Iron Condor Nesting in Brazil Index ETF
by Andrew Wilkinson - February 4th, 2010 5:21 pm
Today’s tickers: EWZ, CVX, WFC, GFI, SU, MA, ZION, DAL, AMAG & JWN
EWZ – iShares MSCI Brazil Index ETF – An iron condor options strategy employed in the February contract on the EWZ implies one investor expects the underlying share price of the fund to stagnate ahead of expiration in two weeks. Shares of the exchange-traded fund, which generally correspond to the price and performance of publicly traded securities in the Brazilian market, are down 5% today to $64.37. Today’s decline merely adds salt to the wounds – The Brazil index ETF has taken a severe beating in the past few months, falling 20.5% since attaining a 52-week high of $80.93 back on December 3, 2009. The iron condor, a strategy utilized by option traders anticipating little movement in the underlying share price, is perhaps one investor’s way of indicating the worst is over and a bottom is close at hand. The iron condor’s construction is essentially the combination of two strangles, or alternatively can be thought of as two credit spreads. On the call side, the investor pockets a net credit of $0.09 per contract by selling 10,000 calls at the February $71 strike for $0.13 apiece, spread against the purchase of 10,000 calls at the higher February $74 strike for $0.04 each. As for the puts, the trader receives a net credit of $0.26 per contract on the sale of 10,000 puts at the February $59 strike for $0.44 each, marked against the purchase of 10,000 puts at the lower February $56 strike for $0.18 apiece. Therefore, the combined credit enjoyed on the iron condor amounts to $0.35 per contract. Maximum retention of the $0.35 credit, or total monetary profits of $350,000, is contingent upon the underlying share price at expiration. EWZ shares must trade within a range of $59.00 to $71.00 in order for the investor to walk away with maximum profits. The investor holding the iron condor is exposed to significant losses if his ‘neutral’ prediction is wrong. Maximum loss potential on the transaction of $2.65 per contract is far greater than the $0.35 credit received for undertaking such risk. But, apparently this trader is confident that shares of the underlying stock will move sideways – at least through February expiration. Perhaps this confidence stems from the fact that losses do not amass to the upside unless shares rebound 10.85% to surpass the upper breakeven price of…
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Weekly Wrap-Up - The Return of Fundamentals?
by Phil - September 27th, 2009 8:23 am
Fundamentals don’t matter, until they do - then they matter a lot…
We had a fantastic week because we stuck to the fundamentals and stayed short - even though it was a very painful path to follow. In last week’s wrap-up, facing the never-ending market climb on low volume I had said "I am trying to get bullish, really I am," and I was trying to find bullish plays for members - but we still ended up bearish for the week with a lot of bearish plays being added and thank goodness as it gave us a fantastic week this week!
Just following the plays I mentioned in last week’s wrap-up would have been great as we had SKF bullish at $21 (now $26), DIA bearish at $98 (now $96.74), FAZ bullish at $16 (now $22.12), OIH bearish at $120 (now $114.75), SRS bullish at $8.50 (now $9.93) - and those were just from Thursday and Friday, last week was very active and very successful. I had been quoting Samuel Jackson to highlight my difficulty joining the bullish analysts and I closed last week’s comments by saying: "It really is hard to be the shepherd in this market as I see wolves everywhere, waiting to pounce on the flock as the mainstream media leads them off to slaughter. Or maybe (hopefully) I’m just being paranoid and everything’s fine…"
Monday I led off the week with my concerns about the spread of the flu, as the season is upon us. That gave us 4 bullish (but hedged) plays on SVA, BCRX and CAH (2), none of which are performing so far so all of which are still good entries, especially CAH who got whacked by a DB downgrade on Thursday yet paid back $1Bn in debt on Friday and still look very good long-term.
I had an early look at the G20s "Framework for Sustainable and Balanced Growth," and our conclusion was that, although a good plan, it sure wasn’t something the markets should be all pumped up about as stability was not going to grow us into the bullish valuations that our stocks had already risen to. I warned members that the media was misinterpreting/misrepresenting this report saying: "You can bet though, that "THEY" are acting on this information and they will be SELLSELLSELLING, as they did on Friday afternoon even as the MSM pump-monkeys continue to tell you to BUYBUYBUY as if, not only has the economy fully recovered - but $70 oil, a…
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Which Way Wednesday - Fed Edition
by Phil - September 23rd, 2009 8:22 am
We’re just waiting on the Fed today, as are the rest of the markets.
Yesterday’s volume was the lowest since Sept 11th but not as low as Monday, which was our lowest volume since the end of June, just before we had a 5% correction. June 26th and 29th were our last two consecutive ultra-low volume days but June 30th was much bigger (a down 100 day), July 1st was up again on low volume and then July 2nd was another big down day and we bottomed out on July 10th. That was the time that the media was telling us we were forming a "classic" head and shoulders pattern and were doomed to revisit the March lows. It was also the last time we enthusiastically bought stocks.
At the time of that weekly review (7/11), we had CAL at $10 (now $16.82), CBS at $5.97 (now $12.58), COST at $43.45 (now $58.58), CVX - who we just shorted - at $58.20 (now $72.60), DIS at $22.41 (now $28.38), EXM at $6.05 (now $7.32), RT at $7.12 (now $8.85), SNDK at $14.47 (now $22.91), SPY at $87.96 (now $107.27), SPWRA at $22.35 (now $32.63), SUN at $22.09 (now $27.75), V at $59.86 (now $74.41), VLO at $15.57 (now $20.50), WFR at $16.61 (now 19.09), X at $30.77 (now $50.45), XLF at $11.10 (now $15.35), XOM at $65.12 (now $69.85) and ZION at $11 (now $19). Of course our members had much better entries as we had been targeting our entries on all of those but anyone reading our weekend review on July 11th could have played along at home from those prices (we even spiked down at Monday’s open) and when I say we are now bearish - it is that we are bearishly protecting these ridiculous profits - the kind of profits you usually don’t get after 3 years, not 3 months!
Overall, the broader market is up 20% over that time so it can be argued that a monkey with a dart board could have made good picks at that time but, if you read that week’s notes - you’ll notice that this monkey was screaming for people to buy and was going against what pretty much EVERY other analyst was saying and I was confident enough to lay out my picks, my strategy and my fundamental arguments for everyone to see. It would have really sucked if I was wrong, but…
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Ratio Call Spread Suggests Bullish Sentiment on Cabot Oil & Gas
by Andrew Wilkinson - August 17th, 2009 5:53 pm
Today’s tickers: COG, HPQ, ALGN, VIX, WLP, UNH, CVX, & OIH
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Options Expriation Day - Back Where We Started!
by Phil - July 17th, 2009 8:10 am
"And now we’re back where we started,
Here we go round again.
Day after day I get up and I say
I better do it again.
Where are all the people going?
Round and round till we reach the end.
One day leading to another,
Get up, go out, do it again." - Kinks
That’s right, we often talk about various market scams but there is no bigger scam in the world than options expiration day when all the stocks are herded back to prices that benefit the largest number of SELLERS of options while the buyers of options can only stare in shock as momentum shifts and trend-lines break and stock after stock magically settles into a value that wipes out the most possible premium. There is something in options called the "Max Pain Theory" that says that stocks will always settle at the strike where the most puts and calls expire worthless but I think that’s a self-fulfilling prophesy as options activity tends to center around the strike as it moves so of course the strike is surrounded by the most options.
What isn’t a theory is what we can observe happening time and again. This is why, at PSW, we primarily SELL options, not buy them. Buying options is gambling, selling options is a business! I often point out to members that options is the game in the world where you can be the "house" with no disadvantage. In Las Vegas, you can bet with the house but they still have an edge but in options, there is no edge and day’s like this remind us why selling options beats buying them - not EVERY time but certainly OVER time.
Our last option expiration day was June 19th and I will give you today’s levels to watch because they are the levels of June 19th: Dow 8,540, S&P 921, Nasdaq 1,827, NYSE 5,934 and Russell 512. All the markets have to do to take out the calls sold that day for a nickel or a dime is to hit those levels at some time today. Of course, anything within 2.5% of those numbers is fine to as you can roll the calls you sold to the next month at no cost, collecting another premium for another month. This is the centerpiece of our Buy/Write strategy, which we discussed last weekend and I will be putting up a new Buy List for Members…
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Stop the Week, We Want to Get Off!
by Phil - July 10th, 2009 7:25 am
TGIF for sure, it seems like ending the week is the only way to stop the markets from dropping!
We failed to take back our weak bounce levels I laid out in yesterday’s morning post as the Dow failed to hold 8,250 on a very brief spike past it, the S&P failed right at 888 in the morning and again in the afternoon (where we were able to use it as a "go short" indicator), the Nasdaq flirted with 1,750 all day and barely held it, the NYSE also failed 5,700 in the afternoon and gave us a good, bearish indicator while the Russell never came close to 488 and failed our critical 480 mark at the close. As I’ve been saying all week, we really don’t have to watch anything but the NYSE, which will test the critical 5,600 mark this morning and failing that level would be, in technical terms: BAD!
Oil ($62) and gold ($920) also failed our levels so there was nothing to be bullish about in yesterday’s action. We were in and out of DIA puts and calls, using S&P 880 as our inflection point and we took the money and ran on our AA calls (up $330, 78%) and DIA calls (up $45, 20%) as our first two completed plays in our $5,000 Portfolio, which will now be tracked under Seeking Alpha’s "Stock Talk" feature as an experiment for non-members. We did a day-trade as well in the $5KP on MCD, picking up the $55 calls at $1.65 for a quick ride to $2, adding another $175 (21%) to the kitty for the week. Our only open trade in this hit and run portfolio is SGR, where we are in the $22.50 calls for $3.30, selling the $25 calls for $1.45 for a net $1.85 entry on this bullish $2.50 vertical spread (4 contracts). Earnings were a slight miss but we’re not worried as the order backlog is fantastic and we’ll be buying more if the after-hours sell-off holds into the morning. If this play comes through for us we’ll be up about $800 in our first week and well on-track of our goal to double up over earnings season.
It will be a shame to have to play the dark side but we’re back to neutral now after covering our bullish plays with DIA puts as the upside just seemed way too risky heading into the weekend. It looks like…
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China Pays Too Much for Oil in Iraq - $16 A Barrel!
by Phil - June 25th, 2009 7:42 am
How much smarter is China than the US?
Well let’s see - The US has spent $1,000,000,000,000 fighting in Iraq and thousands of our soldiers have died and we have secured ZERO barrels of oil for ourselves. China was not part of the coalition of the willing but, for just $8.8Bn, they are getting 550 Million barrels of oil, almost the size of the US’s entire strategic petroleum reserve, through the purchase of Addax Petroleum, and 20% of those reserves are in Iraq . While Bush filled our reserve up "at any price" and became the single largest buyer of crude in the world, filling our SPR at a rate of 2-3Mb a week at times, China simply waited patiently on the sidelines and is now coming in and buying wholesale. That’s pretty smart!
Of course patience is a renowned virtue of the Chinese and just one year after the US was paying over $100 a barrel to fill our own reserves, China’s Sinopec is doubling the country’s oil reserves with a single purchase at 1/6th the price. Sure they have to pump it ($4 per barrel) and ship it ($3 per barrel) as it’s not local but sometimes you have to travel a little to find bargains.
Earlier this year, Iraqi Oil Minister Hussain al-Shahristani gave approval for foreign companies developing oil fields in the Kurdish region to export their crude directly to international markets. Addax was a beneficiary of the change and has been shipping oil since the start of this month. Addax is one of the largest independent oil producers in West Africa and the Middle East by volume. Aside from Kurdistan, it operates off Nigeria, an area that has seen huge exploration success in recent years. The company produced 136,500 barrels a day on average last year, or about 1.7% of China’s daily consumption.
So why is China still paying too much for oil? Sinopec is paying about $16 a barrel of proven and probable reserves. The average for African and Middle Eastern deals in 2008 — a year with triple-digit crude prices — was under $5 a barrel, according to consultants IHS Herold and Harrison Lovegrove & Co. Throw in Addax’s possible reserves and contingent natural-gas reserves and the multiple drops to just over $7 a barrel of oil equivalent. Your average buyer would never factor in such rosy assumptions. But then Sinopec, 66%-owned by the Chinese government, isn’t your average…
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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
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