Options Trader: Monday Wrapup

by: Philip Davis

Yesterday’s action really made me feel good about my cash-out call! The Dow opened at 11,536, ran up to 11,575 in 10 minutes, fell below 11,440 less than an hour later, and then ran back to be rejected from 11,600 for the third time in 4 sessions.

The S&P gave us a better signal, breaking over 1,325 closing at its highest level in over 5 years while the Nasdaq gave us the leadership we’ve been looking for with a 1.3% gain on the day, but finishing (just slightly) below our target at 2,249. The NYSE also decided to fall just below my 8,400 target at 8,398, which makes me nervous and glad I cashed out most of my positions.

Fed Pres. Fisher said there was a “serious correction” going on in housing so, this being bizzaro world, the builders decided to rally, with that sector adding on another point for the day. Fisher did say that he believes the economy to be generally strong, which will likely lead us back to hiking fears tomorrow, but today the markets liked it.

In comments we got out of our oil puts at 11:15 when I became nervous about mixed signals in the Valero Rule, and Rob pointed out at 10:54 that someone cashed over 12,000 Energy Select Sector SPDR ETF (NYSEARCA:XLE) Oct $50 puts (the first of many that were cashed out). Merkhava noticed that the Valero Energy Corp. (NYSE:VLO) $52.50 calls had dropped unnaturally as well (and wisely bought some!). This set off all sorts of warning signals as the puts were just about to go in the money, and I decided THEY must know something, so we took them all off the table at just the right time. This was a great example of how sharing information on the things we are looking at helps us make much better decisions!

A look at the United States Oil Fund ETF (NYSEARCA:USO) daily graph shows you just how ridiculous the buying was in the oil patch from noon through 2:35 after hitting 10 month lows in European trading. It was heartening to see that, and crude tested my target of $61.69 before pulling back slightly to $61.45 at the close. A look at the weekly USO chart shows that it fell to a low of $54.06 and tested $56.30 for the second time in two days. What is $56.30? It’s 5% lower than last Tuesday’s high of $58.95!

Gold is having serious problems with its 200 DMA at $595, but does look like it’s gathering strength. As I’ve said, I won’t play this either way right now.

Today's Picks:

  • Cash, cash, and cash was my answer to what stock I recommend throughout yesterday’s comments, as I am just getting a little nervous until we make and hold new levels. We even had to say goodbye to our Google Inc. (NASDAQ:GOOG) calls as they triggered our cash-out rule by giving up 20% of our gains after a huge spike at 9:45, and we were even given a second chance to get out at 1pm, so we have just our puts and hedges remaining there.

I simply do not have time today to run down all the closed positions, so we will just review the morning’s picks, and I will attempt to get to a follow-up sometime during the week.

  • Sirius Satellite Radio Inc. (NASDAQ:SIRI) made a nice turn after bottoming out at $3.84, and the Jan ’09 $5s finished at $1.10, but they jumped up too fast for me to enter.
  • Our Boeing Company (NYSE:BA) Nov $80s triggered out at $2.15 (up 115%) after a morning spike to $2.40, and I will be getting back in on a pullback looking for a test of the 200 DMA at $77.
  • Dow Chemical Company (NYSE:DOW) Dec $40s were fairly steady and gave us no exit signal, but we maintain a tight stop (.15) at $1.15 (up 53%). The Oct $40s are more of a gamble back even at .35, and I will kill this trade at .25 on any dip so as not to ruin the profit on the longer call.
  • General Electric Co. (NYSE:GE) had a strong day; the $35s ran up to .55 (up 57%) and the stop should be raised to .45, as a pullback in GE is just a bad sign overall.
  • We took out our oil plays at 11:15 rather than wait for a pullback, and that was pretty much the highs for the day.
  • Valero Energy Corp. (VLO) $50 puts exited at $3.70 (up 236%).
  • We exited the Schlumberger Ltd. (NYSE:SLB) Oct $55 put at $1.90 (up 73%) and the Nov $55 puts at $2.65 (up 18%), but held on to the Nov $60s, now $2.35 (up 9%), but with a stop out even at $2.15.
  • Royal Dutch Shell (NYSE:RDS.A) $65 puts finally went somewhere -– down! They dropped to $1.05 (down 13%) after opening at $1.60 (up 33%) and should have been taken off the table. At $1.05 though, they are one of the best put opportunities I see.
  • Cheniere Energy Inc. (NYSEMKT:LNG) Jan $30 puts are still open, now $3.50 (up 19%), and I’m willing to hold these down to even at $2.95 for reasons I mentioned over the weekend.

As I said, most of our open positions should have been closed. I hope I am wrong but I am very concerned that this rally is the worst sort of manipulation and may snap back hard, either later this week or early next week.

The leadership yesterday by financials and the energy sector was exactly what we don’t want to see in a new rally. Without a rotation to new leadership, we may be dooming ourselves to a repeat of the boom-bust cycle that characterized much of last year’s trading.