Weekend Reading – Reviewing the Reviews
by Phil - January 1st, 2011 8:28 am
I am still trying to get more bullish.
I was thinking about writing something cute like I resolve to get more bullish but that would be wrong. I try, in my own humble way, to "get" the market right. That means I am not bullish or bearish but Truthish (to further botch Stephen Colbert’s use of the word) and, as Buddah says: "There are only two mistakes one can make along the road to truth; not going all the way, and not starting." Confucious reminds us that there are three methods by which we may learn wisdom: "First, by reflection, which is noblest; Second, by imitation, which is easiest; and third by experience, which is the bitterest."
In that spirit, we will spend the day in reflection so that we are better able to start on that long road to the truth so that we will be better able to imitate the things that will work in the year to come while trying to avoid making mistakes that will give us bitter experiences.
This post is not about me – We had a fantastic year and I’ve already given some outlook for 2011 back on the 19th in that weekend’s "It’s Never too Early to Predict the Future" and our current position is short-term bearish in the Jan-April time-frame, looking for a pullback to at least 1,200 on the S&P and possibly back to 1,150.
After that, we are expecting a return to steady gains but without the irrational exuberance we’re currently experiencing. So no, I am not bearish – I simply think we’ve gotten ahead of ourselves. Since we don’t know where the rally train will stop, we have our "Breakout Defense – 5,000% in 5 Trades or Less" from Dec 11th, which were a set of very bullish, highly levered plays where a little bet can pay off a lot if we simply hold our long-established breakout levels.
How much is "a lot"? Well my GE trade idea, for example, was to sell the 2013 $12.50 puts for $1.10 (net $1.15 in ordinary margin according to TOS) and to use that money to buy the 2012 $17.50/20 bull call spread for .95, which was a net .15 credit on a $2.50 spread that was on the money at the time. GE has gained about .75 since the 11th and…
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Once IBM’s Tormentor, Dell is Now the Tormented
by ilene - October 7th, 2010 4:00 am
Once IBM’s Tormentor, Dell is Now the Tormented
Courtesy of YCharts
Dell (DELL), with its ultra-low-cost manufacturing and narrow focus on personal computers, helped drive IBM (IBM) out of the PC business. IBM, of course, went on to remake itself into a higher-margin software-and-service provider. And now Dell wants to follow Big Blue’s example. Can Dell pull off the transformation and is its stock cheap enough for investors to take on that certainty?
Right now, Dell shares aren’t terribly cheap; the stock got a little bump after Dell reported a revenue jump of 21%, to $30.4 billion, for the six months ended July 30. Dell’s p/e is actually higher than IBM’s or Hewlett-Packard’s (HPQ).
And Dell’s earnings yield – how much in trailing-twelve-months-profit it had for every dollar you might invest today – is lower than IBM and HP.
Make no mistake, Dell is scrambling to remake itself. It has closed and sold plants, turning instead to cheaper contract manufacturers. That led to severance and facility charges of a combined $883 million for the past three fiscal years. Dell has also lined up new distribution channels beyond its own traditional sales force, web site and 800-number, turning to retailers and resellers.
But adding a middleman crimps margins. The leverage an investor would like to see in Dell’s income statement – profits rising faster than sales – isn’t there yet. The first half net income rose 16%, trailing revenues by five percentage points. And gross margin narrowed to 16.8% during the first half from 18.2% a year earlier.
Dell bought Perot Systems in November 2009 for $3.9 billion, and that adds to service revenue and broadens the work Dell can do for large corporate and government clients. To better compete against IBM and HP in those markets, though, Dell will likely need to make more acquisitions. Lots of them. Happily, Dell has stockpiled cash and compares favorably in that category with its larger rivals.
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Contrarian Player Plants Bull Call Spread on Seed Maker Monsanto Co.
by Andrew Wilkinson - September 29th, 2010 6:23 pm
Today’s tickers: MON, EWZ, XLB, HPQ, V, BCSI & SLB
MON - Monsanto Co. – Shares of the maker of genetically modified seeds seemed to be recovering at the start of the current session following Tuesday’s horrendous performance wherein the stock fell as much as 9.80% from an intraday high of $52.64 to a low of $47.50. MON’s shares managed to rebound 4.50% off Tuesday’s low of $47.50 to briefly touch an intraday high of $49.62, although the rally proved to be short-lived and shares are down 1.00% at $48.25 as of 3:15 pm ET. Though MON was unable to keep hold of earlier gains, one contrarian player is optimistic that Monsanto’s shares will reverse course and head back up by November expiration. The investor purchased a call spread, buying 5,000 calls at the November $55 strike at a premium of $0.85 each, and selling the same number of calls at the higher November $60 strike for a premium of $0.27 apiece. Net premium paid to establish the transaction amounts to $0.58 per contract. Thus, the investor is ready to make money should Monsanto’s shares surge 15.20% over the current price of $48.25 to surpass the effective breakeven point on the spread at $55.58 by November expiration. Maximum potential profits of $4.42 per contract are available to the bullish player if MON’s shares jump 24.35% to trade above $60.00 by expiration day.
EWZ - iShares MSCI Brazil Index ETF – Investors are placing near-term bearish bets on the Brazil fund this afternoon by selling calls to finance the purchase of put spreads in the October contract. The large pessimistic plays could be the work of traders hedging long positions or the mark of outright bearish bettors expecting the price of the underlying fund to slip lower ahead of expiration next month. Shares of the EWZ, an exchange-traded fund designed to replicate the price and yield performance of publicly traded securities in the aggregate in the Brazilian market – as measured by the MSCI Brazil Index, rallied…
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Monday – Merger Mania Continues
by Phil - August 30th, 2010 8:22 am
It’s another busy Monday for M&A activity.
SNY announced a $18.5Bn CASH offer for GENZ ($69/share), INTC buy’s INNNY’s wireless unit for $1.4Bn in CASH and DELL and HPQ are still in a bidding war over PAR (and HPQ thinks their own shares are so cheap they are buying back $10Bn worth of them). The biggest winner in this weekend’s acquisition game is – ME! I live in northern NJ and, with the merger of CAL and UAUA going through, Continental is forced to diffuse some of their concentration at Newark airport and that ends up giving LUV 18 slots, bringing some much-needed additional competition to Newark, which has been pretty much dominated by Continental for years. LUV is a great buy at $11.13 and a fun way to play is the Jan $10/11 bull call spread at .60, selling the Jan $10 puts for .55, which is net .05 on the $1 spread with a 1,900% upside and your worst-case scenario is you own LUV at net $10.05 – what’s not to LUV?
Speaking of diffused concentration, the Glenn Beck rally was a bit of a disappointment with just 87,000 people showing up (Fox had a permit for 300,000 and keeps using that number as if that’s how many came while Beck himself has been claiming between 300,000 and 650,000 were there and Michele Backmann (R-Minn) claims it was the biggest rally ever held in Washington, with no fewer than 1M people in attendance). This has now backfired on Beck, Palin and the Tea Party as a "show of strength" becomes a show of apathy (to the people who can count, anyway) - it probably would have been smarter to hold the rally next weekend but Fox wanted to time the rally for the start of Jon Stewart’s vacation, although it didn’t stop him from commenting in absentia (where I hear Jon has a lovely bungalow). For a more "fair and balanced" view of the rally, see the very nice coverage from Reason TV.
During an interview on "Fox News Sunday," which was filmed after Saturday’s rally, Beck claimed that Obama "is a guy who understands the world through liberation theology, which is oppressor-and-victim – People aren’t recognizing his version of Christianity," Beck added. Beck’s attacks represent a continuing attempt to characterize Obama as a radical, an approach that has prompted anxiety among some Republicans,…
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Three-Legged Bearish Tactician Targets iShares Dow Jones U.S. Real Estate Index ETF
by Andrew Wilkinson - August 28th, 2010 5:04 pm
Today’s tickers: IYR, NSM, IGT, GFRE, LNC, BHI, ONNN & HPQ
IYR – iShares Dow Jones U.S. Real Estate Index ETF – A three-legged bearish options combination play on the IYR, an exchange-traded fund designed to provide investment results that correspond to the price and yield performance of the Dow Jones U.S. Real Estate Index – an index created to measure the performance of the real estate sector of the U.S. equity market, indicates one big player is bracing for a pullback in shares of the ETF through the end of 2010. Shares of the fund went the way of the market this afternoon and rallied 1.05% to $50.71 with less than one hour remaining in the trading week. The investor sold roughly 10,000 calls at the December $55 strike at an average premium of $1.35 each, purchased about 10,000 puts at the December $50 strike for an average premium of $3.65 apiece, and shed 10,000 puts at the lower December $43 strike at an average premium of $1.43 a-pop. The net cost of the pessimistic play is reduced to $0.87 per contract. The transaction could be a hedge to protect the value of a large position in IYR shares. But, if the spread represents an outright bearish bet on the ETF, the investor is poised to profit should shares dip below the average breakeven price of $49.13 by December expiration. Maximum available profits in this scenario amount to $6.13 per contract if the fund’s shares plummet 15.2% from the current price to trade below $43.00 by expiration day.
NSM – National Semiconductor Corp. – Shares in semiconductor manufacturer, National Semiconductor Corp., earlier slipped 2.05% to touch a new 52-week low of $12.41, but the stock came roaring back to life in afternoon trading, rallying as much as 3.2% to an intraday high of $13.08. The significant shifts in the price of the underlying shares inspired investors to purchase both call and put options on the stock today. Options traders may also be gravitating toward NSM options ahead of the firm’s first-quarter earnings report scheduled for September 9, 2010. Investors heartened by the turn-around in shares purchased approximately 5,800 calls at the November $13 strike for an average premium of $0.85 apiece. Call buyers make money if National Semiconductor’s shares rally another 5.9% over today’s high of $13.08 to trade above the average breakeven price of $13.85 by expiration…
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Goldilocks and the 300,000,000 Bears
by Phil - August 14th, 2010 3:43 am
Talk about feeling outnumbered!
As the guy in Airplane kind of said – "Looks like I pricked the wrong week to get bullish!" Of course, as I often tell people I am neither bullish nor bearish – I’m rangeish – and our range is the 5% band between around Dow 10,200 and S&P 1,070, which takes us as low as Dow 9,690 and S&P 1,016 and as high as Dow 10,710 and S&P 1,123 before I really "flip flop" my positions. Despite the fact that this is the range we predicted last October and is the range we’ve been in (other than a brief trip to 11,200, which we shorted the hell out of) all year – people still seem to find it necessary to call me either bullish or bearish as we navigate the channel.
I suppose I have been HOPEFUL for the month (now heading into day 14) that we will finally make a little progress and establish a higher floor at our usual mid-points while, at the same time, the MSM have decided that we are all going to die. That does make me kind of bullish by comparison doesn’t it? We are mainly in cash and we are well hedged to the downside so, unless we are REALLY heading much, much lower, there is little profit in speculating to the downside, other than our quick trades. As PT Barnum once said:
"A man who is all caution, will never dare to take hold and be successful; and a man who is all boldness, is merely reckless, and must eventually fail. A man may go on "’change" and make fifty, or one hundred thousand dollars in speculating in stocks, at a single operation. But if he has simple boldness without caution, it is mere chance, and what he gains to-day he will lose to-morrow. You must have both the caution and the boldness, to insure success."
Balance is the key to long-term success and we’ve had many conversations about that in Member Chat. Our goal is to be neither bullish or bearish but rather to sell premium to both the bulls and the bears when conditions permit us. As Ravalos said Friday in Member Chat:
"Ever since I became member (actually before I became member I was already following your newsletter for quite some time) I find it hard for me to BUY PREMIUM. Over time, I’ve realized that buying the
…
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Which Way Wednesday – Topping or Popping?
by Phil - July 14th, 2010 8:14 am
Wheee, what a ride!
We only had one trade idea for Members all day Monday and that was the DIA $103 calls for .52 from the 9:46 Alert. It is extremely rare that we only have one trade in a day but there really wasn’t anything for us to do as we had been BUYBUYBUYing all last week so there was nothing to do but watch. The calls finished yesterday at $1.12 for a nice 115% gain in 24 hours but we took the money and ran at 10:04 on a spike up to $1.25 because it’s too close to expirations to mess around. They actually topped out at $1.55 near the close but - better safe than sorry. Anyway, we replaced them with IWM calls later in the day and those doubled up and we were out at the close – again, it just doesn’t pay to be greedy.
It’s fun to day trade options on expiration weeks because the premiums go way down and we get fantastic leverage. Our longer-term trades turned mixed for the first time in 2 weeks (we had been 100% bullish) and we went from one to a dozen trade ideas a day as we used DXD for an overall hedge and took bullish positions on AAPL (2), GOOG (2), INTC, T, TZA (which is really a bearish position) and bearish positions on DIA (2) and MA. Of course ALL of our bullish plays were hedged already so the mix was a real indication of how exhausted the rally was starting to look.
Too much, too fast was the watchword for Tuesday as we were already up 5% for the week so we expected a gap fill back to the open (didn’t come yet) before we get serious about taking out our levels (Dow 10,290, S&P 1,102, Nas 2,257, NYSE 6,930 and RUT 651). We expected good news from INTC (we did a bullish ratio spread aimed at $22) and now we’ll see if it’s good enough to get the Nas up to 2,257 but it was the NYSE that worried us yesterday as they were close but no cigar at our 6,930 target.
Gap filling would be nice and normal and would take us back to test Dow 10,200, S&P 1,075, Nas 2,200, NYSE 6,800 and Russell 620. If we can show a little support there and consolidate for the next run, we’ll be in pretty good shape to continue this run but FIRST we have to test them WITHOUT everyone freaking out and…
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The Worst-Case Scenario: Getting Real With Global GDP!
by Phil - June 6th, 2010 8:27 am
$10,500.
That is the per capita average GDP for the 6Bn ape-like creatures on this planet who have pockets and purses. Of the still hairy and pocketless apes, there are only about 1M left and they are mainly prisoners so we won’t be worrying about them but it would be nice to consider the plight of our ancestors once in a while… Anyway, so 6Bn of us fill in those last 3 images in the planetary labor pool with the vast majority of us STILL FARMING and, of course, a select group of us are still hunting and gathering and contributing very little to the GDP.
None of our problems are new – as noted in this 2005 cartoon:
The United States of America with it’s highly evolved population of shopoholics has a per capita GDP of $46,381 – VERY IMPRESSIVE but we rank 6th! Brunei does a little better than we do and Singapore is up at $50,523 (so let’s hear it for corporal punishment) and Norway (one of my top choices of countries to flee to when it all hits the fan) is at $52,561 but Luxembourgh ($78,395 – banking) and Qatar ($83,841 – oil) simply trounce us in earnings power per person. For those of you who like to think Capitalism is all about keeping score – they must be better than you because they make more money, right?
Below the US, per capita GDP drops off fairly quickly. Rounding out the top 10 are Switzerland ($43,007 – watches and more bankers), Hong Kong ($42,748 – don’t tell China!), Netherlands ($39,938 – legal drugs!), Ireland ($39,468 – free beer when on wellfare!) and Australia ($38,911 – beer comes in oil cans plus gigantic bouncing rats). 20th on the list is Germany at $34,212, Greece is 25th at $29,882 (but not for long), 30th is South Korea at $27,978, 40th is Slovakia at $21,245. Lithuania comes in at 50 with $16,542 (1 ahead of Russia) and it steadies out there with emerging market star Brazil in 75th place with $10,514 and, keep in mind – that is where you FINALLY get to the average leverl of economic activity for the world.
Another BRIC in the global wall is mighty China, with a per capita GDP of $6,567 for each of their 1.2Bn persons and India’s Billion people average out at less than half of that, at $2,941, ranking 128th and still ahead of 53…
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Option Player Cops a Strangle on ConocoPhillips
by Andrew Wilkinson - February 17th, 2010 8:10 pm
Today’s tickers: COP, POT, BAC, HPQ, AMZN, SLV, SPWRA, XEC, WFMI & C
COP – ConocoPhillips – A short strangle employed in the May contract on ConocoPhillips this afternoon suggests one investor expects shares of the underlying stock to remain range-bound through expiration. COP’s shares are down 1.25% to $49.29 with approximately thirty minutes remaining in the trading session. The trader ‘copped’ a strangle play by selling 3,000 puts at the May $46 strike for a premium of $1.77 apiece in combination with the sale of 3,000 calls at the May $52.5 strike for an average premium of $1.13 each. The investor responsible for the transaction pockets a gross premium of $2.90 per contract, and keeps the full amount of premium if ConocoPhillips’ shares trade within the confines of the strike prices described through expiration in May. The short position undertaken in both calls and puts leaves the trader vulnerable to potentially devastating losses should COP-shares swing dramatically in the next few months. Losses accumulate for the investor if shares rally above the upper breakeven price of $55.40, or if the price of the stock plummets through the lower breakeven point at $43.10, ahead of expiration day.
POT – Potash Corp. of Saskatchewan, Inc. – Fertilizer and feed products manufacturer, Potash Corp., attracted bullish options traders this afternoon. POT-shares are up 0.75% today to $114.01 just ahead of the closing bell, which contributes to the more than 14.50% rally in the price of the underlying stock since February 5, 2010, when shares stood at $99.36. Optimistic trading patterns appeared in the March contract where one investor established a ratio call spread. The transaction involved the purchase of roughly 4,500 calls at the March $125 strike for a premium of $1.77 apiece, marked against the sale of about 9,000 calls at the higher March $135 strike for an average premium of $0.52 each. The net cost of the ratio spread amounts to $0.73 per contract. Maximum potential profits of $9.27 per contract pad the investor’s wallet if Potash’s shares rally sharply by 18.50% over the current day’s price to reach $135.00 by March expiration. Shares must increase at least 10.25% before the investor breaks even on the spread at a share price of $125.73.
BAC – Bank of America Corp. – B of A investors have enjoyed an 8.75% rebound in the financial firm’s share price to $15.66 today, up from…
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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
(