Take-Off Tuesday Already?
by Phil - July 27th, 2010 8:29 am
Wow, this market goes from zero to sixty in record time, doesn’t it?
Our 1,113 mark (see yesterday’s post for charts) was tested and broken on the S&P yesterday (see David Fry’s chart) on a silly stick save into the close but, seeing that, it was very obvious that "they" are looking to paint some impressive moves on the charts this week so strap yourselves in – it’s going to be a wild one.
1,120 is our next big test on the S&P along with the satanic 666 on the Russell and 10,700 is the next big test for the Dow (as 10,500 seems well in hand). Advancers led decliners 20:1 on the Nasdaq, which shows you what a total farce the market is because we had the same ratios going down so stocks are either ALL good or ALL bad on a random daily basis. Human beings do not trade this way my friends, this market has been totally taken over by machines and the affect of your individual trading is about the same as shotting a water gun into a wave to slow it down.
As long as you accept this fact and "go with the flow" you can be a very happy channel surfer but fight the tide at your own peril! We stuck to hedged plays in yesterday’s Member Chat with our bearish play on FSLR in the Morning Alert and then earnings spreads on MEE and VECO along with long-term bullish plays on LYG, GS, CHK and our beloved TBT, who are finally showing signs of life. We also keep selling GENZ calls to overly enthusiastic buyers who think someone is going to pay more than $70 for the company – even though it was at $50 before the rumors started. Aside from the lack of logic that a buyer with a p/e of under 10 will pay a p/e of over 20 for GENZ, it just isn’t really the right credit environment for buyers to be bidding +40% for a company. We aren’t buying puts but we’ll certainly sell Jan $70 calls for $4 as that’s just silly!
The markets are back in "Soar and Ignore" mode this morning as bad news is now like water off a duck’s back to the market, much the same way good news was ignored just 2 weeks ago. The moon is full this week so I’m going to start charting that against the market as we’re still trying to find some sort of early predictor of…
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DiggMonday Market Measurement – Just Right?
by Phil - July 26th, 2010 8:08 am
Welcome to dead center!
We are finally back to the middle of our predicted trading range. It’s the range that our 5% rule predicted since October of 2008 so we’re hardly going to be shocked to be here now. Usually we are shocked when we’re NOT in our range. I detailed the movement this weekend in our 5% Rule Update, so I won’t get into it all here but let’s just focus on our short-term chart and embrace the uncertainty as we move back to the middle of our range at 1,100.
I say it all the time and I’ll say it again: I’m not bullish or bearish – I’m rangeish. That means I get more bullish at 5% under our line and I get more bearish at 5% over our line and I get extremely bullish or bearish as we get into that 10% zone because – if the market fundamentals don’t change – then my midpoint doesn’t change and the opportunity is to play us to return to "reality" at S&P 1,100 (Dow 10,200).
Just look at those nifty little resistance points we have to watch now – the 200 dma is at 1113 and the 50 dma is at 1,084 and we just ran up from 1,030 (we ignore spikes) past the 5% rule at 1,081, which just so happens to be pretty much the 50 dma so that will be our key test for the week as our bottom to top run from 1,101 to 1,102 is close enough to 10% to merit a 2% (20% of the run) pullback back to, WHOOPS!, 1,080. So 1,080, 1,080 and 1,080 is our line in the sand for the week. If the rally is real, the number will hold and, if it doesn’t hold (especially with all the earnings and economic data we have coming in) then we have to look at the drop from 1,220 to 1,020 (200 points) and consider the move back to 1,120 nothing more than a strong, 50% bounce back to our mid-range.
We are past the EU Stress tests but JPM says 54 banks should have failed for the following reasons:
- Lack of rigour in macroeconomic stresses, leading to low virtual portfolio loss rates
- Sovereign haircuts were applied only to trading books and not to accrual books
- JPM estimates show that the lack of rigor in CEBS stress scenarios resulted in a 1.7% upward bias
…
Options Strategist Portends Big Rebound at Anadarko by Jan. 2011 Expiration
by Option Review - June 17th, 2010 4:24 pm
Today’s tickers: APC, FSLR, SFY, V, XRT, NFLX, DV, MTB, SWY & SNE
APC – Anadarko Petroleum Corp. – Trading in longer-dated call options on Anadarko Petroleum this afternoon indicates one options strategist is expecting shares of the independent oil and gas exploration and production company to rebound significantly by expiration in January 2011. APC’s shares rallied 1.5% at the start of the trading session to reach an intraday high of $43.70. However, as the day progressed, shares lost momentum and are currently down 3.90% on the day at $41.38 with 45 minutes remaining before the closing bell. The long-term bullish player appears to have enacted a ratio call spread, buying 2,000 in-the-money calls at the January 2011 $40 strike for a hefty premium of $10.30 apiece, and selling 4,000 calls at the higher January 2011 $55 strike for a premium of $3.60 each. The net cost of the spread amounts to $3.10 per contract. Therefore, the trader is poised to profit should shares of the underlying stock rebound 4.15% to surpass the effective breakeven price of $43.10 by January expiration. The investor stands ready to accrue maximum potential profits of $11.90 per contract in the event that APC’s shares surge 32.9% from the current price of $41.38 to settle at $55.00 by expiration day.
FSLR – First Solar, Inc. – Bullish options players dominated activity on the manufacturer of photovoltaic solar power systems today with shares of the underlying stock rallying sharply by as much as 5.98% this morning to an intraday high of $125.88, the highest the stock has been in one month. The maker of solar modules was raised to ‘outperform’ from ‘neutral’ at Credit Suisse today where analysts upped their target price on the stock to $150.00 from $110.20. First Solar’s shares tapered off by late afternoon to stand 3.50% higher on the day at $122.93 just before 3:30 pm (ET). Investors positioning for continued upward movement in FSLR’s shares by June expiration purchased at least 1,300 calls at the June $125 strike for an average premium of $1.72 apiece. Call buyers at this strike price make money only if shares of the underlying stock trade above the average breakeven price of $126.72 by expiration tomorrow. Buying interest spread to the higher June $130 strike where roughly 1,100 call options were purchased for an average premium of $0.42 per contract. First Solar’s share price would need…
Options on Halliburton Get Messy
by Option Review - April 29th, 2010 4:20 pm
Today’s tickers: HAL, IPG, AMGN, BP, COF, FXI, OMX, NEM & FSLR
HAL – Halliburton Co. – Making sense of options activity on oil company, Halliburton Co., this afternoon is difficult due to the chaotic and seemingly pattern-less trading taking place on the stock. Investors exchanged more than 200,000 contracts on HAL by 3:00 pm (ET), which represents approximately 37% of total existing open interest on the stock of 541,062 contracts. Frenzied options trading was catalyzed by news the firm is assisting in ongoing investigations regarding the oil spill in the Gulf of Mexico as HAL reportedly provided a variety of oilfield services to Deepwater Horizon rig, which is the rig that caught fire and sank last week. Options volume and options implied volatility on Halliburton jumped while its shares slipped 6.3% to $31.26. The surge in demand for option contracts on the stock, coupled with uncertainty regarding possible repercussions stemming from HAL’s connection to the situation in the Gulf of Mexico, lifted the overall reading of options implied volatility 25.4% to 44.13% as of 3:25 pm (ET). Trading activity is heaviest in the May contract with decent volume building in both call and put options. Some bearish investors bracing for continued share price erosion purchased about 2,200 puts at the lowest available strike – the May $25 strike price – for an average premium of $0.16 apiece. Buying interest in put options was also apparent at the May $26 strike where 1,800 puts were picked up for an average premium of $0.20 each. May $29 strike puts were the most heavily trafficked as more than 16,700 contracts changed hands by 3:22 pm (ET), versus previously existing open interest of just 2,743 contracts at that strike. But, the put action was certainly not one-sided as investors took to buying and selling the contracts, with buyers gaining the right to sell the stock at $29.00, and sellers receiving an average premium of $0.81 per contract in exchange for bearing the risk of having shares of the underlying stock put to them at $29.00. Similar two-way trading traffic in calls took place at out-of-the-money strike prices as some traders threw in the towel on bullish stances expiring in May. Meanwhile, contrarian players purchased out-of-the-money calls, perhaps to prepare for a potential rebound in the price per share ahead of expiration next month.
IPG – Interpublic Group of Cos., Inc. – Advertising and…
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…
Bullish Ddollar Index ETF Intrigues Once Again
by Option Review - November 12th, 2009 4:14 pm
Today’s tickers: UUP, VIX, FSLR, HMY, M, GMCR, CTRP & DOW
UUP – PowerShares DB US Dollar Bullish Fund – A pair of bullish risk reversals on the PowerShares US Dollar Bullish Fund suggests today’s sharp rally for the dollar will likely continue over the next several months. We observed massive bullish plays on the UUP over the past couple of weeks, some tied to machinations of whether or not the fund had enough shares in circulation. But today’s activity predicts far more extreme movements in the price of the dollar index. The UUP is current up 1.4% to $22.80, while the dollar index, which it supposedly tracks, is up just 0.7%. Investors sold 4,700 deep in-the-money put options at the December 29 strike for an average premium of 6.30 apiece, spread against the purchase of 4,700 calls at the same strike for one nickel each. The high-delta put options hold very little extrinsic value because expiration is just over one month away. Thus, investors are expecting the intrinsic value of the puts to decline. The only way this will occur is if the dollar rallies forcing the UUP to increase. If traders’ bullish predictions are correct, the value of the long calls will appreciate, while premium on the short puts erodes. Such a scenario allows investors to profit by buying back the puts for less than the 6.25 net premium received on the reversal. A similar uber-bullish strategy was employed at the January 2010 28 strike price where investors sold 4,250 deep-in-the-money puts short for about 5.30 each, and purchased the same number of calls for 5 cents apiece.
VIX – CBOE Vix index – With the equity market down and the dollar on the rise, investors across different asset classes today appear to be blaming one another for prevailing direction. No one seems to know why anything is moving in the fashion it is. The suggestion of course is that risk appetite is on the demise and fear is picking up. Compounding such indecision in the volatility class are trades suggesting ongoing disparate views on the fortunes for equities going forward. The so-called fear gauge is 5% higher at 24.90 today while trading has been two way. In the November options one investor loaded up on 25,000 call options at a 25 cent premium suggesting that the index will be above 25 when options expire next Tuesday. The…
Human Genome Call Options Active Ahead of Phase 3 Trial Results
by Option Review - 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…
Frothy Friday – Churn Baby Churn!
by Phil - October 23rd, 2009 8:26 am
What a wild week we are having!
We dumped our shorts as planned yesterday morning, getting a very nice dip at the open and my 9:36 Alert to Members was even titled "Take Those Short Profits!" and our upside targets were set (as they were in the morning post) at: Dow 10,087, S&P 1,096, Nasdaq 2,173, NYSE 7,204 and Russell 623. Where did we finish? Dow 1,081, S&P 1,092, Nasdaq 2,165, NYSE 7,182 and Russell 613 – so a bit short of all of our targets but not bad considering we were opening 167 points below that on the Dow so perhaps I can be forgiven for a 6-point miss…
If knowing about massive market moves in advance would be helpful to you – please consider subscribing to our service. If you are already a member and know someone who might like to try our newsletter, you can send them a free trial subscription using this link and you can earn yourselves discounts on membership renewals for each friend who opts into the free trial. We have over 19,000 people on our Newsletter list now and I want to see if we can break 30,000 by the end of the year now that our new mail server is up and running (we’ve been on hold for a month as we filled up our old server!). Your help in this matter would be greatly appreciated. PSW Report Members can extend their subscriptions at no cost simply by referring others to a free trial report – my little experiment in viral marketing…
Even our free PSW Report readers would have done great just following the trades we had in last week’s Wrap-Up (Report subscribers get to read our articles without the 48-hour delay). We had GS Nov $210s shorted at .87, now .35 (up 60%), CERN short $85 calls at $4.15, now $3.10 (up 25%), ISRG Apr puts and calls sold for $39.20, now $36 (up 8%), PARD at $6.87, now $7.35 (up 7%), NTRI at $18.60, now $19.15 (up 3%)…
We had other trades that are still in progress. ICE notably burned us so far, but we rolled them up and shorted them some more yesterday (now $106.56). We’ve had a wild mix of short and long trades this week as we TRY to get more bullish on the markets but yesterday’s run-up had us reloading Thursday’s successful short plays as that set made…
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…
Friday – The Fed Finally Supports the Dollar
by Phil - October 9th, 2009 8:21 am
The dollar rose against the Yen for the first time in 5 days and the most in 2 months this morning.
Bernanke finally came out of his stupor and said the Fed is ready to tighten monetary policy once the economy improves. Once the economy improves? Hasn’t Ben been telling us how great everything is for the past 3 months??? The Dollar Index, which tracks the currency against six U.S. trading partners, recovered from a 14-month low after Bernanke signaled interest rates may rise when the economy “has improved sufficiently.” The yen dropped against all but three of the 16 most-traded currencies after Japan’s machinery orders gained less than forecast.
“People took the comments as an opportunity to take some money off the table before the weekend,” said Simon Derrick, chief currency strategist in London at Bank of New York Mellon Corp. “They came at an opportune time and allowed some people to get some profit out from bets against the dollar.”
White House economic adviser Lawrence Summers repeated the administration’s commitment to a strong dollar, citing recent comments by U.S. Treasury Secretary Timothy Geithner. “He made it very clear that our commitment is to a strong dollar based on strong fundamentals,” Summers said at a Bloomberg forum in New York.
We’ve been talking dollars all week at PSW because it has been my opinion that there has been nothing supporting this rally, especially on the commodity side, other than dollar weakness and fears of further dollar weakness. It’s been a case of so far, so wrong though as our short plays have gotten hammered this week and I was thinking of opening this morning’s post by saying: "Hi, my name is Phil and I’m a shortaholic" because, try as I might, I have been unable to stop taking short positions all week. Even yesterday, as we tested (but did not break) our upside target levels, I found myself putting up 8 bearish trade ideas for Members (DIA puts, FSLR puts, GLD puts, USO puts, EDZ calls, TBT calls, TZA calls, SRS calls) and just one bullish play, which was a DIA vertical spread to cover, just in case we got burned by today’s open.
Fortunately, it doesn’t look like I’ll have to do a mea culpa this morning as FINALLY the dollar is finding some support at pretty much the exact same place we found support on 9/23, which was the beginning of our last…
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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
(