Options Trader: Tuesday Wrapup

by: Philip Davis

Wow, that was a whole lot of nothing!

  • Same store sales were up 1%, kind of weak
  • Retail sales were up 3.2%, not bad
  • The deficit was a winner, down 7% much BTE
  • Manufacturing profits up were up nicely!
  • The Fed did NOTHING

Options Trader 13-12-2006

Oh my gosh! What an economic crisis -- SELLSELLSELL!

I mean really folks, what is it you people want? That little uptick in Q3 Manufactures Profits is $15.3B higher than the $109B last year (up 14%). Run away (I hear Venezuela has cheap gas)!

Forget the fact that this is a 200% increase since 2002 or a 50% increase from 2004. Forget the fact that another 50% increase in 2 more years would add the total value of all manufacturing companies of 2004 to the market in 2008 (that would be Dow 15,000 for those of you playing the home game). Just ignore that because they want you to stop buying now.

That's why they just raised the limits on the minimum net worth for you to invest in a hedge fund to $2.5M. They didn't set them up for you! At the same time, Elliot Spitzer is suing UBS for steering customers into fee-based accounts while all of a sudden CNBC wheels out a bunch of analysts who say there is no Santa Claus.

Thank goodness they are protecting us now, after we've traded and paid UBS those fees and given the rest of our money to Amaranth!

Options Trader 13-12-2006What's going on is that we are indeed very close to escape velocity but we don't have quite enough fuel. All the "pro" investors are long on the market and there's no one on the short side anymore. There is still, in theory, another $200B pouring into funds of all types this year that have yet to be deployed and a declining dollar can inflate our stocks another 10%, but the "pros" are too savvy to let go of their shares cheap...

Ah, you're catching on... When a rocket ship doesn't have enough fuel to make orbit you can do two things -- you can get more fuel (as we said, kind of hard to come by up here) or you can reduce excess mass! Guess who's looking like dead weight to the pros?

Like a used booster rocket, you've served your purpose, you dropped your money into the till and, if you are fully invested, you are of no further use to them so they will try to eject you!

You've seen this joke before, they want to get the annoying guy out of the plane so they tell him it's going to crash, maybe they rough up the ride a little for effect. Then they give him a chute and say "You go, we'll go down with the ship." After that it's "sayonara sucker!" as they fly off into the sunset.

Much like a bad broker (many come to mind) they churn and churn until you can't take it anymore and are forced to bail out.

Options Trader 13-12-2006Is this what is happening right now? I don't know but let's be aware of the possibility. The movement of the market has turned choppy but is still fairly bullish and, while there is no way I would advocate going down with the ship, I'm also not going to be the first guy out the door and I certainly want to check my parachute before I jump!

We did this back in July and August, when I didn't trust the markets and turned a little bearish and we were not that well positioned for September's big gains. Although we averaged 92% for the month we left a lot of big gains on the table by taking early exits. My bad...

So I'm not going to be overly optimistic but I am going to try to keep things in perspective and try to make some plays that have some coverage in any direction -- it's tricky, but fun!

In the tradition of perspective I'm going to activate the Wayback Machine and take us all the way back to —- November 30th!

Just a week after Thanksgiving we were very worried about the markets and we set some modest goals:

  • Dow MUST hold 12,200 and needs 12,300 to be taken seriously
  • Transports can NOT go below 2,650oops"
  • S&P MUST break and hold 1,400
  • NYSE MUST hold 8,900 but needs 9,000 to impress we should be impressed!"
  • Nasdaq needs to get back over 2,450 fast!
  • SOX MUST retake 480 and 490 is no big deal oops"

Options Trader 13-12-2006

Much like my concerns in July, we don't have our SOX or our Transports -- everything else is doing great!

The SOX held up pretty well in the face of several tepid outlooks, while the transports have been weak but are coming off a 400 point increase since 9/11 and have pulled back a total of 100 points from resistance at 2,700. The transports should point the way for us as they are squeezed between a rising 50 DMA at 2,615 (today's high) and 2,581 (today's low).

So we'll keep the chute strapped on and make sure we're aware of the emergency exits but I'd hate to miss the rest of the ride just because of a little turbulence.

Speaking of turbulence -- how about that oil market? After an early run at $62 crude fell to $60.50 and it took a lot of work to close it at $61.02 (that .02 has a lot of psychological value!). As usual, the contracts you can't see dropped considerably more than the contracts you can!

There's still 188,951 open contracts, down 24M barrels from yesterday, and it will be interesting to see how many try to roll into February's 234 million open barrels (at $61.88).

The dollar had a down day as the $700B trade deficit didn't inspire quite the confidence one would have hoped, but oil dropped .20 in the end and gold finished down $3, just holding $630.

Options Trader 13-12-2006

The VIX actually sank further and looks (if you can say this about an abstract index) weak.

So we are drifting sideways with very little volatility -- this is simply not a time to panic...


With the choppiness of the market there was a lot of hitting and running in today's trades:

  • American Express Company (NYSE:AXP) Jan $60s came in at .90 but stayed there. The basis on the original play is now $1.10.
  • $2.75 was the best we could do on the Best Buy Co. Inc. (NYSE:BBY) Mar $52.50s which finished at $3 (up 9%). We took out the Dec $55s we sold for a nickel and the Jan $55s finished at .70, up 55% from our adjusted basis.
  • We took out our Circuit City Stores Inc. (NYSE:CC) Jan $25 caller for .90 (up .60) and bought some for ourselves but the finished flat. Earnings are on the 19th...
  • China Mobile Limited (NYSE:CHL) seemed like it might be done dropping and we took a few Mar $45s for $1.30 with a stop out at $39.50.
  • Chevron Corp. (NYSE:CVX) Jan $70 puts seemed interesting at .55.
  • We took a double-down on the Dow Chemical Company (NYSE:DOW) Mar $45s for .20 (basis .28, down 30%).
  • We did a 2nd round of eBay Inc. (NASDAQ:EBAY) Jan $32.50 at $1. 05 (basis $1.15 -- even).
  • I guess I wasn't the only one underwhelmed by Goldman Sachs Group Inc. (NYSE:GS) earnings as they lost 1% on the day.
  • AT&T Inc. (NYSE:T) was doing so well with the Jan $35s at $1.35 (up 35%) that we sold the Dec $35s for .65 rather than take them off the table.
  • Textron Inc. (NYSE:TXT) Mar $100s came in at our $2.50 target (Monday), I hope I don't regret it!
  • Valero Energy Corp. (NYSE:VLO) $55 puts were taken off the table for a .80 average (up 38%).
  • We added more ExxonMobil Corp. (NYSE:XOM) Jan $75 puts for $1.20. Also I sold the Jan $75s for $2.85 against the April $80s, now $2.50 (up 12%).

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