Options Trader: Monday Morning Ideas

by: Philip Davis

Oil is down on Nigeria’s strike being over. That’s very good and was the one thing I said could save the markets, but let’s not get too excited until we see the S&P make a good turn as the big chart shows them leading the way down for the past week. It will be tough for the S&P to get going with a big oil sell-off though, and the brokers are questionable.

Speaking of brokers . . . The Bear Stearns Companies Inc. (NYSE:BSC) is a continuing disaster as they were forced to lend themselves $3.2B to bail out a hedge fund they only had $35M invested in last month. With $3.2B in brand new exposure, a 50% loss would knock $7 per share off their earning (1/2), but that would make them a great take-over candidate as they have a very low price to book value compared to their peers. So I’m selling the Jan $105 puts for $2 as the worst-case scenario is I own BSC for $102, which I would be happy to do.

Boomtown Rats

Shanghai B shares fell 5.8% this morning and the A shares fell 3.2% but the local A-share market is down just 10% from their 5/29 highs and the B-shares are down 30%, indicating the locals may be left holding a very large bag if this thing falls apart. The WSJ had an excellent suggestion this morning to play European companies that were generating a lot of sales in emerging markets, and we will be putting some of these companies on our watch list.

Looking Abroad

The S&P had me the most concerned. We are going to need tech leadership to turn this thing around, so let’s watch the SOX and the Nasdaq. I will be getting rid of my PowerShares QQQ Trust, Series 1 (QQQQ) puts quickly this morning if the trend stays positive, but I will continue to roll my puts up to keep a tight reign on the Dow until I can be certain they are done going down.

Oil needs to break below $67.50 for us to get really excited but I’m already regretting getting half out of my oil puts ahead of the weekend. Let’s keep an eye out for my predicted short sqeeze on the dollar, gold falling below $650 will be our leading indicator and the rising dollar will have a short-term benefit of keeping a lid on rates but then sustaining that level will become rate-expensive… It’s all very complex!

Oil and Dollar

I’m keeping a neutral stance today and will likely cover with some additional
Diamonds Trust, Series 1 (NYSEARCA:DIA) calls if the market starts to fly as our portfolio is generally bearish. I’m not going to read much into any move we make ahead of the Fed this week, though, not to mention an exceptional amount of market data.

Tempting as it is to reflexively play the transports, I was looking at charts on FedEx Corporation (NYSE:FDX), United Parcel Service, Inc. (NYSE:UPS) and YRC Worldwide Inc. (NASDAQ:YRCW) - they all look like they could head further south, so let’s be very careful out there today!

US Markets