Options Trader: Friday Wrapup

by: Philip Davis

Nothing of note happened today.

We had minimum movement from our indices but a minor bounce from the Nasdaq and the SOX with the Transports holding firm so, on the whole, a great big nothing of a day . . .

We had a very sudden 30 point sell-off in the Nasdaq in the Monday after expiration last month and this month it took three sessions to drop the Nasdaq 60 points - to the exact same spot! The same spot that (coincidentally, I’m sure) the Nasdaq was at the Monday after November options expiration. Don’t you just love it when everything works out like that for the options sellers!

Luckily, those options sellers were us as we sold calls and puts against 1/3 of our open positions, playing the house nicely in a very choppy month. The returns aren’t as sexy but they sure beat losing money!

The Dow blah blah, the S&P blah blah - just click back in the week and read any EOD commentary, we both have better things to do than go over into that on the weekend!

US Markets 22 01 2007 Chart

BushOil was interesting only in that it failed to get back to $52.10 despite a really huge effort. $51.99 was the best they could do with just 65M barrels remaining open for February delivery. As I suspected, they forced the open contracts to an artificially low point in order to have some pumping room for the last two days (Friday and Monday).

March contracts are sitting at a MASSIVE 387M barrels. This is big trouble for traders who have until Feb 20th to bring them down to some number that can actually be accepted in Cushing during March. Since 94Mb was adequate for January (more than adequate it seems as we had an 11Mb build last week) and less than 70Mb seems all right for February, one can only wonder what the traders think they are doing with the other 300 million barrels they have contracts for. Hopefully they are making iPods out of oil, otherwise it will just end up being a cheap substitute for ethanol this spring…

Cushing itself has a 25Mb storage capacity, so it would take 12 turns of inventory (oil dropped off and picked up) in 31 days in order to process 300Mb of crude - that’s just not going to happen. Energy traders still have their heads in the clouds if they think that the 22 months out of the previous 252 that oil has traded over $50 are the norm, rather than just another commodity blip. More to the point, from 1986 through Jan 2004, it never even broke $32!

From the Oil Drum: "The storage at Cushing is full, if you’re long you would have to take delivery." said Nauman Barakat, an energy trader at Macquarie Futures, the trading arm of Macquarie investment bank. "Basically this is confirming that inventories are very high."

Barakat was referring to the storage tanks at Cushing, Okla. where oil is stored until it is shipped to an industrial user, like a refinery. Besides, said Sal Gilbertie, an energy trader at Fimat ,"If you take delivery and there’s no place to put it, what are you going to do? You’re dead. No one’s buying."

So blah blah, oil’s overpriced, markets are manipulated, blah blah - even I’m bored with oil at this point! It’s dead, move along people, nothing to see here…To find out how dead, check in with Zman’s latest post!

Cowboy Oh sorry, one more thing in case I forget to get back to this over the weekend (so remind me). Refiners, like VLO and TSO have 130Mb in storage at any given time. They bought these barrels at the top and, like home builders, need to write down their inventories at some point. Not only that, but commercial consumers, like airlines and truck companies are not stupid and will order less and less oil as they work off their own expensive inventories while waiting for a bottom before they start refilling their mini-reserves. Worth keeping an eye on!

The dollar is also flat lining along the 200 dma and you know I will be laughing my butt off if it pops up next week. The amount of people now on the wrong side of the dollar trade is so staggering that they may have to cover shorts all the way to 90 before the buck runs out of gas. The biggest danger facing the dollar is the President’s State of the Union Message next week because (and don’t tell anyone) we’ve got a lot of problems!

Gold gave us another push but take it from a running back, I know a head fake when I see one and I’m just not willing to go long on gold no matter what they are making the chart look like at the moment. I hate to be neutral as I love my little gold stocks but copper sure isn’t looking like a rally and that just makes me very suspicious of all the excitement around gold this month.

Oil Dollar Gold 22 01 2007 Chart

That’s enough to digest in this post - I’ll put a weekly review up a little later!

Have a good weekend,

- Phil