"And now we're back where we started,
Here we go round again.
Day after day I get up and I say
I better do it again.
Where are all the people going?
Round and round till we reach the end.
One day leading to another,
Get up, go out, do it again." – Kinks
That's right, we often talk about various market scams but there is no bigger scam in the world than options expiration day when all the stocks are herded back to prices that benefit the largest number of SELLERS of options while the buyers of options can only stare in shock as momentum shifts and trend-lines break and stock after stock magically settles into a value that wipes out the most possible premium. There is something in options called the "Max Pain Theory" that says that stocks will always settle at the strike where the most puts and calls expire worthless but I think that's a self-fulfilling prophesy as options activity tends to center around the strike as it moves so of course the strike is surrounded by the most options.
What isn't a theory is what we can observe happening time and again. This is why, at PSW, we primarily SELL options, not buy them. Buying options is gambling, selling options is a business! I often point out to members that options is the game in the world where you can be the "house" with no disadvantage. In Las Vegas, you can bet with the house but they still have an edge but in options, there is no edge and day's like this remind us why selling options beats buying them – not EVERY time but certainly OVER time.
Our last option expiration day was June 19th and I will give you today's levels to watch because they are the levels of June 19th: Dow 8,540, S&P 921, Nasdaq 1,827, NYSE 5,934 and Russell 512. All the markets have to do to take out the calls sold that day for a nickel or a dime is to hit those levels at some time today. Of course, anything within 2.5% of those numbers is fine to as you can roll the calls you sold to the next month at no cost, collecting another premium for another month. This is the centerpiece of our Buy/Write strategy, which we discussed last weekend and I will be putting up a new Buy List for Members this weekend as we now have about 30 of those plays from the past two weeks to review.
So all the excitement of the Dow going down 500 and then up 700 is all nothing in the grand scheme of things and we're right back where we were, or close enough to make option sellers happy. And how did we get here? Well mainly it was Meredith Whitney kicking off another media frenzy with her "bullish" change of heart. Since that worked so well the MSM, led by CNBC yesterday, took Nouriel Roubini's latest comments so out of context (causing the 1:30 rally) that he specifically wrote an article complaining about it! This morning, CNBC had the nerve to make fun of Roubini for "changing his tune." Don't forget CNBC is owned by GE, who reported mixed results this morning and need a strong market to keep their shares up around $12.10, where they were on June 19th.
As you can see from David Fry's S&P chart, we are back in the top of our range and our last play in the $5,000 Virtual Portfolio yesterday was as speculative short using the DIA $87 puts at .57 (looking for .80+ today) as we expected some pullback today since we knew that Roubini was being quoted out of context (unlike the sheeple, we actually read the originals) and we also did not expect GE, C and BAC to be thrilling enough to justify a 10% rally on Whitney's say-so. If you want trading ideas for the market, just go back to my June 19th post as I was suggesting members take bullish plays off the table, buy the QID $31 calls and the DIA $86 puts – the only difference is we can now change July to August for our strike month.
Indeed GE, BAC and C were not that thrilling. Don't get me wrong, we are the proud owners of GE and C in our $100K Virtual Portfolio and we are, of course, reaping the benefits of the same manipulation I like to complain about. As I often say: "We don't really care IF the game is rigged, as long as we know HOW it's rigged so we can place our bets accordingly." GOOG had a nice beat but a little light on revenues and we'll see how close they get to June 19th's $420. We had a bullish play on GOOG last week but cashed it out on that run-up ahead of earnings and I'm willing to go bullish again if they give us a nice run back near $400. IBM crushed numbers and I doubt they'll get back to last expiration's $106 today – if they do, I'll buy some! Next week is light on data and our last data point of this week is Housing Starts, which beat expectations by 10% so no excuse for the bulls today not to keep things going if this rally is real.
The rally seemed real enough in Asia, with the Hang Seng running up another 2.5% on the day. The Nikkei was up half a point and the Shanghai held flat, still up 75% for the year – perhaps waiting for others to catch up to 50% gains (Hang Seng needs 21,000, Nikkei has no chance but 50% off the bottom would be 10,500) before making a break for 100% gain. India jumped 3.5% and the Baltic Dry Index added another 5% and is back to 3,500 so expectations, at least, are very bullish in Asia.
EU stocks are up about half a point (9am), a bit off the highs but still fairly happy. Financials are leading day 5 of the rally with the DAX matching the S&P as the top performing market, up 2.5% on the nose since last expiration day. As we expected, NOK posted poor results but they took most of their medicine yesterday as one of the market's biggest losers. Iceland did agree to join the EU after 6 days of debate and that's an encouraging sign. Just ahead of the US open, the dollar is dropping like a rock against the Euro and other currencies and that is, of course, boosting commodities and the broader market, erasing all pre-market losses. Isn't that special?
While we are comfortable getting back to the middle of our predicted range at Dow 8,650 et al, we're not happy with the low-volume super-rally that got us here this week so we will remain a little skeptical and cautious into earnings. The Philly Fed Index was a disaster yesterday, coming in at -7.5 vs estimates of -4.8 and significantly worse than June's reading of -2.2 with zero being the expansion/contraction line. The six-month outlook for general business activity dipped to 51.9 from 60.1 in June. New orders (-2.2) edged in the right direction from a -4.8 reading for June, yet they still haven't tipped into an expansion phase. Shipments, meanwhile, tilted back to a contraction reading at -9.5 versus 2.1 in June. These are not the kinds of numbers you expect to break overhead resistance with….
We'll just have to see which way things go, they are manipulating the currency markets so it seems like the powers that be REALLY want to see a good finish to this week. It really only matters to the Dow how IBM does as they outweigh C, GE and BAC by 4 to 1 in the price-weighted index. The other big Dow movers, XOM and CVX, will be very dependent on whether or not oil can hold $62 for the week. Since last Thursday, the OIH is up 12.5% and the XLE is up 9%. XLE failed our $48.50 breakout yesterday despite the market move and OIH is right at $100 so they make a fun short there with the Aug $95 puts at $3.40 and we can stop out if oil breaks over $62.50 (doubt it). This is a no trade if oil is over $62, which it may be at the open….
Not much trading to do today other than fun, speculative plays on the action. We are going to be well-covered into the weekend with some speculative downside bets, especially if we don't get a pullback in today's action. Next week it's all earnings and little data with 1/3 of the S&P 500 reporting and we will continue to pick our spots in the $5KP but I think we'll give it a pass over the weekend.
CIT/Spider – Now worse than a penny stock…
UNG/Flam – I like it but you are not selling the puts?
DIA/RMM – Sorry that was Aug $86 puts, now $1.81 – making very slow progress.
Hey last chance for DIA $87 puts for .05 for you crazy last-minute shoppers!
Dear Phil,
GOOG 530DEC is at $6 last week while google is around 400.
Now it drops to $4 but google is at 430.
Can I still hold this position?
phil, any thoughts on market for next week?
LOL Phil.. I only have 1 (One) Contract. I’m wondering if i keep to last minute or I sell now and buy an ice-cream to my daughter with the proceeding 🙂
What do you think about GS for next month: I STO Aug $140 put at $4.10, now $2. Take my profit and run or see what next week brings?
After this week, my portfolio is like a race horse that needs to pee — all my bullish diagonals are scrunched up against the callers and about to flip bearish. Badly need a little pull-back here, lol.
BIDU coming in for a perfect landing. Dear BIDU: I love you.
Who, nice volume on MOS
GOOG/Lafitu – That one was supposed to come off at $8. That’s what happens after earnings, big volatility drop. I’d hang on today, see what GOOG looks like next week.
Next week/Foss – We have a correction ahead of us, this is total BS – that’s what I think….
CIT/Spider – Hey, I love Sundays! That’s a winner you can be proud of.
See, DIA $87 puts STILL .10! Although now they look a little better but just 25 mins left!
Phil, how about GE as day traders get out?
wow. digggin the MOS move. What did youdo?
GS/Sunco – Well you are past earnings and looking good so no reason to pay them $1.90 really. Maybe a stop at $3, just in case.
Look at MOS fall!
Volume 243M and starting to get interesting. 8,710 seems to be defended on Dow but if someone big starts selling we could still fall pretty hard so volume is key right now.
GE/B1 – They may get a downgrade. Both GE and IBM got a lot of revenues from government contracts (stimulus) – that’s nothing to base a long-term investment premise on…
Damn, those DIAs hit .05 again! It’s funnny because trying to shake out the put holders they end up making a nice channel between .05 and .10….
Mosaic: Bloomberg is now running another headline saying VALE hasn’t made any offers for fertilizer acquisitions
Dear phil
Own a calendar spread of Sept RIMM 75 calls at 4.5 and Sept 65 puts at 5.5. Have sold Aug 70 calls at 3 and 70 puts at 3.7. Starting to get worried about my Sept 65 puts, which are down about 3 dollars. Agonizing over next step. What is recommended?
I meant for a short term pop on GE ie oversold because of day trading.
Well. I took the 5 cents on the DIA Put.
Those 5 bucks will transform in the happiness of my little girl with her strawberry & chocolate ice-cream. Priceless!
Im not sure if i will tell her about the other 40 ice-creams lost in the same trade, hope not lost to GS-robocop-trader but to some other nice guy doing the same!
xom, looking pretty weak, didn’t react well to oil pump (even if it is fake). buyng some aug 65 xom puts for .91
No volume so no sell-off, just 251M now so 8M in 10 mins. Happy to get that last nickel back on DIA puts now.
Obama is supposed to speak but not showing up.
RIMM/Drum – Remind me later and I’ll take a look.
Well, same old play as usual into the close – amazing 40-pont run on no volume and now probably back to 8,700 on the button to make sure all calls and puts are wiped….
No volume so no sell-off, just 251M now so 8M in 10 mins. Happy to get that last nickel back on DIA puts now.
Obama is supposed to speak but not showing up.
RIMM/Drum – Remind me later and I’ll take a look.
Well, same old play as usual into the close – amazing 40-pont run on no volume and now probably back to 8,700 on the button to make sure all calls and puts are wiped….
No volume so no sell-off, just 251M now so 8M in 10 mins. Happy to get that last nickel back on DIA puts now.
Obama is supposed to speak but not showing up.
RIMM/Drum – Remind me later and I’ll take a look.
Well, same old play as usual into the close – amazing 40-pont run on no volume and now probably back to 8,700 on the button to make sure all calls and puts are wiped….
Damn it, RIMM — I’m a trader, not a witch doctor!
That was strange, first time I got triple comments.
What a finish! 8,745 on not much volume. Very strange with S&P red and everyone else flat – someone is painting a pretty picture on the Dow.
XOM puts/Jo – I like shorting them if they hit $70 again, tough at $68 with oil up.
Well that was loads of fun – have a great weekend everybody!
Sorry to jump in late. What!? You guys leaving?
HPQ pinned at 40.00! I had a covered call July strike $40. Yahoo!
phil,
easy to paint the dow when ibm gives so much leverage. it is bullshit that dow then drives other indexes. what a deal for manipulators!
Feh ! IBM and an APPL upgrade on opex Friday.
Good riddance option writer rally! Now where’s my bourbon..
At 12:38 I said "short away boys" regarding MOS, next time I do that remind me to take my own advice!
Pinning/Cwan – I know, such fun!
I can’t believe that Dow move at the end, that was wild! S&P pinned 940 but I think Mr. Stick just bought Dow stocks into the close, which makes sense as a high volume day means you can’t move the other indexes.
Yes, a great deal high.
LOL Mr. M – You are AMAZING with that superpower of yours! You actually have extremely good instincts but I think you mistake tops for breakouts and that leads to trouble but you seem to catch the inflection point very often.
True, Phil, my top goal for trading is to understand the inflection points better. I’m not always wrong – I called a perfect top on MOS and a perfect bottom on QLD today – but it’s a lot of work just to breakeven! I will continue to listen and learn…
Still can’t believe the week! Outside of possibly May 26th or April 21st, this week, starting with Monday was the most significant save by ‘them’ since March 10th. Just defies belief that it’s possible to move the markets the way they do.
Hehe MrM, you were right and i confess.. i took a look into 55puts after reading your post, but I didn’t jump in. GRRRR.
Never more true than sell the news (or rumor in this case). AND if its run on Opt-Exp day Its a explosive combination!
Well, have a great week end! Cya
– Spider.
reminding you of my 3.43 pm regarding my RIMM spread
I haven’t seen an update on our FXP straddle, unless I missed it. The closeing at $11.37 is close to our short Aug $11 Put. Should we be rolling that to an Aug $10 for a net gain of $.04? (less broker fees of course)
"THEM"/Matt – Don’t forget that "they" only have to nudge a very small portion of the $11Tn in cash that is on the sidelines to greatly influence our $25Tn market. Back when we had a $40Tn market, there was only $3Tn of cash on the side. As I mentioned this week, market pricing is not really efficient, especially on low volumes. IBM went up $5 today and added 40 points to the Dow all by itself (the whole gain) but just 20M shares were traded for $115ish ($2.3Bn).
IBM actually has 1.3Bn shares outstanding and they gained $6.5Bn on the move. If you assume a fairly even number of buyers and sellers in that 20M share turnover today, then it wouldn’t take much of an imbalance to kick the stock up a few bucks if you really wanted to. Heck, if you have one of those fancy Goldman trading boxes, you don’t even need anyone else to trade with, you can just buy 100,000 shares at $110.10 and sell 100,000 shares at $110.09, then buy 100,000 shares at $110.20 and sell 100,000 shares at $10.19 – you lose $1,000 every time and it would take you 50 steps to to get to $115, costing you $50,000 to trade the same $12,500,000 (average) 50 times, accounting for 1/4 of the total IBM volume for the day.
If it weren’t illegal, I would tell you you could do this yourself with a penny stock. It’s not magic, pumpers can’t keep the whole $152Bn (now) company at $115 but look how easy (and cheap) it is for them to make it LOOK like IBM gained $6.5Bn in value today. This is what they do to take what you or I or any rational person may think is negative or ordinary news or earnings and "spin" it to make it look like the investors are loving it.
That’s why the Dow is so scary, IBM, all by itself, accounted for 130% of the day’s gains. AA dropped 2%, AXP down 1%, BA – 1.6%, BAC -2%, CAT -0.5%, DIS -1%, GE – 6%, JNJ flat, KFT -1%, KO -1%, MMM – 0.8%, MRK – 0.7%, MSFT – 0.6%, PFE – 0.7%, TRV – 0.3%, UTX – 0.3%, WMT flat, XOM flat. 18 down or flat.
That’s pretty awful right? Who were the Dow winners that gave them a 32-point gain on the day? CSCO up 2%, CVX 0.3%, DD 0.5%, HD 1%, HPQ 0.8%, IBM 4.32%, INTC 1.6%, MCD 1%, PG 1.29% and VZ 0.3%.
That’s how you give the Dow a 0.4% gain on the day. IBM boosted tech outlook and took CSCO, HPQ and INTC up with it. PG had no news but is a safety stock and a big weight on the Dow at $50 and, with just 13M shares traded today out of 2.9Bn outstanding, think how easy that one is to manipulate in a pinch! Perhaps HPQ and MCD were random up moves – there’s bound to be a couple. Effectively though, all the bulls have to do is jump on good earnings from IBM with a little program trading and they can reliably expect the tech boys to follow and it doesn’t take much else to keep things going. Don’t forget, someone like GS makes broad market bets and if they can goose IBM up 4% and guarantee a payoff on their longer bets – that’s worth hundreds of millions easily….
That’s motive, means and opportunity – case closed!
phil, RHT (redhat) had a BS move up after hours because it is joining the S&P. Any thoughts on shorting it via buying PUTs, or writings calls or other means.
Catching up after a long morning/afternoon of meetings in biotech land….Human Genome – Lupus, stroke are graveyards for drugs. If it works, then more power to ’em. Options volume is crazy there. 10K of $10 Jan10 C and 13K of the $2.5 Aug09P sold. Someone is gonna be rich.
They are mostly computer algo’s and a few of us dopes.
Everyone else has left the casino.
What a joke.
RIMM/Drum – OK so you are in for $10 and you sold $6.70. Your longs are now $6.40 (ouch) and the puts and calls you sold are $7.05 – Ouch! First of all, what went wrong? First of all, your play, if it worked perfectly, would have left you in at net $3.30 with a $75 call (and the Aug $75s are $2.49) and a $65 put (the Aug $65s are $1.02) so you only would have had $3.51 if everything went off without a hitch. The main problem is, by selling calls and puts that were on the money and taking your own positions out of the money, you effectively took on much more premium than your caller and putter.
The caller or putter each had an excellent chance of being $5 in the money to you and, even if you gained $1.50 on the other side, you would still owe the caller $3.50. Since a $5 out of the money call is not worth $3.50 on RIMM, chances are this would not work out. Conceptually, a butterfly calendar spread is a good thing but not for selliing just one month. With one month, starting at $70, you sold a $70 call for $3 over 30 days (.10 per day) while you paid $4.50 for 60 days (.075 per day). BUT BUT BUT you are not taking into account that you also are $5 out of the money. That means your effective premium is $9.50, not $4.50 and, over 60 days, you are losing .16 per day, 60% more than your caller!
That, my friend is a dysfunctional trade! The put side has the same problem. The rule you violate here is that you are buying premium, not selling it. If you are going to take up a neutral stance on a stock for a spread – you damn well better be sure that the premium math is in your favor. Not every stock is good to do this with, you need to find a stock with lower long-term volatility than short-term and you need to make sure you have a selling plan with an excellent chance of paying off your long position, especially if you are out of the money.
RIMM earnings are 9/24 and one trick you should use for positioning is keep your long positions behind the next earnings – that helps you maintain value. The Dec $65 puts are $6.03 (+$3.72) and the Dec $75 calls are $8.30 (+4.18) but they allow you to sell Sept, Oct and Nov calls and puts, in addition to Aug so the total outlay is $14.33 and you need to collect $3.50 a month in premium to pay off your longs completely while your original $10 worth of puts and calls required you to collect $10 in premium in one month – which you failed to do (because it was impossible).
Is there a "fix" to this? Well you can roll back for more money and let time do it’s work. You can also take out the $65 putter for $1.02 (we have a rule and you already beat him by 72%) and roll yourself back to the Dec $70 puts for net +$5.90 ($5 of which you are using anyway because you are using margin) with an eye on selling the Aug $75 puts, now $5.05 ONLY IF YOU HAVE TO but mainly playing for a pullback. Since you ended up bearish on that leg, now you need to come up with a good play on the bull side that won’t screw you if RIMM heads north and hurts your puts.
You are in the puts for $8.70 ($5.50 original, $5.90 to roll less the $2.70 profit on the puts you sold) and we are confident that we can sell $2.50 a month in premium ($8 + $2 out of position) if we have to so no hurry there. As we are bearish on RIMM for next week (looking for a pullback off this run and also – if AAPL has great IPhone earnings, that’s not really good for RIMM), you can keep the current spread or roll the caller up to 2x the Aug $75 calls, taking them from $2.50 in premium $2.50 in the money to $2.50 in premium $2.50 out of the money) and you can buy yourself one more set of DEC $80 calls at $6.30. By keeping the Sept $75 calls, you knock out part of the premium and get better upside delta in case RIMM does take off but if RIMM goes down, the Aug calls completely pay for your Sept calls AND you have the Dec puts protecting you as well, which should gain as much as the Dec $75 calls lose. Just keep in mind, on the way up, you need to sell Aug puts but you can manage your play by simply covering and uncovering the put side once you are set up.
I hope that’s pretty clear. This is why I stopped doing those butterfly plays last year – much more explanation than the play was worth but it’s a tactic well worth learning. Of course, if you want to sell premium, nothing beats Google and the Jan $410 calls are $48 but you can sell the Sept $430s for $19.25 so $28.75 for a $20 spread +4 months. You can pair that with the Jan $450 puts at $47.50 and sell the Sept $430 puts for $19, which is net $28.50 on the $20 spread. What’s cool about this trade is that you have the $500 calls and the $550 puts so you CAN’T be worth less than net $40 in January and all you paid is $57.25 (risk of $17.25) for the ability to sell about $20 a month in premiums. Of course GOOG is a crazy stock and could move more than $40, which is your safety zone for September but they’ve only moved $50 since April earnings and, obviously, no one seemed to thrilled with these.
It’s a really great play if you have the cash to add to and roll the longs when the play goes against you but, at net $3K per spread contract, it’s not for ameteurs.
FXP/Sunco – Do you mean the naked sale of FXP for the $100KP? There’s nothing to update, that is our downside protection if the market sells off and, if we end up owning FXP, we don’t mind. Is there a different one I forgot?
RHT/Foss – I don’t know if surprise S&P inclusion is BS. It’s a small stock ($3.8Bn, avg volume 2.5M ($50M)) and a lot of indexes MUST buy it now. Once they are done, then it’s probably good to short but give them some leeway first as it take a lot of day’s trading to fill this one out.
Someone/Pharm – Could it be GS? They seem to be the only ones (and JPM) actually making big market money…
Joke/Cap – Yeah, today is one of those days when it does actually piss me off!
Anybody know why oil is up AH?
Yes it was the $100K P Play – Speaking of selling naked puts. FXP Aug $11 puts at .75 so in at $10.25, which is very low for an entry and you can sell Aug $14 calls for .53 right now with the stock at $11.67 so figure you should have no trouble collecting $3 a year on your $10.25 investment and, if you are scaling in, then a DD at $7 would average you in for $8.63, just $1.63 out of the money (20%) even if the stock drops 40% and you can still sell $10 calls for .25 and make $3 per year (34%) while you wait for a dip in China. Let’s call that 20 in the $100KP, net $9,500 used ($11K in margin less $1,500 collected).
I am not sure I read this correctly but I STO Aug $11 Puts and STO the Aug $14 Calls for a credit $1.20. If I get Put I am in for $9.80. Now if I roll down to the Aug $10 put and get put I am in for $8.76?
When I bought into this play I looked at it as a straight straddle because FXP has traded between $11 and $14 for several months and I felt it was a good probability that they would stay there. They have never traded below $12 for more than a day.
FXP/Sunco – I’m sorry about that. I was discussing the possibilities of what you COULD do IF the stock were put to you to explain why I was not worried about holding the naked puts. Luckilly, if you sold both naked the calls sure didn’t hurt you but I rarely advocate naked call selling and certainly not in an ultra-ETF. The Aug $14 calls are .40 and I would suggest taking them out . The nice thing is, even with the dip, the Aug $11 puts are just .78 and still .37 out of the money, despite a pretty good move in China the last couple of days. That’s because the Shanghai ran out of gas and FXP is based more on the Shanghai than the Hang Seng. I know this works as a straddle and you can keep it that way but that wasn’t the risk we were assuming in the $100KP, where these puts are downside protection for us.
Interesting news out of China…. huge increase in reserves of USD !!
China had reserves of 2.13 trillion U.S. dollars in June, the largest in the world.
http://news.xinhuanet.com/english/2009-07/17/content_11726702.htm