Options Trader: Monday Wrapup

by: Philip Davis

Don't blame Buffett!

Berkshire dropped half a point right at the open -- those indicators we were supposed to be watching this morning both blinked red on the first trade of the day, even as the indices kept climbing.

What else didn't happen today:

Options Trader 12-19-2006

Over the weekend we were discussing our three "canaries in a coal mine" that would tell us when it was time to get out. We had the Russell (dead), the NYSE (woozy) and the transports (near death). We also added insider selling (way up), and, of course, the SOX (so-so) to our watch list. I warned:

Canaries Coal Mine 19 12 06"One dead canary -- maybe he had a hear attack, 2 dead canaries -- maybe one couldn't live without the other, 3 dead canaries -- you may have missed your chance to escape!"

Well we have a few very sick canaries and we decided it was a good time to lighten up a little today! By 10:36 we were selling a bit, and I said: "I'm not too worried, I think oil is dragging down the markets but I'm not taking too many chances either!" It didn't take us long after that to get much more worried!

The daily levels we set are very, very, very important -- if we don't get to our goals, we shouldn't be trading!!! I often forget this myself as I get caught up in making this or that trade, but the reality is if the underlying premise of market direction is wrong then the trades picked on that assumption are likely to be flawed as well...

I blame oil for dragging down the markets today. I know I blame oil for everything, but this really was all oil's fault! NYMEX January contracts were still trading today and were pared down by 25% leaving just 77M barrels scheduled for January delivery. The January contract fell $1.22 while the February contract (active tomorrow?) fell $1.30 to $62.79, just .58 over the January!

Barrel Rolling 19 12 06Due to a whole lot of barrel rolling, February (a short month I hear) has 303M barrels open vs January's final tally of just 77M barrels. If we assume that's how many barrels we truly need in a month then we have to figure February needs to get down to 75M barrels by January 19th, when we roll into the March contract. But the March contract already has 118M barrels so if we roll the extra 228M barrels into March, then we will have 346M barrels open for that month. Gosh that seems like a lot of oil!

And those barrels are big and heavy and hazardous and need to be stored somewhere and moved around by trucks and cranes and union men -- all for a spread of $24.36 a month per $2,604 barrel!

Gee I'm glad I'm short oil!

The energy sector took a huge hit today, about 4% on the average, as roaches scrambled to get out of their traps. Not even the trusty rebels could save the oil bulls today as they actually used bombs today at two oil facilities in order to obtain higher oil prices freedom for their people.

Don't blame the dollar for oil's great decline today, it was relatively flat as our markets looked questionable and Gold dropped slightly to $615, clearly in the danger zone!

Is it time to panic? Not yet. The energy sector accounts for 20% of the S&P and was off 4%, so that would account for a .8% drop in that index (11.3 points) but the S&P only went down 4.6 points today -- if it wasn't for those pesky energy stocks we would have been ahead! The Dow suffered a similar fate as heavily weighted ExxonMobil Corp. (NYSE:XOM) dropped 2.3%, shedding $10B of market cap on just 22M shares traded.

Other big Dow losers were Alcoa Inc. (NYSE:AA), Boeing Co. (NYSE:BA), Honeywell International Inc. (NYSE:HON) and Microsoft Corp. (NASDAQ:MSFT) (still recovering from their Zune fiasco). As all of those stocks have just recently made nice gains (even XOM) I see no reason not to wait for at least one more canary to keel over before we head for the exits.


We did bid a fond farewell to several winning positions today as we are lightening up ahead of the holidays. It's always nice to go into the new year with cash and there was certainly nothing about today's action that made us feel like we would be better off with stocks!

As I said this morning: "Just because you're bullish is no reason not to take a profit!"

  • I took half of the American Express Company (NYSE:AXP) $60s off for $3 (up 173%) as it was too much to risk.
  • We took another round of Circuit City Stores Inc. (NYSE:CC) $25s for .40 ahead of earnings tomorrow.
  • Check Point Software Technologies Ltd. (NASDAQ:CHKP) gave us the .45 entry we were looking for and Apr $20 puts finished the day at .55 and the Apr $22.50s are already below our target at $1.15 but I'd rather pay a little more on the way up after a very weak day.
  • Rmyadsk asked if we should double-down ConocoPhillips (NYSE:COP) at 9:43 and I said I was too worried to chase that one (kick, kick). Gutsy call at the top!
  • We took the Diamonds Trust Series 1 ETF (NYSEARCA:DIA) June $124s and they held $5.60, but we decided to hold of on selling the Jan $124s for $1.90 or better unless we get a confirmed downturn. The DIA Jun $124 puts came in at $3.50 and we are hoping to sell the Jan $124 puts for $1.20 or better.
  • eBay Inc. (NASDAQ:EBAY) $32.50s stopped out at $1.45 (up 26%) and I'd like to get back in if it drops further.
  • We initiated the FedEx Corp. (NYSE:FDX) Apr $100 puts for $1.40 against the anticipated spread but we will wait to trigger that one for now! We are still looking to pick up the July $120s for $7.50 (hopefully less) and sell the Apr $120s for $5 (hopefully more) but the main goal is to get this spread ahead of earnings along with the put for downside protection.
  • We added the General Electric Co. (NYSE:GE) Jun $37.50 for $1.70 (now $2.15) as a pre-roll but had no reason to sell the June $35s yet at $3.90 (up 117%). The stop should be $3.70 or a .30 trail.
  • Google Inc. (NASDAQ:GOOG) June $490s stopped out at $44 (up 52%).
  • Harrah's Entertainment Inc. (HET) seemed like a nice opportunity to take the Jan '08 $85 puts for $3.75 and sell the Jan $85 puts for $3.
  • Jos. A Bank Clothiers Inc. (NASDAQ:JOSB) Jan $30s were let go at $1.50 (up 50%)
  • We added more Las Vegas Sands Corp. (NYSE:LVS) Mar $85 puts for $4, now $4.40.
  • We were given another crack at MetLife Inc. (NYSE:MET) $60s for .60.
  • MGM Mirage (NYSE:MGM) had a huge spike and then pulled back and that was as good a reason as any to get out of our $37.50s for $23.90 (adding in the $4.20 we gained on the last sale) giving us an average profit on our two positions of 710%. This is the successful end of a leap we've been selling calls against since June.
  • I put in an offer for more Motorola Inc. (MOT) $20s for $1 but no takers so far.
  • Oil Service HOLDRs ETF (NYSEARCA:OIH) Apr $140 puts ran up to $7.60 (up 19%) and we didn't want to risk it.
  • Oceaneering International Inc. (NYSE:OII) Apr $35 puts were added at $1.10 with tight (.25) stops going on the Apr $40 puts, now $2.65 (up 66%). This assures we have .90 to reduce the basis of the $1.10s to a very safe .20!
  • We went for Oracle Corp. (NASDAQ:ORCL) pre earnings with both the Mar $17 for $1.75 and the Mar $18s for $1.20 against the Jan $17.50s sold for $1.05. This one will be fun to track as the earnings were good, but not great.
  • Zman made a very nice call on PowerShares WilderHill Clean Energy ETF (NYSEARCA:PBW) going down at 10:56.
  • Pfizer Inc. (NYSE:PFE) $25s were taken off the table at $1.20 (up 118%). They boosted their dividend and named a new chairman after the bell so we'll miss some of that but I think 118% is plenty for 14 days!
  • Royal Dutch Shell (NYSE:RDS.A) gave us a chance to double-down on the $70 puts for $1, bringing the basis down to $1.50 (down 23%)
  • We took out the Research In Motion Ltd. (RIMM) $130 puts we sold for $9 for just $5.25 on the morning spike and are hoping for another leg down on the Mar $130 puts, now $9.60 (up 54% from the adjusted basis).
  • Our morning pick, Shaw Group Inc. (SGR) flew up too fast for us, which was a shame as it gained 8.5% for the day and another 2.5% after hours.
  • Toll Brothers Inc. (NYSE:TOL) $32.50 puts for $1.25 seemed like a real bargain compared to puts for other builders we looked at, and I felt very confident when I heard the delusional December builder sentiment: Although sales were flat and traffic was down they say expectations are improving! Like I said over the weekend, they use these reports to manipulate the markets.
  • Standard Pacific Corp. (SPF) was another builder play -- buying the Mar $25 puts for 1.55 and selling the $25 puts for .70.
  • I couldn't resist the Sunoco Inc. (NYSE:SUN) $65 puts for $2.10, now $2.40.
  • Under Armour Inc. (NYSE:UA) (formerly UARM) kicked the day off with a ridiculous Cramer pump right from the NYSE floor and fortunately, they were already a topic of discussion on the weekend where we decided they were not worth buying at this level. As soon as Cramer left the floor, the stock dove and finished the day 5% below the open, back at $50.44.
  • Energy Select Sector SPDR ETF (NYSEARCA:XLE) $61 puts were taken for momentum at $1.65, now $2.
  • XOM $75 puts were also a momentum play at $1.35 (now up .20) while half of the $72.50 puts were taken off the table at .70 (up 75%). The $70 puts are still a loss so we let them ride for now.

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