Bearish Risk Reversal Anchored in Royal Caribbean Cruises
by Andrew Wilkinson - November 30th, 2009 4:10 pm
Today’s tickers: RCL, GE, YHOO, XLF, X, FCX, AIG, CF, JAVA & UAUA
RCL – Royal Caribbean Cruises Ltd. – Bearish option traders clawed-aboard global cruise company, Royal Caribbean, today despite the 0.5% increase in shares during the trading session to $24.24. A large-volume risk reversal in the June 2010 contract indicates rougher seas could cloud RCL’s horizon. One investor sold 20,000 calls at the June 30 strike for an average premium of 1.70 apiece, spread against the purchase of the same number of put options at the lower June 20 strike for 2.25 each. The net cost of the reversal amounts to 55 cents per contract. The investor responsible for the trade is likely long shares of the underlying stock. If this is the case, the long put position established today, provides downside protection beneath the effective breakeven point at $19.45. Conversely, if shares surge during the next seven months, the underlying stock position will be called away from the trader if shares exceed $30.00 by expiration in June.
GE – General Electric Co. – A sold straddle on General Electric this afternoon indicates one investor expects shares to settle at $16.00 by expiration in June of 2010. Shares edged slightly lower by less than 0.50% to $15.88 in late afternoon trading. The trader looked to the June 16 strike to sell approximately 5,000 calls for a premium of 1.61 apiece and 5,000 puts at the same strike for 1.89 each. The gross premium pocketed by the investor amounts to 3.50 per contract. The trader keeps the full 3.50 premium on the straddle if shares center at $16.00 through expiration. The investor may take profits ahead of expiration by buying back the short straddle for less than 3.50 per contract. Premiums on both calls and puts are elevated today because of the 6% increase in option implied volatility on the stock to 35.50%. The trader benefits from lower volatility on GE and from eroding time value of option premiums. Both factors drag option premiums lower and allow the trader to buy back the straddle in a profitable manner.
YHOO – Yahoo!, Inc. – The 0.5% decline in shares of the internet company to $14.93 did not deter one investor from taking a bullish stance in the April 2010 contract today. It appears the trader put on a ratio call spread to position for a rebound in shares by expiration.…
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Which Way Wednesday – Fed Edition
by Phil - September 23rd, 2009 8:22 am
We’re just waiting on the Fed today, as are the rest of the markets.
Yesterday’s volume was the lowest since Sept 11th but not as low as Monday, which was our lowest volume since the end of June, just before we had a 5% correction. June 26th and 29th were our last two consecutive ultra-low volume days but June 30th was much bigger (a down 100 day), July 1st was up again on low volume and then July 2nd was another big down day and we bottomed out on July 10th. That was the time that the media was telling us we were forming a "classic" head and shoulders pattern and were doomed to revisit the March lows. It was also the last time we enthusiastically bought stocks.
At the time of that weekly review (7/11), we had CAL at $10 (now $16.82), CBS at $5.97 (now $12.58), COST at $43.45 (now $58.58), CVX – who we just shorted – at $58.20 (now $72.60), DIS at $22.41 (now $28.38), EXM at $6.05 (now $7.32), RT at $7.12 (now $8.85), SNDK at $14.47 (now $22.91), SPY at $87.96 (now $107.27), SPWRA at $22.35 (now $32.63), SUN at $22.09 (now $27.75), V at $59.86 (now $74.41), VLO at $15.57 (now $20.50), WFR at $16.61 (now 19.09), X at $30.77 (now $50.45), XLF at $11.10 (now $15.35), XOM at $65.12 (now $69.85) and ZION at $11 (now $19). Of course our members had much better entries as we had been targeting our entries on all of those but anyone reading our weekend review on July 11th could have played along at home from those prices (we even spiked down at Monday’s open) and when I say we are now bearish – it is that we are bearishly protecting these ridiculous profits – the kind of profits you usually don’t get after 3 years, not 3 months!
Overall, the broader market is up 20% over that time so it can be argued that a monkey with a dart board could have made good picks at that time but, if you read that week’s notes – you’ll notice that this monkey was screaming for people to buy and was going against what pretty much EVERY other analyst was saying and I was confident enough to lay out my picks, my strategy and my fundamental arguments for everyone to see. It would have really sucked…
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Stock Market Crash – Year One Review III – March Madness!
by Phil - September 10th, 2009 5:51 pm
We left off in Part II with our Feb 23rd Big Chart Review.
Even though I said: "Once again we are in a market that environment that reminds me of the Simpsons episode where Homer jumps over a gorge, crashes, is taken up by a helicopter (Ben) smashing against the wall along the way only to fall all the way from the top again. Pain, pain and more pain every time we try to get long" – we still weren’t fully prepared for the devastation that was to follow as the Dow fell from 7,500 to 6,500 in the next 10 days. My commentary on the environment the next day was:
According to Cap, someone on the YHOO message board was counting the number of times CNBC talking heads said "nationalization" this morning and, as of 8:15, they were up to 300 times. Sadly, this is the fear-mongering that is driving the markets to new lows while Cramer continues to keep his sheeple out of protective ETFs like SKF. So you have the man’s network telling you financials are going to zero while dog and pony boy tells his minions to sell ALL the financials, causing them to go to zero - even though they could hold on and protect themselves with conta-funds, if Cramer didn’t spend 3 days a week convincing his viewers contra-funds are poison. I’ve never seen anything like this outside of a racketerring investigation. Speaking of racketeering - Dennis Kucinich nailed it when he pinned that charge on Paulson and company back in November.
Our wall of worry continues to be a steep one. After yesterday’s failure we do not expect too much out of today, we’ll be happy to just see a bottom at this point but it’s looking a little more likely that we’re heading into a capitulation event that can take us down to frightening levels. The 60% line is a line the markets dare not cross but, as I pointed out yesterday, we already lost the SOX and the Nikkei, with the Hang Seng and the BSE hanging on by a thread. Let’s take these levels very seriously, if the administration can’t turn it around this week – the downward momentum can easily pick up steam.
I’ll spare you the details other than to say we DIDN’T turn it around that week and the downward momentum DID pick up steam. I was at war with…
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Stock Market Crash – Year One in Review – The Gathering Storm
by Phil - September 7th, 2009 7:13 am
Happy anniversary market crash!
One year ago, in September, the market started falling in earnest. A lot of people were caught by surprise by that drop as many thought we had just had a major correction and the worst was over. We had bounced off 10,800 on July 14th and had made it all the way back to touch 12,000 on August 14th but that day I warned my members in the morning post:
We’re really through the looking glass when you see investors stampede right back into oil and other commodity stocks at the first sign of a bounce off a 20% drop. I guess they’ve never seen a pullback off 20% before so it makes sense that Cramer would hit the BUYBUYBUY button on anything that smells like crude. I wish I had access to the tapes of all these same idiots telling you to BUYBUYBUY housing stocks and mortgage companies when they made their first bounce on the way to 80% losses.
It’s not just oil that is expensive, now it has to compete for consumer dollars with food and airline fares and tobacco prices and consumer goods etc. Oil was able to bubble up because people were enjoying a robust economy and it was the ONLY thing that was rising out of control. Metals began to follow it as that didn’t affect the average person but then companies had to start passing on the increased costs and the banks stopped lending money and the consumers were forced to stop using their home’s equity (if there was any left) like a piggy bank and *poof,* suddenly there isn’t enough money for oil. This isn’t going to change because there’ s a hurricane or a shut down pipeline or anything else.
Oil was trading at a still ridiculous $115 a barrel that day, down from $147 on July 1st but still choking the life out of the economy. We were very bearish on oil and natural gas ($14 at the time) as the fundamentals simply didn’t support the price of oil at $115 as much as they didn’t support $147 a month earlier. I had gone negative on oil too early though, as we thought $120 was surely the top back in May. Sometimes fundamentals can get you too ahead of the market. Our man Ben was between a rock and a hard place as he HAD to do something to…
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Monday Market Melt-Down
by Phil - August 17th, 2009 7:33 am
Yee-haw!
We love the smell of pullback in the morning. It smells like – victory! After extensively reviewing our bearish positions in this week’s wrap up and after calling for cashing out our bull plays last week and after taking a whole bunch of short positions – I would have been in a very bad mood this morning had we gone up 150-points instead of down so forgive me for being pleased with myself.
Although we called the stick-save at Friday’s close, even when I predicted it at 12:40 I said that: "getting back to there would be fake, fake, fake and failing there would be very bearish going into the weekend." In my closing Alert to Members at 4:04 I said: "12:42 targets were: Dow 9,350, S&P 1,005, Nas 1,990, NYSE 6,540 and RUT 570. We got 9,321, 1,004, 1,985, 6,537 and 564 so let’s hear it for the 5% rule and Mr. Stick, who’s program is playing our tune. This was, of course fake, fake, fake, so we still expect our sell-off next week." See, this stuff isn’t too hard to follow – targets set at 12:42, targets failed at the close, stay short into the weekend…
Speaking of targets, our first downside targets, which we went over in last Wednesday morning’s post, should be tested this morning at Dow 9,100, S&P 980, Nasdaq 1,950, NYSE 6,400 and Russell 550. As that post was an extensive discussion of levels and ranges we expect and is still fresh, I won’t get back into into it here other than to say how mean you are for not using THIS LINK to get a free trial of the PSW REPORT (just 2 weeks left on summer offer) and then using THIS LINK to refer 2 friends and lock in your own discounts. We’re starting a new $100,000 Portfolio this weekend and only members will get those trade live and I’ll also be continuing the $5,000 portfolio and it’s a great time to start following now that we are back to cash there.
While we are nowhere near as bullish as Cramer (seen here in Thursday making fun of us for being too cautious), we are also not perma-bears. A nice sell-off here is not only long overdue but it’s also healthy and, if we hold 80% of the move up since March, we’re going to be thrilled to go long with a brand…
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Thrill-Ride Thursday, Finally Some Earnings!
by Phil - July 9th, 2009 7:24 am
Wheee, what a day yesterday!
Of course we hit it out of the ballpark with our ICE puts as that stock melted so fast it turned to vapors (or at least the calls did!). Fortunately, we had the puts and the Aug $95 puts I mentioned in the morning post, that we had taken at $6.20 on Tuesday, opened at $8.50 and ran up to $14.35 (up 131%) at the day’s end – all without a significant pullback to stop us out. Since we LOVE to go back to a well that’s paying off, we jumped on the Aug $90 puts for $3 as our first trade of the day at 9:39 and those finished the day at $7.35 (up 145%), not bad for our 3rd play on the same stock in 48 hours!
The best thing about having 100%+ put side winners in a downturn is it gives us free reign to speculate on the upside. Since we had a bottomish view of the downturn yesterday, we were able to use the cushion provided by the gains on ICE (as well as our longer-term DIA and USO short positions) to establish a bunch of speculative upside positions on stocks we thought were bottoming. The key to this strategy is position sizing and portfolio management. If you invest, for example, $2,000 per position and are willing to take 20% losses as a stop-out, then having a 100% winner on ICE (and we had 3!) allows you to take 5 bullish position as the total risk on $10,000 is the $2,000 you gained on the bear side. We don’t just mindlessly flip-flop of course. In fact, it’s been more than a month since we picked up bullish positions for more than a quick trade and we’re not SURE these are going to work but, since we had the winning put plays, it’s a good place to make a stand – dipping our toes in the bullish waters once again.
I mentioned our brand-new $5,000 Portfolio yesterday and our first play was a net .71 spread on AA where we bought the $7.50 calls for $1.75 and sold the $9 calls for $1.04. On yesterday’s dip, we had the opportunity to take out the $9 calls for .70, which was a .35 profit and left us with the naked $7.50 calls at net $1.40, with a break-even at $8.90. We tried to sell them for $2.10 at…
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Bull foresees healthy rally for UnitedHealth Group
by Phil - June 8th, 2009 6:04 pm
Today’s tickers: UNH, USO, MNKD, POT, X, MCD, PALM, S & JPM
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Emerging Markets Rally
by Andrew Wilkinson - May 19th, 2009 4:50 pm
Today’s tickers: EWZ, X, EEM, VIX, DGX, AMR & XHB
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Testy Tuesday Morning
by Phil - April 28th, 2009 8:37 am
So far so bad!
Sadly, we called the action pretty much on the nose yesterday. In the morning post I said that we would: "see where the bottom is today – hopefully we find it early on" and my 9:36 Alert to members I noted: "it will be impressive if this morning dip is all we get." I set our watch level at 8,130 and the Dow was rejected just under there twice and by 12:12, with the Dow at 8,106, I called the top and sent out an alert saying: "All the advance/decline numbers are very red, this is a highly selective rally and we just tested the top again and failed – I have to think it’s worth chancing going short here."
While we were expecting a follow-through to 7,900 today (same action as last Monday/Tuesday) we were concerned by the afternoon stick save attempt and did go into the close just 55% bearish (1/2 covered on our DIA puts) as we had already caught a 100-point drop perfectly and we didn’t want to be too greedy. This morning the futures are indicating that bearish greed may have been a good idea as the futures (7am) are pointing down another 1.5% on news that C and BAC may need to raise more capital along with the continuing flu scare. I emphasize scare at this point because, in a typical year, over 60,000 Americans die from "pneumonia/influenza" and, while we don’t want to make light of a virulent new strain, it’s a bit out of proportion to begin panicking when 150 people die of one particular strain.
Unfortunately, there’s a very fine and quickly crossed line between an outbreak and a catastrophe and the government is right to overreact but the markets are not. Being a forward-looking mechanism doesn’t mean seeing doom around every corner but that’s the kind of nonsense the media likes to stir up and it was amazing to see the Transports take such a huge hit – down 5% on the day with airlines down 10-20% – as the media begins recounting the damage done to the travel industry in the 2003 SARS outbreak. On the whole, this was the last thing we needed with the markets already weak but, as I said yesterday, there is great opportunity growing in this sector. We picked up a hedged entry on UAUA yesterday and CAL will be…
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Microsoft options looking bullish
by Andrew Wilkinson - April 14th, 2009 4:12 pm
Today’s tickers: MSFT, XLF, VRTX, X, MT, TIF, JCG & AIG
MSFT Microsoft Corporation – Some option traders laughed in the face of a 2% decline in MSFT’s shares and were seen making some bullish plays on the stock which currently stands at $19.16. One trade of note was the sale of 5,000 puts at the July 17 strike price for a premium of 90 cents apiece spread against the purchase of 5,000 calls at the July 22 strike price for 74 cents each. This optimistic investor accepts a 16 cent credit on the trade and appears to be looking for shares to rally by about 19% through the breakeven point at $22.74 by expiration. Other bullish investors selected the July 23 strike price where more than 11,000 calls were purchased for an average premium of 44 cents per contract.
XLF Financial Select Sector SPDR – Shares of the XLF have plunged more than 5% to $10.50 today. However, we observed one options investor looking for a recovery in financials by September’s expiry. The financials ETF was one of the top tickers on our ‘most active by options volume’ market scanner with more than 406,000 contracts traded throughout the day. The trade we chose to highlight involved the purchase of 20,000 puts at the September 8.0 strike price for 80 cents apiece spread against the sale of 10,000 puts sold for a premium of 2.79 per contract. This ratio spread yields a credit of 1.19 to the trader (2.79*1 – 0.80*2 = 1.19). The investor will retain the full credit if shares rise through $12.00 by expiration in September. The purchase of twice as many puts at the lower 8.0 strike price serves to cap the investor’s losses at a maximum of 2.81 should shares continue to fall all the way to $8.00 by expiration.
VRTX Vertex Pharmaceuticals, Inc. – The pharmaceuticals company has seen its shares give back gains experienced earlier in the trading day, and is currently off by less than 1% to stand at $27.10. Option implied volatility has jumped from 72% yesterday to the current value of 82% amid unconfirmed rumors reported by one source that Johnson & Johnson may be eyeing VRTX. Option traders took bullish stances on the company by purchasing calls in the April and May contracts. The in-the-money April 25 strike price had 1,100 calls bought for 3.27 apiece, while the April…
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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
(