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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Wintery Wednesday - Are We Now Corrected?
by Phil - February 10th, 2010 8:21 am
Was that it?
A 10% correction (David Fry chart on right) and we’re done? If so, this is still a fairly bullish market, and it should be, as our sell-off last year was, beyond a doubt, way overdone. Often people forget the fundamentals of investing and the biggest fundamental of them all is: "Where else are you going to put your money?" There many fine companies out there with P/E ratios that are below 15. That means if you give them a dollar, they will return 6.6% in earnings. IBM has a PE of 12, which is an 8.3% return on my money and, according to projections, that will improve to 11 next year, generating 9 cents for each dollar I give them.
Call me an optimist but I think IBM is a fairly safe place to keep my money. Perhaps as safe as 4% TBills, or 7% Greek bonds or 3% Yen Notes or, Heaven forbid, a bank! In fact, not many banks are paying 1.8% on your deposits but IBM does through dividends. IBM was my example trade in the Weeekend Wrap-Up so I won’t get into strategies here but that is what our whole Buy List is about - picking up great long-term values and hedging them to even more effective entries.
Not every stock is as rock solid as IBM but (going back to the Wrap-Up) who did we buy when the chips were down last week? C, CCJ, TBT, GOOG, XLF, AAPL, AMED, CSCO, TM, LOW, AKAM, LLY, NLY, GE, TNA, USO, ABX, DELL, FXI, UYG, BRK/B. Not exactly a radical collection of picks is it? Yesterday, with the market up 2.5% from our shopping spree - we bought NOTHING. Part of the "buy low - sell high" philosophy is waiting for the market to be either high or low. Two weeks ago, on Jan 29th, I charted 10,058 on the Dow as a critical support line and, from our Buy List Update this weekend, I put up the following chart for Members:
And where did we finish yesterday on the Dow? 10,058. See, this charting thing is easy - that’s why I don’t usually bother, it’s dullsville! Let’s now turn our attention to our other major levels of 10,165 and 10,300 which, keep in mind, is nothing more than our predicted "weak bounce" off the drop from 10,700. As I said in the above chart, we can expect to be "tight and bouncy," which is what we’re seeing this week as…
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Weekly Wrap-Up, it’s Only a 55-Point Drop You Wimps!
by Phil - February 7th, 2010 12:19 pm
That’s right, I said WIMPS!
I have never heard so much whining and crying and complaining about a market drop as I have the past few weeks. Last week, I pointed out that we had only fallen 105 points from the prior week (10,172 to 10,067) and this week we fell ALL THE WAY to 10,012 to finish the week and you would think the world was ending (again) from the way the MSM has been acting.
By Friday the panic was palpable as we gave up Monday and Tuesday’s bogus gains to test new lows for the year - testing, in fact, the lowest levels the market has hit since last November and I pointed out in Friday’s post that it reminded me of when BSC and LEH went under and everyone panicked and sold Financials off to the point where Warren Buffet was willing to give GS $5Bn AFTER they bounced 50% - THAT’s how undervalued the financials were in November of 2008.
What do we do while people are panicking? We BUY! We don’t BUYBUYBUY like Cramer’s Pavlovian Peons but we sure do BUY and take some nice entry positions with sensible hedges. I was finally motivated to finish updating our Buy List on Friday and 18 of our 38 positions were highlighted (immediately actionable) on Friday. Sure they may go lower, but we’re buying them with 20% buffers built into the positions and then we can double down if they drop 40% (back to Nov 2008 lows) and then we’ll have our entries down 10% from the lowest levels of the past decade or so that we can hold until the next decade - what’s there to panic over?
If I wanted to buy IBM in January but thought it was a little pricey at $134, why would I not be HAPPY to have the opportunity to make an enty at $122, back at where they were pre FABULOUS October earnings? I can buy IBM for $122 and take advantage of the panic-induced VIX at 26 to sell July $125 calls for $6.60 and the July $120 puts for $6.65 for a net entry of $108.75 with a call away at $125 for a $16.25 profit (15%) in 5 months. If IBM should fall below $120, we will have a second round of the stock put to us as $120 for an average entry of $114.38, another 6.2% lower than it is now. If we were more worried, we…
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Long-Term Bullish Spread Unfolds On IBM
by Andrew Wilkinson - January 25th, 2010 4:39 pm
Today’s tickers: IBM, XLF, TXN, XLF, CTXS, EBAY, HAL & FITB
IBM – International Business Machines Corp. – A long-term bullish transaction on IBM suggests one investor is positioning for a significant boost in share price at the computer services firm by expiration in January 2011. IBM’s shares are trading 0.75% higher this afternoon to $126.47. The optimistic trader purchased a ratio call spread on the stock, buying 5,000 calls at the January 2011 $135 strike for an average premium of $6.24 apiece, and selling 10,000 calls at the higher January 2011 $150 strike for a premium of $2.33 each. The net cost of the ratio spread amounts to just $1.58 per contract. Thus, the trader accrues profits if IBM’s shares rally 8% over the current price to surpass the breakeven point at $136.58 by expiration next year. Maximum available profits of $13.42 per contract amass only if shares surge 18.60% to $150.00. IBM’s shares must increase to a new 52-week high in order for the investor to break even on the transaction. The current 52-week high on the stock is $134.25, attained back on January 19, 2010.
XLF – Financial Select Sector SPDR – Option traders continue to initiate bearish strategies on the financial ETF today despite the 0.90% rebound in shares of the underlying to $14.31. Earlier we reported a June $14/$10 ratio put spread, which established downside protection beneath a breakeven share price of $13.30. This afternoon we observed a similar transaction take place. Another pessimistic investor purchased an even larger ratio put spread in the June contract. It looks like this individual bought 27,500 puts at the now in-the-money June $15 strike for an average premium of $1.52 apiece, spread against the sale of 55,000 puts at the lower June $12 strike for about $0.39 each. The net cost of the ratio transaction amounts to $0.74 per contract, and provides downside protection beneath a breakeven share price of $14.26.
TXN – Texas Instruments, Inc. – Chipmaker, Texas Instruments, is scheduled to report fourth-quarter results after the closing bell this afternoon, and although analysts expect the firm to post profits of $0.49 per share on a 19% increase in sales, option traders initiated near-term protective plays. Shares of the semiconductor company are up 1.80% to $23.52 ahead of earnings. One investor established a bearish risk reversal by selling 5,000 calls at the February $24 strike for a premium of $0.50 apiece, spread against…
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Weekend Wipe Out - All the Way Back to Mid-November Lows!
by Phil - January 23rd, 2010 11:36 am
Well I hate to say I told you so but…
No wait, that’s nonsense - what market prognosticator doesn’t love to say "I told you so"? Actually, it’s kind of my job to tell you so and the reason I’m so popular is because, more often than not, when I tell you so, I tend to be right. I’m not right all the time and my single biggest flaw is I am often right but sometimes way too early and timing is EVERYTHING in the markets. It’s not good enough to tell you what is going to happen (give things enough time and everything happens eventually, right Cramer?) - I need to get the period right as well so we can turn it into an actionable trading idea that makes money.
As a fundamentalist, I didn’t like the entire last 500 points of the rally. I had predicted the market would finish the year at 10,200 way back when it was down at 8,650 when the idea was we’d have a Santa Clause rally to 20% (10,380) and then a 20% pullback of that run (346) into Jan earnings that would take us back to 10,034 so the entire run from 10,200 to 10,700 REALLY annoyed me. It didn’t annoy me just because it made me wrong - I’m wrong a lot and I’m old enough to have learned how to deal with it. What annoyed me was the manipulation as, clearly, the fundamentals in no way, shape or form justified the additional 5% move up.
I’ve gone on and on about how fake the move was and how manipulated the markets were and how artificial the support was and I think I’ve pulled out the Seinfeld "fake, Fake, FAKE" clip often enough now that I don’t even have to do a link (but I love it, so I do) or explain how it’s a metaphor for recent market activity so I’m not going to waste our valuable time here. Let’s just do a review of the recent action, which is my best way of preparing for the upcoming Members only post where I’ll be charting out new levels and coming up with action plans for the week ahead.
So don’t read this if you can’t stand to hear "I told you so" because this is the review post and I did tell you so!
When did things go wrong? Clearly they were wrong for ages but when did things go wrong enough that they…
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Capital One Bears Out in Full Force in Options Land
by Andrew Wilkinson - January 22nd, 2010 4:29 pm
Today’s tickers: COF, CAT, XRT, XLY, XLB, XLF, KRE, BRK.B, MCD & ISRG
COF – Capital One Financial Corp. – Better-than-expected fourth-quarter earnings of $0.83 per share, which blew straight past average analyst estimates of $0.45 a share, failed to shield the stock from the massive beating received during the trading session. Shares plummeted 11% to an intraday low of $38.18 after analysts at FBR Capital Markets slashed their forecast for COF’s earnings. FBR analysts cited “shrinking margins and new U.S. credit-card regulations” as reasons for the reducing earnings estimates according to one Bloomberg article released this morning. Bearish option traders are out in full force, populating both the call and put sides of the stock with pessimistic transactions. Investors purchased put options as low as the February $35 strike where 1,200 contracts were picked up for an average premium of $0.57 apiece. Traders long the puts are perhaps bracing for an additional 9.80% shift down in the price of the underlying to the breakeven point on the puts at $34.43 by expiration next month. Approximately 2,000 nearly in-the-money puts were purchased at the higher February $38 strike price at an average premium of $1.46 apiece. Call selling added to the bearish picture as some 2,100 contracts were shed at the out-of-the-money February $40 strike for a premium of $1.43 per contract. Finally, one trader initiated a pessimistic stance in the January 2012 contract. Perhaps this investor believes today’s turmoil is just the beginning of Capital One’s troubles, or, alternatively, the trader may simply be looking to keep the dollar credit on the following transaction. The trader purchased 1,500 puts at the January 2012 $30 strike for a premium of $4.36 each, spread against the sale of 3,000 puts at the lower January 2012 $25 strike for which he received $2.68 apiece. The investor pockets a net credit of $1.00 per contract on the spread, which he keeps if shares settle above $30.00 by expiration.
CAT – Caterpillar, Inc. – Surprisingly bullish trades befell machinery maker Caterpillar today. CAT’s shares commenced the trading day with higher shares, but slipped lower during the session, and currently reside 1.35% lower on the day at $56.09. Investors expecting shares to recover by expiration in March shed 5,000 in-the-money put options at the March $57.5 strike for an average premium of $3.76 apiece. Open interest at that strike of 5,169 lots suggests this transaction could be a closing…
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Ford Call Options Gone Wild as Bulls Populate January 2011 Contract
by Phil - January 7th, 2010 4:31 pm
Today’s tickers: F, IPG, MBI, DAL, XLF, XHB, CROX, GME, BBBY & NVTL
F – Ford Motor Co. – Yesterday we reported on a short strangle play, which implied the automaker’s shares would likely remain within the realm of $10.00 to $12.00 for the next six months to expiration in June 2010. Today we observed bullish options activity in the January 2011 contract, which points to significantly higher shares for Ford in the next twelve months. The stock rallied again today, gaining 2% to reach a new 52-week high of $11.60 with just under 30 minutes remaining in the session. Bullish indications came in the form of a call spread and plain-vanilla call buying strategies. It looks like one investor purchased a large chunk of 50,000 calls at the January 2011 $17.50 strike for an average of $0.58 apiece. The trader responsible for the transaction benefits from this position only if Ford’s shares explode 56% over the current price to surpass the breakeven point at $18.08 by next January. The parameters of the call spread also implies a significant increase in shares of the motor company by 2011, but the nature of the spread limits upside profit potential, whereas the plain-vanilla call buyer’s profits are potentially limitless. The investor responsible for the spread selected the more conservative January 2011 $15 strike to purchase approximately 6,000 calls for an average premium of $1.06 per contract. The other half of the debit spread involved the sale of the same number of calls at the higher January 2011 $22.50 strike for about $0.20 each. The net cost of the bullish play amounts to $0.86 per contract and positions the investor to accrue profits above the breakeven price of $15.86. Maximum potential profits of $6.64 per contract are available to the trader if Ford’s shares rally a whopping 94% from the current value to $22.50 by expiration in January of 2011.
IPG – Interpublic Group of Companies, Inc. – A long straddle strategy initiated on the advertising and marketing company implies one investor expects greater volatility in the price of the underlying through expiration in February. The inherent nature of the long straddle suggests shares of IPG may swing dramatically in the next few weeks. Interpublic’s shares are currently off 2.5% to stand at $7.27 in afternoon trading. The straddle-player purchased about 2,000 puts at the February $7.50 strike for an average premium of $0.55 apiece and bought…
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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 break out despite what seemed to be a contrarian rally to Fed minutes that I summarized to members at 2:02 as "BAD!!!!" I set a…
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Option Traders Try Their Luck with Out-of-the-Money Calls on MGM Mirage
by Andrew Wilkinson - December 23rd, 2009 4:13 pm
Today’s tickers: MGM, EWC, EWZ, DHI, XLF, GLW, TRA, CF, PHM, GFI & EBAY
MGM - MGM Mirage, Inc. – Shares of casino resort operator, MGM Mirage, rallied 5.25% this afternoon to $9.62. Option traders expecting shares to rally significantly in the next 12 months bought call options in the January 2011 contract. Approximately 20,000 calls were purchased at the January 2011 20 strike for an average premium of 70 cents per contract. Investors break even on the calls if MGM’s shares more than double by expiration. Shares must rally at least 115% to the breakeven price of $20.70 in order for call-buyers to begin to accumulate profits.
EWC - iShares MSCI Canada Index ETF – The exchange-traded fund, which mirrors the performance of publicly traded securities in the Canadian market, attracted pessimistic option players. The bearish risk reversal established on the fund contrasts with the nearly 1.5% rally in shares of the underlying to $26.30 during the session. It appears one investor sold 12,500 calls at the June 27 strike for a premium of 1.60 each, spread against the purchase of the same number of calls at the lower June 26 strike for two dollars premium apiece. The net cost of the reversal amounts to 40 cents per contract. Profits on the trade – assuming the investor holds no underlying stock position – accrue if shares of the EWC slip beneath the breakeven point to the downside at $25.60 by expiration in June 2010.
EWZ - iShares MSCI Brazil Index ETF – A number of bullish trades on the Brazil exchange-traded fund today suggest shares of the EWZ are set to rally in the first few months of the new year. Shares edged 1.5% higher during the trading day to stand at $73.21. Optimistic traders employed a number of different option strategies in order to position for bullish movement in the price of the underlying stock. One trader initiated a risk reversal in the January contract by selling 6,000 puts at the January 72 strike for 1.80 each, spread against the purchase of 6,000 in-the-money calls at the same strike for 2.70 apiece. The cost of getting long the call options is reduced to 90 cents per contract for the reversal player. Profits on the position amass above the breakeven price of $72.90. Another option bull unfurled the wings of a butterfly spread in the March contract. The trader purchased the 1000-lot wings of the…
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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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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
(