Options Trader: Wednesday Wrapup

by: Philip Davis

Another impressive day for the markets! Mr. Jones said boo to 12,100 but finished at a new closing high of 12,176 with a strong finish. Just like we were looking for in the morning, we tested and held Monday's gains -- giving us a very good signal.

The best signal was at 12:50 when we heard Rumsfeld resigned and I said at the time "that's great for the markets!" It sure was.

The S&P made another attempt at 1,390 and finished right in the middle at 1,385. The NYSE came to a rest at the high of the day, just 15 points off a new record at 8,857.

The Nasdaq was the star of the day with another new (this decade) high of 2,384 and they accomplished it without the SOX, who flatlined for the day.

The transports also put in a lame performance on disappointing oil movement but, like I said in the morning, we were just thrilled to have them hold 2,600!

I know I'm starting to sound crazy (and I am doubting my own sanity with this oil stuff) but check out today's NYMEX contracts. Yesterday I pointed out that we got a $1.09 drop in the current month but a $1.40 drop in the forward months. Well today we have a .90 recovery in the current contract but, once we get into '08, just a .60 average recovery off of yesterday's huge drops.

Contrary to the CNBC ticker, NYMEX crude settled at $59.83. Oil jumped on an inventory draw but it was really due to an unexpected drop in refining capacity, not an increase in demand.

Refining capacity dropped .8% this week. They were projected to make 2% more (450Kbd) but instead they made .8% less (-75Kbd) leading to a draw of 2.7Mb of gasoline in 7 days.

Merrill Lynch (.pdf) has joined my camp and thinks this natural gas run is BS and, looking at page 11, we can see, as I have been saying for months, that gas prices are being supported by a record "open futures interest" that is 100% higher than last year and 300% of the historical average. The same is true, to a slightly lesser extent in the oil market.

On page 21 we can see why ExxonMobil Corp. (NYSE:XOM) and Chevron Corp. (NYSE:CVX) have been doing so well -- since mid-August, gasoline marketing margins have gone from .30 to over .50 per gallon! On this chart you can see how refiners took the opportunity earlier this year to double their margins from .30 to .69 per gallon!

So the cost of speculation and the cost of tremendous oil company profits will not go away quietly, no matter what the actual price of crude is! It will be interesting to see if the Dems change the rules that have allowed this to happen.

All that being said, we are ready to move on and away from this ridiculous sector. It's not so much that someone manipulates the NYMEX to raise the price of oil .80 in the last 10 minutes of trading as it is that this kind of activity goes without any media comment whatsoever!

Gold dropped $9 as the dollar made a mild recovery as the Democrats gained ground all day.

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  • American Express Company (NYSE:AXP) $57.50s were taken off the table at $1.70 (up 100%) leaving us with a free $60 at .20.
  • ExxonMobil Corp. (XOM) Dec $67.50 puts were rolled into the Dec $70 puts for .75 but they finished the day at .55 for yet another .20 spanking!
  • I went in and out of Valero Energy Corp. (NYSE:VLO) $50 puts for a nickel loss as we just can't take these oil stocks anymore!
  • We got into the Lockheed Martin Corp. (NYSE:LMT) $85 puts for .85 a little early as they finished the day at .70.
  • Sunrise decided Time Warner Inc. (NYSE:TWX) was extended and we picked up the Dec $20 puts for .50 (now .60)
  • Total S.A. (NYSE:TOT) $70 puts finished the day at $1.20 (up 20%) but I will be out of this today unless something really great happens.
  • Merck & Co. Inc. (NYSE:MRK) Dec $42.50 puts finished the day at .50 (up 40%).

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