Skip to main content

Morning Update


Yesterday Alcoa kicked off earnings season with a mediocre report that showed declining cash flow and a bottom line loss despite better than expected EPS and revenue. The shares are modestly lower ahead of the market open. In Europe sentiment has been negative after the IMF said that by 2013 European banks will have to dispose of up to $4.5 trillion in assets. However, there was some good news out of Italy and France, whose industrial production numbers were bother better than expected. Later today in the US wholesale inventories and the Fed’s Beige Book are set to be released, and Bundsbank president Jens Weidman is scheduled to speak, which could generate anti-ESM headlines.

Yesterday call options were unusually active in Ford, with the top trades occurring in the January calls. We saw one trader buy the Jan. 11/12.5 call spread 1,853 times for a net debit of $0.18. This was done with Ford stock trading at 10.10 and is a bullish trade betting Ford will be above 11.18 at January expiration. This means that the trade will require the stock to appreciate by 10.7% in the next 100 days to break even. The maximum profit this spread can return is $1.32, which will occur if Ford is at or above 12.5 at expiration. Since this spread only risks $0.18, it has a very favorable risk/reward ratio. The reason for yesterday’s call activity is likely the news the Ford’s sales in China have increased 1.7% year over year and 10.5% since August 2012. To capitalize on China’s growth, Ford is planning to launch 15 new vehicles in the country and double its production capacity by 2015. Ford’s strong growth in China may have caught investors by surprise due to news out of the region focusing on the slowing economy. Additionally, yesterday Ford was named a top pick by Morgan Stanley, who said the company is leveraged to the US housing recovery and a European restructuring. It appears that this trader is willing to risk a little to gain a lot in the event the global economy does better than forecasted over the next 100 days.

Comments

Post a Comment

Popular posts from this blog

Is the KCJ Foreshadowing a 2008 Repeat?

The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower.  (Source: Access Hollywood) Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007).  So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. A...
Post a Comment
Read more

Morning Update

ECB officials said last night that ECB President Mario Draghi will likely wait to hear Germany’s Constitutional Court’s ruling on the EFSM before publicly unveiling his plans. Many were hoping Draghi would unveil his plan after the ECB’s September 6th meeting, but this is becoming increasingly unlikely. Today Reuters is reporting that Germany is the latest European nation to begin studying the possible impact of a Greek exit from the Euro. This comes ahead of Chancellor Merkel’s meeting with Greece’s Prime Minister today. Merkel has repeatedly said that she would like Greece to remain in the common currency, though clearly someone in Germany believes a Greek exit is possible outcome worth preparing for. This morning US new durable goods orders numbers we released for July, coming in at a gain of 4.2% M/M. Though this was strong than expected, it was primarily driven by strong aircraft sales. Non-defense orders excluding aircraft were down a sharp 3.4% M/M versus a 0.2% decline expecte...
Post a Comment
Read more

Morning Update

Last night rumors that a Spanish bailout would occur in the near future strengthened, tightening Spanish and Italian bond yields to bunds. Even after the rumors that Spain would seek a bailout this weekend we denied risk-on sentiment remained. The Euro is now trading near the psychologically important 1.30 level and US equities are pointing towards a higher open. Yesterday the market also looked strong early on but gave back nearly all of its gains by the close. A strong close higher today will take some momentum back from the bears, while another reversal will only encourage more near-term selling. Yesterday we noticed unusual options activity in Best Buy. Someone sold 22,500 BBY Oct. 19 calls for $0.25 and bought 15,000 Nov. 19 calls for $0.90. This trade appears to be someone rolling their long Oct. calls forward into November. The Nov. calls will turn a profit if the stock is above 19.90 at expiration, which would require a 17% move from yesterday’s close. Best Buy has seen de...
Post a Comment
Read more