Options Trader: Weekly Wrapup

by: Philip Davis

We posted very good gains in a low volume week.

Whether we get follow through into earnings season remains to be seen, but we did get the strong leadership we’ve always wanted from the SOX and the Nasdaq and the NYSE has been coming on strong as well. Only the movement of the Russell is really disturbing but a single strong week can fix that.

We doubled our holdings in the Short-Term Portfolio as a nice up market gave us many bullish opportunities. Here are some of the trading highlights in a week I began by declaring it iPhone Monday.

Index

Current

Day's Move

Must Hold

Comfort Zone

Break Out

Next Goal

Dow

13,611

45

13,000

13,300

13,500

14,000

Transports

2,975

16

2,800

2,900

3,000

3,250

S&P

1,530

5

1,470

1,505

1,530

1,550

NYSE

10,075

49

9,400

9,800

10,000

10,250

Nasdaq

2,666

9

2,525

2,550

2,600

2,750

SOX

514

5

480

490

500

560

Russell

852

2

810

830

850

900

Hang Seng

22,531

278

20,250

20,750

21,000

22,000

Nikkei

18,140

-80

17,400

17,700

18,300

18,500

BSE (India)

14,946

102

13,500

14,100

14,725

15,000

DAX

8,048

61

7,300

7,600

8,000

8,200

CAC 40

6,102

43

5,750

6,000

6,100

6,300

FTSE

6,690

54

6,400

6,550

6,600

7,000

Click to enlarge

We had a very good week on the whole as our gold plays caught fire in the STP thanks to Newmont Mining Corporation's (NYSE:NEM) bold move on Friday. I had kicked off the week on Monday morning with the comment:

I like my gold dogs as they are too far down anyway, plus they provide disaster protection. My Barrick Gold Corporation (NYSE:ABX) Oct $30s are just starting to come back while my Gold Fields Limiteds (NYSE:GFI) went down so far I gave up. Bt now the Oct. $15s seem laughingly cheap at $1.70, while the Market Vectors Gold Miners ETF (NYSEARCA:GDX) is nice and flexible with Sept. $38s at $2.60, and you can sell the July $39s for .68 with dollar increments. AngloGold Ashanti Limited (NYSE:AU) is also beaten down and the Oct. $40s are $1.95, but the stock was at $47.50 in April with Gold at $698. These are XXX plays if you think inflation isn’t just a figment of my imagination!

While we didn’t get a good fill on Monday, those stocks traded down later in the week, giving us great entries.

Monday also gave us a very rare but fun penny stock trade on BIG SCREEN ENTMT GROUP INC. (OTCPK:BSEG), which I admitted to owning a lot of shares (500K) at .075. Perhaps our buying caused the initial spike, but it finished the week at .084, up 12% - make no mistake, this is a half out at .10 kind of play! We finished the day with:

Seagate Technology (NASDAQ:STX) taking off, they’ve been sleepy. Aug $22.50s for $1 could be nice if they take off and a .75 stop is lower than they’ve been in two weeks. XXX.

These augmented our already existing Sept. $22.50s, which came half off with a double.

Apple Presentation

Tuesday was a short day but it was our best day as Apple Inc. (NASDAQ:AAPL), which we are heavy in, not only took off but did so slowly enough that we were able to stop out our callers. As I had said on Monday afternoon: "Accumulating my protects including selling AAPL $120s against 1/2 my position. XXX. Will stop out if something great happens but I’d rather lose .50 as it goes up than as it goes down." We do these covers in lieu of taking huge winners off the table, this is how we let things run without risking all of our gains on a reversal.

I think I had a pretty good handle on Apple this week as I said Tuesday at 11:34:

This should be it ($126) for today, but after a weekend of people going, “I can’t believe you didn’t get one of these,” it is possible that even the most die-hard Apple basher may lose his nerve and, if not buy, then certainly stop shorting this stock.

Thursday put us right back to work with a quick series of exciting momentum plays on oil stocks as ZMan and I did our Market News First report live at 10:25. Our new system of laying out possible puts and calls ahead of the report for the members worked great as we got way ahead of some nice, but short-lived, moves. My comment on MN1 was:

These are momentum plays only, we are looking for twenty five cents or a fifty cent profit on a dollar. When momentum slows, we take our money and run as that’s a very nice move on a day!

This was a great day-trading school as the drop was short-lived and shook out as follows:

• We opened with upside mo plays on Valero Energy Corp. (NYSE:VLO) and
Suncor Energy Inc. (NYSE:SU) and my prediction, "but it may reverse quickly at inventory" was the understatement of the week!
• Chevron Corporation (NYSE:CVX) Aug $85 puts at $1.80
- Were very slow moving to $2.40 (up 33%), finished the day at $2
• Oil Service HOLDRs (NYSEARCA:OIH) - selling the $180 calls for $3.80.
- These dropped to $2.20 (up 42%) and recovered to $3.20 at the close.
• Energy Select Sector SPDR (NYSEARCA:XLE) $71 puts for $1.12
- Ran up to $1.60 (up 42%), finished the day at $1.35, finished the week at .90.
• Exxon Mobil Corporation (NYSE:XOM) Aug $85 puts at $2.17
- Rolled up to $2.75 (up 26%) and finished the day at $2.30, now $1.70 and I like them again!
- Note: I also said I liked the July $75 puts at $1, but of course I meant the $85 puts, which ran up to $1.70 on the turn - those typos will kill you, but fortunately, the $75 puts were just a dime and hard to mistake.

As I said right at 10:33 live, you need to watch XOM to signal an early turn in the Energy Select Sector SPDR (XLE) for a sign to get out and XOM did indeed give a strong turn signal right at 12:30, giving us a perfect exit on our puts.

As positions changed by 10:25 we adjusted some of picks for the broadcast audience and added:

• Transocean Inc. (NYSE:RIG) $105 puts at $1
• This was a long-held position for us that fortunately gave us an exit as it peaked at $1.45 (up 45%) - these finished the week at .60 as RIG took off on Friday.
• Suncor Energy Inc. (SU) $90 puts at $1.60
• These climbed to $2.10 (up 31%) and fell back to $1.50 at the day’s end.
• Tesoro Corporation (NYSE:TSO) $57.50 puts at $1.80 did not work, peaking at $1.90 and finishing the day at $1.55.
• VLO $75 puts
• I said these were my favorites and they did not disappoint as they went from $1.35 to $1.85 (up 37%) in short order and held $1.75 until noon, very nice for a very liquid position.
• XLE $70 puts at .70
- As predicted these made a nice, slow move to $1.25 (up 78%) and finished the day at .90

Despite my good advice to members at 11:18:

"Don’t forget we’re heading into a weekend, so very tight stops on at least half the oil puts. Watch the $71 mark, which they are back above, I expect XLE to bounce off $70 at least and VLO $74.50 would be our first sign of concern. If we can stay below there through lunch, we could be in for a downside afternoon," and my bottom call at 12:08: "United States Oil Fund LP (NYSEARCA:USO) green, someone thinks they are going to pump oil back up this afternoon." I did end up holding a bunch of oil puts into the weekend because, as I said in my Thursday post, I do think $75 oil is a major scam!

Fireworks

In a great group effort, we decided to go for the Priceline.com Inc. (NASDAQ:PCLN) Oct. $75s at $3.40, now $4.30 and much thanks to KC, who has kept this one on our watch list since May! Our end of day decision was to spread them against the Aug $70s at $4.70 and see how it runs.

Friday was all about the gold rally, but I couldn’t resist selling the OIH $180s for $3.70 (now $4) again into morning strength or taking another shot at TSO as the $57.50 puts came down to $1.10 again (now $1.05). Shorting oil over the weekend is very risky, but it’s also been very rewarding on several weekends this year.

Happy Trading had another stellar week over at Wang’s World. We had a 114% return on Ctrip.com International, Ltd. (NASDAQ:CTRP) from Monday, no new Tuesday picks, a 26% gain on PCLN already from Thursday, and brilliant calls on Chicago Mercantile Exchange Holdings (NASDAQ:CME) and SunPower Corporation (NASDAQ:SPWR) on Friday that are still going. These are some of our simplest trades; buys are issued before the open most mornings.

Our Free Picks Portfolio continues to outperform, mainly due to its overweight position on Google (NASDAQ:GOOG). We’ve got a stunning $73,976 balance, up $3,300 from last week and up 196% on 11 positions since it was opened on 4/30. I’m still trying to decide what to do about a $46,000 position in GOOG Sept. $550s ahead of earnings, they were originally part of a safer split but are now naked, only slightly covered by our lower iron condor. Certainly we will be setting a stop at $21 or selling $530/$540s on Monday for the premium on all or most of the position.

The Short-Term Portfolio has a very busy week as we went from 50 to 75 open positions, committing 1/3 of our cash back in as the market gathered strength and we were caught slightly short. It was an extremely profitable week as the return on the account jumped to 172%, but there’s a lot of risk in that number so we won’t put too much stock in it ahead of earnings. By no later than next weekend, we will be doing a major purge and shifting some of our 24 calendar spreads to the more stable LTP, which itself will be undergoing its mid-year tune-up.

Our Long-Term Portfolio took a 9% hit on its returns, dropping down to 126% as the market jump hurt us by taking up the value of the short calls we sold. A large part of the STP’s gains was caused by moves to cover the LTP as the two portfolios are not wholly independent of each other. We spent a lot of time in member chat talking about NOT panicking and buying our callers out on spikes, but it certainly is painful to ride out! Thirty-three positions remain ope,n but will also be subject to a purge as earnings give us some clues as to which plays to stick with and which plays to fold.

The $10KP continues to drag along with a 33% loss. Time Warner Inc. (NYSE:TWX) and The Walt Disney Company (NYSE:DIS) calls crushed us there, as we didn’t have the flexibility to double down on DIS, as we did profitably in the STP. We have six spreads that are waiting for July 20th expiration, so we can wring out some precious premiums from our callers and roll over to August, where hopefully we will have a better run.

Goldfinger

Our Stock Portfolio had a great week (for stocks) with eight positions finishing up 3% at 36% for the year. I’m expecting our Metallica Resources' (MRB) to take off soon and we’ll have to make roll decisions on our five covered positions ahead of expiration, but on the whole, this has been a relaxing place to park some cash all year!

The Complex Spread Portfolio is now way above and beyond our original expectations when we set it up on 5/1 to handle "annoying" trades (ones where it was necessary to have three or more legs). These are mainly well hedged and we don’t expect to make more than 25% on any combination, but we are up a very healthy 68%, a gain of 23% from last week, due entirely to Apple’s good fortune and our very timely decision to take them almost entirely naked into last weekend. I’ve written very extensively about why I thought Apple would do well over the past few weeks, but our decision to take advantage of Monday’s dip while others were panicking was the key move that made this a great trade.

As Option Sage often reminds us - Warren Buffett’s Rule #1 is "Don’t lose money." This does not mean to play things overly safe, but it does mean we should guard our money and keep it available for the real opportunities that present themselves to patient investors who do their homework and take advantage of opportunities to pick up the stocks they really love when others are running away.

We ran away from 26 positions this week for a 26% average gain, but a net loss on positions sold of $26K (hmm, that seems somehow significant…). There were some painful exits on calls we had sold as covers, especially some very expensive GOOG cover plays, but these are more than made up for by gains that remain in the open portfoios (providing GOOG doesn’t turn around and crash on us!). On the whole we entered the weekend fairly neutral even though I still think we are heading into a correction:

Chart