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Showing posts from 2013

Markets Soft without Stimulus

Markets around the world pulled back the reigns as central banks look to taper quantitative easing. Japan’s central bank decided to leave their current pace of monetary policy unchecked, which has effectively cut the Nikkei down 1.5% on the day, affecting nearly every market in-between, scaring the DJIA 165 points off the start this morning. US Treasuries have now notched the highest yield in 14 months on the 10 year note.

This morning 55,257 EEM July 35 puts were purchased by a trader for $0.29 each, costing him a large $1,602,453. This is a bearish move on the Emerging Markets ETF, with expectations that by the July expiration, the price of EEM will dip below $34.71. EEM opened today at $39.32 and if this trader was to pass the breakeven point, the ETF would have to drop by more than 11.7% within a little over a month.

EEM opened today 1.9% lower than its closing price yesterday and since the 52-week high the ETF experienced in early January, it has lowered by over 13%. While this …

Monsanto’s stock makes way while sun shines

Monsanto surges nearly 5% after announcing that the seed making conglomerate will effectively extend and increase its stock buyback after its current repurchase campaign finalizes on July 1. This new program will increase to purchase $2 billion worth of company stock over the next three years. This news from the agriculture behemoth comes as Standard & Poor’s raised its credit rating to “stable” from “negative.”

MON earns its keep from three main sources of generating revenue: agricultural chemical sales, designing and selling biotechnology traits, and collecting royalties on the aforementioned traits. When estimating expected returns, Monsanto management analyzes historical returns, economic trends, market conditions and changes in consumer demand.

Corn seeds make up for three quarters of Monsanto’s seed sales; the USDA projected 2013 production to top 2012 by 32%. This is good news for MON; the more seeds, the merrier-- corn seed has been on a 16% tear. Herbicides to cater the s…

Stocks Stumble Only to Stand Back Up

Week in review June 3-7 2013
S&P 0.7%
Dow 0.83%
Russel 2000 0.34%
GLD -0.65%
TLT(Barclays 20 year us treasury index) -0.94%
VIX -7.31%

“Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves” (Peter Lynch) 
June started off ominous as we saw a continuation of the largest selloff the market has seen in 2013.    On Thursday’s low (1598 in the S&P 500) the marked had slumped a total of 5.27% from the year-to-date high (1687), and the CBOE volatility Index VIX had climbed to 18.51. Technical analysts look for the S&P500 to be at a relative low while the VIX is at a high.  This coupled with an increase in volume signals that there is a culmination in the selling.  When the S&P fell below the 50 day moving average of 1606 the selling pressure peaked and when the dust settled, the SPX closed at 1643 for the week.  This rally got wind in its sail from the lukewarm American job report thi…

Yahoo Bears Search for a Correction

There has been recent activity with Yahoo put options today, where a large quantity of June 25 puts were bought for thirty and thirty-five cents. These were done in quantities of 300-500 contracts, giving the traders the right to sell tens of thousands of YHOO shares. This is a bearish bet that Yahoo stock price will drop below $24.65, which these traders expect to happen by expiration on June 13. For this to occur YHOO would need to drop 4.8% over the next 15 days.

Yahoo offers personalized technology services for their clients, connecting users with the exact content they need. In turn, Yahoo sells that information to advertisers and marketers. Yahoo’s CFO Ken Goldman’s opinion expressed confidence in the Sunnyvale, California company. At a recent conference he remarked, “We’re not afraid to make any decisions” when prompted on Yahoo’s taste for acquisitions. Goldman has an eye on the mobile market, and cites the acquisitions “to help basically accelerate our progress … and continue…

US Treasury Sale Stalls GM's Rally

A large trade of over 3200 June 13 calls was sold shortly after the U.S. Treasury Department released a statement that it will sell 30 million share of the Detroit automaker General Motors. The United Auto Workers will also sell an additional 20 million shares of the Motor City staple, slowing any potential rally on the stock with a total of 50 million shares now on the market. 

Since there are suddenly 50 million new and shares hitting the market, they are expecting the stock to perhaps stay stagnant or slightly increase but certainly not exceed the strike of $36. They will collect the premium from selling the call if the stock stays below $36, , but for that buffer, the seller loses the right to capture any market rally above $36.

Today the Treasury Department gave notice that it will empty its 300 million dollar position in the company by early next year. This has resulted in the slight slump GM is experiencing today (-1.5%). This is because since the treasury has committed to sellin…

Morning Update

AIG got an off the bell spike to $45.47 on the open after a favorable index move, and is currently trading a tick down at $44.40. Today around 4,500 options were purchased on AIG June 40 and 45 calls, reflecting a bullish position in the stock.

American International Group and General Motors will rejoin the S&P 500 after the closing bell Thursday. This is a step in the right direction for AIG, which was removed from the index after taking a $152 Billion taxpayer-funded infusion from the government since the financial crisis in 2008 due to its issuance of credit-default swaps without adequate reserves for. This represents the most the government has ever invested on taxpayers’ behalf. The company has since repaid the government for its loan, and at least in the time being, things are good. Many portfolio managers and funds closely follow the S&P companies, and in order to do so must keep a portfolio relative to the companies and weight in each index. Since AIG is being int…

The Week in Review

One of the questions I get most from clients is how to generate yield when the Fed is on hold with rates at zero. For a while many defensive clients were content receiving their 3% annual yield from Treasury bonds, but the Fed’s most recent meeting minutes shows that the Fed’s pace of bond buying may soon slow. While I do not think tapering is likely before year end (unless economic data accelerates significantly) the bond market is forward looking and already beginning to price tapering in.
Smaller Fed purchases of Treasury bonds will mean that bond yields go up and bond prices go down. Bonds have been in a multi-year bull market, and we may now be on the cusp of a multi-year bear market.
The most important indicator to watch is the 10-year yield, which cracked the 2.10% level this week for the first time in a year. If we continue to hold above 2.05% in June, the top is likely in for bonds and borrowing rates will be on the rise for everyone, including the US Treasury.
So, how am I pla…

Morning Update

This morning almost 9000 Microsoft June 36 call options were purchased within minutes of each other around 9:30am for about $0.27. Currently, Microsoft is trading at about $35 but opened for the day at $34.85. This transaction is a bullish bet that Microsoft stock will rise above the breakeven point of $36.27 by the 21st of June, equivalent to an increase of about 4.1%

This trade occurred on the tail of MSFT releasing its new all-in-one consul Xbox One. MSFT already had a thick slice of the consul market, and this new product offers more options than its competitors with capabilities of TV, sharing, and music capabilities, in addition to gaming. The reception of the new Xbox was not particularly astounding to stockholders, indicated by the drop in stock price, but this drop was quickly restored to previous prices. Another reason why holding Microsoft might be a good move is because Microsoft will release their fourth quarter dividend dates in mid June, probably prior to the expiration…

Morning Update

Today US markets are following Europe’s sell off, and being led down by traditionally safe, defensive sectors like the utilities and healthcare. Johnson & Johnson is one of those names being sold, and is seeing bearish option activity. The biggest trade this morning was the sale of 3,179 July 90 calls for $0.55. This is neutral to bearish trade that expects the stock to be below 90.55 at July expiration.

There are a few reasons to bet that JNJ, which is up 21% year to date when then S&P 500 is only up 13%, is due for a breather. The stock has slightly outperformed the Healthcare Sector this year, benefiting from a flight to safe, defensive, dividend paying names. However, the stock’s PE of 23.75 is near levels not seen since 2005 and suggests that the stock’s price has gotten a bit ahead of its earnings. JNJ’s CFO Dominic Caruso has even hinted that he would not expect the stock to continue to rally at the same pace it has the past few months. One point of concern is a decline…

Morning Update

This morning Shares of Ford are jumping higher on news that the Case-Shiller housing index rose to its highest level in seven years, and that consumer confidence jumped to its highest level since 2008 and a 10.9% gain. One option trader bought 3500 15.50 weekly calls for $0.08 this morning into the stocks strength, betting that Ford could rally 2.3% by the close this Friday. Strong housing numbers are good for Ford because it indicates strong demand for Ford’s trucks. Additionally, sales of trucks are expected to be strong because gasoline prices are expected to be relatively flat through the rest of 2013.

Besides the positive US housing market, other reasons exist to invest in Ford. Some analysts have predicted that the European economy has reached its low point and will soon be showing some growth within the near future. This would increase European consumption and as a result increase demand for automobiles in the continent, of which Ford had about an 8% market share of April 2013.…

Morning Update

Today one stock seeing heavy option volume is Phillips 66. The biggest trade of the day was the purchase of 5,000 November 80 calls for $1.95 with the stock at 66.33. This is a bullish bet that the stock will be above 81.95 at November expiration, a 24% move higher. This bullishness comes on the heels of a recent announcement by the company that they will boost shipments of cheap domestic crudes to its refineries across the country by as much as 130,000 barrels per day. To accomplish this PSX has joined forces with Enbridge Energy Partners for rail shipments of Bakken crude to its east and west coast refineries. Shipments are expected to reach 35,000-40,000 barrels per day by the fourth quarter.

Recently the refiners have sold off as the spread between WTI crude and Brent narrowed along with the crack spread. However, as more capacity to transport and product US crude comes on line, the WTI – Brent spread should widen back out, which gives refiners like PSX a leg up on the global comp…

FaceBook: 1 Year Later

Today marks the one year anniversary of FaceBook’s IPO. After a year of trading the stock is down 37%, and today one option trader is betting that the stock could trade even lower. One of the biggest FB trades today was the purchase of 8353 July 25 puts and the sale of an equal number of July 22 puts. This creates a vertical spread for a net debit of $0.55. This will profit if FB is below 21.45 at July expiration, 19% lower.

This trade could be a either a trader speculating that FB will move lower, or a long term investor that wants a cost effective hedge against a dip in the shares. The benefit of put verticals like these is the risk/reward ratio that they offer: this trade risk only $0.55 but has the potential to return up to $2.45 in profits, for a 445% return on investment. Therefore it allows FaceBook bears to gain exposure to the stocks downside without taking too much risk if they are wrong. Similarly, for someone who is long FB shares it offers the ability to hedge their losse…

Morning Update: Dow Theory

Dow Theory, developed by Charles H. Dow himself in the late 1800s, holds that the strength of a rally can be determined by the relative strength of stock indices. The theory holds that the Dow Transports should lead a rally in the Dow Industrials, since an improving manufacturing sector would require addition shipping volume, whether via boat, train, or air. Over 100 years later this is still a valid theory and is closely followed by many traders. Last week we saw the Dow Transports and the Dow Industrials close at new 52-weeks high, which has one option trader concluding that this rally will continue.

One of the top weightings in the Dow Transportation Index is Union Pacific, and this morning someone bought 100 August 160 calls for $2.95 with the stock at 152.83. This is $29,500 bet that UNP will be above 162.50, 6.3% higher, by August expiration.

The rally in the transports has been driven primarily by rails. The reason is two-fold. First, oil production in the Bakken is exceeding …

Playing Netflix Earnings by the Numbers

Today after the close all eyes will be on Netflix, which will report second quarter earnings. The stock is up over 5% today ahead of the announcement, and option traders are betting that the stock trades higher after the release. The biggest trade of the day has been the purchase of 422 180 calls expiring this Friday for an average price of $9.08. This is a bullish bet that has a breakeven of 189.08 at the close this Friday.

The key to trading earnings announcements with options is to understand the implied volatility you are buying or selling. A quick way is to look at the nearest expiring at the money straddle. A straddle is an option spread that is long both a call and put at the same strike and same expiration. Right now the 170 straddle expiring on Friday is trading $26, which means traders are expecting that the stock will be within 15% of 170 at expiration. Most of this move is likely to occur tomorrow, so we can look at Netflix’s historical moves after earnings in order to dec…

Morning Update

One stock under performing the broad market this morning is Boeing. This has enticed one option trader to buy calls on the stock. The trade was the purchase of 294 August 85 calls for $5.25 with the stock at 87.00. This is a bullish bet that the stock will be above 90.25, or 3.7% higher, by August expiration.

Trades like this are a good example of how you can replace a long stock position with a call option. Investors who are uncomfortable with the market volatility this week can sell stock and buy 1 in the money call for every 100 shares sold. The result of this trade is a position that will profit if the stock continues to rally this summer, but will have limited losses should the market sell-off. The cost of this protection is that the stock must overcome the extrinsic value of the calls, also known as their time premium. In this case, a stock position bought at $87 would have a break even at $87, whereas the call position has a break even of $90.25, 3.5% higher.

However, a look at…

Using Options to Trade Season Trends

Today shares of Coca-Cola are over 5% higher after the company reported better than expected earnings per share and revenue, plus a 4% increase in sales volume. Additionally Coca-Cola announced that that they had agreed to create a franchise bottling system with five bottling companies. The stock has seen heavy option trading as a result of its big pop, with the biggest trade of the day being the sale of 5000 August 44 calls for $0.58.

By selling this call, the trader believes that the stock will not be above 44.58 come August expiration, and if it is there he is willing to either get short the stock or take profit on his longs. If this was done against stock, it would create a covered call position for the trader. This is a way to play the seasonal “sell in May and go away” trade without actually going away. Instead of selling stock positions outright, you can sell call options against those stocks to create a downside cushion that will help your portfolio outperform if we see the ty…

Morning Update

The story of the day is the crash in gold prices which are down about 10% right now following Friday’s 4% plunge. Gold continues to rip through levels of support like they are non-existent, suggesting investors are running for the exits no matter what the price. The sell-off in gold has dragged the gold miners down with it, including Freeport McMoran. This stock is down 12.5% from last week’s high and down nearly 7% today. But option traders are continuing to make bearish bets on the stock which suggests that the bottom may not be in yet for gold or the gold miners.

One of the biggest trades today in FCX was the purchase of 3215 August 21 puts and the sale of 3125 August 27 calls for a net credit of $3.82. This position is known as a risk reversal and is very similar to a short stock position. Typically these option spreads are done against a long term, buy and hold stock position to flatten exposure without creating a tax event. This spread, when done against stock, will cap losses …

Taking Advantage of the Panicked Selling in Gold

A poor PPI reading, retail sale, and consumer confidence number appear to have finally brought some sellers into the equity markets this morning. But the real looser this morning is not a stock, its gold. Gold is currently down nearly 4% and has blown through support at its 2012 lows. Early option trading is heavy, with 1.7 puts trading for every call. Demand for out of the money puts has pushed the gold volatility index up 25%, which demonstrates the level of fear in this market right now.

One of the biggest trades this morning on the GLD appears to be the purchase of 3925 May 150 puts for $3.70 and the sale of 3925 March 2014 144 puts for $6.90. This trade is an expression of a short term bearish and long term bullish view. The May 150 put that was bought will be profitable if GLD is below 146.30 at May expiration. To finance the cost of buying this put and expensive volatility this trader then sold a long term 144 put for 6.90. This trade will be profitable if GLD is above 137.10 …

Morning Update

Yesterday refining stocks plummeted after Valero said it expects to pay $300-$400 million to comply with cleaner gasoline requirements expected to be in effect by 2017. This sent a wave of selling through the refining sector as traders, worrying over margins, heavy maintenance ahead of the summer driving season, and the expenses related to the new emissions regulations took the opportunity to take profits in these names. Options volume in Phillips 66 has been heavy the last two days and focused on defensive trades. One of the biggest trades yesterday was the purchase of 1000 April 65 puts for $0.65 with the stock at 67.85, This morning those puts were sold for $2.35 with the stock at 63.93. This trade risked $65,000 in options premium and turned a profit of $170,000 in one day.

The take away from this trade for long term investors who are long the stock should be that these option traders have already switched from buying puts to selling them. This shows they think this move, which …

Morning Update

This week the slow and steady market rally we have experienced this year has slowed even more, although the uptrend is still very much intact. One option trader is betting that the Nasdaq-100 is at a near term top at its current levels, and sold 8000 of the QQQ 69 calls expiring on 4/26 against a stock position for $0.91. This buy-write or covered call has a neutral to bullish bias to the market  meaning that it will profit if the QQQ stays around this level or moves higher. If QQQ is at 69 at expiration the stock position will breakeven but the option will expire worthless, showing a profit of $0.91. If the Nasdaq-100 declines then losses on the stock position will be offset by the $0.91 of premium collected on the options. Lots of traders and investors are having a hard time seeing how the market will be able to rally significantly higher from here in the near term and are concerned about the seasonal “sell in May and go away” trade that could pressure the market. If you are in thi…

Morning Update

Last week shares of Lululemon were sold hard after the company reported earnings in-line with expectations but guided lower after announcing a product recall. However this morning on option trader made a large bullish bet that the stock will be higher by January expiration. The trade was the purchase of 3942 62.5/72.5 call spreads for $4.07. The cost of this call spread was then financed by selling an equal number of January 50 puts for 3.52. This brings the net cost of the trade to $0.55, which is the trader’s total risk above 50. If LULU is above 62.5 then the trader gets long exposure to the stock all the way to 72.5. The catch is that the trader would be required to buy the stock at 50 if it is below that strike at expiration.

This spread is conservatively bullish and suggests the trader believes LULU could be oversold after last week’s drop. The big question going forward is how will the recall affect sales? Lululemon expects EPS to drop next quarter as a result of the recall, bu…

Morning Update

Yesterday the S&P 500 was only down 0.5% but the VIX was higher by over 18%, showing that traders were exceptionally skittish after getting surprising news from Cyprus. A higher VIX means that there was increased demand for options. In most names the option trading was dominated by purchasers of out of the money puts to limit downside risk to long stock positions. But in Conoco Phillips we saw traders come in and buy large quantities of out of the money weekly calls to play a pop in the stock with minimal risk. The biggest trade of the day was the purchase of 9249 Weekly 60 calls for $0.21 with the stock at 59.35. This trade will profit if COP is above 60.21, 1.5% higher, by the close this Friday.

Yesterday COP opened down 0.70% and immediately began trading higher. The weekly 60 calls opened at $0.08 and traded as high as $0.31 during the day. This highlights the benefit of weeklies, which is leverage. Because expiration is just days away the options are extremely sensitive to c…

Morning Update

One of the top performing sectors during 2013’s stock market rally has been energy. Due to a large supply of cheap natural gas and increasingly accessible crude oil America is well on its way to becoming a net energy exporter by 2020. One company trying to capitalize on this is Cheniere Energy. Cheniere is the only company currently allowed to export LNG and is in the process of building an export terminal. However the company is not expected to show any growth until 2015 at the earliest, which is when gas should begin flowing through it terminal. Nevertheless Cheniere is trading at all-time highs, which spurred one option trader to make a bearish bet on the stock.

The largest trade of the day was the purchase of 5000 April 24/22 put spreads for $0.50 with the stock at 25.00. This fix risk spread will be worth $2.00, making $1.50 profit, if Cheniere is below 22 at expiration, and will incur its max loss of $0.50 if LNG is above 24 at expiration. This is a contrarian play that the sto…

Morning Update

Yesterday shares of Walgreens surged 4.2% on strong option volume to a new 52-week high after an upgrade from “neutral” to “buy” at UBS. The new price target was raised to $48 a share, but some option traders didn’t quite believe that. The biggest trade of the day was the sale of 10,000 April 42/43 call spreads for a $0.58 credit. This is a bearish trade that can make a maximum of $0.58 if WAG is below 42 at April expiration, and incurs its maximum loss of $0.42 if WAG is above 43. This trade is basically a simple bet that the stock will be lower than it is now come April expiration.

This thinking contrasts that of the analysts at UBS, who said that despite the stock’s strong performance year to date and throughout 2012 it is a buy. Prior to yesterday’s pop Walgreen had been trading off of its 2013 highs, which led UBS to declare that now is an excellent buying time. The rationale behind the upgrade was that the Alliance Boots transaction has settled and will begin positively impacti…

Morning Update

Yesterday shares of Zynga popped 10% on rumors that it could be a takeover target. This set option traders into a call buying frenzy, with triple the average daily volume changing hands yesterday. One of the biggest trades of the day was the purchase of 1129 April 4.5 calls for $0.22 with the stock at 3.90. This is a bullish bet that the stock will close above 4.72 at April expiration, an increase of 21%.

Last year Zynga traded up to a high around $15.91 per share before plummeting to close 2012 at $2.63, a loss of 83%. However, so far the stock is up 50% year to date making it a top performer. Traders like this call buyer were speculating yesterday that Yahoo could buy Zynga, which will a catalyst for the stock to continue its rally into April expiration. But is a buyout by Yahoo really in the cards?

Marissa Meyer’s goal is to integrate Yahoo into its user’s daily habits, so the real question is does Zynga’s games fall under the category of daily habits? Yahoo does have a games site…

Morning Update

On Friday shares of Navistar closed up 11% to cap off an impressive 46% gain on the week. Thursday the truck and engine company reported fourth quarter earnings loss that was not as bad as expected. The company also announced a management shake-up and declared “our return to profitability is in clear sight.” Carl Icahn, who owns 11.8 million shares and has been lobbying for a management change, has been quick to endorse former COO and incoming CEO Troy Clarke, and the stock was upgraded to “overweight” at JPM and reiterated as a buy at Jefferies. However, option trading Friday was less optimistic, with the biggest trade being the purchase of 1,000 July 30/20 put spreads for a net debit of $2.00. This is a bearish trade that will profit if the stock is below 28.00, 20% lower, at July expiration.

This trade was most likely done to protect gains from a long stock position instead of as an outright bearish bet. After a 45% rally in a week, protecting gains with a fixed risk spread like t…

Morning Update

Yesterday as the Dow made a new` all-time high for the third consecutive day one option trader made a bet that all-time highs will been seen in the S&P 500 by April expiration. The trade was the purchase of 50,000 April 160/161 call spreads for a cost of $0.13. This is bullish trade that risks $650,000 to make a potential $4.35 million if SPY is above 161 at April expiration. SPY is already up 8% year to date, and this trade bets that it has another 4% left to rally over the next 5 weeks.

Why might this be the case? First off, there has been a slew of data surprising to the upside lately. This morning non-farm payrolls came in at 236,000 versus 171,000 expected, and last week ISM Manufacturing came in at 54.2 versus 52.8 expected along with the Chicago PMI which came in at 56.8 versus 55.0 expected. Second, Bernanke, along with Yellen and Dudley, have been reassuring investors that the Fed will continue to keep rates low for a while yet. This means that markets can rally on good …

Morning Update

Yesterday call options on Bank of America were active on above average volume ahead of today’s bank stress test results. The biggest trade of the day was the purchase of 13427 March 12 calls for $0.20 with the stock at 11.85. This is a bullish bet that BAC will be above 12.20 (3% higher) on expiration next Friday. Bank of America is poised to pass the Federal Reserve’s stress tests with flying colors this time around, which could open the door to a possible dividend increase and stock buyback.

Currently Bank of America is the best capitalized of largest American banks with a Basel III Tier 1 common capital ratio of 9.25%. 5% is the minimum required, which leaves Bank of America with a comfortable amount of excess capital, some of which analysts expect could be allowed to be returned to shareholders. Analysts at JPMorgan estimate that Bank of America could increase its dividend from $0.01 to $0.04 and buy back up to $4 billion in stock. However, news about possible dividend increases …

Morning Update

Yesterday shares of Cree surged higher by nearly 15% after the company raised their forward guidance and announced the release of a new sub $10 energy efficient light bulb. One option trader made a bet that Cree’s future would not be that bright when he bought 9975 June 50 puts and sold an equal number of June 46 puts for a net cost of $1.86 and with the stock at 49.75. This is a bearish bet with a breakeven price of 48.14, 5.9% lower, at June expiration.

In Yesterday’s press release Cree said “Over the last couple of years we recognize that the consumer is instrumental in the adoption of LED lighting, but we need to give them a reason to switch.” Their new product, a $9.97 40-watt LED bulb, is what they hope will convince the consumer to ditch their old inefficient incandescent bulbs in favor of these. The new bulbs will be sold exclusively at Home Depot where a 60-watt incandescent bulb costs $13.97. It is well known that LED bulbs use less power and last longer, but they have alway…

Morning Update

Yahoo shares jumped 3% on Friday as trader responded to news that Yahoo’s Marrisa Meyer is pulling a play out of Google’s book and eliminating unsuccessful products en-masse. Yahoo announced that it would eliminate its BlackBerry app, along with Yahoo App Search, Yahoo Sports IQ, Yahoo Clues, and Yahoo Message Boards. This new policy comes in conjunction with a change in Yahoo’s description of itself in its 10-K. The old description as a ”premier digital media company” has been replaced with “a global technology company focused on making the world’s daily habits inspiring and entertaining.” Traders liked the new “less is more” policy out of Yahoo and the bullish stock trading spilled over into the options market, with over 5 calls trading for every put. One of the biggest trades of the day was the purchase of 2500 July 24/26 call spreads for $0.45 with the stock at 22.00.

This is a bullish bet that Yahoo will be above 24 .45 at July expiration, a 11% increase. The risk in this trade i…

Morning Update

Yesterday JC Penny reported what some are calling “The Worst Quarter in the History of Retail.” The company reported a quarterly loss of $2.51 per shares and that revenue dropped 24.8%. Revenue at stores open for at least a year fell 31.7% and customer traffic dropped 17% last quarter following a 10% decrease in third quarter. Not surprisingly these dismal numbers spurred option traders to make some large bearish bets on the stock. The biggest was the purchase of 30,000 May 16 puts for $1.57 with the stock at 17.50.

This trade will be profitable if JCP is below 14.43, 17.5% lower, by May expiration. One of the biggest concerns investors should have in JC Penny’s cash supply. In November they told investors that they would end the year with $1 billion in cash, but ended up with only $930 million. Wednesday they then told investors that they had delayed $85 million in payments to their suppliers until the early part of the first quarter. This is another red flag that the company is run…

Morning Update

Yesterday as the Dow broke out to new highs the biggest trade of the day went up as one trader bought 600 March 141 DIA calls for 1.06. Oh wait, that was us. As the market gained momentum yesterday we decided to added some fixed risk upside exposure for clients to take advantage of a possible breakout in the Dow. We liked what Bernanke had to say, which was basically that easy monetary policy is not going anywhere anytime fast. We don’t like to fight the Fed, and if interest rates are going to continue to stay low risk assets will continue to appreciate. As if to prove this the New York Fed stepped up yesterday and made their largest asset purchase yet this month. Yesterday the VIX crashed down nearly as fast as it had gone up just days before, which shows just how fast Bernanke was able to remove the fear in the markets. A low VIX also means that option premiums are lower, which makes buying call options more attractive.

Technically the DIA looks poised to make a run for new highs. W…

Morning Update

Yesterday there was unusually high call option activity in Direct TV. The largest trade of the day was the purchase of 8000 June 55 calls for $0.54 with the stock at 48.25. This is a bullish bet that DTV will be above 55.54, 15% higher, at June expiration. The stock is modestly lower on the year and is currently sitting near a level of technical support at 48.00. This trader is betting that this level of support holds and that the stock rebounds higher over the next couple of months.

Direct TV reported earnings on February 14th and gave investors a few reasons to be bullish. The company reported that revenues increased 8%, in line with expectations, and blew away the consensus EPS estimate of $1.03 by reporting $1.55. They also added 10.3 million new subscribers in Latin America during FY2012, which was the biggest driver of growth. Going forward DTV is betting that emerging markets will give them the best bang for their buck and are investing heavily in Latin America. Recently Direc…

Morning Update

Yesterday shares of Morgan Stanley closed down 6.6%, leading the broader market down as fears of a hung Italian parliament looked like an increasingly likely scenario. Morgan Stanley was one of the hardest hit stocks in the S&P 500 because of its exposure to European peripheral bonds. The stock saw extremely high option volume yesterday, with 9.5 puts trading for every call. One of the biggest trades of the day was the purchase of 20,700 Oct. 23 puts and sale of an equal number of Oct.18 puts. The trader paid a net debit of $1.79 for this put spread, which was put on when the stock was trading 22.75.

Time has shown that when the market is spooked over Europe, Morgan Stanley is one of the first stocks to be sold. This is because the company is seen as the weakest of the “too big to fail” banks. Last year the bank made a lot of progress and posted earnings of $1.59 a shares versus a net loss in 2011. Revenues also increased to $30.514 billion in 2012 from $28.555 billion in 2011. Bu…

Morning Update

On Friday, March 1st the sequester is scheduled to take effect and will remove about $45 billion from Pentagon programs. Despite this Lockheed Martin saw heavy call option trading on Friday with 5 calls trading for every put. The biggest trade of the day was the purchase of 5000 April 92.5 calls for $0.65 with the stock at 88.50. This is a bullish bet that the stock, which is down 4.5% year to date, will rally at least 5% over the next month and a half.

Right now there are two risks facing this stock: the sequester, and the Pentagon’s grounding of the F-35 Joint Strike Fighter. Despite the looming deadline for the sequester the defense and aerospace sectors are holding strong near 52-week highs. Although Lockheed is off of its lows it is well off its 52-week high, demonstrating relative weakness to its peers. Lockheed has said that they expect sales to be flat as a result of government budget cuts. To make up for this the company is looking to cut costs and increase sales abroad. The…

Morning Update

Yesterday there was unusual options activity in Sears Holdings. One traded made a large bullish bet on the long term performance of the stock by buying 10,000 January 2015 60/70 call spreads for a net debit of $2.50. This trade will profit if SHLD is above 62.50 in two years, and can return a total of $7.50 is SHLD is at or above 70 at expiration. The total risk is limited to $2.50 if SHLD is below 62.50, meaning that this trade has the potential to return 300% on investment. However, this definitely a speculative play considering that SHLD was trading 47.30 at the time of the trade which means the stock would have to rise 32% for this trade to be profitable.

The problem is that Sear’s is not a profitable company and does not expect to be anytime soon, which makes a 32% rally in the stock unlikely without a major change. Since its merger with Kmart in 2005 Sears has seen revenues and profitability decline. Free cash flow has been negative since 2010, and consensus expectations are for…

Morning Update

Yesterday shares of GM led the market down, closing down over 2% and extending the losses it has experienced since reporting earnings on 2/14. Option activity was bullish however, with calls trading nearly twice their average daily volume. Much of the volume was concentrated in the June 35 calls which traded 35,580 contracts, 98% of which were bought. It appears that one trader bought the bulk of these in a single block trade. The trade went down at an average price of $0.,14 with GM at 27.70. This is a bullish trade that will profit if GM rises by 27% over the next 120 days.

Last Thursday GM reported solid fourth quarter earnings. Revenue rose 3% year-over-year to $39.5 billion and earnings per share rose 23%. What has sent the shares down since then was that North American operating margins declined 0.70% year over year to 5.8%. GM’s European division lost $700 million in the fourth quarter and $1.8 billion for the year. The picture is a bit brighter in South America, where GM has a…

Morning Update

Yesterday Stanford C Bernstein downgraded shares of Vodafone to under-perform and adjusted their target share price downward. This sent the stock down 2.5% on the day and towards a major technical level for the stock. These enticed option traders to make bullish bets, expecting the stock will bounce off of support at 25. The biggest trade of the day was the purchase of 10,000 July 27 calls for $0.55 and the sale of 10,000 July 23 puts for $0.69. This trade is known as a risk reversal and was done for a $0.14 net credit. If VOD closes between 23 and 27 at July expiration, both options will expire worthless and the trader’s profit will be the $0.14 credit collected. If VOD rises above 27 the long call will come in to play and the trader will profit off of the stock’s upside. The risk in the trade is below 23, where the trader will be obligated to buy the stock at expiration.

The 25 level is an important area of support for VOD that was tested several times in 2011 and 2012. The stock to…

Unusual Option Activity in STZ

Last month the US Department of Justice blocked InBev’s deal to acquire Grupo Modelo on fears it would give InBev monopoly pricing power in the US. Yesterday InBev announced that it was selling the Piedras Negras brewery to Constellation Brands so that their acquisition of Modelo would not create a monopoly. The real winner in this deal is not InBev or Modelo, but Constellation Brands, which was able to buy the Piedras Negras Brewery, along with “perpetual rights” to sell Corona, for dirt cheap.

Ahead of the announcement one option trader made a big bet that something like this would happen when they bought 1500 STZ Feb 35 calls for $0.05 that expire today. At the time the stock was trading $31.88 and today is trading $43.86, 38% higher. The total premium paid for the calls on Wednesday was $7,500 and today the position is valued at $1.3 million, a 17,333% winner in two days. This trade seems a little sketchy and is undoubtedly catching someone’s eye over at the SEC.

Morning Update

Yesterday Sanofi-Aventis reported a fourth quarter earnings miss and said EPS would be flat to down 5% in 2013. This caused the stock to gap down about 5% and close near that level. The news was followed by unusually high option trading, especially on the put side. The biggest trade of the day was the purchase of 500 June 42 calls for $1.50 with the stock at 44.86. This is a bearish bet that the stock will be below 40.50, 10% lower, at June expiration.

Sanofi has been one of the best performing stocks in the pharma industry, up about 25% over the last 12 months. The reason for Sanofi’s pessimistic outlook is a slew of patent expirations early this year. The most significant is the expiration of their patent for Plaviks, one of the top selling prescription drugs worldwide. Though the near term outlook is nothing to get excited about, Sanofi looks prepared to return to growth in late 2013 and beyond.

The company has been focused on building a pipeline of drugs that focus on emerging mar…

Morning Update

General Dynamics, one of the world’s largest defense contractors, has had a rough start to 2013. The stock initially moved higher with the broad market following the fiscal cliff deal, but has since plummeted 9% from its highs. The selloff has come as investors have digested the slump in defense spending that pushed Q4 GDP negative, a lackluster earnings report, a new CEO, and the potential for a sequester in March. Yesterday put volume was nearly 3 times the average volume, and the biggest trade was the sale of 2500 March 65/60 put spreads for $1.00 with the stock at 66. This is a neutral to bullish position that will profit if GD is above 64 at March expiration. Should GD fall further the spread can lose a maximum of $4 if the stock falls to 60 or below.

The GD’s 2013 low is 64.47, which it has rebounded off of the last two days. This trader is betting that this swing low holds as support between now and March expiration. If it cracks below this level the next stop is 62.00, which …

Morning Update

On Monday Yum Brands reported that fourth quarter sales dropped 6% in China, the first drop in 3 years. CFO Patrick Grismer added on the conference call that comparable same store sales could slide 25% in the first quarter. This sent the stock down almost 3% on the day though it closed well off its lows. The stock has been pummeled since December when the Chinese government announced that some batches of KFC chicken contained higher levels of antibiotics than was allowed. Despite the gloomy outlook on the Yum conference call, one option trader used the stock’s weakness to sell out of the money puts on the stock to lock in a future purchase price. The biggest trade of the day was the sale of 1000 March 57.5 puts for $0.62 with the stock at 61.84.

This is a bullish trade that suggests this trader is willing to buy 100,000 shares of YUM at 56.88, 8% lower, at March expiration. If the stock does not fall below the put’s strike price the option will not be exercised and the option will exp…

Morning Update

Tomorrow after the close Allstate Corp will report 4th quarter earnings and option traders are betting they will be good. Yesterday one trader bought 10,000 February 45 calls for $0.60 with the stock trading at 43.93. This is a bullish bet that Allstate will be above 45.60, 3.8% higher, at February expiration which is in 8 trading days.

There are a few reasons to be optimistic heading into Allstate’s earnings announcement tomorrow. The first is that, because of Superstorm Sandy, the bar has been set low. The company estimated that it suffered $1.08 billion in catastrophic losses in October, but peers Chubb and Travelers, who have both reported, seemed to make out better than was originally expected. A big part of this is because flood damage is coved by the National Flood Insurance program, not homeowner’s insurance. Other than losses from Sandy, investors will be closely watching for a change in net premiums written. The company increased rates in several states last year and institu…

Morning Update

On Friday before the open Exxon reported fourth quarter earnings of $2.20 per share versus $2.00 estimated. Revenue was down 5.3% to $115.17 billion, just missing estimates of $115.22 billion. Oil and gas output fell 5.2% to 4.29 million barrels per day. Net income rose 6% to a five-year high of $9.95 billion, helped by high refining profit margins. In the fourth quarter refining margins across the country rose by 46% as increased oil production from shale pressured input prices. The stock was little changed and option trading leaned on the defensive side. The biggest trade of the day was the purchase of 2500 April 87.5/80 put spreads for $1.70. This is a bearish trade that will profit if XOM is below 85.80 at April expiration.

A put spread involves the purchase of one put and the sale of another that is further out of the money. By selling a further out of the money put the cost of buying the near put is reduced, moving the trade’s breakeven closer. One reason for this bearish play …