Weekend Reading – Reviewing the Reviews
by Phil - January 1st, 2011 8:28 am
I am still trying to get more bullish.
I was thinking about writing something cute like I resolve to get more bullish but that would be wrong. I try, in my own humble way, to "get" the market right. That means I am not bullish or bearish but Truthish (to further botch Stephen Colbert’s use of the word) and, as Buddah says: "There are only two mistakes one can make along the road to truth; not going all the way, and not starting." Confucious reminds us that there are three methods by which we may learn wisdom: "First, by reflection, which is noblest; Second, by imitation, which is easiest; and third by experience, which is the bitterest."
In that spirit, we will spend the day in reflection so that we are better able to start on that long road to the truth so that we will be better able to imitate the things that will work in the year to come while trying to avoid making mistakes that will give us bitter experiences.
This post is not about me – We had a fantastic year and I’ve already given some outlook for 2011 back on the 19th in that weekend’s "It’s Never too Early to Predict the Future" and our current position is short-term bearish in the Jan-April time-frame, looking for a pullback to at least 1,200 on the S&P and possibly back to 1,150.
After that, we are expecting a return to steady gains but without the irrational exuberance we’re currently experiencing. So no, I am not bearish – I simply think we’ve gotten ahead of ourselves. Since we don’t know where the rally train will stop, we have our "Breakout Defense – 5,000% in 5 Trades or Less" from Dec 11th, which were a set of very bullish, highly levered plays where a little bet can pay off a lot if we simply hold our long-established breakout levels.
How much is "a lot"? Well my GE trade idea, for example, was to sell the 2013 $12.50 puts for $1.10 (net $1.15 in ordinary margin according to TOS) and to use that money to buy the 2012 $17.50/20 bull call spread for .95, which was a net .15 credit on a $2.50 spread that was on the money at the time. GE has gained about .75 since the 11th and…
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DiggMonday Market Movement – “Like Moths to a Flame!”
by Phil - November 29th, 2010 8:01 am
"Investors are drawn to China like moths to a flame." – Neil Woodford
That’s a great quote. Neil is the head of investments at Invesco, running the UK’s largest investment fund with a decade of 15% average returns under his belt so let’s take the man seriously for starters. Mr Woodford’s concerns coincide with figures showing that food prices in China were 10.1pc higher in October than in the same month last year – a level of inflation not seen since mid-2007. This is deepening concern that China’s economy is now starting to overheat.
"I do not deny that in the long term an economy like China will grow much more rapidly than the West. But I think one has to be very careful about correlating growth necessarily with economic opportunity, and opportunity to make money," said Mr. Woodford.
And so it is that the moths are all drawn to the light, even as it burns them. For they are blindly drawn to its grace, hitting their heads about the light, destroying their senses, going without food, and becoming easy prey to those that hunt them. Even those few moths that will get within the embrase of the light will burn unable to escape, ever.
There was no escape for Ireland this weekend as the IMF and EU pinned the country down and forced them to swallow a $130Bn aid package at (get this!) 6.7%. $17.5Bn of this money is to come out of Irish pension funds all just to make sure Bill Gross doesn’t lose any of the money he lent to Ireland! I honestly cannot tell you who is the more vile, despicable villain in this debacle. Is it the banks, who started this mess with their idiotic lending practices? Is it the lobbyists and lawmakers, who turned Ireland into a tax haven for EU Corporations and destroyed the economy by funneling tax breaks to the wealthy? Is it the Irish Government, who stupidly bailed out the failing banks with guarantees that put the nation on the hook for more money than their entire GDP. Is it the bondholders, who drove up the cost of financing Ireland’s newfound debt to levels that threatened to break the National Bank or is it the EU & IMF, who are effectively playing the role of loan sharks, borrowing $100Bn at…
Tempting Tuesday – Getting in the Zone
by Phil - November 16th, 2010 8:29 am
It’s hard to be in cash, isn’t it?
I’ve been calling for cash for weeks and now I’m starting to feel like Braveheart, trying to get anxious Members to hold, Hold, HOLD in chat every day as traders, by nature, like to trade and sitting in cash waiting for market certainty is pretty boring. Of course it’s a lot less boring than riding the market down all tied up in positions, isn’t it? As you can see from David Fry’s TLT chart, we did get it right when I called a top on Treasuries at $105 (Sept 24th) but it did take it a little while before it really began breaking down – better early than late in your market timing!
I was early with "October’s Overbought Eight" on the 3rd although, obviously, we had a few huge winners on our short-term plays as we caught that first dip on NFLX, PCLN, BIDU and FSLR while AMZN is looking good as is TLT (Dec $102 puts now $8.50 from net .35 entry, up 2,328% and done, of course). MOS, on the other hand, went up and up but is finally backing off it’s run. Dec $62.50 puts at $2.10 should do quite well if they fail to hold the $65 line.
CMG, on the other hand, has become our white whale, now up 27% from where we first looked at them. The original play was a ratio backspread of 4 March $190 calls at $10.75 ($4,300), selling 5 Nov $175 calls for $8.75 ($4,375) which was a net credit of $75 on the spread. The good news is the March $190 calls are now $51 ($20,400) but the very bad news is the Nov $175s are now $56 ($28,000). We have, of course adjusted this trade several times but it is still very painful to wait out.
An example of a simple adjustment on a trade like this is to roll the calls to 10 Jan $210 calls at $28 ($28,000) and rolling the March calls to 8 June $230 calls at $29 ($23,200) so an extra $2,800 put into the trade to buy a more manageable 6-month spread. When you do this, you have to keep in mind that your net entry has gone up from a $75 credit to a $2,725 debit and killing the trade now would cost $4,800 more so the…
Herbalife Optimist Secures Insurance Policy Ahead of Earnings
by Option Review - October 21st, 2010 4:04 pm
Today’s tickers: HLF, REE, XLB, BIDU, DAL, RSH & MOT
HLF - Herbalife, Ltd. – It looks like one cautiously optimistic options trader initiated a delta neutral hedge on the maker of weight management, nutritional supplement and personal care products this afternoon ahead of the firm’s third-quarter earnings announcement scheduled for release after the close on November 1, 2010. Herbalife’s shares are currently down 1.25% to stand at $63.20 as of 3:45 p.m. in New York trading. The investor appears to have picked up 58,000 Herbalife shares at a price of $63.76 each as well as 2,000 calls on a 0.29 delta for a premium of $1.45 per contract. The long stance taken in HLF shares suggests the trader is bullish on the stock and expecting shares to climb higher. But, the put options serve as downside protection in case the investor’s inclinations fail to align with the performance of the stock going forward. The put options will be well worth the added premium if earnings are disappointing and shares head lower ahead of November expiration day.
REE - Rare Element Resources, Ltd. – The Canada-based company that was the target of bullish options trading just 24 hours ago has transformed into a hub of bearish activity. Shares in Rare Element Resources, which own the Bear Lodge mine in Wyoming, fell as much as 27.05% from yesterday’s high of $13.71 to an intraday low of $10.00. Despite the substantial decline today the current price of the stock is still up roughly 260% since August 20, 2010, when shares were around $2.80 each. Pessimistic players took to the options field on REE to place bearish bets on the stock. Investors expecting shares to continue lower picked up put options and sold call options in the November and December contracts. Traders picked up…
Trade War Tuesday – China, Japan and US at Odds
by Phil - September 28th, 2010 8:20 am
War does not determine who is right, only who is left. – Bertrand Russell
Just when you thought it was safe to go back in the water, Japan and China are at it again. We discussed the "fishing’ incident last week and Japan has released the Chinese captain who rammed one of their Coast Guard vessels. Now shippers in several Chinese cities said customs officers have stepped up spot inspections of goods being loaded onto ships bound for Japan and being imported from the country. Traders said officers in some cases were taking the highly unusual step of looking at every item in a container instead of following normal practice of examining a small sample. The heavy searches, which can add costly delays to shipments. For it’s part, Tokyo wants China to pay restitution and now China’s navy is moving into disputed waters.
China is fighting a trade war on two fronts as they are threatening to retaliate against US businesses operating in China if Congress passes legislation intended to force a revaluation of the Yuan. The House of Representatives is set to consider legislation this week that would let companies petition for higher duties on imports from China to compensate for the effects of a weak yuan. Forcing China to raise the value of its currency may create 500,000 jobs in the U.S., most in manufacturing at above-average wages, according to C. Fred Bergsten, director of the Peterson Institute for International Economics in Washington. China’s currency, which is undervalued by as much as 25 percent, is the most important trade issue facing the U.S., he said in testimony last week.
So we are pressuring China to strengthen their currency, which would make our currency relatively weaker. One would think the dollar couldn’t get much weaker than it is now (see Dave Fry’s chart). We’ve been shorting GLD (buying GLL) and TLT, expecting a dollar bounce off these levels but if we fail here – we’re going to have one very ugly chart.
Of course a 10% drop on the dollar could be just the ticket for the markets – since our stocks are priced in dollars. That makes them look pretty good compared to cash that’s sitting on the sidelines (or tied up in notes) that’s lost over 10% of it’s buying power since June.
That’s right, JUNE! As people who travel to…
Delta-Neutral Trade Suggests Guarded Optimism on Ventas Ahead of Q2 Earnings
by Option Review - July 26th, 2010 4:31 pm
Today’s tickers: VTR, BIDU, WAT, DHI, LCC, ODP, GAP & ISLN
VTR – Ventas, Inc. – Shares of the REIT with a portfolio of seniors housing and healthcare properties in the U.S. and Canada rallied as much as 2.04% this afternoon to reach an intraday- and new 52-week high of $51.57. Ventas popped up on our ‘hot by options volume’ market scanner in the second half of the trading session after one cautiously optimistic investor bought a large amount of stock in combination with a delta neutral put spread in the August contract. The transaction shows guarded optimism by one investor ahead of the firm’s second-quarter earnings report scheduled for release ahead of the opening bell on Wednesday morning. The options strategist paid a premium of $1.05 per contract for an 8,500-lot August $40/$50 debit put spread with a .32 delta tied to the purchase of 272,000 Ventas shares at $51.37 each. The investor is hoping to see shares rally to new highs following earnings, but has shelled out extra premium in order to get long downside protection in case Ventas’ shares decline.
BIDU – Baidu, Inc. – The Chinese-language internet search provider’s shares jumped 3.6% to an intraday high of $80.87 today after the firm received an upgrade to ‘buy’ from ‘neutral’ with an increased target share price estimate of $92.00 from $69.00 at UBS. Shares were also lifted higher on news Baidu is in talks with mobile phone makers to discuss use of the firm’s search box on devices sold in China. The price of the underlying stock is currently up 2.05% on the day to arrive at $79.67 as of 3:00 pm (ET). Options players itching for continued appreciation in the price of the underlying shares through the end of this month purchased weekly call options on the stock that are set to expire on July 30. Investors picked up 1,000 calls at the July $80 strike for an average premium of $1.48 each. Call buyers at this strike make money if Baidu’s shares rally another 2.3% to trade above the average breakeven price of $81.48 by expiration day. Optimistic individuals looking for BIDU’s shares to hit a new 52-week high before the week is through purchased some 2,100 call options at the higher July $85 strike for an average premium of $0.29 a-pop. Shares must increase at least 7.05% in order for July $85 strike call…
Thrill-Ride Thursday – Wednesday Never Happened, Now What?
by Phil - May 27th, 2010 8:16 am
Poor CNBC! They are never going to get those chocolates…
I joked with Members during yesterday’s rally, after Fast Money’s bullish "Half-Time Report": "Uh oh – All the Fast Money people said buy - make sure you have your disaster hedges in place!" Indeed the market fell off a cliff almost the second they said it but we got out of our TZA calls (a little early) and did a little bottom fishing yesterday with our own buys on LYG ($3.13), Short EUO ($25.30), VZ ($27), FRO ($30.50), RIG ($58.50) and PFE ($15.10). Maybe I’m just a paranoid conspiracy theorist but I said to Members at the close:
That was a sad little show at the end wasn’t it? Nas was beaten with a stick into the close. AAPL $243, BIDU $67.46, AMZN $123… Ugly stuff. Not at all sure what they were trying to accomplish if not a flush…
Gap/RMM – Yes (we will gap) up. I just didn’t see why we would sell off like that. It seems that someone wanted to paint un ugly picture, maybe they didn’t get a good fill on Tuesday morning? Maybe not gap up tomorrow, maybe another drop and THEN we take off but I’m thinking a fund that wants to make numbers on Friday would want to flush us today and buy the SPX overnight and pump us up for a big finish so they can get back to cash on Friday and book it.
Isn’t it funny how that’s pretty much exactly what’s happening this morning? A huge gap up into the open that’s erasing the previous day’s losses when no one is trading – just like yesterday (when I get on my knees and pray - we won’t get fooled again). Fast Money got fooled out of their bullish 1:50 positions by 5pm as suddenly they relized the market is controlled by evil computer programs – not exactly news to us and no reason to shake us out of our well-hedged positions. We ignored rumors on China (and we always ignore Steve Ballmer) in chat and those seemed to be the major rumors moving the market lower yesterday.
Cramer kept the rumor mill grinding, saying: "The Chinese reportedly are debating whether or not to sell their European bonds, and that’s what killed our upward momentum." CNBC seems to have pulled the video so it’s hard to tell the tone but Cramer put up a list of a dozen stocks to buy but said to wait for…
Wild Weekly Wrap-Up – The Madness of the Markets (Part 1)
by Phil - May 21st, 2010 11:22 pm
Where do I even begin to go over this week?
I think, to set the proper tone, let’s look at my Thursday morning Alert to Members where I said: "Get out, Get Out, GET OUT of the short-term short-side plays if we get back over the 200 dmas. Take the money and RUN. CASH OUT THE SHORT SIDE. Is that clear? We may not hold these lines but that’s why we have October Disaster Hedges, the shorter-term downside plays are huge winners and should be cashed here – we’ll find something else to short if we fall off this support level. 200 dmas need to be held and those are: Dow 10,250 (8,650 is next major support), S&P 1,100 (900), Nasdaq 2,225 (not there yet! 1,800), NYSE 7,100 (5,500) and Russell 630 (still above! 500)."
We never did hold those levels but, as I mentioned in Friday morning’s post, I thought the end of day sell-off on Thursday was a bit forced, and, in my first Alert of Friday morning I said: "TAKE THOSE SHORT PROFITS OFF THE TABLE!" Now, I am not prone to making statements in all caps in Member Chat - almost never is about how often so this was a pretty important statement. Before that Alert, right at 9:42, I had already called for the SPY $105 calls at $2.45 as our first trade of the day. Those calls finished at $4.11, up 67% for the day so a good start to our expiration day!
A good start and our other day trades did very nicely as well:
- FXI June $39 calls at .98, now $1.28 - up 30%
- DIA May $102 calls at .13, out at .45 – up 246%
- DIA May $101 calls at .95, out at .80 - down 16%
- DIA May $101 calls at .10, out at .80 – up 700%
Of course we followed our strategies and took 1/2 the DIA’s off the table at a double so the other half was a free ride (we like to gamble but we’re not crazy!) but the FXI was the only "keeper" for the day, we’ll see if that was a good idea on Monday. We also took (as I said we would in the morning post) a number of well-hedged, bullish plays on BA (from the post), TNA, TBT (have I mentioned how much I like them lately?), INTC, AAPL, VLO, FCX (I guess we’re done relentlessly shorting them!), XOM and…
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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...
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