Options Trader: Friday Outlook

This chart from David Fry at ETF Digest:

Yet another exciting week in the markets draws to a close.

We didn’t have too much stress in yesterday’s drop as we were a little over-covered anyway after the big run-up, and yesterday’s pullback gave us a chance to buy back some of the calls we sold at a very nice profit as well as giving us a chance to reposition some of the financial callers that had buried us in last week’s run up.  As I often say during big runs, what is easily done can be easily undone and we got a huge reversal of Tuesday’s XLF spike that put our spreads right back on track.

We were expecting durable goods to save us this morning, despite the bad housing numbers, after reading Whirlpool (WHR) and Caterpillar (CAT)’s earnings reports and listening to the conference calls.  We thought WaMu (WM)’s sell-off was enough nonsense to add them to our Stocks Portfolio on yesterday’s dip but selling the $4 calls as we’re not THAT confident.  Still, picking up the stock at $3.90 and selling a .80 call puts us in for net $3.10 and getting called away on the 15th at $4 is a very quick 29% gain and we liked that play so much we decided we were willing to double down by selling the $4 puts for .80 as well.  That means if we get called away over $4 our basis is $2.30 and, if the stock is put to us at $4 because it turns lower, our average entry is just $3.15, since there are $3 calls as well, we can simply reload and try again in September.  This is the strategy we outlined in last months post "Can You Be Satisfied Making 20% Returns Each Year?"

That’s why we reset the Stocks Portfolio this month and added the Butterfly Collection Portfolio - we know the market is going to be choppy and the trades we play around with in the $10KXtreme portfolio (aiming to get to $100K as quickly as possible) and the $25K Portfolio (aiming to get to $50K during the quarter) are not the kind of things you do with retirement money - all unhedged stock trading is gambling and options trading is more so but it’s gambling we can afford if we follow the safer, more dependable strategies with the bulk of our investment portfolio.

We had fun taking a few risks yesterday, pressing plays on WHR, Boeing (BA) and, of course, our beloved Googles (GOOG).  We’re not expecting a big run here as the weekend looms large and scary, and the oil bulls are on the march again as nothing of substance is being done as yet to rein in the madness other than scapegoating some small speculators on the NYMEX as if THEY were the problem.  What this case actually proves is that anyone, even less experienced traders with a few million dollars, can manipulate the energy markets and make millions.  Imagine what a multi-billion dollar investment house with a "win at all costs" attitude (the bottom 5% performers are laid off each year - that’s the message!) and a long history of price fixing and stock manipulation can do…

As expected, Asia did not take our little correction very well and the Nikkei dropped 2% (saved by the bell) while the Hang Seng gave up the week’s gains to finish back at 22,740 (down 1.5%).  Samsung’s profits jumped 51% on cellphone and flat panel sales but there were bombings in Bangalore that spooked the morning markets and certainly give us a reason to keep covered over the weekend.  Europe was well down this morning but has recovered about half to about 1% in the red across the board.

Back home, NY Attorney General Andrew Cuomo kept the heat on the financials by filing civil fraud charges against UBS, accusing the firm of "multi billion dollar consumer and securities fraud," and demanding that the firm pay back its profits from the business, make investors whole and pay damages. The firm is accused of pushing risky securities on retail and corporate customers with misleading sales tactics, even as the market for those securities was falling apart. When the collapse came, many customers faced losses or were stuck with securities they couldn’t sell.

The New York complaint also alleges that several high-ranking UBS (UBS) executives, whom the New York attorney didn’t name, sold roughly $21 million of their own auction-rate securities holdings amid the turmoil. Some 50,000 UBS customers were left holding $37 billion worth of the struggling investments, the complaint says.  Needless to say, UBS is not one of the banks we are keen on!

 

We’re still waiting for our housing package to be finalized but I’m encouraged on that front, our Hovnananians (HOV) came back down again and gave us a chance to load up again after cashing 1/2 out with a double the other day.  The dollar is quietly gathering strength as both Europe and Asia are looking a little more iffy to investors but it is still all about the POO (Price of Oil) and it would be nice if the New Home Sales Report at 10 is not as miserable as yesterday’s Used Home Sales Report and I’m pretty sure it won’t be as it’s the incentives offered by the builders on new homes as they clear out inventory that have been cutting into the sales of old ones.  As with everything else we are watching in the markets - rotation can be painful but good over the long haul.

We don’t want a huge reversal today, that will just make the market look flaky, but a nice 50% retrace of yesterday’s drop with a strong finish is just what the doctor ordered for today.  Ahead of the weekend, anything up is good but I’m not going to be happy if we can’t finish with Dow 11,450, S&P 1,260 and Nasdaq 2,300.  While we’re wishing, lets go for oil below $125, GOOG above $480 and Apple (AAPL) back at $165.  That would make for a very nice weekend!

Comments

[BSchecker]

I love it! A stock that Phil has been buying since $17 (CROX) gets crushed by 50%. No Mention. Now he is hoping for a NKE buyout on a company that isn't going to make any money this year. The fad is dead just like this stock.

[LikeStock]

I'm new here, but obviously you are someone that people are following in a big way. I'd like to see what your reaction is to Crox and what your plans may be concerning it now are.

[Rumpelstilzchen]

Have the nerve to delete my account, but never commented on any of the replies here. Well atleast I know you read them, and know the truth behind them.

Instead of deleting me again, why don't you ask some of your members to post here and tell me that I'm wrong. I want them to tell me that they made money from your advice... I would love to hear that.


SIR: It is SA Editors and not Mr. Davis who review and, if necessary, edit or delete comments. Personal attacks and crusades against a specific author are not tolerated, and such commenters lose the right to post. Reasoned discourse that encourages give-and-take within the community is welcome.
--SA Editor

[lobsterboy]

phil, might be a good time to either reply to this or stop posting. I have read your posts and I do find some of those things you say insightful or interesting. However, if your just using this website to get more clients service your no better than the people you put down everyday. And you'll have to live with that.

[Philip Davis]

BSchecker, Rumplewhatever, Contender - as much as it pleases me that you hang on my every word like you do (it's a powerful thing to take up so much of someone else's life), it seems the curse of the Midianites is upon you and that's a sad thing so I will help anyone who asks for it and you can dream about me this weekend or obsess over me during your waking hours but that's no reason I can't chat with real people on this site.

Lobsterboy - what would you have me respond to? They make things up that aren't true and expect me to spend time defending myself, not worth my time. We have over 1,000 members now and a couple of them must be satisfied and I still post on SA for free because they gave me an early break (well before I had a pay service) and I'm loyal to them and allow them to publish my morning posts. How do you see my providing to SA for free something that other people pay for to be "just using this webside to get more clients"? If anything, it costs me clients as it's a very low cost alternative for people who don't want to pay for membership.

If these boys want to attempt to turn this site into the YHOO message board, that's not my problem and even their obsession with me isn't my problem, clearly it's theirs. There are people I don't like and I just don't read them, much less hang on their every word. Stalkers go with the territory, most of the popular writers I talk to have their obsessed anti-fans. I'm harsh on Cramer, Bush and Whitney myself so I guess it all goes with the territory but I don't see them interrupting their lives to address my concerns.

What bothers me is I used to enjoy having conversations with readers here as there are lots of really smart people who read SA but, as you point out, my disinterest in rising to their bait is taken by someone like you to be an admission of guilt of some kind so I'm saying this once here and that's it. I am very amused by the fact that I, Phil Davis, occupy the thoughts of these people to this extent while if I don't happen to click over here for a day, they don't even exist to me at all. Just think of the disproportionate impact I'm having!

So I've decided to simply respond to the people who have real questions (why should they suffer) but, overall, it sure is nice to be ranked as one of SA's most commented authors!



CROX/Likestock - What a disaster! I have to give props to Ahmit, who totally called this one while I trusted the management. I still can't figure out what they did with all the money as sales were "only" off 2% for the Quarter, down $4M from last year, yet the company managed to not make the $48M they made last Q2. Our bullish case was based on the 80% increase in international sales that were reported in Q1 and had increased to over 1/2 of total sales. Now that's drying up too but it's the MASSIVE missed guidance by management that makes me want to give up on them.

Our position, which had been rolled and doubled several times from our original play (but we sold many calls against them along the way so, until today, we were in decent shape) was the Sept $6 calls with a $2.85 basis against which we'd last sold the $9s for $1.15.

It's rare but there's really nothing to save in this trade, all we could do was sell the current $5s for .70 and use that money to roll back to the Dec $5s and hope we find some way to make back the $1.70.

Usually, if you get blown out of a hedged position (and almost all of our positons are hedged) the best course of action is to sell another option with good premium that pays for you to roll yourself back in time and closer to the money but you never want your caller to have position advantage over you, in case there is a sharp bounce.


I would say that this is the type of strategy we teach but Lobsterboy would think I was soliciting so I'll just say that there are many fine web sites that teach using stock options as a hedging tool and those strategies can get you through many tough times but there's really nothing that's going to save you from a 50% drop pre-market and that's why position management MUST be a part of any good portfolio strategy (many fine sites teach that as well).

Murphy - this is all your fault as your link caught my attention and I decided to respond to you but first I had to do a little housekeeping! First point is XLF is financial so I'm not sure we're talking apples to apples subsituting a health-ETF basket but I think you were thinkining about the XLV.

We use the XLF because the risk of owning any single bank is pretty insane. We took gambles on C and BAC pre earnings as well as LEH and JPM as they were ones we were pretty sure were going to beat. We also took the XLF and had a variety of covers and naked positions among the 5.

You can pursue a similar strategy targeting health care but one interesting use of an ETF, if you are playing a major component of it, is to go long on the single stock and short on the ETF ahead of earning. Bad earnings from a major player in a sector can bring down the whole ETF but good earnings from one stand-out don't always translate into a sector break-out.

All portfolio management is about balance and it's not the sort of thing you can learn without practice but, as Mr. Miyagi says "Once you find balance, you can accomplish anything."

Have a good weekend all,

- Phil

[CoverIsBetter]

I applaud Phil for finding a stock so cheap with such a high out-of-the-money Call that it makes this trade (WM) work.
Awesome! I would love to be able to repeat this strategy, but many of my favorite cheap stocks have such a cheap near term Call price, the covered call trade is not worth it.
Guess you have to pay the fee to get more of this pin action?

[lobsterboy]

Phil,
thanks for responding to me, I do appreciate it. I have read your update daily and do so enjoy the pictures you add to the articles. I guess more information is better and since I am not a member of your news letter I couldn't speak to the pics you make, but I do know this you have is some cases provided some thoughtful insight and for that I say thanks.
The reason I like this forum is just b/c it's not yahoo.
Thanks,
Lobster

[Calvin C.]

Anyone see the possibility of WM going lower into the 2s territory?

[Philip Davis]

Thanks Lobster. If you want to get an idea of what we do in member chat, I did take the time to address BSchecker's "concerns" to the trades he asked about in the next post. I don't claim to be perfect - we have wins and misses but the nature of the hedged strategy we run is that we cash in our wins and usually we can roll our misses and turn them into wins at a later date. With a diversified portfolio, time is on your side and, as I we like to say at PSW, there's always an option...


WM/Calvin - Of course there's a possibility but $2 would very likely be on the way to $0 as the bank is already priced for bankruptcy. Like the stand we took on C in the teens, sometimes you just have to look at a stock and say "Yes, I would buy the whole company at that price." WM tested $3 and bounced sharply back on the 14th and we're hoping that line holds for the rest of the month. On this play, if we have faith that the downside is $3 on our $3.10 net entry and the upside is $4, it's a pretty good risk/reward spread.

Also, you have to look at the fundamentals. Congress is passing a housing bill that Bush said he would sign. The concerns on the banks is primarily based on concerns of the value of their housing portfolios due to high default rates so fixing the housing problem fixes the banks. While it might not make everything all better, it sure might mean that some part of the 85% drop in value for WM may be recovered, giving us a nice win.