Options Trader: Monday Wrapup

by: Philip Davis

Hey - we didn’t go down!

We got a little Nasdaq leadership but it only came right at the end after a really pathetic start and the Dow gave up a nice early gain to finish up just four points and we can’t even blame Exxon this time as they were down just .41 as oil fell $1.41 to $54.01. I blame the dollar today, which was dragged back from 85.38 all the way back to 85.10 because, if you think people stand to lose a lot with collapsing oil, that is just nothing compared to what is being bet on the dollar NOT rising!

So we must blame someone for the Dow’s decline (as this is a blame culture) and it wasn’t CAT (up 1%), HPQ (up 1.75%), INTC (up 1.75%) or even VZ (up .5%) but the rest of the group were just weak with AA, C, GM, MRK and PFE all giving up about a point in some pretty lacklustre trading.

So I choose to make GM the scapegoat, as they have way more Dow weighting than they deserve and are a very poor excuse for an auto company and need to be removed from an index that is meant to track the health of U.S. industry. Edmunds says U.S. auto sales are up in January, oil is back below $55 and this company still can’t get out of its own way! Dow index makers - please replace GM with TM so we can get a true picture of the health of the economy!

How did the rest of the markets do today?

* TERRIBLE! We are nowhere close to any of the levels we set this morning. So sad I’m not even going to review them! Go down to the morning post and see for yourself!

US Markets 30 01 2007 Chart

Moving on then…

Oil was its usual fun and exciting self - the oil patch got off to a great start when TSO reported huge profits as it turns out (funny story actually) that while the crude prices they paid fell over 10% from Q3 and close to 20% from Q2 - they forgot to pass those savings along to the consumer (see, I told you it was a funny story!). Net profits for TSO were up 129%, despite the fact that they actually produced less product than last year.

Oil Profits

TSO collected $300M more dollars in profits in 2006 (+60%) from you, for being the middleman in the oil crisis, adding $540M to cash reserves which they announced they will use, not to build additional refining capacity that this country needs, but to buy a refinery from Shell! As with consolidation in other commodity sectors, the less competition the better!

The rally they sparked was short-lived, though, as oil itself broke down towards my $54.60 rest target after a nice fake morning pump as traders shuffled contracts from March to April but, at 11:31, I commented in the member chat: "Something’s up with CHK, EOG, ECA… Now is the time to add some oil puts I think!" What did I see?

I saw part of our tracking group collapsing led by EOG who made a U-turn off a huge spike at 11:15 which was confirmed by some topping action in crude less than 10 minutes later but EOG’s quick collapse let us know that there would be pain ahead for the rest of the group.

We had all the time in the world to pick up additional PBR puts and I took the PTR $120 puts (1/24) off the table at $1.70 (up 52%) but we weren’t taking any chances - the way oil has been whipsawing us lately, 50% is PLENTY to make on a position! At 12:03 I said: "If oil breaks below $54.60 we may have something worthwhile…" and we did, oil had a very weak finish, closing right at the bottom of the day’s range.

There are still 386K NYMEX contracts open in March (13 trading days left) and 109K contracts are now jammed into April and another 55K in May, 96K in June followed by July through November each under 30K but (uh oh!) there are already 147M barrels of oil scheduled for delivery in December at $58.68. As I pointed out in comments today, only .29 separates the March and April contracts, that can’t last! June-July = .44, Aug-Sept = .39, Nov-Dec = .33… They can’t keep that up for long… You can still buy Dec 2012 barrels for $60.40 a barrel and sell calls against them for 70 months, even if you just pick up .25 a month of premium it’s a huge winner as long as oil doesn’t go below $42.90 but there are hardly any takers… Doesn’t that seem strange?

It’s not like Dec 2012 is a dead contract, 242,000 barrels were traded today and 16M barrels worth of contracts are currently outstanding so at least one person knows they can drive to the 2012 Olympics for under $2.50 a gallon!

Gold fell $7 as the dollar showed some strength and was in no mood to recover as it settled just above $640 at $642. The 50 dma calls out to be tested, just $10 further down from here!

Oil Dollar Gold 30 01 2007 Chart

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If you’re interested, my Web Radio Interview with MN1 is now available for download HERE. I did pretty good in that interview as it was from the 25th and every trade I gave them; LVS, BAB, OII, XLE, FXI all worked out!

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What didn’t work out today was BAB’s huge recovery on a huge 3% jump as they avert the strike. As I said over the weekend, the damage is already done, both to BAB’s reputation, and to their bottom line as they did it all at the last minute and many passengers have already gone through the hassle of rebooking. The company also had to agree to put $1.5Bn into their $4Bn underfunded pension program plus two years worth of wage concessions on a go-forward basis. We set a stop on our Mar $105 puts at $1.20 but they never went below $1.55 for the day. They still make a nice hedge against our oil puts.

Our AMZN play worked out perfectly as we took the July $37.50s for $3.75 and sold the $35s for $3.25 later in the day. This will be tricky to manage and we will track it carefully but picking up the Julys early worked out great as they are already up .25, which is not bad since we are only in for .50 out of pocket! Thanks to Ravi for pointing out this excellent opportunity!