Skip to main content


Showing posts from February, 2013

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 …

Morning Update

This morning the January NFP report was released. It showed the economy added 157,000 jobs, ticking up the unemployment rate to 7.9%. Overall the report was in line with expectations and, eased worried created by the negative GDP report on Wednesday. Private sector employment increased by 166,000, which was slightly weaker than expected but strong nonetheless. This confirms that the negative GDP report was more due to a decrease in government spending ahead of the fiscal cliff instead of negative growth in the private sector.

After the close on Wednesday Qualcomm reported better than expected 4th quarter earnings, beating on both the top and bottom lines despite weak earnings from their major customers like Apple and Nokia. The stock gapped up 6% and closed up 4% on the day. Option trading was bullish with the biggest trade of the day the purchase of 4,000 April 70 calls for $0.98 with the stock at 66.49. This trade will profit if Qualcomm is above 70.98 (6.8% higher) at April expira…