Options Trader: Friday Morning Ideas

by: Philip Davis

We're having a big Fed party and I just have to hope we don't end up with a big hangover.

Commodities are running wild as the dollar weakens against perceived Fed weakness. The fact of the matter is that the Fed cannot stop raising rates (unless we stop spending more money than we have) as our expanding economy is being fueled by a Trillion dollars worth of deficit spending.

Asia picked up huge gains, right around 400 points in China, Japan and India with India being the biggest percentage gainer (4.4%). Oddly enough, the Japanese market is responding to data that shows their core consumer prices are rising, probably because they read my "inflation is good" article. Look for nice action on our Toyota and MTU trades at the open and take the money off the table.

Europe is up about a point in a commodity based rally (ho hum). Airbus is filing a suite against "unknown persons" for "unauthorized disclosure" of a meeting in which the company discussed production delays of the A380. Wow, things are so bad there that this is what they choose to worry about? One scandal brewing there is the fact that many Airbus executives dumped stock ahead of the public finding out about the delays. The CEO claims he had "no priviledged information." Then what are they suing about?

A 1% drop in the dollar offsets a 2% rise in the markets to International equity funds so they may not seek to throw good money after bad today if that weakness continues.

It will be all up to the US fund managers to decide how badly they want to salvage this quarter but I certainly wouldn't want to be holding anything but cash on Monday, just in case this is all just one big round of window dressing! The Dow is exactly .50 below the 50 dma so anything up is good there, the S&P looks a lot stronger and may head to its 50 dma of 1,277 if we are lucky while the NYSE is within shooting distance of its 50 dma of 8,207.

Any downward movement or rejections off the 50s will be a real sign of weakness and funds will be wary of being caught on the wrong side of the markets two quarters in a row. On the other hand, a triple index breakout above the 50s may give us a signal that the bull is back but, if that's the case, we have a long time to catch a real rally.

Oil is hovering just over $73 as the July 4th weekend is upon us and crude has already established another breakout pattern that looks to be on the way to $75 or more but the fundamentals are still heading the opposite way.

Here's a nice article summarizing the situation.

Gold flew up to $600 in the overnights as the Fed sounds like they might not be jumping all over inflation and Israel blows things up in the Gaza. Like oil, you don't short gold into a long weekend either but today may be a good day to take some mining profits.

I am going to miss most of the day at meetings and will quicky dump my Dow puts if it has a hot open. It is very likely that funds will try to turn a 4% loss for the quarter into a 3 or even 2% loss which will keep them positive for the year but next week will be very confusing with holidays and all.

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As long as no one is rejected from their 50s I am happy to buy today but I wouldn't be looking to hold over this weekend.

Take your money and run on the Apple spreads, the current calls that we sold will be toast today while the longs should hold up but not if there is a real problem with the options investigation so it's just not worth the worry.

If oil has another big day I will be taking a few puts into the weekend on the off chance that demand disappoints (it didn't last holiday) as I think $75 represents a pretty firm ceiling for at least a small pullback. I like COP $65 puts, XOM $62.50 puts, CVX $62.50 puts and VLO $65 puts but only if the price pulls back today and only as a total gamble if they drop over 35% today.

HOV still lags the other builders by a wide margin, over 50% off last year's highs and I would like to pick up the Aug $35s for .50 or less but giving it an hour or so to make sure we don't get a pullback. I am funding this purchase with a quick sale of my $30s on the slightest drop!

Is it time to talk INTC $20s for .25? If you are up a buck on the $17.50s then rolling into the $20s and taking 75% of the profits off the table is a no brainer...

MLHR Aug $30s got repriced to .35 since I last looked (down just .15 now) and I really think the drop is overdone.

GE has a nice low premium on the $32.50s and there should be some early pullback but only if the Dow is heading higher.

MRB is still a slow mover in the gold market and a real bargain at $3.11.

Boy am I glad I didn't short GM yesterday! I suggested their out should be a sale to Toyota way back in Novemeber and the rumor today is that Nissan is actually interested. The stock is up 13% in pre-market! Can't wait to short them again...

Dont' be fooled by today's action, PALM and RIMM are just adjusting to get back in line with each other.

Have fun today!