Seeking Alpha
Profile| Send Message|
( followers)  
That wasn't so bad was it?

The markets don't go up every day. If they did then stocks would probably cost more (just a theory). We were prepared for it, positioned for it and now it happened -- or is it still happening?

That's the hard question! Did our levels hold up?

  • Dow 12,300 -- check.
  • The transports told us so all day -- flat!
  • S&P holds 1,408 -- check.
  • NYSE flat(ish) at 9,047 (would have preferred 9,051).
  • Nasdaq led us down, finished just under 2,450 (2,447).
  • SOX were positive but, as predicted, impressed no one.
  • Russell did not break 800 and, as I said, we risk looking toppy.

Hmmmm, I'm not happy. The Dow is an idiotic way to measure the markets, so we ignore that, which leaves us with just he S&P holding our levels. The NYSE was neutral and the Russell and the Nasdaq were little help. On the whole, a nothing day, but certainly nothing good (other than the not falling off a cliff part!).

Oil went down and you would think we would be dancing in the streets but the transports weren't buying it, and neither were half of the energy companies either. You can see the confusion in our Valero Group as ExxonMobil Corp. (NYSE:XOM) led the decliners, Tidewater Inc. (NYSE:TDW) (our "guest") led the advance, while Valero Energy Corp. (NYSE:VLO) and United States Oil Fund ETF (NYSEARCA:USO) split the difference.

The stocks we track rose and fell in concert just after the inventory report and then splintered into chaos, as if they went through a prism. Oil itself only went down .24, but again this was less than half of the average of the contracts that aren't manipulated for your CNBC viewing pleasure.

Now we begin to play the Contango Tango as two days of this nonsense has thinned the month-to-month spreads to the point where just .24 separates the Nov '07 contract from the Dec '07 contract.

We'd better start keeping track of this before backwardation forces a massive crude sell-off one of these months! This is the inevitable result of manipulation...

Oil Contracts 7 12 06

Essentially this means that the 227,430 contracts that were purchased today must either convert next Friday to accept delivery in January, or be rolled into February for an additional premium. Well, for next month $1.33 should cover the storage costs, margin interest etc. for our option holder to roll the contract, as should February and March but come April .64 per barrel (1%) does not seem like a lot of money for someone to have to hang on to several million barrels of oil at $65 a pop.

Just like any option we purchase, you need to be rewarded for the risk of holding the contract an additional month. When the risk outweighs the reward, you sell. Presto -- you're an oil trader!

Only these options don't expire worthless, they are contracts and if you buy 'em, you WILL accept delivery of the oil (1,000 barrels per contract) in Cushing, OK the following month. So make sure you have a buyer, a storage facility and delivery vehicles ready!

So you can see the problem -- if they keep propping up the current contract at the expense of the later-month contracts, eventually the oil that a trader is forced to accept this month actually costs more money than he can sell it for next month. Nobody likes that, not even a cockroach!

We saw the Roach Motel Theory in action today as they scrambled to get out of XOM, with 30.7M shares changing hands. As predicted here for the past month, volume = loss in XOM trading! At $77 a share it took $2.3B to bail out the sellers of just .5% of the company's stock and $10B was lopped off Exxon's market cap to provide that exit.

Now I'm no math whiz but it seems to me it might be bad for the company if every $2.5B in trading drops the value of the company by $10Bn... Let's work this the other way -- on November 30th we had a busy day too with 27M shares being purchased and the stock rose .39 (.5%) vs. today's $1.75 (2.24%) drop. Uh-oh!

Gold was off 2% (also as predicted) to finish at $638 and the dollar was up just .33% but bounced where we needed it to.

===================================

We had a much more active day than planned because we all jumped on a very silly 10:30 oil pump, expecting a short ride down that ended up being a downhill challenge!

  • Continental Airlines Corp. (CAL) was a no-trade as the inventory reports did little to excite energy traders despite the CNBC pump-fest that surrounded them (see today's comments for the play-by-play).
  • Intel Corp. (NASDAQ:INTC) also did not trigger as the SOX and Nasdaq failed our levels -- good thing too!
  • We didn't take the Chevron Corp. (NYSE:CVX) or HYDL puts as better opportunities presented themselves as the morning progressed.
  • I did take the NASDAQ 100 Trust Shares ETF (QQQQ) $44 puts at .30 and just held them for protection (now .35).
  • One of the positions we protected was the eBay Inc. (NASDAQ:EBAY) Jan $32.50s for $1.25 (finally), now $1.45 (up 15%).
  • Las Vegas Sands Corp. (NYSE:LVS) Dec $90 puts stopped out at .80 for a very disappointing dime loss. The Jan $95 puts are back about even at $5.
  • Motorola Inc. (MOT) spiked us up and kicked us out of the Dec $22.50s for .35 (up 75%). We kept the Jan '08 $22.50s, now $2.90 (up 10%).
  • We got a heads up on the inventory from Valero who gave the customary head fake before flying up on a "larger than expected" draw but cooler heads prevailed and we took the opportunity to double down on existing puts in addition to adding some new ones. Valero Energy Corp. (VLO) was my first play on the rise and we picked up the $55 puts for .45 (now up a nickel).
  • ExxonMobil Corp. (XOM) $75 puts were taken as a double down at .30 and I was thrilled to take half off at .50 as it reduced the remaining basis to a very manageable .27 with the puts now at .55. It is a great relief after rolling .80 from last month, doubling down at .65, .55 and .30 over the course of the month with the last move pulling a .20 profit! The XOM Jan $75s were taken for $1.15 and finished the day at $1.50 (up 30%). I took round 3 of Jan $70 puts for .30 and made a quick 50% while the Jan $72.50 puts were picked up at .65 and taken half off the table at .80 to reduce the remaining basis to .60.
  • Sunoco Inc. (NYSE:SUN) $75 puts were called right at the top for $1.75 and finished the day at $2.10 (up 20%).
  • Energy Select Sector SPDR ETF (NYSEARCA:XLE) $60 puts were also well timed at .55 and finished at .70.

So on the whole it was a fun day of trading, but I'm not impressed with oil's move yet as they have gone up so far the past two weeks, all we have is a simple retracement so far.

We'll see how we get through the gas inventories tomorrow morning although we know what a joke that has been for the past month!

Have a good evening,

- Phil

Read all of Phil Davis's articles on Seeking Alpha

Source: Options Trader: Wednesday Wrapup