Options Trader: Wednesday Morning Ideas

by: Philip Davis

Now we get to see what the markets are really made of as we should pretty much test all our levels today.

I think even if Bernanke wants to blow his credibility and tell Congress everything is fine today, the sting of last night’s oil shock and the Beazer investigation will be very hard to shake off. Today we will be happy to avoid a triple digit Dow drop.

Andrew Coffey from MN1 just turned me on to an excellent show called Wall Street Warriors, which you can watch online. It’s a great behind the scenes look at the people behind the trades. I especially like the guy who’s proud of the fund he manages that bases investment decisions on the migratory patterns of elephants…


Asian markets are migrating South with the Nikkei and the Hang Seng in triple digit retreat. North Korea has millions of people starving during a food shortage due to a combination of a poor harvest and the fact that other countries have pulled back the bulk (75%) of their aid as our man Kim has done everything he could to make people hate his country. "We are losing the fight against hunger in North Korea," WFP Director Banbury told a news conference. "If donors do not respond to the request, millions of people are going to go hungry."

The rest of Asia is doing quite well as the AAsian Development Bank raised it’s overall growth forecast .5% to 7.6% and cut expectations for inflation but that is based on an oil price target of $57, questionable today. "Markets have moved to reprice risks, but calm could yet give way to less settled conditions," ADB President Haruhiko Kuroda said in the publication. "If asset prices get badly punctured and reversals occur, the chill would be widely felt." That has got to be the worst positive spin I’ve ever heard…

"With these high growth rates, we’re seeing a surge in housing and equity prices," ADB’s chief economist, Ifzal Ali, said. "We’re seeing fast credit expansion, rising prices of goods, particularly food items." OK, now I think they’re just messing with us - this sounds like an economic report from September 1929!

Consumerism for Beginners

Europe is flat and dull this morning ahead of the U.S. open but it won’t take much to push those markets off a cliff as well. Bernanke starts speaking near the close of the EU trading so expect a reaction over there to set the tone over here this afternoon. I’ve been grousing about the evils of the consumer society and someone sent me an excellent BBC documentary on the subject. Best quote by Edward Bernays, the architect of the consumer society "I decided (on returning from Paris in WW1) that if we could use propaganda for war, then we could use it during peace to influence the people." Bernays’ most dramatic experiment was to persuade women to smoke - he connected cigarettes with Freudian (his Uncle) symbolism to connect women’s feelings of inferiority to NOT smoking. If you’ve never taken a marketing/psychology course, I highly recommend spending an hour to learn from this video.

"We must shift America from a needs to a desires culture. People must be trained to desire, to want new things, even before the old have been entirely consumed. Man’s desires must overshadow his needs." Wow - mission accomplished, fellows … can we please stop now?

We NEED our desire culture to hold up in the face of some very tough news today. The consumer confidence numbers are already showing cracks and, as I warned last week, as foreclosures pick up and everyone knows someone who is losing their home, confidence can go out the window pretty fast. The U.S. consumer has played the role of Lazarus more often than not so we’re not going to declare them dead until we thoroughly examine the body, but we’ll see how far Dr. Bernanke is willing to go today to tell Congress that what looks like pneumonia is just a head cold.

Just in case the patient really is sick, we need to have some mattress plays ready and I’ll have a full list up on the member site before the market opens but an obvious one is a variation of our already existing Diamonds Trust, Series 1 (NYSEARCA:DIA) Apr $120 and $122 puts we’ve been holding for protection as well as the iShares Goldman Sachs Semiconductor (IGW) $60 puts and iShares Russell 2000 Index (NYSEARCA:IWM) $79 puts but let’s see how our levels hold up before we start panicking - like I said, today is a great test, if nothing else.

We’re going to keep is simple today, up would be amazing, so let’s just watch our danger zone, especially in European markets which are, in theory, healthier than ours with solid growth numbers and a strong currency (remember when we had that?):

Phil\'s US Markets

Obviously we need to watch the NYSE, which has been our leader throughout the rally but the Russell has been breaking down fast and will be critical below 795. As you can see from the chart, the S&P will give us a pretty clear warning if it fails the 200 dma support at 1,425 so let’s keep very tight stops on our April and May calls if we lose that one.

US Markets

$64 is the number to watch in the oil patch, if we blow through resistance there on a rumor than the sky is the limit if anything actually happens. Bear in mind that the rumor was discounted less than 10 minutes after it started but traders seized the opportunity to press the contracts higher in Asia and in Europe. Believe it or not, I will still be looking to pick up some puts around the inventory as it won’t help the refiners if oil is back at $70 and consumption slows 10%, a very real possibility should we hit an economic slump.

We have PLENTY of oil calls in the portfolio, especially our 400 Exxon Mobil (NYSE:XOM) $80s which were just a dime only five days ago and half (100) of our COP $65s, which are already at $5 (up 355%). These are the covers that let us make aggressive downside oil plays, we took Tesoro Corp. (NYSE:TSO) off a little early and hopefully we will get another crack at those puts but Valero (NYSE:VLO) is very likely to hit unrealistic levels this morning, but we’ll have to wait and see how the open treats us.

Was the "rumor" timed to allow oil traders to bail ahead of a very bearish inventory report? We’ll be watching the trading action very closely today but I still maintain that gold is NOT indicating a crisis below $680, especially with the dollar in the toilet.

Let’s be very clear, I do NOT think the markets will collapse. I’m actually hoping they hold our levels today and give us an all clear to jump back in the pool, but let’s be prepared for the worst with some covers.



Google will gain a few million more eyeballs in a deal with LG Electronics to "jointly market LG-Google handsets" and Google (NASDAQ:GOOG) already has similar deals with Motorola (MOT), Samsung, Sony Corporation (NYSE:SNE) and Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC).

Kind of sounds like everyone, doesn’t it? People familiar with the matter have said Google, Mountain View, Calif., is separately developing software tailored to run on mobile phones. The software goes well beyond the applications for phones Google already offers for accessing its services, those people say. Which devices the new Google software might run on and the devices’ technical specifications remain a matter of speculation." Let’s keep a close eye on Google today; it may be time to jump back in soon.