Last week, my first installment of "Playing the Expiry..." proved popular and profitable, so here is another post for option traders to consider. Again, as always, before implementing any strategy, understand the full risks of all trades discussed today.
Again, Google [GOOG:NSD] appears to be back in play. It's highly-priced stock comes in handy for those looking to the options. Today, we will do a bull call spread for the Aug27 weekly options. Here is the strategy and its potential profit.
Google is currently trading at $453.23, down $1.39. The 440 call (long) is priced $13.60 x $14.40 and the 450 call (short) is priced at $5.50 x $6.00. In a worst case scenario, if your fills are at the market or natural price, your net cost is $8.90 or $890 per contract excluding commissions. Because of significant support at $450, Google has a high probability of remaining in the money, allowing you to profit $1.10 or $110, which is a 12.35 per cent return. Not a bad return if you do ask me.
Your profits can be improved by attempting to fill your buy and sell in between the bid and ask prices. My fills were $14.30 and $5.80, saving me $0.40 a contract, allowing me to earn an additional 5 per cent profitability and lowered break-even points.
Remember to close both options out (if needed) before the 4 PM EST close on Friday, to avoid paying exercise/assignment costs on the options.
P.T.E. record book located at the top bar, to the right of "MAIN".
3PAR (PAR) Trading Opportunity
3PAR Inc. [PAR:NYSE] has found itself caught in the middle of a war, but unlike most times, this has proven beneficial. A week ago, the company announced that Dell [DELL:NDQ] was planning to buy them out for $1.1 billion. Shares surged from under $10 to $18. Then, late last Friday, Hewlett-Packward [HPQ:NYSE] announced it was going to buy the data-storage system for $1.6 billion, or $24 a share. Shares surged once again, to nearly $27 on speculation that Dell would raise its bid and has three days to make a new offer (from Aug 25).
Both Dell and HP have billions of dollars in cash laying around, so a bidding war is anticipated, especially since both companies want to compete with IBM and others.
So what can a trader like you do to profit? With $24 a share a near guarantee on the valuation, consider buying in-the-money September calls to replace the purchase of the underlying security. The Sep 20 calls have almost no time value to worry about, and a final number is expected in the next few days. If Dell decides not to make a move, the most one can lose as of today is $2.60 a contract (or share if equity bought). And rumours are circulating that the $24 a share may be bumped by 3PAR management, with an average estimate from 9 brokers of $29 a share, representing a 7.5 per cent premium. And to the option trader, a profit of around 35 per cent.
Note: these figures are based solely on current available information and speculative information. These figures are not guaranteed and likely to change if a new bid is placed by Dell lower than $27/share or HP decides not to negotiate with 3PAR from its current bid of $24/share.
Due to the speculative nature of this trade, highly consider its risks with your financial advisor before implementing any strategy or similar strategy discussed within this post.
Both Dell and HP have billions of dollars in cash laying around, so a bidding war is anticipated, especially since both companies want to compete with IBM and others.
So what can a trader like you do to profit? With $24 a share a near guarantee on the valuation, consider buying in-the-money September calls to replace the purchase of the underlying security. The Sep 20 calls have almost no time value to worry about, and a final number is expected in the next few days. If Dell decides not to make a move, the most one can lose as of today is $2.60 a contract (or share if equity bought). And rumours are circulating that the $24 a share may be bumped by 3PAR management, with an average estimate from 9 brokers of $29 a share, representing a 7.5 per cent premium. And to the option trader, a profit of around 35 per cent.
Note: these figures are based solely on current available information and speculative information. These figures are not guaranteed and likely to change if a new bid is placed by Dell lower than $27/share or HP decides not to negotiate with 3PAR from its current bid of $24/share.
Due to the speculative nature of this trade, highly consider its risks with your financial advisor before implementing any strategy or similar strategy discussed within this post.
Should the Fed Raise Rates?
I read an interesting article last night on Bloomberg suggesting that Bernanke should consider raising interest rates from its current historic lows.
Traditional methods of monetary policy implemented during this recession have failed to lead the United States out of recession. Growth continues to stumble, questions about a double-dip linger, unemployment hovers around 10-percent, and the housing market lacks a foundation. So what argument can be made for raising rates, a tactic normally employed to slow down the supply of money?
When the Fed dropped rates to record lows near zero per cent, it was hoped that the banks would increase loans to small businesses and home buyers, but tightening credit policies and risk management strategies by the banks prevented these loans to enter the economy. Instead, financial institutions used their "free" money to invest in themselves through trading and building other assets. The government has unintentionally rewarded the banks for their bad behaviour and is creating another potential crisis.
"Blow the system up, we'll come back and reward you with very low interest rates that allow you to build up capital, and then you could try it again next time around," Rajan said.
Concerns about inflation, a usual suspect during times of low-interest rates, were valid, but with low consumer demand, prices of goods still remain low in America, even as commodity prices, like wheat, base metals, and soybean rise from Chinese demand. The Fed's current stance of deflation (when prices fall for extended periods of time) prevention is currently the number one issue blocking a rise in interest rates.
Rajan also points out that low interest rates are artificially "propping up" the housing market in America by creating demand from speculators. Americans continue to carry large amounts of household debt, near record levels in fact - $11.7 trillion as of June (according to the article). With debt levels so high and banks managing credit worthiness more conservatively, those looking to get loans may be out of luck. Foreign speculators in the housing market is historically high, a possible link to Rajan's argument.
If the government does not want to raise rates to prevent deflation, the government should cut out the middle man, the banks, and go directly to the American citizen. Instead of providing loans to the banks and being at the mercy of new credit policies, provide loans directly to the small businesses that want to expand and to the credit-worthy American who is unable to obtain a loan. Some stimulus plans proved effective long-term too.
The Cash for Clunkers program, which ended months ago, re-ignited the auto industry. Providing temporary jobs to Americans via the census earned the economy a respectful quarter of growth.
Although these programs will cost tax payers billions, the government's current policy of low rates has created a cheap way to sell treasuries and notes, and why not take advantage of super-conservative investors willing to take just 2.5 to 3 per cent yields on a 10-year?
With Christmas just one quarter away, the government could also provide incentives for companies that hire immediately after summer ends when students head back to class. I'm certain many companies would go along with it in hopes that it spurs the economy and ultimately, their top and bottom line too. Companies are hording trillions of dollars in cash, since risk-free assets are paying so little, so CEO's may be more willing to spend if the right tax benefit or other incentives proves beneficial.
I remember saying the day of his inauguration, if Obama and his administration can get the US out of its deep recession, he would be considered one of the greatest presidents ever.
The Fed must think outside of the box, outside of traditional monetary policies to stimulate this economy. Banks are building up assets for free and creating a potential bubble, again, but this time without strengthening the economy. Raise rates and force banks to make money on interest again by expanding loans to Americans. If banks fail to lend, governments should directly lend to citizens, which would create new jobs and provide a second source of income other than tax, which could be used to pay off debt. Allow the housing market to finally collapse, providing very affordable homes for Americans with newly approved loans and hopefully improve the flow of money.
When the Fed dropped rates to record lows near zero per cent, it was hoped that the banks would increase loans to small businesses and home buyers, but tightening credit policies and risk management strategies by the banks prevented these loans to enter the economy. Instead, financial institutions used their "free" money to invest in themselves through trading and building other assets. The government has unintentionally rewarded the banks for their bad behaviour and is creating another potential crisis.
"Blow the system up, we'll come back and reward you with very low interest rates that allow you to build up capital, and then you could try it again next time around," Rajan said.
Concerns about inflation, a usual suspect during times of low-interest rates, were valid, but with low consumer demand, prices of goods still remain low in America, even as commodity prices, like wheat, base metals, and soybean rise from Chinese demand. The Fed's current stance of deflation (when prices fall for extended periods of time) prevention is currently the number one issue blocking a rise in interest rates.
Rajan also points out that low interest rates are artificially "propping up" the housing market in America by creating demand from speculators. Americans continue to carry large amounts of household debt, near record levels in fact - $11.7 trillion as of June (according to the article). With debt levels so high and banks managing credit worthiness more conservatively, those looking to get loans may be out of luck. Foreign speculators in the housing market is historically high, a possible link to Rajan's argument.
If the government does not want to raise rates to prevent deflation, the government should cut out the middle man, the banks, and go directly to the American citizen. Instead of providing loans to the banks and being at the mercy of new credit policies, provide loans directly to the small businesses that want to expand and to the credit-worthy American who is unable to obtain a loan. Some stimulus plans proved effective long-term too.
The Cash for Clunkers program, which ended months ago, re-ignited the auto industry. Providing temporary jobs to Americans via the census earned the economy a respectful quarter of growth.
Although these programs will cost tax payers billions, the government's current policy of low rates has created a cheap way to sell treasuries and notes, and why not take advantage of super-conservative investors willing to take just 2.5 to 3 per cent yields on a 10-year?
With Christmas just one quarter away, the government could also provide incentives for companies that hire immediately after summer ends when students head back to class. I'm certain many companies would go along with it in hopes that it spurs the economy and ultimately, their top and bottom line too. Companies are hording trillions of dollars in cash, since risk-free assets are paying so little, so CEO's may be more willing to spend if the right tax benefit or other incentives proves beneficial.
I remember saying the day of his inauguration, if Obama and his administration can get the US out of its deep recession, he would be considered one of the greatest presidents ever.
The Fed must think outside of the box, outside of traditional monetary policies to stimulate this economy. Banks are building up assets for free and creating a potential bubble, again, but this time without strengthening the economy. Raise rates and force banks to make money on interest again by expanding loans to Americans. If banks fail to lend, governments should directly lend to citizens, which would create new jobs and provide a second source of income other than tax, which could be used to pay off debt. Allow the housing market to finally collapse, providing very affordable homes for Americans with newly approved loans and hopefully improve the flow of money.
Playing the Expiry for August 20, 2010: Google (GOOG)
It's a new segment in my blog, and hopefully I can continue to do this weekly (or at least monthly). I will have a new layout soon so it should give you a chance to visit it every Thursday before close to make a trade.
With the market having taken a beating today on bad employment news, some stocks have taken a larger drop than need be. Today's focus is on Google [GOOG:NSD].
The following trade was executed today in my account creating a bull call spread on Google, trading at $470.25. I purchased the Aug260 call ($11.00) and sold the Aug270 call ($3.60). The total net debit is $7.40, meaning my break even is $477.40 on the underlying. My reasoning for this trade is a technical one. Google fell below the Bollinger Bands today, which indicates that a technical rebound is more likely than a drop. My trade is not trying to capture a big up move, but a lack of a continued down move. If Google remains at $470.25 (now $471.20 as I write this), I will be able to capture about $250* per contract (or 33% profit), not too bad for a $740 investment for one day.
*The 460 call will gain $0.20 and the 470 call will lose $2.40, netting about $250, allowing for spreads and commission.
As with all trades, profits are not guaranteed and losses may occur. Ensure options trading is suitable for your investment needs and objectives. Talk to a financial advisor if you are always unsure.
With the market having taken a beating today on bad employment news, some stocks have taken a larger drop than need be. Today's focus is on Google [GOOG:NSD].
The following trade was executed today in my account creating a bull call spread on Google, trading at $470.25. I purchased the Aug260 call ($11.00) and sold the Aug270 call ($3.60). The total net debit is $7.40, meaning my break even is $477.40 on the underlying. My reasoning for this trade is a technical one. Google fell below the Bollinger Bands today, which indicates that a technical rebound is more likely than a drop. My trade is not trying to capture a big up move, but a lack of a continued down move. If Google remains at $470.25 (now $471.20 as I write this), I will be able to capture about $250* per contract (or 33% profit), not too bad for a $740 investment for one day.
*The 460 call will gain $0.20 and the 470 call will lose $2.40, netting about $250, allowing for spreads and commission.
As with all trades, profits are not guaranteed and losses may occur. Ensure options trading is suitable for your investment needs and objectives. Talk to a financial advisor if you are always unsure.
Retail Data Paints a Gloomy Picture
The Canadian economy, which is growing at around 6 per cent and has created thousands of new jobs and as such, consumers are able to support a recovery. However, in the United States, the country's unemployment level remains between 9.5 and 10 per cent.
The "pros" believe that the continued strength in corporate profits is proof there is an economic recovery in America. Why just today, Wal-Mart [WMT:NYSE] and Home Depot [HD:NYSE], also Dow components, reported earnings beating estimates; Wal-Mart even raised their guidance for the remainder of the year. This trend of great corporate profits has been the story of 2010. 75 per cent of S&P 500 companies have beaten the estimates. These figures are being used as a crutch to support the idea that the American economy is on its way back, albeit, very slow and lacking job creation.
But wait, is this really an accurate picture of the American economy or a story of American companies being able to make money globally? The companies that have reported giant profits are companies that have stores all over the world. Wal-Mart has more than 4,000 stores in 15 countries, including China, which is now the second largest economy in the world, passing Japan just recently. Home Depot also has a substantial foot hold in Canada and Mexico, and some stores in China.
Companies have been saying for months that US sales are slow, yet the "pros" continue to believe in a recovery. Wal-Mart said today that their US sales were down 1.8 per cent and "steep price cuts did not boost sales as hoped". And Wal-Mart only beat by 1 cent a share today through cost-cutting measures. And revenue came in lower than expected. Wal-Mart earned $103.73 billion versus an expected $105.33 billion: $1.6 billion short.
Last week, Nordstrom [JVN:NYSE], a higher-end retailer only in the United States, provided earnings that were considerably weak, knocking the stock down over ten percent by Friday. Unlike the majority of retailers that have, or will be releasing earnings this week, Nordstrom has not exposed itself in the key Asian market, where growth is pacing nearly ten per cent a year or more.
Tomorrow, we will receive an earnings report from Target, the second largest US retailer, which also has limited exposure to Asia, if any. If Target's profit and guidance, along with other data, prove to be below expectations, I believe the "pros" should really take a second look at their predictions if they ever stumble upon my blog.
Yesterday, a report on BNN, Canada's business network, noted that junk bonds are pricing in a 25 per cent probability of a double-dip recession. That's a substantial figure, especially when 99 per cent of people believe a double-dip is very unlikely.
The US economy will be unable to grow if companies do not hire in the United States. We have seen that jobs are not created by government stimulus; it is small and large businesses that ultimately shape the landscape of any economy. They are the ones that price material goods and create services that consumers buy, and create jobs to maintain the cycle. But if nobody is coming to buy their products in the US, why should they hire more workers?
A few months ago, I was very optimistic about the American economy because there were signs of growth, but 8 months later, this growth has stalled, and I truly believe that a double-dip recession is very likely.
Image source: The Guardian (http://blogs.guardian.co.uk/ethicalliving/shopper.jpg)
Apple (AAPL), Goldman (GS) Trading Opportunities
Apple [AAPL:NDQ] took a huge hit today, along with the rest of the market, but has shown a key support at $250.00 - at close: over 20,000 shares bidding. The stock dipped below the level intraday but surged above and held on for the remainder of the day. I decided to take advantage of the weekly options to capture two more days of time value. I purchased the AAPL Aug13 240 call and sold the AAPL Aug13 250 call, that is, a debit or bull call spread. As of 3:12 PM EST, the security was hovering $250.55, the 240 call was asking $10.90, and the 250 call was bidding $2.53, creating a natural trade of $8.37. If the stock remains above $250, you simply close both options on Friday and capture the $1.98 on the short, and take a $0.35 loss on the long.
For traders with excess margin, you could consider writing the 250 puts for Aug13 for $2.00, but if traders decide to push Apple lower, you could see larger losses than the bull call spread strategy.
Goldman Sachs [GS:NYSE] broke the (up) trend line on Tuesday, which could be a bearish signal. The MACD and the DMI are also converging into bearish territory. My only concern is that the volume was not significant, only average, and today's large drop could be a result of market sentiment, not a technical drop. I bought puts late last week, but unfortunately sold them yesterday before the FOMC announcement. If this drop is indeed a technical sell off, GS would most likely trade down to the lower bollinger band, which is $140.
For traders with excess margin, you could consider writing the 250 puts for Aug13 for $2.00, but if traders decide to push Apple lower, you could see larger losses than the bull call spread strategy.
Goldman Sachs [GS:NYSE] broke the (up) trend line on Tuesday, which could be a bearish signal. The MACD and the DMI are also converging into bearish territory. My only concern is that the volume was not significant, only average, and today's large drop could be a result of market sentiment, not a technical drop. I bought puts late last week, but unfortunately sold them yesterday before the FOMC announcement. If this drop is indeed a technical sell off, GS would most likely trade down to the lower bollinger band, which is $140.
Bienvenido a Miami
Social Similes: A Parody of Our World - Set 6 Volume 5
It was the biggest sports story of the summer: Chris Bosh and Lebron James were headed to Miami to join forces with Dwyane Wade. The Heat, now considered a power house in the East, has a chance to win its first NBA Championship since 2006. But recent documents uncovered suggest that James moved to the city sung about by Will Smith for more than just a championship.
Both TMZ and ESPN have evidence that Lebron James moved to Miami for the natural, year-round, free sun tanning capabilities of the city because he is in fact a Caucasian.
TMZ uncovered an old clip from "America's Funniest Home Videos", the ones with Bob Saget, with a white 6-year old child trying to do a slam dunk but failing and landing on his head. Then a lady, presumably his real mother, asks, "Lebron, are you okay?" The boy responses, "Yes. I'm a James boy! I'm always okay."
ESPN reporters followed up on the story and found hundreds of documents from a local sun tanning salon supporting TMZ's theories.
It turns out that Lebron spends over $1 million a year at the salon to keep his skin a dark colour. And the new Obama 10 per cent tax was too much for the all-star to handle financially. His addiction to sun tanning started at the end of his middle school days and trended into high school. One story suggests that Lebron faced much racism during his first few days of high school when he entered an all-white school, as many students believed him to be black. He would later change schools and end up at St. Vincent - St. Mary High School, where his future stardom became recognized.
The NBA wanted to market his talents and ensure they could capitalize on it properly. NBA arenas are filled with thousands of fans, but the majority of these fans are white. The league knew that it had to expand to a larger audience, including Hispanics, Asians, and more blacks if it wanted to compete with more professional sports entering the market.
The city of Cleveland comprises of 52 per cent blacks, meanwhile, the NBA team was selling mainly to white fans, and were not always selling out. So, the NBA requested to the franchise to finish last and pick Lebron. Since that day, the Cavs profits surged and the NBA royalties rolled in.
But Cleveland was not the first city to enroll in the program. Houston was the first, drafting the first Asian all-star to play in the NBA in 2002. And since, an Italian and an Australian have also been drafted first overall, bucking the nearly all-American trend.
Like all conspiracy theories, this one holds very little merit. TMZ said they will be scouting his home in Miami to see if his real parents show up. For now, Lebron, go out and win a championship.
Both TMZ and ESPN have evidence that Lebron James moved to Miami for the natural, year-round, free sun tanning capabilities of the city because he is in fact a Caucasian.
TMZ uncovered an old clip from "America's Funniest Home Videos", the ones with Bob Saget, with a white 6-year old child trying to do a slam dunk but failing and landing on his head. Then a lady, presumably his real mother, asks, "Lebron, are you okay?" The boy responses, "Yes. I'm a James boy! I'm always okay."
ESPN reporters followed up on the story and found hundreds of documents from a local sun tanning salon supporting TMZ's theories.
It turns out that Lebron spends over $1 million a year at the salon to keep his skin a dark colour. And the new Obama 10 per cent tax was too much for the all-star to handle financially. His addiction to sun tanning started at the end of his middle school days and trended into high school. One story suggests that Lebron faced much racism during his first few days of high school when he entered an all-white school, as many students believed him to be black. He would later change schools and end up at St. Vincent - St. Mary High School, where his future stardom became recognized.
The NBA wanted to market his talents and ensure they could capitalize on it properly. NBA arenas are filled with thousands of fans, but the majority of these fans are white. The league knew that it had to expand to a larger audience, including Hispanics, Asians, and more blacks if it wanted to compete with more professional sports entering the market.
The city of Cleveland comprises of 52 per cent blacks, meanwhile, the NBA team was selling mainly to white fans, and were not always selling out. So, the NBA requested to the franchise to finish last and pick Lebron. Since that day, the Cavs profits surged and the NBA royalties rolled in.
But Cleveland was not the first city to enroll in the program. Houston was the first, drafting the first Asian all-star to play in the NBA in 2002. And since, an Italian and an Australian have also been drafted first overall, bucking the nearly all-American trend.
Like all conspiracy theories, this one holds very little merit. TMZ said they will be scouting his home in Miami to see if his real parents show up. For now, Lebron, go out and win a championship.
RIM vs. Apple 2.0
The war between Apple and Research in Motion is heating up as rumours on a new tablet device from RIM is expected to be announced some time tomorrow.
RIM, maker of the Blackberry hand held device, recently purchased the domain name "blackpad.com." The move triggered speculations that RIM plans to name the device the Blackpad or at least has some major interest in the name. It is believed to have been purchased for about $1,500.
RIM's move to enter the tablet device and take major market share from Apple and Amazon will be tough. Based on the information available, many do not expect RIM to penetrate with profitability. It is believed that the Blackpad, to be released in November, will be used as an add-on to Blackberrys (or is it Blackberries) and will not function as a stand-alone device. This limited versatility could prove to be the downfall of the Blackpad because it will be unable to maximize its market.
The name Blackpad, if true, is also being remarked as a terrible name. By using the suffix -pad, it will surely promote the iPad even more so if RIM's device fails in popularity. Many are asking RIM to change it to Padberry or even Blueberry or Raspberry. It seems like loyal BB users prefer the berry aspect of the name, not the black.
Research in Motion has continued to grow quarter after quarter, but that has not improved their share value. The stock is down nearly 60 per cent from its all-time high, reached in the spring of 2008. Meanwhile, its archenemy Apple is trading near its all-time highs. It is clearly a tale of two companies going in opposite directions.
Other notes
Research in Motion still dominates the smartphone market, holding a 33 per cent market share in the United States and is ranked 3rd worldwide. Apple iPhones dropped to number 3 in the US today. Google Android phones have surged to second place and is on pace to sell more phones in one year than the total number of iPhones ever.
RIM, maker of the Blackberry hand held device, recently purchased the domain name "blackpad.com." The move triggered speculations that RIM plans to name the device the Blackpad or at least has some major interest in the name. It is believed to have been purchased for about $1,500.
RIM's move to enter the tablet device and take major market share from Apple and Amazon will be tough. Based on the information available, many do not expect RIM to penetrate with profitability. It is believed that the Blackpad, to be released in November, will be used as an add-on to Blackberrys (or is it Blackberries) and will not function as a stand-alone device. This limited versatility could prove to be the downfall of the Blackpad because it will be unable to maximize its market.
The name Blackpad, if true, is also being remarked as a terrible name. By using the suffix -pad, it will surely promote the iPad even more so if RIM's device fails in popularity. Many are asking RIM to change it to Padberry or even Blueberry or Raspberry. It seems like loyal BB users prefer the berry aspect of the name, not the black.
Research in Motion has continued to grow quarter after quarter, but that has not improved their share value. The stock is down nearly 60 per cent from its all-time high, reached in the spring of 2008. Meanwhile, its archenemy Apple is trading near its all-time highs. It is clearly a tale of two companies going in opposite directions.
Other notes
Research in Motion still dominates the smartphone market, holding a 33 per cent market share in the United States and is ranked 3rd worldwide. Apple iPhones dropped to number 3 in the US today. Google Android phones have surged to second place and is on pace to sell more phones in one year than the total number of iPhones ever.
Subscribe to:
Posts (Atom)