Options Player Positions for Recovery in Beleaguered Bank of America Shares
by Andrew Wilkinson - July 21st, 2010 5:54 pm
Today’s tickers: BAC, JNJ, EXP, KO, YHOO, VVUS, SKS & STJ
BAC – Bank of America Corp. – A large-volume bullish risk reversal initiated in the September contract on Bank of America in the first half of the current trading day indicates one options strategist is positioning for a rebound in the price of the underlying stock by expiration day in a couple of months. BAC’s shares, which fell 2.85% to $13.38 this afternoon, are currently down more than 32.7% since the stock reached a 52-week high of $19.86 back on April 15, 2010. Analysts at Goldman Sachs removed Bank of America from the conviction buy list on Monday. But, one optimistic individual is rooting for BAC to come roaring back to life by September expiration day. The investor appears to have sold 20,000 puts at the September $12 strike for a premium of $0.26 apiece in order to purchase the same number of calls at the higher September $15 strike for a premium of $0.36 each. The net cost of the transaction amounts to $0.10 per contract. If financial services firm’s shares fail to rally above $15.00 by expiration, the investor will lose the full premium paid to purchase the trade. However, if the price of the underlying increases 12.85% over the current price of $13.38, the risk reversal player will start to make money above the effective breakeven price of $15.10 through September expiration. Finally, the short position in put options at the September $12 strike suggests the investor is willing to have Bank of America shares put to him at an effective price of $12.10 apiece should the puts land in-the-money at expiration.
JNJ – Johnson & Johnson – Shares of the provider of consumer products, pharmaceuticals and medical devices fell more than 2.85% in afternoon trading to arrive at $56.89 just before 3:00 pm (ET). The health care company’s shares slipped lower after the firm said second-quarter revenue was flat and lowered its 2010 profit forecast by $0.15 a share. JNJ still reported a 7.5% increase in net income, earning $1.23 a share in the second-quarter, but revising full year earnings lower took its toll on the price of the underlying stock today. One contrarian options player populating JNJ LEAPS caught our eye this afternoon. The investor appears to have purchased a plain-vanilla debit call spread using sky-high strike prices in the January 2012 contract. The…
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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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Smart Portfolio Management III – The $1,000,000 Portfolio (Members Only)
by Phil - May 15th, 2010 6:35 am
You can’t lose what you don’t have.
The reverse is true for people with Millions in a stock portfolio. Phil points out that the reson you don’t run a large hedge fund trying to make 100% gains is that the people who invest in those funds are more interested in what we call "preservation of capital" rather than generating wealth. Generally, the people who have $1M of investable cash to play the markets have already achieved a great deal of success, often by taking their own risks along the way. For most of us, $1M is hard to come by and, while we want to put that money to work – we certainly don’t want it wondering off and joining the circus.
As a high net-worth investor, you need to decide how to diversify your assets to suit your long-term goals. We’re not going to get into that here – let’s just say that if you want to gamble and go for some of our "more exciting" plays, perhaps allocate a portion of the portfolio to those. Whether that’s 5% or 10% or 30% is up to you but it is good to fence off your risk to a sensible, manageable amount that you really can afford to lose while keeping the bulk of your market allocation well diversified and well-hedged.
I have my own 5% Rule. Phil’s famous 5% Rule deals with the predictable movement of stocks in their trading ranges but my 5% Rule, which Phil also agrees with is simply "Do not put more than 5% of your portfolio in the stock of any one company!” This is so much easier said than done for many reasons!!
[1] Transition to Large Numbers
Moving from a 5 or 6 figure account to a 7 figure account has a profound impact on many traders. In fact, our friend Dr. Brett refers to the effect “performance anxiety” can have on a portfolio and notes that one of the causes is the responsibility felt by traders as larger dollar amounts are traded. Phil advocates a system of "purging" Short-Term Portfolio gains when they gets too large and shifting money into safer investments in a Long-Term Portfolio – it is good to have a strategy for balancing out your holdings, not just target goals.
While it might be acceptable to put 15% of your $10,000 portfolio on that long call you just KNOW will make money, it would be a big…
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Top of the World Tuesday – The 566% Play
by Phil - April 13th, 2010 8:29 am
Yay 11K, we did it!!!
I think the only person more fed up than I am with this nonsense is David Fry (his chart with my note on volume), who summed it up nicely saying: "There’s no need to make this stuff up anymore since end-of-day stick saves are right there and in your face. No pretense or deception is necessary anymore. When you have “other people’s money”, including the taxpayers to work with; you can do what you wish and not be called-out on it. Who’s going to do that anyway, the financial media? LOL!!! Anyway, the media got the headline number they wanted and Main Street is no doubt impressed… Monday’s volume was pathetically light; so managing the market higher was easy for those who could. Breadth was positive per WSJ data below."
It’s all about S&P 1,200 now that the Dow has made it’s magic number. As you can see from the chart, 1,200 is not even proper resistance, it’s just a stopping point that should not take so long to resolve in a proper rally but, then again, a proper rally usually has volume and we’ve had none at all – especially when you consider that of the entire NYSE listed volume yesterday of 4.6Bn shares traded, C, ABK, BAC and FNM made up 25% of the trading. With S, GE, FRE, AA, F and RF adding up to another 10%, that leaves just 3Bn transactions spread out among the other 4,000 listings. The bottom line is volume is far, far lower than it appears and it appears to suck…
None of that matters though, as David says, it’s right in your face and the people manipulating the market can’t even be bothered to pretend not to be doing it anymore. I’ve already sent out an Alert to Members this morning with our last major disaster hedge of this cycle in preparation of HAVING to go bullish if we make S&P 1,200. I say having to to go bullish because I’m still convinced it’s a different kind of bull that’s driving us higher and we’ll be making few long-term commitments for the first few weeks but if we have another 10% more to gain on our indexes – there’s no point on sitting it out, is there?
As you can see from this Fallond Stock Chart of the S&P, this…
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Optimistic individual Initiates Mammoth Bullish Risk Reversal Play on Conseco
by Andrew Wilkinson - March 31st, 2010 6:20 pm
Today’s tickers: CNO, OSIP, HIG, FXI, JDSU, ARQL, GNW, TEVA, KO & UBS
CNO – Conseco, Inc. – The holding company for a number of insurance companies, such as Colonial Penn Life Insurance Co. and Washington National Insurance Co., popped up on our ‘most active by options volume’ market scanner late in the session after a massive bullish risk reversal was established on the stock in the January 2011 contract. Conseco’s shares declined 0.80% during the course of the trading day to stand at $6.18. It looks like one optimistic options player sold 33,727 puts at the January 2011 $5.0 strike for a premium of $0.50 apiece in order to partially finance the purchase of 33,727 calls at the same strike for $1.80 each. The net cost of the transaction amounts to $1.30 per contract. Thus, the investor responsible for the reversal is prepared to amass profits if Conseco’s shares rally through the breakeven price of $6.30 ahead of expiration day in January. The 67,454 contracts involved in the spread trump existing open interest on the stock of 48,756 lots.
OSIP – OSI Pharmaceuticals, Inc. – The outline of a slightly lopsided iron condor appeared in the May contract on OSI Pharmaceuticals, indicating one options investor expects shares of the biotechnology company to trade within a specified range through expiration. OSIP’s shares surrendered 0.85% during afternoon trading to stand at $59.55 perhaps after The Wall Street Journal reported that Astellas Pharma, Inc. is extending its tender offer for OSI Pharmaceuticals – valued at $3.5 billion – by three weeks to April 23, 2010. The investor responsible for the iron condor play essentially enacted two credit spreads, one using put options and the other calls, in order to pocket options premium. On the call side, the trader shed 4,000 contracts at the May $60 strike for a premium of $1.90 apiece, spread against the purchase of the same number of calls at the higher May $62.5 strike for $0.90 each. As for the puts, the investor sold 4,000 lots at the May $55 strike for a premium of $0.94 per contract, marked against the purchase of 4,000 puts at the lower May $50 strike for $0.62 each. Notice that the put credit spread is wider than the spread on the call side, which creates a lopsided iron condor in this case. The net credit pocketed by the trader amounts to $1.32…
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Testy Tuesday – Faber Says US Treasuries Are Junk
by Phil - February 9th, 2010 8:24 am
"If the US were a corporation, it would have bonds that are junk rated."
That’s the word from Marc Faber but, then again, his column is called the "Gloom, Boom, Doom Report" so he is very much talking his book. Faber makes the case that our unfunded liabilities make the US a toxic investment, much the way GM health and pension obligations. The US ended up bailing out GM but who can bail out the US? Faber argues that additional debt growth no longer has the ability to add to GDP growth, meaning we have passed a tipping point where we have no choice but to pay off existing debt (most likely through inflation) or default.
Pragmatic Capitalist has a great article discussing total debt to GDP and, yes, we all need to be very concerned but our debt to GDP is up at levels we hit in the Great Depression – that was 80 years ago and the US is still standing! While I don’t advocate dismissing these issues, I do want to point out that these issues are always with us and the MSM has gone from completely ignoring them (our Meatball Market of January) to focusing on nothing but. Suddenly Faber, Roubini and various bond pimps have center stage and the gold bugs are trying to pull the last group of suckers into that tent with scary stories about the imminent collapse of the USA, as if having a share of an ETF that says it holds some gold somewhere is going to do you any good when your broker goes dark in the predicted economic catastrophe.
The reason gold has been a valuable alternative to currency throughout human history is that it has a high value to weight ratio – Try loading up the SUV with a pound of gold ($17,088) or 235, 42-gallon barrels of oil and you’ll see what I mean. Gold’s value as a currency hedge is that it’s readily exchangeable anywhere in the world for cash. While it may make some sense for the bomb-shelter crowd to store some bullion along with the beans – what edge do you think you’re getting with a certificate that says you own a share of an ETF that stores some gold somewhere?
If the US economy implodes and the market collapses – where exactly will you be going to claim your gold? In 2008, when the economy WAS collapsing, gold fell from $936…
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Option Player Reenergizes Bullish Stance on RRI Energy, Inc.
by Andrew Wilkinson - December 17th, 2009 4:29 pm
Today’s tickers: RRI, USO, GLD, MT, AEM, INTC, ESRX, C, KO & GEOY
RRI – RRI Energy, Inc. – A large-volume call option combination play launched RRI Energy onto our ‘most active by options volume’ market scanner this afternoon. The investor responsible for the activity banked profits by selling-to-close a previously established long call position. The trader also initiated a new bullish stance on the stock to position for a near-term rebound in shares of the underlying. RRI’s shares are down more than 2.5% today to $5.58. It appears the investor originally purchased 35,000 calls at the now deep in-the-money December 4.0 strike for a premium of 1.30 apiece in early November when shares were at $5.15. Today the trader sold the chunk of call options for 1.55 each, banking net profits of 15 cents per contract. Finally, the RRI-optimist established a fresh bullish stance at the in-the-money January 5.0 strike by buying 35,000 calls for a premium of 85 cents apiece. Shares must rally about 5% from today’s price in order for the investor to break even at $5.85 by expiration next month. The increase in demand for option contracts on the stock lifted option implied volatility significantly. Volatility on RRI Energy increased 21.66% from an intraday low of 55.31% to a high of 67.29%.
USO – United States Oil Fund LP – Shares of the USO fund slipped slightly lower during the trading session, falling less than 1% to $36.50, as of 3:00 pm (EDT). Short strangle plays in the July contract suggest shares of the fund are likely to remain range-bound for the next seven months to expiration. Investors shed 2,500 calls at the July 38 strike for a premium of 3.56 apiece, in conjunction with the sale of the same number of puts at the lower July 33 strike for a premium of 2.75 each. Short-stranglers receive a gross premium of 6.31 per contract on the trade. They keep the full amount of premium if USO’s shares trade within the strike prices described through expiration. Shares of the fund traded within the range of $33-$38 for the four month period starting July 15, 2009, and ending October 12, 2009. Perhaps today’s short strangle sellers expect to see similar inertia in USO shares for the next seven months to expiration.
GLD – SPDR Gold Trust ETF – A bullish risk reversal on the gold exchange-traded fund suggests…
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Monday Market Movement
by Phil - December 7th, 2009 7:57 am
Now what?
I wish I knew. As I said in the Weekly Wrap-Up, we’ve been stuck in a range – which has been fine for us as 60 of 80 trade ideas from the last 2 weeks were winners and will be more so if we flatline or head south from here, as that’s how we’ve been playing the market. It’s not that we WANT the market to fall, just like your doctor doesn’t WANT you to have the flu. But, when you show up at the office with a sore throat, headache, fever and congestion – he’s going to tell you you have the flu and write you a prescription to help you get better. That’s what we do! We analyze the market symptoms and determine a course of treatment. We don’t need to be bullish or bearish on any given day as it’s far, far more satisfying to be right.
In Member chat this morning, we were discussing leap strategies regarding entries on (in this example) KO and we looked at the benefits and pitfalls of trying to establish positions at the top of a big run. I mentioned that KO is not something I’d be looking at now as they are too near the highs and don’t have any particular near-term growth catalyst (and the strong dollar may hurt their earnings, which are more than 50% international).
In the Wrap-Up you’ll see that the kind of long plays we went for were more beaten-down stocks that we still like long-term like SPWRA, VLO, RMBS. WFR, PARD… Even in a great bull market like this one that may or may not be topping, there are still plenty of bargains to be had and, if we don’t see any good ones today, it’s still better to wait until earnings and bargain-hunt there rather than buy stocks just because your cash is burning a hole in your pocket (we went to mainly cash the last 2 weeks and many members are getting antsy already).
Actually, having cash in US Dollars may be an excellent investment at the moment as those dollars could gain 10% as the dollar bounces back. Commodities have certainly continued to fall over the weekend with gold at $1,141, oil at $74.71, siver back to $18 and copper $3.18 (our watch level was $3.20). Futures are pretty lame overall, down about 0.3% at 7:30 but we’re still above our levels so don’t get too excited if…
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Jobless Thursday – REITs Turn Rotten
by Phil - October 1st, 2009 8:28 am
Look out below!
I warned yesterday that the end of the quarter may well mark the end of Goldman and their Gang of 12′s Global pump job and what better way to pull the rug out from under the markets then for Goldman Sachs themselves to issue a report that warns that REIT valuation seem "stretched" and they are projecting "flat to down 15% returns next year" with concerns that they are "just beginning what could be a multi-year down-cycle."
Other headlined charts (and Zero-Hedge has the full scoop) are:
- Still a long road ahead for a recovery in credit.
- Cap rates to rise substantially.
- Deleveraging process just beginning for the REIT sector
- Despite pipeline reductions, development remains a risk
In other words, all the stuff I’ve been saying for for the last couple of months as they IYR has climbed 50% since July 15th is now the subject of a GS report on Oct 1st. I was fine with the sector rising 20% (IYR $36) but the move to $46 was completely without merit and, as I noted in a post last week, we shorted it there and went very long on SRS (ultra-short on the IYR). In fact, just yesterday, in the morning post, I discussed Friday’s multiple plays on SRS. We also have short positions on BXP and, of course, we’re still overall short on the whole market as a correction in the real estate sector is not going to be an isolated incident.
Fortunately, at PSW, we don’t have to wait for Goldman Sachs to tell us a sector is overvalued because we understand valuations and we practice sound fundamentals – something that is sorely lacking in the larger investing community. There’s a reason REITs usually trade at 10x multiples and it’s the same reason commodity producers usually trade at 10x multiples as well – because the underlying commodity, whether it is land or oil or gold or copper, can fluctuate in price over time and will sometimes spike earnings up and sometimes spike them down so, on the whole, they are WORSE long-term investments than say AAPL, MCD, KO or PG, who tend to steadily grow their business over time and deserve stronger multiples.
When the REITs were trading at 5x earnings in March, we were loading up on them but when they crossed 12x in August, we flipped negative. That’s called buying low and selling high, something GS and their traders (like Cramer – and congrats on that…
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Verifone Options Indicate Bullish Positioning at Payment Provider
by Andrew Wilkinson - September 10th, 2009 4:19 pm
Today’s tickers: PAY, GLD, WFC, SMH, CMCSK, SUN, KO & MON
PAY - The designer of systems that enable secure electronic payments edged onto our ‘most active by options volume’ market scanner this afternoon after a large bullish stance was taken in the January 2010 contract. Shares of the firm have increased nearly 1% today to stand at $14.13. The options action observed indicates that one investor expects significant appreciation in shares by next year. But, the trader apparently does not see the stock rising much higher than the current 52-week high of 19.91, attained nearly one year ago on September 12, 2008. The bullish trader was seen partially financing the purchase of a long call spread by selling 12,000 out-of-the-money puts at the January 10 strike for 55 cents each. He then bought 12,000 calls at the January 12.5 strike for 3.10 per contract, spread against the sale of the same number of calls at the higher January 20 strike for 42 cents premium apiece. The net cost of the spread was reduced to 2.13. Thus, the trader stands to accumulate maximum potential profits of 5.37 should the stock surges to $20.00 by expiration in January. Shares would need to rally a whopping 42% from the current price for the trader to pocket the maximum available profits of approximately $6,444,000. We note that the 36,000 lot trade put on today exceeds the previous existing open interest on the stock of 29,251. – Verifone Holdings, Inc. –
GLD - Option traders established ratio put spreads on the gold exchange-traded fund today amid a 1% rally in shares to $97.86. Gold is actually a couple of dollars lower today as the dollar regains its feet and investors critically assess the rationale for gold’s recent ascent. Today’s put spreads represent downside protection for investors hoping to lock in gains assumed to have been made during the recent rally in the price of gold. Using the November contract 2,500 puts were picked up at the November 97 strike for 4.20 apiece, and spread against the sale of 5,000 puts at the lower November 93 strike for 2.25 each. The investor pockets a net credit of 30 cents on the trade, which he will retain in full if shares of the GLD remain higher than $97.00 by expiration. Beneath a price of $97.00 for GLD, the investor faces rising profits should shares fall to $93.00…
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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
(