IYR-Investor Constructs Three-Legged Bullish Combination Play Despite Declining Market
by Andrew Wilkinson - January 12th, 2010 4:11 pm
Today’s tickers: IYR, PFE, FXI, WFT, UUP, JPM, GLD, ERTS, STJ & PVH
IYR – iShares Dow Jones U.S. Real Estate Index ETF – Bullish options activity on the IYR flies in the face of bearish momentum across equities in the broader market today. The investor responsible for the optimistic positioning in the February contract appears little concerned with the current 2% decline in the value per IYR share today to $45.31. It looks like the trader sold a put credit spread in order to offset the cost of buying out-of-the-money call options. The three-legged combination involved the sale of 10,000 puts at the February $45 strike for a premium of $1.56 each, spread against the purchase of 10,000 puts at the lower February $42 strike for $0.65 apiece. The net credit of $0.91 per contract received on the credit spread is more than enough to cover the cost of the 10,000 calls purchased at the February $48 strike for $0.55 each. After establishing all three legs of the spread, the trader pockets $0.36 per contract. The investor keeps the full $0.36 only if IYR’s shares trade above $45.00 through expiration next month. Additional profits amass only if shares of the fund rally 6% from the current price to surpass $48.00. We note that the investor responsible for the trade may suffer maximum potential losses of $2.64 per contract if the price of the underlying slips to $42.00 by expiration day.
PFE – Pfizer, Inc. – A bullish risk reversal on the global pharmaceutical company today suggests shares may rally to $20.00 by expiration in June. Pfizer’s shares withstood downward market pressure for the majority of the trading session, and even climbed slightly higher in earlier trading, but edged 0.75% lower to $18.70 by 2:15 pm (EDT). The reversal play involved the sale of 10,000 in-the-money put options at the June $20 strike for a premium of $2.07 apiece, spread against the purchase of 10,000 out-of-the-money call options at the same strike for $0.70 in premium. The investor receives a net credit of $1.37 per contract, which he keeps if PFE’s shares rally up to $20.00 by expiration. The short sale of put options implies the trader is willing to have shares put to him at an effective price of $18.63 each. However, the investor would optimally like to see shares rally at least 7% over the current price to surpass the breakeven price…
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Caterpillar Optimist Buys Bullish Risk Reversal
by Andrew Wilkinson - December 21st, 2009 4:04 pm
Today’s tickers: CAT, EEM, CHK, AAPL, AA, UUP, MNKD, LVLT, CHTT, WTR & WAG
CAT - Caterpillar, Inc. – Near-term bullish options trading on the machinery manufacturer today suggests some investors are positioning for a rally in CAT shares by expiration day in January 2010. The stock edged 0.75% higher during the trading session to $57.56. One investor initiated a bullish risk reversal on Caterpillar by selling 6,000 puts at the January 55 strike for a premium of 95 cents each, spread against the purchase of 6,000 calls at the now in-the-money January 57.5 strike for 1.67 apiece. The net cost of the reversal play amounts to 72 cents per contract. The investor accumulates profits on the transaction if CAT’s shares rally above the breakeven price of $58.22 by expiration.
EEM - iShares MSCI Emerging Markets Index ETF – Shares of the emerging markets exchange-traded fund increased 0.10% today to $40.41. Option traders established long-term bullish and long-term bearish positions in the January 2012 contract during the session. A bullish risk reversal took place at the January 2012 40 strike where one trader sold 6,500 puts for 7.80 apiece to buy 6,500 calls for 7.50 each. The optimistic investor pockets a net credit of 30 cents per contract on the transaction. The full 30 cent credit is safe in the trader’s piggy bank if shares of the EEM trade at or above $40.00 through expiration in two years. The investor is positioned to accrue additional profits as shares increase above $40.00. The other transaction observed in the January 2012 contract appears to be bearish. The trade involved the sale of 10,000 calls at the January 2012 45 strike for a premium of 5.30 each, marked against the purchase of 5,000 puts at the January 2012 35 strike for 5.50 each. The investor takes in a net credit of 5.10 per contract due to the 2-to-1 ratio of calls sold to puts purchased. EEM’s shares must trade below $45.00 in order for the investor to keep the 5.10 credit.
CHK - Chesapeake Energy Corp. – Natural gas and oil exploration and production company, Chesapeake Energy Corp., experienced a 1.75% rally in the price of its shares to stand at $26.52 in afternoon trading. Some investors are anticipating a significantly higher share price for CHK by expiration in July 2010. Chesapeake-bulls bought roughly 4,000 calls at the July 30 strike for an average premium of 1.86 per contract.…
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Wild Weekly Wrap-Up
by Phil - December 19th, 2009 8:20 am
Wheee - that was fun!
Last week, I asked the question were we "Too Bearish or Just Too Early?" I said in that wrap-up: "This Friday the market topped out about 150 points higher than last Friday, closer to the top of our range so we went much more bearish on Friday, perhaps too bearish considering this was the best Friday finish since Nov 6th and we haven’t had a down Monday since October 26th." We did get the move up we feared on Monday but we stuck to our guns and had a fabulous week.
Even as the market was going against us Monday morning, my first Alert of the week to members at 9:44 said: "I’m still more inclined to look downward at: Dow 10,250, S&P 1,100, Nasdaq 2,187, NYSE 7,200 and Russell 600… I’m still bearish because oil is weak, gold is weak, the financials (XLF at 14.30) are weak and most of the good news we are hearing is nothing but fluff." That was a pretty good call as we hit our target levels yesterday and held them, so we flipped more bullish right at 11:30 on Friday, in what was some very good timing for our intra-day play.
We are still on a stock market roller coaster that’s going to have plenty of ups and down in the thin, holiday trading that will likely characterize the end of the year. The market will be closed 2 Fridays in a row and good luck finding people around this Thursday or the next one so 6 proper trading days left to 2009 at best. We got out - that drop was very satisfying and we’ve moved mainly to cash (our $100K Portfolio has $88,000 in cash at $107,249 at the end of it’s first month). Last week we were able to cash out the bull side, this week we got satisfaction from our bear plays and that leaves us footloose and fancy free to have fun the next two weeks. If our day trading goes as well as it did on Friday, we can end this year with quite a bang.
Manic Monday - Dubai, CitiGroup and GS Move Markets
This picture says it all. When you want to blow smoke up investors’ asses, the dream team of economic BS is Greenspan and Cramer, who appeared on Meet the Press last Sunday to tell us that the market is smarter than reality and Greenspan actually had the nerve to say that we are underestimating…
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Thrill Ride Thursday
by Phil - December 17th, 2009 8:30 am
Wheee - this is fun!
Everything went according to plan yesterday as the very fake pre-market pump I warned you about in the morning post very quickly turned into a day of carnage for the markets. Sure we only ended up down 10 points, but it was down 100 from the open.
Fortunately, we have learned how to ride this bull and we grabbed the DIA $105 puts at a .55 average per my 9:47 Alert to Members and we cashed those out at .90 (up 63%) in the afternoon. We also had a quick 20% winner on Dec QID calls and we kept the Jan QIDs as our continuing bearish bet as we didn’t want to risk a possible overnight pump job taking the markets back up with open Dec calls. Still, we weren’t worried enough to cover our longer DIA puts so we were very bearish but, as I said yesterday: "We have neglected to do is play the futures pump for the past week as we keep expecting something very bad to happen and boy would we feel silly if we were just 55% bearish when this house of cards comes tumbling down."
It has been volume, volume, volume that kep me questioning the rallies this year - the fact that all the up moves come on very thin volume (ie. manipulated) while all day long the insiders sell to the suckers who are draw in by the futures action and stick saves (it’s a team effort). This chart from Ron Greiss illustrates what’s wrong with our rally on a more macro level:
While we are certainly not ready to do a bearish victory dance on this tiny little correction, we certainly feel a heck of a lot better about our decision to stay bearish. In addition to adding bearish DIA and QID plays yesterday, we (of course) added more SRS at our target bottom, took the money and ran on EWJ, shorted XTO (rumors XOM may walk), got more UUP and shorted V. Our long covers were TOL and the VIX but it was a very bearish day of picks, especially considering our already bearish stance (see Weekend Wrap-Up - Too Bearish or Just too Early?).
Also a little too early was our positioning for an up move in the Dollar, which began in early November when I wrote a lengthy article on the Dollar, Gold, Oil, The CRB and the Fed and why I felt we were reaching the…
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Which Way Wednesday - Fed Edition
by Phil - December 16th, 2009 8:07 am
What a great morning!
Well, if you are a futures bull anyway. We keep telling you that’s where the action is. Last Thursday we gapped up 100, Friday another 50 and Monday another 50. Wow, what a market right? And where did we close a week ago Wednesday? 10,337. And where did we close yesterday after 200 points of futures gains? 10,452. So we LOST 80 points during real trading hours and gained 200 when no one was looking - yet no one is being arrested - go figure…
I already made my skeptical note to Members this morning as the pre-market action tacked on another 50-point gain that pretty much started at 3am on the dot as the Hang Seng threatened to fail 21,500, which would have been a serious breakdown on a triple test over 5 days. It still looks to me like the Hang Seng will be looking at a 10% correction in the very near future but the pump crowd aims to put off that day of reckoning for as long as possible.
The Nikkei, on the other hand, had their own gap up, back over our 10,200 target (we went long on EWJ again yesterday) but failed to hold it and closed at 10,177, up 1%. Once the Nikkei closed, the dollar was allowed to drop back to 89.5 Yen and the Euro was jammed up from $1.451 to $1.458 but that was nothing compared to the Pound, which went from $1.623 at 3:45 to $1.636 at 6:45 - a spectacular move that allowed copper to get back to $3.17 (up 1% from yesterday’s close) along with 1% gains in Silver ($17.50), Gold ($1,135) and Oil ($71.50) all of which made great futures shorts at those prices.
The dollar is being jammed down on whispers in Europe that the Fed will announce today that the US Economy is much improved BUT they have no intention of raising rates in the foreseeable future. This enables the burgeoning dollar carry-trade to continue and, as John Carney points out at Clusterstock, it allows the Fed to keep buying Mortgage Backed Securities from the Banks as fast as they can turn them over.
The Fed can do this with confidence because the MBS’s are, in turn, guaranteed by FRE and FNM who are, in turn, backed by the US Government - leaving US, the taxpayers, on the hook for Trillions of dollars of additional bank debt while the banks use their crap MBS paper…
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CAT-Bears Brace for Rocky Start to 2010
by Andrew Wilkinson - December 15th, 2009 4:34 pm
Today’s tickers: CAT, MS, UUP, STI, WFC, MCO, M, ROK, BBY, JAVA & HMY
CAT - Caterpillar, Inc. – Bearish option traders are bracing for potential CAT-share price erosion through expiration in February 2010. Shares edged nearly 0.75% lower in late afternoon trading to stand at $57.94. One pessimist purchased a put spread to prepare for potential declines. The transaction involved the purchase of roughly 7,000 puts at the February 55 strike for a premium of 2.35 apiece, marked against the sale of 7,000 puts at the lower February 35 strike for 49 cents premium each. The net cost of the trade amounts to 1.86 per contract. The investor responsible for the spread probably holds a long position in the underlying. Under this assumption, the trader has established downside protection, which kicks in if Caterpillar’s shares fall beneath the breakeven price of $53.14 by expiration day in February.
MS - Morgan Stanley – Analysts at Barclays Capital slashed fourth-quarter earnings estimates for Morgan Stanley to 40 cents from 90 cents today. Perhaps the bearish options activity observed on MS during the trading session was partly inspired by the significant profit-forecast revision at Barclays. Either way, investors populating Morgan Stanley’s January 2010 contract appear pretty pessimistic on the second-largest U.S. securities firm. Traders threw in the towel on MS by shedding nearly 20,000 calls at the January 31 strike for an average premium of 75 cents apiece. Some investors may be closing out previously established long call positions. Analysis of the existing open interest at that strike suggests traders are likely cutting their losses by selling the calls today. Investors abandoning bullish bets do not paint a rosy picture of where MS’s share price may settle during the first weeks of 2010.
UUP - PowerShares DB US Dollar index Bull Fund – The U.S. dollar is brimming with confidence on the first of a two-day FOMC meet in Washington and while investors are not expecting any signs of a policy change, there is certainly a firmer tone underlying the dollar in the past 72 hours or so. Option traders placed extremely bullish bets using call options on the bullish dollar index fund, whose shares currently stand 0.9% higher on the day at $22.82. Investors bought a huge chunk of 100,000 long-dated options reserving buying rights over the dollar at a fixed $24.00 before the contract expires in January 2011. That leaves traders hoping for a 5% rally…
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Japanese ETF Options Active (After Philstockworld’s Thursday Pick)
by Andrew Wilkinson - December 11th, 2009 5:29 pm
Today’s tickers: EWJ, RX, UUP, DRI, IMAX, SFD & AET
EWJ - iShares MSCI Japan Index Fund – Shares of the Japan exchange-traded fund rose 0.3% today to $9.92. The roughly 125,000 contracts exchanged on the fund today is likely the work of one investor adjusting previously established positions. The trader may be unraveling a portion of a bearish risk reversal established back in late-September. It appears 62,500 puts were sold at the March 10 strike for 53 cents apiece, spread against the purchase of the same number of calls at the January 2011 12 strike for 24 cents premium each. The technically bullish direction of the risk reversal play is possibly a closing transaction given the large levels of existing open interest at each strike described above.
RX - IMS Health, Inc. – Shares of the provider of prescription information to the pharmaceutical and healthcare industries plummeted 14% to $18.34 at the start of the trading session. The stock collapsed on news senate democrats proposed an amendment to restrict data-mining practices. Investor uncertainty, as measured by option implied volatility, exploded today on fears the proposed ban may hurt RX’s recent $5.2 billion sale to TPG Inc. and the CPP Investment Board. IMS Health’s shares recovered significantly by midday (EDT) with the stock down a lesser 7.5% to $19.77. Frenzied option traders vied for both calls and puts in the December and January contracts. Investors exchanged nearly 100,000 contracts on the stock in the first three hours of the trading day. Today’s volume blew right past the previous existing open interest on RX of 73,386 contracts. Heavy trading volume and rising investor uncertainty launched option implied volatility up as much as 401.72% to a one-year high of 70.55%. Some traders appear to be selling call options to buy puts in the December contract, while other investors initiated plain-vanilla put buying strategies. Bearish individuals shed more than 6,000 calls at the December 20 strike for an average premium of 46 cents apiece. Traders keep the premium received on the sale if shares of RX remain below $20.00 through expiration. Put buyers favored the December 17.5 strike where roughly 10,000 puts were picked up for about 46 cents each. Some of the puts were spread against the sale of higher strike call options, while other contracts were purchased outright. Roughly 5,000 puts were purchased at the lower December 15 strike where investors paid an average of…
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Weak Weekly Wrap-Up
by Phil - November 21st, 2009 8:26 am
This chart says it all (thanks Jesse).
In last week’s wrap-up I said: "Since early September our upside targets for the indexes have been: Dow 10,087, S&P 1,096, Nasdaq 2,173, NYSE 7,204 and Russell 623 and nothing has happened to change our fundamental outlook for the better so the closer we get to those levels, the LESS comfortable we are taking bullish positions." I mentioned how tempting it had been to cash out all our longs and go 100% bearish when we hit 10,300. Our downside levels told us to wait until the 16th, when Monday’s move up was finally the last straw and we are out of the bull game (our last major Buy List was July 11th and most picks are up over 100%), probably for the rest of the year.
This chart shows you that the S&P is primed for a 5% correction back to 1,050. I don’t know why Jesse didn’t extend out the lower support line, which would take us right about to my pullback target of S&P 1,000/Dow 9,650. I stuck my neck out on TV two weeks ago, calling for a 10% correction to those levels but we’ve been playing both sides of the fence until this week, when I finally had to put my foot down on Monday, after having discussed cashing out for the holidays in Member Chat over the weekend. Our general plan this week was to cash out the winners and leave only longer-term, hedged bullish plays while adding more speculative downside plays for the short-term correction.
Why the change of heart? Well, something you don’t see on this chart but is pretty clear on the Yahoo monthly view, is that virtually all of the gains (ALL of them if you include the spikes) in the Dow for the ENTIRE month of November have come on single days each week. This week it was Monday (139 points), last week Monday (206 points) and Nov 5th was Wednesday (198 points). Take those days out of the run from our Oct 30th close at 9,712 and we’re up just 63 points to 9,975 despite there being only 1 losing day in the first week (11/3, down 16 points) of the month and one losing day in the second (Nov 12th, down 92 points). That is one super-flimsy way to build a "rally" don’t you think?
Getting 90% of our gains in on 3 days in 3 weeks indicates a certain lack of follow-through to these bullish market moves. I outlined the nature of the manipulation that takes place in yesterday’s post so…
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Friday: Dell Misses, Is Goldman Sachs Stupid or Evil?
by Phil - November 20th, 2009 8:18 am
How can a firm that never loses money be so totally wrong?
Just this Monday, Goldman Sachs helped to gap the markets higher at the open in low-volume futures trading with the following pronouncement: "Goldman Sachs resumes coverage on Dell Inc. (NASDAQ: DELL) and gave DELL a Buy rating at a 12-month price target of $19. Goldman believes that DELL will benefit from a corporate PC refresh cycle and will show better earnings as DELL is trying to optimize its cost structure. Goldman believes Dell will report better than expected earnings and beat analysts’ expectations. Goldman expects DELL to report earnings of $1.09 for CY2009 and $1.37 for CY2010 from their previous estimates of $1.07 for CY2009 and $1.35 for CY2010." Fact is, they missed by a mile.
That report took Dell up 2% for the day and the Dow gained 150 points and we were dumbfounded by the move, both in DELL, who were swallowing a difficult acquisition of Perot Systems and of the market, which acted like $31Bn DELL is the same kind of bellwether that $120Bn HPQ is, even if Goldman’s report had been even close to accurate. As it was, they couldn’t have been more wrong if they were playing "opposite day." How is it that a firm that has only 3 losing trading days in 6 months can be this amazingly wrong on crucial analysis?
So is Goldman actually stupid and, as many have implied, simply cheating to rack up their amazing market gains or are they intentionally manipulating the markets. Former GS-employee Jim Cramer jumped right on the bandwagon on Monday afternoon and told viewers that "obviously," since DELL is going to do so well (because GS says so) that INTC and MSFT must be buys too.
This is how manipulative stock pumping works - start a rumor, push it out through the media, extrapolate the rumor out to affect market-moving stocks that don’t even have upcoming news events and then tell people they are missing an opportunity, even after the train has left the station (by Cramer’s 2:30 spot on Monday, the Nasdaq had already hit the high for the week, peaking out exactly at the moment Cramer told his retail investors to pile into the market).
Were the beautiful sheeple only buying what Cramer’s buddies were selling? Is that how GS makes their money, buying low on Friday, making an upgrade on Monday, getting their pals to sucker people into the "rally" and then dumping into the retail…
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Thrill Ride Thursday - CRE Crash?
by Phil - November 19th, 2009 8:12 am
What a nice day we had yesterday!
I led off my morning post saying it was time to short the Dow, Copper, Oil and the Euro and anyone playing those futures bets off my 8:27 post made out like a bandit. I even posted a nice little DIA play FOR FREE (for those of you who can’t be bothered to subscribe yet), picking the DIA $104 puts at .55. It only took 45 minutes for those puts to shoot up to .85 and I warned our Members to take it off the table on the way up and, since it was my free trade of the week, I also posted it over at Stock Talk on Seeking Alpha. This is a great way to follow-up on some of our trades and is also the back-up for our member chat whenever we have server issues so do make sure you are signed up to follow me there (just click on my picture).
Yes, I know that so many newsletter writers give you free trade ideas that make 54% in 45 minutes that it’s hard to keep track so only do it if you REALLY want to. The futures, of course, make TONS more than that as they are heavily leveraged, As I said in yesterday’s post, we have been trying to get more bullish but sometimes we just have to put our bearish foot down. In Member Chat we also took bullish pokes at EDZ, SRS, DIA $103 puts and ERY early in the morning and then we were able to just sit back and watch the dip. I was a penny early calling a bottom on copper at $3.12 but .05 on the futures contracts is a huge win and we are very nervous bears, especially on low volume days, and we take our profits quickly.
At 1:40, I said to members: "DIA - Well mission accomplished on the $103 puts and now we see what Mr. Stick can accomplish for the day. Without the RUT over 600 I have no desire to cover the March puts" and we even decided to go with the DIA $104 CALLS at 3:20 to protect us against the anticipated stick save. Those went from .65 to to .80 into the close, another very quick 20%. We don’t do this all the time, these plays are fun to make during expiration week as the premiums are low and there are huge short-term rewards for good market timing. Our longer-term short play for…
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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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