 strike for a premium of $2.45 each, and selling the same number of calls at the higher October $7.0 strike at a premium of $1.45 apiece. The net cost of the transaction amounts to $1.00 per contract. Thus, the trader is prepared to make money should the biopharmaceutical firm’s shares rally 1.85% over the current price of $5.89 to trade above the effective breakeven price of $6.00 by October expiration day. The investor walks away with maximum potential profits of $1.00 per contract if Arena’s shares surge 18.85% to exceed $7.00 by expiration. In the nearer-term September contract, another bullish player opted to sell 2,700 puts at the September $2.0 strike to take in an average premium of $0.30 per contract. The put seller keeps the premium received on the transaction as long as Arena’s shares trade above $2.00 through expiration day in September. Options implied volatility on ARNA is higher by 14.1% to 101.05% as of 2:55 pm (ET).
CQB – Chiquita Brands International, Inc. – Call buying on the international marketer and distributor of bananas and fresh produce continues today with shares of the underlying stock trading higher by 3.15% to stand at $13.10 as of 1:20 pm (ET). Bullish traders started to buy November $12.5 strike calls yesterday afternoon as Chiquita’s shares rallied nearly 5.5% to end Thursday afternoon at an intraday high of $12.72. The company’s shares continued their ascension today, inspiring investors to build up bullish stances on the stock ahead of the second-quarter earnings report next Thursday. Investors purchased approximately 3,000 calls at the November $12.5 strike by 1:25 pm (ET) for an average premium of $1.73 apiece. Call buyers make money if Chiquita’s shares increase another 8.6% to surpass the average breakeven point at $14.23 by November expiration. Traders buying the calls on Thursday have a clear first-mover advantage because they paid an…
Fast and Furious Four-Day Wrap-Up
by Phil - June 5th, 2010 7:12 am
Wheeeee, what a ride!
Like any good car race, the lead changes often in the markets. Yesterday the bears took the lead as the combination of Hungarian debt issues and a disappointing jobs number were like a tire blow-out for the bulls, who were forced to pull in for a pit stop. Fortunately, we had our seat belts on and had assumed the crash position as I had warned Members on THURSDAY Morning at 10:04:
Watch that 666 line on the RUT – we don’t want to lose that or even show weakness there… ISM a bit disappointing, now we’ll see what holds but I’m out of short-term, unhedged, upside plays here.
I felt strongly enough about it that we also posted it on Seeking Alpha, to warn as many people as possible, under the heading: "Phil Calls Short-Term Top." I don’t post live trade ideas on Seeking Alpha but in Premium Member Chat (and you can subscribe here) I followed right up at 10:17 Thursday morning with the following trade idea:
BGZ (large-cap bear) is at $15.27 and I like them as a hedge here with the (June) $14/16 bull call spread at .75, selling the July $14 puts for .95 and that’s a net .20 credit on the $2 spread with about $2.70 in margin so you can do a 10 contract spread for a $200 credit and $2,700 in margin (according to TOS standard) with a $2K upside if the market even twitches lower. Worst case is you own BGZ as a hedge to a dip below Dow 10,600 (your put-to area) at net $13.80 (9% lower than current price).
That’s what hedged trade ideas look like in our Member Chat. At PSW, you need to put some time in LEARNING how to trade and, more importantly, how to hedge. This is a fairly complicated options play but we take it BECAUSE IT WORKS! There are many, many simpler ways to play that don’t work (or carry far more risk) but we prefer to teach our Members how to do the things that do work. As it stands, just 48 hours later, BGZ is up 10% on Friday to $16.89 (so the spread is now 100% in the money) and June $14/16 bull call spread is now $1.50 while the July $14 puts are Down to .60 so net .90 already on the spread that already paid…
The Pharma Initiative
by ilene - May 17th, 2010 1:19 pm
Pharmboy discusses Merck, Regeneron, and Vivus and maps out his plans for trading stock and options in these companies. - Ilene
The Pharma Initiative
Courtesy of Pharmboy
Hola fellow PSW subscribers! The week is finally over, and the fluctuations in the market is making many of us jittery. This write up has a few picks for all, one that is conservative, one a bit more risk, and a fly-by-the-seat-of-your-pants short.
First, let’s take a look at the pharma & biotech sector in comparison to the entire market. The Healthcare Spider (XLV) and now the Biotech Spider (XBI) are now under performing the market. The most logical explanation for this is the passage of the health care bill. If the reimbursement is less, pharma and its compadres will also collect less. Many of the companies have already factored in the hit to earnings, so it is known the ramifications going forward. Drugs will always be needed, as they are one of the scientific advances for extending life (which in turn makes medical care more expensive). The population is not getting any younger, so economies of scale will kick in and increase revenue, giving incremental increases in profit (if it is a well run company). So, on to the picks.
Figure 1. Comparison of XLI & XBI against major market indices.
Merck & Company
Merck & Co. traces its origins to Friedrich Jacob Merck who purchased a drug store in Darmstadt, Germany in 1668; and Emanuel Merck who took over the store several generations later, in 1816. Emanuel and his successors gradually built up a chemical-pharmaceutical factory that produced — in addition to raw materials for pharmaceutical preparations — a multitude of other chemicals.
In 1891, George Merck established his roots in the United States and set up Merck & Co. in NY as the US arm of the family partnership, E. Merck (named for Emanuel Merck), which is now Merck KGaA. Merck & Co. was confiscated in 1917 during World War I and set up as an independent company in the United States. Between the wars and during World War II, the company was led by George W. Merck, who oversaw America’s germ-warfare research at Fort Detrick.
Figure 2. 2010 Merck stock price.
Merck has a broad therapeutic focus, with key products historically positioned within the cardiovascular (Zocor, Cozaar/Hyzaar), infectious diseases, endocrine, respiratory
…
Short (but Wild) Weekly Wrap-Up
by Phil - April 3rd, 2010 7:55 am
What a crazy week!
The markets were bucking like a bronco but were they trying to throw off the shorts prior to a move back down or trying to flush out the weak-handed longs prior to a big breakout to new levels? After gapping open to 10,900 on Monday morning we went up to 10,950, down to 10,830 and back to 10,950 – all to finish the week at 10,927, which is up 39 points since March 23rd so don’t tell me we’re wasting out time as that’s 5 points a day baby (if we round up).
We had the day off on Friday but we did get the critical Non-Farm Payroll data for March but, as noted in my report (and in the Member Chat), despite the very excited reaction from the futures, there is no clear indication there that either the Bulls or Bears have a lasting point. So perhaps the wild market action is nothing more than good old-fashioned indecision – the futures flew up but then Goldman said they saw "Little Underlying Improvement" in the data and that "Productivity Gains Have Diminished Sharply" - clearly mixed signals that may take some time to resolve.
Last weekend, I complained that it was a "6-Point Weekly Wrap-Up" as that’s all we got from the S&P, which finished at 1,166. This week I am happy to report that we gained 12 points – all the way to 1,178 and we are closing in on that 1,080 mark, which we did touch briefly at Thursday’s open (which gave us the great shorting opportunity we had looked for in Thursday morning’s post!). It’s not that I don’t respect the rally – technically, you have to respect the rally but that’s why we’re in cash: We can take advantage of these huge intra-day moves down (and sometimes up) - getting our 6-second bull rides and scoring as many points as we can before the rodeo clowns turn on the buy programs and stop the ride.
Overall, it’s a pretty mindless market. You can go long at about about 2pm and flip short about 10 am the next morning – in the futures that can add up to shocking amounts of money and it sure isn’t bad when you are using options for leverage either. We’re sure the game will collapse one day and hopefully we’ll be able to pull the rip cord without…
Testy Tuesday – Dow 9,650, Berkshire $60 Edition!
by Phil - November 3rd, 2009 8:14 am
Wheee, this is fun!
Just two weeks ago, on October 17th, I warned in the Weekly Wrap-Up that it was "Dow 10,000 or Bust" for the next week and we failed that one and last Wednesday we were looking to hold NYSE 6,900 and THAT failed too. Now we enter into the second phase of our limbo game where the deep-voiced guy asks the question "how low can you go?" and we’ll be setting our next bar at our long-standing 9,650 target for the Dow, which we are already hitting in pre-market trading. If that fails, we’ll have to look down to S&P 1,000. As you can see from Jesse’s Chart, we took a nice bounce off serious resistance yesterday but we’re just not feeling it yet, even though the market is now as technically oversold as it was in March.
Yesterday was like a roller coaster and my first Alert to Members of the morning targeted 9,775 as the on/off line for our bullish/bearish posture on our DIA covers. We whipped past that line right about 10 am as we got good reports from ISM, Pending Home Sales and Construction Spending but by 12:45 we had broken back down so I sent out an Alert calling to refocus back to 55% bearish by adding the DIA Jan $100 ($5) and Jan $102 puts ($6.20), already covered by the Nov $99 puts ($2.50).
The reason we mess around with our covers is we don’t want to flip in and out of our option positions, which are generally either straight bearish or well-hedged long positions, is because options carry a relatively large bid/ask spread and cost you money every time you get in and out. So, on the whole, we’d rather let our over-riding cover plays, like our DIA spread, adjust our stance as conditions change, making a single adjustment that keeps us balanced as we ride out the market waves.
It’s been a couple of weeks since we had a good, old-fashioned stick save but we got a mother of one yesterday (as seen in Dave Fry’s chart) which was right on schedule as Kustomz bought it up in Member Chat at 3:09 and I agreed at 3:19 that "It does feel like a pre-stick move" and we grabbed VIX $25 puts at .85 to protect ourselves from a sudden surge in complacency.
By 3:33, my next comment to Members was: "The stick lives!" but…
German
Spanish
French
Italian
Portuguese
Japanese
Korean
Russian
Chinese
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
(