Options Trader: Wednesday Wrapup

by: Philip Davis

Woo-eee!Ride that bronco! The markets were all over the place today and you had to be quick to make a buck. We were very quick in comments today, initiating our first oil puts at 10:19 as Tesoro Corp. (NYSE:TSO) ran into the 5% rule which felt like a safe top ahead of inventories, and we got out of oil puts at 11:21 after TSO pulled back the entire 5% for a one-hour 61% gain!

Other than that the day was tricky, and both the conversation and our trading reflected that, which was tentative for the most part. We cashed-out a good number of our remaining positions, and we are in a nice cash position to move forward, whichever way the market goes.

The Dow made a lot of noise but ultimately went nowhere, finishing at a very disappointing 11,689 after being rejected from 11,700, but the S&P made a new 6-year high at 1,336.59 (you need the .59 because it only made it by .26). The NYSE added a respectable 24 points, while the Nasdaq added a sad 2. But for some reason, the QQQQs were negative for the day -- indicating a certain lack of faith.

Neither the SOX, which lost 3/4 of a point, nor the TRANQ (flat) were any help at all, and what really bothered me was the fact that the oil sector gained almost 2%, adding 4 S&P points for the day. As I have often said, this is nothing to base a rally on.

As I said this morning, this was a good overall test of how the markets take bad news, as the durable goods report was indeed worse than expected.

Oil seemed to take this, plus an over 8M-barrel build in inventories (I kid you not!), as a sign to rally and tacked on $2 today to finish at $62.96 on the long-promised Super Mega Oil Pump™.

Gold also shot up today as a small scandal rocked the treasury markets indicating that they too, like the NYMEX, are being manipulated. Against a flat dollar gold broke through resistance to finish at $602.

Perhaps the gold bugs are right and our entire monetary system is a sham that will topple like a house of cards....... nah!

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Walgreen Comp. (WAG) opened the day too high to buy, with the $45s jumping to $2 before settling back at $1.30, where I would wait for a possible test of the 200 DMA at $44.75 before buying, hopefully closer to $1.

General Motors Corp. (NYSE:GM) is coming close to our $33 target as talks with Nissan are back on. They have agreed to talk “until Oct. 15th,” so perhaps we will have to wait until then for our puts.

McDonald's Corp. (NYSE:MCD) had a very nice day with a 2% gain and our $40s finished at $1 (up 25%) from a .80 open.

AAR Corp. (NYSE:AIR) took a dive yesterday, and our Feb $25s should be stopped out at $2.40 (or at least half out with a $2.20 stop on the rest) to preserve a double.

Bed Bath & Beyond Inc. (NASDAQ:BBBY) $37.50s stopped out at $2 (up 100%).

BP PLC (NYSE:BP) $60 puts were given up at .15 (down 50%) -- these were a roll so we are just happy we didn’t keep the $65s on the table!

Capital One Financial Corp. (NYSE:COF) is really taking off, so we are setting a tight stop on the $80s which are at $1.60 (up 146%) as we already have the roll of the Dec $80s at $3.40 (up 66%) which is in such good shape we need to stop it at $3.10 as well (yes, I still don’t trust the markets!).

Cablevision Systems Corp. (NYSE:CVC) suddenly took off and stopped us out of the $22.50 puts at $1.05 (up 91%).

E.I. DuPont de Nemours (NYSE:DD) $42.50s are just a nickel off our stop at $1.10 (up 120%), and should be taken off on any weakness.

Dow Chemical Company (NYSE:DOW) Dec $40s stopped out at $1.35 (up 80%), and the $40s are off the table at .45 (up 29%), as we don’t keep a short call when a long call stops out!

Florida Rock Industries Inc. (FRK) Mar $45 stopped out at $1.80 (down 27%), and I just don’t get this one...

General Electric Co. (NYSE:GE) $35s stopped out at .70 (up 100%).

Intel Corp. (NASDAQ:INTC) stopped us out at .90 (up 100%) after topping out at $1.10.

Overseas Shipholding Group Inc. (NYSEMKT:OSG) finally stopped out at $3 (up 100%).

Plum Creek Timber Co. Inc. (NYSE:PCL) caught fire yesterday -- up 1%; the $35s are still at .25 though.

sanofi-aventis (NYSE:SNY) gapped down and we lost our Dec $50 at .30 (down 33%) and the Oct $45 at .60 (down 8%).

Toyota Motor Corp. (NYSE:TM) finally started moving with the Nov $110s hitting $3.30 (up 32%) and the pre-roll Jan $115s at $3.20 (up 28%). We should have a .30 trailing stop on the Novembers to reduce the basis on the Januarys.

On August 18th I made this comment about one of my favorite small caps: "The best way to buy Cambridge Display Technology Inc. (NASDAQ:OLED) is to take the amount you want to spend, divide it by 24, and buy that much each month. It may go to $2, it may go to $12, but one day it will go crazy!” Well today was the day:

Today's Picks:
We had a very fun day with our oil plays.! At 9:51 I made the following comment:

I think they've been pushing barrels off for 2 or 3 weeks now and we may get a surprise crude build today as the EOQ count catches up with the fake data - might take until next week but tankers can only slow down so much before they end up somewhere! Both Valero Energy Corp. (NYSE:VLO) ($50 put $1.10) and TSO ($55 put $.90) are very exciting short opportunities -- Schlumberger Ltd. (NYSE:SLB) is really good though with the $60 puts (.60). The oil set I track is back to where it was last Wednesday.”

As you know, we got the biggest build of the year 40 minutes later.

Merkhava agreed and exited his tricky but very profitable Valero call at 9:53.

  • At 10:07 I called the ExxonMobil Corp. (NYSE:XOM) $65 puts for .70 and the SU $65 puts for .90.
  • As a side note, we were discussing builders and I think I am getting the hang of them again as a great housing report led me to make this comment at 10:19: “New home sales up 21% in Northeast! OMG!!! US new home sales up 4% So great news for housing market must mean sell Toll Brothers Inc. (NYSE:TOL) ($29.40)???

TOL dropped to $28 by 2pm! As I pointed out: “Margin for error on that housing report is 11% - that's 11% total, not 11% of 4% - this is such a pump job!

  • Also, this great call at 10:25: “That's a triple top for Goldman Sachs Group Inc. (NYSE:GS) if they don't break it soon.”
  • Anyway, back to oil. We added Oil Service HOLDRs ETF (NYSEARCA:OIH) at 10.29, as it was up a ridiculous 2% with the $125 puts at $2.65 (low of the day, on the button).
  • At 10:28 VLO started to dive and we knew something was up. Sure enough they were in front of those inventory numbers, which were a disastrous build! (Note: If you are reading the comments it is important to know that the time stamps are 8 mins fast even though they post pretty much right away -- a Google site issue -- I’m lazy and generally just use the stamped time in recaps but we are 5 minutes smarter than we seem!).
  • Despite our exuberance over the inventory call, by 11:00 we became concerned about the Valero Rule, and I called for tight (20% of the profit) stops on oil, with all trades off at 11:15 when TSO crossed my $57.40 limit.
    • The VLO $50 puts exited at $1.40 (up 27%)
    • TSO $55 puts exited at $1.45 (up 61%)
    • SU $65 puts exited at $1.20 (up 33%)
    • OIH $125 puts exited at $3.20 (up 21%)
  • XOM $65 puts only went to .80 so I decided to ride those out and I doubled down on my entry at .65 at the days end.
  • SLB $55 puts were also taken at the end of day at what we hope is a good price at .55.
  • Devon Energy Corp. (NYSE:DVN) was a great counter play if you followed our timing calls in comments (or the morning’s instructions) as the $60s came down to $2.70 after inventory at 10:50, as we got our initial turn signal from the Valero Rule, finishing at $4 (up 48%) for the day where we exited as we decided to go back to shorting oil ahead of the natural gas report today.
  • This chart is a great example of a perfect Valero Rule turn with a major pivot confirmed among 4 tracking stocks giving us a buy signal right about 10:45 (in total defiance of all fundamental logic after a huge inventory build). We even stayed in our puts a little long because we just couldn’t believe it but, once again, the Valero Rule trumps logic in timing our oil trades!

Great teamwork yesterday getting through a very difficult oil day!

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