by Phil Davis - January 20th, 2011 8:06 am
Just buy the f’ing dip.
That’s the great advice we had back on December 2nd, as it was pointed out by Captain Broccoli that we should just ignore all the so-called "facts" of the economy and "just borrow money at this ridiculous low interest rate and just buy the f’ing dip." "It’s not a pyramid scheme, you idiot," says the Captain – "It’s a dip buying scheme!" So far, on every little dip we have had since December 2nd – the Captain has had the winning strategy – do we dare ignore his sage advice today?
Yesterday we had the biggest pullback since November 23rd with the Russell and the SOX, two of our most over-extended indexes, falling 2.5% in a single day. The Russell essentially gave up an entire month’s worth of gains in a single day because, as I have warned you over and over and over until I myself was bored hearing it, it has been a low-volume rally and the pure physics of the situation means that, when people finally want to sell stocks, there aren’t enough buyers in the world to support the prices they have run up to.
The Shanghai, which we’ve been watching closely, dropped another 3% today to 4-month lows this morning. We did the chart of the Shanghai vs the Hang Seng on Friday, when I was droning on about how weak the real Global economy is and how dangerous inflation was looking and how the government was papering it all over, etc. Even so, I reminded Members in Chat that none of that reality mattered and we still had to buy the dips until it stopped working. Is today the day or have we finally reached the end of the gravy train?
We did some hedged buying on Friday with new long-term bullish trade ideas on AAPL, AET, BAC, GENZ and INTC (2) as well as shorter-term bullish trade ideas on CSTR (April) and ABX (quick 50% profit and done). We also had a short play on PCX (up huge already) and hedged with RKH Feb $85 puts at $1.15 (now $1.80, up 56%) and rolled our losing QID position in the $10,000 Virtual Portfolio to the Feb $10 calls at an average of $1.15 (now .90, down 22%). This is how we can be long-term bullish and short-term bearish. Buying the f’ing…
by Option Review - September 11th, 2010 7:30 am
Today’s tickers: HIG, EW, GENZ, AWK, STEC, DELL, HTZ, DBRN & OVTI
HIG – Hartford Financial Services Group, Inc. – Call options on the insurance and financial services firm are flying off the shelves today with shares trading higher by as much as 2.95% to tie down an intraday high of $22.99. As of 2:20 pm ET, more than 14.1 calls have changed hands on HIG for each single put option in action on the stock thus far in the session. The sharp increase in demand for calls bumped up the insurer’s overall reading of options implied volatility 26.4% to today’s high of 56.57%. While some investors populating HIG are selling calls, the majority of calls traded were purchased by traders positioning for continue appreciation in the price of the underlying shares. Near-term optimists picked up roughly 7,500 calls at the September $23 strike for an average premium of $0.50 each. Call buyers at this strike make money if HIG’s shares rally above the average breakeven price of $23.50 by expiration day next Friday. Other bulls purchased some 4,600 calls at the September $24 strike for premium of $0.23 each. Another 2,800 calls were scooped up at the higher September $25 strike at an average premium of $0.16 a-pop. More than 10,800 calls changed hands at the September $26 strike versus previously existing open interest of just 3,300 lots. The vast majority of those calls, some 7,000 contracts, traded to the middle of the market at a premium of $0.12 apiece. Bullish sentiment on the insurance company spread to the October $24 strike where some 2,000 calls were coveted at an average premium of $0.76 each. Investors holding these contracts stand ready to accumulate profits if HIG’s shares jump 7.7% over today’s high of $22.99 to exceed the average breakeven price of $24.76 by October expiration. An additional 2,000 calls were picked up at the October $25 strike for premium of $0.70 a-pop. Traders long the calls make money if shares surge 11.8% to trade above $25.70 ahead of expiration day next month. Options traders exchanged more than 66,700 contracts on Hartford Financial Services Group by 2:30 pm ET.
EW – Edwards Life Sciences Corp. – The provider of products and technologies created to treat advanced cardiovascular disease popped up on our ‘hot by options volume’ market scanner after…
by Phil Davis - August 30th, 2010 8:22 am
It’s another busy Monday for M&A activity.
SNY announced a $18.5Bn CASH offer for GENZ ($69/share), INTC buy’s INNNY’s wireless unit for $1.4Bn in CASH and DELL and HPQ are still in a bidding war over PAR (and HPQ thinks their own shares are so cheap they are buying back $10Bn worth of them). The biggest winner in this weekend’s acquisition game is – ME! I live in northern NJ and, with the merger of CAL and UAUA going through, Continental is forced to diffuse some of their concentration at Newark airport and that ends up giving LUV 18 slots, bringing some much-needed additional competition to Newark, which has been pretty much dominated by Continental for years. LUV is a great buy at $11.13 and a fun way to play is the Jan $10/11 bull call spread at .60, selling the Jan $10 puts for .55, which is net .05 on the $1 spread with a 1,900% upside and your worst-case scenario is you own LUV at net $10.05 – what’s not to LUV?
Speaking of diffused concentration, the Glenn Beck rally was a bit of a disappointment with just 87,000 people showing up (Fox had a permit for 300,000 and keeps using that number as if that’s how many came while Beck himself has been claiming between 300,000 and 650,000 were there and Michele Backmann (R-Minn) claims it was the biggest rally ever held in Washington, with no fewer than 1M people in attendance). This has now backfired on Beck, Palin and the Tea Party as a "show of strength" becomes a show of apathy (to the people who can count, anyway) - it probably would have been smarter to hold the rally next weekend but Fox wanted to time the rally for the start of Jon Stewart’s vacation, although it didn’t stop him from commenting in absentia (where I hear Jon has a lovely bungalow). For a more "fair and balanced" view of the rally, see the very nice coverage from Reason TV.
During an interview on "Fox News Sunday," which was filmed after Saturday’s rally, Beck claimed that Obama "is a guy who understands the world through liberation theology, which is oppressor-and-victim – People aren’t recognizing his version of Christianity," Beck added. Beck’s attacks represent a continuing attempt to characterize Obama as a radical, an approach that has prompted anxiety among some Republicans,…
by Option Review - August 4th, 2010 5:02 pm
Today’s tickers: RIG, BKS, GPS, HIG, CX, GENZ, ENP & PG
RIG – Transocean, Ltd. – Shares of the provider of offshore contract drilling services are up 6.75% to stand at $53.79 with 20 minutes remaining before the closing bell. Transocean is scheduled to reveal its performance for the second quarter of 2010 after the market closes today. Impending earnings inspired a flurry of options activity on the stock in afternoon trading. Investors are making good use of RIG’s weekly options pre-earnings, placing both bullish and bearish bets by exchanging calls and puts. Optimists hoping to see Transocean shares extend gains through weekly-expiration on Friday purchased roughly 3,200 calls at the August $55 strike for an average premium of $0.74 each. Buying interest spread to the higher August $60 strike where approximately 1,000 calls were coveted at an average premium of $0.08 apiece. A strong earnings report and continued rally in RIG’s shares will benefit traders making bullish wagers today. On the flip side, some investors are hedging possible disappointing earnings and subsequent share price erosion. Put players picked up roughly 2,500 puts at the August $52.5 strike for an average premium of $0.96 each. These contracts, which expire on Friday, yield profits – or downside protection – to investors should Transocean’s shares decline 4.2% from the current price of $53.79 to breach the average breakeven point on the downside at $51.54 by expiration. Calls expiring on August 20 were also heavily traded ahead of earnings. Trading traffic is heaviest at the August $55 strike where more than 11,500 contracts changed hands by 3:50 pm ET. Overall, options players exchanged roughly 1.65 calls for each single put traded on the stock today.
BKS – Barnes & Noble, Inc. – The bookseller’s shares surged 24.9% at the start of the trading session to an intraday high of $16.04 on news the retailer willing to consider offers from others to buy the company and its 720 outlets. Shares cooled slightly by 3:20 pm ET, but are still up 18.85% on the day to arrive at $15.26 ahead of the final bell. The U.S. bookseller was upgraded two levels to ‘neutral’ from ‘sell’ at Goldman Sachs. Options traders hoping to see Barnes & Noble’s shares continue higher ahead of expiration next month purchased roughly 1,000 calls at the September $18 strike for an average premium of $0.47 apiece. Call buyers make money…
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…
by Phil Davis - 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
by Option Review - July 27th, 2010 4:55 pm
Today’s tickers: MGM, SLV, CISG, GENZ, XRX, JNPR & DD
MGM – MGM Resorts International – The operator of casino resorts attracted bullish options players this afternoon with the price of the underlying stock rallying as much as 3.65% to an intraday high of $11.36. It looks like investors expecting shares to continue higher ahead of August expiration purchased call options. The most optimistic of individuals picked up approximately 5,200 calls at the August $13 strike for an average premium of $0.21 each. Call buyers at this strike make money if MGM’s shares surge 16.3% to trade above the average breakeven price on the upside at $13.21 by expiration day next month. Other bullish traders who are perhaps hoping shares can retain the present rally, but not looking for shares to move much higher ahead of expiration in August, sold 3,000 puts at the August $10 strike for an average premium of $0.37 each. If investors are selling these puts outright, they walk away with the full premium received on the transaction as long as MGM’s shares exceed $10.00 through expiration day. Investors populating MGM Resorts International today exchanged more than 2.2 call options for each single put option in play on the stock as of 3:45 pm ET. MGM is scheduled to report its second-quarter results ahead of the opening bell of August 3, 2010.
SLV – iShares Silver Trust ETF – Shares of the iShares Silver Trust fell more than 2.90% to $17.26 in late afternoon trading inspiring some traders to load up on put options. Fresh put activity was most heavily concentrated in the September contract where current put volume at in- and out-of-the-money strikes exceeds previously existing open interest. Investors bracing for further bearish movement in the price of the SLV’s shares purchased 1,900 in-the-money puts at the September $18 strike for an average premium of $1.17 apiece. In-the-money put buyers are prepared to profit should shares of the fund decline another 2.5% to slip beneath the average breakeven point on the downside at $16.83 by September expiration. Put volume was heaviest at the September $16 strike where more than 16,700 contracts changed hands by 3:25 pm ET. It looks like investors purchased at least 14,400 of those lots for an average premium of $0.29 each. Shares of the fund must fall 9.00% from the current price before September $16 strike put buyers breakeven at a…
by Phil Davis - 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…
by Option Review - July 2nd, 2010 4:45 pm
Today’s tickers: PFE, EWZ, BAC, JNPR, RHB, GENZ, MRVL & SKX
PFE – Pfizer, Inc. – Options strategists initiated diverse transactions on the global pharmaceutical company today with shares of the underlying stock slipping 0.75% lower to arrive at $14.12 in afternoon trading. One investor expecting Pfizer’s shares to remain range-bound through August expiration sold a straddle, while a pessimistic trader enacted a ratio put spread in the January 2011 contract. The short straddle took place at the August $15 strike where approximately 10,000 calls were sold for an average premium of $0.27 apiece, in conjunction with the sale of about 10,000 in-the-money puts for an average premium of $1.28 each. The straddle-seller pockets a gross premium of $1.55 per contract on the transaction, keeping the full amount of premium received if Pfizer’s shares settle at $15.00 at expiration. Shares must rally 6.2% in the next couple of months to reach $15.00 by expiration day in August. The short stance taken in both call and put options expose the responsible party to potentially devastating losses in the event that shares swing dramatically in either direction away from the $15.00 strike price. Losses accumulate for the straddler if PFE’s shares rally above the upper breakeven price of $16.55, or should shares slip beneath the lower breakeven point at $13.45 ahead of expiration. In longer-dated January 2010 options, a bearish trader wary of continued erosion in the price of Pfizer’s shares established a ratio put spread. The investor purchased 10,000 puts at the August $14 strike for a premium of $1.47 each, and sold 20,000 puts at the lower August $11 strike for a premium of $0.49 a-pop. Net premium paid for the transaction amounts to $0.49 per contract. The trader is poised to profit if shares of the pharmaceutical company decline 4.3% from the current price of $14.12 to breach the effective breakeven point on the spread at $13.51 by January 2011 expiration day. Maximum available profits of $2.51 per contract pad the investor’s wallet if Pfizer’s shares plummet 22.00% to settle at $11.00 at expiration.
EWZ – iShares MSCI Brazil Index ETF – Shares of the EWZ, an exchange-traded fund designed to provide investment results that correspond to the price and yield performance of publicly traded securities in the aggregate in the Brazilian market as measured by the MSCI Brazil Index, rallied 0.70% to $63.40 by 2:30 pm (ET). Despite…
by Phil Davis - June 26th, 2010 12:35 pm
Finally a chance to buy again!
The problem with hitting the dead bottom with our June 7th Buy List is there haven’t been any good entry opportunities since for new Members. Now we are back down to about the bottom of the "flash crash" (S&P 1,065) and it does look like we may be forming another bottom. right about where we were when I wrote on June 6th "The Worst-Case Scenario: Getting Real With Global GDP!" where I pointed out: Things are just simply not bad enough to sit on our hands with a big pile of cash.
I am still not advocating going over a 25% commitment to long-term positions so PLEASE - keep that in mind at all times - our buying premise is that we have cash (with a target of staying at least 75% cash right now) and we will need more disaster hedges if we can’t hold this week’s lows. If we have a 2% hedge in place now that pays 10% on a market drop of no more than 20% below where we are now, then we can expect to have 10% of our money from that hedge to pay for any stocks that are put to us and, if we are only allocating 20-25% of our cash to buy round 1 here, then logically, that extra 2% we’re putting up as insurance will pay for half of an unexpected drop. If we get less confident in holding our levels, then we can up our hedges.
That means, if we spent $25,000 to buy round 1 of stocks and $5,000 of insurance that pays 500% if we hit our assignment area (down 20%) and we are assigned a basked to stocks, which force us to double down, then the $25,000 we need to double down with will come from our insurance hedge and that means we’ll be in 2x the stock for $30,000 with $75,000 more cash on the side (assuming it was a $100K Virtual Portfolio).
Let’s keep this example dead simple and say we buy the SPY for $106.82 and let’s say we buy 300 shares for $32,000. Now we cover that with the sale of the March $103 calls for $12 and the $95 puts for $6 and that nets out to $88.82 ($26,346) and our upside at $103 is $14.18 ($4,254 or 13%). We are committed to owning 600 shares of SPY at the $88.82 we paid for 300 plus another 300 at $95 for an…