Straddle-Strategist Sells Flextronics Options
by Andrew Wilkinson - March 3rd, 2011 4:29 pm
Today’s tickers: FLEX, BMY, CQB & TSS
FLEX - Flextronics International, Ltd. – The Singapore-based provider of electronics manufacturing services popped up on our scanners after one big player sold a massive straddle in the July contract. Shares in Flextronics are currently up 5.0% at $8.14 as of 11:55am in New York. The sizable straddle play composed of a total of 49,000 FLEX options is almost on par with the overall level of open interest on the stock of 56,483 contracts. It looks like the investor is reeling in time-rich, in-the-money call premium as well as just out-of-the-money put premium, in the expectation that volatility will come off and shares in the name will remain around this level. The straddle-strategist sold 24,500 calls at the July $8.0 strike for a premium of $0.70 each, and sold 24,500 puts at the same strike for a premium of $0.60 apiece. Gross premium pocketed on the transaction amounts to $1.30 per contract. The trader keeps the full premium received on the sale as long as shares in FLEX settle at $8.00 at expiration in July. The short straddle strategy implies the investor at least sees shares trading within a certain range through expiration. In this case, the trader keeps some of the premium received and staves off losses unless shares in FLEX swing above the upper breakeven price of $9.30, or slip beneath the lower breakeven point at $6.70. The short stance in both call and put options expose the trader to potentially devastating losses in the event that shares work against him in the next few months. However, the investor need not hold the position to expiration. The trader may be able to buy back the straddle at an advantageous price at some point, benefiting from the erosion of time value as well as subsiding levels of implied volatility.…
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Friday Already? What Next?
by Phil - December 3rd, 2010 8:28 am
What a wild week!
The Dow is up 400 points since Monday and we are just 150 points away from our November 4th high. Once we get over 11,500, we have no reason at all to be bearish from a technical standpoint and fundamentals are out the window so what else should we be looking at? We ended up too bearish on our $10K-$50K Portfolio as we hit our double-down targets on a couple of index shorts so I am CLEARLY in the bear camp this morning as we’re still playing this as a double-top, rather than a breakout but what if we do break out? As David Fry said this morning:
Any worries from Europe, China tightening, higher Jobless Claims are mere inconveniences when the light is a bright green. Let’s face it; this is what the Fed stated they wanted with their POMO activities—higher prices overall with higher stock prices emphasized. The Fed prints money and buys bonds from the Primary Dealers and (wink wink) they know what they’re supposed to do with it. Bears just better get out of the way.
Looking at David’s Nasdaq chart, we can see that we are back at 2007 highs. I find this truly amazing as it seems to me things aren’t quite as good in America as we THOUGHT they were in 2007, before we found out that Financial earnings were a scam and before our homes lost 1/3 of their value and when our neighbors used to all have jobs but CNBC is telling us over and over and over and over again how great things are so it must be true because they are on TV and TV doesn’t lie to us.
So there’s our ridiculous rally premise and we’re "very excited" to go bullish if we break over the 2007 market highs. XLF has been a real laggard so we like taking advantage of a run in the banks with trade ideas like the FAS April $20/25 bull call spread at $2.70, selling the April $21 puts for $2.55, which is net .15 on the $5 spread that’s already $4.25 in the money. So, if FAS makes a .75 gain between now and April expiration and holds it, this trade makes a 3,233% profit. That’s pretty good right?
See, that’s why we don’t fear the upside. If the…
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Defending Your Portfolio With Dividends – Q4 (Members Only)
by Phil - October 23rd, 2010 7:55 am
In uncertain markets, dividends can give you a critical investing edge.
As you can see from the chart on the left, just mindlessly investing in dividend-paying stocks can give you more than a 2:1 annual advantage in your investments.
Of course, here at PSW, we teach the art of selling options premiums – something that turns virtually any stock into a "dividend" payer. For example, MSFT is only a small, 2% dividend-payer but a fairly solid cash-machine of a stock that we don’t feel is likely to go bankrupt overnight so it makes for a nice safe staple in a long-term portfolio. But MSFT is also a very poorly-run company that hasn’t grown in 20 years but we can make it a much more interesting stock by simply selling covered calls.
For example, in our August edition of Dividend Payers, we looked at MSFT for $24.23 and we sell the Sept $24 calls for .77. This lowered our effective basis to $23.46 and selling the call putus in no special danger – we simply agreed to sell MSFT for $24 on expiration day in September (the 17th).
The stock was called away from us, and we made a .54 profit or 2.3% of our net $23.46 cash investment in less than 30 days. That works out to a 26% annualized ROI and we had an opportunity (as we had expected) to buy the stock again and again at $24 on Oct 4th and 5th and sell the November $24 calls for .90 for a net $23.10 re-entry and ANOTHER 3.8% GAIN if we are called away at $24 or greater on Nov 19th. Doesn’t that beat waiting a whole quarter for your 1% dividend checks?
Of course, you can optimize all this with timing and we favor stocks that are on sale – this is just a very simple example of how our most basic options strategy can drastically boost your annual returns on any stock in your portfolio.
Let’s say you don’t want to mess around with MSFT every month. You could have simply sold the 2012 $22.50s for $4.40 (also suggested in the August post), that dropped your net entry from $24.23 to $19.83 and getting called away at $22.50 would be a profit of 13.5% over 17 months PLUS you would be getting your .52 annual dividend…
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Bullish Strategist Positions for Rebound in Plains Exploration & Production Co. Shares
by Andrew Wilkinson - June 28th, 2010 5:49 pm
Bullish strategist positions for rebound in Plains Exploration & Production Co. shares
Today’s tickers: PXP, MRVL, SRE, RIMM, MU, AFL, BMY & DELL
PXP – Plains Exploration & Production Co. – The implementation of a three-legged bullish options combination play on Plains Exploration & Production Co. drew our attention to the November contract where one investor utilized call and put options to position for a rebound in the price of the underlying stock. Shares of the independent oil and gas company soured in late afternoon trading, slipping 3.2% lower to stand at $20.98 by 3:35 pm (ET). PXP’s current price of $20.98 represents a 40.4% decline in value since April 15, 2010, when the stock touched an intraday high of $35.41. But, the options activity observed in the November contract today indicates one trader is expecting the stock to rebound sharply ahead of expiration in five months time. The investor essentially sold short put options in order to partially finance the purchase of a debit call spread. The trader purchased 10,000 calls at the November $22.5 strike for a premium of $2.45 each, sold 10,000 calls at the higher November $28 strike for a premium of $0.70 each, and finally sold 10,000 puts at the November $17.5 strike for a premium of $1.30 a-pop. The net cost of the transaction amounts to $0.45 per contract. Thus, the investor responsible for the three-legged play is positioned to make money as long as PXP’s shares rally 9.4% to surpass the effective breakeven price of $22.95 by expiration day in November. Maximum potential profits of $5.05 per contract are available to the trader if Plains’ shares surge 33.5% to surpass $28.00 by November expiration.
MRVL – Marvell Technology Group Ltd. – Global semiconductor maker, Marvell Technology Group Ltd., popped up on our ‘most active by options volume’ market scanner in the second half of the trading session due to rampant bearish options activity in the July and August contracts. Marvell’s shares edged 1.50% lower this afternoon to stand at $17.11 just ahead of the closing bell. Pessimistic traders expecting shares to continue lower ahead of July expiration sold 3,100 calls at the July $17 strike for an average premium of $0.74 each. Call selling spread to the August $15 strike where 2,300 in-the-money calls were sold at an average premium of $2.52 per contract. Perhaps in-the-money call sellers are hoping to keep…
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Marvell Technology Group Ltd. Call Options Fly Off The Shelves
by Andrew Wilkinson - June 11th, 2010 4:15 pm
Today’s tickers: MRVL, EFA, MSFT, PFE, BMY, BAC, GME, NFLX & PM
MRVL – Marvell Technology Group Ltd. – The semiconductor maker popped onto our ‘most active by options volume’ market scanner late in the session due to rampant call buying in the June and July contracts. Marvell’s shares are higher by 1.65% to $17.74 just before 3:30 pm (ET). Near-term optimistic individuals itching for continued appreciation in the price of the underlying stock purchased approximately 9,000 calls at the June $18 strike for an average premium of $0.33 apiece. Investors long the calls make money if Marvell’s shares rally at least 3.325% from the current price of $17.74 to exceed the average breakeven point to the upside at $18.33 by expiration day in one week. Buying interest spread to the July $18 strike where bullish players paid an average premium of $0.89 per contract to take ownership of some 5,100 call options. Traders holding these contracts accumulate profits as long as MRVL’s shares increase 6.5% to surpass the average breakeven price of $18.89 by July expiration.
EFA – iShares MSCI EAFE Index Fund – The implementation of a large-volume short strangle on the EFA, an exchange-traded fund designed to provide investment results that correspond to the price and yield performance of the MSCI EAFE Index – an index which includes stocks from Europe, Australasia and the Far East, indicates one options strategist expects shares of the underlying fund to remain range-bound through September expiration. Shares of the EFA are trading lower by 0.63% to stand at $48.53 with less than 45 minutes remaining before the closing bell. The investor responsible for the strangle sold 16,000 puts at the September $42 strike for an average premium of $1.54 apiece in combination with the sale of the same number of calls at the higher September $52 strike for an average premium of $1.15 each. Gross premium pocketed on the transaction amounts to $2.69 per contract. The strangle-seller keeps the full premium received as long as the fund’s share price trades within the boundaries of the strike prices described through expiration. The short stance assumed in both call and put options expose the responsible party to losses in the event that shares rally above the upper breakeven price of $54.69, or if shares trade beneath the lower breakeven point at $39.31 at expiration. We note that shares of the fund have not…
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Barrage of Bearish Plays Befall Airgas, Inc.
by Andrew Wilkinson - May 19th, 2010 4:24 pm
Today’s tickers: ARG, QSFT, VTR, MET, SPWRA, USO, JPM, BMY, ADI & EXPE
ARG – Airgas, Inc. – Options investors initiated diverse bearish strategies on the distributor of industrial, medical and specialty gases this afternoon with shares of the underlying stock lower by 1.75% to $61.73 as of 3:15 pm (ET). Pessimistic players are likely wary of potential sharp share price erosion should Air Products & Chemicals Inc., the industrial gases maker forging a hostile takeover of Airgas in a proposed $5.1 billion bid for the company, fail to ultimately close the deal. Maybe bearish options investors are taking a cue from Paul Huck, CFO at Air Products & Chemicals, who yesterday stated, “there is a large drop in the stock price awaiting this, should Air Products go away” because “If we go away, who else is going to show up and pay this?” Airgas’s share price, which is up roughly 39% since Air Products’ offer went public ahead of February 5, 2010, would likely come crashing down if for some reason Air Products walks away given the lack of other serious competing offers for ARG at this time. Bearish traders bracing for potential share price hemorrhaging purchased a debit put spread and sold calls in the July contract and enacted a ratio bearish risk reversal in the October contract. One investor purchased 2,925 puts at the July $55 strike for a premium of $1.50 each, and sold the same number of puts at the lower July $50 strike for $0.65 apiece. Net premium paid for the spread amounts to $0.85 per contract, thus yielding maximum potential profits of $4.15 each if Airgas shares decline 19% to breach the $50.00 level by expiration day. The sale of 5,000 calls at the July $65 strike for an average premium of $1.05 each may or may not be the work of the same investor. Open interest of 19,000+ calls at the July $65 strike implies the call seller could be closing out a previously established long stance on the stock. Otherwise, the responsible party expects to keep the $1.05 premium per contract received on the sale as long as shares of the underlying stock do not exceed $65.00 ahead of July expiration. Finally, one pessimistic individual populating the October contract sold 5,000 calls at the October $70 strike for a premium of $1.28 each in order to buy twice as many puts…
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The Calm Before the Storm – Big Pharma Is Gonna Have Big Problems and Pfizer is the BIGGEST
by ilene - March 24th, 2010 2:01 pm
Second coming of the calm before the storm; fear not, there’s time to find shelter. - Ilene
The Calm Before the Storm – Big Pharma Is Gonna Have Big Problems and Pfizer is the BIGGEST
Courtesy of Pharmboy, member of Phil’s Stock World
This is a brief article of where the pharmaceutical industry has been, and where it could be headed in the near future. In contrast to past articles where I focused on the pipelines of GSK, LLY, MRK, BMY and ‘biotechs’ GENZ, GILD, and others, this is a summary of the industry. The overall market continues its grind up and I am gun-shy of its continued direction, but with the passage of the health care bill, biotechs that serve niche markets will be well positioned to see a rise both in stock price and potential M&A activity. In addition, as noted on Friday, March 19th on the laggers/leaders of the past month or so, Telecom and Healthcare were at the bottom of the pile. For the review of Big Pharma and some biotech picks at the end, generic companies are excluded from most data (Merck KGaA, Mylan, Teva and Watson).
From 2002 to 2009, the top pharmaceutical companies by sales had growth rates greater than 12% (compounded annually). Unfortunately, this growth is not sustainable and should move towards flat to nominal growth by 2014. The growth decline will challenge these companies to seek more profitable routes, including licensing and acquisitions. Picking the right companies based upon the science is at the forefront of good investing. Not they will all succeed because the science is sound, but understanding the molecule, target, and the disease helps guide smart decisions. Good management helps as well!
Let’s start with a summary of potential acquirers. Table 1 is a list of the 15 largest pharmaceutical and biotech companies ranked by healthcare revenue. Some companies (e.g., Bayer and Johnson) have additional revenue which is not included the sales data.
Table 1. Top 13 Pharma Companies in Sales (2009)
|
Rank |
Company |
Sales ($M) |
Based/Headquartered in |
|
1 |
Pfizer |
50,001 |
US |
|
2 |
Hoffmann–La Roche |
46,300* |
Switzerland |
|
3 |
Merck & Co. |
45,930** |
US |
|
4 |
…
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PetroBras Bear Braces for Aftershock – Buys Ratio Put Spread
by Andrew Wilkinson - February 10th, 2010 5:01 pm
Today’s tickers: PBR, HOG, BMY, FXE, KFT, YHOO, MOS, NTGR, BIDU & DIS
PBR – Petroleo Brasileiro SA ADR – Shares of Brazil’s state-owned oil and natural gas company rose 1.20% to $40.02 this afternoon, adding to the nearly 8% recovery in shares since Friday February 5, 2010, up to an intraday high of $40.25. But, painfully recent memories of the nearly 30% decline in the price per PBR-share from $52.88 on December 1, 2009, to a six-month low of $37.31 on February 8, 2010, have one investor casting doubts that this week’s rebound in shares will last. The investor initiated a ratio put spread to hedge against further share price erosion through February expiration. The trader bought 10,000 puts at the February $39 strike for a premium of $0.50 apiece, and sold 20,000 puts at the lower February $36 strike for a premium of $0.10 each. The net cost of the pessimistic play amounts to $0.30 per contract. Thus, the investor is positioned to amass profits should PBR’s shares slip beneath the breakeven price of $38.70 by expiration day. Maximum potential profits of $2.70 per contract are available to the trader if PetroBras’ share price falls 10% from the current price of $40.02 to reach $36.00 by expiration next Friday.
HOG – Harley-Davidson, Inc. – The motorcycle manufacturer’s shares declined 0.25% to $22.67 today prompting pessimistic options trades in the March contract. Investors purchased put spreads to position for potential share price erosion through expiration next month. Approximately 12,500 puts were picked up at the March $22 strike for an average premium of $1.08 apiece, spread against the sale of 12,500 puts at the lower March $19 strike for a premium of $0.25 each. The debit put spreads cost traders a net $0.83 per contract. Maximum potential profits of $2.17 per contract accumulate for put-spreaders if HOG’s share price plummets more than 16% from the current value of the stock to reach $19.00 by expiration.
BMY – Bristol-Myers Squibb Co. – Pharmaceutical company, Bristol-Myers Squibb, attracted bullish options traders today despite the 1.25% decline in the price of its shares to $23.94. One investor is optimistic that BMY’s shares will rally approximately 9% in the next five months to June expiration. The trader purchased a debit call spread to position for potential bullish movement in the price of the underlying stock. It appears the investor purchased 5,900 calls at…
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Bullish Bedlam on UnitedHealth in Late-Day Trading
by Andrew Wilkinson - December 16th, 2009 4:04 pm
Today’s tickers: UNH, F, EZCH, FBP, XOP, F, BMY, KFT, UNT, TIVO, ADBE & AMED
UNH – UnitedHealth Group, Inc. – Bullish investors stampeded the health and well-being company in late afternoon trading with shares up 3% to a new 52-week high of $32.25. Frenzied call activity on the stock drove option implied volatility up sharply by 19.5% to 45.17% from an intraday low of 37.37%. One investor was ready for the rally today, and banked profits on a previously established call position. The trader likely purchased about 20,000 calls at the now deep in-the-money December 23 strike price for a maximum premium of 3.00 per contract back on October 8, 2009, when UNH shares were at $24.13. Today the trader sold the calls for an average premium of 8.95 each. It looks like the investor took in net profits on the sale of at least 5.95 per contract for a total of $11.9 million. Next, it appears the trader extended bullish sentiment on the stock by establishing a larger call position. A big chunk of 30,000 calls were picked up at the now in-the-money January 31 strike for an average premium of 2.20 each. Thus, the trader breaks even on the new position if shares surpass $33.20 by expiration next month. Other bullish traders initiated call spreads on the stock. One UNH-bull bought 5,000 calls at the in-the-money January 31 strike for about 2.12 apiece, and sold the same number of calls at the higher January 34 strike for 70 cents premium each. The net cost of the spread amounts to 1.42 per contract and yields maximum potential profits of 1.58 apiece if shares rally up to $34.00 by January’s expiration day.
F – Ford Motor Co. – A late afternoon, large-volume put spread on the U.S. automaker is likely the work of an investor locking in gains enjoyed during Ford’s recent share price rally. Shares reached a new 52-week high of $9.64 during the trading session. The option trader looked to the March 2010 contract to purchase 18,000 puts at the March 9.0 strike for 62 cents apiece, spread against the sale of the same number of puts at the lower March 7.0 strike for 16 cents premium each. The net cost of the protective play amounts to 46 cents per contract. If the investor is indeed holding a long position in the underlying, the value of that…
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Mead Johnson and Bristol Myers Split Inspires Option Traders
by Andrew Wilkinson - November 16th, 2009 4:21 pm
Today’s tickers: MJN, BMY, FTR & FDO
MJN – Mead Johnson Nutrition Co. – Over the weekend Bristol Myers Squibb decided to sell its remaining 83% stake in Mead Johnson, maker of baby formula, Enfamil. Mead Johnson shares declined by 2% to $44.35 and the additional uncertainty surrounding the issue caused options implied volatility to spike higher in early trading. On Friday the expected degree of movement on the stock stood at 36.5% before jumping today to 56.3% as investors wonder whether the company will be able to stand on its own two feet without Bristol Myers. One option trader who clearly knows the stock well enough appears to have used a short straddle combination to predict that today’s move is bogus on two fronts. Using the December contract the seller wrote around 1,500 call options at 35 cents and sold a similar number of puts at the same strike. Being deep-in-the-money put options the premium here fetched 8.00. The premium especially on the put is boosted by the direction of the share price today but mostly by the 55% leap in implied volatility. The investor thus expects the share price to rise should Bristol find a buyer and similarly expects lower volatility. Last week those puts traded at 6.60. One analyst Bristol Myers has been hunting for a buyer at $60 per share, which may indicate the value this company might add to a willing buyer.
BMY – Bristol Myers Squibb – For its part shares surged to a one-year high after it jettisoned Mead Johnson, rising 5.7% to $24.47. The progress was slow throughout the morning that some call sellers were left wanting at the November 24 strike. Early sellers were forced to rethink as they tossed out calls at 27 cents per contract only to see buyers step in shortly after 10am to pay 34 cents before things really got interesting with call options currently commanding a 65 cent premium. Some 9,800 calls changed hands at this strike – almost equivalent to the 10,694 previously established calls. Put sellers were also in evidence using the same November contract and collected rich premiums in the expectation that the share price will rise despite the additional risk that the company has a less diversified product line in light of the Mead Johnson announcement. Option implied volatility rose, but only jumped from 21% to 23%.
FTR – Frontier Communications Corp.…
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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
(