Weak Weekly Wrap-Up – Charting Uncertain Waters
by Phil - May 8th, 2010 5:43 am
I’m just doing a quick wrap-up this week because, surprisingly, it MIGHT be time for a new Buy List!
I had said to Members on Cinco de Mayo, in our 5% Rule Review, that if we broke below 1,155 we would retrace all the way to 1,100 with our 5% Rule resistance points around 1,100 at 1,155, 1,114, 1,100, 1,073 and 1,045. We actually spiked as low as 1,066 on Thursday but finished the week at a very sad 1,110 as we watched for that "weak bounce" zone to be broken all day. This does not bode technically well for the markets next week but I told Members we would have to give the markets a pass for the day. Based on the uncertainty of the weekend, we can’t expect a lot of capital commitments ahead of the EU decision. After all, we’re in cash – why shouldn’t other smart funds be too?
When I predicted we’d hit 1,000 on Wednesday, I did not think it would be on Thursday! The markets are now negative for the year and the S&P has spiked almost to the Feb low of 1,044 (and our lowest close was 1,056). That’s right, these 5% Rule numbers are the SAME ones we used back then and it’s the same series we used to measure our winter run at the end of last year. We expect a bounce here, hopefully at least a test of 1,155 on a relief rally if Greece is "fixed" yet again on Monday but we’re not going to be too impressed until we’re over that line.
Still that means it’s time to at least lay out a new Watch List, which is the prelude to a Buy List – giving us a list of stocks we’d like to get into at lower prices. Our last Member Watch List was back in December and by Feb 6th we had our famous Buy List, which we triggered at Dow 10,058 for a very successful run through March 18th ("Bye Bye Buy List!"), when we closed 2/3 of the positions and we have since cashed out the rest as I got more and more worried about the rally, finally calling for all cash last week.
Speaking of last week, for those of you who say I don’t pick enough straight stocks – I listed 33 short trade ideas from my unofficial "Sell List" last Friday (4/30) when the Dow was way up at 11,167…
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Tumultuous Tuesday – Funds Tend to Short Ten-Year Treasuries
by Phil - May 4th, 2010 7:55 am
Societe Generale is out with the latest edition of their hedge fund watch and in it we see that they’ve found hedge funds to have the "shortest position EVER on bonds."
Well, ever is since 2005 but still, hedge funds now have more than 270,000 short contracts on the 10-year Treasury Bond and that’s not even counting PSW Members and their TBT positions (ultra-short the 20-year) so we are either twice as smart as hedge funds or twice as dumb – either way, it looks like it’s coming to a head!
SocGen also reports large short positions in 30-year TBills too with a net short there of about 100,000 contracts and the Bank concludes that funds are also "strong net sellers of the Yen (50K net short) and buyers of US Dollars." Short positions in the Euro are being reduced now that we’re near my $1.30 target but this is a critical line for the Euro and we could still break 10% lower if it doesn’t hold, I mentioned our Euro play in the Weekend Wrap-Up so I won’t get into it here but what a day we had yesterday already!
According to Market Folly, hedge funds are also now net sellers of equities with long/short equity funds are now around 25% net long, which is definitely below their historical average of 35-40% net long. Folly also sees that, according to CFTC data, many hedgies have been adding to shorts in S&P futures. Whether they are simply selling longs to lock in some profit or making a market timing call, one thing is clear: hedge funds are definitely cautious in this market. Following the funds has been profitable this year as they are up 13% year-to-date after the Hedge Fund Generals Index was up 69% last year.
PSW members did their best to avoid temptation yesterday despite the "rally" (that failed to make it back to Thursday’s highs on low volume) and despite the "fabulous" auto numbers that CNBC et al could not stop fawning over. Indeed the statistics were so good they were – RIDICULOUS – Chrysler up 25%, DIA up 18.8%, F up 24.7%, GM up 6.4%, HMC up 12.5%, Hyundai up 30%, Kia up 17.3% and TM up 24.4%. This caused me to comment to Members:
OK, now I may be an old fuddy-duddy but I’m counting less than 1M cars sold in a month in this group and it seems to
…
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GDWheee Friday – Could be a Wild Ride!
by Phil - April 30th, 2010 8:30 am
Attention ladies and gentlemen:
The stock market will soon be leaving the station, please secure all personal items, pull down the safety bar (our Disaster Hedges) and keep all body parts inside ride at all times. Well you know you can follow all of the safety instructions and STILL get smacked in the face with a black swan (like our friend Fabio, pictured here) which is why we elected to get back to cash ahead of this report. The markets were just too insane this week and who the heck knows if Europe will still be a Union on Monday or what the GDP number is going to be (but I do think it’s a miss).
Since our biggest weekend fear is financial panic in Europe, our cash US dollars will become more valuable in a crisis and if the market drops, all the better as we can ride back in and do some bargain hunting. If the market takes off on good GDP and Greece is "fixed" and Spain is "fixed" and Portugal and Ireland are not really a problem (especially for MS and JPM) and the CRIMINAL charges against Goldman look beatable and and the Financial Reform Bill doesn’t disrupt the market with a disorderly breakup of the big banks and the Bank of International Settlements Report continues to be ignored and the run on the Greek banks doesn’t spread to other STUPID counties – well, then we can BUYBUYBUY because, if all this doesn’t matter, then it’s very likely that the entire planet Earth could explode but Wall Street will keep ticking higher.
Yep, I can’t wait to ride this baby mindlessly higher! After all, what can go wrong? BIDU is ONLY $710 a share, BLK is $190, CMP is $76, GOLD is $84, BUCY is $65, FAST is $56, MMM is $90, FOSL $40, F $13.50, DECK $149, SHOO $55, TPX $35, LZB $14, CTB $22, NOG $16, CEO $176, FTI $75, CLB $150, CIB $46, BBD $19, TD $75, BCA $45, BAP $87, ITUB $22, EDU $94, WYNN $93, FFIV $72, CY $14, CREE $77, UPS $70, UNP $78…
These were stocks I was looking at last week, when I told members I thought it was easier to construct a Sell List than our usual Buy List for this market but, if we’re heading…
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Qualcomm Bull Itching for a Sharp Rally in Shares by July Expiration
by Andrew Wilkinson - April 15th, 2010 4:48 pm
Today’s tickers: QCOM, KBE, XRT, GE, BAC, F, UPS, UAUA & NTRI
QCOM – Qualcomm, Inc. – The manufacturer of digital wireless telecommunications products and services received a vote of confidence by one optimistic options investor who purchased a debit call spread in the July contract today. Qualcomm’s shares rallied 0.55% in late afternoon trading to stand at $42.84 as of 2:45 pm (ET). The trader initiated the call spread by purchasing 4,000 lots at the July $46 strike for a premium of $1.00 each, marked against the sale of 4,000 calls at the higher July $49 strike for $0.37 apiece. Net premium paid for the bullish play amounts to $0.63 per contract, thus positioning the investor to amass maximum potential profits of $2.37 per contract should Qualcomm’s shares rally 14.4% over the current value of the stock to $49.00 by expiration day in July. The parameters of the transaction suggest the responsible party hopes Qualcomm’s share price shifts toward the stock’s current 52-week high of $49.80, attained back on January 8, 2010, in the next several months to expiration.
KBE – SPDR KBW Bank ETF – Shares of the SPDR KBW Bank fund, which replicates the performance of the KBW Bank Index, slipped 0.75% during the course of the trading day to stand at $28.18 with 35 minutes remaining in the session. Earlier today, one investor pocketed a net credit by selling a large chunk of call options spread against the purchase of put contracts. The trader sold 28,260 calls at the May $29 strike for a premium of $0.58 each, and purchased the same number of puts at the lower May $27 strike for $0.40 apiece. A net credit of $0.18 per contract pads the investor’s wallet as long as shares of the underlying fund trade below $29.00 through expiration day in May. Additional profits are available should shares slip beneath $27.00 in the next several weeks. The transaction may be linked to an underlying share position. If this is the case, the put options serve as downside protection should the fund’s share price erode, but the short position in calls could result in the investor having the underlying shares called away from him at expiration should the call contracts land in-the-money at that time.
XRT – SPDR S&P Retail ETF – A massive bearish transaction on the XRT, an exchange-traded fund which seeks to replicate the performance…
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Ford Motor Co. Calls Fly Off the Shelves
by Andrew Wilkinson - April 14th, 2010 5:09 pm
Today’s tickers: F, PGR, IBM, YHOO, SMH, LINTA, VALE, POT, LEN & RRGB
F – Ford Motor Co. – Call options on automobile maker, Ford Motor Co., are flying off the assembly line this afternoon with shares of the underlying stock soaring 4.5% higher to $13.36. Investors exchanged more than 381,000 option contracts on Ford by 3:25 pm (ET), and paid extra attention to call contracts, trading more than 3.7 calls to each single put option in action. The most heavily trafficked area of the Ford options arena today are call contracts at the September $14 strike where bullish players bought up approximately 86,000 lots for an average premium of $1.12 apiece. More than 99,100 calls changed hands at this strike, which puts the previously existing open interest of 22,831 contracts to shame. Call-buyers holding the September $14 strike call options are positioned to make money if the auto maker’s shares surge 13.2% over the current price to surpass the average breakeven price of $15.12 by September expiration. Ford’s overall reading of options implied volatility is up 14.5% to 39.48% with 30 minutes remaining in the trading session.
PGR – The Progressive Corp. – Bullish options investors dabbled in call options on the insurance holding company in late afternoon trading with shares of the underlying stock rallying up 5.55% to a new 52-week high of $20.55. One investor was prepared for the rally and banked profits on a previously established long call position today. It looks like the options optimist originally purchased 2,000 calls at the May $20 strike for an average premium of $0.35 apiece back on March 25, 2010, when shares of Progressive Corp. were trading at around $18.86 each. The subsequent surge in the value of Progressive’s shares prompted the trader to sell the calls today for a premium of $0.95 apiece, thus banking net profits of $0.60 per contract. Finally, the investor initiated a fresh bullish stance on the stock by purchasing 2,000 calls at the higher August $22.5 strike for a premium of $0.40 each. The trader makes money on the new call acquisition if the insurer’s shares increase another 11.45% to exceed the effective breakeven share price of $22.90 by expiration day in August.
IBM – International Business Machines Corp. – The computer services giant received a vote of confidence by one big bullish options player this afternoon amid a 1.7% increase in the…
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Xyratex’s Earnings Forecast Inspires Bullish Options Activity
by Andrew Wilkinson - April 1st, 2010 4:11 pm
Today’s tickers: XRTX, EXEL, PBR, F, BPOP, ALTH, RIG, MYL, HIG & SYMC
XRTX – Xyratex, Ltd. – Shares of the provider of data storage and network technology surged 13.7% at the start of the trading session to a new 52-week high of $19.25 after the firm said it anticipates earnings per share of at least $1.10 in the second quarter. The company’s earnings forecast is significantly greater than the consensus estimate of $0.76 per share. The wear-and-tear of the trading session parsed some of the early-morning rally, but Xyratex’s shares are still up 9.50% to $18.56 as of 2:45 pm (ET). Bullish investors prepared for continued appreciation in the price of the underlying by purchasing 1,100 calls at the June $20 strike for an average premium of $1.49 apiece. Call-buyers at this strike profit only if shares surge 15.8% from the current price of $18.56 to exceed the effective breakeven point at $21.49 by expiration day in June. Options traders exchanged 5,025 contracts on the stock during the trading day, which is nearly on par with total existing open interest on XRTX of 5,656 contracts.
EXEL – Exelixis, Inc. – Bullish options trading tactics were employed on the biotechnology company this afternoon as the firm’s shares surged 11.7% to an intraday high of $6.78. It looks like one investor sold 5,000 puts short at the November $5.0 strike price to take in an average premium of $0.40 per contract. The put seller keeps the full premium received on the transaction as long as shares of Exelixis trade above $5.00 through expiration day in November. By selling the put contracts, the investor implies he is willing to have shares of the underlying stock put to him at an effective price of $4.60 each in the event that the put options land in-the-money at expiration. The jump in options activity on the stock and the shift in share price lifted the overall reading of options implied volatility on Exelixis 42.2% to 82.1% in the final hours of the trading week.
PBR – Petroleo Brasileiro SA – A debit call spread enacted on Brazilian oil and gas company, Petroleo Brasileiro, suggests one investor is positioning for continued bullish movement in the price of the underlying stock through July expiration. PetroBras’ shares rallied 1.9% late in afternoon trading to stand at $45.35 as of 2:30 pm (ET). The optimistic options trader purchased 2,500…
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Tenet Healthcare Receives Bullish Three-Legged Options Combo Play
by Andrew Wilkinson - March 22nd, 2010 4:09 pm
Today’s tickers: THC, F, TIVO, HIG, LVS, XME, AET & SHW
THC – Tenet Healthcare Corp. – Shares of the provider of health care services surged 9.39% today to $6.29 following the passage of health-care reform legislation through the U.S. House of Representatives. Intriguing bullish options trading transpired on Tenet Healthcare during the current session as investors secured positions that yield profits if the firm’s shares continue to appreciate through expiration in January 2011. One optimistic player enacted a three-leg options combination play by selling short put options to partially finance the purchase of a debit call spread. The investor picked up 10,000 calls at the January 2011 $7.5 strike for a premium of $0.65 apiece, and sold 10,000 calls at the higher January 2011 $10 strike for $0.10 each. Next, the trader shed 10,000 puts at the January 2011 $5.0 strike for $0.55 premium apiece. The investor’s combination play was essentially enacted at zero cost because of the financing provided by the sale of higher-strike calls and out-of-the-money put options. Maximum potential profits of $2.50 per contract are available to the Tenet-bull if shares of the underlying stock jump 59% from the current price to $10.00 by expiration next year. The short position in put options implies the trader is willing to have Tenet’s shares put to him at $5.00 each should the put contracts land in-the-money ahead of expiration day in January. Options implied volatility on the stock slumped 20.9% this afternoon to 46.67% following the passage of the health care bill in the House.
F – Ford Motor Co. – Bullish options activity on the automobile manufacturer picked up as the trading day progressed amid a 4.5% rally in the price of the underlying stock to $13.90. One optimistic individual initiated a bullish risk reversal transaction in the June contract to position for continued upward momentum in the price of Ford’s shares through expiration. The investor sold 5,000 puts at the June $10 strike for a premium of $0.23 per contract in order to partially offset the cost of buying the same number of call options at the higher June $16 strike for $0.44 apiece. The net cost of the reversal play amounts to $0.21 per contract. Thus, the investor responsible for the trade stands ready to accrue profits if Ford’s shares surge 16.60% over the current price to surpass the breakeven point at $16.21 by expiration…
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Ford Rally Fuels Bullish Options Activity
by Phil - March 17th, 2010 4:19 pm
Today’s tickers: F, EEM, DELL, UPS, IYR, JACK, WFC, CLX, SKX & LNC
F – Ford Motor Co. – The automobile manufacturer’s shares are once again trading at a new 52-week high after rallying 4.00% today to $14.02. Upward movement in the price of the underlying stock inspired bullish options trading activity. One investor initiated a plain-vanilla debit call spread to position for continued share price appreciation through expiration in September. The trader bought 5,000 calls at the September $15 strike for a premium of $1.03 per contract, and sold the same number of calls at the higher September $17.5 strike for $0.40 each. The investor paid a net $0.63 per contract for the spread, but could gain as much as $1.87 per contract if Ford’s shares surge 25% over the current price to $17.50 by expiration day. Nearer-term put activity clashes with the bullish move described in the September contract. It looks like investors purchased at least 18,600 put options at the April $13 strike for an average premium of $0.27 apiece. Perhaps put buyers are long shares of the underlying stock and are merely picking up cheap downside protection. But, it could also be the case that traders are buying the puts outright because they expect Ford’s shares to decline ahead of next month’s expiration day. If the latter is true, put-buyers amass profits if shares trade beneath the effective breakeven point on the puts at $12.73 by expiration.
EEM – iShares MSCI Emerging Markets Index ETF – Shares of the EEM, an exchange-traded fund that mirrors the price and yield performance of the MSCI Emerging Markets index, rose 1.55% during the session to $42.24. Despite the move up in share price, one investor employed a total of 60,000 option contracts on the fund to establish a bearish risk reversal in the January 2011 contract. It appears the options player shed 30,000 calls at the January 2011 $48 strike for a premium of $1.60 apiece in order to partially finance the purchase of 30,000 puts at the January 2011 $38 strike for $2.88 each. The net cost of the reversal amounts to $1.28 per contract. The massive size of the position may mean the trader is currently long an equivalent number of underlying shares of the fund. If this is the case, the transaction provides downside protection on that position should the EEM’s share price erode ahead of…
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Options Player Reveals Long-Term Bullish Sentiment on AIG
by Andrew Wilkinson - March 12th, 2010 4:19 pm
Today’s tickers: AIG, MU, F, POT, CLF, PAYX, ERIC, SVU, LFC & CA
AIG – American International Group, Inc. – The insurer’s shares experienced a fantastic 56.7% run up from its low point in the current month of $24.54 on March 3, 2010, up to yesterday’s intraday high of $38.45. During the current session, AIG surrendered a small portion of its recent share price gains, slipping slightly lower by 1.40% to stand at $34.62 in afternoon trading. Extreme-bullish positioning in long-dated options caught our attention today as one investor established a call spread in the January 2011 contract. The optimistic trader purchased 5,500 calls at the January 2011 $50 strike for a premium of $3.65 apiece, and sold the same number of calls at the higher January 2011 $75 strike for $1.30 each. The net cost of the transaction, and maximum loss potential faced by the investor, amounts to $2.35 per contract. American International Group’s shares must surge 51.2% from the current price of $34.62 in order for the trader to break even on the spread at $52.35 per share. Perhaps the individual responsible for the trade expects AIG’s shares to rebound up to the current 52-week high on the stock of $55.90 (attained back on August 28, 2009), or above within the next ten months to expiration. Maximum available profits of $22.65 per contract – total gains of $12.4575 million – accumulate for the bullish player if AIG’s shares jump 116.6% from today’s price to $75.00 by January expiration day. Shares last traded above $75.00 back in October of 2008.
MU – Micron Technology, Inc. – A large-volume long-term bullish transaction on the manufacturer of semiconductor devices indicates one big options player anticipates continued upward movement in the price of Micron’s shares by expiration in January 2011. Shares rallied 2.55% to $10.05 this afternoon, but earlier increased more than 4% to reach an intraday high of $10.25. The optimistic investor purchased a debit call spread in by picking up 20,000 in-the-money call options at the January 2011 $10 strike for a premium of $2.07 apiece, marked against the sale of 20,000 calls at the higher January 2011 $15 strike for $0.58 each. The net cost of the spread amounts to $1.49 per contract, positioning the investor to amass profits if Micron’s shares exceed the breakeven price of $11.49 by expiration next year. Maximum potential profits of $3.51 per contract…
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Bears Bombard Blackberry-Maker, Research in Motion
by Andrew Wilkinson - March 1st, 2010 5:00 pm
Today’s tickers: RIMM, CAT, MGM, F, SLM, FRX, FXI, MWW & AIG
RIMM – Research in Motion Limited – Blackberry maker, Research in Motion, attracted bearish options strategists even though the firm’s target share price was upped to $100.00 this morning from $95.00 at Canaccord Adams. RIMM opened the session higher, but slipped slightly in afternoon trading by 0.05% to $70.85. One bearish tactic employed today was the use of a plain-vanilla put spread in the March contract. The trader responsible for the transaction purchased 4,400 puts at the March $65 strike for a premium of $0.54 apiece and sold the same number of puts at the lower March $60 strike for $0.20 each. The net cost of the spread amounts to $0.34 per contract. Maximum potential profits of $4.66 per contract are available to the investor if RIMM’s share price slumps 15.30% beneath the current value to $60.00 by expiration. We note that the mobile device manufacturer’s shares last traded below $60.00 on December 4, 2009. The bearish risk reversal is another pessimistic tactic utilized today. One trader sold 5,000 calls at the April $75 strike for a premium of $2.66 each in order to purchase 5,000 puts at the lower April $70 strike for $3.80 apiece. The net cost of the reversal play amounts to $1.14 per contract. The investor stands ready to accrue profits to the downside if shares of the underlying stock trade beneath the effective breakeven point at $68.86 by expiration in April.
CAT – Caterpillar, Inc. – February marked the seventh consecutive month of manufacturing expansion in the United States; this fact, coupled with today’s jump in equities’ prices, inspired bullish options trading on machine-maker, Caterpillar. CAT’s shares rallied 1.50% during the session to $57.92 after its earnings forecast through the year 2012 were increased by analysts at Morgan Stanley. MS maintains an ‘overweight’ rating on CAT and a $70 share price target, at present. Bullish options activity appeared on the put side of the field where one investor established a credit spread. The trader sold roughly 16,300 puts at the April $55 strike for a premium of $1.38 apiece, and purchased the same number of puts at the lower April $50 strike for $0.47 each. The investor pockets a net credit of $0.91 per contract, and keeps the full amount as long as Caterpillar’s share price remains above $55.00 through expiration day in…
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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
(