Options Trader: Thursday Wrapup

by: Philip Davis

Thump! What was that? I don't know... keep driving! You know that never works out in a horror movie, and I'm not sure it's going to work out in the markets. What happened today? What was that thump?

Before we drive on and fire the last of our booster rockets (I know, mixing metaphors -- shame, shame), it would be nice if we could figure out what we hit just...

One thing we hit in the morning was all of our levels. At about 9:47 we had:

  • Dow 12,360.75 (best intraday high was 12,409.31 on 11/21).
  • Transports were supportive at 2,653
  • S&P 1,418.25, an all-time high
  • NYSE 9,092.54, an all-time high
  • Nasdaq 2,454.90, not even close to 2,468.42 (11/24)
  • SOX 493.25, yawn, we were at 559.60 in January

By 11:45, we had pretty much crossed to the opposite side of the open on most indices, and it got worse, and worse, and worse and worse until they rang the closing bell:

  • The Dow finished the day at 12,278, 82 points off the high but 83 points over Monday's open
  • S&P 1,407, 9 points off highs, 9 points over Monday
  • NYSE 9,041, 51 points highs, 52 points over Monday
  • Nasdaq 2,427, 27 points off the high, 7 points over Monday

US Markets 8 12 06

Well, I said this morning that I wasn't sure what the markets would do today and I guess they weren't either!

So, on the average, the above indexes dropped .3% from the day but, other than the Nasdaq, I really didn't find it too disturbing. All I see today is a lot of irrational exuberance being sucked out of some ridiculously priced shares, but no major sell-off yet.

In fact, read my Monday morning article and tell me how pleased I should be to see these levels today! Those who forget the past blah, blah, something... I forget... But you get the idea.

So what happened? If it was profit taking I don't think they're done, based on our finishing patterns. Analysts seem to think that unemployment will rise tomorrow, but so what -- who thought 4.4% was sustainable? As usual, not having a second decimal point in such an important figure is beyond ridiculous!

The big concern tomorrow is likely to be any signs of wage pressure because there's nothing the markets hate more than regular workers getting paychecks! We are expected to add 110K jobs for the month but watch out for adjustments to prior months, which were subject to election shenanigans in November.

The ECB raising rates to 3.5% was no help today either (as noted this morning). We are very dollar-biased here but most of the world feels much more secure keeping their money in Euros at 3.5% interest than in dollars at 5.25% -- that was certainly a smart move this year!

We're in for a rough time with the greenback as China is playing hardball ahead of Paulson's visit next week, angling for more liberal trading policies. Don't expect them to budge on this because they want concessions now while Bush still has congress and they can twist his arm. China is worried the Democrats will try to protect American jobs by enforcing fair trade polices.

Rodney RoachOil did what it usually does, post all of the day's fake gains in the last 15 minutes of trading, but once again the contango collapses and today the December contract fell to $67.90, $1.78 cheaper than the November contract! That's Backwardation!!!

Today's pump of .30 in the January contract, you, the home viewer, can see was .42 greater than the .12 drop in the February contract you can't. March dropped .77 against January, April .85, May .69 (thinly traded) and June .89.

Just .45 separates May and June now while .50 separates June and July. Holding 1,000 barrels of $66.40 July oil all the way until December nets you just a $1.50 per barrel premium. No problem oil speculators -- as long as you can find a storage facility to hold your black goo for .20 per barrel per month and nothing bad happens to the price for 6 months you might come out even (less fees and commissions of course)!

This all came against a flat dollar but it did bounce off the 82.5 mark again with some authority, leading me to suspect someone is still defending it (a least we hope so!).

Someone needs to defend gold though -- it fell all the way down to $632 today on its way to my $620 target.

Oil Dollar Gold


We had a lot of fun trading today!

We didn't go for the market's head fake in the morning which kept us out of playing new calls but plenty of good plays came up:

  • Once the day got going I was actually full of predictions! I called a don't-buy on Apple Computer Inc. (NASDAQ:AAPL) in the morning, despite the apparent bounce, and later in the afternoon I said: "Apple peaked at $93 on the 27th so we have a $6 drop in 2 weeks. I'd say below $85 before expiration is a reason to worry but not otherwise." We'll see how that one goes!
  • Best Buy Co. Inc. (NYSE:BBY) Jan $55s came in at $1.60 and the plan is to sell Dec $55s ahead of earnings.
  • Boston Scientific Corp. (NYSE:BSX) got the good news we wanted!
  • I couldn't stand the teasing anymore and we grabbed the ConocoPhillips (NYSE:COP) Jan $70 puts for $2.25 (now $2.45).
  • The market looked ugly at the top and we grabbed the Diamonds Trust Series 1 ETF (NYSEARCA:DIA) $123 puts for just .60 (now $1, up 66%) as the transports seemed too weak to get us anywhere.
  • Thank you Cramer! I love you again, going to bat for eBay Inc. (NASDAQ:EBAY) on tonight's show. We picked up a quick buck on his mention in after-hours, but I feel much, much better about the Jan $32.50s we picked up yesterday! As I said in October, this stock can do much, much better...

Euros to Yen was indeed the currency trade of the day with the Euro picking up 3.5% in today's trading! This was in large part due to my 12:48 decision to convert all my money to Euros as we listened to Bush's press conference.

I think the moment came when Bush was asked whether the Iraq Study Group report would carry weight with him and he said: "A lot of reports in Washington are never read by anybody but, just to show you how important this one is, I read it!" The Daily show should just send him a check for this stuff...

  • Corning Inc. (NYSE:GLW) joined our watch list, possibly the Feb $22.50s for .85 if $21 firms up.
  • Oooh, Hewlett-Packard Co. (NYSE:HPQ) is paying a fine of $14.5M! That'll teach them not to spy...
  • IMAX Corp. (NYSE:IMAX) finally got moving with a new theater deal.
  • Research In Motion Ltd. (RIMM) was great, but we changed our game plan as it dropped too fast so we grabbed the Mar $130 puts for $10 (now $11.90) and I rode them down to $130 where I sold half the Jan $130 puts for $8.20 (now $9.10) and let the rest ride.
  • I jumped too early on the Sirius Satellite Radio Inc. (NASDAQ:SIRI)/XM Satellite Radio Holdings Inc. (XMSR) merger rumor and paid $3.93 to get in, after refusing to pay $3.75 just 2 days ago (kick, kick).
  • Texas Instruments Inc. (NYSE:TXN) is now one we want to pick up tomorrow if the Nasdaq recovers.
  • Gas inventories were wild as usual. I had my finger on the Valero Energy Corp. (NYSE:VLO) $55s ahead of the numbers, but at 10:31 we flipped to another round of the $55 puts at .60 instead, bringing our total basis up to .50. They finished at .65 (up 30%) but we could have made money on it both ways!
  • We picked up ExxonMobil Corp. (NYSE:XOM) Apr $80 calls for $2.25 (yes CALLS) in the afternoon to cover some of our oil puts, rather than take them off the table. Those are CALLS for those of you who are still in shock!


In other scary news: Sub-prime lender Ownit Mortgage shut down today. Totally gone, no notice, just gone. That's $8.3B worth of lending power out of the market (Toll Brothers Inc. (NYSE:TOL) sold $5.7B worth of homes all of last year). Merrill Lynch & Co. Inc. (MER) owned 20% of them ($100M down the drain) and this is EXACTLY what we talked about Tuesday when I said:

"U.S. Mortgage delinquencies have doubled in '06 causing a ripple effect in the $10T mortgage market. 4% over 60 days may not seem like much but that's $400B missing from some banker's ledger at the end of each month. That's a lot of money -- just ask Uncle Billy!

"Who are the bankers who get hurt the most? Usually it's sub-prime lenders but most of them have been bought up the past few years by Investment Banks like Morgan Stanley (NYSE:MS), MER and Bear Stearns Companies Inc. (NYSE:BSC). They are scary to short, but see my comments yesterday about what happens when you have too few people with too much money!"

As I often say, sometimes it takes the whole 48 hours for me to be right!

Congrats to Prof for predicting this way back in the summer of '05 when he first went negative on the builders!

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