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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Contrarian Players Keep an Eye on the Upside at Intel
by Andrew Wilkinson - January 20th, 2010 4:05 pm
Today’s tickers: INTC, GA, EWZ, VIX, PALM, HGSI, CREE, CYD, BAC, CAL, XLB & CREE
INTC – Intel Corp. – Investors populating the March contract on chipmaker, Intel Corp., expect shares to rebound by expiration. Shares are trading slightly lower by 0.10% to $21.03 with about one hour remaining before the closing bell. Bullish traders utilized a couple of different option strategies. Some investors sold 2,400 puts at the March $20 strike to receive an average premium of $0.45 per contract. Put-sellers keep the $0.45 premium if Intel’s shares trading above $20.00 through expiration. The short sale of puts suggests investors are happy to have shares of the underlying put to them at an effective price of $19.55, should the contracts land in-the-money. Additional bullish action took place at the higher March $22 strike where 20,400 calls were purchased for an average premium of $0.36 apiece. Investors long the calls begin to accumulate profits to the upside if shares of INTC rally 6.3% over the current price to surpass the breakeven point at $22.36 by expiration day in March.
GA – Giant Interactive Group, Inc. – Online game development company, Giant Interactive, attracted significant option volume in late afternoon trading today. Options traded on the stock amassed to 52,350 contracts by 3:00 pm (EDT), which is more than twice that of existing open interest on GA of 25,314 lots. Shares are trading flat at $7.48 with one hour remaining in the session. While some investors are putting on risk reversals, it looks like the bulk of the trading volume represents short straddle plays. Short-straddlers sold the bulk of some 30,000 calls exchanged at the July $7.5 strike for an average premium of $0.51 apiece, and shed the majority of the 26,000 puts traded at the same strike for roughly $0.62 each. Investors selling the straddles receive an average gross premium of $1.13 per contract, and keep the full premium if shares settle at $7.50 by expiration. Shares are a scant two pennies off the central strike price of $7.50. Traders employing the short straddle strategy also benefit from declines in option implied volatility because of the downward pull such shifts in volatility have on put and call premium. Investors may profit ahead of expiration if they buy back the short straddles for less than they received on today’s sale. Option implied volatility is lower by about 3.5% to 24.44%.
EWZ – iShares MSCI Brazil Index ETF…
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Testy Tuesday Morning
by Phil - January 5th, 2010 8:27 am
Wow - what a lot of work to get back to last Tuesday’s high!
As usual, the vast majority of gains came in pre-market trading and the rest came in light-volume, early morning trading while the rest of the day was dominated by every buyer finding a willing seller for 75% of the day’s volume. We saw what happened on Thursday when someone big wants to sell and there are no buyers so we’ll see how long the bull’s luck (manufactured or otherwise) will hold out as we begin to get economic data along with some early earnings reports.
The Ag sector popped 2% yesterday ahead of tonight’s earings from MOS with MON checking in tomorrow morning so we’ll see how wise those last-minute bets were in short order. SONC also has earnings tonight and we like those guys long-term. SONC makes a decent buy/write candidate as you can buy the stock for $10.29 and sell June $10 puts and calls for $2.25 for a net entry of $8.04 with a very nice 24% profit if called away at $10 and an average entry of $9.02 (a 12% discount) if more stock is put to you below $10 in June.
FDO and WOR also report tomorrow morning. FDO will be interesting but a weak dollar probably hurt them last quarter. Tomorrow night we hear from BBBY, BLUD, OHB and Sonic competitor RT, who seem a bit pricey at $7.50. Thursday we get our first real builder, LEN along with STZ and TXI. After the bell on Thursday we hear from APOL, CRI and SCHN with GBX and PSMT on Friday. AA officially kicks of earnings season next Monday with GAP, INFY, KBH, BGG, SCHW, SHFL, INTC and JPM highlighting the reporters.
We have plenty of data this week including Factory Orders and Pending Home Sales at 10 am along with December Auto Sales throughout the day (did you get a new car for Christmas?). Tomorrow is jobs day, with the ADP Report and Challenger Job Cuts ahead of the bell followed by ISM Services (yesterday’s ISM was a nice beat) and, of course, Crude Inventories at 10:30 which are unlikely to sustain $82 oil (USO Jan $40 puts for .80 are a good way to play this). We talked about the other stuff yesterday so I won’t repeat it - suffice to say we have plenty of data this week to see if we justify these lofty levels.
Everyone is talking about AAPL’s new "Slate" computer so I’m not going to. …
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Phase Transitions and the Googlephone
by ilene - December 23rd, 2009 4:30 pm
Baruch compares the smartphone space to a place called "Extremistan" and questions Google’s decision to branch out from its own Googlextremistan home to more dangerous territory where it may only have mediocristan survival skills. - Ilene
Phase Transitions and the Googlephone
Courtesy of Ultimi Barbarorum
Baruch keeps thinking about Apple and what it’s done to mobile phones. Call him obsessed if you will, but it is also his job to think about it, and there’s good money to be made if you get it right. You may recall his last post on the subject, that Apple has become wholly dominant in the mobile internet and smartphone space. What’s struck him recently is how few of the intelligent analysts and counterparties he talks to actually agree with him on what seems even to generalists utterly obvious. Lots of them still think it’s a good idea to push other smartphone stocks, like PALM or RIMM, which if Baruch is right is a very efficient way to lose money, inferior only to piling it up in big mound and setting light to it.
Why people can think this way was a mystery to Baruch, until he made the realisation that the phase transition in the handset market is not yet evident to them; they still think the handset market resides in Mediocristan, as opposed to the Extremistan regime it has most likely become. They haven’t been reading their Taleb.
It’s a forgiveable error; again, Mediocristan is a fictional place where standard distributions, bell curves, rule, where market shares are shared between players, and where tall poppies get their heads cut off. Hardware and appliance markets have traditionally exhibited these characteristics. Look at cars, or blenders; lots of players can make a decent living selling blenders. Similarly, until now, 4 or 5 names shared out the vast majority of goodies in mobile telephones. Maximum market shares seemed to be limited at 30%-40%; losing or gaining 10 points of share took years. Over long periods those gains or losses would, unless something had gone very wrong with one of the players, tend to mean revert. It seemed a fast, dynamic sector at the time, but really, it wasn’t.
Now, software or application markets show us entirely different characteristics, those of Extremistan, where rapidly evolving monopolies and duopolies are much more common. SAP and Oracle own the enterprise software space. Adobe owns documents. Google owns search. Microsoft still owns PC operating systems and office software suites. Autonomy owns unstructured data mining, etc etc. In…
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Trash in Drugs Sends Genzyme Lower
by Andrew Wilkinson - November 13th, 2009 4:47 pm
Today’s tickers: GENZ, AGO, UUP, PALM & DIS
GENZ - Genzyme Corp. – - A hot topic in the last few minutes has seen shares of biotech company, Genzyme slide by 5% to $50.50 with the AP reporting that the FDA has found tiny particles of trash in Genzyme made drugs, which according to the article says “bits of steel, rubber and fiber in drug vials could cause serious adverse health effects for patients. Option wizards were quick to pounce on the opportunity to sell rapidly deteriorating call options in the December 50 and 55 strike prices. While this could be the work of frantic bulls trying to get out of the way of a potential sandstorm it’s more likely the case that trigger-happy bears have been awakened. Ahead of the news the December 50 call traded lightly during the morning at a 4.70 premium before slumping to 2.30 on volume measuring a couple of thousand contracts, while the 55 strike fell from a pre-breaking news premium of 1.85 all the way down to 70 cents. While the situation has stabilized, option implied volatility across the field is up around 25% at 42% today. That’s something for call-writers to pay heed to.
AGO - Assured Guaranty Ltd. – – Shares in the bond issurer are 14.8% higher at $20.77 and broke right through the 52-week high after Moody’s lowered its insurance financial strength rating on the company from Aa2 to Aa3. In a statement the company expressed its delight in having maintained a double-A rating in the current economic climate. It also noted that Moody’s number-crunching of its insured residential mortgage exposure was conducted under a pretty dire scenario and was based on “an extremely pessimistic view of the future performance of residential mortgage exposure.” The company boasted that even on this worst case scenario its $12.5 billion claims paying resources are more than sufficient to meet projected obligations. The options activity confirmed the bullish jump in Assured’s share price. Using the December contract investors established 11,000 bullish bought call options at the December 22.5 strike price indicating further bullish moves ahead. The 1.40 premium would require the share price to rise a further 15% to reach breakeven at expiration. Curiously the call buying frenzy caused options implied volatility to rise from 69% to 75% today. Options volume of almost 30,000 contracts is around nine times the usual on the stock.
UUP - PowerShares DB US…
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October Overview - When the Goblins Come Home to Roost
by Phil - November 1st, 2009 8:15 am
What a crazy month we had!
The Dow began the month of October at 9,712 and finished the month of October at EXACTLY 9,712. Now I don’t want to say the market is manipulated but… No, I’ve got nothing, there are no buts - the market is totally manipulated! Either that or you believe that the random outcome of tens of millions of traders around the globe trading hundreds of billions of shares of stock would just so happen to begin and end the month within .50 after going as low as 9,378.77 (on the 5th) and as high as 10,157.94 (on the 21st). So that is literally a 1 out of the 779-point swing coincidence to hit that 9,712 nail on the head.
At PSW we couldn’t be happier about this frankly. As I often say to members: We don’t care IF the game is rigged, as long as we can figure out HOW the game is rigged so we can play along. We were bearish in our September 27th Wrap-Up when I predicted that Earnings season would bring about a "Return to Fundamentals." We targeted retrace moves of Dow 9,512, S&P 1,020, Nasdaq 2,030, NYSE 9,496 and Russell 556 - all of which we hit the following Friday.
That week I highlighted my fundamental market concerns and Monday (9/28) my topic was "6 Unemployed People Per Available Job," Tuesday I said "Consumer Confidence is Key," Wednesday we caught the turn perfectly as I predicted "End of Quarter, End of Pump," and Thursday, October 1st was the day that "REIT’s Turned Rotten" - which was something we had been playing for during the September rally so we were thrilled with what is NOW the 2nd worst down day of the month. That was the day GS decided to agree with me that REITs were over-valued and gave us a signal that the Gang of 12 were no longer all on the same page. Friday, the 2nd, we were back to looking at the Jobs numbers when I asked "Is Anybody Working for the Weekend."
We could not have been more pleased with what was the worst week in the market since then end of August, which was a,most as bad at the beginning of July (are you beginning to see a pattern?) and I said that Friday: "Just like any good roller coaster, market plunges can be fun when you are strapped in safely and prepared for them. Our members…
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Weekend Reading - Looking for Green Shoots
by Phil - October 11th, 2009 8:21 am
I’ve been beefing up our bullish plays on the Watch List.
If we’re going to get more bullish I thought it would be a good time to look for some bullish premises so we don’t feel totally silly paying 20-year high p/e’s for the S&P 500. Obviously, our main hope is that the stocks we buy will grow into their earnings so the next month’s worth of reports will be key. The bar for corporate earnings is still set at very easy to beat levels yet, like this limbo-playing child, when they announce their beats of very low expectations we’re going to get all excited and tell them how great they are doing.
The problem is, these are not kids who we hope may grow up one day to be President or CEOs of major companies. these ARE CEOs of major companies and they are being paid top salaries for top performance and we, the stock purchasing public, are paying top dollar for what should be SPECTACULAR performance, not beating 75% off last year’s earnings by a penny!
When I am being asked to buy IBM back at it’s all-time high or AMZN or BIDU or AM, PALM, NFLX, PCLN, URBN, UHS, CERN, CREE, GMCR, CY, SWM, TRLG, BKE, etc - then their performance better look like this:
Nothing against those particular companies, any individual company can be exceptional and beat the market, but - Are the companies we’re buying really doing exceptional things or are have we just developed such ridiculously low expectations that we have been psychologically conditioned (and Wall Street firms employ armies of behavioral psychologists for a reason) to treat these stocks and the CEOs who run them like our children? If your child was the child in the above picture and I asked you for $20 to see her limbo show - you might pay it. If it’s not your child though, would you even consider making an afternoon of it? No, of course not, for good money you expect to see the cool fire guy at the top of his game and that is what you should expect from companies trading at or near all-time highs - NO LESS!
I love President Obama but he was just given a Nobel Peace Prize simply for not being President Bush - low expectations! On Sept 17th, PALM announced that it lost 10 cents a share, not losing the 25 cents expected and gave lowered guidance for Q3. The non-adjusted loss for PALM was their 9th…
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Wrong Way Weekly Wrap-Up
by Phil - September 19th, 2009 8:28 am
I am trying to get bullish, really I am.
As I said to Members on Thursday morning in chat, like Sam Jackson in Pulp Fiction: "I’m trying hard to be the (bullish) shepherd" but the data makes it hard - so very hard! Anyway, I’m not here to complain about the market forces moving against us but to review the carnage of our picks going all the way back to Sept 10th, when we decided the prior day’s beige book was not going to be enough to break out over 9,600 on the Dow. Now, with the Dow at 9,820 after testing 9,900 it’s a good idea to look back and see what we missed in this last 2.5% leg up.
On Thursday the 10th, we talked about patterns. One pattern I recommended following right in the morning post was the famous "stick save" investment. Simply buying high-delta DIA calls at about 2:30 each afternoon and selling into the pumped-up close. That was a winning play on the 10th, 11th (Fri), 14th and 16th but not the last two days, when we turned a lot more bearish - but we’ll get to that further down this review. 4 out of 5 days is pretty good for a patten and seeing it broken 3 of the past 5 days is also significant. I did promise that Thursday that we will look for more bullish opportunities once we have a clear break over our last two levels (NYSE 6,959 and S&P 1,056) and we did make those this week. If we hold it through Tuesday, it will be time and we’re going to line up some trades this weekend. True to my word on that Thursday, we chose a variety of bullish and bearish plays in Member Chat. I’m posting the plays along with suggested adjustments if needed as it’s a nice way to review our various strategies in progress - especially under "adverse" conditions.
Trade ideas of the day for Members were:
- DIA $95 puts that ended up being rolled and doubled down for a net 20% gain (too much bother to detail).
- SUN at $23.36, now $28.45 (up $5.09), short Oct $25 calls at $2.20, now 3.70 (down $1.50) and short the Jan $22.50 puts at $1.15, now .70 (up .45).
- Another buy/write at net $23.01/22.76, already up 17.5% so can be closed early here.
- FDO short Apr $25 puts at $2.10, now $2.40 (down 14%). No change.
- CEPH 2011 $50/$60 bull call spread at net $5.50,…
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Popular Bank Shares Surge as Option Player Stakes a Claim
by Andrew Wilkinson - September 16th, 2009 9:25 pm
Today’s tickers: BPOP, LNCR, EEM, XLK, XL, PALM, LIZ & MI
BPOP - The ‘popular’ bank popped up on our screens this afternoon after a large-volume risk reversal was established on the stock. The massive trade was likely the work of an investor with knowledge of commercial banks as approximately 60,000 contracts were exchanged on BPOP amid a more than 12% rally in shares of the underlying to $2.60. It appears the trader purchased 30,000 now in-the-money October 2.5 strike calls for an average premium of 33 cents apiece. He funded the purchase of the calls by selling 30,000 puts at the January 2.5 strike for 43 cents each. The investor received a net credit on the transaction of 10 pennies per contract. The motivation is perhaps that this individual is swimming with the rising tide of financial names today and expects a far larger rally lifting shares towards $3.75-resistance level. If this is the case, he is likely to exercise the calls by October’s expiration and take delivery of the underlying shares to ride with the stock’s upward momentum. Even if the move continues somewhat, it would likely reverse the structure of this trade to his advantage. – Popular, Inc. –
LNCR - The provider of oxygen and respiratory therapy services attracted option bulls today with shares of the firm standing more than 13% higher for the session to $29.85. Option implied volatility on LNCR exploded 50% higher from a low of 32% this morning to an intra-day high of 48%. The burst in volatility is likely due to increased investor demand for calls on the stock as well as greater uncertainty regarding future price movements in shares of Lincare. Perhaps the rise in uncertainty stems from news that Deutsche Bank raised LNCR’s target price from $33.00 to $38.00 today and maintained their ‘buy’ rating on the stock. Investors gobbled up 2,200 September 30 strike calls for an average premium of 31 cents. The contracts will expire worthless unless shares breach the $30.00-level to land in-the-money by Friday. Bullish sentiment spread to the October 30 strike where traders coveted 2,400 calls for about 71 cents premium. Investors long the calls will begin to amass profits if shares rally through the breakeven point at $30.71 by expiration in October. – Lincare Holdings Inc. –
EEM - The emerging markets exchange-traded fund jumped higher on our ‘most active by options volume’ market scanner this afternoon after…
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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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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
(