Weekend Reading – Reviewing the Reviews
by Phil - January 1st, 2011 8:28 am
I am still trying to get more bullish.
I was thinking about writing something cute like I resolve to get more bullish but that would be wrong. I try, in my own humble way, to "get" the market right. That means I am not bullish or bearish but Truthish (to further botch Stephen Colbert’s use of the word) and, as Buddah says: "There are only two mistakes one can make along the road to truth; not going all the way, and not starting." Confucious reminds us that there are three methods by which we may learn wisdom: "First, by reflection, which is noblest; Second, by imitation, which is easiest; and third by experience, which is the bitterest."
In that spirit, we will spend the day in reflection so that we are better able to start on that long road to the truth so that we will be better able to imitate the things that will work in the year to come while trying to avoid making mistakes that will give us bitter experiences.
This post is not about me – We had a fantastic year and I’ve already given some outlook for 2011 back on the 19th in that weekend’s "It’s Never too Early to Predict the Future" and our current position is short-term bearish in the Jan-April time-frame, looking for a pullback to at least 1,200 on the S&P and possibly back to 1,150.
After that, we are expecting a return to steady gains but without the irrational exuberance we’re currently experiencing. So no, I am not bearish – I simply think we’ve gotten ahead of ourselves. Since we don’t know where the rally train will stop, we have our "Breakout Defense – 5,000% in 5 Trades or Less" from Dec 11th, which were a set of very bullish, highly levered plays where a little bet can pay off a lot if we simply hold our long-established breakout levels.
How much is "a lot"? Well my GE trade idea, for example, was to sell the 2013 $12.50 puts for $1.10 (net $1.15 in ordinary margin according to TOS) and to use that money to buy the 2012 $17.50/20 bull call spread for .95, which was a net .15 credit on a $2.50 spread that was on the money at the time. GE has gained about .75 since the 11th and…
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DiggDemand for GM Calls Rises as Analyst Upgrades Lift Shares
by Option Review - December 28th, 2010 4:16 pm
Today’s tickers: GM, CECO, PFE & EDMC
GM - General Motors Co. – An onslaught of analyst upgrades for General Motors sent the automaker’s shares higher and kicked bullish trading in its options into high gear today. GM’s shares increased as much as 3.00% to secure an intraday high of $35.64 as of 12:55pm. The car and truck manufacturer was rated new ‘outperform’ with a target share price of $43.00 at Credit Suisse, new ‘hold’ with a 12-month target of $38.00 at Soleil Securities, new ‘buy’ with a target share price of $45.00 at Citigroup, and was rated new ‘overweight’ at JPMorgan Chase & Co., Barclays PLC and Morgan Stanley, among others. While near-term calls were active during the session, it was a large print in March 2011 contract calls that caught our eye. It looks like one bullish player scooped up 10,000 calls at the March 2011 $38 strike, which is more than two times greater than the 4,463 lots of previously existing open interest at that strike, for a premium of $0.85 per contract. The call buyer stands ready to profit should GM’s shares jump 9.00% over the current price of $35.64 to trade above the effective breakeven point at $38.85 before the contracts expire in March. It looks like General Motors may report fourth-quarter results at some point on March 10, 2011.
CECO - Career Education Corp. – Put buying observed on the beleaguered provider of for-profit education services on Monday continued this morning as shares in Career Education Corp. slipped 1.6% lower to $19.95 in the first half of the session. Investors positioning for shares in CECO to decline significantly in the next couple of months purchased at least 2,000 puts at the February 2011 $17 strike for a premium of $0.39 apiece yesterday. Today, bears once again targeted the same February 2011 $17 strike, buying up more than 2,400 puts for an average premium of $0.49 each. Put buyers paying $0.49 in premium per contract are poised to profit should Career…
Bears Take a Bite Out of Las Vegas Sands Corp. Options
by Option Review - November 8th, 2010 5:09 pm
Today’s tickers: LVS, JPM, WNR, PFE, SLW, PCLN & XLK
LVS - Las Vegas Sands Corp. – Options strategists are initiating trades on the operator of casino resorts that suggest LVS shares could pull back further off recent highs. One big player wary of bearish movement in the price of the underlying shares purchased a large-volume ratio put spread in the January 2011 contract. Las Vegas Sands’ shares started the session in the red, but recovered this afternoon, and are currently up 1.65% at $52.84 as of 3:20 pm in New York. The put player purchased 20,000 contracts at the January 2011 $52.5 strike for a premium of $5.50 each, and sold 40,000 puts at the lower January 2011 $45 strike at a premium of $2.21 a-pop. Net premium paid to initiate the bearish spread amounts to $1.08 per contract. The investor responsible for the transaction is prepared to make money, or realize downside protection on a long position in the underlying shares, if LVS shares decline 2.7% from the current price of $52.84 to breach the effective breakeven point at $51.42 by January expiration. Maximum potential profits of $6.42 per contract are available to the trader if shares of the casino operator plunge 14.8% lower to settle at $45.00 at expiration. More than 216,000 option contracts have changed hands on LVS with 35 minutes remaining before the final bell. Options implied volatility on the stock is up 4.1% at 57.43%, the highest reading of IV since the end of July.
JPM - JPMorgan Chase & Co. – Shares of the financial services firm fell 0.85% to $40.59 late in the trading session, but earlier today one cautiously optimistic investor initiated a delta neutral hedge using longer-dated put options in the June 2011 contract. It looks like the investor picked up…
Defending Your Virtual Portfolio With Dividends – Q4 (Members Only)
by Phil - October 23rd, 2010 7:55 am
In uncertain markets, dividends can give you a critical investing edge.
As you can see from the chart on the left, just mindlessly investing in dividend-paying stocks can give you more than a 2:1 annual advantage in your investments.
Of course, here at PSW, we teach the art of selling options premiums – something that turns virtually any stock into a "dividend" payer. For example, MSFT is only a small, 2% dividend-payer but a fairly solid cash-machine of a stock that we don’t feel is likely to go bankrupt overnight so it makes for a nice safe staple in a long-term virtual portfolio. But MSFT is also a very poorly-run company that hasn’t grown in 20 years but we can make it a much more interesting stock by simply selling covered calls.
For example, in our August edition of Dividend Payers, we looked at MSFT for $24.23 and we sell the Sept $24 calls for .77. This lowered our effective basis to $23.46 and selling the call putus in no special danger – we simply agreed to sell MSFT for $24 on expiration day in September (the 17th).
The stock was called away from us, and we made a .54 profit or 2.3% of our net $23.46 cash investment in less than 30 days. That works out to a 26% annualized ROI and we had an opportunity (as we had expected) to buy the stock again and again at $24 on Oct 4th and 5th and sell the November $24 calls for .90 for a net $23.10 re-entry and ANOTHER 3.8% GAIN if we are called away at $24 or greater on Nov 19th. Doesn’t that beat waiting a whole quarter for your 1% dividend checks?
Of course, you can optimize all this with timing and we favor stocks that are on sale – this is just a very simple example of how our most basic options strategy can drastically boost your annual returns on any stock in your virtual portfolio.
Let’s say you don’t want to mess around with MSFT every month. You could have simply sold the 2012 $22.50s for $4.40 (also suggested in the August post), that dropped your net entry from $24.23 to $19.83 and getting called away at $22.50 would be a profit of 13.5% over 17 months PLUS you would be getting your…
Another Manic Monday – Greenspan Finally Agrees With Me
by Phil - 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
…
9 Fabulous Dow Plays Plus A Chip Shot (Members Only)
by Phil - July 7th, 2010 7:24 am
We were discussing what to invest in in a terrible market this morning in Member Chat.
I thought it would be handy to add this post to our Buy List because 9 of my 10 picks below are Dow components and there are very easy ways to hedge our Dow purchases against disaster so it will be a good opportunity to construct a self-contained virtual portfolio filled with dividend-paying stocks that are suitable for a long-term retirement account that we can buy using our discount strategy.
Let’s say we allocate $5,000 to each of these positions and we intend to buy $2,500 in the first round and hold $2,500 on the side in cash, in case the Dow does fall more than 20% and the majority of our stocks are put to us in a second round. In the below list, XOM and WMT are more expensive but others are less so you can buy 100 of the big boys (price-wise) and see what’s left or allocate a double helping for those two, so you’d be buying 100 shares for about $4,000 a block (after our discount) and hold back $4,000 on those two.
This is acceptable because we do have $50K in cash sitting around and A) We don’t really believe the Dow is falling below 8,000 B) When the stock is put to us our margin requirement will only be about $25K (assuming 50% margin for stocks held) as our short puts will be gone C) We will have a disaster hedge. On all of these plays, the upside is at least 25% so that’s also our built-in cushion, all the way to Dow 7,307 so we really only need our protection to kick in below 8,000.
Aside from our weekend 500% DXD disaster hedge, which is perfect to cover this group, we can do a very simple, margin-free hedge like the DIA 2012 $95/80 bear call spread for $5.50, which pays $15 if the Dow is below 8,000 in Jan 2012. So $5,500 put into this play returns $15,000, offering us an additional 20% downside protection, now down to Dow 5,845. If that seems silly to you (it does to me) then a $2,500 hedge that gives us an additional 10% downside protection would seem to be plenty.
Once we have that hedge in place, we can aim to make it free by selling puts. To make up $2,500 over…
Options Tacticians Target Pfizer, Inc.
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…
Testy Tuesday – Bottom Busting or Big Bounce?
by Phil - June 29th, 2010 8:27 am
Wheeee, what a ride!
Finally all our very boring sitting around at 75% cash makes us feel smart as the market makes what we hope is that final blow-off bottom to re-test our lows. I already sent out an Alert to Members this morning so a lot of this is old news to them but nothing has changed since 4:30 so here’s a quick reprise – What we are mainly seeing in the futures this morning is 2 major factors that are driving the markets lower:
1) Japan, where too strong Yen (88.6), -0.1% industrial output, -1.7% exports, rising unemployment (just 5.2%) AND lower houshold spending (-0.7%) numbers sent the Nikkei down 1.25% today to 9,570. If you think about it though, pretty much all of that is a strong Yen issue because it lowers demand for the exports (making them more expensive) and then factories slow down and people get laid off and household spending drops from that PLUS the fact that it’s now cheaper for them to buy imports so they can buy the same stuff at lower prices.
So, overall, nothing people shouldn’t have expected but ugly to read about.
2) China, where the Shanghai fell 4.27% today to 2,427, which is a lot because they are a 10% limit down market on individual stocks so you can bet the selling isn’t done if the AVERAGE was down 4.27%. The Hang Seng was ugly too, falling 2.3% to 20,248. What sent China off a cliff was kind of silly. The Conference Board, which is a NY-based research firm had reported that Chinese economic indicators rose 1.7% in April – something at the time (June 15th) we thought sounded a bit high. Well, funny thing is it turns out the people at the Conference Board must have been high on something because it turns out they made a "calculation error" and the correct number was just 0.3%.
There is a third factor in play and, earlier this morning I thought it was too silly to be considered but, apparently, you can panic retail investors over pretty much anything. On Thursday, there are $547.5Bn worth of bank-loans from last year’s special liquidity program that are due to roll over and there are rumors circulating that the ECB won’t renew the facility at all. The ECB has, in fact, already promised to replace it with rolling 3-month loans at the…
Something to Love about GSK
by ilene - June 23rd, 2010 4:29 pm
Something to Love about GSK
Courtesy of Pharmboy
Visit Pharmboy here for his previous articles on pharm/biotech stocks and chapters in his TA book.
UK-based GlaxoSmithKline was ranked as the world’s fourth largest player in 2009 (behind US-based Pfizer, France-based Sanofi-Aventis and Switzerland-based Novartis) based on prescription pharma sales. The company was founded in 2000 via the merger of Glaxo Wellcome and SmithKline Beecham and is headquartered in Brentford, London, UK. I wrote about GSK in my first PSW write-up in 2009.
In terms of its therapeutic focus, GSK owes its market-leading position in the global respiratory market to the Glaxo Laboratories legacy. Over 30 years ago, Glaxo launched Ventolin for the treatment of asthma and developed and launched Serevent and Flixotide in 1990. A combination of these two compounds—sold under the brand names Seretide/Advair ($7.8B in 2009). Similarly, GSK’s origins in the CNS market—currently its third largest therapeutic area of focus—can be traced back to the Wellcome and SmithKline scientists. Other therapeutic areas of importance include infectious disease and virology (vaccines).
What GSK has done instead is sought to in-license product rights in order to boost the sales potential of its portfolio. Of the eight products launched by GSK since 2000, four have been in-licensed (Lexiva from Vertex, Levitra from Bayer, Boniva from Roche and Vesicare from Astellas). However,
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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
(