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…
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
Facebook
Twitter
Wild Weekly Wrap Up - Only Halfway Through January!
by Phil - January 16th, 2010 8:29 am
Wheee, what a ride!
The week can be neatly summed up by my 1:35 comment to Members in yesterday’s chat, summed the week up quite nicely as I said: "So funny, a whole week of gains I thought were ridiculous wiped out in 4 hours." Of course it’s easy to laugh when you play the market correctly - as I had said in the morning post, we had cashed out into Thursday’s run up and planned on going bearish through the weekend but it turned out we got our sell-off early, jumping the $100K Portfolio, for example, up 12% in one day - enough to send us back to cash rather than risk a weekend reversal.
We laid the groundwork for this little sell-off in last weekend’s posts as we put up an aggressive Buy List for Members but in my regular weekend post we emphasized the need to cover our buys with "Disaster Hedges" as we were heading to the tops I had predicted when I published the "Last Charts of the Decade," where I set resistance target of Dow 10,457, S&P 1,135, Nasdaq 2,314, NYSE 7,389 and Russell 638. As you can see, I pretty much hit them on the head, other than the Dow but that’s because our year-old 5% rule calculations did not account for the change in the Dow that replaced C and GM with TRV and CVX, who added about 100 Dow points since their inclusion so we started using 10,549 this month and we’ll make it 10,557 for today’s chart, which makes perfect sense looking at this group (I added the Transports as they are fell right off our 2,000 target, giving us the early warning that things were not right):
As you can see, the 5% Rule rules! I will apologize for being such a grump this week but the rally was really starting to annoy me as it was so blatantly forced up through our levels without a proper test that is was really getting me down about the markets. I don’t mind that the markets are manipulated, that’s been going on since markets were invented - it’s stupid and destructive manipulation that bothers me, the kind that, long term, destroys more investor confidence than it builds and squanders capital resources on the "wrong" companies (and now, ETFs!).
In this case, very precious investor capital is being steered into commodities, which is a very poor use of recessionary capital as is inflating the money supply to…
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
Facebook
Twitter
Which Way Wednesday - For Retail Sales?
by Phil - December 23rd, 2009 8:12 am
![[Retail sales chart]](http://s.wsj.net/public/resources/images/P1-AO101A_RETAI_NS_20081225220014.gif)
Remember this from last year?:
Price-slashing failed to rescue a bleak holiday season for beleaguered retailers, as sales plunged across most categories on shrinking consumer spending, according to new data released Thursday. Despite a flurry of last-minute shoppers lured by the deep discounts, total retail sales, excluding automobiles, fell over the year-earlier period by 5.5% in November and 8% in December through Christmas Eve, according to MasterCard Inc.’s SpendingPulse unit. "This will go down as the one of the worst holiday sales seasons on record," said Mary Delk, a director in the retail practice at consulting firm Deloitte LLP. "Retailers went from ‘Ho-ho’ to ‘Uh-oh’ to ‘Oh-no.’" The holiday retail-sales decline was much worse than the already-dire picture painted by industry forecasts, which had predicted sales ranging from a 1% drop to a more optimistic increase of 2.2%.
That was the December 26th headline in the WSJ (the chart is from last year too) which presaged poor Q4 earnings that sent the markets off a 27% cliff from Jan 1st through March 9th of this year. The Dow was at 9,000 last January and managed to fall all the way to 6,500 on those retail results - the same retail results we are hoping to beat by 1% this year with the Dow at 10,500. This will be interesting to say the least. We remain skeptical of the rally but have put up a new, very bullish Watch List as we have identified many stocks we can buy into a technical rally if it holds up into the week after New Years as we begin to deploy some of our own sidelined cash.
We held our short-term bearish stance but our premise is wearing thin as even the 2.2% GDP (20% worse than expected) announcement yesterday was somehow taken as good news by the market. Today the WSJ is touting strong interest in a $1.1Bn CRE auction held by the FDIC as another positive market sign - forgetting the fact that these commercial properties are being sold at 50-90% discounts and are just 3% of the over $30Bn of seized assets the FDIC is sitting on and must sell over the next 12 months (so $1.9Bn short of target this month already).
The FDIC must raise more capital in order to seize more banks as their balance sheet hit negative $8.2Bn at the end of September. They had been putting off the sales, hoping for a turnaround but 50…
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
Facebook
Twitter
Wild Weekly Wrap-Up
by Phil - December 19th, 2009 8:20 am
Wheee - that was fun!
Last week, I asked the question were we "Too Bearish or Just Too Early?" I said in that wrap-up: "This Friday the market topped out about 150 points higher than last Friday, closer to the top of our range so we went much more bearish on Friday, perhaps too bearish considering this was the best Friday finish since Nov 6th and we haven’t had a down Monday since October 26th." We did get the move up we feared on Monday but we stuck to our guns and had a fabulous week.
Even as the market was going against us Monday morning, my first Alert of the week to members at 9:44 said: "I’m still more inclined to look downward at: Dow 10,250, S&P 1,100, Nasdaq 2,187, NYSE 7,200 and Russell 600… I’m still bearish because oil is weak, gold is weak, the financials (XLF at 14.30) are weak and most of the good news we are hearing is nothing but fluff." That was a pretty good call as we hit our target levels yesterday and held them, so we flipped more bullish right at 11:30 on Friday, in what was some very good timing for our intra-day play.
We are still on a stock market roller coaster that’s going to have plenty of ups and down in the thin, holiday trading that will likely characterize the end of the year. The market will be closed 2 Fridays in a row and good luck finding people around this Thursday or the next one so 6 proper trading days left to 2009 at best. We got out - that drop was very satisfying and we’ve moved mainly to cash (our $100K Portfolio has $88,000 in cash at $107,249 at the end of it’s first month). Last week we were able to cash out the bull side, this week we got satisfaction from our bear plays and that leaves us footloose and fancy free to have fun the next two weeks. If our day trading goes as well as it did on Friday, we can end this year with quite a bang.
Manic Monday - Dubai, CitiGroup and GS Move Markets
This picture says it all. When you want to blow smoke up investors’ asses, the dream team of economic BS is Greenspan and Cramer, who appeared on Meet the Press last Sunday to tell us that the market is smarter than reality and Greenspan actually had the nerve to say that we are underestimating…
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
Facebook
Twitter
Option Trader Prescribes Bullish Risk Reversal on CVS
by Andrew Wilkinson - November 19th, 2009 5:43 pm
Today’s tickers: CVS, LIZ, ITMN, MA, V, RF, KG, HW, WSM, AEP & NTAP
CVS - CVS Caremark Corp. – Shares of the pharmacy retail chain are up 1.5% to $31.11 perhaps due, in part, to the ‘buy’ rating it received at UBS today. Optimistic options activity took place in the December contract as one investor initiated a bullish risk reversal. It appears the trader sold 4,400 puts at the December 31 strike for an average premium of 94 cents apiece in order to finance the purchase of the same number of calls at the higher December 32 strike for 63 cents each. The investor pockets a 31 cent credit on the trade, which he retains in full as long as shares remain above $31.00 through expiration. Additional profits accumulate if CVS’s shares rally above $32.00.
LIZ - Liz Claiborne, Inc. – A 15,000-lot covered call in the January 2011 contract on Liz Claiborne today suggests shares are likely to recover, albeit at a glacial pace. Shares of the apparel and accessories retailer suffered a 5% decline to $4.55 during the trading session. One investor effectively purchased shares of the underlying stock for $3.30 apiece by selling 15,000 calls at the January 2011 5.0 strike for a premium of 1.25 each. Thus, the trader stands ready to accrue gains of 51% if shares of LIZ appreciate to $5.00 by expiration. The long-term positioning of the covered call play provides several advantages to the investor. One advantage is that the call options do not expire for another 13 months, which leaves ample time for LIZ’s shares to appreciate up to the strike price of $5.00. The 15,000-lot call transaction represents nearly 50% of the total existing open interest on LIZ of 31,502 contracts. Note that shares last traded above $5.00 yesterday at approximately 10:35 am (EDT).
ITMN - InterMune, Inc. – A bull call spread on the biotechnology company today suggests shares could rally significantly by expiration in April 2010. Bullish options activity on the stock belies the more than 3% decline in ITMN’s shares during the session to $10.94. The call spread involved the purchase of 3,750 calls at the April 15 strike for an average premium of 2.25 each, marked against the sale of the same number of calls at the higher April 25 strike for 75 cents apiece. The net cost of the transaction amounts to 1.50 per contract. The optimistic investor is positioned…
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
Facebook
Twitter
MYTHS & REALITIES
by ilene - November 5th, 2009 3:40 pm
MYTHS & REALITIES
Courtesy of The Pragmatic Capitalist
David Rosenberg has some excellent thoughts on everything from Warren Buffett to the boom in M&A:
Myth: Warren Buffett is making a big wager on the U.S. economy.
Reality: The Oracle believes that with oil prices where they are and likely to go higher, rails will grab transport share from the truckers. This may also be a back-door bullish call on coal. Or maybe it’s a constructive sign on buying of U.S. made goods out of Canada where local domestic demand is hanging in just fine, thank you very much.
Myth: There are signs of life in the retail sector.
Reality: October auto sales in the U.S. did pick up from September’s abyss, but this was still the eighth worst month in the last 27 years. And yes, it does look like U.S. chain store sales are going to come in somewhere between +1.0-2.0% year-over-year. But beware. This actually says more about the detonation that took place a year ago — the “base” for the year-over-year calculations — than anything truly robust at the present time.
Also, don’t forget that these are YoY same store sales from surviving retailers. Thousands have gone bankrupt in the last year, for example Circuit City, which for sure has helped BestBuy’s activity, and there are countless other examples. So the data, for lack of a better term, are distorted and tell you very little about what consumers are doing in the aggregate.
Myth: The low end consumer is adjusting to the new frugality more than the high end.
Reality: If only it were only so. Unfortunately, a gap has opened between employment-dependant spending and wealth-dependant spending. After all, the investor class is giddy after a 60% rally from the March lows in equities, a rally in which 2.7 million jobs in the U.S. have been lost. Epic. So in October, luxury goods sales came in at +6.5% YoY and jewellry at +7.2%! Meanwhile, department stores who cater to the guy (and gal) on the street posted a 1.5% sales decline (as per MasterCard’s SpendingPulse survey).
Also keep an eye on where people are buying their food and what food they are buying (good article in yesterday’s Wall Street Journal on this) — Cheesecake Factory is all of a sudden seeing a burst of sales activity (Starbucks too from what we are hearing and reading) that is eluding the fast-food chains at the moment.
Myth: We have…
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
Facebook
Twitter
What the Burlington Northern and Black & Decker Deals Have in Common
by ilene - November 4th, 2009 11:18 am
What the Burlington Northern and Black & Decker Deals Have in Common
The Deal Professor, having expressed his dismay at the lack of M&A a day too early, weighs in on the similarities between Buffett’s purchase of BNI and the Stanley Works buyout of Black & Decker…
From Steven M. Davidoff (NYT):
While both deals may or may not be the sign of a new trend, and two deals certainly do not make a trend, both are notable for their similarities. Both are strategic investments in America. Burlington Northern is a railroad; its success or failure depends on the state of the American economy. Stanley Works and Black & Decker are American icons in the tool-making business that derive substantial portions of their revenue from American sales and are merging to further fight off global competition.
The deals represent the creative consolidation going on in the distressed M.&A. market.
An interesting look at what dealmaking looks like these days.
Read the rest:
(What's this?)
(Fund my Mutual Fund, 11/3/09)
(Money Morning, 11/3/09)
(AlphaNinja, 11/2/09)
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
Facebook
Twitter
Weekend Wrap-Up, Ripping Through the Top or Topping and About to Tip?
by Phil - July 25th, 2009 12:34 pm
What a week this has been!
In last week’s 600-Point Weekly Wrap-UP, I said it would take some spectacular earnings results next week to keep the rally going and it seems like we got them this week as roughly 85% of the companies reporting this week beat expectations with 42 of this week’s reporting companies guiding up and only 18 guiding down. While people like Richard Bernstein may make very good arguments for why we shouldn’t focus too much on quarterly earnings surprises, I have to say I am somewhat swayed by the preponderance of evidence we’ve gotten this week that, by and large, the vast majority of our companies are weathering the storm far better than analysts have expected.
"It’s pretty amazing what passes for good news these days," remarks Barry Ritholtz on his blog, The Big Picture (www.ritholtz.com.) "Beating dramatically lowered earnings forecasts on cost-cutting and layoffs — rather than top-line growth — seems to be the order of the day. The irony is that the Wall Street analyst community overestimated earnings at the top of the cycle — pure extrapolation of trend to infinity. They seem to be doing the same thing now, only extrapolating falling earnings to zero. What that produces is not true upside surprises, but merely jumping over a dramatically lowered bar," he says.
It’s interesting Barry says this now because it sounded familiar and I went back to my May 2nd Weekly Wrap-Up, where the sentiment was very similar and I said at the time: "With 2/3 of the S&P 500 weighing in, earnings have been 70% positive. I had warned earlier in the week that we are only beating a very low bar but we are beating nonetheless. As you can see from the above chart, even if we do keep moving up, we are heading into some very serious overhead resistance that may not prove futile this time. With the added pressure of the old "sell in May, go away" adage - there will be a lot of obstacles to overcome this week and next so we will remain on guard but we have also trained ourselves not to think and simply go with the flow, letting our levels guide us and, so far, our levels keep saying yes - despite our common sense saying no."
More importantly, with the Dow right at 8,200 that Friday and the S&P at 875, was my call that we had…
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
Facebook
Twitter
Weekly Wrap-Up - Hitting Our Targets At Last!
by Phil - May 2nd, 2009 8:15 am
Finally we break out!
Last Friday we had our charts that indicated it was possible but we played 55% bearish into the weekend thank goodness and, as I predicted in the weekend wrap-up, our broken clock (going into each weekend 55% bearish) was right twice as we had a harsh sell-off on Monday that did not get us off to a good start. After last week’s action, which I called "a big, ugly W," where 8,130 capped our gains on the Dow, we got a very nice 2.5% rule move for the week on a breakout where we held 8,130 to the downside. While we still went into the weekend just a little bearish - it’s getting harder to believe it as the relentless rally continues but better safe than sorry over the weekends as our rallies are still coming on very low volume and, other than Friday, we sold off into every close this week.
We finished the week right at the 8,200 mark that I predicted weeks ago would be the top of this rally. In fact, the breakout levels we’ve been using since we first broke out over 7,632 in late March were DIA 8,130, S&P 870, Nas 1,700, NYSE 5,500 and RUT 480 - these were our break DOWN levels of January (and pretty much where we closed for the week) so, on the whole, we are nicely confirming that our "V" bottom of March 9th was an aberration and will NOT be revisited. We do still expect a retest of 7,900 but 7,632 may now be off the table and our 8,650 target (the mid-point of what we’ve considered "fair value" since October) is just as likely to be hit before we see another pullback.
What we’re looking for is a new range that confirms the 5% levels around 8,650, which is, as a floor, 8,200 (8,217 to be exact) and, at the top of the range, 9,100 (9,082). The closer we get to 9,100 before pulling back, the more likely 8,200 firms up as a floor. Volatility is certainly washing out of the market slowly but surely as the VIX finishes the week at 35.30, down 20% for the month against an 8% gain in the S&P - a complacency that indicates that up, as we like to say, is the new down.
We had an absolutely fantastic week as we learned to stop worrying and love the rally. After being cautious last Friday, my…
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
Facebook
Twitter
Friday - Workers of the World Unite!
by Phil - May 1st, 2009 8:29 am
Happy May Day!
I remember when Russia used to parade their nukes down Red Square and we used to do "duck and cover" drills in the schools during one of the greatest bull market runs in history. Now we have turned into such wimps that we panic out of our stock holding over fear of germs! Chrysler workers of the world united yesterday as the failed capitalist corporation filed for bankruptcy and agreed to give control (55%) to it’s workers. I am thrilled with this outcome as it’s going to be a fascinating socioeconomic experiment to see what decisions the workers make regarding Chrysler’s major long-term issues like retirement benefits and health care. I’m sure the administration is happy too to have a petri dish in which to watch the issues that plague this whole nation long-term play out in microcosm. If we’re lucky, we will even be able to blame the Italians (Fiat) for anything that goes wrong.
Many global markets are closed today for various celebrations and, ironically, many countries around the world still honor a US labor incident that this country has swept under the rug - the 1886 Haymarket Affair, which took place in our President’s hometown of Chicago when a workers strike for an 8-hour workday got out of hand and about 50 people died (4 police, the rest strikers). 8 Strike organizers were tried as anarchists and seven wer hung and if you thought the NYTimes was always a liberal paper, read 1886’s "Anarchy’s Red Hand: Rioting and Bloodshed in the Streets of Chicago" and compare that to the more balanced Wikipedia account of the incident. Anyway, that’s why we don’t celebrate May Day in America even though the American Haymarket Affair is the one that inspired this memorial holiday in the rest of the world.
Speaking of our government sweeping things under the rug, it’s incredible that people are buying this nonsense that Chrysler will have a quick and painless bankruptcy. If you think the trial of the union organizers as anarchists was a farce, imagine the joke of a court proceeding that we’ll have to have in order to steamroll billions of dollars of debtholders into submission. It was less than 2 years ago, August 2007, when Cerberus Capital took a majority stake in Chrysler and the company quickly turned around and borrowed $10Bn against questionable assets like auto patents and things like the Jeep brand name. They burned through that money plus $4Bn from the Treasury and the government…
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
Facebook
Twitter
German
Spanish
French
Italian
Portuguese
Japanese
Korean
Russian
Chinese
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
(