Options Trader: Tuesday Wrapup

by: Philip Davis

Wheee - that was fun!

The Dow sold off early, went down 100 points to 13,320 by 11, then back to 13,450 at 2 at two when (surprise, surprise) the Budget Report came out and told us that we are a silly, immature country run by ineffective leaders who never met a spending bill they didn’t like.

Budget Deficit Disorder

May deficit spending came in at $67.7B (and this does not count the $102B Iraq "emergency spending"), up 58% from last year. That news came on top of a 10-year note auction that drew scant interest from foreign buyers. Perhaps it is because of the $232B the government spent last month, over $50B of it was on debt interest payments. Another problem was that receipts were down 15% from the prior year as the vast wealth being amassed by corporations and high net-worth individuals continues NOT to trickle down on other parts of the economy [but
Saks Incorporated (NYSE:SKS) had a 37.5% increase in same store sales, so perhaps they got something nice for the maid!].

Hopefully they got her a big bag, because 90% more people are being forced to live out of one than last year as home foreclosures rise to one out of every 656 households in the month of May. If this trend continues, in one year we will have one out of 54 homes in foreclosure for the year. This trend may in fact ACCELERATE as interest rates shot up to five-year highs today.

Once an area starts down the road to mass foreclosures, it’s likely to spread as momentum picks up. "Foreclosures are contagious to the rest of the community. It’s very hard for a market to scrub volatility out and become stable again," said Steve Schroeder, CoreLogic’s chief executive. Foreclosure’s impact falls on every member of a community, not just the owners who lose their homes. When properties sit vacant and unsold, entire neighborhoods suffer as property values decline.

We did our best to halt the decline of our portfolio values today as it was a great day for swing trading, with the Dow up or down over 50 points every hour except lunch!

US Markets

• 9:48 - "10-year 5.2%, 30-year 5.31% They have got to be kidding trying to rally back on this!"
• 9:54 - Took Micron Technology (NASDAQ:MU) $12s for .10, sold later for .25 (up 150%). Suggested shorting Morgan Stanley (NYSE:MS) (dropped $2.30 EOD).
• 10:18 - Petroleo Brasileiro S.A. (NYSE:PBR) $110 puts at .55, finished the day at .62 (up 15%). Also NYMEX Holdings, Inc. (NMX) $125 puts for .48, now .25 (they can’t all be winners!).
• 10:48 - Made my weekly "I am still buying Starbucks (NASDAQ:SBUX)" statement
• 11:05 - Chicago Mercantile Exchange Holdings (NASDAQ:CME) $550 puts for $3.30, finished at $4.70 (up 36%); Research in Motion Limited (RIMM) $165 puts at $1.65, now $1 (down 40%)
• 12:02 - Suggested Google (NASDAQ:GOOG) $510 puts at $1.42, now $2.05 (up 44%)
o Got the home foreclosure report - very concerned!
• 12:43 - Round 2 of PBR $110 puts at .35 (filled later, avg. basis .45)
• 12:52 - Decided that Bush/Greenspan and pending Deficit number could spark a rally, so we prepared covers with Diamonds Trust, Series 1 (NYSEARCA:DIA) $134s at .57 (peaked at .95) and GOOG $510s at $2.35: "It’s not so much I think sinister forces are orchestrating it but the confluence of 3 positive statements will make you think people are out to get your bearish portfolio.‘
• 1:22 - Executed GOOG $510s at $2.50, out at $3.25 (avg, up 30%)
• 1:37 - "Oil below $65 but oil sector turning up - must be all the IPhones they’re selling!"
• 1:46 - called for DIA July $135 puts
• 1:59 - "Deficit numbers out in 90 seconds - could get a quick reverse so hair trigger on GOOG here as $3.25-$3.50 is huge money on a cover play!"
• 2:49 - "At least the energy sector knows the NYMEX close was a sham!"
• 2:55 - "Mortgage Bonds getting worse and worse… Possible support here, but otherwise we got to 5.5% which will FREAK OUT the markets."

After that it was pretty much like watching a slow-motion accident. We were done trading by 3pm and sitting in neutral portfolios, amusing ourselves by taking side bets on where this thing will stop. I’ll put up charts in the morning, but I’m way behind for the week and will be out tomorrow, so best of luck to everyone! Hopefully I’ll catch up in the evening but please, please, please make sure you are well covered and out of June contracts (unless it’s one you sold and you are sure they will expire worthless).

Rates are up, the dollar is up (just under 83 now), gold is back near $650 and oil is still being manipulated to keep it over $65. We have our inventory reports tomorrow plus a slew of economic data so we should be in for another wild ride!