Covered-Call Sellers Make Note of Exits on American Airlines Parent Corp.
by Andrew Wilkinson - March 9th, 2010 4:14 pm
Today’s tickers: AMR, AIG, C, GME, HD, XLP, ALL, CMC, QLGC & YUM
AMR - AMR Corp. – Bullish investors engaged in covered-call selling on AMR Corporation this afternoon after its subsidiary, American Airlines, revealed February passenger unit revenue increased between 6.5% to 7.5% as compared to roughly the same time a year ago. The so-called buy-write strategy took off amid an 11% rally in the price of the underlying stock to $9.93. Options traders sold approximately 16,300 calls at the March $11 strike for an average premium of $0.09 apiece, and simultaneously purchased an equivalent number of AMR-shares when the stock was trading at approximately $9.84 each. The net price paid per AMR-share amounts to $9.75 apiece because of the $0.09 per contract financing provided by the sale of the call options. Investors utilizing the buy-write strategy are positioned to accumulate maximum potential gains of 12.82% if shares rally through $11.00 by expiration day. The covered-calls provide an effective exit strategy for investors, who walk away with 12.82% profits if AMR shares rally to $11.00, and if the underlying shares are called from them at expiration.
AIG - American International Group, Inc. – Insurance firm, American International Group, already reported plans to sell two units for $51 billion, but speculation that it may sell additional assets sparked rampant options trading activity on the stock this afternoon. Shares surged more than 18% to $34.34 at times during afternoon trading. Options investors exchanged more than 224,000 contacts on AIG as of 2:30 pm (ET), and traded more than two call options on the stock for each single put option in play. Two-way trading traffic in out-of-the-money call options is evident, but it looks like – in most cases – more calls are being purchased than sold. The nearest-to-the-money March $35 strike had more than 37,000 calls trade today versus that strike’s previous existing open interest of just 12,297 contracts. More than 12,300 calls were purchased for an average premium of $0.89 apiece. The higher March $40 strike had 12,900 calls picked up by bullish individuals who paid an average $0.25 premium per contract. Finally, the March $45 strike attracted buying interest in the amount of 3,200 calls for an average premium of $0.18 each. More than 7,000 contracts changed hands at the March $45 strike, which trumps existing open interest of just 2,489 lots. It is likely that a large portion of today’s trading activity…
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$5,000 Portfolio Update - Week 6 - $5,614
by Phil - August 15th, 2009 4:04 am
Well we’re back to cash…
After getting off to a great start, up 12% in the first 3 weeks, we were lucky this week to get back to 12% after having a run of bad luck (or bad skill actually, as we went bearish too early and got punished for it). The goal of the $5,000 portfolio is to play around the volatility of earnings and make no mistake, it’s a high-risk way to trade $5,000 and is meant to be a small portion of a large portfolio - not something you would want to do with your only $5,000. Of course the usual disclaimer is, this is a virtual portfolio, don’t try this at home, trading is dangerous, always consult a professional financial adviser, etc, etc. The idea is to practice different option strategies and we’re learning from our successes and failures - I hope!
Our first play 5 plays that we closed were on AA, DIA, SGR, MCD, and DELL, which had a total gain of $629 in our first 6 days. For details on those trades, go to the Day 6 post. We have been posting all of the moves for the $5KP in member chat, of course, but also on Seeking Alpha’s Stock Talk, where we have discovered the added bonus that, like Twitter, you do not have to refresh the page to see new comments! If you want to follow these trades, just click on "Follow" under my picture and you will automatically see any comments made there. A full review of Stock Talk commentary regarding the $5KP is available here and please make sure you click "Follow" on my picture so that you will be able to track further updates.
We closed positions on WFC and AXP, up $258 in our last review on July 25th and we have since closed our YUM position with a $256 loss on the 28th, which was a shame as we gave up on 8 Aug $35 calls at .45 ($360) and they flew up to $2 ($1,600) just a week later. Unfortunately, in a small portfolio, you don’t have the luxury of riding out your losses and, at the time, we felt lucky to escape this underperfomer with a relatively small loss.
A VNO put spread we couldn’t fill the week of the 21st, was an easy fill the next week and 3 Sept $50 puts were in at $3.70 ($1,110) and 3 Aug $50 puts were sold for $2.90 ($870). The premise of this play is a tough one to hold on through as we expected VNO (and all commercial realty) to…
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Which Way Wednesday - Beige Book Edition
by Phil - July 29th, 2009 8:30 am
Today we get the "anecdotal" information on the current economic conditions from each of the twelve Federal Districts, we find these reports very useful as they tend not to be sugar-coated and the last BBook release (June 10th) marked a clear top to the the last round of irrational market exuberance when there was no significant improvement in the Fed’s outlook despite the market having rallied 10% in the month leading up to it.
That’s all it takes to pop a bubble - the simple lack of additional air. Members would do well to review the comments of that day as we got a quick read on the Book, which backed up our generally toppy view of the market and we jumped right on POT $105 puts for $1.15 at 2:03 as I had been targeting them as the most ridiculously overpriced stock and my quick read from the Fed confirmed it. POT fell from $117.88 that day to $92.72 on expiration day and bottomed out at $82 on July 13th. This is the way to play the Beige Book, you need to have a premise that is either confirmed or denied by the facts and you can make a play accordingly but you can’t simply REACT to the information, it can quickly be too late by the time you figure out what to do. Having a plan and alternatives based on various outcomes allows you to take advantage of market data as it comes out. That’s why we get so excited when we get our Beige Book!
BBook days are often market movers. This year’s Books came out Jan 14th (down 250), March 4th (up 100 ahead of huge drop) and April 15th (up 100) and June 10th where we went down 130, up 100 and finished the day back down just 24 points. Going back to my June 10th post, I see a lot of similarities, including the China bubble - which I also said was overdone at that time ahead of a 2,000-point pullback that began on the 12th. Oil was $71.50 that morning and it’s "just" $65.50 now and that’s a ray of sunshine if it heads lower. That was also the day I called for a class action suit against GS for their blatant manipulation of the energy markets - something I still have not found a law firm brave enough to take on!
I sent out an extensive review of the Beige Book in a 2:35 Alert to…
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$5,000 Portfolio Update - Week 3 - $5,598
by Phil - July 25th, 2009 8:25 am
We’re up 12% in 3 weeks - not bad…
The goal of the $5,000 portfolio is to play around the volatility of earnings and make no mistake, it’s a high-risk way to trade $5,000 and is meant to be a small portion of a large portfolio - not something you would want to do with your only $5,000. Of course the usual disclaimer is, this is a virtual portfolio, don’t try this at home, trading is dangerous, always consult a professional financial adviser, etc, etc. The idea is to practice different option strategies and we’re having a a very exciting first few weeks!
Our first play 4 plays that we closed were on AA, DIA, SGR, MCD and DELL, which had a total gain of $629 in our first 6 days. For details on those trades, go to the Day 6 post. We have been posting all of the moves for the $5KP in member chat, of course, but also on Seeking Alpha’s Stock Talk, where we have discovered the added bonus that, like Twitter, you do not have to refresh the page to see new comments! If you want to follow these trades, just click on "Follow" under my picture and you will automatically see any comments made there.
On Wednesday, we also had an open a ratio backspread play on YUM and we sold 6 Aug $37 calls for $1.15 ($690) and bought 4 Aug $35 calls for $2.20 ($880). The idea of a trade like this into earnings is that a large drop will hurt your callers more than it hurts you and, to the upside, you have net $800 in the net $190 spread before you have to pay your 2 open callers a penny. That means they would each have to go up $3 before wiping out your profits. Since YUM was at $36 at the time and we did not feel it would be likely to go to $40, even on great earnings, the play made sense. YUM had very poor earnings and dropped right down to $34, below our strike. We decided to buy back the 6 Aug $37 calls for .40 ($240), so a gain of $450 on that leg. That left us with the 4 naked Aug $35 puts, which we paid $880 for, less the $450 gains so we are in those 4 calls for an average of $1.13 per contract. We have since doubled down that position at .40 leaving us with 8 at an average entry of .77 per contract. Currently, they are trading at .50 so we are down $216 on this…
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$5,000 Portfolio Update - Day 9 - $5,424
by Phil - July 17th, 2009 6:16 pm
We had a pretty good week with our new portfolio.
The goal of the $5,000 portfolio is to play around the volatility of earnings and make no mistake, it’s a high-risk way to trade $5,000 and is meant to be a small portion of a large portfolio - not something you would want to do with your only $5,000. Of course the usual disclaimer is, this is a virtual portfolio, don’t try this at home, trading is dangerous, always consult a professional financial adviser, etc, etc. The idea is to practice different option strategies and we had a very exciting first week!
Our first play 4 plays that we closed were on AA, DIA, SGR, MCD and DELL, which had a total gain of $629 in our first 6 days. For details on those trades, go to the Day 6 post. We have been posting all of the moves for the $5KP in member chat, of course, but also on Seeking Alpha’s Stock Talk, where we have discovered the added bonus that, like Twitter, you do not have to refresh the page to see new comments! If you want to follow these trades, just click on "Follow" under my picture and you will automatically see any comments made there.
On Wednesday, we also had an open a ratio backspread play on YUM and we sold 6 Aug $37 calls for $1.15 ($690) and bought 4 Aug $35 calls for $2.20 ($880). The idea of a trade like this into earnings is that a large drop will hurt your callers more than it hurts you and, to the upside, you have net $800 in the net $190 spread before you have to pay your 2 open callers a penny. That means they would each have to go up $3 before wiping out your profits. Since YUM was at $36 at the time and we did not feel it would be likely to go to $40, even on great earnings, the play made sense. YUM had very poor earnings and dropped right down to $34, below our strike. We decided to buy back the 6 Aug $37 calls for .40 ($240), so a gain of $450 on that leg. That left us with the 4 naked Aug $35 puts, which we paid $880 for, less the $450 gains so we are in those 4 calls for an average of $1.13 per contract. The calls have fallen to .70 so we are down .43 on those ($172) so far. While we do feel that YUM is still a good value, our concern is…
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Working Class Thursday - Show Us the Jobs!
by Phil - July 16th, 2009 8:24 am
Jobs, jobs, jobs!
That’s what it’s all about, or not about today. Last week we got much better than expected numbers as Job losses fell from 640,000 to 565,000 but how much of that was due to the July 4th holiday weekend we will see this morning. Analysts have quickly lowered their expectations to match last week’s figure (as they don’t have a clue of their own) and now we are expected to lose "only" 550,000 jobs this morning - still a 6.6M annual pace so keep that in mind should the markets decide to "celebrate" that number. Looking at the chart, you’ll see that July of ‘08 had a sharp downturn in Job losses as well, down from 400,000 to 350,000 with July 4th celebrated on a Friday last year too. Those reports arrested a slide in the Dow from 13,000 in May to 11,000 in mid-July and the market ran back to 11,800 on Aug 11th and we held around 11,500 until things fell apart in September and we fell all the way to 8,000. I know - history is just soooooo boring, what could possibly be learned from it?
Yesterday was an amazing day as we ran right up to the target levels I predicted on Monday, which I reiterated in yesterday’s morning post, saying: "Our upper targets to break the dreaded head and shoulders pattern are: Dow 8,500, S&P 930, Nasdaq 1,825, NYSE 6,000 and Russell 510." We had what we call a "Free Money Day" as the markets went up and up and up some more with the Dow topping out way up at 8,620, a 6.4% move off the bottom, which is just about a 20% retrace of the 33% drop so, of course, we shorted it! The S&P made it right to 932 and finished there, up 7.1% since Friday. The Nasdaq made it all the way to 1,860 after gapping just over our target at the open, up 6.9% for the week. The NYSE hit 6,000 on the nose and finished just under it - up 7.1% while the Russell over-achieved to 515, up 8.4% in 3 days.
As I mentioned yesterday, just because we made our targets, we are not automatically expecting a "breakout." We are not happy with the WAY in which we got here - a short rally on fairly low volume leaves what I call an "air pocket" below the gains as there is little support. …
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Brazilian Markets Beckon Option Bulls
by Andrew Wilkinson - July 15th, 2009 5:28 pm
Today’s tickers: EWZ, NOK, YUM, EXPE, CY & COF
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Will We Hold It Wednesday? Industrial Production Edition
by Phil - July 15th, 2009 8:27 am
Whee, this is great!
Any excuse to take the markets higher and INTC was a good one last night. We’re thrilled because my 2:43 Trade Idea for members was "INTC Jan $17.50s for $1.28, speculative naked call with earnings tonight." We don’t do those very often but we looked primed for a pop and not much was expected from Intel, who were still expected to earn just 8 cents this quarter by the 44 analysts who are paid to follow them, despite the fact that they earned .11 last quarter (an 8-cent upside surprise) and had earned .28 last year in Q2. That made the long call an excellent play since we were also willing to stick with them and add to the position if INTC had missed. As it is, that should give us a nice 50%+ pop this morning!
Other trades ideas from yesterday’s Member chat were a GS put spread, AIG puts (and we can’t wait for "earnings" on them!), DIA puts and calls as momentum plays, a YUM ratio backspread for the $5,000 Portfolio and a JPM bear put spread. So we weren’t overly enthusiastic in the run-up, mainly because we loaded up the truck in last week’s dip with 18 bullish plays that I reviewed in the weekend wrap-up. So we are looking for short plays to defend ourselves until we are sure what we have here is more than the proverbial "dead cat bounce" off our 33% retrace (which I discussed in Monday’s post). As I mentioned in yesterday’s post, our upper targets to break the dreaded head and shoulders pattern are: Dow 8,500, S&P 930, Nasdaq 1,825, NYSE 6,000 and Russell 510. We’re making good progress but nothing would be worse than failing this breakout and confirming the downward pattern so it will still be a tough week to get through, especially with todays manufacturing data, which we are concerned about.
I think David Fry summed it up for the skeptic’s camp yesterday saying:
The AP headline today read: “Goldman Sachs’ $2.7B profit shows the firm’s prowess.” Good Grief! You have to hand it to Da Boyz, they know how to bedazzle Main Street. Anyone with a HAL 9000, their bad debts taken off their books, billions in public money to trade and most of their competitors (Bear Stearns and Lehman Bros.) eliminated should do just dandy. “Prowess”? My okole!
INTC did indeed have good earnings (if you throw out that pesky $1.8Bn monopoly settlement, of course) but they…
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$5,000 Portfolio Update - Day 6 - $5,629!
by Phil - July 15th, 2009 7:26 am
We had a pretty good week with our new portfolio.
The goal of the $5,000 portfolio is to play around the volatility of earnings and make no mistake, it’s a high-risk way to trade $5,000 and is meant to be a small portion of a large portfolio - not something you would want to do with your only $5,000. Of course the usual disclaimer is, this is a virtual portfolio, don’t try this at home, trading is dangerous, always consult a professional financial adviser, etc, etc. The idea is to practice different option strategies and we had a very exciting first week!
Our first play was a spread on AA into earnings, initiated Monday at 1:10 with a buy of 3 $7.50 calls for $1.75 ($525), which we later covered with 3 $9 calls at $1.04 ($312). That put us in the $1.50 spread for net .71 and we needed AA to finish next week at $9 to collect our full profit. We bought back the $9 calls on Tuesday, ahead of earnings as they fell to .70 (up 33%), which lowered the basis on the remaining $7.50 calls to $1.42 and we got out of that one the next day as they spiked up to $2.50 in the morning after earnings. Net profit $324.
The second trade we entered was a DIA call play, the $84s, which we entered Tuesday at 10:30 at .70 (5 contracts) and subsequently doubled down at .50 (average basis .60) and again at .42 (average basis .51), sold 10, leaving us with 10 contracts at .51 and got out at .60 on Wednesday’s "stick save" close. Net profit $90.
The third play of the week was SGR and we initiated that one Thursday at 11:12 with a straight spread of 4 $22.50 calls for $3.30, selling the $25 calls for $1.45 for a net entry of $1.85 on the $2.50 spread. Earnings were a miss on SGR but we felt that the sell-off was an overreaction so we took out the $25 calls for .25 (82% profit), leaving us in the $22.50s for net $2.10 ($3.30 entry less the $1.10 profit on the $25 calls). We hit our goal of $2.50 yesterday (7/14) and stopped out with a .40 gain although some hung on as the $22.50s flew all the way to $3.30 in the afternoon. Even at .40 it’s a nice $160 gain.
Our final play of the week was a quickie on MCD on Thursday at 12:27, where we…
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Monday Market Movement - Are We Done at 1/3?
by Phil - July 13th, 2009 7:12 am
There it is!
The Nikkei gave up another 2.5% overnight and is now down 1,000 points for the month of July, retracing 1/3 of the gains since March 10th, at 7,000. The Hang Seng also fell 2.5% (this is why we have rules!) but finishing at 17,254 is down just 1,750 points (10%) since July 1st but also represents a very neat 1/3 retrace off 7,650-point run to 19,000 from the March low of 11,500. I hate to say I told you so (actually, it’s kind of fun sometimes) but the 2 full paragraphs I devoted to playing the FXP (ultra-short China) in Friday’s post are all huge winners, with the July vertical spread looking like a clean double already - how’s that for weekend protection? Don’t be greedy, if we are not heading lower today in the US, it’s a good idea to kill the short-term trade and take the profits off the table.
On a global basis, we need to be concerned with this 1/3 retrace trend as the Shanghai has not gone down much at all off it’s 54% run from March. The Shanghai Composite only fell 1% this morning and has miles to go to match the sell-off of the other indices. Over in Europe, the FTSE is down to 4,125, falling from 4.500 in June (8.3%) after rising from 3,500 in March (28%) so, PRESTO, a 1/3 retrace there too! The DAX is right on the 1/3 line at 4,600 and the CAC is right on the nose after rising from 2,550 to 3,500 (37%) and falling back to 3,100 (12.7%), just about 1/3. Are we sensing a theme here?
The Dow rose from 6,500 on March 9th to 8,800 on June 12th (up 35%) and is now back to 8,150 (down 7.4%) with about 5% more to fall before hitting the magic 33% mark. Call 700 the floor on the S&P with 950 as the top and we have a 35% gain there as well with 880 being a 7.4% drop. Wow, what a coincidence! Only there are no coincidences, just quant trading programs that decide these things long before you read the paper and decide what stocks look good and bad… The Nasdaq was our Icarus index, flying too close to the sun with a 50% move from 1,300 to 1,850 and they are down just 100 points which works out to 15.4% down, a 30% retrace.
We’ll be watching the 1/3 line on the Nasdaq with great…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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