Options Trader: Thursday Outlook

Tough call today…

The pre-markets (8am) look good but that would be good when compared to our horrible finish yesterday, not good at all compared to Tuesday’s top. Oil is still at $123 as both the ECB and BOE decided to hold rates steady, not the best outcome for the dollar. There seems to be a consensus that AIG is going to take down the markets this evening but I don’t see it happening and we may even pick up some AIG calls if they get any cheaper.

TM took down the markets in Asia with a 28% drop in profits as the weak dollar and weak US auto consumer took their toll on the World’s top auto company. Raw materials are, of course, also up leading Toyota to post their first decline in profits in 7 years. TM says they expect to earn just 1,250,000,000,000 Yen ($12Bn) for the year or about 100Tn times more than GM. Small cars are still flying off the lot with Prius sales up 23% and Yaris sales up 58% in the US, mainly the company miscalculated on their truck roll-out (last year’s Superbowl). We’re going to be happy to take out our callers and stick with this one.

Myanmar continues to be a concern in Asia and rice went limit up in morning trading as the death toll rose to over 100,000. The Nikkei dropped 1% and the Hang Seng gave up 0.6% despite a bounce on the mainland exchange (2%) on the rumor that the government would step in and help the markets (doubtful).

Europe opened low but is coming back to flat ahead of the US open now that they have gotten past the rate decisions. The Euro is falling against the dollar and the Yen as EU economic data is indeed more sucky than ours: "The euro-zone retail sales result overnight was a shock to us," said Jun Kato, a senior dealer at Shinkin Central Bank. "The result suggests the region’s economy may also be slowing down. Some players have started to price in a change of the bank’s view on the economy in the near term." Euro-zone retail sales fell 0.4% in March instead of rising 0.2% as expected.

Italy’s Finmeccanica (FINMF.PK) is buying DRS Technologies (DRS), a major military supplier with about $3Bn in sales so expect a lot of protectionist screaming on this one. Speaking of which, here’s a great article about outsourcing the Presidency (if only!). At least we don’t have to worry about Vladimir Putin’s continued employment as Russian legislators confirmed him as Prime Minister the day after he stepped down from the Presidency. There were 56 dissenting votes out of 448 and memorial services will be held after their untimely deaths next week.

We’re getting a string of better than expected (low expectations) retail sales reports with our ANFs doing very well (up 6%) and our WMTs up 3.2%, leading the pack. Neiman Marcus (NMG) has a 1.9% dip and Limited Brands (LTD) got hit with a 5% dip in same-store sales. Victoria’s Secret (part of LTD) was down 4% as $50 bras went up in smoke with each tank of gas. Art Cashin had this take on sales: "People are buying milk, bread and gasoline on their credit cards and it’s their last lifeline to reality."

Eduardo Castro-Wright of Wal-Mart (WMT), where discount Sam’s Club sales were up 6.6%, noted, "The economy continues to get tougher and the ‘paycheck cycle’ is more pronounced for customers than in past months. As money gets tighter for them toward the end of the month, sales drop more than we have seen in the past." Yeah, that’s not actually a good sign folks! And oil was "only" $109 on average in April. ...

In addition to our fun with Crocs (CROX) today, Energy Conversion Devices (ENER) posted some amazing results but guided Q4 in-line so the exuberance pre-market may be a bit irrational, and I’m considering a naked sell of the $45s at the open as they seem more than fairly valued up there.

I don’t see any really great reasons to go up or down today. That takes us into the Friday before a big data week, so it’s very possible we stay flat through the weekend around 12,850, which means we’re going to want to be well covered with May callers to burn off those premiums.

We’re already well covered but let’s see which way the wind blows today.

Comments

[expert anal...:]

So you want to short or sell ener options......amazing that you make such a simple and quite dumb call. They did guide up...did you see the range, the midpoint is higher that what was expected...obviously they are sandbaging....

do you want your readers to get wiped....this stock could see 80 by next week...yea...i said 80.....compare to fslr

fslr revs 200M.....ener revs 70 M....

fslr profit 50c/share.....ener profit 17c share.....

ener does 1/3 of what fslr does....should be 1/3 price, but in market cap.....not stock price.....that puts it at say 8x current value to just get to 8 B cap....Fslr is 22.5 B cap...

could go to 400 on a hge squeeze with major coverages announced....

If you would linke me to write for you column...let me know...because you certainly did not do you homework!!

2008 May 08 10:40 AM

[investorslive:]

Nice on ENER here are some others on watch

www.investorslive.com/.../

2008 May 08 11:08 AM

[Tedamerica:]

Enter your comment hereOptions guys,

I need help. I took a quick course on options trading and thought I knew everything. I took a 200 contracts on Visa at a strike price of $95 at 1.10. At end of Day it was .56.

I am new to options and this is too maddening for me.

Any advice?

2008 May 08 08:04 PM

[Philip Davis:]

ENER - well some guy (maybe you Expert) paid us $2.25 for the $50 call that expires next Friday. So we don't need to buy the stock, or do anything other than take the $2.25, put on a stop at $3 (if it breaks $50 before the value of the contract deteriorates) and, if ENER doesn't break $5 in 5 days we take it all ($225 per contract) as pure profit.

My risk is $75 and my potential profit is $225 - you should really learn to understand the mechanics of a trade before you criticize it as I would have to buy $5,000 worth of ENR and they would have to make 4% by Friday just to make the same $225 while my risk of a gap down is significantly higher than my risk of a gap up on the call I sold as the stock has to go to $52.25 (up 4%) JUST for my caller to get his $225 back.

This is what we teach at Philstockworld, how to use options to DECREASE your risk and make superior returns. I don't think ENER is a bad stock at all, I just don't go chasing 40% moves no matter how much we love a stock.

Ted: I advise rather than spend $22K on a single contract that is a horribly bad idea (for pretty much the same reasons that I just told Expert you don't chase ENER and note the $90 was the insurmountable barrier), you should spend $49 and spend a month papertrading our picks on my web site. This is not a shameless plug - we really do help people just like you every day!

You are, frankly, lucky you still have .56 of value for a call that's more than 10% out of the money with no expected event. There is no cheap way to "save" this play as the premiums for the other months are ridiculous on V.

The correct way to play this (other than cashing out and moving on) would be to roll yourself down to the $80s at $7.65 (+ $7.09) and sell the $85s for $3.75, which brings the total cost of your play to $1.10 + $7.09 - $3,75 = $4.44 and any finish above $84.44 gets you even. The most you can make on that play is .56 because above that you owe the $85 caller money but it has a very good chance of getting your $10,800 back (assuming you have $88K for the new play!).

Another expensive way to "fix" this is to take the low premium ($2.80) June $80s for $10.10, which will lose approximately .60 of premium between now and expiration and sell those same $85s, which have $1.45 of premium, after which you will "roll" that position to the June $85s, now $7.10 for a net collection of perhaps $8.50 against your $11.20 investment meaning you need a June finish above $82.70 to "win."

There is one other thing you can do but it's risky:

Since you already have the 200 $95s you can sell 200 $90s for $1.52 and 200 $85 puts for $1.52 covered with 200 $80 puts for .38. That puts net $53,000 back in your pocket and you are playing for the stock to finish between $80 and $90 on Friday. You would need $5 per contract in margin to make this trade ($100K) and you do risk that loss (less the $53K you collected) if the stock goes all the way up to $95 or down to $80.

There are about 5 other strategies we teach on our site to save a play like this but mainly we teach you never to put yourself in this position in the first place!

Good luck....

2008 May 08 08:59 PM

[Tedamerica:]

Phil-

What if Visa bounces over $90 today or Monday? Dont you think that will put me back near my money?

Ted

2008 May 08 10:29 PM

[Tedamerica:]

Phil -

I also am going to check out your website.

Thanks

2008 May 08 10:30 PM