Philip Davis

Options Trader: Friday Outlook

Schase - You have to understand options trading to understand how we play a bubble like oil. It goes up in spurts and comes back down and the strategy we pursue shorting oil stocks is we pick a top and (for example) buy the XOM $90 puts on the 16th with $2K out of $10K allocated at $1.50 per contract (13 contracts). When the position moves 30% against us, which it did just 2 days later, we buy 13 more for $1 ($3,300 invested on 26 contracts).

Since it spiked up to $95.70 on the 21st and we thought it was toppy, we rolled those contracts to the $95 puts for + $1.50 per contract, effectively another double down. That put us in 26 XOM $95 puts for $3,300 + $3,900 = $7,200. Since we rolled to a higher strike we increased our allocation but the next roll (if XOM broke $97.50) would have been to move to July puts ($95s for + $1.20) and sell some June puts ($90s for $1.25) to pay for it.

In this particular case, there was no need as the stock came flying down and made us a nice double, which we got out of yesterday and flipped long to play the bounce back, hoping for another nice run up to short into.

We do this all the time and we play both sides but we very much think the whole thing is a scam so it's easier for us to commit the big money to the downside when a stock runs too high. We have 700 members and that's the kind of trading we teach at PSW. There are oil bulls and bears there and we all get along very well because when one group gets out, it's a great signal for the other group to get back in. As User 14.. says, someone else's captitulation is always a good sign to get in yourself and we have a really good community that helps each other trade.

With options using a good cash management strategy, you can ride a bubble like oil up and up and up and still make a really good return when it slides. We are not long-term holders and generally we allow for a stock to run against us for 3 full months but after 45 days we are generally just trying to get even after flipping to a spread.

Obviously, not too many stocks run straight up for 3 months so we have a pretty high success rate.

The Oil Shortage, and Other Fairy Tales

Yes farmers do make money from wheat speculation but it's only an accident that the commodity producers make money in a speculative frenzy. Meanwhile we enrich places like Iran to the tune of $400M a day which Bush himself claims they are using to fund terrorism.

Sadly, it won't be the "evil speculators" that are wiped out, it will be all the average people and pension funds that are being herded into the next "sure thing" investment like sheep to the slaughter right at the top of the market.

Don't forget Goldman Sachs made over $6.5Bn in 2006 and 2007 SHORTING housing after spending the first half of 2005 upgrading the builders. Funny how they caught the turn just right but forgot to mention it to anyone until it showed up.

Why complain? Because people are being robbed and I care, because this country is being destroyed by the greedy who prey on the fear of the people to make them accept these abuses without making "unpatriotic" or "anti-capitalist" complaints.

As Hermann Goering said: "It is the leaders of the country who determine policy, and it is always a simple matter to drag the people along, whether it is a democracy, or a fascist dictatorship, or a parliament, or a communist dictatorship. Voice or no voice, the people can always be brought to the bidding of the leaders. That is easy. All you have to do is to tell them they are being attacked, and denounce the pacifists for lack of patriotism and exposing the country to danger."

This oil bubble is war profiteering plain and simple, the people of this country have been led to believe that the world is an evil place and problems cannot be solved through diplomacy and the constant state of war allows oil interests and defense contractors to make hundreds of billion more dollars each year than they did before their man got elected. I'm sure it's all just a happy coincidence for them...

The Oil Shortage, and Other Fairy Tales

Lot's of great comments here, I love it when we can have a nice, civil exchange of ideas. CBubble, that is great stuff. I just answered a person on another post as to HOW the price of oil is manipulated and I'll print it here to so excuse the length but this is why the whole thing can fall apart MUCH faster than you think. The housing and .com bubbles were de-centralized events and they fell apart in a de-centralized fashion but the scam going on at the NYMEX that has driven the price of oil up from $30 to $130 a barrel in 5 year can be unwound with the stroke of a pen if they change the regs:

I don't know a good site for tracking NYMEX contract volume from open to close but there is currently an "open interest" on the NYMEX for 378,974 contracts, representing 1,000 barrels each, that is the "demand" for July.

At the peak of June trading there were close to 450,000 open contracts but the NYMEX allows traders to "roll" open contracts to longer months WITHOUT PENALTY and by the close of the June contracts, less than 30,000 contracts (30M barrels) were actually finalized for delivery. The other 420M barrels that were, at some point, contracted to be delivered in June, were "rolled" into July, August, Sept.. contracts.

You can track this nonsense here on a daily basis:

futures.tradingcharts....

Notice how there are 378,974 barrels "ordered" for July and 91,509 for Aug and 94,177 for Sept and 49,177 for Oct. I will tell you for a fact, right now, that on June 24th (close of July trading) there will be LESS than 40,000 contracts accepted for delivery. All but 40M of the now 378M barrels that could be delivered to the US PER THE EXISTING CONTRACTS will be cancelled by these evil manipulative bastards in oder to create an artificial shortage of oil each month while driving up the apparent demand for the next month by rolling the contracts forward.

That's how the scam works.

Also, note that the "front month" contracts, the one they print on CNBC etc. rose $1.38 today but longer contracts were negative, with the Dec 2015 contracts that they couldn't stop talking about and pointing to just 2 days ago when they crossed $140, have quickly and quietly dropped to $132.77 just 48 hours later.


futures.tradingcharts....

It's very easy for the oil apologists to point to all sorts of abberant statistics to try to confuse you. China demand is a classic example - it's up 40% in the past 5 years. What they don't tell you is that that 40% was a rise from 5Mbd to 7Mbd but Chinese production went from 1.6Mbd to 4.1Mbd during the same amount of time causing them to import 500Kbd LESS than they did in 2003.

No, it's much better to scare you by saying 40% even though that 40% is about how much fuel we would save in America if we simply inflated our tires properly (10% x 20Mbd).


Mark Twain said "There are three types of lies: Lies, damn lies and statistics." Always be wary of people who throw them around without letting you take a look at the sources for yourself. It's hard to pick up in the text on Seeking Alpha but I try very hard to have links to all my stats. When CNBC shows you the Dec 2015 contract one day to "prove a point" and then doesn't show it again, you need to be suspicious.

Just ponder that those 378,974 contracts were traded on the NYMEX today 425,099 times. That's a churn rate of 115%! The net change in price was 1% and the net change in open interest was less than 1%. What would you think of a stock or option contract where the entire float turned over in one day? This is what goes on EVERY SINGLE DAY at the NYMEX.

425,099,000 barrels of oil were traded today, readily available to any trader who wants them delivered in July, with another 136,725,000 August barrels traded and another 73,297,000 September delivery contracts written yet in not one of those months will more than 42M barrels ever be delivered because that is the transfer capacity at Cushing, OK.

So the ENTIRE thing is a joke. People are ordering barrels they don't want with contracts written for a place that will never accept delivery AND, if anything actually happens to disrupt supply, there is a loophole called "Force Majeure" which allows the contracts to be cancelled by the shipper due to "supply distruptions" so they are not even buying insurance.

The only thing they are insuring is that they will bleed you dry by forcing you to pay $130 a barrel for something that has a global average production cost of $42 a barrel. This is nothing less than the single largest con in human history and your "reliable sources" are a government that was elected thanks to hundreds of millions of Petrodollars of campaign contributions and a media that is owned by companies that either are energy companies or accept millions of dollars from energy companies.

The 30M barrels of oil that were actually accepted for delivery in July set someone back $4Bn, that sounds like a lot until you realize that that $4Bn locked in a price increase of $25 a barrel during the month of May x 85Mb a day worldwide or $65Bn bonus dollars paid to the same people who are churning oil contracts in the pits.

What if you had 15 shares of IBM at $100 and the price of the last trade on June 24th will set the price you can sell IBM for in July. What if you could buy that last contract for $150 and that would let you sell the ones you are already holding for $150. You would spend $50 extra for a single contract but would collect $50 more on the 15 you have for a net profit of $7,450!

Would you do it? Do you know anyone who would? Do you think no one would?

That's how the NYMEX works. Those 30M barrels that are "accepted" at the contract close determine the price of the 85M barrels PER day that are delivered for the 31 days of May. That's 2,635 barrels over 30 or 1/87th.

This is how you are being ripped off, this is how the manipulation operates, this is the only reason that oil is over $70. There is no shortage, there is no great demand, there is just a greedy cadre of immoral people who manipulate a system that costs the American people $500Bn a year (the premium we're paying over $70) just so they can skim a few million for themselves.

Have a happy Memorial Day weekend folks!

Options Trader: Wednesday Outlook

That is very impresssive stuff Jack but I get stuck at how you're getting from FSLR's current use of 3 tonnes of tellurium last year (which was 10% of global production) to having free access to 300 tonnes. I have seen nothing to indicate production levels likely over 350 tonnes no matter what the price as the extraction of Te depends on someone first wanting copper.

If you have links I'd be happy to take a look at that IS the crux of my bearish long-term outlook on FSLR (although the fact that their contracts lower prices 20% per year and that Germany may be topping off their own solar rebates are coming in a close second and third now).

My assumption is that even if Te production does somehow increase to 350 MT a year and FSLR grabs 1/4 of it, that's ony enough for perhaps 1 GW at that point. Also - wouldn't it be awful if some other solar company decided to use Te, since it's so fantastic?

Options Trader: Wednesday Outlook

I stand corrected re. the Yuan, it did not occur to me that it wasn't in dollars so that's just the 3,000% increase in price then correct? I'll make sure we fix that fact.


We did short FSLR out of the box, both on the leap I recommended and, ultimately, we took the $320 puts during or morning session (we do live trading on the member site) so we're pretty pleased so far. Today we grabbed the $310 puts for a nice morning double and we'll short them again if they go up again but the leap stays naked, looking for a double over time.

Mark - that ad is a classic! Maybe I should apply and hook them up with Jack Satan, he seems to have some tellurium to unload. I really don't understand why it upsets people to point out a problem with an investment. Yes, I was wrong about the amount per Kg and I will say so but that doesn't change the fact that there is not enough tellurium on the planet earth for this company to fulfill their business model - the one that people are investing in.

Thanks for the forum link Energy!

ISRG was cheap at $300 (it went to $350) and we bought it again at $280 last month and it's still cheap at $290 but thanks for being a long-time reader global!

Options Trader: Wednesday Outlook

If you have other data and can post links I'd be happy to take a look at it.

Are Tuesdays Good for Reversals?

Deceptive, unethical and only illegal if you get caught which is impossible to prove and why very rich people belong to very exclusive clubs where they can talk. While it may be a problem if you were to dump Google and suddenly buy it back as it would leave a trail, if I happen to mention to you in the clubhouse that this week that I'm going to be dumping my Googles by lunch on Friday if they don't cure cancer by then and you just happen to be looking to execute a block purchase of Google this week (which you may have mentioned to me over cocktails) then it is sheer coincidence when I dump my shares and cause a panic and you happen to decide that's a good time to buy. Next week, you happen to hear me mention a desire to get into RIMM and you happen to mention to me that you are sick of yours and giving them until Thurday's close to come out with a phone that drives your car or you're getting out. And round and round it goes...

Cramer - hypocrisy or not the guy is good. He gets that hype machine cranking and drops a few street.com articles around that he then uses to back up what he's saying and it's amazing what he gets done but we make a fortune shorting his crap once they run it up.

Michael - that's a great call you made and I like your work on the blog! Very good stuff.