Mixed Action on ETF Country Plays
by Andrew Wilkinson - August 13th, 2010 4:30 pm
Today’s tickers: EFA, EEM, DYN & RMBS
EFA – iShares MSCI EAFE Index Fund – One investor appears nervous over a continued slide lower for global stocks and used a put option combination in the index fund tracking Europe, Asia and Far Eastern markets in an effort to profit from a further 10% slide. The iShares ETF is trading at an unchanged $50.89 on Friday while one investor has paid a $980,000 net premium to help reduce the cost of taking a nearby bearish position on the prospects for the fund. If the fund does crash to $45.00 before the option play expires in September, the investor stands to make profits of $4,020,000. The position could be full or partial protection against a long stock position in which case options profits are offset by rising losses as the share price declines. In order to make a profit at expiration the investor must see the share price settle at less than $49.02.
EEM – iShares MSCI Emerging Markets Index Fund – An alternative to the strategy above was offered possibly by the same investor using a put spread in the emerging markets ETF. With the fund having rebounded from about $40.00 per share yesterday, the fund gave of 6.2% of its recovery. This seems to have provoked this investor to seek short-term gains by betting against a further slip in emerging markets. The investor again focused on the September expiration and with shares trading now at $40.63 used the $38.00 and $33.00 strikes to write a credit spread. Instead of buying the higher strike, it appears to have been sold in exchange for puts at the lower $33.00 strike. The purpose is to bank the net premium of 49 cents per contract from making the play. The investor this time faces losses beneath an expiration price $37.51 and see them increase to a maximum of $4.51 per contract in the event markets do face a meltdown over late summer. In order to reach breakeven the shares would need to decline by 7.7% from today’s trading price and to leave the investor facing maximum pain would need to slide by 18.8%.
DYN – Dynegy Inc. – The announcement by Blackstone that it was making a $4.50 a share bid for the power generating company created a groundswell of demand for shares in Dynegy, which rose 60% pennies short of the deal price.…
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SEC Charges Goldman Sachs With Fraud On Subprime Mortgages, Paulson & Co. Implicated
by ilene - April 16th, 2010 12:33 pm
SEC Charges Goldman Sachs With Fraud On Subprime Mortgages, Paulson & Co. Implicated
Courtesy of Zero Hedge
Washington, D.C., April 16, 2010 — The Securities and Exchange Commission today charged Goldman, Sachs & Co. and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter.
The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.
"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, Director of the Division of Enforcement. "Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party."
Kenneth Lench, Chief of the SEC’s Structured and New Products Unit, added, "The SEC continues to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the U.S. housing market as it was beginning to show signs of distress."
The SEC alleges that one of the world’s largest hedge funds, Paulson & Co., paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events.
According to the SEC’s complaint, filed in U.S. District Court for the Southern District of New York, the marketing materials for the CDO known as ABACUS 2007-AC1 (ABACUS) all represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC (ACA), a third party with expertise in analyzing credit risk in RMBS. The SEC alleges that undisclosed in the marketing materials and unbeknownst to investors, the Paulson & Co. hedge fund, which was poised to benefit if the RMBS defaulted, played a significant role in selecting which RMBS should make up the portfolio.
The SEC’s complaint alleges that after participating in the…
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Wild Weekly Wrap Up – Only Halfway Through January!
by Phil - January 16th, 2010 8:29 am
Wheee, what a ride!
The week can be neatly summed up by my 1:35 comment to Members in yesterday’s chat, summed the week up quite nicely as I said: "So funny, a whole week of gains I thought were ridiculous wiped out in 4 hours." Of course it’s easy to laugh when you play the market correctly – as I had said in the morning post, we had cashed out into Thursday’s run up and planned on going bearish through the weekend but it turned out we got our sell-off early, jumping the $100K Portfolio, for example, up 12% in one day – enough to send us back to cash rather than risk a weekend reversal.
We laid the groundwork for this little sell-off in last weekend’s posts as we put up an aggressive Buy List for Members but in my regular weekend post we emphasized the need to cover our buys with "Disaster Hedges" as we were heading to the tops I had predicted when I published the "Last Charts of the Decade," where I set resistance target of Dow 10,457, S&P 1,135, Nasdaq 2,314, NYSE 7,389 and Russell 638. As you can see, I pretty much hit them on the head, other than the Dow but that’s because our year-old 5% rule calculations did not account for the change in the Dow that replaced C and GM with TRV and CVX, who added about 100 Dow points since their inclusion so we started using 10,549 this month and we’ll make it 10,557 for today’s chart, which makes perfect sense looking at this group (I added the Transports as they are fell right off our 2,000 target, giving us the early warning that things were not right):
As you can see, the 5% Rule rules! I will apologize for being such a grump this week but the rally was really starting to annoy me as it was so blatantly forced up through our levels without a proper test that is was really getting me down about the markets. I don’t mind that the markets are manipulated, that’s been going on since markets were invented – it’s stupid and destructive manipulation that bothers me, the kind that, long term, destroys more investor confidence than it builds and squanders capital resources on the "wrong" companies (and now, ETFs!).
In this case, very precious investor capital is being steered into commodities, which is a…
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Blackberry Bull Banks Profits as RIMM Shares Rebound
by Andrew Wilkinson - December 7th, 2009 4:13 pm
Today’s tickers: RIMM, BAC, VZ, CAG, NYB, RMBS, TEVA, DIS & NVDA
RIMM – Research in Motion Limited – Blackberry maker, Research in Motion, revealed a distribution deal with Digital China – a unit of Legend Holdings – aimed at expanding its business in China. Shares stood 2.5% higher to $60.22 thirty minutes before the closing bell. One option investor banked profits on a previously established call position in the January 2010 contract today. It appears the trader originally purchased 25,000 calls at the January 80 strike for 30 cents apiece on December 4, 2009. Today the investor shed all 25,000 lots for 43 cents each. Net profits on the closing sale amount to 13 cents per contract for total gains of $325,000. Option implied volatility on the stock is up slightly on the day to 59.91%.
BAC – Bank of America Corp. – A bearish risk reversal on Bank of America this afternoon suggests one investor expects shares to suffer significant declines by expiration in May 2010. BAC’s shares slipped 2% to $15.98 in late-day trading. It appears the pessimistic player shed 7,500 calls at the May 22 strike for 36 cents apiece in order to partially offset the cost of buying the same number of put options at the lower May 13 strike for 70 cents premium each. The net cost of the transaction amounts to 34 cents per contract. The effective breakeven point on the put options of $12.66 is 20.77% lower than the current price per BAC share. The investor responsible for the reversal could be taking an extremely bearish bet on Bank of America. If this is the case, the investor expects shares to nosedive down to lows experienced at the end of July 2009. Alternatively, the trader could be long the stock, and financing cheap downside protection by selling covered call options. The long puts serve as protection in case the stock tumbles, whereas the short calls suggest the investor is happy to have the underlying stock position called from him at $22.00 each. Shares of BAC would need to rally 38% from the current price in order for the March 22 strike calls to land in-the-money.
VZ – Verizon Communications, Inc. – Option traders displayed mixed near-term sentiment on the communications company this afternoon. Shares edged 2% higher to a new 52-week high of $33.36 with less than one hour remaining in the…
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Two Week Wrap-Up – Trading Our Range
by Phil - December 6th, 2009 7:58 am
Your "crystal ball" was dead-on with the insights into the report on jobs as well as the initial rise and then correction. Truly impressive. – Champstar2
We didn’t have a weekly wrap-up last week because of the holiday.
In our Nov 21st Wrap-Up, I had said next week we’ll be watching to see if we can get more bullish above our 25% lines at: Dow 10,250, S&P 1,100, Nasdaq 2,187, NYSE 7,000 and Russell 600 and that became the bottom of our new range while I sent out a 9:41 Alert to our Members on Nov 23rd sticking with our upside targets of Dow 10,471, S&P 1,113, Nas 2,205, NYSE 7,266 and Russell 605. That has been a very reliable range to play for the past two weeks and we’ve been having a good time playing both ends of it.
Rather than just wrapping up this week’s moves, I thought we’d add the prior week as the pattern is very much the same (and it was the same the week before) so it certainly bears (oops, don’t say bears!) studying. Of course, when I talk about patterns, I don’t just mean the chart pattern where we have all of our gains for the week on Monday and Tuesday on low volume and then larger volume selling for the rest of the week as the funds who pump the futures up dump their ill-gotten gains on retail investors. I’m talking about the global new patterns, as reported by the MSM, that make this sort of manipulation so effective. It’s not that I’m so good at predicting things – it’s really just that I’m good at spotting the BS…
Monday - Stuffing the Futures for Thanksgiving
I was pointing out that morning that 90% of the market gains since October had been coming on a single day each week and how a lot of that was happening in the very thinly-traded Futures market, where a few thousand shares traded overnight are able to lever the entire US market up by Trillions of Dollars. It’s a very sick and broken system that has been seized by manipulators to yank investors around, making sure retail investors have little ability to participate in these wild market moves as the game is already over by the time trading starts the next day.
This week, we had 2 days like that with both Tuesday and Friday gapping up over 100 points…
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Plum Creek Options Active
by Andrew Wilkinson - October 9th, 2009 5:06 pm
Today’s tickers: PCL, TBT, GE, OXY, C, ODP, RMBS & S
PCL – Plum Creek Timber – It appears that an investor sold a 15,000 lots strangle on paper-manufacturer, Plum Creek using February options. The implied volatility reading on the share price of 38% remains above the 31% on the share price performance. Call premium at the 35 strike was sold at 1.15 and pushed it lower by 4% on the day while the 10% decline in put premium was accounted for by simultaneous selling of puts at the 25 strike price. Together the premium of 2.05 implies that this investor expects that shares in Plum Creek remain hemmed between $37.05 and $22.95 during the next five months. Shares are 0.4% higher today at $31.32. There is also action at the same expiration 30 series where 5,000 calls traded close to a 3.40 asking price while puts traded on identical volume at a mid-market premium of 2.63. This is more opaque than the strangle and could represent a reversal in which a Plum Creek bull is selling puts to purchase calls. However, it could also be a sold strangle in a similar vane to the above. The currently implied trading range in this case would be between $23.97 to $36.03.
TBT – ProShares UltraShort 20+ Year Treasury ETF – With today’s comments from Fed chairman Bernanke sending bond prices spiraling, investors have targeted call options on the inverse exchange traded fund, TBT, to target a continuation in the move. Likely investors expect further normalization in the yield curve as the discussion on a tighter policy stance expands. As bond yields have fallen during the recent four months, the price of this ETF has slipped from near $60 per share to $42. Today its price stands at $46.14 for a 4.8% gain. Note that the fund focuses on the 20-year area of the yield curve and is double leveraged, which account for today’s sharp price movement. Investors targeted call options in expectation of a further move and used October calls up to the 49 strike to play that move. They also bought calls at the 46 through 50 strike prices.
GE – General Electric – Option sellers chose to write call premium at the December contract using the 21 strike price today. We can see around 7,000 calls sold at premiums between 9-11 cents as shares in the conglomerate slip…
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Option Traders Latch Onto Rambus Chatter
by Andrew Wilkinson - September 4th, 2009 5:52 pm
Today’s tickers: RMBS, BIIB, IYF, OSK, GNW, XOP & S
RMBS - The latest from the rumor mill suggests that the memory chip maker may be the target of a buyout by Samsung Electronics for approximately $25.00 to $27.50 per share. Some analysts reported that such rumors are likely unfounded, and we should note also this is currently idle market chatter. Nevertheless, frenzied options activity was observed on the stock amid a more than 8% rally to $17.22. Option traders concentrated their efforts on out-of-the-money calls in the near-term September contract. Nearly 6,000 calls were picked up at the September 18 strike for about 68 cents each. The higher September 19 strike had 5,000 calls purchased for an average of 47 cents apiece. Finally, the most bullish investors looked as high as the September 20 strike to gather up more than 8,000 calls for 37 cents per contract. Rumors remain unconfirmed, but traders holding the call options are positioned to bank some serious profits if the buyout speculation proves accurate by expiration this month. – Rambus Inc. –
BIIB - The largest maker of medicines for multiple sclerosis announced that it has extended an unsolicited takeover bid, worth $356 million in cash, for its drug partner Facet Biotech Corporation. Shares of BIIB rose more than 2% during the session to the current price of $51.03. Perhaps the takeover bid inspired the bullish reversal strategy we observed in the April contract today. One investor appears to have shed 10,000 puts at the April 35 strike price for a premium of 90 cents apiece in order to partially offset the cost of purchasing 5,000 calls at the higher April 55 strike for 3.80 each. The net cost of the transaction amounts to 2.00 per contract. The investor responsible for the trade will begin to accrue profits if shares of BIIB rally approximately 12% from the current price to breach the breakeven point at $57.00 by expiration day. – Biogen IDEC, Inc. –
IYF - Shares of the IYF have moved slightly higher during the session, gaining less than 0.5% to arrive at the current price of $50.09. The ETF jumped onto our ‘most active by options volume’ market scanner this afternoon after a large bullish reversal play was initiated in the November contract. We note that the transaction was tied to stock. The investor responsible for the trade shed 20,000 puts at the November 40…
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Continental Butterflies
by Andrew Wilkinson - June 12th, 2009 4:26 pm
Today’s tickers: CAL, POT, EEM, RMBS, NVDA & FXI
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Investors dispute Monsanto “Hold” assessment
by Andrew Wilkinson - March 25th, 2009 5:13 pm
Today’s tickers: MON, HPQ, WFC, MYGN, QCOM, XLI, C, WFR, DRYS, FXI, AMD & RMBS
MON Monsanto Company – The St. Louis-based provider of herbicides, seeds, and related biotechnology trait products used to improve farming productivity, experienced a 1.5% decrease in shares to $82.13. Despite the slight decline, a report from Standard & Poor’s this morning noted that the agriculture sector experienced its strongest year in 2008, and further, that “seed and agriculture technology companies stand to benefit” from the health of the farm economy. Monsanto was highlighted for its solid research and development efforts and its promising estimates for earnings through 2012. However, one analyst did report that shares are “fairly valued” at $84.00, prompting a ‘hold’ recommendation. MON popped onto our market scanners after one investor initiated a bull call spread in the May contract. The purchase of 7,500 calls at the 95 strike price for 2.30 was spread against the sale of 7,500 calls at the 105 strike for 55 cents apiece. The net cost of this strategy amounts to 1.75 and yields a maximum potential profit of 8.25 if shares can rally upwards to $105 by expiration. Shares would need to grow by 28% in the next 2 months in order for this optimist to succeed in capturing the maximum profit of 8.25 by expiration day.
HPQ Hewlett-Packard Co. – In contrast to the call-selling witnessed yesterday in the options world, today investors were keen on purchasing calls in the November contract as shares of HPQ rally 1% to $30.95. The world’s largest personal-computer maker received an “outperform” rating by RBC Capital Markets due to the company’s, “diverse revenue portfolio, recurring book of business, stronger margin profile and solid management team,” according to one report released today. While most of the activity occurred in the November contract, one investor was seen banking profits on the sale of 3,000 calls at the in-the-money April 27.5 strike price for a premium of 4.00. Moving ahead 7 months, investors splurged on 2,000 November 32.5 calls for 4.40 apiece. Meanwhile, 5,500 calls were purchased at the 35 strike price for 3.40 at the same time that 6,500 calls were picked up for 2.50 at the 37.5 strike price. Finally, the most optimistic traders looked to the November 40 strike where some 2,400 calls were coveted for a premium of 1.80 per contract. Investors are clearly hoping for HPQ to…
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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
(