Options Trader: Monday Wrapup

by: Philip Davis

Well that wasn't so bad was it?

The Dow held 11,200 pretty well, the S&P never went below 1,270 the Nasdaq is so pathetic nobody cares what it does and the NYSE dropped less than .5% at worst.

There was only a modest rise in the oil and metals area (<1%) although oil itself was up 3% (but finished below $77) and gold broke $660 but settled back at $659.50 - all interesting action ahead of tomorrow's Fed report.

I forgot to mention over the weekend but people are starting to use the "R" word but I have moved my position to 70% tighten for reasons previously stated.

I was speaking to Bernanke at lunch today (I was having lunch and speaking, I have no idea where he was) and I told him the best strategy would be to say "While core CPI appears to be contained, we remain concerned about the growing cost of commodities, notably oil and it's growing affect on the PPI. With underlying strength evident in the Global Economy and a soft landing in the housing market (I know, a lie) the FMOC will raise the discount rate one quarter basis point which we hope will be enough to allow for a pause at the next meeting."

This would make everyone happy and still give them room to mess with our heads for another month. We'll see if Ben uses my language exactly tomorrow or if he improvises.

Here's the deal - if I held all these stocks I wouldn't be panic selling the day ahead of what most people think is a 70% chance the Fed will pause. The end of rate hikes can mean a 5% jump in the markets within a month or so so I wouldn't be dumping out of things, even with oil prices choking the life out of the consumer.

So, Fed pause tomorrow and everyone feels justified but we're already up from 10,700 (4%) from the 17th or perhaps you can say just 1% over the 200 dma on the Dow. If the Fed raises, then you are likely to see a real good old fashioned sell off!


BP did worse than I thought, dropping all the way down to $70.45 and the $70 puts ran up to $1.10 (up 120%) but I dumped at the open at .95 which seemed like a very good idea until the last 90 minutes of trading when it just fell off the table. COP also took a hit today but nothing like BP did (even though both COP and XOM own more of the pipeline than BP does).

On Thursday we shorted 4 oil stocks and only BP was a big hit (and boy did we luck out on that one!).

The CHK $32.50 puts finished the day at .65 (up .10) and the ECA Sept $50 puts are still $1 while the RDS.A $70 puts finished the day at .60 (down 35%). Of course all of these trades were winners on Friday which is why stops are so important!

As I often say, setting 20% stops on losses allow a 100% gain to wipe out 5 losing trades (assuming you evenly weight your trades, which you should) so why not use them?


TSO was the should have shorted from Thursday as I said to watch them and they went straight downhill without a bet.

Google hit us with another announcement at the end of the day, signing up to place ads on MySpace, which is probably jumping the shark here. Still, that's a huge, hip audience they've gotten themselves and it shows that management is actually out there making deals on that fancy plane of theirs.

DIS fell below and did not retake my $29.60 target and the $30s dropped to .50 but now I'd rather have the Sept $30s for .80.

AAPL did just what we thought, selling off as the actual meeting can never live up to the hype. I thought their new Mac was fantastic and I can only hope people who were waiting for the new IPod sell off like crazy so I can buy some this time! Also, in Apple's defense, when was there a time in the last 4 years that you could have granted Apple options and the stock didn't go up? The stock went from 7 in '02 to $70 today, of course the options made a lot of money!

ADM is another one that did exactly what we predicted, falling early to just below $40 and recovering very nicely to break back over the 50 dma at $41.43.

EP got hammered as gas is becomming a 4 letter word with investors this week.

I'd like OXY to retest $110 before I short it but I've got my finger on the trigger if oil turns back down (very much following the Valero Rule for this one). We need to ponder the movement of RIG and DO and figure out what the market is trying to tell us here...

FRK had a fun day, diving down to $38.50 but finishing up 50 cents and the Dec $45s shot up to $2.10 (up 33%).

I was right about JOBS, they are down 10% in the AH even though they beat.

AMT blew off their earnings report as they will have to "restate" it. Still, in absence of hard bad news the stock picked up a point.

CPKI did beat by a penny but had a big 20% beat if you don't count stock option expenses (who does?) and a lease adjustment. All the numbers were great and outlook was raise so we should be very happy with the Sept $25s which were already $1.85 (up 20%) at the end of the day.

PD was up just a bit but the Sept $90s jumped 10% to $4.20.

MVL didn't fool anyone and I shouldn't have set such a cheap entry but they were down a lot in pre-market but finished the day up 7%. The Sept $17.50s opened at $1.25 and ran up to $2.20 (kick, kick).

HANS hit my $30 mark after breaking the 5% rule 5 times in one day! Very tempting at this price and you have to like owning this stock and selling the Feb $30s for $6.45 for a likely 20% return in just 7 months plus downside protection to $23.55 where I would be thrilled to hold it long term. This is a great company and the earnings were great if someone took the time to read them (see today's comments).

I felt bad about my TEVA comment as it dropped from $35 to $33.25 today but it recovered back to $34 at the bell. It's still a good stock, it just ran up too high...