Options Trader: Wednesday Wrapup

by: Philip Davis

That really wasn't so bad!

The Dow only lost 15 points on the day and looks like it really wants to go check out 12,000.

The S&P has no interest in going below 1,350.

The NYSE is not even looking at 8,500.

The Nasdaq, oops... The Nasdaq dropped 7 points, fell below 2,300 and couldn't retake yesterday's low. Slight worry.

But you know -- it just doesn't matter!

Why should it with oil down another buck to finish just .10 off the 52 week low of $57.49? That's right, if just one guy sells a few contracts in Europe tomorrow, oil will open at a new low!

Yes, yes we are all shocked, unless you read this oil bear back on September 25th, when he predicted: "...the next 5% down is $57.14 and it could go there before there is a real turn (if at all)."

Since that guy was right before we'd better keep a close eye on that $57.14 level tomorrow for a possible bounce! In the amazing world of mathematical convenience, a 5% bounce from $57.14 is $59.997 -- let's call it $60 and make that our new danger zone!

Both oil and gold were beaten into submission today by the rising dollar which stopped right up against the 200 DMA of 87.25 on a very strong chart:

The dollar was buoyed by the Fed minutes, as minutes showed concerns over "possible acceleration in labor costs," which meant they "continued to see a substantial risk that inflation would not decline as anticipated."

This is right in line with what I said a week ago Tuesday when I called for another Fed hike. I thought this was terrible news for General Motors Corp. (NYSE:GM), who sell cars by financing them and are themselves over $300B in debt.

  • We took our first round of GM $30 puts at the lunch spike for .20, looking for a quick double but also moved into the GM $32.50 puts for .90 after the Fed.


This is also terrible news for the invulnerable homebuilders who seem to do no wrong, but I did find one that slipped up just a little...

New Jersey luxury home builder Kara Homes, named to the Inc 500 fastest-growing private companies in 2004 and 2005 has filed for bankruptcy!

"The Inc. 500 listing is the latest in a series of accolades Kate Homes has garnered. The firm has topped Builder Magazine's annual list of America's fastest-growing home builders, placing first, second and seventh in 2002, 2003 and 2004."

After spending a year offering incentives up to $250,000 (15%) plus 12 mortgage-free months, the company decided it could not cover its $297M in debts against an asset base of several hundred homes "valued" at $350M.

According to Bloomberg (and long predicted by our own Prof), "Almost half the people who sign contracts with builders are canceling before the house is finished, forcing companies to sacrifice profit margins by offering freebies to attract new buyers."

"There could be many similar filings in markets glutted with single family homes," said Gerard Cassidy, managing director of bank equity research for RBC Capital Markets in Portland, Maine. "Kara is already at the table. We expect more people to come to dinner, the question is, how many more?"

"Incentives are just falling straight to the bottom line and taking away from the profits," said Daniel Oppenheim, a homebuilding analyst for Banc of America in New York. As a group, homebuilders will see profit "fall by half," he said.

One wonders how many small banks will get caught in the crossfire on this one and how many cards this house is built on...


Speaking of crossfire -- a small plane hit a building in NYC and, of course, scared the crap out of everyone! Amazingly, the markets didn't go down much and oil didn't go up at all, indicating surprising strength and weakness respectively.

Weirdness going on at Harrah's Entertainment Inc. (HET) -- they have a $15.5B offer on the table, that's $84, and the stock is still at $76 (this is another one I sold a week too early!).

Despite my sideline sitting attitude, there were a couple of plays we just couldn't resist today. In addition to our GM puts:

  • I couldn't resist the Alcoa Inc. (NYSE:AA) Nov $27.50s for .60 and the S&P endorsed it!
  • Tesoro Corp. (NYSE:TSO) $60 puts came in at $1.60 (now $1.75).

Today was another great day on the slippery slope of oil puts and we took good profits on most of our October positions.

  • The Devon Energy Corp. (NYSE:DVN) $60 puts were taken half off at .55 to leave the remainder of our double down in at .45, now .60 (up 33%).

There were too many other cancellations to list, I will update the spreadsheet tomorrow.

  • We took half our Nokia Corp. (NYSE:NOK) $20s off the table at .70 and now we have to see if we can figure out why Nokia bought Loudeye Corp. (LOUD) this evening. This is a very interesting move as Loudeye has the rights to 1.6M songs.

Read all of Phil Davis's articles on Seeking Alpha.