Cisco Call Options Fly off the Shelves
by Andrew Wilkinson - March 8th, 2010 4:06 pm
Today’s tickers: CSCO, DRYS, CIGX, AES, V, MCD, BIIB, SNE, GME & VALE
CSCO - Cisco Systems, Inc. – Bullish call-buying dominated options trading patterns on Cisco today on news the firm is slated to “make a significant announcement that will forever change the internet and its impact on consumers, businesses and governments.” Cisco’s shares jumped 4.15% to a new 52-week high of $26.25 during the session on a target share price upgrade to $28.00 from $26.00 at JPMorgan Chase & Co. Bullish traders purchased approximately 15,800 in-the-money calls at the March $26 strike for a premium of $0.33 apiece and coveted 9,300 calls at the higher March $27 strike for an average premium of $0.10 each. Uber-bullish individuals bought 4,000 calls at the March $28 strike for just two pennies premium per contract. Investors long the closest-to-the-money March $26 strike calls are positioned to accrue profits if Cisco’s shares trade above $26.33 ahead of expiration day. The surge in demand for options on the stock as well as uncertainty surrounding tomorrow’s announcement lifted the reading of overall options implied volatility on Cisco by 17.5% to 22.85% in afternoon trading.
DRYS - DryShips, Inc. – Dry-bulk shipping company, DryShips, Inc., experienced a short-lived dip in the price of its shares in morning trading, but regained its footing this afternoon, rallying 7.77% to $6.10 with about forty minutes remaining in the session. Call-buying action flooded DRYS today with approximately 22,300 now in-the-money calls picked up at the near-term March $6 strike for an average premium of $0.22 apiece. Nearly 12,000 calls were coveted at the higher March $7 strike for $0.05 premium per contract. Optimism spread to the same strike prices in the April contract, as well. Investors secured roughly 11,600 long in-the-money calls at the April $6 strike for an average premium of $0.39 each. Traders bought another 4,000 call options at the higher April $7 strike for $0.16 per contract. Options traders exchanged more than 130,000 contracts on DryShips during the session, which represents about 27% of total existing open interest on the stock of 480,443 contracts. Options implied volatility jumped approximately 34.8% this afternoon to 60.26%.
CIGX - Star Scientific, Inc. – Shares of the maker of dissolvable smokeless tobacco products surged 6.70% to $1.12 today, inspiring one investor to establish a bullish risk reversal on the stock in the August contract. The trader appears to have sold roughly 7,200 puts at the August…
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Weekly Wrap-Up - Buffett’s Daring Derivative Deal Does Well
by Phil - February 28th, 2010 9:30 am
I was going to talk about Buffett’s annual letter to investors.
Fortunately, I procrastinated and other people did some detailed reporting like Ravi Nagarajan, Andy Fry, Scott Patterson and Joe Del Bruno - who does a great job of pointing out that Berkshire’s 4th quarter results were propped up by Buffett’s $1.05Bn gains in derivatives betting (something Buffett himself once called "weapons of mass financial destruction" but, as we well know - if you can’t beat them…), which accounted for 1/3 of Berkshire’s $3.06Bn profits.
Buffett’s biggest bet was selling a put against the S&P 500 back in March - a move I said at the time was BRILLIANT and Buffett himself now says about his own options trading: "We are delighted that we hold the derivatives contracts that we do. To date, we have significantly profited from the float they provide. We expect also to earn further investment income over the life of our contracts."
What did Buffett do? Exactly what we teach you to do here at PSW - he took advantage of an irrational move in the markets and SOLD INTO THE EXCITEMENT, getting a fat premium from some sucker that bet the S&P would not hold 666 5 years from now. Buffett effectively sold $5Bn worth of puts that expires worthless at S&P 700 between 2019 and 2027, putting $5Bn in his pocket and holding aside $1Bn in margin, which is how much he’s already ahead on the bet. Like a good options trader, he has a plan and he’s trading his plan, making sure his investment is on track and patiently letting time do it’s work as it eats away at the put-holder’s premium.
What about the risk? Well I can’t speak for Buffett’s stop-loss technique but we’re talking about a company that has (had) $40Bn in cash using their excess margin to make a $5Bn bet that the S&P would not stay below 700 for 10 years. Buffett and I both tell people - NEVER buy a stock (or sell a put against one) that you are not willing to own for 10 years. The S&P was 5% below at the time and would have had to drop, perhaps, 20% more to cost him $1Bn so let’s call the stop 550 on the S&P where Buffett risked 2.5% of his cash against a posible 400% gain on his $1Bn risk allocation over 10+ years. While it is true that if the S&P dropped 50% in one day Buffett would be in deep trouble - sometimes you do have to play the odds…
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Two Week Wrap-Up - Trading Our Range
by Phil - December 6th, 2009 7:58 am
Your "crystal ball" was dead-on with the insights into the report on jobs as well as the initial rise and then correction. Truly impressive. - Champstar2
We didn’t have a weekly wrap-up last week because of the holiday.
In our Nov 21st Wrap-Up, I had said next week we’ll be watching to see if we can get more bullish above our 25% lines at: Dow 10,250, S&P 1,100, Nasdaq 2,187, NYSE 7,000 and Russell 600 and that became the bottom of our new range while I sent out a 9:41 Alert to our Members on Nov 23rd sticking with our upside targets of Dow 10,471, S&P 1,113, Nas 2,205, NYSE 7,266 and Russell 605. That has been a very reliable range to play for the past two weeks and we’ve been having a good time playing both ends of it.
Rather than just wrapping up this week’s moves, I thought we’d add the prior week as the pattern is very much the same (and it was the same the week before) so it certainly bears (oops, don’t say bears!) studying. Of course, when I talk about patterns, I don’t just mean the chart pattern where we have all of our gains for the week on Monday and Tuesday on low volume and then larger volume selling for the rest of the week as the funds who pump the futures up dump their ill-gotten gains on retail investors. I’m talking about the global new patterns, as reported by the MSM, that make this sort of manipulation so effective. It’s not that I’m so good at predicting things - it’s really just that I’m good at spotting the BS…
Monday - Stuffing the Futures for Thanksgiving
I was pointing out that morning that 90% of the market gains since October had been coming on a single day each week and how a lot of that was happening in the very thinly-traded Futures market, where a few thousand shares traded overnight are able to lever the entire US market up by Trillions of Dollars. It’s a very sick and broken system that has been seized by manipulators to yank investors around, making sure retail investors have little ability to participate in these wild market moves as the game is already over by the time trading starts the next day.
This week, we had 2 days like that with both Tuesday and Friday gapping up over 100 points at the open, accounting for 250% of the…
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Wells Fargo Put Spreaders Back in Town
by Andrew Wilkinson - November 11th, 2009 4:27 pm
Today’s tickers: WFC, AMR, PG, DRYS, DTV, M, EMC, WYNN, TOL & SFD
WFC - Wells Fargo & Co. – A popular option strategy frequently employed on Wells Fargo, the ratio put spread, appeared once again in the January 2010 contract. The bearish play was initiated despite the more than 2% rally in shares during the trading session to $28.75. The ratio spread involved the purchase of 7,500 puts at the January 27.5 strike for an average premium of 1.60 apiece, marked against the sale of 15,000 puts at the lower January 24 strike for 67 cents each. The net cost of the protective play amounts to 26 cents per contract. Thus, downside protection will kick in if shares decline beneath the breakeven price of $27.24 by expiration in January.
AMR - AMR Corp. – American Airlines operator, AMR Corp., attracted a large bullish play by one investor targeting the January 2010 contract. Shares of AMR are up more than 4% to $5.83 with just under one hour remaining in the trading day. An AMR-optimist initiated a call spread by purchasing 15,000 calls at the January 7.5 strike for an average premium of 35 cents each, marked against the sale of 15,000 calls at the higher January 9.0 strike for 10 cents premium apiece. The net cost of the bullish transaction amounts to 25 cents per contract. Profits are available to the call-spreader if shares of AMR rally at least 33% to breach the breakeven point at $7.75 by expiration. Maximum potential profits of 1.25 per contract for a total of $1.875 million are attained by the trader if shares surge 54% to $9.00.
PG - The Proctor & Gamble Co. – Options activity in the January 2011 contract on the consumer products company today indicates one investor expects little fluctuation in shares over the next 14 months. Shares of PG are slightly up by less than 0.25% to stand at $61.90. The trader initiated a sold strangle by selling 2,000 puts at the January 60 strike for 5.73 each, and by selling 2,000 calls at the higher January 65 strike for a premium of 3.82 apiece. The gross premium pocketed on the sale amounts to 9.55 per contract. The strangle-seller retains the full premium if shares of PG remain ‘strangled’ within the parameters of the strike prices described. The investor will benefit from lower option implied volatility on the stock, as well as from the…
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Monday Markets - Is Momentum Shifting?
by Phil - October 26th, 2009 8:29 am
We’re still trying to get bullish, really we are…
Yes we are reluctantly bullish and only technically bullish at that. All we are asking of the markets is for them to take out our very simple levels and hold them for more than a day or two. Those levels are (and have been since early September): Dow 10,087, S&P 1,096, Nasdaq 2,173, NYSE 7,204 and Russell 623. These are, according to the 5% rule, the levels we need to hold in order to establish a floor in the markets that justifies setting higher upside targets. If they cannot be crossed, then these REMAIN our upside range targets and we need to start seriously considering the possibility that we may still get a pullback to Dow 9,650, S&P 1,020, Nas 2,075, NYSE 6,900 and Russell 575.
As I mentioned last week (and noted on David Fry’s IWM chart), the Russell was the first to fail our 623 mark and will be our canary in the coal mine as they test 595, which is the 50 dma. A failure there and the markets have little support all the way down to our June highs, our original breakout levels of Dow 8,650 and other levels you don’t even want to think about on a Monday.
$2.66 is another level we don’t want to think about. That’s the average price of regular gasoline this weekend. Despite 10% lower demand than last year when December gasoline averaged $1.66 a gallon. What’s a dollar a gallon between friends right?
Well, actually since US consumers use 63M barrels of gas each week, and a barrel happens to be 42 gallons, it happens to be about $10.5Bn a month taken our of consumer’s pockets. That’s cash, after-tax money - gone! Money they won’t be able to give to all those nice Russell companies for Christmas this year. Remember how much that $160Bn stimulus helped the economy last year? How much do you think a $120Bn mugging hurts the economy this year?
The timing couldn’t be worse - last year, gas prices flew down and helped people make it to the mall for Christmas, this year already - as we can see from Amazon’s great quarter, many people will be skipping the malls and buying on-line. With 10% of the workforce unable to find jobs and 10.3% of the US retail space now vacant (up from 8.4% last fall) it’s kind of hard to get into the Christmas spirit, let alone the…
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Wild Weekly Wrap-Up - August in Retrospect
by Phil - August 29th, 2009 8:28 am
It has been a crazy few weeks!
I went back over our Long Shots list from August 9th, thinking all our picks must be doing great but really only C, with a 67% gain, is really outperforming. Long spreads on UYG and BHI are on target for nice gains but haven’t moved much. Looking at our original picks in Pharmboys Phavorites from the same week, GSK is on track and up nicely already, our AZN cover is up 45% and MRK flew up 19% already. On the riskier Biotech side, ARIA’s stock is up 16% and our spreads are all performing well, ONTY has been flat, OGXI is up 33% and the Jan $17.50s are up a rockin’ 63% with that "cautious" spread up a surprising 75% already.
SPPI had a wild ride (as we predicted with TSCM’s failed assassination attempt) and the buy/write is already up 24%, the Feb vertical is up 50% and the naked Jan put sale is up 27% and our Feb hedge play is right on track so all good there and a fine example of how following Cramer and his lackeys and and doing the opposite of what they say can be very profitable! Congrats to Pharmboy for a very fine set of picks, proving once again that there is room for research and fundamentals - not a single loser in the bunch in a choppy market! It was very timely as I had mentioned just that week in my interview with AOL Finance that XLV was my favorite sector and our IHI pick of 8/10 is up 28% on the naked Feb $45 put sale while the Feb $45 calls have already jumped 16%. It was a great call as IHI outperformed XLV and all our major indexes.
So our energy service pick (BHI) and overall financial pick (UYG) have not done much in 3 weeks and those were our leading sectors into my call to cash out our exposed long calls on Aug 13th, ahead of expirations. The Dow was at 9,400 on that day and now, a bit more than 2 weeks later, we’ve gained another 144 points but to listen to the MSM, you would think you are missing the rally of the century the past couple of weeks. This is one of the reasons I’ve gotten a bit more cynical about the rally - there is so much hype and so little actual progress, something must be wrong.
Back on Thursday, Aug 6th,…
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Retail ETF Sees Large Protective Ratio Put Play
by Andrew Wilkinson - June 1st, 2009 5:16 pm
Today’s tickers: XRT, CSX, POT, MON, LO & DRYS
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Call Buyers Emerge
by Andrew Wilkinson - May 30th, 2009 6:54 am
Today’s tickers: EEM, DRYS, SLV, GLD, DHI, BRCM, STSI & LFC
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Friday Already?
by Phil - May 22nd, 2009 8:29 am
Man what a fun week, I can’t believe it’s ending so soon!
We are already on vacation, having followed our plan to cash out at the bottom yesterday anticipating some short covering today that would take up the markets. Actually, we took some bullish plays into yesterday’s close as it was such an obvious set-up for a stick save and there was so much bad news out already that we weren’t too worried about more. My hot streak continued as I posted to members at 11:13, with the Dow on the rise at 8,267: "OIH now at the 5% rule (94) and XLE at -4% (47.50 is 5%) and Nas at 2.5% rule (1,685) along with RUT (477) while S&P needs 880, Dow needs 8,220, and NYSE 5,725. Those are the points that should hold and bounce us at least back to -2% but, after the way they behaved at 1.5%, we need to see them retake -1.25 before we’re even slightly safe."
The Nas bottomed out at 1,678 at 2:45 but came back 20 points to -1.89%, the Russell hit 474 at the same time but finishe down 1.66%, the S&P hit 880 on the nose at 2:53 before recovering to -1.68%, the Dow hit 8,224 at 2:52 but rallied back to down 1.54% and the NYSE bottomed out at 5,728 at 2:58 before making it back to -1.53. Now I know there are lots of stock services that can tell you exactly what the market will do for the day 3 days in a row and I’m certain that there’s no way to profit from that kind of information anyway so, whatever you do - don’t sign up for this service (see, we are cleverly experimenting with reverse psychology!). We took quick profits on our DIA calls into the close but left our DDM (ultra-long Dow) calls on for fun and they should get a nice pop this morning. We also couldn’t resist some great buy opportunities during that sell-off and we picked up new, hedged positions in HMY, FIG, DRYS, RF, DAL and UYG in addition to our Dow plays. As we also sold the Dow puts to cover our longer covers - we ended up pretty darned bullish after being 100% bearish at the open. We are flexible if nothing else!
Our futures are looking pretty good this morning despite BKUNA being siezed by regulators in a move that will take a $4.9Bn bite out of the FDIC. The FDIC sold the company’s banking…
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Cisco lower ahead of earnings: Put selling noted
by Andrew Wilkinson - May 4th, 2009 6:11 pm
Today’s tickers: CSCO, NYT, DRYS, INTC, VIX, MON, USB, CROX, IPG, ELN, & WFC
CSCO Cisco Systems, Inc. – Shares are off slightly by less than 1% to $19.42 ahead of earnings expected for release from the company this Wednesday. We observed a rash of put selling in the June and July contracts, a bullish sign from option investors on the stock. The in-the-money June 20 strike price saw some 4,700 puts sold for a premium of 1.40 apiece while the in-the-money July 20 strike also had about 4,500 puts sold for 1.61 per contract. Finally, the deeper in-the-money July 21 strike had some 4,400 puts shed for a rich premium of 2.23 apiece. Perhaps put-sellers see Cisco rebounding through the summer months.
NYT The New York Times Company – The media company has experienced a share price surge of more than 8.5% to $5.87 amid reports that the New England newspaper, The Boston Globe, is safe for now as NYT has not filed its intention to close the newspaper. NYT appeared on our ‘hot by options volume’ market scanner late in the trading day as one investor appears to have sold 5,000 in-the-money puts at the July 7.5 strike price for a premium of 2.12 apiece in order to fund a bull call position in the October contract. The put premium helped fund the purchase of 15,000 calls at the October 10 strike for about 37 cents each. The trade yields a net credit of about 1.01 to the investor given the richer put premium received on the sale (1*2.12 – [3* 0.37] = 1.01). NYT plans to continue talks with its unions in order to avoid closing The Globe. The deadlines for negotiations have been extended to Sunday.
DRYS DryShips, Inc. – Shares of the shipping company have gained 13% to arrive at the current share price of $9.35. The drybulk carrier received a target share price increase to $12.00 from $10.00 by an analyst at Jeffries & Co. as well as an upgrade to ‘outperform’ at Oppenheimer. Bulls hungry for a continued near-term rally on DRYS picked up 12,500 call options at the May 11 strike price for an average premium of 25 cents apiece. The overall tone on the Greek fleet was optimistic as investors showed their preference for call options by trading calls more than five times to every put option in play. It will be interesting to monitor bullish…
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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
(