Bears Bombard Blackberry-Maker, Research in Motion
by Andrew Wilkinson - March 1st, 2010 5:00 pm
Today’s tickers: RIMM, CAT, MGM, F, SLM, FRX, FXI, MWW & AIG
RIMM - Research in Motion Limited – Blackberry maker, Research in Motion, attracted bearish options strategists even though the firm’s target share price was upped to $100.00 this morning from $95.00 at Canaccord Adams. RIMM opened the session higher, but slipped slightly in afternoon trading by 0.05% to $70.85. One bearish tactic employed today was the use of a plain-vanilla put spread in the March contract. The trader responsible for the transaction purchased 4,400 puts at the March $65 strike for a premium of $0.54 apiece and sold the same number of puts at the lower March $60 strike for $0.20 each. The net cost of the spread amounts to $0.34 per contract. Maximum potential profits of $4.66 per contract are available to the investor if RIMM’s share price slumps 15.30% beneath the current value to $60.00 by expiration. We note that the mobile device manufacturer’s shares last traded below $60.00 on December 4, 2009. The bearish risk reversal is another pessimistic tactic utilized today. One trader sold 5,000 calls at the April $75 strike for a premium of $2.66 each in order to purchase 5,000 puts at the lower April $70 strike for $3.80 apiece. The net cost of the reversal play amounts to $1.14 per contract. The investor stands ready to accrue profits to the downside if shares of the underlying stock trade beneath the effective breakeven point at $68.86 by expiration in April.
CAT - Caterpillar, Inc. – February marked the seventh consecutive month of manufacturing expansion in the United States; this fact, coupled with today’s jump in equities’ prices, inspired bullish options trading on machine-maker, Caterpillar. CAT’s shares rallied 1.50% during the session to $57.92 after its earnings forecast through the year 2012 were increased by analysts at Morgan Stanley. MS maintains an ‘overweight’ rating on CAT and a $70 share price target, at present. Bullish options activity appeared on the put side of the field where one investor established a credit spread. The trader sold roughly 16,300 puts at the April $55 strike for a premium of $1.38 apiece, and purchased the same number of puts at the lower April $50 strike for $0.47 each. The investor pockets a net credit of $0.91 per contract, and keeps the full amount as long as Caterpillar’s share price remains above $55.00 through expiration day in April. The parameters of…
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Testy Tuesday - Have the Markets Become Comfortably Numb?
by Phil - January 19th, 2010 8:08 am
"There is no pain you are receding
A distant ship’s smoke on the horizon.
You are only coming through in waves.
Your lips move but I can’t hear what you’re saying.
When I was a child
I caught a fleeting glimpse
Out of the corner of my eye.
I turned to look but it was gone
I cannot put my finger on it now
The child is grown,
The dream is gone.
but I have become comfortably numb." - Pink Floyd
I have a theory that the markets (and the American people in general) aren’t irrational, they are simply shell-shocked after suffering a very traumatic group financial experience…
To be shell-shocked is to be "mentally confused, upset, or exhausted as a result of excessive stress" and the most common symptoms are: Fatigue, slower reaction times, indecision, disconnection from one’s surroundings, and inability to prioritize - That certainly sounds like our Congress doesn’t it? Combat stress disorder was first diagnosed in WWI, when 10% of the troops were killed and 56% wounded - far worse than had been experienced in previous wars. Our current financial crisis has similarly affected more people than any previous crisis with almost everyone knowing someone who is bankrupt or lost their jobs or homes and almost no one escaped the carnage of the downturn without some financial damage.
Combat fatigue may go a long way to explaining the severe drop-off in volume that has plagued the markets since March, with participation now down to 25% of where we were last January and that leaves us open to the blatant sort of market manipulation that Karl Denninger caught last week as well as the usual nonsense we get daily from HFT programs that drive the market with such precision that we are able to tell how the day is going to go by simply checking our hourly volume targets. Here’s a clip from CNBC where a floor trader discusses market manipulation as a fact of trading (2 mins in).
As Nicholas Santiago points out on In The Money Stocks, "January is usually a very high volume month, yet it has started off the New Year even lighter than the last two months of 2009. Light volume markets are very difficult to short. Hence the old saying, ‘never short a dull market’." Not only is the market volume light, but over 60% of the trading volume is concentrated on 5 stocks: AIG, C, BAC, FNM and FRE!
We have often noted that high-volume (relatively) days almost always tend to be down days and PSW Members can tell you how the…
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Mixed Sentiment on BAC Pits Bulls Against Bears
by Andrew Wilkinson - December 4th, 2009 4:11 pm
Today’s tickers: BAC, XRX, XLF, CAR, XLU, BIG, SLM, TTWO, MRVL & TSN
BAC - Bank of America Corp. – Investors employed two contradictory option strategies in the February contract on Bank of America today. One trader initiated a large bearish risk reversal while the other put on a bullish call spread. BAC’s shares rallied 3.5% this afternoon to $16.30. The pessimistic investor appears to have sold 30,000 in-the-money call options at the February 15 strike for 1.74 apiece in order to purchase 30,000 puts at the same strike for 84 cents each. The reversal results in a net credit of 90 cents per contract to the trader. Perhaps this individual expects shares to decline beneath the $15-level by expiration so he may retain the full 90 cent credit on the trade. Bullish trading in the same February 2010 contract suggests shares are set to rally higher in the next few months. An optimistic investor purchased 10,000 calls at the February 17 strike for 89 cents each, and sold the same number of calls at the higher February 19 strike for 34 cents apiece. The net cost of the spread amounts to 55 cents per contract. Maximum potential profits of 1.45 are available to the investor if shares increase more than 16.5% from the current price to a new 52-week high of $19.00 by expiration in February.
XRX - Xerox Corp. – One investor utilized the risk reversal strategy in order to take a long-term bullish stance on Xerox. Shares moved 1% higher this afternoon to $7.85. It looks like the trader sold 20,000 puts at the January 2011 7.5 strike for a premium of 1.15 each to partially finance the purchase of 20,000 calls at the same strike for 1.60 apiece. The net cost of the reversal amounts to 45 cents per contract. The investor profits if shares surpass the breakeven price of $7.95 within the next 12 months to expiration.
XLF - Financial Select Sector SPDR ETF – Shares of the XLF rallied 0.75% in afternoon trading to stand at $14.46. Bullish options activity on the fund suggests shares are likely to appreciate within the next several months. Optimistic investors purchased 69,000 in-the-money call options at the March 14 strike for an average premium of 1.36 per contract. XLF shares must rise 6% from the current price before profits accumulate above the breakeven point at $15.35. Shares last traded above $15.35 back on October…
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Hi-Ho Long-Term Silver Bulls!
by Andrew Wilkinson - November 18th, 2009 4:15 pm
Today’s tickers: SLV, EWT, CL, BG, ILMN, COH, TMO, SPG, BG, ADSK & SLM
SLV - iShares Silver Trust ETF – A bull call spread in the January 2011 contract on the silver ETF today suggests shares of the SLV may rally significantly over the next year and two months time. Shares of the SLV are currently up 0.5% to $18.23. The silver-bull purchased a ratio call spread by buying 3,000 calls at the January 23 strike for an average premium of 1.93 apiece, and selling 6,000 calls at the higher January 30 strike for about 90 cents each. The net cost of the transaction is reduced to just 13 cents per contract. Shares of the fund must rally at least 27% before the investor breaks even at a price of $23.13. The trader stands ready to accumulate maximum potential profits of 6.87 per contract if the stock surges up to $30.00 by January 2011.
EWT - iShares MSCI Taiwan Index ETF – A massive bearish play on the Taiwan Index exchange-traded fund caught our attention this afternoon with shares of the EWT down 0.5% to $12.64 in late-day trading. It appears one investor established a bearish risk reversal in the December contract to position for potential share price declines through expiration. The trader sold 31,000 calls at the December 13 strike for 20 cents premium apiece, spread against the purchase of 31,000 puts at the lower December 12 strike for 20 cents each. The sale of the calls exactly offset the cost of buying the puts. Essentially the reversal is a “free” bet that shares of the EWT will trend lower ahead of the 2010. The investor responsible for the transaction is likely long shares of the underlying fund and seeking protection to the downside. If shares fall beneath $12.00, the value of the underlying position is protected. However, if shares of the fund rally by expiration, the trader risks having shares of the stock called from him at $13.00 apiece.
CL - Colgate-Palmolive Co. – Speculation that Reckitt Benckiser Group may acquire Colgate-Palmolive spurred an all-out call option feeding frenzy on CL today and lifted shares of the U.S. company to a new 52-week high of $86.33. Investors flooded the November and December contracts, scooping up call options to position for further upward movement in the price of the underlying. The sudden surge in demand for Colgate-Palmolive options in the midst of takeover chatter boosted…
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Caterpillar Sees Sizeable Options Activity
by Andrew Wilkinson - October 22nd, 2009 7:32 am
Today’s tickers: CAT, EEM, FITB, VALE, SLM, EXPE, SNDK, SLM & YHOO
CAT - Caterpillar, Inc. – A long-term bullish play on the world’s largest maker of bulldozers and excavators proved highly profitable for one investor who banked hefty gains in the January 2010 contract this afternoon. Shares of CAT are currently up less than 0.5% to $59.80 on an upgrade to ‘neutral’ from ‘sell’ at Goldman Sachs. It appears the trader originally purchased 15,000 calls at the January 55 strike for 3.50 apiece, and 20,000 calls at the higher January 60 strike for 1.95 each, back on September 25, 2009. Today the investor sold the January 55 strike calls for 6.90 and the January 60 strike calls for 3.85 per contract. Net profits to the trader amount to $8.9 million. Elsewhere, it seems a large bullish call position was partially financed through the sale of put options. It looks like a chunk of 25,000 put options sold for 68 cents apiece at the December 50 strike at the same exact moment 40,000 call options were purchased for 1.50 each at the February 70 strike. The investor responsible for the trade likely expects shares of CAT to remain above $50.00 through expiration in December. This short sale partially offsets the cost of taking a massive bullish stance through expiration in February.
EEM - iShares MSCI Emerging Markets Index ETF – Shares of the emerging markets exchange-traded fund are trading more than 1% higher today to stand at the current price of $41.45. A 100,000-lot straddle caught our attention in the November contract this afternoon. It appears one investor has taken advantage of lower volatility on the EEM by purchasing a long straddle. The transaction involved the purchase of 50,000 calls at the November 41 strike for 1.53 apiece, and the purchase of 50,000 puts at the same strike for 1.21 each. The net cost of the trade amounts to 2.74 per contract. Volatility on the EEM has fallen to 27%, the lowest reading on the fund since August of 2008. Perhaps the long-straddle player expects volatility to jump higher before the options expire in November. The nature of the strategy is such that he will benefit given a sufficient shift in the price of the EEM in either direction. Profits are available if shares swing either above the breakeven point to the upside at $43.74, or if shares dip beneath the lower breakeven price…
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Energy Options Strangle Play Delivers the Goods for Investor
by Andrew Wilkinson - June 29th, 2009 4:27 pm
Today’s tickers: XLE, MFE, FITB, SLM, XHB, F, INTC & XLF
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Chinese ETF sees more call option action
by Andrew Wilkinson - March 18th, 2009 4:46 pm
Today’s tickers: FXI, XL, AIG, WYE, EEM, JAVA, GIS, BK, SLM & C
FXI iShares FTSE/Xinhua China 25 – Shares are up by approximately 1.5% to stand at $27.96. The Chinese ETF appeared on our ‘most active by options volume’ market scanner after one investor purchased 40,000 in-the-money calls at the March 27 strike price for an average price of 55 cents per contract. The investor snagged the chunk of calls at a low premium earlier today relative to the current premium on the calls of 1.35. It looks like this trader offset the cost of the purchase by selling 40,000 calls at the April 30 strike price for a premium of 63 cents. Thus, he pockets a credit of 8 cents on the trade. As long as shares remain above $27 by Friday, this investor will have the right to collect 4,000,000 shares of the underlying stock at the strike price. But, by selling the calls in April this trader has capped upside gains at a maximum of 3.0 if shares happen to rally to $30 by expiration. The sale effectively provides him with an exit strategy in April.
XL XL Capital Limited – Shares of the property and casualty insurance firm have rallied 7.5% to $4.43 on the heels of AIG’s surge today. One investor looking for further upside gains purchased 6,400 calls at the March 5.0 strike price for 13 cents apiece. If shares can continue to rebound in this fashion and rise by 12% from its current price, then this trader would begin to profit at the breakeven share price of $5.13.
AIG American International Group – Outrage at $165 million in bonuses paid out to employees of the firm’s financial products division while taking in TARP funds at the same time apparently could not detract from AIG’s share price, which is soaring upwards by 40% to $1.35. While government appointed CEO Edward M. Liddy is getting reamed out at the Congressional hearings today, options investors have been busy trading calls across multiple contracts. Traders were heavily favoring the call side and skewed the call-to-put ratio to more than 4.5 calls to every put in action today. At the April 3.0 strike price, optimists picked up 3,700 calls for 10 cents each. Despite the huge rally today, shares would need to continue upwards by another 129% in order to reach the breakeven point at $3.10 by the end of next month. Investors…
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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...
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