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Weekly Wrap-Up – 10,000 or Bust!

I think I was right on the money last week when I said:

The bar for corporate earnings is still set at very easy to beat levels yet, like this limbo-playing child, when they announce their beats of very low expectations we’re going to get all excited and tell them how great they are doing.  The problem is, these are not kids who we hope may grow up one day to be President or CEOs of major companies. these ARE CEOs of major companies and they are being paid top salaries for top performance and we, the stock purchasing public, are paying top dollar for what should be SPECTACULAR performance, not beating 75% off last year’s earnings by a penny! 

In that post, I rattled off a list of stocks that seemed overpriced to me: AMZN, BIDU, AM, PALM, NFLX, PCLN, URBN, UHS, CERN, CREE, GMCR, CY, SWM, TRLG, BKE and you would have had a fabulous week just shorting those stocks as only NFLX, URBN and CREE stayed positive.  Now most newsletter writers would quit right there and make a giant ad saying they were 12 for 15 on the week but, as our members know, THAT'S NO BIG DEAL AT PSW!  I'm just going to remind members that they can refer friends to FREE advice like that in our trial newsletter and earn 20% or more off their subscriptions for doing it. 

Picking stocks is easy but a few percent here and a few percent there isn't much fun is it?  On that list, the two we attacked were AMZN and BIDU, both of which ran (in our opinion) way too high AND had very liquid and very overpriced call options that we could sell to collect premiums.  AMZN is a staple short in our $100K Virtual Portfolio and we had set up BIDU the week before, selling Oct $420 calls for $8.30 and the Oct $430 calls for $7,20.  While both went higher on Monday, the fact that we had a plan for managing the trade kept us from panicking and, thankfully, Monday was the only day those positions gave us trouble and both finished the week worthless (100% profit for us). 

Adjusting our positions kept us busy this week as we STILL have a slightly bearish bias and I apologize for that but, as I said in Friday's post: Every time I try to get a little more bullish, they pull me back in!  It's the curse of being a fundamentalist, it's not enough to show us a shiny box with a pretty bow – we like to know what's in the box before we buy it.  Right now, the global economy is a cardboard box with some shiny wrapping paper (MSM cheerleading) and it's all tied up with $15Tn worth of deficit spending on behalf of the global governments.  

Paul Krugman and I have nothing against deficit spending, it's the best way to avert a severe economic downturn and we just may have accomplished that but it is worrying that so much of THIS deficit's spending went NOT to building things and NOT to manufacturing things of lasting value but instead was used to bail out past failed investments and re-inflate the exact same bubbles that crashed us just 12 monts ago.  Gas is back to $2.75 a gallon, Oil at $79 a barrel, copper near $3, gold at $1,054 – "brother can you spare 27 dimes and a nickel just so I can make it to my job interview" is not a premise that's likely to reinvigorate the middle class.  But the investor class is happy and, in this top 10%-centered, screw the poor society we have in America, that is all that matters and we will party like it's 1999 as long as the Dow can stay above 9,999:

We were all about going with the flow this week as we had a wild mix of bullish and bearish picks as we were skeptical bulls at best.  I don't summarize spreads here as it would take all week to write a review but the majority of our long plays were hedged and our general goal was to pick low-risk/high-reward bullish plays so we could minimizer capital commitment to positions we don't have our hearts quite in yet while still giving ourselves a very attractive upside profile if the market does indeed break higher.


Just Another Manic Monday – The Inverted Risk Pyramid

My attempt to get bullish hit an immediate bump in the road as I unfortunately (or fortunately, time will tell) read Gregor MacDonald's: "The Alignment of Asset Reflation and a Collapsed Economy" that morning the neatly explained my fundamental frustrations.  I discussed the Dollar, Global Trade, Latvia's Pending Collapse, and the Risk Pyramid – sometimes I go back and read these and even I feel like I'm getting an economics lecture!  My conclusion set the tone for the week:

So happy Monday to you!  MacDonald is very likely 100% right and we are heading off a cliff but, as he also points out, gold and the S&P can rise 30% before we get to the jumping point.  The strategies we discussed this weekend along with our Watch List and long index vertical plays will allow us to play along without losing our heads – just in case we wake up one morning and find that the cliff was a lot steeper than we had imagined!

We had lined up a LOT of bullish spread plays on our Watch List and our trigger levels were:  Dow 9,829, S&P 1,071, Nas 2,146,  NYSE 7,047 and Russell 620 and, in my morning Alert to Members, I pointed out that it was the Russell that was holding us back.  It is very normal for small-cap stocks to lead us off a market bottom, which has clearly been the case in this 6-month view.  But notice the Russell also falls faster and harder during a pullback as it is the small-cap stocks that get hurt first as the dollar weakens and purchasing power declines. 

I've called the Russell our canary in the coal mine and this week's under performance needs to be taken seriously if it turns into a trend.  Our Monday selections were:

  • ERY Nov $11 puts sold at .75, now $1.10 – down 46%
  • GS Nov $210s sold for $2.40, now .87 – up 64%
  • DXD at net $31.40, now $32.93 – (Apr bull call spread)
  • CERN Nov $85 calls sold for $4.70, now $4.15 – up 12%
  • CERN short at net $82.90, now $84.37 – (Nov bear put spread)
  • BAC Nov $17.50 calls sold short at $1.37, now .75 – up  45%
  • BAC Nov $17.50 puts sold short at $1.10, now .95 – up 13%

That's a great trick in earnings season, playing for the volatility crush into earnings by selling puts and calls, preferably on a stock that isn't likely to move too much.  With GS, we took advantage of the very high market expectations to sell a call that was over 10% out of the money for 2.5% of the stock price – that's a 12.5% cushion!  BAC was so attractive we sold both sides of that trade and, of course, we hedged low because we thought they may disappoint but also because, if they fell far below $17.50, we really don't mind owning the stock at net $15.03.  The same is true for ERY, which would be put to us at net $10.25 and is now $10.74 so the fact that the put is currently selling for $1.10 doesn't bother us as we have no intention of buying them back

Testy Tuesday – Topping or Popping?

We took advantage of Monday's dip to cash out our winning short plays from the prior week.  I said in the morning post: "Despite the low volumes, buyers are clearly in control of this market" and I went over my logic from the previous day's Member Chat, where I told the bears that we weren't getting the downside movement we needed and it was a good idea to switch sides, comparing it to betting as a fan (of bearish positions) vs. betting as in investor (on whichever side happens to be winning at the moment).  I pressed the point, saying: 

I never understand the "fan" behavior of market players.  If you see the market going up and up and up and up – perhaps it’s time to make a few up bets.  Bears don’t earn loyalty rewards or get frequent-complainer points from the market so, if your "team" is getting trampled, it’s OK to switch sides – at least for a while – no one will think any less of you.  In the case of our bull-market bets, we have a great opportunity to switch sides at a very significant line this week, the 2009 highs of Dow 9,829, S&P 1,071, Nas 2,146,  NYSE 7,047 and Russell 620 – 3 of which held up yesterday despite the afternoon sell-off.  If we can confirm these levels on real volume today, it will simply be madness to be bearish until those lines are crossed again to the downside.

I strongly recommend reading that post if you are "not a flip-flopper" as being a flip flopper is the most profitable way to play the markets these days.  In fact, in that very morning's post, I noted how totally screwed Cramer fans were as he piled them into CIT at $2+ on Sept 28th and they were diving down to .85 on bankruptcy rumors but, by the afternoon, I flip-flopped and called a buy on them.  Why, because they were holding up too well - so I figured something was up.  They ran up to $1.15 the next day and hit $1.20 on Thursday, up 33% off Tuesday's track,  Of course take the profits and run because we have no faith but, just because you are short on a stock, doesn't mean you should be blind to it when it looks strong

Meredith Whitney did us a solid and downgraded GS and OPEC raised their demand forecast and our futures were pointing solidly lower but we had good retail numbers and warned Members in my 9:51 Alert: "9:45 Dow volume is just 19M so no conviction to this morning’s selling so far so I continue to warn bears not to let profits slip away."  Our biggest mistake of the week was staying short on oil and OIH but it's a mistake we continue to make as we've pressed those bets by rolling up and doubling down so we REALLY hope oil doesn't break $80 next week.  Our Tuesday plays were:

  • ERY Nov $10 puts sold for .65, still .65 – even
  • ERY at net $9.80, now $10.74 (Apr bull call spread)
  • AIB at $8.53 (buy/write), now $8 – down 6%
  • ISRG Apr $210 puts sold for $17.80, now $15.20 – up 14%
  • ISRG Apr $280 calls sold for $22.50, now $24 – down 7%
  • FXP Nov $10 puts sold for $1.50, now $1.70 – down 13%
  • ERY at net $12.15, now $10.74 (Jan bull call spread)
  • DIA $97 puts at .25, stopped out at .15 – down 40%
  • DIA $100 calls at .25, stopped out at .65 – up 160%
  • EWZ at net $70.30, now $75.49 (Jan bull call spread)
  • EDZ at net $7.50, now $6 (Apr bull call spread)

Notice something new is creeping into our trade ideas – pair trades!  As market conditions change, our trading style changes to adapt and these weekly wrap-ups are a great way to keep tabs on what's working and what isn't over time and it's especially helpful to go back to historical posts, when the market conditions were similar and see what was working and what wasn't.  That's one of the reasons I started keeping a trade blog in the first place.   ISRG, DIA and EWZ were all paired with hedges.  In my 3:37 comment to Members we took that DIA play based on my belief that we'd get a 200-point move in one direction or the other (it was only 150, but that was enough for the play to work). 

If you are wondering why we would take bull calls on ERY at net $9.80 and net $12.15 with the $12.15 spread in Jan, it's a matter of risk/reward.  The April spread was the $9/11 for net .80, conservative and pays a $1.20 profit (170%) if ERY moves up modestly over time.  The Jan spread is a very aggressive $11/15 spread for $1.15, which pays $2.85 if successful (247%) and they are not as risky as they seem as bull spreads hold value well, especially on volatile ETFs.  In fact, ERY fell from $12 to $10.74 since we took that spread and it's still $1 (down 13%), which is not too bad for a volatile ultra-ETF, not even worth scaling into or adjusting yet..  

Wednesday Rally – INTC and JPM's Piles of Chips

Big beats from INTC and JPM gave us every possible reason to make new highs.  I had called for shorting after hours in Tuesday's chat as the run-up to $22 was just way overdone and they actually finished the week back at $20.18, lower than they were before earnings.   The hardest decision I had to make all week was not adjusting our "too bearish" $100K virtual portfolio that day or the next as we took two consecutive hits in row that drove us down to $93,000.  By Friday, we were $117 short of a full comeback – Ah, the advantages of not panicking….

  • ERY Nov $12 calls at for $1, now .65 – down 35%
  • Oil futures short at $75.35, done at $74.50 ($10 per penny, per contract, profit!)
  • OIH Nov $125 calls sold for $5.75, now $7.40 – down 28%
  • DDM at net $38.20, now $40.21 (Jan bull call spread)
  • IWM at net $61.20, now $61.68 (Jan bull call spread)
  • UYG at net $6.40, now $6.08 (Dec bull call spread)
  • DIA $99 puts at .30, done at .15 – down 50%
  • DIA $100 calls at .30, done at .65 – up 116%
  • SLX short at net $60.70, now $57.41 (Nov bear put spread)
  • SLX Nov $62 puts at $5.70, now $5.80 - up 2%
  • SPY short at net $106.68, now $108.89 (Nov bear put spread)

In my 12:30 alert to members, as the Dow once again looked like it would hit 10,000, my comment was: "So, look at 9/22 and 9/23, which were a blow-off top and we were down at 9,600 that Friday (25th) and 9,400 the next Friday (10/2).  This is why I remain paranoid on days like this.  If we are really BREAKING OUT, then we have another 1,000 points to play with but buying on a day like today or killing short plays can be extremely counter-productive.  The best thing you can do is add more conservative bullish plays that negate your short-side losses until we have a clear picture."

Notice the string of bull call spreads we took mid-day, those were contingent on us holding 10,000 for more than a day so already questionable but the first two make 67% and the UYGs make 150% if UYG gets to $7, making them a very nice offset to our still bearish positions if the market does start to gap up on us before we can establish other, more conservative bullish positions, like the ones on our Watch List.  Our main concern on Wednesday was a huge pop from the Fed, failing to get that, we never got around to getting more bullish. 

Thrill-Ride Thursday: Jobs, What Jobs?

As I noted in the morning post, Wednesday had been a tough day for us because, while we were prepared to make an orderly transition to bullishness, we were not ready for a bullish spike up (as indicated in the picture here).  Of course, 500 Dow points for the month of October happened to be our famous 5% rule for the month and that, we felt, entitled us to a 100-point pullback so we STILL stayed bearish. 

As I said in the morning post: "While we are disappointed, we’re not terribly concerned as we’re only going to roll the calls to November anyway and I did promise the members that, if we hold our breakout levels for 2 closes, then I’ll be shifting more bullish.  I’ve been trying to identify more bullish positions this week but our mix has still tended bearish as I’m just having so much trouble buying into this rally…  despite some early market disappointment, we are still in a positive earnings environment and we’ll take advantage of the morning dip to press some of those upside plays – just in case we get a proper breakout."

We took advantage of the morning dip to pick up some bullish plays but nothing crazy as the Philly Fed was a huge disappointment:

  • RAD at $1.58, now $1.58 – even
  • NUAN at $15.55 (buy/write), now $15.27 – down 2%
  • IMAX March $10 puts sold for $1.05, now $1.05 – even
  • CBI at net $18.70, now $20.12 (2011 bull call spread)
  • GLL at net $12.40, now $11.54 (Apr bull call spread)
  • GOOG at net $561, now $549 (March bull call spread)
  • XOM $75 puts at $2.60, stopped out at $2.40 – down 8%
  • SRZ at $5.12 (buy/write), now $5.15 – up 1%
  • PARD at $6.86 (buy/write), now $6.87 – even
  • C 2011 $5 calls at $1.02, now .97 – down 5%

Well we sure were trying to pick some upside plays.  Notice they are generally hedged as we don't trust them and also, taking a lot of bullish verticals allows to make low dollar commitments with limited downside, just in case the bullish thing doesn't pan out… 

Frightening Friday – You Mean Markets Can Go Down Too?

It didn't take much to send the market back down on Friday.  Minor disappointments from GE and BAC and we were down 100 points by 10 am on strong volume.  I noted in the morning post: "We have struggled for two weeks trying to get more bullish but even at yesterday’s exciting close we remained 55% bearish and decided to hold that stance into the weekend.  As I updated our $100K Virtual Portfolio last night, I was surprised and disappointed that I could find no justification to raise my targets on AMZN, BAC, C, GE, UYG or XLF, sticking with our generally bearish positions, even though they burned us this week.  While both GE and BAC beat on earnings this morning, both companies missed on revenues and what’s surprising is how sharply the markets reacted to such small misses."

  • ICE Nov $100 puts at $4.80, now $3.35 – down 30%
  • DIA $99 calls at .65, done at $1.05 – up 61%
  • DIA $99 puts at .10, done at .05 – down 50%
  • ICE Nov $110 calls sold for $4, now $4 – even
  • SRZ Jan $5 puts sold for $1.20, now 1.20 – even
  • VZ at $28.93 (buy/write), now $28.90 – even
  • HGSI at $20 (buy/write), now $20.02 – even
  • NTRI at $18.62 (buy/write), now $18.60 – even

It was hard to be terribly impressed by our finish this week.  We didn't hold 10,000, the Russell didn't hold 620 and the SOX finished well off for the week, down 3%.  We'd feel BETTER about our bullish bets IF we got another correction, perhaps a test of our 50 dmas at Dow 9,650, S&P 1,050, Nas 2,075,  NYSE 6,950, Russell 595, SOX 310 and Transports 1,925. 

The Shanghai is just 2.5% under the Sept high at 354.58 and we'll be watching that closely as well as looking for the Hang Seng to get over 22,300 and if the Nikkei can't hold 10,200 we've got real problems (10,275 is 50 dma and they are just shy).  Over in Europe, we either get new highs with Asia or we retrace 50 dma's there which are:  FTSE 5,000, DAX 5,600 and CAC 3,700 – all of which look more likely than a move up so anything green in Europe can be taken as a real plus. 

Before we get too excited and jump on the medial hype-wagon about our "recovery," let's take a look at this great chart by Prieur du Plessis, which shows us how far we've come but also reminds us how far we still have to go.  As I keep saying to members – If it's a REAL rally, we're not missing much by being a little cautious here:




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  1.  Phil,  I have a Bexp april 10 call w/ a delta of .639. How do I determine what the option would be worth if Bexp doubled from its current price of  $10.27??

  2. Gel / HERO
    I like your keen eye for stocks. Would be interested in your opinion here. Some interesting long term options. For example, a Jan 11 buy/write could be done $1.90/$3.45 with a 160% payback on a call away @ $5.
    I have been in/out/in this over the past few yrs. Definately in a rough patch now. Insiders bought heavily last fall. Near term earnings look poor and they have a lot of rigs idle. I believe they just rolled over some debt but at premium rates. Current L/T debt to equity is about 1.1 to 1 so not too bad and TBV is $9.90 but that is some concern because I have to wonder how much those rigs would be worth if no one wants them? Lots of potential value here if drilling activity increases.
    Phil, your 2 cents also ?

  3. ?BAC/ Phil
    Need some help in adjusting a position.
    My current postition is:

    Short 5 Nov 13′s & short 5 Nov 14′s. Net on these is $ 2.31; now $3.87.

    Long 20 Feb10 17′s- net $ 2.39; now $ 2.00.

    Looking at :

    Roll the callers to 2X or 20 contracts- Jan11 22.50′s for $1.95- about even.

    Roll the Feb 10 17′s to Jan 11 17.50′s for $3.85. Plus $1.85.

    So, that puts me in the $5 spread for $2.29. ($2.39 + $1.85 – $1.95)
    I know you can do this in your sleep so bear with my pea brain. Do I have this right?
    Is this a good move or do you have better suggestion?


  4. Anyone who knows about Interactive Brokers, is there a way to model hypothetical portfolio change (i.e. if "the market" goes up or down 5%, what will my account do?)?  Thanks.

  5. AAPL
    Phil – I know you recommended selling the Jan170Ps into earnings monday.
    But – how about selling the Jan 170P/210C strangle – BE about 158/222
    We would capture the volatility crush and if it goes down you still get to buy it at 158

  6. Paul Krugman and Phil are absolutely right about about the benefits of deficit spending. It can create terrific results if directed properly to the right targets. The 778 Billion stimulus is huge, but poorly executed, and the desired results are dismal. I  am in the process of closing down my summer home in Lake Tahoe, NV. Drove over to Reno Friday to do a few chores and was faced with massive traffic jams. …. Joe Biden flew in for a breakfast fund raising session on Air Force 2,  with Harry Reid, and his speach was focused on the GREAT success of the stimulus, as it interfaces with the resolution of the state’s number one problem – unemployment. He again said he was totally amazed at the success of the stimulus in solving the country’s problems. Now here is a guy that really is uninformed ! The state of Nevada lost 52,000 jobs in the last year (13.5% unemployment). In a report that came out this week, Nevada officialy gained a total of 159 new or saved jobs ( WOW )since Biden took office. Of those new jobs, 146 were new government jobs. This idiot spent 250,000 dollars of taxpayer money flying back and forth across the country to raise money for a colleague’s re – election campaign, and spent the morning tying up traffic and did nothing but piss off the residents of Reno. Harry Reid is at 30% approval rating at the moment here, and after Biden’s help on Friday it may soon be at 20%. Mickey Mouse could run against this guy and win. FWIW

  7. US deficit at a record $1.5 trillion

    For September, a month when the Government usually records surpluses, the deficit was $US46.6 billion – a sharp contrast to the $US45.7 billion surplus in September last year, the last time the Government was in the black.


  8. ." The foundation of middle class wealth–housing–is mortally wounded. Just because a fellow with 23 arrows sticking out of his back staggers to his feet is not evidence that he is now well.  "    love this quote as it seems to sum up where we are . There will be no end to the government tap because no one gives a crap about deficits ( look at Japan at 200% of gdp ). When a country becomes morally bankrupt the only thing left is a shameless pusuit of money . Wall street will take every dime the moron leaders are willing to give them directly or by defalt by not having the slightest idea of whats going on  or even where the taxpayers money is being spent . . There will be no party for average citizens .
    One of the reasons I follow Phil is it moderates my pessimism , otherwise I would be 100% bearish .

  9. Phil, if you have time could you comment on the pros and cons of this strategy I came across for playing APPLE on Monday. Just wondered what the risks are of this approach…….assuming you like apple in the next month.
    Nov call spread: buy 190 ($7.80), sell 200 ($4.10) costs: $3.70
    finance by selling 175 put for $3.55
    if apple falls below 175 you start losing, but if it rises just above 190 you start making money and can make 9.85 if apple rises to 200 by Nov expiration.

  10. Pstas/HERO…. Hey, thanks for the confidence. Credit must go to the army of bird-doggers I hear from most days – many ex hedge fund guys and long time investor freaks. I listen to them and then check out the fundamentals on my own. Over time, I guess I have been fortunate, as very few tips I get have turned out negative. I am happy to share what I learn with my co-members at PSW, when I feel positive about an opportunity FWIW.
    I am in the HERO play with 1000shares of the stock, and a strangle having sold 20 contracts of the Jan. 5 puts, and 20 contracts of the Nov. 5 calls ( I must love selling premium). I’m up 40% on the stock, and up net 28% on the sold options. I am comfortable with the long term prospects of the company’s future, as I am generally bullish on the demand for oil and gas as the economy recovers. I would defer to Phil for an opinion on this specific one, as this is just a gut feeling on my behalf. Their earning will be reported on Oct. 28th. Also, they just had an upgrade by Thomson on 9/25. I believe that their stock value will probably mirror the movement of UNG, and I have a lot of that, assuming the move will be up and not down Enjoy the weekend !

  11. BEXP/OldG – If BEXP went to $20 you can pretty much assume your premium would be gone and your call would fetch $10, when a call goes too far in the money, the premium starts to die.   Note that the $2.50 call is $7.80, that’s only $7.75 in the money and it already has no premium.  This is yet another example of why we like to sell premium, not buy it. 

    HERO/Pstas – I was loving them in April and then I think we went back in July with a $2.50 buy/write that just expired ($2.05/2.27) and that’s how I like to play these guys – cautiously on dips.  It’s a cyclical business and I like to play them into hurricane season but I have no interest in carrying them into the spring, especially when earnings are iffy.  On the plus side, they are probably getting cheap debt but on the minus side, helicopters need to be maintained and paid for whether you use them or not. This is a very cyclical business that makes huge money during emergencies but this is not 2 years with no hurricanes – I will be amazed if they put up good numbers but I’ll also be loving them on the next dip as long as they aren’t going BK.  I will point out on HERO that the 2011 $5/10 spread is $1 and that makes for a very nice 400% profit if HERO does well with limited downside risk.  You can offset that by selling 1/4 the Nov $5s (.45) since they can roll up to 2x the Jan $7.50s (.23) and those can roll up to 1/2 the 2011 $12.50s (.50) or, in other words, you’ll be up 400% on your longs way before you owe the callers a dime and 10 1/4 sales gives you a free ride.

    BAC/Pstas - Notice you bought more premium than you sold and got burned.  I assume you are purposely flipping from very bearish to very bullish?   Your vertical is fine but you’re kind of selling your Febs low and then rolling them into even more premium, not my favorite way to go…  I’d roll the 20 Feb $17s ($2) to 20 May $16s at $3.20 (+$1.20) and roll the 10 $4 callers ($40) to 15 Feb $17 calls ($2) and 10 Feb $15 puts ($1) so you get the same $40 and your entire cost is $1.20, with which you are buying $1 of intrinsic value plus 3 months.  If BAC goes up, you have 5 uncovered calls to soften the blow and if it heads down, you can roll the putters to 20 2011 $7.50 puts, now .50 and, of course, the callers would be gone.  You’re in this spread for .08 and adding $1.20 = $1.28 so it doesn’t take much of a win to get you back on track this way. 

    AAPL/Edro – Very valid play.  I just don’t think they are going down and I don’t mind at all owning them for $165 if they miss and people freak out so I’m happier buying 2x the puts than splitting the puts and calls.  Anyway, I’d only roll them to the Apr $155 puts if they actually went down so my commitment is more like $150 than $165.  Of course splitting is more prudent but if you feel strongly about a position, you don’t HAVE to bet against yourself. 

    Biden/Gel – Yes but think of all the flight attendents and security guards and police overtime and crappy buffet revenues he brings to the state on these little trips.  Sure it cost $250,000 but that’s getting spent somewhere!  8-)

    Also, isn’t the election a year away?  I wouldn’t worry too much about Reid just yet, there will be a bottomless checkbook for Dems to keep the Senate… 

    Deficit/Kustomz – Are you still worried about that?  I’ve given up…

    Thanks 2a3!  (I guess)

    AAPL spread/Ocelli – Wellllllllll….  You’re "paying" for the spread by doubling up your risk, it’s not free, assumption of risk over time WILL cost you money at some point unless you are incredibly lucky.  Your goal is to make $9.85 if AAPL hits $200 (up $12) by Nov expiration and you risk losing $3.70 PLUS an unlimited amount of money if they go below $175.  If you simply buy 2x the $190/195 vertical spread for $2, you risk $4 to make $10 at a $5 lower strike with no additional downside risk. 

    To accomplish what you are trying to do (make money without spending any), you are better off selling Jan $160 puts for $3.65 (delta .17 vs .25 on Nov $170 puts) as they are less likely to get hit and you can even cover with Nov $150 puts at .45 but, as I said above, it’s hard to imagine any scenario in whick AAPL will drop 20% that fast.  The Jan $160 puts can be rolled to the Apr $140 puts (now $3.73) and the 2011 $100 puts (now $3.50) and THAT’s a price at which AAPL is pretty darned attractive.

  12. Phil, brilliant advice, thanks. You gave me two very improved approaches, with much less risk. I also like that your second one with covering using the Nov $150 helps with margin, I think (I have some issues with large margin since I do not have portfolio margin). And yes, it is hard to imagine a scenario where aapl falls 20% in that time frame, but the rolls you suggested offer an escape if I am wrong…….exactly the analysis I needed.

  13. Phil, I’m, confused. You’re saying my call would be worth $10, 4 times what I paid for it but that the premium would be gone. Would I still be able to sell the call? What am I losing if the premium is gone but the call is up 400%? Should I have sold the call earlier? Is there there a point as delta is rising when one should sell?
    I notice that BEXP when up 5.21% on Fri but the 2.50 and 5.00 calls didn’t go up at all where as the 10 call went up 11.63%.
    Also, what does this mean for leaps.
    There’s obviously a big hole here in my understanding of options which I want to fill.

  14. AAPL strangle
    The attraction to the AAPL Jan170P/210C strangle is simply that the margin required for the strangle is the same as the margin required for the naked Jan170 puts so you get twice as much return.
    And, as a bonus, when (not if) the IV drops you have an immediate winner as long as the price stays between the breakevens.

  15. Oldgoat
    You want an Option Simulator to play what-ifs with your positions.
    I like the TOS analyze screen and the OptionsXpress Pricer which is part of the chain screen
    You can do a search on the web and find all sorts of tools

  16. Phil and others
    I have a qn on the GOOG trade that we did last week. My entries were
    BOT OCT 550 CALL
    SOLD OCT 530 PUT
    BOT OCT 510 PUT
    At close on friday I was left with -1 GOOG 530 and +1 GOOG 550. Obvioiusly by clsing at 549, I simply lost the $500 that put in. However, In my TOS account I find a credit of $53000 ($530 X 100) and my account locked down. Does this mean I am now short 100 shares of GOOG. Is it my responsibility to buy back 100 GOOG on  MOnday OR is this simply a settlement process which has accounted for the net credit and margin that was posted and by tomorrow morning I would simply be back to normal.
    I find I am short 100 shares of GOOG @530.Thanks.

  17. chakra, you’ll have to buy the 100 shares tomorrow. If you don’t need to do any other trades, you can wait and hope for a better price during the day, or just do it early. You’ll be charged a $15 assignment fee plus the $5 (or whatever) for buying the stock vs. the $1.25 (or whatever) you would have paid in commissions to close the 530 call Friday, so it’s better to close the short call out before you take assignment in most cases. However if GOOG gaps down on Monday, it will have worked out to your advantage this way.

  18.  Phil, what are your thoughts on BAC regarding near future and longterm.  Thanks

  19. phil : what was the NTRI buy/write ?

  20.  chakra/GOOG    Breaking down this play…..The -1 Oct 530 put expired and you kept the premium.    The +1 Oct 510 put expired and you lost the premium.  The +1 Oct 550 call expired and you lost the premium.   This brings us to the -1 Oct 530 call.  This will be called away….that is, you will have to deliver 100 shares of GOOG to whoever bought those calls.  That’s my read on it.   By the way, I seem to recall that Phil’s rec on this stock was for November options, not October.  Close this out as quickly as possible on Monday.

  21. Edro/Iflantheman
    Thanks. However, I have had short calls in the money on exopiration day before and have never had this situation. Normally, the short call is offset by the long call in this case, the -530 is offset by the long 550 and the difference is already held as margin. In other words, my max loss on the trade can only be the diffrence between the Long strike minus the short strike plus the premium collected.  Isnt that the whole purpose of a spread and the brokerage holding the collected premium and a little more as margin.
    If I have to hold a short position over the weekend the risk is enormous and does not make sense. The only time I have faced this situation is when I had a DIA butterfly expire with two short calls. One of them was offset by a long call and the other was assigned. I found my account locked down with a 100 K credit. fortunately for me the Dow gapped down and I made money on free money.
    I will find out for sure in the AM and hope the darn stock gaps down.

  22. BEXP/OldG – LOL, you’re right, given your premise that BEXP goes up 100% then paying 25% over the current stock price for an April call will be brilliant in retrospect.  You are going to see all kinds of wild price swings in these thinly traded options, especially on the long end as sentiment shifts one way or the other.  I am simply not a fan of getting into a position that requires a stock to gain over 20% just so I can get my money back.  Rather than pay $2.40 for the Apr $10s, you can spend $1 on the Apr $10/12.50 bull vertical and then you get your $1 back at $11 and a 150% profit at $12.50, a price at which you would be getting a dime profit on the $10 calls.  A consevative fellow could even take the Apr $7.50/10 spread for $1.50, which pays 66% if BEXP simply dosn’t go down.  For you to make $1, BEXP has to get to $13.40 (up 30%).  Not that I endorse this company in the first place (too risky) but I am certainly against paying ridiculous premiums like that if they can be avoided. 

    Strangle/Edro – I agree, that’s fine if you are impatient or margin-challenged.

    GOOG/Chakra – Holy cow, you can’t let the caller expire in the money!  You’ve been assigned GOOG at $530 so there’s $53,000 cash in your account but, yes, that puts you short GOOG at $530.  On the bright side, you kept the $1,800 you owed the caller too.  Check with your broker but you usually have until Wednesday to settle out buy buying GOOG but keep in mind that you lose $100 per $1 GOOG moves higher.  Your biggest worry is a squeeze today from other people who were assigned GOOG short and have to scramble to buy it.  With AAPL earnings up tonight, I doubt there will be a lot of selling in the Nas today.

    BAC/Jo – Clearly this government has no intention of letting the big banks fail (or the markets for that matter) so long-term I remain bullish.  Short-term, this economy is much weaker than sentiment indicates but we’re not buying the economy, just the sentiment so we play the cards as dealt but BAC is now tainted and is not something I would play near-term, other than selling the $17.50 puts and calls. 

    NTRI/Dflam – Well they popped up now so all differnt prices.  You can go back to Friday’s post and check but after a pop to $18.60 on Friday, I’d go with the 2011 $15s at $5.60 and sell the Jan $17.50 puts and calls for $4 for net $1.60 on the $2.50 spread or you have NTRI put to you at net $19.10 less whatever value remains on the leaps.

    Futures are wild this morning, up 100 points since 10pm except oil, which strangely has been heading down all morning (but still $78.65).  China upgraded their Q3 GDP to 9% and it seems UK housing prices rebounded sharply

  23. Lots of news this morning:

    Scroogenomics author Joel Waldfogel talks to Real Time Economics about the "deadweight loss" of holiday shopping and how we could recapitalize the banks instead of giving (and receiving) ugly sweaters.

    "I do not understand how financial institutions could think they could take taxpayer money and turn around and act like it’s business as usual … but they seem to be winning this argument." – Elizabeth Warren of the Congressional Oversight Panel on bonuses and the power of banking lobbies (videos, about 10 mins.).

    Two days’ worth of speakers at a trading industry conference this week were unanimously supportive of high-frequency trading, arguing it reduces costs and volatility while adding liquidity. And then Seth Merrin took the stage.

    An interactive employment map covering the past five years is captivating, if grim: Healthy green circles give way to a huge, suddenly disastrous red one around Hurricane Katrina; a slower-growing one, like a cancer, in Detroit; and then a chicken-pox smattering turning into a full-on zombie outbreak of job losses.

    Harvard’s Niall Ferguson says the dollar may fall another 20% in the next two to five years – the "simplest solution to most of America’s problems," but terrible news for everyone who isn’t the U.S. or China.

    China will be able to sustain the momentum of its V-shaped recovery, setting the stage for even stronger growth in 2010, the chief economist of its National Bureau of Statistics says. A return to robust growth will allow lawmakers to focus on repairing deep-seated imbalances in its economy, including over-reliance on investment and overcapacity.

    Venezuelan President Hugo Chavez confirms recent chatter about a move to displace the dollar as the official oil-trade currency: "We’ve been talking about this in OPEC. Venezuela agrees and there are other countries, such as Iran and Russia that have also proposed this idea."

    The world could face an oil supply shortage in 3-5 years if companies don’t invest now in new production, Chevron (CVX) CEO David O’Reilly warns. "The big issue is, will there be adequate investment during this time, particularly during this economic downturn, to ensure that the capacity is there in 2015 and beyond. That’s the challenge, and the jury is still out on that."

    Shares of U.S. oilfield services company Exterran Holdings (EXH) may be overvalued by up to 40%, Barron’s says. A surplus of gas-compression rigs have clobbered Exterran’s manufacturing backlog, and its rental business has more horsepower idled in North America than its next-ranked competitor owns in total.

    The biggest jump in tax-exempt borrowing costs since January drives municipal bond sales down this week, to $3.8B of tax-exempt and $3.4B of taxable securities, from $11B sold last week. State and local governments are expected to seek at least $17.9B in the debt markets in the next 30 days.

    CIT Group (CIT) sweetens its $29B debt restructuring late Friday, amid widespread belief that its earlier exchange offer was too unsatisfying to succeed and that the lender would head for a prepackaged bankruptcy (at minimum). The changes shorten new bonds’ maturities and accelerate their repayment, and boost equity for subordinated holders. The offer’s expiration is still Oct. 29.

    U.S. maps at the New York Fed show some bad local credit conditions – including a Florida foreclosure rate nearing 8%, while no other state is even at 4%.

    Obama lashes out at health insurers in his weekly radio address, calling their efforts ‘deceptive and dishonest.’ "For decades, whenever we have tried to reform the system, the insurance companies have done everything in their considerable power to stop us," he said.

    FAA is reportedly widening its probe of American Airlines (AMR), investigating allegations that it flew empty planes in for repair at unusually low altitudes out of fear they could have broken at normal heights. The airline could face millions of dollars in penalties, and officials are also considering the unusual move of taking punitive action against supervisors who authorized substandard work.

    Pfizer’s (PFE) experimental oral rheumatoid arthritis drug was effective both as a standalone and in combination with standard treatments, a final analysis of data from mid-stage studies shows. "People should be extremely excited about it," lead researcher Dr. Roy Fleischmann says, noting it should be cheaper than current biotech solutions like Abbott’s (ABT) Humira and Amgen’s (AMGN) Enbrel.

    Meanwhile, Johnson & Johnson (JNJ) says its newly approved rheumatoid arthritis drug Simponi, in combo with the common treatment methotrexate, was significantly more effective at inhibiting joint damage than methotrexate alone. The data could be used to allow J&J to expand Simponi’s label claims to include joint damage prevention.Meanwhile, Johnson & Johnson (JNJ) says its newly approved rheumatoid arthritis drug Simponi, in combo with the common treatment methotrexate, was significantly more effective at inhibiting joint damage than methotrexate alone. The data could be used to allow J&J to expand Simponi’s label claims to include joint damage prevention.

    CME Group (CME) is in informal talks to take over the Chicago Board Options Exchange in a deal worth up to $5B – a 50% premium to its current worth, and about 20x its expected annual earnings. Adding CBOE would put Chicago’s three biggest exchanges under one roof, and give CME, already the largest futures exchange, a dominant position in stock options.

    Barron’s says shares of private prison operators (CXW, GEO, CRN) trade at untenable discounts as investors obsess over states’ stop-gap attempts to curb costs, and overlook prisons’ steady profitability, and a widening gap between supply and demand.

    Monday’s economic calendar:
    11:00 Bernanke: Asia and the Global Crisis
    12:00 PM CATO Institute: Which Way Forward for Fannie and Freddie?
    1:00 PM NAHB Housing Market Index

    Notable post-market earnings: AAPL, ATHR, BSX, JDAS, LNCR, PKG, STLD, TXN, UDR, VLTR, WERN, ZION