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

I would like to bet ten tens on the tenth horse in the tenth race, please.

"I would like to bet ten tens on the tenth horse in the tenth race, please."


Last summer, on a warm cloudy day June 11, 2016 in Elmont New York, a good friend of mine (Rob) confidently walked up to the cashier at Belmont and spoke those famous words.  Ten Tens on Ten in the Tenth Race.  In fact, it had been decided it months earlier. We had been discussing hosting his bachelor party in New York, go to the Belmont Stakes, and watch a Yankees vs Tigers game and Rob convinced the group to go to New York by proudly proclaimed his prophecy.  I had almost forgotten about this bold prediction when I witnessed him at the register, but when I looked up, and saw Flintshire, the 10th horse in the race upcoming race was the favorite.  “What could possibly go wrong?”  I thought to myself (an options trader who bought a racing program attempting to handicap and gain an ‘edge’ in the previous nine races unsuccessfully).  I went to a pretzel vendor and changed 5 twenties into ten tens, wal…
Post a Comment
Read more

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. 
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. As the summer hit, FANG has slowed with GOOGL and AMZN hitting…
Post a Comment
Read more

The market should take Trump seriously this time.

Kim Jung-Un gave the U.S. an unwelcome birthday present as he test launched an ICBM capable of reaching Alaska.  North Korea has made it very clear that their intention is to grow their nuclear capability to be able to reach the Continental United States.  This would destabilize the region, and world overnight.
Now I don’t expect the war drum beating will spill over into mortar shells raining down on Seoul anytime soon.  There has been a choreographed diplomatic dance going on for the past 40 years with North Korea that is likely to continue as follows; North Korea acts out, U.S. gets upset, U.S. sanctions them (with help from China).  North Korea gives up their acting out activity (promises they won’t do it again), a North Korean South Korean gesture of goodwill takes place, such as joint Olympic teams, joint economic projects, North Korea gets to declare victory.
However, this go around seems slightly different.  Now we have a President who has made it very clear in his campaign tha…
Post a Comment
Read more