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Showing posts from November, 2012

Morning Update

Yesterday US GDP data showed that the economy grew at its fasted pace since late 2011, though it remains uncertain whether this pace will continue to year end as a result of hurricane Sandy and the Fiscal Cliff. Odds of jumping off the fiscal cliff seemed to increase yesterday as President revealed that his opening demands for a deal are $1.6 trillion in tax increases, $50 billion in infrastructure spending, and the power to raise the debt limit without congressional approval. Reuters reported that the proposal was “greeted with laughter” from congressional Republican leaders and it appears it is a step back rather than a step forward in the negotiations.

On Tuesday the Durable Goods report for October showed orders were unchanged, mainly due to weakness in auto sales, airplanes, and defense. However, yesterday Ford announced that it is on track to have its best Hybrid sales month ever and increase its electrified car market share to 11%, a 5 fold increase year over year. The primary…

Bullish GMCR Options Activity

After the close on Tuesday Green Mountain Coffee Roasters reported better than expected fourth quarter earnings that sent the stock up 27% yesterday. One trader decided to play the rise in the stock with options, and bought 24,000 Dec. 33 calls for $3.85 with the stock at 35.89. This is a bullish bet that the stock will appreciate by at least 2.7% over the next 22 days.

This bullishness comes after GMCR reported EPS of $0.64 versus expectations of $0.48, net sales increased 33% year over year, and next year’s guidance was raised. GMCR has been beaten down by the market and is currently 68% off its all-time high from 2011. The stock’s downfall began in 2011 when David Einhorn made a strong bearish case for the stock at an investment conference. His thesis for shorting the stock was the K-Cups are more expensive than buying traditional coffee grounds and wouldn’t catch on with consumers making the company’s growth unsustainable and the stock overvalued. Then in April of this year Starbu…

Bullish Options Activity in GLD

Today one option trader is taking advantage of gold’s decline by buying upside calls. The biggest trade of the day is the purchase of 7,250 GLD January 2014 calls for $4.35. This is a bullish trade that profits if GLD is above 204.35 at January 2014 expiration, which is 415 days away and a 23% move higher. The 200 level in GLD corresponds to a spot gold price of about $2100/oz.

Gold fundamentals remain strong going into 2013, and while I don’t expect gold to trade to $2,100/oz in the coming year, I do expect gold to appreciate significantly. This is based on simple supply and demand. The supply side of gold is not expected to increase dramatically next year, but demand should continue to grow. The two primary sources of gold demand are central banks and exchange traded funds. In 2011 net central bank purchases exceeded 455 tonnes, the largest since 1964. This year the World Gold Council has reported that net central bank purchases are about 20% of global supply. Meanwhile, demand for…

Morning Update

Overnight another Greek bailout was agreed to, which has sent the Euro lower against the dollar. In the past these events have been a “buy the rumor, sell the news” events, so today’s price action is no surprise. And as with the past Greek bailouts, analysts are already saying that it is just kicking the can down the road without a real solution. The main economic news out of the US this morning is the durable goods numbers, which came in ahead of expectations, though expectations were exceptionally low. The October number was unchanged following a 9.2% increase in September and massive 13.1% drop in August. The chart from the Federal Reserve, shows capital goods orders with formal US recessions highlighted in grey. If the recent drop in durable goods orders continues, the trend shows that the US is likely headed for a recession.

One of the sector’s hardest hit since President Obama’s reelection has been the Utilities. The SPDR Select Sector Utilities ETF, XLU, is down 4.8% versus a …

Morning Update

Last week the market rose on optimism that there will be resolutions to the debt crisis in Europe, the fiscal cliff in the US, and conflict in Israel. However, no real solutions were actually found to any of those problems last week. Therefore, we remain cautiously long in this market and are watching the price action in the S&P closely. There appears to be major headline risk in this market, and it will only take one comment from a congressman about not compromising to send this market lower. The focus this week will be on congress, durable goods orders, and GDP and the levels we are watching in the S&P 500 futures are support at 1390 and resistance at the 100-day mobbing average at 1405.

One stock that saw a surge of interest and high trading volume during Friday’s abbreviated trading session was RIM. Shares closed up over 13% on the day following an analyst upgrade and upward price target revision to $15. On trader bought 11,055 March 18 calls for $0.47 with the stock at …

Morning Update

This morning jobless claims were released due to the holiday and were in line with expectations at 410K. Last week’s claims were revised up from 439K to 451K. The Euro was volatile overnight, first falling on news that no agreement over Greek aid disbursement have been reached. However since then the Euro has traded all the way back and is now up on the day. Today’s US trading session is likely to see light volume ahead of the holiday.

Yesterday I noticed unusual options activity in Halliburton. One trader bought 3827 December 30 puts for $0.54 with the stock at 31.35. This is a bearish bet that will profit if HAL is below 29.46 (6% lower) at December expiration in 30 days. Halliburton is a high beta stock that was down over 20% from its September highs before rebounding a few percent with the broad market this week. This trader is taking advantage of this bounce to get bearish exposure to the stock, and also take advantage relatively low implied volatility. Thirty day implied volati…

Morning Update

Last night moments after the US close Moodys downgraded French debt from Aaa to Aa1. The biggest reaction to this was in the EUR/USD rate, which slipped from 18.15 to 1.2765 in minutes. However, the Euro completely recovered as soon as European markets opened for the day and is now sitting at 1.2800. European markets are basically unchanged this morning, along with US stock futures. Housing starts were reported at 0.894M this morning, beating consensus estimates of 0.836M.

Yesterday Wall Street was in rally mode as traders snapped up “risk-on” positions. We noticed unusual options activity in EWZ, the iShares MSCI Brazil Index. One trader bought 40,000 March 53/55 call spreads for $0.77 and also sold 20,000 March 48 puts for $1.54 with the ETF at 51.68. This is a bullish bet that will profit if EWZ is above 55 at March expiration. That would require a 6.4% move over the next 115 days. If EWZ sells off and is below 48 at expiration, the trader will be put to 2 million shares there. By …

Twilight Finale

LGF is releasing its final movie of the teen mega blockbuster twilight today. The franchise has been widely popular and has been a boon to the relatively small movie production company Lions Gate Films. Typically upon movie releases for LGF we see a run up in the stock prior to the release and then a sell off upon release. Typical for Hollywood to buy the rumor and sell the news. There are signs this time might be different, Early returns are already strong, with one report stating that the film grossed 30.4 million from screenings at 10 pm last night and at least one investor is planning on this final addition to buck the trend and beat expectations on this opening weekend. In one trade an investor bought 600 December 17 calls for .29 cents. He is outlaying $17,400 to get long 60,000 shares over 17. This is an attractive way to play the upside in this stock; we have a defined risk, and don’t lose any more than our original capital if the stock does indeed sell on the news.

Morning Update

Since the election the Russell 200 is down 6.3% while RVX, an index that applies the VIX calculation to the Russell 2000 to track implied volatility, is up only 2.7%. Typically we would expect implied volatility to increase 4% for every 1% down move in the stock market, and the breakdown of this relationship suggests that there is no panic selling going on right now. Implied volatility has been kept low because option traders are selling puts into declines in the Russell as they choose levels they are willing to buy the market. Yesterday the largest trade of the day in RUT was a spread known as an iron condor. This spread involves selling an out of the money bull put spread and an out of the money bear call spread. This trader chose to sell 1602 Dec. 700/690 put spreads and sell 1244 Dec. 830/840 call spreads for a net credit of $1.15. At December expiration, which is in 34 days, RUT is between the spreads short strikes (700 and 830), all of the options will expire worthless and the…

Morning Update

Overnight trading saw a risk-off environment as headlines showed Europe has fallen into another recession, their second in four years. This news should not surprise anyone. What is most concerning is that October Eurozone CPI came in at 2.5%, suggesting the Eurozone could be entering a period of stagflation. In Japan the opposition leader called for unlimited BOJ easing, which has caused heavy Yen selling against all major currencies. In the US this morning the October CPI was reported in-line with expectations at a 0.1 M/M increase. Jobless claims, however, were well above expectations for 361K, coming in a 439K. This is likely a distortion in the data caused by hurricane Sandy and the S&P 500 futures are little changed after the data release.

Yesterday October retail sales data showed a seasonally adjusted decline of 0.3% versus expectations of a 0.1% decline. This was the largest drop since June and followed a strong 1.1% advance in September. The SPDR S&P Retail ETF, XRT, …

Morning Update

This morning futures are modestly higher head of the open with the Euro up 0.30% and European indices down. Today retail sales were released for October and came in at -0.3 versus -0.1$% expected. The reading was likely affected by hurricane Sandy, but the bottom line is that ales slowed after accelerating the month before. The PPI was also release this morning and like retail sales came in weaker than expected. Consensus estimates were for a 0.2% increase but the PPI was reported at -0.2% month over month. Food inflation rose 0.4% last month but energy decreased 0.5% led by gasoline prices, which eased 2.2%. The market will be closely following President Obama this week and into next as he aism to begin congressional budget talks this Friday. He is said to be calling for $1.6 trillion in tax revenue increases over the next 10 years, which is likely to be rejected by Republicans.

This morning 773 million Facebook shares will be free to hit the market as another stock lock-up expires.…

Morning Update

Yesterday one of the worst performing sectors was the homebuilders. The SPDR Homebuilders ETF, XHB, sold off 1.5% to close at its 50-day moving average. The ETF saw heavy option volume yesterday, most of which were puts. Over 8 times the average daily put volume traded and the put/call ratio was 12.8. The biggest trade of the day was the purchase of 21,000 Jan. 24/22 put spreads for $0.42 with XHB trading at 25.56. This is a bearish trade that profits if XHB is below 23.58 at January expiration. This would require a 7.7% decline over the next 67 days. This spread will realize its full value of $2.00 if XHB is below 22 at expiration, which will return a profit of $1.58 or a 376% return on risk. However, if XHB is above 24 at expiration this spread will be worthless.

Data suggests that the US housing market has bottomed, so why all the bearishness? Yesterday a component of the XHB, DR Horton Inc (DHI), reported earnings that beat EPS forecasts but missed on revenue. And last week Zillow…

Morning Update

This morning US equities are pointing towards a higher open despite lower markets across Europe. European stock indices have been trending lower after the decision on Greek aid scheduled for today was delayed. Fitch said saying they feel Spain’s debt rating is appropriate but Moody’s said that the ECB is only buying time for the Euro and their decision on France’s rating will be released in a few weeks. This has Spanish-German 10yr bond spreads widening to 450 bps, which is significant because it is the threshold where the LCH, a European clearinghouse, begins reviewing bonds eligibility to meet margin requirements.

One sector that has showed relative strength during last week’s broad market decline was the consumer discretionary sector, XLY. XLY is one of the best performing sectors year to date, up 15.43% versus an 8.36% gain for SPY. However, one option trader is betting that the good times are over for this ETF. The biggest option trade on Friday was the purchase of 2500 March 46/…

Morning Update

Yesterday the S&P 500 sold off over 1% and the VIX also sold off over 4%. Typically for a 1% down move in the S&P 500 the VIX will move up by 4%, so yesterday’s price action was very atypical and is a bullish indicator. The VIX moves up when the S&P moves down because traders bid up the cost of out of the money puts in order to protect their portfolios from further declines. Yesterday we saw traders doing the opposite: selling puts at levels they were willing to get long the market. The biggest trade of the day in SPY options was the sale of 48,000 Nov. 136 puts for $0.53 with SPY at 138.75. This trade will profit as long as SPY is above 135.47 (2.4% lower) at November expiration, which is in 8 days. If SPY is lower than 136 then the trader will be put to 4.8 million shares of SPY at 136, but regardless the trader will keep the $0.53 in premium collected.

For people who want to begin buying into this sell off selling puts is a good way to go because you can effectively get…

Morning Update

Yesterday the market sold off on news that Obama has been reelected and the announcement by Draghi that Germany’s economy is beginning to suffer from the European debt crisis. CNBC showed scenes of violent riots in Greece throughout the day, which also helped drive the market downward. The Greek riots were due to parliament’s austerity vote last night, which unsurprisingly passed. Today attention will be focused back on the US. Jobless claims this morning came in at 355K versus 370K expected and 363K last week. The US balance of trade was also released, coming in at -$41.5B versus -$45.4B expected and -$43.8B last month. The S&P 500 futures are modestly higher ahead of the market open though the better than expected data did not have a profound effect on them. Today we will be closely watching the S&P’s price action around 1402, which is the 100-day moving average, and 1380, which is the 200-day moving average. The market looks like it wants to test 1380, though it could test…

Morning Update

Yesterday as election results rolled in the S&P 500 futures sold off, hitting lows for the night as NBC announced Obama had won the election. After the news the futures rallied to test the 50-day moving average but the level was swiftly rejected as Mario Draghi said the European debt crisis was beginning to hurt Germany, Europe’s largest and most resilient economy. This caused traders to go into risk-off mode, with bonds catching a bid and equities across North America and Europe being sold.

As Americans took to the polls yesterday to choose the country’s new leader, China’s Politiburo Standing Committee is preparing for the 18th National Congress of the Chinese Community Party which will begin Thursday and result in a new ruling elite. Expectations are for Xi Jinping to be named party chief, effective next March. As a result there has been heavy options activity in FXI, the China 25 Index ETF. Yesterday one trader sold 19,875 Dec. 36.5 puts for $0.68 and bought 13,250 Dec. 38 cal…

Morning Update

Today is election-day in America and US equity futures are modestly higher ahead of the open despite poor data out of Europe. German Composite PMI for October was reported at 47.7 versus 49.2 last month. Readings like this are consistent with a 0.5% quarterly decrease in GDP. On top of this declines in the France’s private sector over the past two months are the sharpest seen since just after Leman’s bankruptcy in 2009. Nevertheless Europe’s markets are in the green on hopes for that Greece’s newest austerity bill is passed this week. The Euro is well off its lows of the session, which is helping to put a bid in risk assets like crude oil, which is up 1% at the moment.

Ahead of today’s presidential election we noticed heavy call buying in the oil services sector. Call options on Schlumberger were particularly active, with 4.4 calls being bought for every put. The biggest trade of the day was the purchase of 3113 Jan. 77.5 calls for $0.59 with the stock at 69.10. This trader is bullish…

Morning Update

This morning US equity futures are unchanged after Asian markets closed in the red and European stock indices are down as well. The key events this week will be US presidential elections, a leadership change in China, and an vote on further austerity measures in the Greek parliament. Current polls suggest Obama will be the most likely winner Tuesday night, though it is far from a sure thing. European credit market have started the week trading with a risk off tone ahead of these key events, with the German 2-yr yield dipping into negative territory this morning. The dollar is stronger against the Euro as well, though gold, silver, and crude oil are little changed.

On Friday Chesapeake Energy Corporation’s stock fell 7.9% after the company admitted its debt reduction targets for 2012 may be pushed into 2013, along with some deal closings. This drove unusually high put trading volume in the stock on Friday. The biggest trade of the day was the purchase of 7,000 Nov. 19 puts for $0.67 an…

Trading the Election

Moments ago we saw a trader buy 51,504 XLV Nov. 42 calls for $0.07 with XLV at 40.40. This is a bullish bet that XLV, the SPDR Health Care Select Sector ETF, will be above 42.07 in 14 days, or 4.1% higher. We think this is actually a bet on the outcome of the election. An Obama victory is likely to benefit healthcare stocks while a Romney victory is likely to benefit the energy sector. Various polls show a wide range of election outcomes, with most showing Obama holding a narrow lead. At the office we like to watch markets like inTrade to see where people are betting their real money. The inTrade market for Obama to win currently implies that he has a 66.3% chance of winning. This trade is risking $360,528 and could potentially make many multiples of that, and shows how some of the smart money is beginning to position themselves for an Obama victory.

Morning Update

This morning October non-farm payrolls were released, coming in at 171,000. This was better than even the best estimate going into the report. However, the unemployment rate did tick up to 7.9%, in line with expectations. This report sent the market higher with the S&P 500 futures now at their 50-day moving average. Gold on the other hand has fallen over 1% and below the psychologically important 1700 level. Our model for gold suggests there is still more downside for the metal, so our positions remain conservative and tightly hedged.

On September 14th the S&P 500 reached its 2012 peak and is down 3% since then. One stock that has not been dragged down with the broad market is Whirlpool, which is up 20% since Sept. 14th and 111% year to date. Yesterday we saw heavy call buying in the stock, suggesting option traders believe Whirlpool’s rally is not over yet. In total 1491 December 100 calls were bought yesterday for $4.50. This is a bet that WHR will be above 104.50, or 4% hi…

Morning Update

Yesterday US equity trading resumed after a 2 day hiatus due to hurricane Sandy. Volume was a little light but overall trading appeared to be normal. This the ADP employment report was released, coming in at 158,000 versus 155,00 expected and 162,000 last month. However, ADP has switched to a new method for gathering data this month meaning that there is no track record to show how well the numbers will predict tomorrow’s NFP report. Jobless claims were also released this morning, coming in at 363K, down 9K since last week. The market is little changed by this data and looks to open nearly unchanged from yesterday’s close. The e-mini S&P futures tested the 1400 level in overnight trading for the third night in a row, and the level was once again swiftly defended by the bulls. This appears to be a key support level that is likely to be tested in a regular trading session before the market moves higher. 

On Tuesday Ford Motor Company reported an EPS beat for its 3rd quarter earnings…