Iron Condor Nesting in Brazil Index ETF
by Andrew Wilkinson - February 4th, 2010 5:21 pm
Today’s tickers: EWZ, CVX, WFC, GFI, SU, MA, ZION, DAL, AMAG & JWN
EWZ – iShares MSCI Brazil Index ETF – An iron condor options strategy employed in the February contract on the EWZ implies one investor expects the underlying share price of the fund to stagnate ahead of expiration in two weeks. Shares of the exchange-traded fund, which generally correspond to the price and performance of publicly traded securities in the Brazilian market, are down 5% today to $64.37. Today’s decline merely adds salt to the wounds – The Brazil index ETF has taken a severe beating in the past few months, falling 20.5% since attaining a 52-week high of $80.93 back on December 3, 2009. The iron condor, a strategy utilized by option traders anticipating little movement in the underlying share price, is perhaps one investor’s way of indicating the worst is over and a bottom is close at hand. The iron condor’s construction is essentially the combination of two strangles, or alternatively can be thought of as two credit spreads. On the call side, the investor pockets a net credit of $0.09 per contract by selling 10,000 calls at the February $71 strike for $0.13 apiece, spread against the purchase of 10,000 calls at the higher February $74 strike for $0.04 each. As for the puts, the trader receives a net credit of $0.26 per contract on the sale of 10,000 puts at the February $59 strike for $0.44 each, marked against the purchase of 10,000 puts at the lower February $56 strike for $0.18 apiece. Therefore, the combined credit enjoyed on the iron condor amounts to $0.35 per contract. Maximum retention of the $0.35 credit, or total monetary profits of $350,000, is contingent upon the underlying share price at expiration. EWZ shares must trade within a range of $59.00 to $71.00 in order for the investor to walk away with maximum profits. The investor holding the iron condor is exposed to significant losses if his ‘neutral’ prediction is wrong. Maximum loss potential on the transaction of $2.65 per contract is far greater than the $0.35 credit received for undertaking such risk. But, apparently this trader is confident that shares of the underlying stock will move sideways – at least through February expiration. Perhaps this confidence stems from the fact that losses do not amass to the upside unless shares rebound 10.85% to surpass the upper breakeven price 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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Bears Bombard Wells Fargo with Pessimistic Option Plays
by Andrew Wilkinson - January 14th, 2010 4:26 pm
Today’s tickers: WFC, GS, EWZ, EK, CHRW, BIDU, CBY, ACOR, INTC, EK & EAT
WFC – Wells Fargo & Co. – Bearish traders lumbered around Wells Fargo today purging calls and feasting on out-of-the-money put options. Pessimistic positions were initiated during the trading session despite the 1.5% move up in shares of the underlying to $29.02. Investors piled into put options at the February $23 strike where roughly 23,000 contracts were purchased for an average premium of $0.13 apiece. Perhaps put buyers are merely securing cheap downside protection in case WFC’s shares fall off the proverbial cliff by expiration next month. Traders may be expecting a pull back in shares of the financial firm. If the puts were purchased as an outright bearish bet on the stock, investors long the contracts could turn profits by selling the puts before expiration next month if premium levels on the lots appreciate above $0.13. Medium-term pessimism was apparent in the April contract where traders shed 4,700 calls at the April $32 strike for an average premium of $0.66 each. Additional bearishness took place at the April $28 strike as investors picked up roughly 5,600 puts for $1.55 apiece. Pessimistic trading patterns suggest a bumpy start to the new year for Wells Fargo.
GS – Goldman Sachs Group, Inc. – Bullish activity in the February contract on investment banking firm, Goldman Sachs, suggests shares are poised to pop up in the next few weeks. Shares appreciated slightly during today’s session, rising 0.10% to $169.22 ahead of the closing bell. One optimistic options strategist purchased a debit spread to position for bullish movement in the price of the underlying. The trader bought 10,000 calls at the February $180 strike for a premium of $2.25 apiece, spread against the sale of 10,000 calls at the higher February $185 strike for $1.30 each. The investor shelled out a net $0.95 per contract on the trade. Goldman’s shares must gain approximately 7% from the current price in order for the call-spreader to breakeven at $180.95. Maximum potential profits of $4.05 per contract amass for the trader if GS shares jump 9.3% to $185 by expiration day in February.
EWZ – iShares MSCI Brazil Index ETF – Shares of the EWZ, which corresponds to the performance of publicly traded securities in the Brazilian market, edged 1.75% lower during the trading day to stand at $74.53. Bearish option traders made aggressive moves on the stock using…
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JPMorgan-Bull Constructs Three-Legged Combo Play as Shares Rise
by Andrew Wilkinson - January 5th, 2010 4:31 pm
Today’s tickers: JPM, LVS, S, WFC, UAUA, NBR, PTEN, FIG, PCS, DAL & TPX
JPM – JPMorgan Chase & Co. – A three-legged combination play suggests one investor anticipates a significant rally in JPMorgan’s shares within the next few months. The stock is trading 2% higher this afternoon to $43.65. The trader utilized both calls and puts in the March contract in order to position for potential bullish movement in shares of the underlying. The investor sold 15,000 puts at the March 40 strike for an average premium of 1.18 apiece to partially offset the cost of buying a call spread. The call spread involved the purchase of 15,000 calls at the now in-the-money March 43 strike for an average premium of 2.58 each, marked against the sale of 15,000 calls at the higher March 47 strike for 90 cents premium apiece. The net cost of the three-legged strategy amounts to 90 cents per contract. Maximum potential profits of 3.50 per contract – a grand total of $5.25 million – are available to the investor if JPM’s shares rally through $47.00 by expiration day. Profits amass above the breakeven price of $43.50. The short put stance at the March 40 strike implies the investor is willing to have shares put to him at $40.00 apiece if the put options land in-the-money.
LVS – Las Vegas Sands Corp. – Reports of a large 48% increase in December revenue at Sands China – the Macau unit of Las Vegas Sands Corp. – pushed shares of LVS up 9.5% to $18.21 today. Option bulls, hoping good fortune and accurate foresight are on their side looked to the February contract to initiate plain-vanilla call buying strategies. The now in-the-money February 18 strike had roughly 2,700 calls picked up for an average premium of 1.29 apiece. The higher February 19 strike was the hot spot for bulls looking to bet on an LVS rally. Out of the 19,500 calls traded at that strike, more than 12,200 contracts were purchased for about one dollar per contract. Call options exchanged at the February 19 strike vastly outnumber previously existing open interest at that strike of just 2,725 lots. The higher February 20 strike received bullish interest as well, with about 2,000 contracts coveted by traders for an average premium of 66 cents each. As of 3:15 pm (EDT), investors traded just under 127,000 option contracts of LVS, which represents approximately 21%…
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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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Investor Plants WFC Short Straddle - Set to Bloom in April 2010
by Andrew Wilkinson - November 20th, 2009 4:24 pm
Today’s tickers: WFC, IYT, RYL, YHOO, XLE, MU, ADCT, KBH, DELL, NE & GPS
WFC - Wells Fargo & Co. – Shares of the financial holding company surrendered 1.5% today to stand at $27.88. One investor initiated a sold straddle on WFC in the April 2010 contract. The trader sold 10,000 calls at the April 32 strike for 1.59 apiece in conjunction with the sale of 10,000 now in-the-money puts at the same strike for 5.81 each. The gross premium on the transaction amounts to 7.40 per contract. The investor will retain the full premium if shares settle at $32.00 by expiration. The premium received acts as a buffer against losses in the event that shares swing in either direction away from the $32.00-level. However, the trader will accumulate losses if shares breach the upper breakeven price of $39.40, or if shares decline beneath the lower breakeven point at $24.60, by expiration in April.
IYT - iShares Dow Jones Transportation Average Index ETF – The exchange-traded fund, which measures the performance of the transportation sector of the U.S. equity market, appeared on our ‘hot by options volume’ market scanner this afternoon after one investor initiated a bearish put play. Shares of the fund moved 0.5% lower to $70.53 during the session. The trader established a put spread by purchasing 5,000 puts at the December 70 strike for 1.80 each, and by selling the same number of puts at the lower December 65 strike for 40 cents apiece. The net cost of the trade amounts to 1.40 per contract and provides downside protection beneath the breakeven price of $68.60 down to $65.00 through December’s expiration.
RYL - The Ryland Group, Inc. – Shares of homebuilder and mortgage-finance company, Ryland Group, declined nearly 4% this afternoon to stand at $18.86. Investors exchanging options on the stock today spread pessimistic sentiment through to expiration December. Traders sold 10,000 calls at the December 19 strike for an average premium of 1.10 apiece. The full 1.10 premium pocketed by investors is retained in full as long as shares of RYL remain below $19.00 through expiration day. Call-sellers do not seem to expect that shares of Ryland will recover before the start of 2010.
YHOO - Yahoo!, Inc. – We observed two different option strategies in play on Yahoo this afternoon. A large-volume sold strangle in the January 2011 contract suggests shares are likely to remain stagnant through expiration. The transaction involved the sale…
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Wells Fargo Put Spreaders Back in Town
by Andrew Wilkinson - November 11th, 2009 4:27 pm
Today’s tickers: WFC, AMR, PG, DRYS, DTV, M, EMC, WYNN, TOL & SFD
WFC - Wells Fargo & Co. – A popular option strategy frequently employed on Wells Fargo, the ratio put spread, appeared once again in the January 2010 contract. The bearish play was initiated despite the more than 2% rally in shares during the trading session to $28.75. The ratio spread involved the purchase of 7,500 puts at the January 27.5 strike for an average premium of 1.60 apiece, marked against the sale of 15,000 puts at the lower January 24 strike for 67 cents each. The net cost of the protective play amounts to 26 cents per contract. Thus, downside protection will kick in if shares decline beneath the breakeven price of $27.24 by expiration in January.
AMR - AMR Corp. – American Airlines operator, AMR Corp., attracted a large bullish play by one investor targeting the January 2010 contract. Shares of AMR are up more than 4% to $5.83 with just under one hour remaining in the trading day. An AMR-optimist initiated a call spread by purchasing 15,000 calls at the January 7.5 strike for an average premium of 35 cents each, marked against the sale of 15,000 calls at the higher January 9.0 strike for 10 cents premium apiece. The net cost of the bullish transaction amounts to 25 cents per contract. Profits are available to the call-spreader if shares of AMR rally at least 33% to breach the breakeven point at $7.75 by expiration. Maximum potential profits of 1.25 per contract for a total of $1.875 million are attained by the trader if shares surge 54% to $9.00.
PG - The Proctor & Gamble Co. – Options activity in the January 2011 contract on the consumer products company today indicates one investor expects little fluctuation in shares over the next 14 months. Shares of PG are slightly up by less than 0.25% to stand at $61.90. The trader initiated a sold strangle by selling 2,000 puts at the January 60 strike for 5.73 each, and by selling 2,000 calls at the higher January 65 strike for a premium of 3.82 apiece. The gross premium pocketed on the sale amounts to 9.55 per contract. The strangle-seller retains the full premium if shares of PG remain ‘strangled’ within the parameters of the strike prices described. The investor will benefit from lower option implied volatility on the stock, as well as from the…
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Toppy Tuesday Morning
by Phil - November 10th, 2009 8:05 am
That was some day yesterday.
We even had to flip bullish in the afternoon (slightly and reluctantly) but, when push came to shove and they asked me for my opinion on TV, I had to tell them I still thought we were toppy. I said that despite the Fast Money crew sitting in the studio right below me actively advising their viewers to chase the performance and, right after them, our friendbuddypal Jim Cramer told his viewers that no news is good news and the market is in a "a positive and delicious void" where we don’t have to worry about any pesky facts interfering with our buying premise.
To that end, Cramer suggests chasing AAPL, GOOG, GS, BAC and WFC and anything else that is not nailed down. "There are only 35 days of trading left in the year," Cramer says, "so we can expect money managers to pile into these companies when they realize the 2010 numbers are too low. Retail investors should be sure they aren’t left behind." Yes, we should blindly follow the money managers because they’ve never steered us wrong before (end sarcasm font).
Does it bother me to have be on the other side of the trade from "the finest minds on Wall Street"? A little, to be honest. As I pointed out yesterday in reminding you about what happened in 1999 and as John Maynard Keynes reminded us all decades ago: "The market can remain irrational longer than you can remain solvent." We discussed this logic back on October 12th, when I warned the bears that you can’t keep supporting the wrong team when they are clearly losing the game.
We had stayed about 55% bearish into the weekend but quickly covered up in the morning after all that stimulus talk against the declining dollar. In my 9:43 Alert to Members I said: "If we break over 10,120, then the selling the DIA $103 puts, now $2.55 are a great momentum play if you have the longer covers to protect you." Those puts finished the day at $1.70, a nice, quick 32% gain on the day and that’s how fast you can rebalance using index covers and those profits came AFTER buying back the Dec $99 puts we sold for $2.50 at $1.80 - 28% from Friday to Monday.
In the morning post, I had set up a chart for the week and added our 25% targets of Dow 10,250, S&P 1,100, Nasdaq 2,187, NYSE 7,000 and Russell 600 and,…
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Risk Reversal Pops Up on Biotech-Company, Life Technologies
by Andrew Wilkinson - November 3rd, 2009 4:08 pm
Today’s tickers: LIFE, FL, VTR, WFC, RRI, WFR, CAR, FRX, SWK, BNI & WFR
LIFE - Life Technologies Corp. – Biotechnology company, Life Technologies, popped up on our ‘hot by options volume’ market scanner this morning after one investor initiated a risk reversal in the December contract. Shares are relatively flat on the day at $47.58. The reversal is most likely the work of a bullish individual positioning for a rally in shares of LIFE by expiration next month. It appears the trader sold 5,200 puts short at the December 45 strike for an average premium of 1.30 apiece to finance the purchase of the same number of call options at the higher December 50 strike for 1.20 each. The investor receives a credit of 10 cents per contract on the transaction. The 10 cent credit is money in the bank as long as shares remain above $45.00 through expiration. Additional profits on the trade require the stock to surge to a new 52-week high of $50.00. Shares must rally 5% from the current price before the investor begins to accumulate profits. The 10,400 contracts exchanged in the spread represent about 23% of the total existing open interest on LIFE of 45,963 lots.
FL - Foot Locker, Inc. – A long-term bullish play in the January 2011 contract pushed the global retailer of athletic footwear and apparel onto our ‘hot by options volume’ market scanner this afternoon. Shares are currently up nearly 1% to $10.25. It looks like the trader initiated a bullish risk reversal by selling 3,500 puts at the December 7.5 strike for 1.10 each, and by buying the same number of calls at the higher December 12.5 strike for 1.10 apiece. The investor put on the trade for free and hopes to see shares rise above $12.50 by expiration in 14 months. Profits begin to accumulate if the stock rallies 22% over the current price to surpass the breakeven point at $12.50. We note that shares of FL have traded beneath $12.50 since November 11, 2008.
VTR - Ventas, Inc. – Shares of the real estate investment trust edged slightly higher by less than 0.25% to $40.56 during the trading day. An investor expecting shares to appreciate by expiration in December put on a bullish risk reversal strategy. The trader sold 3,000 puts at the December 35 strike for 60 cents premium and simultaneously purchased the same number of calls at the December…
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A Vault for Valero Means Call Option Feeding-Frenzy as Expiration Nears
by Andrew Wilkinson - September 17th, 2009 5:32 pm
Today’s tickers: VLO, NTRI, EFA, BAX & WFC
VLO - We can explain in part the activity in the September 20 strike call options, which is due to expire at the weekend. That’s straight forward. It’s now in the money following a 9% share price gain to $20.97. Investors have possibly built up a substantial short position at the start of August in the expectation that share would remain below $20 as they have since they collapsed on June 2. Selling short the calls means they stand to retain the premium if the stock price remains south of the border. We see little news to set off today’s enthusiasm for Valero, but the rally that has put the calls into the money has the potential to spark a significant amount of short covering. Options open interest here is around 33,000 while today’s volume is at around 29,000. Expiration Friday tomorrow should be fun. – Valero Energy Corp. –
NTRI - The weight management products and services firm, which offers portion-controlled pre-packaged meals that can apparently satisfy ex-NFL quarterback Dan Marino’s appetite, edged onto our ‘hot by options volume’ market scanner this morning. Shares of NTRI have surged more than 6% today to $15.84, inspiring bullish options action in the October contract. It appears some 3,200 calls were purchased at the October 17.5 strike for an average premium of 25 cents per contract. Investors will begin to accumulate profits if shares of the weight management company rally 12% higher to breach the breakeven point at $17.75 by expiration next month. The rise in demand for options on NTRI helped fuel the 24% burst in option implied volatility on the stock from an intra-day low of 41% to a high of 51%. – NutriSystem Inc. –
EFA - Shares of the exchange traded fund representing stocks from Europe, Australasia, and the Far East have come off slightly today to stand less than 0.25% lower at $55.78. Perhaps fearing further bearish movement in the stock, investors coveted approximately 25,000 puts at the October 53 strike for an average premium of 73 cents apiece. Traders picking up the put options may currently hold long positions in the underlying stock meaning a 6% decline for shares of the EFA would be protected by put option exposure and that would kick in beneath the breakeven price of $52.27. – iShares MSCI EAFE Index ETF –
BAX - “Swine Flu” vaccine-maker, Baxter International saw…
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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
(