Options Trader: Thursday Morning Ideas

by: Philip Davis

"When the M&As start to unwind it is time to be all cash or short the market - this is that time!!!" - Me, in noting the problems with the DaimlerChrysler AG (DCX) funding, yesterday at 10:50.

Five minutes later I said:

Transports off a cliff even with declining oil prices. I’m letting the rules dictate what I get out of with Aug and Sept stopping out on 20% of the profit pullbacks (which is most of them). The DIA puts are in great shape again but at this point I’d rather take a fresh look at things in a couple of more days than try to “save” things now."

Debt Troubles


So this is why I work off stops, as soon as I started setting them, the market stopped dropping but I am raising them with every tick up and will be getting the hell out if we fall again.


The VIX is calming down now pretty consistently going down when the markets go up, indicating up is still the right direction but things seem pretty out of control to me if XOM can go up and down $5Bn in value 3 times in 2 hours.


Exxon Mobil (NYSE:XOM) - I am adding back puts into earnings. If they miss then $1.75 for the $90 puts will be a real bargain. There is what I consider to be an irrational expectation that they will earn 14% more money, despite the fact that sales are down 1.5% (at least). Now these guys can make their numbers say anything they want them to as they take in $100B a quarter in revenues. Politically, however, I think they wouldn’t mind a miss this Q as it will carry them all the way through the Summer able to tell Congress how they are just a poor struggling energy company that’s just trying to make a nice return for all the widows and orphans who own the stock. They do have 5% less shares than last year, but I think costs are way up. If they miss, it will be a Dow disaster.


S&P needs 1,520 to make this thing real. Dow needs to get back to 13,850 to make up 1/2 its losses for the week. Nasdaq needs to retake 2,675 to catch Friday’s low or yesterday’s open, but still way below Monday’s high of 2,705, which itself was pretty far down from the 2,720 close on the 19th. I hate to be the grouch, but I really don’t think much of this movement and everyone else seems to be buying like crazy so I’ll take the contrary position for the day…

So you may have guessed that I am not surprised to see the market down 100 points this morning in overnight trading. "If there are three major concerns for the stock market, it’s the concern about residential real estate, the concern that the (leveraged buyout) market is drying up and concern about energy prices. That’s enough to give this market a pause," said Art Hogan, chief market analyst at Jefferies & Co. in Boston.


In other words, maybe all that stuff Phil keeps droning on about does actually matter!

Something mattered in Asia this morning as both the Nikkei and the Hang Seng had very bad finishes, each giving up 150 points just into the close. Possibly it was triggered by a sharp spike in crude, which was spurred on by the usual Nigerian rebel activity that takes us by surprise two or three times a week. Criminal Narrators Boosting Crude have the nerve to say that the lower inventories in Cushing are the cause of the spike in oil yet. I just pointed out the other day how NYMEX traders CANCELLED 350M out of 380M barrels that were scheduled for delivery to that facility by the last day of August contract trading.


This is the same nonsense they pulled last month and the month before, and they will pull it again next and every other month unless you do something about it. Send this article to people, demand a Congressional investigation of the NYMEX trading activity, ask why over 330 Million of the 378 Million barrels of crude that were scheduled for September delivery TO CUSHING, as of yesterday’s close at $75.88 a barrel (up $2.32 from the morning’s price), will not be delivered in September. Ask what kind of shell game these people are running while you suffer! Ask your local representative "Why aren’t you investigating energy traders?" Or you can just pay another $50 to fill up your tank and wonder when you will need a C-note to do the same.

Europe is also flying down despite the "great" news that Royal Dutch Shell plc (NYSE:RDS.A)RDS.A posted an 18% rise in profit as MASSIVE refining margins (more than 3% better than any previous quarter) more than offset the 1.4M barrels a week that they failed to protect in Nigeria. Security Fence: $5,000. Cost of a security guard to fend off teenage rebels in an outboard motorboat: $35,000. Cost to the World as oil climbs from $60 to $77: $558B. Amount Shell oil makes per quarter: $8.67B. Ability of CEO Jeroen van der Veer to say with no conscience: "We have delivered another set of competitive results, driven by operating performance. Our investment plans are on track" - Priceless!

Notice how oil is once again being pumped up like crazy just as the oil companies announce their quarterly results? This is all a part of the Roach Motel Theory, as it let’s them get out while you are being pulled in. I still see this as a very false run-up in crude, but like I said - you let it happen!

Rather than watch the charts today, I think we’ll take a look at the progress on the advance/decline lines, which have been bothering David Fry and I for a week now:

Click to Enlarge
Advances and Declines

If we don’t get a turnaround here, it really doesn’t matter what the headline index numbers are, does it?

Click to Enlarge

We’ll see how the dollar holds up but it should get a good boost between the short squeezing and the "flight to quality" that is sure to grip the bond market this morning.

Stay tuned for the fun and excitement!

Click to Enlarge
US Markets