Options Trader: Friday Wrapup and November Rundown

by: Philip Davis

What a week that was...

If you went long you got punished, if you went short you got punished -- all in the same day!

As Rick Santelli summed it up nicely on CNBC today, "To think that foreign investors are willing to lend us money for 10 years at 4.4% in exchange for a promise of U.S. currency is really amazing!"

That mirrors my weekend comment: "I think the dollar drop could be good for our exporters, of course, but it's kind of like saying that running a 104 fever means you'll be all warmed up for the decathlon -- this is a symptom of a very serious problem and not really a reason to put on our party hats!"

I ran away screaming from this nonsense last week but we still took quite a few light trades and I've been honing my day trading skills as you really can't make a lot of money by holding things too long right now.

The morning's drop knocked out almost all of my remaining calls so I'll be in big trouble if we have a huge rally on Monday!

Summary of today's trades:

  • We held firm on those Applied Materials Inc. (NASDAQ:AMAT) $18 puts despite the rise, as they were there for crash protection, but as I'm out of most of my calls they weren't worth keeping so they were exited on today's late rally at .60 (up 71%).
  • Boeing Co. (NYSE:BA) got weak so we sold the Jan $90s to cover our position at $3.30. That was good timing too although Boeing did make a nice recovery. With our basis down to just $2.50 on the Jan '08 $90s and the calls we sold down to $3.10, the current $10.50 price reflects a 196% gain so far!
  • Of course we also sold our own Boeing Co. (BA) Jan $90s for $3 (up 20%) too!
  • In comments we switched the BE Aerospace Inc. (NASDAQ:BEAV) on the drop and took the July $25s for $3.90 and sold the Apr $25s for $3.50 at the dead top -- that's a .40 investment I can feel confident about! As the Julys already went up to $4.20 and the Aprils dropped to $3.30, we could close this now with a 125% gain!
  • We have to watch Baidu.com Inc. (NASDAQ:BIDU). I forgot about them, as I said on the 22nd "If they pull back -- consider it a gift!" Of course it all depends on Google, but darn we should have caught that on Tuesday!
  • We picked up Cheesecake Factory Inc. (NASDAQ:CAKE) Jan $30s for .30 as I felt they have suffered enough for the month and I don't think the 1.5% price increase will chase customers away. Also, they are mainly in malls -- the kind people might shop in this season...
  • I got a gift this morning as the Caterpillar Inc. (NYSE:CAT) Jan $60s I tried to sell for $3.70 yesterday triggered at the open, on that quick gap up. Very nice as I rode out the drop in comfort! The basis on Jan '09 $60s is now down to $6.05 against the $11 value (plus I owe my caller anything over $60).
  • Yesterday in comments I advised holding off on China Mobile Limited (NYSE:CHL): "CHL totally great company but China is a total wildcard and I'd rather buy them on a big pullback than up here." Wow -- talk about being a market mover -- they were dumped in force today, so we'll keep an eye on that one as they held $40 well.
  • We didn't play it but I made a comment Tuesday morning that bore out during the week and is a good view into my current thinking on retail: "Coldwater Creek Inc. (NASDAQ:CWTR) (and other clothing retailers) -- I'm concerned that the electronics boom is taking away from essentials spending. People just aren't that flush and the warm weather isn't helping move the winter lines. Once you hit December and you haven't felt the need for winter clothes a lot of people might make due with last year's stuff (don't forget we had spring in February this year). CWTR is testing the 200 DMA at $26.25 but showed no bounciness yesterday at that level. With a P/E of 38 I would only like these guys on a significant pullback."
  • I couldn't take it anymore with the Dell Inc. (NASDAQ:DELL) $25s so I got out at $2.40 (up 167%) and rolled into the $27.50s for .30 just so I won't feel silly if it takes off again!
  • It took me all of 27 minutes to take my first trade on the Diamonds Trust Series 1 ETF (NYSEARCA:DIA) $121 puts (BQs not DAs) for .75 as I said at the time: "Well if they're just going to give me the DIA $121 puts for .75 who am I to say no?" 6 minutes later we got the weak ISM numbers and the Dow plunged giving us an exit, early but happy at .95 and $1.25 for a nice 47% gain.
  • We crushed the hopes and dreams of another options buyer by taking out our caller on the Google Inc. (NASDAQ:GOOG) $500s for $4 (up $16.10, for us anyway!) and our June $490s are roughly flat at $47.30 but I sold the Dec $490s against them for $7.60 at t he close as I didn't want to risk the weekend. As I said way back on the 21st: "GOOG -- taking advantage of irrational exuberance on break of $500 -- if someone is willing to pay me $18 for a call that was out of the money by $4 just an hour earlier -- I'm going to take it!"
  • The Home Depot Inc. (NYSE:HD) $37.50s came off the table on the morning dip at $2.30 (up 229%) and I didn't trust the rumor enough to roll into the $40s. These news trades are my favorite kind of plays -- we grabbed this one in comments on Wednesday afternoon!
  • I was glad to get out of those Nordstrom Inc. (NYSE:JWN) Jan $50s for a nickel loss this morning at $1.95 -- I thought I was going to regret it but then I was happy again -- it was that kind of day!
  • Another one we didn't play but one of my best money savers of the week was Monday at 9:45 when someone asked me if we should jump on Cramer's Mastercard Inc. (NYSE:MA) pump as the stock flew up to $108.60 at the open and I said "I would want it to come down, not be the guy paying $107!" Poor Cramerites...
  • McDermott International (NYSE:MDR) $50 puts seemed cheap for .40 but weren't as they went nowhere but I had such a good time with them on Monday that I had to go back!
  • Oil Service HOLDRs ETF (NYSEARCA:OIH) was very, very good to us all day. Yesterday's $140 puts were exited at $1.85 (up 48%) at 10:40, rebought for .95 at 1:20, sold again on the oil pump at 2:10 for $1.30 (up 37%), and rebought yet again for $1 at 3:10! Funny note on OIH -- every time I got out of a put, Tom took a long and we both made money all day. As Tom said: There is something for bulls and bears in this market!
  • Somebody asked me if I liked OmniVision Technologies (NASDAQ:OVTI) in comments the other day and I said I did like the Mar $17.50s but they were risky ahead of earnings. Well earnings were a disaster and they dropped 16% today! As a large part of that plunge was in stock option expenses, legal expenses (patents) and R&D (more patents). I now love this company! Let's keep an eye on them as we can now look at Mar $12.50s for $2.25, just .50 more than the $17.50s were just 2 days ago!
  • Could Starbucks Corp. (NASDAQ:SBUX) finally have bottomed at $35? Tune in next week as this could be a good one!
  • Tiffany & Co. (NYSE:TIF) scared me out of the rest of the Jan $35s for $4.20 (up 91%) on the morning drop, but I think I may miss those...
  • Our ExxonMobil Corp. (NYSE:XOM) $75 puts were taken off with the first dump of OIH at .80(up 33%) and I was so relieved to be out of those with a profit that I didn't go back there! Don't blame Valero for not letting us know how to trade this one! As I said in yesterday's comments: "I've made the mistake of looking at XOM as a company rather than XOM as a blue chip, dividend paying investment with a strong global presence that acts as a safety net for worried investors. Add to that the fact that it's way up for the year and perhaps that low turnover rate means the roaches are happy in their little hotels for now and it may be a long time before it all hits the fan in there."

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As for the very tricky month of November:

We closed 32 positions in the last 10 days of the month for a 45% profit with a 10 day average hold, not quite as good as the first half of the month but not terrible either.

Our 39 remaining open positions are up a comfortable 39%, a huge improvement over the beginning of the month, and there are now 13 income producers in the bunch with just 18 uncovered calls and 12 open puts -- a pretty good mix considering we have no idea what's going to happen!

For the month, we closed out 100 positions with a 66% average gain (I'm not counting Quest Software Inc. (NASDAQ:QSFT) Apr $15s because the basis was lowered to a nickel and ended up being a 1,500% gain) on 9 average days held.

This is not bad because it includes some really nasty oil puts that we were finally able to work out of (after some very scary doubling!). I was thrilled to get out my XOM $70 puts for "just" a 50% loss, Tesoro Corp. (NYSE:TSO) for -38%, Total S.A. (NYSE:TOT) -25%...

It was a tricky adjustment but oil is now a very small part of the picture and, should it actually ever go down, there is plenty of purchasing power to jump on the bandwagon.

Of the 20 losing positions 8 were oil plays, but we actually had a few winning oil plays as well including McDermott International (MDR), BP PLC (NYSE:BP) and Sunoco Inc. (NYSE:SUN) doubles.

35 positions gained 50% or more and an itchy trigger finger kept us from any total wipeouts -- one of the things that torpedoed us as we closed out the last option expiration period.

The loser squad included Chevron Corp. (NYSE:CVX) $65 puts that went far away for a 69% loss, XOM Dec $65s that really hurt at -53%, TSO whipped us for -38%, Oceaneering International Inc. (NYSE:OII) dropped 33%, along with smaller losses from TOT, OII (again, I never learn!) and our old pal Valero Energy Corp. (NYSE:VLO)!

Non oil-losers included, as usual, a few rolls like American Express Company (NYSE:AXP) $60s (-43%), Chipotle Mexican Grill Inc. (NYSE:CMG) Dec $55 puts (-42%), as well as straight up mistakes like Coca-Cola Co. (NYSE:KO) Dec $45 puts (sure, NOW they're working!), United Parcel Service (NYSE:UPS), Freeport-McMoRan Copper & Gold Inc.(NYSE:FCX), my old pal Caterpillar Inc. (CAT), United Parcel Service (UPS), BEA Systems Inc. (BEAS), Sony Corp. (NYSE:SNE), Eli Lilly & Co. (NYSE:LLY) and some Alcoa Inc. (NYSE:AA) Nov $30s I wish I would have kept.

The winners were a pretty even mix of 45 calls and 32 puts with the calls clearly outperforming but the puts coming on very strong at the month's end.

Big put winners included BEAS Dec $15 puts that were only taken as cheap protection into earnings but gained 700%, SUN $65 puts that were finally purchased on the right day (11/15) which jumped 525% the next day, Freeport-McMoRan Copper & Gold Inc.(FCX) -- a news play that took in 386%, General Motors Corp. (NYSE:GM) (like shooting fish in a barrel) for 196%, Las Vegas Sands Corp. (NYSE:LVS) (same fish different barrel) for 132% along with several DIA and NASDAQ 100 Trust Shares ETF (QQQQ) puts that were well timed.

Our top 10 call winners were:

  • NASDAQ 100 Trust Shares ETF (QQQQ) $42s picked up for .15 (11/3) closed at .90 (11/7) for an 86% gain.
  • Tiffany & Co. (TIF) Jan $35s in at $2.20 (11/14) held for 2 whole weeks for an 86% gain ($4.10), the Consolation Prize Team marches on!
  • American Express Company (AXP) $57.50s that closed a double at $1.70 but I would have done well to hold that!
  • Williams-Sonoma Inc. (NYSE:WSM) Dec $35s were an intraday double on the 14th (another CP team member!).
  • Yahoo! Inc. (NASDAQ:YHOO) Jan $27.50s finally, finally justified my faith (from 9/21) by finishing up 124% at $1.90.
  • Alcoa Inc. (AA) $27.50s also required conviction but gave us 133%.
  • Diamonds Trust Series 1 ETF (DIA) $123s were another comment play (we do a lot more of these as things get choppy) that lasted a couple of hours on the 17th but left us 150% richer.
  • Quest Software Inc. (QSFT) Nov $15s (11/3) was a nice earnings play that jumped 500%.
  • Sirius Satellite Radio Inc. (NASDAQ:SIRI) Dec $4s were a great timing play that went from .05 to .35 (up 600%) and we got out just right.
  • IntercontinentalExchange Inc. (NYSE:ICE) $95s were our second best play of the month and we hit that on the money with a $1.20 entry during the NMX IPO and got out for $7.80 (up 650%) the same day (17th) -- another great comment trade!

One of my favorite plays of the month was selling the MGM Mirage (NYSE:MGM) Dec $55s for $2.25 when the stock shot up on the Kerkorian buy-in. This is one of the silliest plays in stocks as my Jan $37.50s are very safe at $16.60 (up 605%) while the extra $2.25 is almost certain to expire worthless, unless someone is going to make an offer between Thanksgiving and Christmas.

The corollary to "Always sell into the initial excitement," is, of course, "always sell calls into the initial excitement."

Along the same lines we took advantage of the Phelps Dodge Corp. (PD) merger to buy the almost-certain-to-expire-worthless (but not for a whole year) Jan '08 $120 puts for $8.90 (now $9.30) and sell some poor guy the virtually certain to expire worthless Dec $120 puts for $6.30 (now $1.85). If that's market efficiency, I just don't get it!

Thank goodness for that trade because it makes up for the wipeout of my PD Dec $90 puts that we picked up for $2.50 and they're not even worth selling for a dime! There is an expression that "When the market hands you lemons, you make lemonade," and this is pretty much a textbook example!

It finally occurred to me to just do the same with my annoying Kinder Morgan Inc. (NYSE:KMI) Jan $'08 $105 puts to get rid of that premium!

Another poor options player bought YHOO Jan $30 calls for $1.90 when I sold the ones I held on the 24th. That reduced my basis on the Jan '08 $25s all the way down to $2.90 (now $5.30) and I bought the poor guy out today for .40.

This is the best strategy you can employ in a market like this and we will work on more of these in the future...

We also closed out 17 regular stock positions for a 15% average gain with an average hold of (yawn) 29 days -- see the spreadsheet for all the dull details...

Regrets, I've had a few -- and here are some of the big ones:

I had a diatribe about how bad General Motors Corp. (GM) was on the 16th, saw GM going down on the 21st, falling below the $35 top I had predicted, commented on it, but waited until it went below $32.50 to establish a put position because it burned me the last time.

I even made a comment that GM was like LVS -- short it every time it goes on a run, but I was late pulling the trigger on LVS too, even though I called a top at $94 on the 22nd in comments.

There can be no greater regrets than our GOOG calls from September. While we did really well with them, averaging well over 100% gains for the bunch, it would have been smarter to just roll a little into other calls or keep a few for the hell of it. We had the $410s for $12.60 and the $420s for $9.60.

Am I overly cautious? I suppose I have to think about this as I do tend to take the money and run a little too early a little too often...

I should have had more faith in my The Children's Place Retail Stores Inc. (NASDAQ:PLCE) Dec $70 puts as they dropped to new lows this week! We took them off the table at $4.50 (up 73%) on the 20th, giving up another $2 in gains this week (so far!).

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All in all it was a very busy month but, like I promised in September, I finally got a handle on this market!

Have a great weekend,

- Phil

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