Options Trader: Weekly Wrapup

by: Philip Davis

That was sure better than last week.

We started last weekend off talking about hedging, but we had little need for it as the markets made steady gains for most of the week. Unfortunately, I’m still viewing it as a weak bounce, especially if we’re not clearly over 12,300 by Monday.

We didn’t need to trigger our mattress plays this week but PLEASE don’t go into next week without at least one or two ready to trigger. I always hate to be a chicken little (it’s bad for ratings!) but a big chunk of the market definitely did fall just 10 days ago and it’s just a little early to be going out without a helmet. Impressive as a 2% gain in one week may be, it would have been a lot more impressive if it hadn’t followed a 6% drop!

I particularly love Tom2oc’s take on Google, (NASDAQ:GOOG) which I was watching closely yesterday as well: "I wanted to see GOOG moving above the mid BB band today. Needless to say that this didn’t happen today. Why it didn’t happen, I don’t want to know, it just didn’t happen. I believe this is bearish. Look at that chart and see how the price trends in the half parts of the bollinger bands in waves. Seems like we might be starting another wave down the bottom band now."

I love TravelCenters of America LLC (NYSEMKT:TA) guys! I must have read 200 pages of information on GOOG this week, analyzed the potential threat from Wikipedia, the spillover effect from Yahoo’s (NASDAQ:YHOO) AT&T (NYSE:T) deal, Microsoft speaking out against them in a copyright dispute … but it didn’t once occur to me that I could just choose not to know! What a timesaver!

And I say this in all sincerity as Tom is on the money as often as I am, that’s the beauty of good charting, many times news is just an excuse to make or break technical inflection points that were long in forming.

Tom is concerned we may be in a "falling rally," and so am I. As I’ve been saying all week, I need more convincing than a 20% bounce and pure Fibonacci retracement is 38.2% - I would have been happy with 33% but we didn’t make that in the Dow (24%), the Transports (17%) or the Nasdaq (25%) with the Russell just coming in under the wire at 33% and change.

Fibonacci Levels

The NYSE (42%) and the SOX (56%) leave me cautiously optimistic going into next week but both got rejected pretty harshly yesterday - the NYSE from 9,100 and the SOX from 480. Healthy consolidation or the top of a bounce? Tom’s take is that we’re at the mercy of the world markets, notably China and Japan but even a meltdown in South Korea can trigger a nasty sell-off with this many nervous investors out there.

I’m a little nervous too when the WSJ polls economists, on their reaction to the much-hyped jobs report, and the consensus is: "It could have been worse." Yes, the sky could ACTUALLY BE falling as opposed to just sagging a bit! 97,000 jobs is a number that can be revised up and down 50,000 jobs next month (Dec. and Jan. were revised up 55K yesterday) as they actually have no clue more often than not making this the silliest of all market moving indicators with a whopping 100% margin of error. The rise in private payrolls was the lowest since Nov of 2004 and the overall increase matched the low of Jan 2005.

Peter Morici states, "Despite the Bush Administration’s exhortations, this unemployment rate is hardly remarkable by historical standards. In November 2000, when George W. Bush won the presidency, unemployment was 3.9%, and the number and proportion of adults choosing to participate in the work force is lower today than in 2000. Today, were the adult labor-force-participation rate at 2000 levels, the unemployment rate would be about 6.1%."

Let’s keep an eye on Toyota Motor Corporation (NYSE:TM), who are having trouble selling their new Tundra trucks, already offering a $1,500 (7%) discount and, if this spreads, it can end up eroding the last good reason U.S. automakers have to stay in business (high-margin truck and SUV sales). I’ve been saying for months that this economy simply cannot sustain $60 oil and no one out West is going to buy a truck that gets 15 mpg when that gallon cost them $3. The integrated oil companies and the refiners continue to indulge in a despicable orgy of profiteering while manipulating prices on the
IntercontinentalExchange, Inc. (NYSE:
ICE) (unregulated) and NYMEX (jokingly regulated), literally killing the economic goose that lays the golden eggs they’ve been poaching for the past four years.

I’m not going to rant about oil, I think I can hopefully just sit back and enjoy the carnage next week as the situation is the same as it was last August when I predicted oil was about to fall off a cliff. If you haven’t read up on the Roach Motel Theory, now would be the time as little motels have set up shop all over the market and we will be looking for signs to trade off in the weeks ahead. Even though Exxon Mobil (NYSE:XOM) finally took my advice and upped their E&P budget, I think it’s too little too late to give them more than a short bounce before Elvis is finally forced to leave the building.

More than anything else, I’ll be watching the dollar next week as China still has a Trillion of them to deploy on the international markets, but if you were going to go out and spend a few hundred Billion on stocks and commodities, wouldn’t you want to wait for a sale? What if it was within your power to cause the prices to drop ahead of your upcoming shopping spree.

收买, 卖光 - Buy low, sell high!

Position Statement

I decided that the Challenge Portfolio was not working out, the results were unrealistic and working with $1M was no help to most readers, so I dumped to positions into the short and long-term portfolios and reformatted them. I suppose the last straw was when I tried to use the actual CNBC Challenge on Friday and it would not let me buy anything - way too annoying! This will let us concentrate on actual trading. Hopefully everyone will like the new system, I took elements from the past two and come up with a nice spreadsheet (I think).

Our momentum from last week slowed a little on the reverse and we closed out 35 positions for a 60% average gain. On a cash basis we gained 231% but that was because we made most of our money selling contracts to other people when the VIX went through the roof, buying them back as all the excitement calmed down.

 Symbol Month Strike Type Date Qty  Buy   Price  P/L % Profit
AAPL Mar-07 90 Call 1/17 50 $0.33 0.90 0.57 173%
AAPL Mar-07 90 Call 1/17 25 $0.33 0.48 0.15 45%
ATI Mar-07 100 Call 3/6 20 $5.00 7.50 2.50 50%
BA Mar-07 85 Call 2/26 -20 $5.00 3.00 2.00 40%
BAB Mar-07 100 Put 1/22 9 $1.00 3.40 2.40 240%
BTU Mar-07 40 Put 3/1 25 $1.00 1.45 0.45 45%
CAT Mar-07 68 Call 2/15 -20 $1.55 0.15 1.40 90%
DELL Mar-07 25 Call 2/24 -10 $0.70 0.05 0.65 93%
DIA Mar-07 122 Call 3/2 -75 $1.35 1.50 (0.15) 11%
DIA Mar-07 120 Put 3/5 -400 $1.10 0.25 0.85 77%
DIA Mar-07 122 Call 3/6 50 $1.60 2.00 0.40 25%
DIA Apr-07 117 Put 3/5 200 $1.16 0.70 (0.46) -40%
DNA Mar-07 85 Call 1/8 -10 $3.00 0.30 2.70 90%
DNA Jan-08 85 Call 1/8 10 $7.15 8.00 0.85 12%
FXI Mar-07 100 Call 2/27 -20 $2.45 1.15 1.30 53%
GOOG Mar-07 470 Call 2/27 -30 $9.00 0.85 8.15 91%
GOOG Mar-07 480 Call 2/26 20 $4.75 1.10 (3.65) -77%
GOOG Mar-07 460 Call 2/27 -20 $9.00 2.70 6.30 70%
GOOG Jun-07 470 Call 3/6 20 $19.50 22.40 2.90 15%
GOOG Mar-07 450 Call 3/6 -15 $8.00 12.40 (4.40) 55%
HES Mar-07 50 Put 2/12 10 $0.60 1.00 0.40 67%
HES Mar-07 50 Put 2/12 10 $0.60 1.00 0.40 67%
IWM Jun-07 77 Call 3/6 20 $1.59 1.73 0.14 9%
KMI Mar-07 105 Put 2/20 -50 $1.80 0.25 1.55 86%
SBUX Jan-08 38 Call 1/29 20 $0.90 0.80 (0.10) -11%
SBUX Mar-07 30 Call 2/26 -20 $2.10 0.45 1.65 79%
SBUX Jan-08 38 Call 1/29 20 $0.90 0.80 (0.10) -11%
SHLD Mar-07 180 Call 2/12 -10 $7.80 1.35 6.45 83%
SHLD Mar-07 185 Call 2/15 -10 $6.70 0.55 6.15 92%
SHLD Mar-07 185 Call 2/16 -10 $7.50 0.60 6.90 92%
SPY Mar-07 140 Call 3/6 20 $1.70 2.12 0.42 25%
VIX Mar-07 13 Call 2/8 -10 $1.00 1.20 (0.20) 20%
VLO Mar-07 60 Call 3/7 100 $0.70 1.10 0.40 57%
VLO Mar-07 55 Put 2/27 100 $0.80 1.20 0.40 50%
XOM Mar-07 73 Put 3/7 -100 $1.40 0.88 0.52 37%

Learning how this works is exactly why we wrote the 2/12 educational piece "The Crushing Effect of Implied Volatility & How to Profit From It!" The Sears Holdings Corporation (NASDAQ:SHLD) play we recommended in that article was a huge winner and we’re ready to reload on those and other plays if this market continues it’s rocky road.

As usual it also helps not to lose and we only closed down five losers; two Diamonds Trust, Series 1 (NYSEARCA:DIA) puts, a GOOG call, and two Starbucks SBUX calls all of which were offsetting hedges of successful plays. Our big winners were British Airways (NYSEARCA:BAB) puts, Caterpillar (NYSE:CAT), Dell (NASDAQ:DELL), Genentech (Private:DNA), GOOG, Kimco Realty Corporation (NYSE:KIM) & SHLD calls we sold,
Hess Corp. (NYSE:HES) and Valero Energy Corporation (NYSE:VLO) puts. The funny thing about selling contracts is they have an upside limit of 100%, which actually lowers our average performance but, as you can see from the cash performance, it’s certainly the way to go in a choppy market.

The lack of doubles has held our remaining 80 open short-term positions down to an average gain of 23% but a 2.5% cash loss as we established a lot of new positions ($278K) for the Challenge portfolio, which swamped the $121K of good performers in the short-term portfolio. I’ll be getting this back down to size over the next two weeks as It’s more positions than I want to manage. Also note that there aren’t 80 stocks as the new system still counts each leg of a spread separately so it’s 60 stocks - still too many…

Thank goodness for the nice, relaxing long-term portfolio. I’ll be doing a monthly review of that tomorrow as it’s time to reposition but we hardly touched the LTP all week, added another $80K in new positions and it’s still up an average of 59% on 46 open positions. As I said last week we had way too little money in that one so we will focus on finding some more long-term plays for the rest of March.

We added IMAX Corporation (NYSE:IMAX), New Century Financial Corporation (NEW) and Sirius Satellite Radio (NASDAQ:SIRI) to our straight stock position and the 13 stocks we hold are up an average of 5%, being killed by my ill-fated Tesoro Corporation (NYSE:TSO) short that I’m too worried to sell puts against (so bought puts against it).

All in all not a bad week but I still stand ready to cash out as we dodged a bullet last week with that bounce. I took healthy helpings of April DIA puts to provide some cover but, on the whole, the portfolio is more bullish than I think is prudent at this time. Hopefully I’m wrong and we break, a lot will depend on Asia’s Monday morning.

Until then - have a good weekend!

- Phil