Tempting Tuesday - Waiting on the Fed
by Phil - March 16th, 2010 8:13 am
The dollar is diving and the futures are flying this morning!
Word is that the Fed will remain doveish in their 2:15 statement today with no sign of tightening in the near future. That has (as of 7:30) rallied gold 1.5% to $1,115 and oil is back over $80 and copper is $3.35 again while the Euro jumps back to $1.375 and even the British Pound squeezes the hell out of the shorts as it flies from $1.497 at 3:30 to $1.514 (1%) in 4 hours, which is a pretty big move for FOREX!
The EU also helped themselves by laying out a groundwork for a financial lifeline to debt-stricken Greece, breaking a taboo against aid to cash-strapped governments in order to avert a crisis for the euro. Officials from the 16 countries using the currency worked out a strategy for emergency loans in case Greece’s plan for 4.8 billion euros ($6.6 billion) in tax increases and wage cuts fails to stave off fiscal disaster. “We clarified the technical arrangements that would enable us to take coordinated action which could be swiftly put into place in the event it is necessary,” Luxembourg Prime Minister Jean-Claude Juncker told reporters late yesterday after leading a meeting of Euro-area finance officials in Brussels.
The EU is also meeting to discuss ways to reign in hedge funds and credit-default swaps but the revised bill from Chris Dodd is now so watered down by compromise that it no longer requires regulators to agree that excluding a swap from being cleared “is necessary and appropriate for the reduction of systemic risk.” So what’s the point? The problem is that there are $605 TRILLION Dollars of CDS’s written against a Global GDP of $50Tn. Usually, it’s a red flag for the police when a person insures their home for 12 times what it’s worth, right?
Hexagon Securities LLC and at least 19 other financial firms are pressing regulators to force swaps clearinghouses to lower entry barriers in order to improve competition in a $605 trillion derivatives market dominated by the world’s biggest banks. They also seek tougher conflict-of-interest laws to ensure that a bank’s derivatives desk doesn’t influence clearinghouse decisions that could shut out new competitors. ROFL - move to Russia, you Commies! This is America, where big banks rule and "firms with less than $5Bn net worth" drool! See, my daughters taught me that one - wins every argument!
Speaking of people who rule our lives - Saudi Oil Minister,…
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Natural Gas Options Trader Enacts Bullish Risk Reversal
by Andrew Wilkinson - February 16th, 2010 4:32 pm
Today’s tickers: UNG, IP, EEM, CAH, TRA, UAUA, USO, WFMI, BRK.B & ANF
UNG - United States Natural Gas ETF – Shares of the natural gas exchange-traded fund, which mirrors the price and performance of natural gas, are down 1.85% to $9.67 with just under one hour remaining in the trading session. Options traders initiated bullish plays in the March contract despite the dip lower in the price of the underlying shares. It looks like one investor initiated a bullish risk reversal to position for a rebound in the price per UNG share by March expiration. The trader sold 8,250 in-the-money puts at the March $10 strike for a premium of $0.64 each in order to offset the cost of buying 8,250 calls at the same strike for $0.40 apiece. The trader pockets a net credit of $0.24 per contract on the reversal, which he keeps if shares of the fund trade above $10.00 by expiration day. Additional profits are available to the upside if and when the price per share exceeds $10.00 apiece.
IP - International Paper Co. – Global paper and packaging firm, International Paper Company, enticed bullish options traders to initiate optimistic positions in the March contract as shares of the underlying stock jumped 6% in late afternoon trading to $23.92. Plain-vanilla call buying took place at the March $25 strike where upwards of 10,000 contracts were purchased for an average premium of $0.45 apiece. Call buyers stand ready to accrue profits should IP’s shares rally another 6.40% over the current value of the stock to surpass the effective breakeven point on the calls at $25.45 by March expiration.
EEM - iShares MSCI Emerging Markets Index ETF – Shares of the emerging markets exchange-traded fund, which generally corresponds to the price of the MSCI Emerging Markets index that was created by MSCI as a benchmark for international stock performance, rallied 2.30% to $39.32 this afternoon. June contract options activity on the EEM suggests shares may stagnate near the current price through expiration in four months. It looks like options traders sold straddles in order to pocket premium on the sale of both calls and puts. Investors sold approximately 9,100 calls at the June $39 strike for an average premium of $2.95 apiece and sold 9,100 puts at the same strike for a premium of $2.65 each. Gross premium enjoyed by straddle-sellers amounts to $5.60 per contract. Investors keep the full $5.60 premium per…
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VIX Draws Large Bearish Put Play
by Andrew Wilkinson - February 2nd, 2010 5:28 pm
Today’s tickers: VIX, MS, BAC, UNG, SU, RL, GIGM, FCX, CVS, SPF & DOW
VIX – CBOE Volatility Index – A massive bearish put position initiated on the VIX today is a bullish sign for the S&P 500 index. The VIX fell more than 6% during the current session to stand at 21.21 as the past two day’s uptick in equities serve to dissipate some of the fear and uncertainty felt by investors during the prior trading week. One investor anticipating further downside movement for the VIX picked up roughly 103,000 puts at the March 20 strike for an average premium of $0.70 per contract. The put options position the investor to accrue profits beneath a VIX reading of 19.30 through expiration. It appears the investor expects the so-called fear-gauge to head in the direction of the index’s 52-week low of approximately 17.49 attained on January 19, 2010. But, the VIX must fall another 9% from the current reading in order for the investor to breakeven by expiration. Furthermore, today’s reading is still 21.25% greater than the 52-week low described previously.
MS – Morgan Stanley – Global financial services firm, Morgan Stanley, attracted the attention of bullish options investors in afternoon trading. Shares are currently trading 1.00% higher at $27.83 with roughly one hour remaining in the trading day. A bull call spread stuck out like a sore thumb in the scantily populated March contract on the stock today. One investor purchased 5,000 calls at the March $28 strike for a premium of $1.35 each, and sold the same number of calls at the higher March $31 strike for an average premium of $0.34 apiece. The trader paid a net premium of $1.01 per contract for the spread, but stands to accrue maximum potential profits of $1.99 per contract should Morgan Stanley’s shares rally up to $31.00 ahead of expiration day. The call-spreader breaks even on the transaction as long as MS’s shares rise 4.25% from the current price to $29.01 before the options expire.
BAC – Bank of America Corp. – Optimistic sentiment on Bank of America appeared in the August contract today amidst a 0.65% improvement in shares of the underlying stock to $15.52. One bullish trader initiated a call spread to position for upward movement in BAC’s shares by expiration. The investor purchased 4,000 calls at the August $16 strike for an average premium of $1.52 apiece, spread against the sale of 4,000…
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Investor Uses Options to Strangle Ford’s Share Price through June 2010
by Andrew Wilkinson - January 6th, 2010 4:14 pm
Today’s tickers: F, WLP, IBN, SWHC, UNG, SNDK, MU, DTV, FDO & MON
F – Ford Motor Co. – A short strangle play in the June contract on Ford suggests shares of the automaker are likely to remain range-bound through the next six months to expiration. Ford’s shares continued to rally during the current session following yesterday’s news that the firm enjoyed a 33% increase in December auto sales over the previous year. Shares reached a new 52-week high of $11.42 today on a 4.20% increase over Tuesday’s close. The sold strangle transaction implies one investor expects the recent boom to dissipate along with option implied volatility. The strangler sold 15,000 puts at the June $10 strike for a premium of $0.80 cents apiece in combination with the sale of 15,000 calls at the higher June $12 strike for $1.10 each. The investor pockets a gross premium of $1.90 per contract, which he keeps if Ford’s share price stays within the confines of the strike prices described through expiration. The premium received provides limited protection should shares swing outside the boundaries. But, the investor faces losses in the event that shares move above the upper breakeven price of $13.90, or trade beneath the lower breakeven point at $8.10 by expiration in June. It is possible the strangle-seller expects to benefit from a move lower in volatility. Option implied volatility on Ford rose significantly by 18.87% over the past 48-hours, from a low of 40.85% on Tuesday morning, to today’s high of 48.56%. Shrinkage in the reading of volatility on Ford may allow the investor to close out the short position at a profit because, as a general rule, declines in volatility weigh down option premiums.
WLP – WellPoint, Inc. – Shares of the health and benefits company reached another new 52-week high of $61.45 today, adding to gains experienced earlier this week. The stock appreciated 5.5% from $58.27 on the final day of 2009, up to $61.45 today, the highest price attained in the past 12 months. Option traders displayed diverse strategies on WellPoint during the trading day. Near-term players banked gains by selling 7,000 calls at the now in-the-money January $60 strike for a premium of $1.70 apiece. One trader rolled 3,500 calls forward to a higher strike by selling-to-close 3,500 lots at the January $60 strike for $2.00 each, and buying up 3,500 calls at the higher February $62.5 strike for a…
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Chunky Put Play Hits Natural Gas ETF
by Andrew Wilkinson - September 28th, 2009 4:42 pm
Today’s tickers: UNG, QCOM, PXP, XRX, ALL, AMAT, MU & CMCSA
UNG - Shares of the natural gas exchange-traded fund are currently off by more than 1% to $11.80. One investor has picked up some serious downside protection on the fund today by purchasing a large chunk of put options in the April 2010 contract. We believe the trader is likely holding a long stock position in the UNG. It appears the trader purchased 31,000 puts at the April 9.0 strike for a premium of 75 cents per contract. The net cost of the put options amounts to $2,325,000. Shares of UNG would need to decline 30% from the current price before downside protection kicks in beneath the breakeven point at $8.25. Perhaps the put buyer expects the fund to reach a new 52-week low by expiration in April. The current 52-week low of $8.94 was attained on September 3, 2009. We note that it is always possible the trader is essentially shorting the stock and placing a large bearish bet on the ETF in order to profit from downward movement in the share price. – United States Natural Gas ETF –
QCOM - A tech-sector rally fueled by an analyst upgrade of Cisco Systems (CSCO) this morning helped boost shares of QCOM 2.5% during the trading session to $45.82. The manufacturer of wireless network products attracted optimistic option traders to the November contract. We observed plain-vanilla put selling at the November 42 strike where it appears 5,000 lots were sold short for an average premium of 92 cents apiece. Investors shorting the contracts will retain the full 92 cent premium as long as shares of QCOM remain higher than $42.00 through expiration. But, if the November 42 strike puts land in-the-money, investors short the contracts will have shares of the underlying put to them at $42.00 each. Finally, a sold strangle was initiated through the sale of 1,200 puts at the November 43 strike for 1.07 apiece, in combination with the sale of 1,200 calls at the higher November 50 strike for 81 pennies each. Investors ‘strangling’ QCOM receive a gross premium of 1.88. The full premium is retained by these individuals as long as the stock trades within the confines of the strike prices described through expiration in November. Traders face losses in the event that shares swing 13% higher to surpass the upper breakeven point at $51.88, or if shares decline…
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Thrilling Thursday Morning - Beijing Bop
by Phil - September 3rd, 2009 8:28 am
That is, of course, what residents of Macau are required to chant every morning in honor of Stanley Ho, who held the monopoly on casinos in China until 1992. This morning it turns out Macau’s economy contracted by 13.7% in Q2, it’s 3rd consecutive quarter of shrinkage. It’s possible that the restrictions placed on civil servants in 2008 to stop them from gambling and to curb money laundering has caused much of the decline why is the decline accelerating if things are so good in China? One thing about Macau is that all the US businesses that are now there make it harder for the Chinese government to pad the statistics and, taken at face value, Maccau is underperfoming the rest of China by 22%.
This is worth noting today as China is leading the market bounce as the vice chairman of the China Securities Regulatory Commission, said the authorities will promote a “stable and healthy” market, tempering investor concern that the government wants to curb equity and property speculation. Ministers from the Group of 20 nations are likely to suggest the global economy is healing when they meet in London this weekend, while the European Central Bank probably will keep interest rates at a record low today. The Shangai composite index ran right up to the 5% rule today and has pulled a turnaround in global equities. As noted in David Fry’s chart, we were oversold and due for a little bounce anyway.
As noted by Ben over in our Chart School section, copper has climbed back into the "stupid zone" on that news but still has a ways to go before getting stupid enough to short again. We’ll be keeping an eye on the copper miners like PCU, FCX and RTP as well as BHP, who got a nice pop on a UBS upgrade this morning but it’s a little early to short until we see jobs reports today and tomorrow.
This is not surprising to us as we read the Fed minutes yesterday and the greenest shoot they could find was that things were picking up in other countries, a favorite ploy we discussed in Monday’s post as the Shanghai was falling 6.7% that day. Fortunately, we were playing bullish into the close as we know how this game works and I had said to members just ahead of the Fed, at 1:58: "Beware bears - I was just noticing that last minutes were May 20th…
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Satyam Computer Attracts Bullish Option Strategies
by Andrew Wilkinson - August 31st, 2009 5:22 pm
Today’s tickers: SAY, UNG, DVN, BJS, AXP, & IP
SAY - The global IT solutions provider popped up on our ‘hot by options volume’ market scanner this afternoon after bullish call activity was observed in the near-term September contract. Shares of the firm have rallied higher by more than 16% during the session to stand at the current price of $6.37. Investors appear to have purchased approximately 4,000 calls at the September 7.5 strike for an average premium of 35 cents apiece. Shares of SAY would need to surge 23% higher in order for traders long the calls to begin to amass profits above the breakeven price of $7.85. Bullish sentiment spread to the October 7.5 strike where another 1,600 calls were scooped up for a premium of 51 cents. Option implied volatility on Satyam has exploded upwards from an intraday low of 74% to the current reading of 120%. We note that the 15,000 contracts exchanged on the stock today represent more than 54% of the total existing open interest on SAY of 27,735 lots. – Satyam Computer Service Limited –
UNG - Shares of the natural gas exchange-traded fund have slipped 4.4% lower today to reach a 5-year low of $10.64. Despite the present weakness in UNG, one investor was seen making far-term bullish bets on the fund by targeting the April 2010 contract. It appears that the trader established a bullish reversal play by shedding 3,000 puts at the April 10 strike for 1.85 apiece in order to purchase 3,000 calls at the higher April 11 strike for 1.82 each. The trader receives a net credit of 3 pennies per contract and has positioned himself to add to his gains if shares rally higher than $11.00 by expiration. The short put position indicates that the investor is happy to have shares put to him at an effective price of $8.15 in the event that the put options land in-the-money by expiration. Shares need only remain higher than $10.00 for this individual to retain the 3 cent credit indefinitely. – United States Natural Gas ETF –
DVN - The independent energy company appeared on our ‘most active by options volume’ market scanner following contrarian options activity in the January 2011 contract. Shares of DVN may have slipped more than 2% lower to $61.15 today, but did not deter one option trader from initiating a bull call spread on the stock. Hoping for significant appreciation…
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$112,291 Portfolio Update, Week 16
by Phil - August 8th, 2009 8:23 am
Next week will be the last week for our very profitable portfolio, that started with $100,000 on April 10th.
This portfolio has already made 19% in 16 weeks and many members wanted to start a new one from scratch. So, by popular demand, we will be restarting a brand new portfolio the week after options expiration, also with $100,000 and also a hedged portfolio but this time with the goal of drawing a monthly income. I got this idea when I went down to Florida last week and spoke to many people who asked me about their investing accounts. Many of these "safe" accounts had been cut in half or worse and the returns they were producing were coming in at 5% year - if that and people were counting on this money for their monthly expenses. I spoke to many people with $1M in the bank who were living off $50,000 a year in interest and dividends!
Using options and good hedging strategies, we have been able to produce a return in our virtual portfolio of 19% in just 16 weeks (12% cash, 7% unrealized). I’m not advocating someone take a whole $1M and shift it to stocks and options but, if you can make 20% on $200,000 while your other $800,000 makes a "safe" 5%, your annual income goes from $50,000 to $80,000 - that’s a lot of early-bird specials! I will, of course, be happy to answer any adjustment questions on this portfolio anytime during chat but we will no longer be tracking it weekly or making new plays. The goals of the new portfolio will be similar and the new trade ideas can be applied whether you are looking to draw an income or just start building long-term set of holdings for reinvestment.
In the last $112,007 Portfolio Update, from July 28th, we remained bullish and it really paid off with another $2,117 in unrealized gains ($6,690 not included in above total) as we made a very well-timed bottom call the week before and ran with it. We have haven’t had to call an "audible" in two weeks, sticking to our plan as the market held up nicely.
The first few weeks after you sell options are usually the worst and the rising VIX had boosted the premiums of the puts and calls we sold but none of that matters because we played a little more aggressive to the upside and, despite losing $3,080 on our covers, we are still way ahead of goals. As usual, we are…
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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
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