Options Trader: Thursday Wrapup

by: Philip Davis

Another very nice consolidation day!

There was nothing for us to really play as the S&P never got over 1,300 and oil was up all day with bad Valero Rule signals. Apple overcame exploding laptops to stay positive (why didn't I buy it at $52???) and GE and AXP held the line all day but without the S&P or Nasdaq confirmation, it was just too risky to play today.

Nonetheless, we played WSM on that crazy sell-off this morning. In comments we picked up the $30s for just .65, a full $2.65 less than they were yesterday! Who can resist? They finished the day at .90 but we got half out at the first run at $1.05 (up 60%), reducing our basis on the remainder to just .25.

So we held on all the indices on another light volume session. Expect fireworks tomorrow starting at 10am when Bernanke addresses us from Jackson Hole. The next Fed meeting is Sept 20th and Ben has got to talk tough because they probably can't really raise the rates so close to elections. Expect him to blast commodity prices, possibly with a Greenspanesque "irrational exhuberance" statement.

The Fed is now in a corner where they have damaged the economy to the point where lingering commodity prices can kill it. They can force a recession, which will guarantee pullbacks in commodities or they can attempt to talk them down. Since all he has to do is read one of my recent oil posts to into the cameras, I think he will go with the talking option.

Gold dropped to $628 as the dollar firmed up against tomorrow's speech. The Fed premium works like the terror premium and the "Gentle Ben" scenario has been priced in already so rates and the dollar are pushing higher as some of the 70% betting on no more rate hikes decided to hedge a little today.

Oil made a nice run at $72.50 but ultimately failed but you wouldn't know it from XOM's reaction, as the stock flew up $1.09 to a new all-time high of $70.72. This give Exxon a $420Bn market cap and runs their p/e up to 11, near the top of the sector. XOM has marched to the beat of its own drummer this week, pulling 3% ahead of the other majors.

What struck me as most interesting was that SU, who look a little further down the road than most oil companies, traded down again today.

Taken as a whole, the oil sector made a Fibonacci retracement today but XOM's new high should have a lot of people scratching their heads tonight. The p/e's of the other majors are SUN (9.3), CVX (9.2), COP (6.1) so we may need to play these up if Exxon holds this level.

Good call getting out of our oil puts yesterday wasn't it?

I hate this day trade in and out stuff but the market gives us no choice (other than not to play) with these wild mood swings.

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SUNW continues on its march with a huge .12 gain, running the $5 calls to .15 (up 50%) but we need at least .20 to call it a trade after comissions. Looks good!

TXN gave us the $1 entry we were looking for on the Oct $32.50s and then was kind enough to rally to close at $1.20 (up 20%).

FMD continues to react positively to rate news (even though it's hard to tell what that news really is). Mar $60s are $3.80 already (up 15%) and the $55s are $1.70 (up 125%) but shame on you if you bought these risky calls in this market!

MSFT is giving us a nice, slow grind up and the Oct $27.50s are up a nickel to .25 while the Oct $25s are already $1.35 (up 20%).

Oops, should have been more patient with those UNHs!

MO is going somewhere but the $90s are still .20.

I shouldn't have chickened out of builders either but the market is way too choppy to risk it, big bounce back today!

NEM $50 puts are back in the black at .75 (up 15%).

We had to say goodbye to the KBH $40 puts at $1.50 (up 115%) as it spiked up this morning.

We gave up on the SNE $45 puts at $2.20 (up 70%) when both it and Apple refused to go down on more exploding laptop news. As I said in comments "what else can possibly go wrong?"

I was wrong about HLX, they were two different option classes...

GE Oct $35s gained a nickel to .30, fine for a first day.

Nice timing call on PD (pat, pat) - we had a huge open that gave up the sold puts at just .45 followed by a nice all day drop that left our now naked Jan $82.50 puts at $6.80 (up 20%). Our flip flop position to buy the puts we sold worked out well as the $80 puts leaped up to .95 (up 110%) SO FAR!!!

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Note to new readers:

Please read My Trading Policies which I promise I will clean up some day. The important thing is that when we say no buying calls if the S&P doesn't hit 1,300, that doesn't mean don't buy the puts! I have been asked this 3 times this week so I felt I should bring it up.

Also, when we say no buying puts or calls we are generally talking about current month options. We love picking up longer contracts like the TIF Jan $35s for $1 on down days, in fact (again please read policies) about the only time I take these calls is when they are heading the wrong way.

The simple logic is: if it's down 20% from where I wanted to buy it, I just saved myself a lot of headaches. Assuming nothing has really changed it's a good time to step in and, if it loses another 20%, I can say goodbye knowing I was absolutely wrong about it!

Thanks,

- Phil