Are the Canucks For Real?

Imagine this - a Vancouver Canucks team that did not finish with 54 wins and 117 points this year. Instead, they finished the season having to fight to the bitter end to get that Presidents' Trophy, but lost out to the Sharks by a single point. Despite having the most goals scored and fewest allowed, despite having a top ranked power play and third ranked penalty kill, the team only finished second. In that situation, I ask you this, "Would Vancouver still be favoured to win the Stanley Cup?" Imagine that.

It's a hypothetical situation that isn't so far-fetched. Consider the idea that if the Northwest Division was more competitve, Vancouver may have had fewer wins within the division. The Canucks won 18 out of 24 games against their divisional foes, an impressive feat on its own under normal circumstances, but not as impressive when 12 of those games happens to be against the rebuilding Avalanche and Oilers and the remaining 12 were against the Flames and Wild, who also did not make the playoffs.

Had the division been a little better, Vancouver probably would have only finished with 12 or 13 wins against the Northwest, the amount of wins against the other two Western Conference divisions. In that sense, the team would have earned about 10-12 points fewer, putting them on par with the Sharks or Red Wings.

Last season, the Washington Capitals won the Presidents' Trophy but were ousted in the first round by the Montreal Canadiens. Questions about the team's inflated place in the standings has been raised for many seasons now. The Southwest Division has never had more than two representatives make the playoffs since Ovechkin was drafted. And last year, no other team made the playoffs. The Capitals have had a dominant record against their division rivals, reaching the same win levels as the Canucks did this season against their own respected division. However, the Capitals record outside the Southwest was mediocre at best, barely posting above .500.

So are the Canucks built for the playoffs? Based on their elite statistics, you could easily argue they are, but seeing them almost lose to an eighth place team that's a shadow of their former glory should have fans concerned.

Ryan Kesler, who is having a break out season, managed to score an impressive 41 goals, tying him with team mate Daniel Sedin, and tied for fourth overall in the league. However, Kesler managed to pocket just 11 goals against playoff teams, and it's not like he only played 25 games against playoff teams. The amount of games versus playoff and non-playoff teams is almost exactly even at 41. This lack of productivity has continued into the first eight games of the playoffs, with zero goals.

Even Don Cherry says you need your best players to score in the playoffs. After all, you can only lean on your third and forth line for so long; their roles are not to score. The Sedin brothers just haven't really showed up statistically. TSN pointed out some poor defensive play by Henrik which ultimately lead to at least two goals against Chicago. Maybe it was a weakness that nobody was aware of because it was not exposed during the regular season. I don't really know.

To say that Vancouver does not deserve the Presidents' Trophy would be the voice of a bitter Oilers fan. Vancouver and Calgary success just isn't allowed in Oil Country, but as a realist, I know that Vancouver is a good team, arguably the best Vancouver team since 1996. They do deserve the Trophy, no doubt about it. However, with that said, I truly believe this team is a 48-win team. So to answer my own question above, no, the Vancouver Canucks real odds of winning the holy grail is about as good as the Sharks or the Wings. That's going to set up a very good third round.

A Small Wager on Las Vegas Sands

About two weeks ago, I wrote how Las Vegas Sands [LVS:NYSE] had been trading in a small range for several weeks, giving arise to great option writing opportunities (click here). Those that heeded the trade suggestions and continued, would have seen healthy profits.

Well, the shares of Las Vegas Sands are still trading in a tight range, although the range has shifted upwards by about $2. The shares have continued to resist breaking through above $46.50 and has held support in the high $46.00 range, give or take a few cents. It also helps that the upper Bollinger Band, which have also thinned over the last few days, indicating lower volatility, is floating below $47. I took the opportunity this week, earlier than usual, to write a short straddle on Las Vegas with the weekly 46.00 calls and puts.

The current premiums received on the pair is roughly $1.20, giving you a break even range of $44.80 to $46.20 (excluding commissions and SEC fees). This range gives downside and upside protection of over 2.6% each from the strike price.

Normally, I write the options on Wednesday or Thursday, but decided that I would rather take advantage of one extra day to capture a few more cents on time value. My outlook on the stock most likely won't change over the next few hours, unless significant news were to change that.

If you are slightly more bullish or bearish on the company over the next four days or risk adverse, consider implementing a short combination trade, instead of the short straddle mentioned here. One could cut their potential earnings today by writing a higher strike on the call or lower strike on the put. The 47 call expiring April 29 are trading at about $0.26 while the 45 puts are roughly $0.22.

A combination is less risky but also potentially more profitable, as it may require only two trades instead of three. It is only more profitable if the stock deviates further from $46 but still remains between $45 and $47. With a short straddle, one leg must be closed out, and the further away from $46, the lower the net profit. In this situation, if the stock closes near $45.30 or $46.70, the short combination would be more profitable than the above short straddle.

Disclaimer: Writing uncovered (or naked) options requires substantial margin and is only available to sophisticated traders. Uncovered calls have unlimited risk and can have infinite losses. Before making any trade, always discuss this with your advisor or professional broker.

Intertainment: When a Stock Goes Viral

Every so often, a tiny company posts news that send traders into a frenzy. These penny stocks soar hundreds of percent in a matter of days making early investors very wealthy. Volume could jump from as little as 25,000 to 100 million, as traders get a little envious and want in on the price action. This is what we're seeing with Intertainment [INT:TSXV], the next penny stock that just went viral.

The stock went from being worth a dime a share to over $3 in less than three months, but the move was not a nice steady line most value investors look for, it was a bumpy three months where price action occurred at the start of February and just this week, a gap of ten weeks. And those who bought it the first time it went exponential would have seen themselves buying into massive exuberance, often irrational, followed by roughly half their investment wiped out in two days. If they had waited ten more weeks, they would have seen their investment, or more accurately, gamble, grown to almost three times their original purchase.

Of course, having worked in the investment industry for years, I know that those who bought near the highs are often not sophisticated traders and were buying into the hype. Eventually, these traders will get burned (as we've already seen today alone). As well, their level of patience is no where close to a fund manager or a value investor who might wanna wait it out.

Historically, penny stocks that make major moves and go exponential eventually succumb to reality. Earlier in the year, rapper 50 Cent tweeted about a stock called H & H Imports [HIHN:OTC], sending the stock up ten times its value in days. Several weeks later, it had another bullish move, sending it to $1.75. The stock was 4 cents before the tweet. Where is it now? 73 cents. That's about 40 per cent from its highs obtained when five million shares moved it up in March.

Last year, Electrovaya [EFL:TSX] had major news and went from under $1.00 to over $4.00 in just over a week. Volume surged to over 6 million from just a few thousand per day. Where is this stock now? $2.12.

Before that, there was Resverlogix [RVX:TSX]. It almost tripled from about $3 to $8 in a few days. The stock today is at its lowest point in the last three years, $1.97.

And one final example, Weststar Resources [WER:TSX], a stock I sadly own, and bought at the start of my trading days. The stock, which has done a reverse stock split last fall, went from $2 to $14 (it was actually about 15 cents to $1.10 pre-split) only to have fallen from grace as well. Today, it is 95 cents, and was as low as 17 cents in the summer.

If there is any lesson in this, it's that if you have never heard of the company before it went viral, your best bet is to stay the heck away from it. Most traders are unable to short against the hype, which I have done to two of the stocks above. The truth is, Intertainment will be a long, forgotten stock by the end of April whose securities will probably be sitting in someone's account, along with Nortel, Weststar, and the rest.

Continued Consolidation on Las Vegas Sands

Shares of Las Vegas Sands [LVS:NYSE] have made option writers, like me, wealthier over the last three weeks. Having recognized the early signs of a consolidation pattern in the making, short combination trades have proven profitable. A short combination is a spread trade where the trader writes two naked/uncovered options: A put at a lower strike and a call at a higher strike. This is a neutral strategy with the hope the stock's value remains between these two values by the expiration of the options, allowing the trader to earn money.

The stock's value took a turn for the worst in March when rumours about legal issues arose. Early reaction was negative; the stock's value plummeted about 25 per cent in under a month. But as it approached its 200-day moving average, the stock saw some support. It was at this point that more information about the legal suit hit the news and it was apparent that a big disaster was not looming. The stock then gapped up back to the mid-40's.

The stock had some trouble trading above $45 at the end of March and continues to show some resistance in the $45 area, meanwhile, holding above $43. This sideways pattern, often referred to as a trading range or consolidation trade, has held very well for over three weeks now.

Option writers have taken advantage of this range by writing weekly puts at a strike of 43 and weekly calls at a strike of 45. The stock has closed between $43 and $45 on Friday for four consecutive weeks. More importantly, the stock has been volatile enough to allow traders to capture added risk premiums and the ability to wait and write options when the stock falls or rises to $43 and $45 levels.

Often is the case, when implementing a spread strategy, traders will write both legs at the same time. However, because of the volatility, by writing the options on different days or even different times during the day, traders are earning additional premiums. The table below shows the bid value of the options at the high and the low of the day during the stock's high and low.

Time Stock Price Apr 21 45.00 C Apr 21 43.00 P 10:14 AM EST $42.84 $0.14 $0.83 3:55 PM EST $45.86 $1.33 $0.10

As we see, under traditional spread timing methods, if the trader implemented the short combo near the low of the day in the morning, the trader would have earned a net premium of $1.02 (14 cents on call, 88 cents on put). However, seeing that the stock has traded in such a volatile range, a trader could have written the put only, and waited a day or two for the stock to move closer to $45. In this case, the stock did it in three hours. So, instead of earning $1.02, the trader could have earned as much as $2.21 (1.33 cents on call, 88 cents on put). That's roughly 120 per cent more!

However, a trading range is always temporary. It could last only a few weeks, or even a few months. The caveat to a short combo trade is that when a break out up or down occurs, a trader must recognize and close out the in-the-money option before the trade becomes unprofitable. One could consider rolling up the option helping offset losses, if any, while capturing additional time value on a new leg.

Note: I started writing this before the stock made a major move in the final hour of trading today. The material above is for informational purposes only and is not meant to be advice or an opinion that the stock will remain sideways for this week. I have NOT yet opened up a position on LVS this week.

Disclaimer: writing uncovered (or naked) options requires substantial margin and is only available to sophisticated traders. Uncovered calls have unlimited risk and can have infinite losses. Before making any trade, always discuss this with your advisor or professional broker.

A Short Straddle on Alcoa

Alcoa [AA:NYSE] kicks off the unofficial earnings season for the first quarter this evening, when it is prepared to announce its own Q1 results. But today, I'm not going to discuss the numbers and its estimates and forecasts. No, you can get that anywhere. Today, I'm going to quickly discuss a common trading strategy that may be employed to take advantage of the risk premium priced into stocks before an earnings report.

A short straddle is a neutral trading position in which a trader believes the stock will have a small move. Because of the higher risk and expected volatility in the stock, the option premiums will be substantially higher than it would be under normal circumstances. This strategy requires the ability to write an uncovered call and an uncovered put. In the case of Alcoa ($17.70), you could consider writing a short straddle at a strike of 18.00. The current bids on the call and put are $0.34 and $0.66 per contract respectively. That nets you $1.00 per pair of legs. Excluding commissions, the break even range on this trade is $17.00 to $19.00. That gives downside protection of 3.95% and upside protection of 7.34%. This means if the stock falls no more than 3.95% or rises less than 7.34%, you will profit. The closer it is to $18.00 by Friday, the more you earn.

But if you think the stock might move slightly lower than the current price of $17.70, then you could consider writing the 17.00 call and put. The net premiums would earn you $1.07, which would give you a break even range of $15.93 to $18.07. This strategy would profit if the stock fell less than 10.00% or rose less than 2.04%.

You must also close at least one leg on or before the expiration date. The closer it is to the strike price, the less you will have to pay to close the in-the-money option.

Disclaimer: writing uncovered (or naked) options requires substantial margin and is only available to sophisticated traders. Uncovered calls have unlimited risk and can have infinite losses. Before making any trade, always discuss this with your advisor or professional broker.