2010 Outlook - A Tale of Two Economies
by Phil - December 27th, 2009 6:54 am
"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way–in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only." - Charles Dickens, 1859
Dickens famous novel (which was originally written as a weekly series in 31 installments) depicts life in the time of the French revolution but was also a parable, meant to warn the British aristocracy that they should not ingore the parallels to the social inequities that existed at the time in England. Dickens warned the nobles that the seeds of revolution were planted through unjust acts and surely there would be a time of reaping yet to come.
It is said that the French Revolution was sparked by outrage over a statement by the Queen Mary Antoinette who, when told that the peasants had no bread to eat, supposedly replied (she never actually said this) "Qu’ils mangent de la brioche" or "Then let them eat cake." It’s hard for us to imagine the impact of this statement in modern times but "peasants" were 90% of the population at the time and bread was 90% of what they ate, consuming 50% of the average family’s income (people weren’t silly enough to pay for housing back then - they just found a bit of land, bought some wood and nails and built their own homes). Brioche was a luxury combination of bread enriched with flour and butter so the statement "Qu’ils mangent de la brioche" implies both lack of caring and cluelessness on the part of the Queen.
The United States had what passes for a revolution between 2006 and 2008 as we threw out the Republicans and went with a Democrat-controlled government. While the Bush administration, the Republican Congress and Fox News may have been as clueless as a French Queen to the plight of the people - the fact of the matter is that the base pay of top management rose 78% from 2002-2007 while…
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Volatility Up at Dow Chemical as Investors Feast on Options
by Andrew Wilkinson - September 14th, 2009 5:51 pm
Today’s tickers: DOW, XLF, FMCN, MAR, CAT, S & MOT
DOW - The manufacturer of chemicals, plastic materials, and other specialized products jumped onto our ‘most active by options volume’ market scanner this afternoon amid a more than 7% rally in shares to $25.30. Option traders displayed bullish tendencies as investors exchanged nearly two call options to each put traded on the stock. The near-term September contract had traders buying up both calls and puts. Bullish call buying occurred at the now in-the-money September 25 strike where more than 6,100 calls were picked up for an average premium of 33 cents each. More optimistic individuals purchased some 1,100 calls at the higher September 26 strike for 27 cents premium. Investors also locked in gains by buying 4,300 puts at the September 24 strike for 25 cents each. An additional chunk of 5,600 puts were scooped up at the higher September 25 strike for 56 cents apiece. Investors purchasing the puts probably hold long positions in the underlying stock. Finally, the October 26 strike was also targeted by bullish traders who bought about 2,000 calls for 85 cents per contract. The intraday shift in option implied volatility on DOW suggests investors are anticipating greater fluctuation in the price of the underlying shares. Volatility increased 12% during the session, rising up to a high of 51.5% from an intraday low of 46%. – The Dow Chemical Co. –
XLF - A large-volume bearish reversal caught our eye on the financials exchange-traded fund as shares of the underlying spent the better part of the trading session in the red. However, the XLF has recovered this afternoon to stand more than 0.5% higher at $14.63. The massive options reversal enacted in the October contract suggests at least one trader does not expect to see the fund climb much higher over the next five weeks. The transaction involved the sale of 35,000 calls at the October 15 strike for 39 cents apiece spread against the purchase of 35,000 puts at the lower October 14 strike for 49 cents per contract. The net cost of getting long the puts amounts to just 10 pennies each. It is likely the investor responsible for the spread holds a long position in the underlying stock. If this is indeed the case, he has established downside protection that would kick in if shares of the XLF fell beneath the breakeven point at $13.90…
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A Little Cautious Optimism at Arena
by Andrew Wilkinson - August 26th, 2009 5:20 pm
Today’s tickers: ARNA, XLF, EEM, FXI, ARM, MAR & MYGN
ARNA - The clinical-stage biopharmaceutical company received a downgrade to ‘sell’ at EVA Dimensions this morning, perhaps prompting bearish put buying which we observed in the October contract. However, a contrarian trader took an opposing stance on the stock by utilizing puts at the same strike, albeit in a different manner. Shares have declined less than 0.5% to stand at the current price of $4.87. Plain-vanilla put buying earlier in the session matched the bearish downgrade. Approximately 10,000 puts were purchased at the October 4.0 strike price for an about 95 cents apiece. Traders holding the puts will begin to amass profits if shares of ARNA fall beneath the breakeven price of $3.05. An investor with a glass-half-full outlook on Arena chose to purchase a chunk of 10,000 puts at the same strike for a dollar a-pop. However, these put options were married to shares of the underlying stock because the trader is hoping for shares to appreciate. He has strategically used put options to protect his long stock position in case the value of the shares decreases ahead of expiration. – Arena Pharmaceuticals, Inc. –
XLF - Shares of the financials ETF have surrendered less than 1% during the trading session to stand at $14.53. A long-term short strangle was positioned in the January 2011 contract by an investor expecting lower price volatility through expiration. It appears that the trader shed 8,000 puts at the January 13 strike price for a premium of 1.80 each and sold 8,000 calls at the higher January 17 strike for 1.40 apiece. The ‘strangler’ receives a gross premium of 3.20 per contract for a total of $2,560,000. He will make off like a bandit with his chunk of change as long as shares remain within the parameters of the strike prices described through expiration. The short put/call positions expose him to potential losses if the price of the XLF breaches the effective breakeven points. Losses begin to accrue if shares rise through $20.20 or fall beneath $9.80 by expiration. We note that this individual does not need to remain short through January in 2011. He may choose to take profits by making a closing purchase for a net price that is less than 3.20, or the premium received on today’s transaction. – Financial Select Sector SPDR –
EEM - A large-volume put spread was initiated by an investor who…
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$5,000 Portfolio Update - Week 6 - $5,614
by Phil - August 15th, 2009 4:04 am
Well we’re back to cash…
After getting off to a great start, up 12% in the first 3 weeks, we were lucky this week to get back to 12% after having a run of bad luck (or bad skill actually, as we went bearish too early and got punished for it). The goal of the $5,000 portfolio is to play around the volatility of earnings and make no mistake, it’s a high-risk way to trade $5,000 and is meant to be a small portion of a large portfolio - not something you would want to do with your only $5,000. Of course the usual disclaimer is, this is a virtual portfolio, don’t try this at home, trading is dangerous, always consult a professional financial adviser, etc, etc. The idea is to practice different option strategies and we’re learning from our successes and failures - I hope!
Our first play 5 plays that we closed were on AA, DIA, SGR, MCD, and DELL, which had a total gain of $629 in our first 6 days. For details on those trades, go to the Day 6 post. We have been posting all of the moves for the $5KP in member chat, of course, but also on Seeking Alpha’s Stock Talk, where we have discovered the added bonus that, like Twitter, you do not have to refresh the page to see new comments! If you want to follow these trades, just click on "Follow" under my picture and you will automatically see any comments made there. A full review of Stock Talk commentary regarding the $5KP is available here and please make sure you click "Follow" on my picture so that you will be able to track further updates.
We closed positions on WFC and AXP, up $258 in our last review on July 25th and we have since closed our YUM position with a $256 loss on the 28th, which was a shame as we gave up on 8 Aug $35 calls at .45 ($360) and they flew up to $2 ($1,600) just a week later. Unfortunately, in a small portfolio, you don’t have the luxury of riding out your losses and, at the time, we felt lucky to escape this underperfomer with a relatively small loss.
A VNO put spread we couldn’t fill the week of the 21st, was an easy fill the next week and 3 Sept $50 puts were in at $3.70 ($1,110) and 3 Aug $50 puts were sold for $2.90 ($870). The premise of this play is a tough one to hold on through as we expected VNO (and all commercial realty) to…
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$5,000 Portfolio Update - Week 3 - $5,598
by Phil - July 25th, 2009 8:25 am
We’re up 12% in 3 weeks - not bad…
The goal of the $5,000 portfolio is to play around the volatility of earnings and make no mistake, it’s a high-risk way to trade $5,000 and is meant to be a small portion of a large portfolio - not something you would want to do with your only $5,000. Of course the usual disclaimer is, this is a virtual portfolio, don’t try this at home, trading is dangerous, always consult a professional financial adviser, etc, etc. The idea is to practice different option strategies and we’re having a a very exciting first few weeks!
Our first play 4 plays that we closed were on AA, DIA, SGR, MCD and DELL, which had a total gain of $629 in our first 6 days. For details on those trades, go to the Day 6 post. We have been posting all of the moves for the $5KP in member chat, of course, but also on Seeking Alpha’s Stock Talk, where we have discovered the added bonus that, like Twitter, you do not have to refresh the page to see new comments! If you want to follow these trades, just click on "Follow" under my picture and you will automatically see any comments made there.
On Wednesday, we also had an open a ratio backspread play on YUM and we sold 6 Aug $37 calls for $1.15 ($690) and bought 4 Aug $35 calls for $2.20 ($880). The idea of a trade like this into earnings is that a large drop will hurt your callers more than it hurts you and, to the upside, you have net $800 in the net $190 spread before you have to pay your 2 open callers a penny. That means they would each have to go up $3 before wiping out your profits. Since YUM was at $36 at the time and we did not feel it would be likely to go to $40, even on great earnings, the play made sense. YUM had very poor earnings and dropped right down to $34, below our strike. We decided to buy back the 6 Aug $37 calls for .40 ($240), so a gain of $450 on that leg. That left us with the 4 naked Aug $35 puts, which we paid $880 for, less the $450 gains so we are in those 4 calls for an average of $1.13 per contract. We have since doubled down that position at .40 leaving us with 8 at an average entry of .77 per contract. Currently, they are trading at .50 so we are down $216 on this…
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$5,000 Portfolio Update - Day 9 - $5,424
by Phil - July 17th, 2009 6:16 pm
We had a pretty good week with our new portfolio.
The goal of the $5,000 portfolio is to play around the volatility of earnings and make no mistake, it’s a high-risk way to trade $5,000 and is meant to be a small portion of a large portfolio - not something you would want to do with your only $5,000. Of course the usual disclaimer is, this is a virtual portfolio, don’t try this at home, trading is dangerous, always consult a professional financial adviser, etc, etc. The idea is to practice different option strategies and we had a very exciting first week!
Our first play 4 plays that we closed were on AA, DIA, SGR, MCD and DELL, which had a total gain of $629 in our first 6 days. For details on those trades, go to the Day 6 post. We have been posting all of the moves for the $5KP in member chat, of course, but also on Seeking Alpha’s Stock Talk, where we have discovered the added bonus that, like Twitter, you do not have to refresh the page to see new comments! If you want to follow these trades, just click on "Follow" under my picture and you will automatically see any comments made there.
On Wednesday, we also had an open a ratio backspread play on YUM and we sold 6 Aug $37 calls for $1.15 ($690) and bought 4 Aug $35 calls for $2.20 ($880). The idea of a trade like this into earnings is that a large drop will hurt your callers more than it hurts you and, to the upside, you have net $800 in the net $190 spread before you have to pay your 2 open callers a penny. That means they would each have to go up $3 before wiping out your profits. Since YUM was at $36 at the time and we did not feel it would be likely to go to $40, even on great earnings, the play made sense. YUM had very poor earnings and dropped right down to $34, below our strike. We decided to buy back the 6 Aug $37 calls for .40 ($240), so a gain of $450 on that leg. That left us with the 4 naked Aug $35 puts, which we paid $880 for, less the $450 gains so we are in those 4 calls for an average of $1.13 per contract. The calls have fallen to .70 so we are down .43 on those ($172) so far. While we do feel that YUM is still a good value, our concern is…
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Working Class Thursday - Show Us the Jobs!
by Phil - July 16th, 2009 8:24 am
Jobs, jobs, jobs!
That’s what it’s all about, or not about today. Last week we got much better than expected numbers as Job losses fell from 640,000 to 565,000 but how much of that was due to the July 4th holiday weekend we will see this morning. Analysts have quickly lowered their expectations to match last week’s figure (as they don’t have a clue of their own) and now we are expected to lose "only" 550,000 jobs this morning - still a 6.6M annual pace so keep that in mind should the markets decide to "celebrate" that number. Looking at the chart, you’ll see that July of ‘08 had a sharp downturn in Job losses as well, down from 400,000 to 350,000 with July 4th celebrated on a Friday last year too. Those reports arrested a slide in the Dow from 13,000 in May to 11,000 in mid-July and the market ran back to 11,800 on Aug 11th and we held around 11,500 until things fell apart in September and we fell all the way to 8,000. I know - history is just soooooo boring, what could possibly be learned from it?
Yesterday was an amazing day as we ran right up to the target levels I predicted on Monday, which I reiterated in yesterday’s morning post, saying: "Our upper targets to break the dreaded head and shoulders pattern are: Dow 8,500, S&P 930, Nasdaq 1,825, NYSE 6,000 and Russell 510." We had what we call a "Free Money Day" as the markets went up and up and up some more with the Dow topping out way up at 8,620, a 6.4% move off the bottom, which is just about a 20% retrace of the 33% drop so, of course, we shorted it! The S&P made it right to 932 and finished there, up 7.1% since Friday. The Nasdaq made it all the way to 1,860 after gapping just over our target at the open, up 6.9% for the week. The NYSE hit 6,000 on the nose and finished just under it - up 7.1% while the Russell over-achieved to 515, up 8.4% in 3 days.
As I mentioned yesterday, just because we made our targets, we are not automatically expecting a "breakout." We are not happy with the WAY in which we got here - a short rally on fairly low volume leaves what I call an "air pocket" below the gains as there is little support. …
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Option traders see Harley dropping a gear
by Andrew Wilkinson - April 13th, 2009 4:25 pm
Today’s tickers: HOG, GE, GM, MWW, MAR, YHOO, ALL & C
HOG Harley-Davidson, Inc. – The motorcycle company’s shares have dipped by more than 2% to $17.64 today and have motivated investors to shop for downside protection on the stock. HOG appeared on our ‘most active by options volume’ market scanner after one trader purchased 11,800 puts at the May 15 strike price for a premium of 88 cents per contract. This lot of purchased-puts represents nearly twice the amount of existing open interest at that strike. Should shares fall below the breakeven point at $14.12 by expiration next month the trader will begin to amass profits as shares move lower. From today’s current price, shares would need to fall by another 20% in order to breach the breakeven point described.
GE General Electric – Shares of the Connecticut-based company have rallied by more than 8% to $12.25. Option investors were observed making a mixture of bearish and bullish moves on GE. At the April 12 strike price, 20,000 calls were sold for a premium of 63 cents apiece while the April 12 puts were purchased 24,000 times for an average price of 57 cents per contract. Perhaps investors are banking gains by selling in-the-money calls ahead of expiration on Friday, but also picking up downside protection in case shares reverse direction in the next 4 days. The May 10 strike price witnessed the sale of nearly 16,000 puts for 46 cents and indicates that some traders do not see shares dipping below the breakeven point at $9.54 by next month’s expiration. Finally, the June 13 strike price saw the purchase of 4,600 calls for a premium of 1.06 apiece as some investors are hopeful that shares will breach $14.06 in June. Bullish traders even looked to the June 20 strike price where 2,600 calls were picked up for about 8 cents each. GE’s shares have not traded above $14.06 since January 14th, and have not been above $20.00 since November 4, 2008, but option traders appear to be chomping at the bit – hungry for a meatier GE share price.
GM General Motors, Corp. – Shares are off by more than 16% to $1.70 amid news that the U.S. Treasury has directed the failing automaker to prepare for a bankruptcy filing by June 1, 2009. Option implied volatility has exploded to 324% from Thursday’s reading of 197% as investor uncertainty regarding GM’s future continues…
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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
(