Gold Bulls and Bears Place Bets on Bullion
by Andrew Wilkinson - December 3rd, 2009 4:12 pm
Today’s tickers: GLD, MTG, ACN, BAC, HUN, PSS, ARO, HUN, APWR & FDO
GLD - SPDR Gold Trust ETF – Surprise, surprise…shares of the gold exchange-traded fund reached another record high by climbing up to $119.42 today. We observed one investor initiate a contrarian play in the January 2010 contract. The trader established a bearish risk reversal by selling 4,000 calls at the January 120 strike for 3.65 apiece, spread against the purchase of 4,000 puts at the same strike for 4.60 each. The net cost of the spread amounts to 95 cents per contract. The trader, if long shares of the underlying, enacted downside protection to hedge against potential declines in the price of gold through expiration in January. Perhaps this investor believes gold has peaked, at least as far as the next couple of months are concerned. In contrast, longer-term trading in the September contract was decidedly bullish. The trader sold 5,750 puts at the September 117 strike for 9.35 apiece in order to finance the purchase of the same number of calls at the higher September 140 strike for an average premium of 5.88 each. The investor banks a net credit of 3.47 per contract on the transaction, which he retains in full as long as shares remain higher than $117.00 through expiration. Additional profits amass if shares jump 17% to surpass the $140-level by expiration in September.
MGT - MGIC Investments Corp. – Bullish investors populated MGIC Investments Corporation with various optimistic option strategies throughout the trading day. Shares surged 20% to $5.10 after its Wisconsin regulator waived minimum capital requirements for two years. This permits the company to continue selling coverage despite nine straight quarterly losses. Investor reacted by picking up nearly 5,000 calls at the now in-the-money December 5.0 strike for an average premium of 30 cents apiece. Call-buyers will profit if MTG’s shares surpass the breakeven price of $5.30 by expiration. Additional bullish transactions appeared in the January 2010 and March 2010 contracts. Optimistic individuals shed 3,000 puts at the January 5.0 strike for 60 cents premium apiece. Investors retain the premium received on the sale if shares remain above $5.00 through January’s expiration day. Put-sellers stand ready to have shares of the underlying stock put to them at an effective price of $4.40 per share if the puts land in-the-money. Finally, another chunk of 5,000 puts were sold at the March 5.0 strike for 1.35 each.…
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GOLD REPRESENTS THE MASSIVE RISKS IN THIS MARKET
by ilene - December 2nd, 2009 7:51 pm
Is gold risky? At least Pragcap thinks so, in contrast to many other’s predicting much higher prices. Here’s why. - Ilene
GOLD REPRESENTS THE MASSIVE RISKS IN THIS MARKET
Courtesy of The Pragmatic Capitalist
There is no doubt a bubble forming in gold prices. In my opinion, the price of gold perfectly reflects the irrationality across many major markets, most notably, the equity markets. Despite no signs of inflation gold is up over 70% in the last year. As we’ve long opined, this is nothing more than the irrational money chasing that the Federal Reserve has once again created via their magically destructive printing press.
The Fed is effectively forcing investors into risky assets as they give investors no other choice to support their retirement/income needs via their ZIRP. The price of gold has gone nearly parabolic in recent weeks and I would now classify gold as the riskiest of risky assets to own. This move down in the dollar and up in gold has come to epitomize the failure of Fed policy to reflate markets back to normality. As we’ve said before, there are only two outcomes from the Fed printing policy: more bubbles or utter failure. For now, it looks like we’re in store for the former and that means there are more busts in our future. I think monetary and fiscal policy are currently making our macro problems even worse, but how bad these problems become has yet to be seen.
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Put Volume Explodes on iShares MSCI Hong Kong Index ETF
by Andrew Wilkinson - December 2nd, 2009 4:38 pm
Today’s tickers: EWH, HPQ, M, GLD, LCC, KRE, BBY, WAG & DYAX
EWH - iShares MSCI Hong Kong Index Fund – The EWH popped onto our ‘most active by options volume’ market scanner today after one investor traded 70,000 put options on the fund. Shares of the ETF are up 0.25% this afternoon to stand at $16.22. It appears the trader shed 35,000 puts at the January 14 strike for 10 cents apiece in order to partially offset the cost of purchasing 35,000 puts at the June 14 strike for 65 cents each. The net cost of the protective play amounts to 55 cents per contract. The nearer-term short put position in the January contract implies the investor does not expect shares to dip below $14.00 by expiration in less than two months. The investors stands ready to have a whopping 3,500,000 shares of the underlying put to him at $14.00 apiece in the event that the put options do land in-the-money. The long put position in the June 2010 contract suggests the trader is already long the stock. He is most likely extending downside protection on the underlying position for the next seven months before expiration. Shares of the EWH would need to fall 17% from the current price in order for downside protection to kick in beneath the breakeven point at $13.45. We note that shares of the fund have traded above $14.00 since July 15, 2009.
HPQ - Hewlett-Packard Co. – Medium-term bullish trading graced the global technology company’s February 2010 contract despite a 1% decline in HPQ shares this afternoon to $49.06. A risk reversal by one option player suggests shares could increase significantly by expiration in February. The trader sold 12,000 puts at the February 40 strike for an average premium of 27 cents apiece, and bought the same number of calls at the higher February 60 strike for 8 pennies each. The transaction yields a net credit of 19 cents per contract. The investor retains the full credit as long as HPQ’s shares remain above $40.00 through expiration day. Additional profits accumulate if the stock surges 22% higher than the current price to surpass the $60-level. The long call position probably serves more as a stop loss, or insurance policy, on the trade in the unlikely event that shares do jump more than 22% in the next three months. The reversal was more likely motivated by the 19…
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Which Way Wednesday?
by Phil - December 2nd, 2009 8:23 am
Are we at the top of our range or about to break higher?
Our lower breakout on the Dow has been 10,250 and that has held up very well for the past few weeks so we have to respect that but, at the same time, we seem very overbought and just needing some sort of correction to help us confirm the bottom of the channel is still supporting us (see Fallond chart). The other levels we were looking for in Monday’s post were: S&P 1,100 (check), Nasdaq 2,187 (2,175), NYSE 7,200 (7,212) and Russell 600 (589).
As I said on Monday: "If we don’t get 3 of 5 of our indexes over, then there’s not going to be anything to get bullish about." Unfortunately, we didn’t like the way we got there yesterday so we stayed bearish (60%) into the close but we sure are ready to run with the bulls by slapping on a couple of DIA covers and using 10,500 as our on/off switch to play the upside (which should coincide with the Nas and Rut breakouts).
As I noted to Members in yesterday’s 9:43 Alert, our prior market tops were Dow 10,495, S&P 1,113, Nas 2,205, NYSE 7,266 and Russell 605 so there is no excuse for any of our indexes not to make the grade if we’re really heading higher. Today’s fly in the ointment may be oil inventories at 10:30, as holiday driving and flying numbers were not that great so the anticipated drawdown of about 2M barrels may turn out to be a build, especially in gasoline as many families had subdued Thanksgivings at home this year (thankful to be employed, thankful to have 70% of their IRA left, thankful their house only lost 20% of it’s value, thankful gas is still under $3…), which does not bode well for Christmas either.
Fundamentally, we think the economy still has serious issues and that the market is delusional at these levels but we don’t fight the Fed or the big technicals so IF we do make our levels, THEN we will be some very reluctant bulls but bulls we will be.
I have, for quite some time, been saying this is very much like 1999 and we do expect a big sell-off in the near future as reality begins to take it’s toll on the market but, in December of 1999, the Dow went from 11,000 to 11,500 on the 31st before giving it all back…
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Option Trader Irons Out Bullish Risk Reversal on Vale
by Andrew Wilkinson - November 25th, 2009 10:06 pm
Today’s tickers: VALE, GLD, BKC, VIX, IYR, GPS, CTXS, JPM, JCG, BKC, & TIF
VALE - Vale S.A. – Iron ore producer, Vale, experienced a more than 2.5% rally in shares during the trading session to arrive at a new 52-week high of $29.64. A bullish risk reversal in the March 2010 contract today indicates at least one investor is positioning for continued upward movement in the price of VALE shares by expiration. The trader sold approximately 3,300 puts at the March 26 strike for an average premium of 1.29 apiece in order to finance the purchase of roughly 3,300 calls at the higher March 32 strike for 1.59 each. The net cost of the transaction amounts to 30 cents per contract and positions the investor to amass profits if shares surpass the breakeven price of $32.30 by expiration. Shares must jump at least 9% from the current price to breach the effective breakeven point on the trade.
GLD - SPDR Gold Trust ETF – Shares of the gold exchange-traded fund, which replicates the performance of the price of gold bullion, rose 1.5% today to yet another all-time high of $116.43. We observed bullish activity in the June 2010 contract by one investor who initiated a call spread on the fund. It appears the trader purchased 13,265 calls at the June 125 strike for an average premium of 5.95 each, spread against the sale of the same number of calls at the higher June 150 strike for 2.10 apiece. The net cost of the gold-spread amounts to 3.85 per contract. The investor responsible for the trade accumulates profits if shares rally 11% from the current price and surpass the breakeven point at $128.85. Maximum potential profits of 21.15 per contract are available to the trader in the event that shares of the GLD surge 29% to $150.00 by expiration day in June of 2010.
BKC - Burger King Holdings, Inc. – Burger King-bulls bought nearly 4,700 calls at the in-the-money December 17.5 strike for an average premium of 50 cents apiece. Such activity suggests investors expect shares to rally through $18.00 – the breakeven point on the calls – by expiration in December. Bullish sentiment on the flame-broiled burger maker is perhaps inspired by strength in the fast-food restaurant sector. Cash-strapped consumers, wary of the 10.2% unemployment rate, are likely trading down from moderately priced eateries to cheaper nosh provided by the fast-food companies. BKC’s Senior…
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Weak Dollar Wednesday - Charging More for Less
by Phil - November 25th, 2009 8:25 am
Over $1.50 for the Euro this morning!
The Pound ran up to $1.675 and, as soon as the Nikkei closed (up 40 points), the dollar dove to just 87.5 Yen. That sent gold flying up to $1,180, copper to $3.18 and silver to $18.80 but oil couldn’t get back over $76.50, which is strange because the last time the dollar was this low oil was $140 a barrel. Why have the commodity speculators abandoned oil and moved on to metals?
For one thing, energy trading is now under Congressional scrutiny - as well it should be, since it is a forced tax on every man, woman and child on the planet. Copper prices don’t affect anybody since no one is building anything anyway and pennies sure aren’t worth saving since you need 5 of them just to buy a piece of gum these days. Silver has industrial uses but there’s not much industry with Industrial Production at less than 80% capacity so no one is complaining (are there any workers left to complain?) about that price and gold consumption is off 34% from last year so the 43% rise in price since last year isn’t tapping more overall global dollars - speculators are just getting much much less for much much more.
Oil collapsed last year because, when push came to shove, people simply couldn’t afford to buy barrels of oil for $140, or $100, or $80. The problem with trying to manipulate the oil market is 86M barrels more come out of the ground every day, whether you want it or not and if people stop consuming then it has to be stored and that can get expensive. As it is now, global stockpiles of crude products are at record levels and it is possible that the US is literally out of room to store natural gas despite massive production cutbacks from cartel members like CHK, XOM and EOG.
So manipulating the price of oil and natural gas gets tough as demand falls off but only 800 tons of gold were consumed in all of Q3, down from 1,206 last year, when gold averaged $825. In India, the world’s largest consumer of gold, demand fell about 50% from 271.2 tons to just 137.6 tons. China picked up the slack as the government stockpiled metals (just another speculator) and demand there went from 116.9 tons to 128.6 tons so a 10% increase in Chinese demand to WOW the investors into…
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Virgin Media bulls bank profits and build new positions
by Andrew Wilkinson - November 23rd, 2009 4:38 pm
Today’s tickers: VMED, EWZ, HAL, FMCN, VIX, SEED, GLD, CMCSA, SEED, LDK & USG
VMED - Virgin Media, Inc. – Virgin-bulls banked profits and established new positions on the telecommunications company this afternoon amid a 1% increase in shares to $16.54. One investor initiated the closing purchase of 10,000 put options that were originally sold short for an average premium of 68 cents apiece back on October 16, 2009. Today the trader closed out the position by buying the puts for just 15 cents each. Net profits on the trade amount to 53 cents per contract for a total of $530,000. The same investor is likely responsible for putting on a similar bullish strategy in the March 2010 contract. The March 15 strike had 10,000 puts sold short for one dollar per contract. The sale of the put options implies the trader expects shares of VMED to remain above $15.00 through expiration in March. Finally, optimism spread to the March 17.5 strike where 2,685 calls were purchased for an average premium of 1.45 apiece. Call-buyers amass profits if shares of VMED rally another 15% over the current price to breach the breakeven point at $18.95 by expiration day in March. Option implied volatility is currently 8.5% lower to 42.40%.
EWZ - iShares MSCI Brazil Index ETF – A bullish risk reversal on the EWZ in the January 2010 contract indicates investors are positioning for a rally in shares over the next couple of months. Shares of the fund are trading 1.5% higher to $76.28 this afternoon. Traders sold 5,500 puts at the January 77 strike for an average premium of 4.90 apiece in order to finance the purchase of 5,500 calls at the same strike for 3.35 each. The bullish reversal yields a net credit of 1.55 per contract. Investors retain the full 1.55 credit if shares of the Brazil Index ETF trade above $77.00 by expiration in January. Additional profits accumulate to the upside above the $77.00 breakeven price. The 1.55 credit also acts as a buffer against losses to investors in case shares fail to rise up to the strike price described. Investors short the put options stand ready to have shares of the underlying stock put to them at an effective price of $75.45 each if the put options land in-the-money by expiration.
HAL - Halliburton Co. – Near-term bearish option plays on the oil and gas company belie the more than 2%…
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Dow Chemical Option Bulls and Bears on the Prowl
by Andrew Wilkinson - November 17th, 2009 4:32 pm
Today’s tickers: DOW, GLD, ISIS, DTV, SINA, XOM, SPWRA, AGO & SINA
DOW - The Dow Chemical Co. – Shares of the manufacturer of chemicals and plastic materials increased 2% during the trading session to $29.45. We observed a mix of bullish and bearish option plays on the stock today. One investor appears to have unraveled an in-the-money ratio call spread in the December contract in order to finance the purchase of 7,500 calls at the December 28 strike for 1.92 apiece. Further along, in the January 2010 contract, another bullish player rolled a long call position to a higher strike price. It looks like the investor originally paid between 2.35 to 3.30 in premium to buy 5,000 calls at the now deep-in-the-money January 24 strike back on September 14, 2009. Today the trader closed out the December 24 strike calls by selling 5,000 contracts for 5.30 each. The closing sale of the calls was spread against the purchase of 5,000 fresh call options at the higher January 28 strike for about 2.45 premium per contract. Finally, protective plays dominated the March 2010 contract. Two put spreads were established this afternoon. The first transaction involved the purchased of 5,000 puts at the March 27 strike for 2.08 each, marked against the sale of the same number of puts at the lower March 20 strike for 47 cents apiece. The net cost of the trade amounts to 1.61 per contract and yields protection beneath the breakeven price of $25.39. The other put spread involved the same number of put options but was transacted at the March 26/19 strikes at a net cost of 1.38 per contract. Downside protection on this play kicks in if shares decline through the breakeven point at $24.62 by expiration day in March.
GLD - SPDR Gold Trust ETF – More than 253,800 option contracts changed hands on the GLD with about 30 minutes remaining in the trading day. Investors traded calls on the exchange-traded fund more than 1.8 times to each put option in play. Shares of the GLD, which replicates the performance of the price of gold bullion, are up 0.25% in late-day trading to stand at $111.90. A large-volume ratio call spread on the fund suggests some investors expect the price of gold to rise sharply by expiration in January 2010. Bullish traders bought approximately 15,000 calls at the January 112 strike for an average premium of 3.88…
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Wild Weekly Wrap-Up, Topping or Popping?
by Phil - November 14th, 2009 12:02 pm
This was an annoying week for bulls and bears alike.
We had a very exciting day on Monday, topping out at 10,248 but I didn’t like the way we got there (low-volume, commodity rally, as noted in David Fry’s chart) and, when pressed for a prediction on TV that evening, I had to say that I felt that we were more likely to be down by Thanksgiving than up with a possible Santa Claus bounce into Christmas. What we did get for the remainder of the week was very choppy action on even lower volume.
I had mentioned in last week’s "Wrong-Way Weekly Wrap-Up" that we were partying like it’s 1999 as we broke through Dow 10,000 and S&P 1,080, despite rapidly deteriorating fundamentals. Stocks are being bought because they are going up in price (much like commodities), not because there is any actual demand for them and that is very clear from the rapidly declining index volume as we run back into resistance at S&P 1,100.
Since early September our upside targets for the indexes have been: Dow 10,087, S&P 1,096, Nasdaq 2,173, NYSE 7,204 and Russell 623 and nothing has happened to change our fundamental outlook for the better so the closer we get to those levels, the LESS comfortable we are taking bullish positions. In fact, yesterday as we got our mid-day spike to 10,300, I told members that it was sorely tempting to just cash out all bullish positions and take 20% of the portfolio 100% bearish with a 10% stop. Rather than mess around with a mix of positions, going fully bearish can allow for some spectacular gains if we crash and stopping out with a 50% loss would suck - but a breakout like that, well above Dow 11,000 and S&P 1,200 would certainly give us reason to be more bullish.
As I concluded last week: "We’re generally not happy until we see Russell 600 and the Dow Transports over 4,000 (now 3,852) and we took a 55% bearish stance into the weekend because we’ll feel a lot less silly being burned by a move up than we would if we weren’t bearish enough for a move down. It would be nice to be able to make more of a commitment but the bulls clearly have the bears cowering in fear so we’ll just patiently wait and see how far they can play things out." Not much has changed since then and we are still waiting to confirm…
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Friday - Is the Dollar Going UUP?
by Phil - November 6th, 2009 8:12 am
Is it time to buy the buck?
As noted by Andrew Wilkinson on Wednesday, there was a huge volume surge in UUP call options, the ETF that tracks the US Dollars index value, ahead of the FOMC statement. 155,000 November call options were bought at the $23 strike level and another 155,000 were purchased at the December $23 strikes. The November calls came in at around .15 and are now .25 (up 66% in one day on UUP) and the December calls were executed around .25 and are now .40 (UUP up 60%) - this is not bad for a day’s work but was it just a day’s work or are we betting on a trend?
As you can see from David Fry’s chart, it’s not just the 300,000+ options (controlling 30M shares) that have been trading bullishly around the dollar - there has been a stunning surge of volume buying that has built up since mid-October as the dollar index skates along our own target low of 75.
So strong was the demand for shares of UUP that we noted in Member Chat that the PowerShares DB US Dollar Index Bullish Fund (UUP) was halted pending clearance of their request to register another 100M shares "in order to meet investment demand."
“There’s been a lot more interest in this ETF because investors are using it as a hedge on the dollar,” said David Stec, an ETF options trader at Group One Trading on the Chicago Board Options Exchange floor. “Yesterday, with the amount of options volume they saw, they probably have to add some shares. The ETF is based on the dollar versus a basket of currencies, so if there aren’t enough shares it might trade at a premium.”
The Dollar trading at a premium? Surely you can’t be serious! Well, I am serious and don’t call me Shirley… While this may be contrary to what you’ve been hearing in the MSM, where dollar bashing has become a popular blood sport, it’s the main reason we’ve been having trouble buying into this commodity-led rally, which has been primarily based on the 15% pounding the Dollar has taken since March. As I often point out to members, if you adjust the S&P to reflect a real currency, like the Euro or the Yen, then you’ll find that our "spectacular" 60% rally in the S&P since March is really just a 27% rally and looks like this to a foreign investor (S&P value converted…
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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
(