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Showing posts from January, 2013

Morning Update

Yesterday was a big day for RIM, who officially launched the BB10 and announced a name change from Research in Motion to BlackBerry (symbol BBRY). The change confirms what every analyst has been saying for months: the future of the company hinges on the success of this phone, to the point that naming the company after it seems appropriate. BlackBerry’s stock has seen a huge run-up ahead of the event, similar to what used to happen to Apple’s stock ahead of a major product launch. However, much like Apple, it was a “buy the rumor, sell the news” scenario. The stock was 24% off of its Jan. 246th intra-day high as of yesterday’s close, falling 12% yesterday alone. One option trader is betting that BlackBerry has already seen its 2013 high for the year by buying 5,000 January 2014 13 puts for $3.15 with the stock at 14.02. This is a bearish bet that BlackBerry will be below 9.85 (30% lower) one year from now.

The reason for this bearishness is relatively simple: while it seems to be a goo…

Morning Update

This morning markets were moving pre-open on the unexpected news that Q4 US real GDP contracted 0.1% on expectations for a 1% increase. The news caused a kneejerk reaction in S&P 500 futures to the downside but at the open the index was back to near unchanged. Overall the market does not appear to be too worried about this. Part of it is the Bernanke put in the market, part is expectations of an upward revision, and part is hesitation to make big bets ahead to eh Fed meeting today. Although no major changes are expected to come from the Fed meeting traders will be looking to see if this has any effect on the duration of the Fed’s stimulus. In contrast to the poor GDP growth housing is strong, earnings are slightly better than last quarter, and the S&P 500 is at multi-year highs. Friday’s NFP report will be important in that it could confirm the slowdown in growth seen in the GDP report or confirm the bullish case for equities with a beat.

Yahoo reported earnings after the clos…

Morning Update

On January 24th Oppenheimer upgraded shares of Bed Bath and Beyond to Outperform with a price target of $71. The stock took off and traded to a high of 59.95 on Friday before giving back 2.1% yesterday. But one option trader was taking advantage of the profit taking pull back in the stock to buy calls. The biggest trade of the day was the purchase of 8126 March 62.5 calls for $0.41 with the stock at 58.00. This is a bullish trade that will profit if BBBY is above 62.91 (8.5% higher) at March expiration.

Despite the S&P 500 trading at multi-year highs shares of BBBY are still well below their 2012 peak. The stock has struggled in the fourth quarter due to decelerating sales growth that the company blames on declining sales of Green Mountain products as they become increasingly available elsewhere and competing products take market share. Bed Bath and Beyond shares have also suffered due to the impact on EPS from acquisitions of Linen Holdings LLC and Cost Plus. However, these shoul…

Morning Update

After Thursday’s market close Starbuck’s reported fourth quarter earnings that beat expectations and sent that the shares 4.1% higher on Friday. The company reported revenue growth of 11% and EPS growth of 14%, both of which were records. The growth was driven by their Americans and Asian/Pacific stores, which reported same store sales growth of 7% and 11% respectively. Starbucks said this holiday season was its best ever, claiming 1 in 10 adults received a Starbucks gift card and that their limited edition $450 steel gift cards sold out in 6 minutes. After selling out they were selling on eBay for over $1,000. The bullish trading in the stock spilled over to the options market with 1.8 calls trading for every put. However, one option trader was selling calls into the strength against a long stock position.

The trade was the purchase of 120,000 shares at 56.84 and the sale of 1,200 February 60 calls for $0.20. This is a buy-write trade that suggests the trader is bullish on the stock …

Morning Update

Since the beginning of 2013 the VIX has fallen over 30% and is now at lows not seen since 2007. But one trader believes that this could soon change: yesterday someone bought 100,000 VIX Feb. 16 calls for $0.55. This is a $5.5 million bet that the VIX will settle above 16.55 (30% higher) 13 trading days from now. The trade occurred just before the VIX spiked from about 12.60 to a high of 13.50 before reversing again to close at 12.75.

The VIX is a mean reverting product and this is a bet that it will revert off of its current exceptionally low level back towards its long term average, which is roughly the 15-20 range. However, there is no guarantee that the VIX will move back to these levels anytime soon. For instance, during 2005 and 2006 the VIX rarely popped above 15, preferring to stay between 10 and 15 since the market was bullish and realized volatility was low. During the financial crisis the VIX took off and has since spent much of its time above 20. As the ramifications of th…

Morning Update

The earning season continued yesterday with a big beat from Net Flicks and a miss from Apple. Apple is down a little over 10% ahead of the open, which is dragging the NASDAQ 100 futures down 1.5%. But better than expected jobless claims (33K versus 360K expected) has DOWN futures up and S&P futures down 2.5 points. Abroad Japanese trade data showed that exports continued to drop last month, extending the streak to 7 months. The severe decline in Japanese exports comes despite efforts to weaken the Yen as trade with China declines following disputes over territory. In Europe French PMI fell to 1.9 points to 42.7 on expectations of a rise though Germany’s PMI posted a gain. It appears that the European recession is hitting France in full force but has not penetrated the EU’s core to Germany yet. Spanish unemployment was released as well and come in in-line with expectations at a depressionary 26.02%.

Yesterday before the market’s open Coach reported a fourth quarter earnings of $1.1…

Morning Update

Yesterday a week of big tech earnings was kicked off with Google, who beat expectations and is seeing its shares higher by 5%. IBM is also higher by 5% after a solid fourth quarter. Today after the close Apple will report, the outcome of which could reveal the stock’s trend for the coming months. Beside this traders will be watching for news that Congress will pass a bill to raise the debt ceiling until May. The deal would be tied to a provision that will suspend the pay of lawmakers if a budget deal is not reached by April 15th. This deal would move much of the risk in the market out to the April options cycle and would likely be accompanied by a selloff in February and March VIX as hedges roll into April option positions.

Yesterday Verizon reported a fourth quarter earnings miss but showed strong revenue growth on the wireless side. Vodafone, who owns a 45% interest in Verizon Wireless, saw bullish option activity ahead of its own earnings as a result. The biggest trade of the day w…

Morning Update

This week market focus is likely to be on US earnings, with many large, widely held company’s reporting. Tomorrow Apple will report after the close in what will be one of the most closely watched and anticipated earnings report of the quarter. Google will be reporting today after the close. Option traders are currently pricing in a 5.5% move this week. On average GOOG has moved 5.8% over the last 2 years following earnings. The largest move was 13% and the largest downside move was 8%.

Friday morning Morgan Stanley released fourth quarter earnings that sent the stock soaring 7.9%. EPS came in at $0.45 versus $0.27 expected, and revenue increased 23% to $6.97 billion. The report and conference call were bullish from many standpoints, and encouraged option traders to step into long positions in the stock. One of the biggest trades of the day was the purchase of 29400 April 24 calls for $0.70 with the stock at 22.30. This is a bullish bet that MS will be above 24.70, 11% higher, at April…

Whole Foods

Yesterday one option trader placed a big bet for the rest of 2013 by buying 86,200 shares of Whole Foods at 89.82 and selling 862 Jan. 2014 98 calls for 6.50. This covered call position will break even as long as Whole Foods is above 83.32 (7% lower) one year from now. If Whole Foods rallies 9% to 98 by next January this trade will return 16% because of the call premium collected. This is a conservatively bullish trade that at once hedges downside risk while leaving room for growth. From a risk/reward perspective this is a great trade: it offers 7% downside protection and 16% potential upside appreciation. Additionally, holding a long dated short call against stock reduces day to day price fluctuations of the position and makes it easier to stick with the original trade thesis for the entire year even during whippy, volatile markets.

Despite liking the risk/reward of this trade, in order to justify putting it on I also need to like the underlying company. Whole Foods is a brand name I…

Morning Update

GM’s shares have been on a tear since July but sold off more than 4% yesterday as investors digested the company’s potentially weaker earnings outlook in 2013. In 2012 US new car and truck sales reached a five-year high of 14.5 million and expectations are for 15.5 million in 2013. The reason for these high expectations out of the US auto industry is that credit is becoming easier to get, interest rates are low, and the average age of a car on US roads is about 11 years old.

However the company said Tuesday night that they could see lower profits and margins in the first half of 2013. This had one option trader turn bearish and buy 5,000 March 29 puts for $1.32 while the stock was at 29.01. The breakeven for this trade is 27.68, or 4.5% lower.

Yesterday European car sales were released and most markets showed sales decrease of 10 to 15%. This puts demand for new cars at the lowest level since 1995 as the recession takes its toll on consumer spending. GM is fighting to keep losses in …

Morning Update

Yesterday Seagate Technology closed up 1.4% on the day, easily outpacing the broad markets gains. However option trading on the stock was only mildly bullish. Option volume was concentrated in calls but most of these were sold, not bought. The biggest trade of the day was the sale of 1700 March 36 calls for $1.53 against the purchase of 170,000 shares at 34.43. This is a modestly bullish trade that expects the stock to rise to 36 by March expiration.

Seagate is a high beta stock that is up about 10% year to date and 36% since its late November lows. The call sold in the buy-write trade yesterday coincides with Seagate’s 2012 high at 35.71, which is the next major point of resistance for the stock. Despite the rally Seagate looks cheap by many metrics: it trades at a 4.6 times earnings, 3.9 times free cash flow, and 0.8 times sales. In addition Seagate has a 4.4% dividend yield and has reduced outstanding shares by an average of 5% per year over the last 5 years through buy backs. How…

Morning Update

The economic news this morning is mixed with retail sales coming in at a surprisingly strong 0.5% increase while the Empire State Manufacturing Index missed big, printing -7.78 on expectations it would be zero. This is the 6th negative print in a row and the 5th big miss in a row. Overnight the US also got a warning from Fitch who warned that “If we have a repeat of the August 2011 debt ceiling crisis we will place the US rating under review. There will be a material risk of the US rating coming down.” In August 2011 the S&P 500 dropped over 15%, which would not be out of the question if a similar event occurred in February. The best indicator of the market’s anxiety over this is the February VIX future, which is tied to March SPX options and is due to expire on Feb. 13th, just days before the US is expected to hit the debt ceiling.

Yesterday shares of Dell jumped 13% on reports that the company was in talks with several private equity firms about going private. This morning Jeff…

Morning Update

Yesterday Delta Airlines gaped up and traded at it highest level since 2011 before finishing the day up 1.5% but off of its highs. The stock saw heavy call trading, sending the call/put ratio to 5.3:1. The biggest trade of the day was the purchase of 6000 June 13 calls and sale of 6000 June 15 calls for a net debit of $0.88 with the stock at 13.52. This trade has a break even price of 13.82 at June expiration, and it therefore a bullish bet that the stock continues its rally higher.

The reason for Delta’s surge higher yesterday was an upgrade from Goldman who changed its rating from “sell” to “buy” on the company’s cost-cutting efforts and rebounding international credit. Goldman’s price target is $15.90, but this trade structured their option trade with a price target of 15. By selling the 15 call they were able to subsidize the purchase of the 13 call. This means a lower outlay of cash for the position and therefore lower risk to the trade. Delta is already up 12% year to date and …

Morning Update

Risk assets are higher across the board this morning after the ECB left rates unchanged, as expected. At the December meeting some members of the board had voted for lower rates but today’s decision was unanimous. Draghi cited “considerable” improvement in financial markets as a reason, which has helped to propel risk assets higher. Central banks have effectively removed much of the tail risk in Europe and the US, which has driven the VIX to exceptionally low levels. As long as the situation in Europe continues to slowly progress we expect the Euro to continue to strength as money moves back into high yield credit overseas.

Draghi hinted that the ECB could cut rates, and in today’s press conference he seemed to suggest that this would still be possible in the future. Draghi said there was “considerable” improvement in financial markets and Spanish bonds are trading at

Yesterday Facebook shares jumped over 5% higher on news that the company had invited the media to its Menlo Park head…

Morning Update

Yesterday was the second day in a row where the market was down and the VIX was down. However, the February VIX future was actually up on the day and closed 20% higher than the spot index. This shows that traders are already entering positions to hedge their tail risk in February on expectations that Congress takes the nation to the brink in resolving the debt ceiling issue. February VIX expiration is on the 13th, so we actually expect most of the volatility spike to be seen in the March VIX contract and expect March’s premium to February to widen as the debt ceiling nears.

On Monday an empty Boeing 787 Dreamliner parked at Boston’s Logan airport caught fire. This began a news barrage of other Dreamliner problems – a Japanese Airlines plane that was forced to turn around just before takeoff due to a fuel leak, and an All Nippon Airways flight that was canceled on account of a glitch in the plane’s computer, and a Dreamliner discovered to have wiring problems. This comes after Boeing’s…

Morning Update

Yesterday the VIX continued its march lower, closing in the red along with the S&P 500. It is rare and unusual to see the VIX close down on the day when the market is down, and especially on a Monday. Implied volatility tends to have a slight upward bias on Mondays. This is because the VIX is based on 30 day implied volatility, not 30 trading days. But on Friday market makers know that Saturday and Sunday will have no volatility since the market is not open, and consequently their trading models adjust the VIX slightly downward. On Monday these models need to price VIX based on 30 days again, not the effective 28 days that were used near the close on Friday. Therefore, all other things being equal, the VIX is biased upward on Monday mornings.

Yesterday Pandora saw heavy option trading volume after announcing Dec. 2012 listener metrics. The data came in better than expected with total listener hours up 54% year over year. As a total share of radio listening in Dec. 2012 Pandora acc…

Morning Update

The week ahead is relatively light on data, with the notable US releases coming on Thursday with Jobless claims and Friday’s International Trade numbers. Overseas there will be an ECB and BOE meeting Thursday, with no expected changes to policy at either. Tomorrow Aloca will kick off another earnings season and are expected to report $0.06 EPS. With the fiscal cliff behind us traders are likely to refocus their attention on US corporate earnings. Expectations to not appear terribly high so strong beats could propel the market higher. In any event the VIX looks poised to jump higher on any downtick in the market after a record sell-off last week. Although the VIX index looks cheap here, the January VIX future is trading at 15.30, which is a 10% premium to the index. The February contract is trading at a 9% premium to the January future. The steep contango in the futures term structure suggests traders expect the spot index to rise and are anticipating increased volatility down the roa…

Morning Update

Last night Asian markets rallied hard after their holiday earlier this week to catch up to the S&P. Us markets on the other hand ended the day lower after the FOMC minutes showed a “few” dissenters that wanted to see QE end before 2014. The implication that interest rates could risk sent a strong wave of buying through US Dollar crosses and there was heavy selling in treasuries and gold. Since then the yield curve has steeped, which typically is a sign that expectations of inflation are increasing. This morning the NFP report came in at 155K which was very close to analyst expectations. However the market reaction suggests that it was a bit weaker than had been priced in. With the Fed loosely tying QE to the unemployment rate a strong jobs report is going to be negative for stocks and good for gold and the dollar. Gold has been the biggest mover, trading lower in Asia and opening down 2.5% in the US. But after the jobs report the metal is up over $20, suggesting that it had been …

Morning Update

Yesterday global markets saw a massive rally in nearly all risk assets following the passage of a fiscal cliff bill. The VIX had its biggest 2-day decline ever and the Russell 200 closed at an all-time high. While all might look well in the market if you only saw this, looking at currency markets shows some concern. After a strong rally during Asian trading hours, the Euro-Yen pair reversed to nearly unchanged by the close of US markets. Also, the Euro-Dollar pair closed lower on the day, which is atypical of risk-on rallies. This tells me that the rally may have been getting a little over done and that the market may need to pause after two days of strong gains. The large gap up on SPY is concerning and is likely to be filled before the market really breaks higher. The VIX index also seems to be a bit low at 14.69 considering the amount of volatility that the market realized this week and that the debt ceiling and non-farm payrolls still loom. SPY 10-day realized volatility is 12.19…