Bank of America Bear Cleans Up
by Option Review - May 28th, 2010 5:41 pm
Today’s tickers: BAC, FXY, VALE, ATPG, CAT, EBAY, CSCO, KG, NE & AGN
BAC – Bank of America Corp. – Activity in out-of-the-money call options on Bank of America in the first half of the trading session appears to be the work of an investor taking profits on the closing purchase of a previously established bearish short call position. BAC’s shares surrendered 1.85% today to stand at $15.88 as of 2:45 pm (ET). It looks like the investor originally sold 20,500 calls at the November $24 strike for an average premium of $0.37 per contract back on April 28, 2010, when shares of the underlying stock were trading at a volume-weighted average price of $17.73 each. In the past four weeks since the initial sale of the calls, Bank of America’s shares declined 12.12% down to the current price of $15.88. The call seller was properly positioned to benefit from share price erosion, and today was able to buy back the same call options for just $0.10 apiece. Thus, the closing purchase of the calls yields net profits of $0.27 per contract to the responsible party.
FXY – CurrencyShares Japanese Yen Index Fund – A sizeable debit call spread enacted on the FXY, an exchange-traded fund designed to reflect the price of the Japanese Yen, indicates one options strategist is expecting shares of the underlying fund to rally sharply by expiration in January 2011. Shares of the fund are currently up 0.18% at $109.14 as of 1:52 pm (ET). The investor purchased 8,709 calls at the January 2011 $110 strike for a premium of $4.40 apiece, and sold the same number of calls at the higher January 2011 $125 strike for $1.00 in premium each. The net cost of the transaction amounts to $3.40 per contract, thus dictating a breakeven price – above which profits start to accumulate – of $113.40. Shares of the FXY must rally at least 3.90% from the current value of $109.14 before the responsible party starts to make money. Maximum potential profits of $11.60 per contract are available to the spread trader if shares jump 14.53% from the current value of the fund to $125.00 in the next eight months to expiration. It does not appear the fund’s share price has ever exceeded the current 52-week high of $115.40, attained back on November 30, 2009.
VALE – Vale S.A. – Shares of the world’s largest…
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DiggStrangle Strategist Targets VeriSign Options
by Option Review - May 20th, 2010 5:47 pm
Today’s tickers: VRSN, CAT, EWZ & XCO
VRSN – VeriSign, Inc. – Symantec Corp. agreed to shell out $1.28 billion in cash to purchase VeriSign Inc.’s authentication services unit in a deal reportedly set to close by the end of September. Despite securing a buyer for its unit, which certifies that websites are legitimate and safe for online transactions, VeriSign’s shares are lower by 1.75% to stand at $27.50 as of 11:20 am (ET). VeriSign received an upgrade to ‘buy’ from ‘hold’ at Deutsche Bank today where analysts tout a 12-month target share price of $35.00 on the stock. One options strategist expecting shares of the underlying stock to remain range-bound through September expiration sold a strangle to reap the benefits of inflated options implied volatility. The investor sold 10,300 calls at the September $31 strike for a premium of $1.00 each and sold the same number of puts at the lower September $28 strike for $2.85 apiece. Gross premium pocketed on the transaction amounts to $3.85 per contract. The trader keeps the full premium received on the sale as long as shares trade within the range of the strike prices described through expiration. The short sale of both call and put options expose the investor to potential losses should shares rally above the upper breakeven price of $34.85, or if shares slip beneath the lower breakeven point at $24.15, ahead of expiration. Another investor opted to take profits off the table by selling a previously established long call position in the September contract. Perhaps the trader is taking in whatever profits are available now in case shares continue lower ahead of expiration. It looks like the investor originally purchased at least 15,000 calls at the September $28 strike for an average premium of $1.45 apiece back on April 15, 2010, when shares were trading at a volume-weighted average premium of $26.84. Today the options trader sold 15,000 calls at that strike for a premium of $2.15 each, receiving net profits of $0.70 per contract. In hindsight the investor could have raked in more substantial gains had he sold the calls yesterday when VeriSign’s shares surged to a 52-week high of $29.23 on the news Symantec Corp. agreed to buy out the authentication services unit at VRSN.
CAT – Caterpillar, Inc. – Options activity on the machinery manufacturer casts a glimmer of optimism on the stock despite the 4.45% decline…
Smart virtual Portfolio Management III – The $1,000,000 virtual 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 virtual 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 virtual 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 virtual 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 virtual 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 virtual Portfolio gains when they gets too large and shifting money into safer investments in a Long-Term virtual 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 virtual portfolio on that long call you just KNOW will…
What Me Worry Thursday?
by Phil - May 13th, 2010 7:48 am
What a freakin’ recovery!
As I said on Monday: "It’s a paper tiger of a straw man we’re building for $1Tn but you HAVE to respect $1,000,000,000,000 – you just have to… Our 5% Rule series for the S&P over the 1,155 breakdown line is the very critical 1,170, followed by 1,185, 1,200 (critical), 1,215 and 1,230 and THEN we are on the way to recovery." Wow, that guy is AMAZING! Anyway, so here we are at 1,170, after two days of testing the 1,155 line as a bottom so now it’s onwards and upwards to 1,185 hopefully. I also said on Monday: "Below that, we’re not too impressed but it also won’t be very surprising if all $1Tn buys us these days is some moderate lift that isn’t strong enough to break our major technicals."
We have been casting a wide and bullish net since the crash, finally pulling some of our sideline cash for long plays on ABX, APPY, BAC, BIDU, BRK/B, BSX, C, CAT, DIA (3), DF, ERX, GOOG, LIZ, LVS, MEE, MON (3), RIG, T (2), TBT (2), TZA (shorting it), UNG and WFR. We’re hedging heavily, of course, but it feels good to have longs again after being in cash for a while. Our short-term bearish plays (mostly DIA and TZA) have been crushing us so far, which is good in a rally but yesterday was a bit much for us and we got a little more bearish but it looks like the G7 has adopted the "Better Red Than Dead" mantra as the World racks up astounding deficits to put off admitting that this little debt problem is not isolated to the PIIGS nations.
Nonetheless, the global markets are rallying in unison – even while the Pound ($1.47) and the Euro ($1.26) collapse and even the Yen jumped back up last night, falling off the very BS 93.63 to the dollar it hit at 3am to psych up the Nikkei exporters back down to 92.75 this morning. I noted weeks ago how the Yen knocked down for Japan’s open and then drifts lower into the US open virtually every night – it’s what currency traders call the "Goldman Trade" because you can bet it every single day and have a perfect quarter. Sure it’s blatant manipulation designed to fool an entire nation of investors but, what else is new – Fuggedaboutit…
So, a TRILLION Dollars down the rabbit hole in Europe – Fuggedaboutit! I pointed out to Members in yesterday’s…
Manic Monday – Just Another (Million) x (Million) Dollar Bailout!
by Phil - May 10th, 2010 7:53 am
Another day, another Trillion dollars for the banksters!
I mean really – how much money did you loan Greece? Perhaps you wrote Spain a check? France??? Well, you did now! $220Bn of that money came from the IMF and 20% of the IMF’s money comes from the USA as we once again paper over the global financial crisis for another month or two – whatever respite $1,000,000,000,000 buys us these days…
So YAY, I guess. We couldn’t be more thrilled for ourselves as we cashed out at the top and went short, then we cashed out at the bottom and went long. We’ve caught moves in the market from top to bottom that used to be considered two or three good years of trading in the past two weeks – that’s nuts! We went up so fast that there was no point in putting plays on our new Watch List (can’t be a Buy List yet because we don’t like chasing) as we’ll be up 5% at the open today.
In addition to the DIA $107 calls (my comment into Friday’s close as to whether I would keep them into the close was: "Not if I can get out even but they are gambling money so I won’t take a small loss (not when I can have a much bigger one!)" – we also picked up very nice entries on BAC, BRK/B, C, CAT, ERX, GOOG, LVS, MEE, MON, RIG, T, TBT and TZA (shorting it). How long we stay in those after the instant gratification of a 5% bump in 8 trading hours remains to be seen, as I said in our Watch List post:
There are two major forces at work there – the NEED to OVERCOME GREED and the TOOLS to OVERCOME FEAR. At PSW, we have a 2-step program for overcoming greed. Step number one is "Taking the money" and step number two is "running." The people who master these two complex steps find they have lots of cash at the bottoms and the tops of the cycles – they find that you can buy low and sell high once you realize that you don’t have to wait until the top to sell nor do you have to wait until the bottom to buy – especially when we can go from top to bottom at
…
Bears Out in Full Force as Market Takes a Nose-Dive
by Option Review - May 6th, 2010 5:34 pm
Today’s tickers: XRT, MBI, CAT, XHB, FLS, PCS & TWC
XRT – SPDR S&P Retail ETF – It’s not surprising that we are seeing bearish trading patterns emerge on the XRT, an exchange-traded fund designed to mirror the performance of the S&P Retail Select Industry Index, with shares of the fund trading 5.30% lower as of 3:20 pm (ET) to stand at $40.25. One long-term pessimistic individual initiated a three-legged bearish options combination play on the XRT using both call and put options. It looks like the investor partially financed the purchase of a debit put spread by selling twice as many out-of-the-money call options by volume. The trader purchased 5,000 puts at the September $40 strike for an average premium of $2.42 apiece, and sold the same number of puts at the lower September $34 strike for a premium of $0.84 each. Finally, the investor reduced the premium outlay required to establish the transaction by selling 10,000 calls at the September $48 strike for a premium of $0.73 per contract. The net cost of the options combination play is reduced to just $0.12 per contract. The investor responsible for the pessimistic play makes money if shares of the underlying fund slip beneath the effective breakeven point at $39.08. Maximum potential profits of $5.88 per contract are available to the trader should shares of the retail fund plummet 15.5% from the current price to breach $34.00 by September expiration. Options implied volatility on the XRT is up 15% to 34.80% with roughly 40 minutes remaining in the trading day.
MBI – MBIA Inc. – Investors who earlier in the session scooped up large numbers of put options on the insurance company are likely pleased as punch given the subsequent 10.4% decline in MBIA’s share price to $8.81 as of 3:25 pm (ET). Bearish investors purchased approximately 50,000 puts at the June $7.0 strike for an average premium of $0.75 apiece at around 11:40 am (ET) this morning when shares of the underlying stock were trading at $9.30 each. The decline in share price since this morning coupled with the 25.2% increase in the overall reading of options implied volatility on the stock to 136.22% inflated premium on the June $7.0 strike puts, which are currently up 200% on the day to reflect an asking price of $0.90 per contract. Put buyers in this case are poised to amass profits should…
Here Kitty-Kitty (CAT)
by ilene - April 26th, 2010 3:22 pm
Here Kitty-Kitty (CAT)
Courtesy of Karl Denninger at The Market Ticker
You have to have a rather odd view of "improving" to deal with the report given here as "reflecting economic improvement":
Caterpillar Inc. reported a profit in the first quarter, citing improved economic conditions, particularly in emerging markets, as the heavy machinery maker also raised its forecast for the year.
Ok, so we should have seen a beat on both revenue and earnings, right? Remember, the first quarter of 2009 was the depth of the recession – the bottom – if you believe the headlines.
So what did we get?
For the first quarter, Caterpillar reported a profit of $233 million, or 36 cents a share, compared with a prior-year loss of $112 million, or 19 cents. Excluding items such as tax charges related to new health-care legislation and prior-year restructuring impacts, per-share earnings rose to 50 cents from 39 cents.
That’s good! A profit .vs. a loss; exactly what one would expect. How were revenues?
Revenue dropped 11% to $8.24 billion.
Analysts polled by Thomson Reuters had forecast earnings of 39 cents a share on $8.84 billion in revenue.
Uhhhhhhhh….. wait a second.
Economic recovery eh?
Machinery sales were down 1% from a year ago – but I thought a year ago was the depths of the recession and we have been recovering since? So how do we get a negative year-over-year comparison?
Worse, in North America (that’s here!) machinery sales were down 15% with dealer inventories half of year ago levels. That is, not only is heavy equipment not selling, dealers don’t think it will be in the near future either. So how did we get big increases? Asia, up 40%. Yep, that matters, and it’s what drove the results.
Engine sales were even worse, off 28%, and even in Asia they were down, in that case 15%.
The street is cheering this report on the back of everyone and their brother pumping the company (most especially the fools on CNBS) but the facts are what they are. With no revenue increases you can argue for improving profit due to firing huge numbers of people all you want, but the top-line, particularly in America, is horribly bad and does not point to any sort of turn-around in construction equipment sales of any sort, nor any improvement in over-the-road trucks and other engine markets (such as marine.)
Disclosure: No position
Mega Earnings Monday – 1,000 Reports This Week!
by Phil - April 26th, 2010 8:21 am
What a crazy week this is going to be!
Pre-Market we’re hearing from BLK, CAT (are we building stuff?), EXP, HTZ, HUM, LO, TUES and TZOO and later we will hear from BSX, CHH, OLN, RSH, RCII, TXN (major) and my "friendbuddypal" Cramer’s TSCM (if they are not delayed). Revenues at The Street have crept back up this year in a recovery that pretty much mirrors the market. The company does pay a nice 2.6% dividend, which works out to a nice $200,000 bonus on Jimmy’s 2.1M shares (6.7% of the company) so you know that bonus will be a priority for the company. Cramer was BUYBUYBUYing his own stock at $2.41 in January but sadly they have no options to hedge… They might make a nice pick-up after earnings if they disappoint and head back to $3 or less.
I’m full of useful information on hundreds of stocks right now because I’ve been researching our new Buy List but I’m not pleased with what I’ve been seeing so far and this week’s tidal wave of earnings, with 1,000 companies reporting means we’re in no hurry to dip our toes in the water. I told Members this morning I should probably be working on a Sell List, as it’s much easier to find companies I want to short than ones I want to buy. Even in the Weekly Wrap-Up, we featured a 1,900% downside hedge on the Russell to offset the 566% plays and other bullish plays we’ve begun to reluctantly take, just so we don’t feel too silly in this runaway market.
If you have never watched Jim Cramer discussing the sleazy, manipulative ways he used to game the markets – you really must take 10 minutes and watch this video, where Jim explains how any immoral bastard with $10M can yank the entire futures market around at will. He prefaces one of his favorite strategies with "this is blatantly illegal but.. I think it’s really important… these are things you MUST do on a day like today and if you are not doing it, maybe you shouldn’t be in the game." Are you playing the game or are you being played?
The biggest game ever played may be unwinding as we speak. Bloomberg reports that foreign-exchange profits from carry trades are disappearing as differences in central bank interest rates fail to increase fast enough to compensate for swings in…
Bears Bombard Blackberry-Maker, Research in Motion
by Option Review - March 1st, 2010 5:00 pm
Today’s tickers: RIMM, CAT, MGM, F, SLM, FRX, FXI, MWW & AIG
RIMM – Research in Motion Limited – Blackberry maker, Research in Motion, attracted bearish options strategists even though the firm’s target share price was upped to $100.00 this morning from $95.00 at Canaccord Adams. RIMM opened the session higher, but slipped slightly in afternoon trading by 0.05% to $70.85. One bearish tactic employed today was the use of a plain-vanilla put spread in the March contract. The trader responsible for the transaction purchased 4,400 puts at the March $65 strike for a premium of $0.54 apiece and sold the same number of puts at the lower March $60 strike for $0.20 each. The net cost of the spread amounts to $0.34 per contract. Maximum potential profits of $4.66 per contract are available to the investor if RIMM’s share price slumps 15.30% beneath the current value to $60.00 by expiration. We note that the mobile device manufacturer’s shares last traded below $60.00 on December 4, 2009. The bearish risk reversal is another pessimistic tactic utilized today. One trader sold 5,000 calls at the April $75 strike for a premium of $2.66 each in order to purchase 5,000 puts at the lower April $70 strike for $3.80 apiece. The net cost of the reversal play amounts to $1.14 per contract. The investor stands ready to accrue profits to the downside if shares of the underlying stock trade beneath the effective breakeven point at $68.86 by expiration in April.
CAT – Caterpillar, Inc. – February marked the seventh consecutive month of manufacturing expansion in the United States; this fact, coupled with today’s jump in equities’ prices, inspired bullish options trading on machine-maker, Caterpillar. CAT’s shares rallied 1.50% during the session to $57.92 after its earnings forecast through the year 2012 were increased by analysts at Morgan Stanley. MS maintains an ‘overweight’ rating on CAT and a $70 share price target, at present. Bullish options activity appeared on the put side of the field where one investor established a credit spread. The trader sold roughly 16,300 puts at the April $55 strike for a premium of $1.38 apiece, and purchased the same number of puts at the lower April $50 strike for $0.47 each. The investor pockets a net credit of $0.91 per contract, and keeps the full amount as long as Caterpillar’s share price remains above $55.00 through expiration day in…
Capital One Bears Out in Full Force in Options Land
by Option Review - January 22nd, 2010 4:29 pm
Today’s tickers: COF, CAT, XRT, XLY, XLB, XLF, KRE, BRK.B, MCD & ISRG
COF – Capital One Financial Corp. – Better-than-expected fourth-quarter earnings of $0.83 per share, which blew straight past average analyst estimates of $0.45 a share, failed to shield the stock from the massive beating received during the trading session. Shares plummeted 11% to an intraday low of $38.18 after analysts at FBR Capital Markets slashed their forecast for COF’s earnings. FBR analysts cited “shrinking margins and new U.S. credit-card regulations” as reasons for the reducing earnings estimates according to one Bloomberg article released this morning. Bearish option traders are out in full force, populating both the call and put sides of the stock with pessimistic transactions. Investors purchased put options as low as the February $35 strike where 1,200 contracts were picked up for an average premium of $0.57 apiece. Traders long the puts are perhaps bracing for an additional 9.80% shift down in the price of the underlying to the breakeven point on the puts at $34.43 by expiration next month. Approximately 2,000 nearly in-the-money puts were purchased at the higher February $38 strike price at an average premium of $1.46 apiece. Call selling added to the bearish picture as some 2,100 contracts were shed at the out-of-the-money February $40 strike for a premium of $1.43 per contract. Finally, one trader initiated a pessimistic stance in the January 2012 contract. Perhaps this investor believes today’s turmoil is just the beginning of Capital One’s troubles, or, alternatively, the trader may simply be looking to keep the dollar credit on the following transaction. The trader purchased 1,500 puts at the January 2012 $30 strike for a premium of $4.36 each, spread against the sale of 3,000 puts at the lower January 2012 $25 strike for which he received $2.68 apiece. The investor pockets a net credit of $1.00 per contract on the spread, which he keeps if shares settle above $30.00 by expiration.
CAT – Caterpillar, Inc. – Surprisingly bullish trades befell machinery maker Caterpillar today. CAT’s shares commenced the trading day with higher shares, but slipped lower during the session, and currently reside 1.35% lower on the day at $56.09. Investors expecting shares to recover by expiration in March shed 5,000 in-the-money put options at the March $57.5 strike for an average premium of $3.76 apiece. Open interest at that strike of 5,169 lots suggests this transaction…
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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
(