Skip to main content

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 volatility in HAL is currently 27.32, which is near the bottom end of its 52-week range of 25.13 – 60.80. If HAL sells off like this trader expects, implied volatility will increase as investors rush to buy puts to protect their stock positions pushing the price of these puts up even more.

Right now Halliburton’s technicals are bearish. The stock made a head-and-shoulders top on its daily chart over the last few months. This price pattern would suggest the stock trades down to 28.00, which also coincides with previous area of major support and is near the stock’s 52-week low. Fundamentally, the stock also faces some headwinds. During the company’s last earnings report David Leasar, the company’s chairman, president, and CEO, said “We expect the next couple of quarters to be pretty bumpy.” That’s because of price volatility in guar gum, a key material used in hydraulic fracturing led Halliburton to hedge at an unfavorable price which has left them stock with huge amounts of overpriced investory. Another reason is that Halliburton’s North American customers are cutting back spending due to high costs and low energy prices. Relative to the third quarter of 2011 there are 6.5% fewer rigs in North America, which means fewer customers for Halliburton. Halliburton’s international operations remain strong, but may not be stellar enough to drive substantial growth going forward.

I like this trade for playing a near-term sell off in the stock because it has a very favorable risk-reward ratio. If Halliburton does trade down to 28, this option will return $1.46 in profit, but can only loose $0.54 in the event that scenario does not play out.

Comments

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…

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…

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…