Options Trader: Wednesday Morning Ideas

by: Philip Davis

Can we turn this thing around already?

That was hardly a dip in retrospect, and we are getting to be very experienced astronauts, able to ignore those little shakes and rattles as the market ship lurches forward into uncharted territory.

This is the one week anniversary of our physics lesson where we talked about how difficult it is to break orbit and, more importantly, about the periapsis -- the point at which the market, no matter how high the orbit, comes perilously close to reentering the atmosphere of bearishness!

Ironically, the larger the Apogee (the point at which the market is furthest above "normal") the more terrifying the drop back to the Perigee (underperformance) will seem, even though there are literally trillions of astronomical bodies that go through this cycle every single day without crashing!

dictionary-apogee 20 12 06In fact, in order to break an orbit, a spacecraft may purposely throw itself into a very close orbit around a planet in order to utilize the gravitational pull to its advantage as it picks up speed for that final thrust into deep space. This is what the Nikkei did as it dove down to 16,776 yesterday, perilously close to a breakdown, before "slingshotting" back over 17,000 this morning!

As we said last week in the parachute article, the perigee is a good time to eject excess mass (nervous investors) as you prepare to leave them, and previous market highs, behind.

All of Asia had a pretty good rebound, led by Thailand which jumped 11% (yes, in one day) as investors poured back into the market -- proving once again that a sincere, quick apology is the best way to save a relationship. I'd love to see the VIX for that exchange! "Yesterday, after the market closed, we got together with stock market brokers and the private sector to discuss how to prevent flows from the stock market to bond market instead," Finance Minister Pridiyathorn told The Wall Street Journal in an interview.

GS Economy 20 12 06When in doubt, just let Goldman Sachs run your economy... What kind of crazy little banana republic would come up with that solution? -- Oh, never mind!

The Hang Seng rose to 19,240, 'just' 165 points below a new all-time high. We'll see if they picked up enough momentum (or shook off enough excess mass) to break out this week. Our pals at China Mobile Limited (NYSE:CHL) added 4.67M subscribers last month, a very nice report after hitting our double down target of $1.10 yesterday!

China is putting in some tough new trade restrictions to curb the exports -- of babies! That's right, you can no longer adopt a Chinese baby if you are old or fat, single, medicated or poor! China says its rationale for a change in rules is simply that it cannot meet the demand of prospective families. Perhaps energy traders can switch to Chinese baby futures as it sounds like supplies will be drying up fast!

china-dollar 20 12 06As we mentioned in comments yesterday, the dollar dropped as the U.S. Treasury (cough, Paulson, cough, cough) "declined to designate China as guilty of currency manipulation... noting the government in Beijing is moving steadily, though slowly, toward a flexible foreign-exchange regime." Well isn't that special?

Also going on in the world's most important economy -- Taiwan has given approval to 3 semiconductor companies to invest $825M in China! In case you are young I will sum this up by saying these guys REALLY hate each other and this is a truly amazing sign of how important China is becoming.

Meanwhile the world's strongest economy (nope, still not us!) is cracking down on corporate tax evasion, cleaning up the environment and stepping in to head off the crisis in Somalia. There are so many responsibilities for a real world power...

Let's keep in mind that last Wednesday was a big disappointment ahead of Thursday's big gains, so no going all crazy! As with yesterday, please remain seated until the captain has given the all clear signal and we can safely float about the cabin...

We will go back to looking up, as we covered in yesterday's post:

Options Trader 12-20-2006

Oil may be the villain of the day as it was last Wednesday with an early morning pump that faded fast. Tune into comments today as the situation is liquid and slippery with all sorts of shenanigans taking place in the energy sector. March contracts are up $1.38 from last week and I will be watching those more closely than the manipulated front-month contract.

Oil Gage 20 12 06Any downward pressure on February, with 300M barrels on order for delivery at $63.46, will be bad for the energy sector. But there is very likely to be a bigger than ridiculously low expectations (1.8Mb) draw on crude, so we will make our energy plays after inventories today.

The dollar looks stable (stable being an odd way to describe something that just doesn't happen to be actually falling off a cliff at the moment) and perhaps we'll get a chance to see how gold performs on a flat day. $630 has been a major block for gold on the way up and, so far, we have nothing more than a weak bounce off $620.

Options Trader 12-20-2006

Let's be very careful out there today!

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FedEx Truck 20 12 067:52 Update: FedEx Corp. (NYSE:FDX) earnings look good to me but it's getting killed on lowered guidance! But these are very good numbers against a fabulous year last year, and I likely will be dumping my puts and adding to my longs on this wrong-seeming reaction!

FDX already announced a 5.5% price increase for next year -- that's $1,900M more money for doing the same thing they did this year! Let's say that costs them 10% of their clients -- that's the same money for doing 10% less than they did this year. Even if they fail to scale back 50% of what they should reduce in order to cut back -- that's still +$500M added to the bottom line (currently $2B).

Perhaps FedEx is so busy and the labor market is so tight that they don't want any more business, and raising prices is simply an exercise in pricing power (I ran a service business and made this choice at one point as it made more sense than expanding).

The FDX play we ended up making pre-earnings should do all right. We have the Apr $110 put for $1.40, which was already well in the money yesterday, and protected our the nice cheap (or maybe not!) July $120s that we picked up for $7 and protected further by selling the Jan $115s for $3.50.

I'll be looking for a chance to buy out my caller and absolutely taking 1/2 of the puts off the table on the early drop as they more than pay for all the remaining positions! This gives us a free(ish) look into the next earnings!

Meanwhile, these are strong numbers and generally good for the economy, making me want to take a look at United Parcel Service (NYSE:UPS) as well!

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Speaking of space: This is very cool and not a joke -- it's how we will be building massive space stations in the not so distant future!

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