TGIF – Closing a 12% Down Quarter
by Phil - September 30th, 2011 8:15 am
1,320 – That was the S&P close on June 30th.
1,160 – That was the S&P close after yesterday’s wild action. A neat 160-point drop (12%) in 3 months for the World’s largest market kind of sucks, don’t you think? My commentary in June 30th’s "It’s the End of the Quarter as We Know It" post was:
We feel fine because we cashed out on the long side (shorter-term, unhedged positions) and we really don’t care what the market does today or tomorrow but we are betting this rally reverses and we will be taking some (more) short hedges today – hopefully selling into the last legs of this fairly fake-looking rally.
My top downside picks to play the sell-off were EDZ ($17.90 at the time, now $28, which is up 36% even without using options to make a spread) and TZA ($35.50 at the time, now $51.10 – up 44%). As I said in that morning post: "I didn’t think they could take the Dollar below 75 but they hit 74.54 last night and it remains to be seen if they can hold it down in real trading, especially with the Pound weakness (see this morning’s Alert) and the Yen’s unwanted strength. Something’s gotta give and we’re betting it’s this fake, Fake, FAKE rally…."
We were shorting oil futures (/CL) at $95 (now $80, up $15,000 per contract) as we thought the holiday weekend was the end of the run but we did keep heading up to $100 (down $5,000 per contract) before finally getting a drop to $75 (up $25,000 per contract) in early August.
One funny play from that June 30th Member Chat was the VIX Aug $15/17 bull call spread at $1.20, selling the $16 puts for .50 for net .70 on the $2 spread. That just seems so cute (and obvious) with the VIX at 38.84 now (it was 30 at the end of Aug for a full 185% gain on that hedge).
Other hedges we liked in that post were the TZA Oct $31/42 bull call spread at $3, selling RUT Aug $710 puts for $2.90. The RUT puts expired worthless so net .10 on the spread that is currently $20 in the money for pretty much the full 10,900% gain.…
Facebook
Twitter
LinkedIn 
del.icio.us
DiggRumor Mill Generates Options Feeding Frenzy on U.S. Steel Corp.
by Option Review - August 18th, 2010 4:39 pm
Today’s tickers: X, BBY, AEO & CREE
X – United States Steel Corp. – Unconfirmed rumors that ArcelorMittal may be interested in buying U.S. Steel at $80.00 per share inspired an all-out options feeding frenzy on the Pittsburgh, PA-based steel producer. U.S. Steel’s shares rallied as much as 6.7% in the first half of the trading session to reach an intraday high of $50.50 as of 11:50 am ET. The churning of the rumor mill, increased demand for the steel maker’s options and the significant move in the price of the underlying stock lifted the overall reading of options implied volatility on U.S. Steel 20.1% to 55.54% just before noon in New York trading. Call options on the stock are the clear favorite today and are changing hands 3.6 times for each single put option in play with investors exchanging nearly 200,000 contracts on U.S. Steel by 12:15 pm ET. Investors initiating bullish stances purchased in- and out-of-the-money call options and sold out-of-the-money puts. The August $50 strike, which currently has volume of 21,200 calls, is the most popular as of early afternoon. At least 9,800 of those call options were purchased for an average premium of $0.82 per contract. Traders positioning for U.S. Steel’s shares to continue higher ahead of Friday’s expiration picked up at least 4,300 calls at the August $55 strike for an average premium of $0.46 each. Another 3,500 calls were coveted at the August $60 strike, while some 3,000 call options were purchased at the August $65 strike price. Investors may or may not intend to hold these positions overnight. It will be interesting to see, by examining changes in open interest at these strikes tomorrow, whether traders are buying into the rumors rather than initiating intraday transactions to take advantage of the feeding frenzy while it lasts. Options traders holding the August $50 strike calls may profit if U.S. Steel’s shares rally above the average breakeven price of $50.82 ahead of expiration in a couple of days. Finally, September $55 strike calls were the hot-ticket item in that expiry. As of 12:30 pm ET, more than 11,700 calls changed hands at that strike, with at least 4,500 of those contracts purchased by investors at an average premium of $1.37 each. Traders long the calls make money if the price of the underlying stock jumps 11.6% over today’s high of $50.50 to surpass the average…
A few good shorts
by Chart School - April 22nd, 2010 4:24 pm
Here’s what Allan is shorting.
A few good shorts
*****
YHOO – fresh signal
Allan’s newly launched newsletter, “Trend Following Trading Model,” goes with the trend-following trading system he’s been working on for years. Most trades last for weeks to months. Allan’s offering PSW readers a special 25% discount. Click here. For a more detailed introduction to the Trend Following Trading Model newsletter and trading system, read this introductory article.
p.s. Market Club sent out three videos yesterday on Apple, Oil and Gold.
Summary (but watch the videos):
Apple: "the hottest stock in the world."
Oil: "crude oil has been very choppy."
Gold: "this market is setting itself up for a large move to the upside." But not tomorrow.
Strangle Strategist Sees Sharp Shifts in Johnson Controls Shares
by Option Review - March 25th, 2010 4:58 pm
Today’s tickers: JCI, LEA, X, LFT, TS, MU, LULU, DLB & RRC
JCI – Johnson Controls, Inc. – A long strangle enacted on the maker of batteries for automobiles and hybrid electric vehicles this afternoon implies the firm’s share price could swing dramatically ahead of May expiration. Johnson’s shares gained 0.72% in late afternoon trading to stand at $33.35. Earlier in the session shares of the underlying stock reached a new 52-week high of $33.60. The investor responsible for the long strangle play is expecting to profit if JCI’s shares trade outside of a specified range ahead of expiration day. The volatility player purchased roughly 10,000 puts at the May $32 strike for an average premium of $0.89 apiece and picked up 10,000 calls at the higher May $34 strike for $1.14 each. The net cost of the strangle amounts to $2.03 per contract. Shares must trade above the upper breakeven price of $36.03, or trade beneath the lower breakeven point at $29.97, in order for the strangler to amass profits ahead of May expiration.
LEA – Lear Corp. – Bullish options activity on the manufacturer of automotive seat systems suggests at least one investor is preparing for shares to trade at a significantly higher price by expiration in September. Lear’s shares increased 0.85% to $80.37during the current session to trade just $0.53 below the current 52-week high on the stock of $80.90. The optimistic options strategist initiated a debit call spread by purchasing 2,500 calls at the September $85 strike for a premium of $5.40 apiece, and by selling the same number of calls at the higher September $95 strike for $2.10 each. Net premium paid for the transaction amounts to $3.30 per contract. Thus, the trader stands ready to accrue maximum potential profits of $6.70 per contract if Lear’s shares surge 18.20% from the current price to $95.00 by expiration day in September.
X – United States Steel Corp. – Bullish options trading on U.S. Steel Corp. today follows news reports that steelmakers are set to hike prices globally as the economic recovery drains inventory levels and boosts demand and prices for raw materials. The price of steel, according to a Bloomberg News article, increased 9.1% in the U.S. during the month of February. U.S. Steel’s shares rallied 2% during the first half of the trading session to stand at $64.77, and earlier this morning traded up to…
Semiconductor HOLDRS Options Heat Up in Late Trading
by Option Review - March 24th, 2010 4:30 pm
Today’s tickers: SMH, X, WMT, SYMC, MOS, SKS, GE, GENZ, DVN & ADBE
SMH – Semiconductor HOLDRS Trust – Massive bearish positioning on the Semiconductor HOLDRS Trust, which holds shares of common stock issued by 20 different companies engaged in the semiconductor business, indicates shares of the underlying stock may be set to tumble lower ahead of expiration day next month. Shares of the SMH are down 2.40% to $27.92 with thirty minutes remaining in the trading session. It appears one investor purchased 50,000 put options at the April $27 strike for an average premium of $0.41 per contract. Such a large stake in bearish put options suggests the purchaser is perhaps paying for the privilege of securing downside protection on a long underlying stock position. If this is the case, the put contracts yield protection should shares of the SMH trade beneath the effective breakeven price of $26.59 ahead of expiration. Of course, it is also possible the trader does not currently own shares of the SMH. In this scenario the investor makes money if shares fall another 4.75% below the current price to breach the breakeven point on the puts at $26.59. The sudden flurry of options activity on the Semiconductor HOLDRS Trust lifted the overall reading of options implied volatility 7.8% to 26.35%. SMH-investors exchanged more than 131,900 contracts this afternoon, which represents nearly 72% of total existing open interest of 183,473 contracts.
X – United States Steel Corp. – Shares of iron and steel producer, United States Steel Corp., rallied 0.65% during afternoon trading to $63.75. Bullish traders anticipating continued share price appreciation for U.S. Steel purchased out-of-the-money call options in the October contract. Nearly 5,600 calls were coveted at the October $75 strike for an average premium of $4.68 apiece. Investors holding these call contracts stand ready to accrue profits if shares of the underlying stock surge 25% to surpass the effective breakeven share price of $79.68 ahead of expiration day in October. We note that U.S. Steel’s share price last traded above $80.00 during the final days of September 2008.
WMT – Wal-Mart Stores, Inc. – The largest retailer on the planet experienced a slight pullback in the value of its shares this afternoon perhaps on news the firm may sell $2 billion of 5- and 30-year senior notes. Shares edged 0.40% lower during the session stand at $55.68. Options traders expecting lower volatility…
Motorola Business Split Creates Appetite for Options
by Option Review - February 12th, 2010 4:37 pm
Today’s tickers: MOT, ALL, BWLD, BONT & X
MOT – Motorola Inc. – The Shares are almost 8% higher at $7.20 on the news that the company will split into two with networks on one side and mobile devices on the other. Shares are on the move because this probably reflects management’s confidence in the turnaround for mobile devices. It appears that one option investor is looking for further upside and placed a 20,000 lot call option spread when shares were trading at about $6.95 this morning. The spread involved the purchase of now in-the-money April call options at the $6.00 strike, which cost $1.12. The buyer sold the same amount of $9.00 strike calls expiring at the same time for 7 cents to reduce the breakeven to $7.05 in two months. It is likely that this investor wants to take a stake in the company now that it’s announced this corporate split and as long as Motorola’s shares stay north of $6.00 in April, he will be able to exercise that option.
ALL – Allstate Corp. – Looks like a substantial amount of call option buying in the home and auto insurer today as its share price holds up relatively well in the face of a 1% loss for the major market averages. At $29.36 shares are off by just a nickel, possibly still sheltered by a 22.7% surge in revenue and earnings that exceeded investor hopes earlier in the week. Call option buying at the April expiration $31 strike has so far totaled more than 22,000 contracts. Buyers paying around 65 cents per contract for rights to get long of shares in the insurer should they rally by more than 5.6% in the next nine weeks are clearly banking on a rebound to the January peak above $31.50. Implied volatility has slumped in the aftermath of earnings further eroding the premiums today.
BWLD – Buffalo Wild Wings Inc. – An earnings miss earlier in the day from the Minneapolis-based restaurant operator attracted option investor attention today. The activity is curious simply because it’s contrarian. The share price slumped more than 12% earlier to $41.28 before steadying to $43.00. The decline in options implied volatility to 37% is twice the decline in the share price and is perhaps behind investors willingness to write almost 2,000 put options at the soon to expire February $40 strike. Premium sellers, who…
Long-term Put Play on Intel Provides Protection through 2011
by Option Review - January 27th, 2010 4:39 pm
Today’s tickers: INTC, FXI, UFS, TM, BRK.B, X, QCOM, MCO, APC, COST, HNZ & DLTR
INTC – Intel Corp. – Shares of chip-making giant, Intel Corp., dipped lower in early trading, but rebounded this afternoon to stand 0.75% higher on the day at $20.15. Long-term protective positioning in the January 2011 contract on the stock suggests cautious optimism by Intel-option traders. One investor purchased a put spread by picking up 5,000 in-the-money puts at the January 2011 $22.5 strike for a premium of $4.05 each, marked against the sale of 5,000 puts at the lower January 2011 $12.5 strike for $0.35 apiece. The net cost of the transaction amounts to $3.70 per contract. The trader responsible for the spread is likely long shares of the underlying stock. The spread, in this scenario, serves as an insurance policy on the value of the underlying position should Intel’s shares slip beneath the effective breakeven price of $18.80 in the next year to expiration. The investor is protected even if shares of the semiconductor chip producer collapse down to $12.50 by January of 2011.
FXI – iShares FTSE/Xinhua China 25 Index Fund – Shares of the exchange-traded fund, which invests in twenty-five of the largest and most liquid Chinese companies, are down 0.75% to $38.27 with just under one hour remaining in the trading session. FXI’s share price has declined nearly 15% in the past few weeks, from a 2010 high of $44.53 on January 6, 2010, down to an intraday low today of $37.89. One option trader’s actions in the March contract today suggest he has had enough of the downturn, and is looking for a sharp rebound by expiration in two months. The investor initiated a three-legged combination play using both calls and puts on the fund. It appears the main portion of the trade is a ratio-bullish risk reversal involving the sale of 5,000 deep in-the-money put options at the March $41 strike for a premium of $3.66 each, spread against the purchase of 10,000 calls at the same strike for $0.70 apiece. The purchase of 10,000 puts at the March $35 strike for $0.85 each rounded out the third leg of the transaction. The investor pockets a net credit of $0.56 per contract on the trade, which he keeps if shares rally up to $41.00 by expiration. Additional profits accrue to the upside if shares bounce 7.15% higher to…
Yen ETF Options Play Suggests Eternally Cheaper Currency
by Phil - January 8th, 2010 4:24 pm
Today’s tickers: FXY, EEM, PEP, TEVA, TIF, UPS & X
FXY – Japanese Yen Shares – The exchange-traded fund, which seeks to mirror the price of the Japanese Yen, is trading more than 0.50% higher today to stand at $107.12 in the aftermath of employment data undermining the U.S. dollar. Options activity in the March contract this morning suggests the price of the Yen may decline in the next couple of months. One Yen-bear sold call options in the March contract in order to finance the purchase of a put spread. The investor sold 10,000 calls at the March $110 strike for a premium of $1.20 per contract. The put spread involved the purchase of 10,000 puts at the March $105 strike for a premium of $1.70 each, marked against the sale of the same number of puts at the lower March $100 strike for $0.40 apiece. The net cost of the three-legged combination trade amounts to just $0.10 per contract for the investor. Thus, from a pure options standpoint (assuming no underlying position in shares), the investor stands to accumulate maximum potential profits of $4.90 per contract in the event that shares of the FXY plummet to $100.00 by expiration in March. FXY’s share price must decline 2% to $104.90 before the trader breaks even on today’s transaction.
EEM – iShares MSCI Emerging Markets Index Fund – Shares of the emerging markets exchange-traded fund are up less than 0.50% today to $43.01. Near-term pessimistic sentiment clouded the February contract as one investor initiated a ratio put spread on the fund. It appears the trader purchased 5,000 puts at the February $40 strike for an average premium of $0.69 apiece, marked against the sale of 10,000 puts at the lower February $35 strike for roughly $0.17 each. The ratio spread results in a net cost of $0.35 per contract. The investor responsible for the spread is likely holding a long position in the underlying stock. In such a case, the value of the share position is protected if EEM’s shares decline 8.5% from the current price and breach the effective breakeven point at $39.65 by expiration next month.
PEP – PepsiCo, Inc. – Global beverage, snack and food company, PepsiCo, received an upgrade to ‘buy’ from ‘hold’ at Edward Jones today despite slight share price declines of less than 0.50% to $60.76. Bullish investors initiated a couple of different strategies…
PSW Rewind of 2009 – The First Quarter
by Phil - January 1st, 2010 2:42 pm
Thursday’s close was very exciting, wasn’t it?
Well it sure was for us as my 10:01 Alert to Members was a play on the DIA Jan $103 puts at .56. Thanks to the late afternoon dip, they finished the day at .90 (up 60%) after peaking out at .95, a very nice win to close off the year. That was the only Alert trade all week as this market has been too tough to call and we don’t make trades just for the hell of it. I had been sniping at DIA puts all week expecting a pay-off but Thursday it finally came together.
Of course, I also strongly advocated hedging on Thursday morning and listed 4 trade ideas in the morning post to hedge ourselves against the possibility of just such a drop so don’t say you haven’t been warned. Whether there will be follow-through on Monday or a full reversal remains to be seen and, even if I knew, I wouldn’t tell you here because this is a review – predictions are another article entirely.
We treaded very cautiously into last year because our PSW Holiday Retail Survey was not looking very pretty so it was no surprise to us, on Dec 26th, when we got some horrific retail reports. These are, of course, the same reports that we "beat" this year – but not by much. Dec 29th was Monday and Israeli jets attacked Hamas targets in the Gaza sending oil flying up to $48 a barrel. That gave us a nice commodity rally into the close of the year but January 2nd was a Friday and we decided (fortunately) to take the money and run on our long plays, holding open our main cover of SKF Jan $120s at $4.35, which hit $80 later in the month (up 1,732%) and USO Feb $32 puts at $3.40, which hit $10.50 in the Feb dip (up 208%) so, on the whole, not too differently positioned than we are now, coming into the new year. Visually 2009 looked a little like this:
January – Waiting for Obama, or Something, to Change
We began January much the same way we ended December with my Wed Jan 7th comment being: "We call it "Testy Tuesday" for a reason and our 5% rule was tested twice during the day but the market failed to…
Bear Play on Silver ETF
by Option Review - December 29th, 2009 4:08 pm
Today’s tickers: SLV, BAC, TZA & X
SLV – iShares Silver Trust – It looks as though commodity traders have it all to play for in 2010. Raw materials prices had surged especially late in 2009 as they felt the tailwind of a declining dollar. However, an abrupt about-face helped pull the rug and several commodity prices went into a tailspin. The irony here is that it’s a strengthening global economy backed by evidence of rising demand for industrial inputs that has lifted silver and copper prices independently of the hoarding for the precious yellow metal, which grabbed all the headlines recently. Shares in the iShares Silver trust, meant to track the price of an ounce of silver are still holding well above last week’s $16.64 low, although are down today at $16.83. One investor appears to have extended protection against a fall in the price of silver by selling almost 40,000 January put options and buying the same amount of contracts in the February contract. We don’t know whether the investor is already commodity bullish and just aims to protect unnecessary losses in the event of a sudden dollar upturn, or whether this is an outright bet that the commodity rally is overdone. If the latter is the case, the investor will benefit in the event of a 10.8% decline in the price of the ETF. The option market tells us that there is a 16% chance of that happening by expiration in February.
BAC – Bank of America – Shares at the banking behemoth are 0.7% lower today at $15.18 and although implied options volatility is hardly changed at 33.6%, it does appear that the at-the-money straddle has been sold somewhat during this morning’s trade. The volume patterns at both January $15 strike calls and puts appears married and there is actually heavier volume on the put side where sellers raked in average premiums of around 31 cents during the morning. In the middle of December shares recorded a low at $14.83, while we need to glance all the way back to the start of November and well before the announcement of BoA’s new chief executive to see weaker price action that drove its shares down to $14.21. Naked selling of put options at today’s premium dictates a breakeven share price at expiration of $14.69, which is effectively where today’s put sellers are buying shares in the event…
German
Spanish
French
Italian
Portuguese
Japanese
Korean
Russian
Chinese
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
(