Options Trader Friday Outlook: Churn Baby Churn

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 |  Includes: AAPL, AMZN, APD, BMY, CACH, CERN, COF, DECK, DIA, FSLR, GS, ICE, ISRG, MS, MSFT, NFLX, NTRI, PARD, POT, SONC, SPWR, SRS, STX, TASR, TBT, TUP, TZA, UAL, WDC
by: Philip Davis

Click to enlargeWhat a wild week we are having!

We dumped our shorts as planned yesterday morning, getting a very nice dip at the open. My 9:36 Alert to Members was even titled "Take Those Short Profits!" and our upside targets were set (as they were in the morning post) at: Dow 10,087, S&P 1,096, Nasdaq 2,173, NYSE 7,204 and Russell 623. Where did we finish? Dow 1,081, S&P 1,092, Nasdaq 2,165, NYSE 7,182 and Russell 613 - so a bit short of all of our targets but not bad considering we were opening 167 points below that on the Dow so perhaps I can be forgiven for a 6-point miss…

Even our free PSW Report readers would have done great just following the trades we had in last week’s Wrap-Up (Report subscribers get to read our articles without the 48-hour delay). We had Goldman (NYSE:GS) Nov $210s shorted at .87, now .35 (up 60%), Cerner (NASDAQ:CERN) short $85 calls at $4.15, now $3.10 (up 25%), Intuitive Surgical (NASDAQ:ISRG) Apr puts and calls sold for $39.20, now $36 (up 8%), Poniard (OTCPK:PARD) at $6.87, now $7.35 (up 7%), NutriSystem (NASDAQ:NTRI) at $18.60, now $19.15 (up 3%)…

We had other trades that are still in progress. ICE notably burned us so far, but we rolled them up and shorted them some more yesterday (now $106.56). We’ve had a wild mix of short and long trades this week as we TRY to get more bullish on the markets but yesterday’s run-up had us reloading Thursday’s successful short plays as that set made 20% or more across the board in less than a day. Note on David Fry’s chart that we bounced off resistance, but a test of the 50 dma on the S&P still seems likely.

We have plenty of long plays we like if we cross our breakout levels but our goal is to keep the emotions out of the trade and just play our levels. That’s why we pretty much sat on our hands through most of yesterday’s trading. We took a long position on SRS as we feel the REITs are way overpriced and we added more bullish TBT plays as that is our second favorite long-term play. We did go long on Taser (NASDAQ:TASR) and short on Capital One (NYSE:COF) (bad idea!) and Potash Corp. (NYSE:POT) (good idea!) and a Bristol-Myers (NYSE:BMY) hedged play caught our eye at 2:30 but at 3pm we realoaded short plays on the DIA, FSLR, MS, AAPL and longs on SRS, TZA and CAL as the run seemed way overdone.

At 3:22 we looked at eight earnings plays and we’ll see how they work out in the Weekend Wrap-Up. Thank goodness we hedged Amazon (NASDAQ:AMZN) and it will be interesting to see how the 5 Jan $100s at $4.80 /4 Nov $95 at $4.55 spread will work out. I very much regret not taking our short AMZN play off the table in the $100KP and that is going to require some serious adjusting but, if we don’t break over our watch levels today - I don’t think I’m going to be worried about the spike up with 4 weeks to go until option expiration day.

AMZN did indeed have amazing numbers and this $100 stock is well on its way to earning $2 a share this year - Booya! In fact, if all goes well next year, AMZN thinks they may make $2.50 per now $107 share. Wow! That’s an ROI of 2.3%, almost as much as you can get from a 12-month CD in the bank! As I ranted last Monday, the concept of Risk has gone completely out of this market - as evidenced by the VIX dropping to 20 this week despite the fact that this has been the most volatilie week in the market in quite some time as we went from 9,940 on the Dow Monday to 10,100 Tuesday, back to 10,000 Wednesday, down to 9,940 again on Wednesday and then opening at 9,920 on Thursday morning before running all the way back to 10,100. And we used to make fun of the Chinese markets!

We’ll see if the combined forces of AMZN and Microsoft (NASDAQ:MSFT) can take us over our bullish breakout levels today. We loaded up with bullish plays from our Watch List as well as during chat this week but, sadly, all our big winners have still been coming on the bear side as these little moves up turn out to be just that - little. Our earnings plays for today were:

  • 4 AMZN $95 calls sold for $4.55, buying 5 Jan $100 calls at $4.80
  • DECK Dec $100 calls sold naked for $3.10
  • 6 NFLX $52.50 calls sold at $1.40 against 4 Jan $55 calls bought at $1.70
  • SPWRA Jan $30 puts sold short at $2.40
  • SPWRA 2011 $45s for $4.20, selling Dec $35s for $2.05. This is a spread where more money will be put into the longs if they do well and otherwise we roll down to establish a long position.
  • WDC Dec $34 puts sold naked for $1.10 (STX did good).
  • CACH at $4.90, selling June $5 puts and calls for $2.50 nets $2.40/3.70
  • MSFT 2011 $22.50s for $5.45, selling Jan $26 puts and calls for $2.60 nets $2.85 on the $3.50 spread

As with the Tuesday trades we looked at in Wednesday morning’s post, the idea is to make a series of small bets where we cash out the winners and work the "losers" into longer-term spreads as none of these positions is something we don’t want to stick with long-term (unless the earnins report changes our fundamental outlook). So far, starting with $1,000 in each trade we have STX even but on track, SONC down $200, TUP up $350, APD even, CAL was already moved to 2x the Dec $13 puts but we’ll call that down $800 and MS is up $875 so a net of up $325 (5.4%) on $6,000 at risk for 3 days. Our biggest loser, CAL, is a stock we would be happy to own 160 shares of at net $11.80, which is our current risk on that play as we rolled the Dec $15 puts to 2x the Dec $13 puts.

By diversifying your risk like this, you can cash out, for example, SONC, APD, and MS for $3,675 and leave STX and TUP to mature (as they are on track to do very well) and put $1,000 back into CAL (which we did) to end up in a position (the Dec $13 puts sold at $1.20) that can become a stock position we DO want to allocate capital towards. The leaves us wit 3 spreads we REALLY like and $2,675 of our cash back to reload for the next set. This is how you can build a portfolio of good spreads - take small shots at these earnings plays, which pay us very good premiums, and then, AFTER we have the facts from the earnings reports, keep the good ones and get rid of the bad ones.

Asia had a very nice morning with the Hang Seng up 1.7% and the Shanghai up 1.9%. The Nikkei was flat and the movement of all 3 was the usual afternoon stick-save nonsense but we’re bullish now so we’ll pretend that it’s normal and not dwell on it. There is no news in Asia - they are rallying because we are rallying and that’s about it. Europe is more interesting as they are up 1% (9am) DESPITE a HUGE miss in UK GDP (the World’s 6th largest economy) as the economy there SHRANK 0.4% vs the +0.2% expected by economists. Of course, a 300% miss is nothing unusual given the quality of the people they have forecasting the economy and, even as I write this, our Forecaster-In-Chief, Ben Bernanke is doing a song and dance on TV trying to tell US investors to not worry and be happy.

"The third-quarter [gross domestic product] data are a real shocker and desperately disappointing," says Howard Archer, chief European economist at IHS Global Insight in London. Going forward, the U.K. economy faces significant hurdles to sustained growth. Unemployment is at 7.9% and in early-2010 the restoration of value added tax to 17.5% from 15%, an increase in a social security tax and an increase of five percentage points to 50% in the income tax of the highest earners will couple with a program of spending cuts that will take money out of the British economy. Underscoring how painful a reduction in government spending is likely to be, Friday’s figures showed that the public sector had been the only area of the economy with any life, with growth flat for the quarter after a decrease of 0.2% in the previous three months. "It is becoming increasingly clear that the recovery, when it does begin, will be slow and bumpy," said Hetal Mehta, an economist at the Ernst & Young ITEM Club of economic forecasters.

So, despite the urgings of Mr. Bernanke, I do remain a bit skeptical of the rally but, like a good little mindless bull - I will keep my promise and initiate some more bullish trades if it looks like we are going to hold our levels for the day. MSFT reported an 18% drop in profits and is being treated like they invented the IPhone or something and AMZN, who did invent the Kindle at least, has gained $8Bn in market cap since yesterday’s close - pretty good for a stock that was less than $35 on March 9th!

Since we are already short the Nov $95 calls, our most likely play will be to sell the Dec $110 calls, prior to rolling the Nov $95 calls up to the same spot, creating a 2x short position at the Dec $110s. We may also choose to sell puts if we get a good price so stay tuned in member chat for the adjustments.

Let’s not go crazy today, we need to hold our levels on strong volume and then it’s the weekend anyway so we’re probably going to try to be 50/50 into the close anyway as it’s not possible for us to see a sustained hold of our levels until Monday.

Have a good weekend,

- Phil