Note to members:
As an experiment, I will be going more into detail as to my thought process based on the "Give a fish – Teach to fish" philosophy as my goal here is to build a robust community of sharp traders who can help each other spot market opportunities.
That means that I will have a lot of maybes here and things I am watching develop so always feel free to ask me later if I still like a trade or if things are developing the way I want. On the big site, I couldn’t do stuff like that because I would get accused of being "wishy washy" or whatever but reality is that I watch things for days, weeks, months… years sometimes before I think it’s actually the right moment for a trade (see "The Man Who Planted Trees").
If this confuses more people than it helps I’ll reconsider, so let me know!
Thanks,
– Phil
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Great article by Shlomo Greenberg in Seeking Alpha on CHKP! I’m very sorry I missed this one as they were a hell of a bargain in August at $17. At the moment, I have to agree with C, who initiated them at neutral on Friday as the company took a sharp turn off a 33% gain and is more likely to give up 1/3 of that gian, to $20 before consolidating for another move up.
I like the April $20 puts for .45 as a conrarian play (but not if the stock or the broad market is moving up) and I think we should keep our eye open for maybe $1.20 or less as a nice entry (10%) on the April $22.50s but, with 7,333 open contracts already, I would be selling way before we get to April! If the stock moves up quickly, they might make a fun spread with the Jan $22.50s, which can be sold for .55.
So the move is to open a small position in the April $20 puts in anticipation of protecting the $22.50s when they get cheap. With a small entry on the puts, if it gets away from us, we don’t care (well, we always care a little) but if the stock drops and gives us a shot at the $22.50s for a buck we can DD on the $20 puts (perhaps a .70 average entry) giving us a cheap spread with the stock at $21ish with 3 months to go.
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Also in SA, Bill Trent makes a nice observation that truckers CHRW and LSTR don’t actually own their trucks (they job to independents) and won’t get killed in a slowdown the way YRCW might. The opportunity here is to watch for those two to get pulled down with the sector (Yellow just gave another warning and we had a great discussion in comments the other day about trucker problems) and then take up positions. Money is already running away from the Transports – if that trend doesn’t break the Dow will!
YRCW has the very ugly distinction of being a stock with a p/e of 7 that I cannot recommend! It’s all about the oil as it slows the economy and raises their costs but it will take a while for us to really adjust to a reality of $60 oil long-term so I think if we don’t get below $55 a barrel soon, we can revisit below $35 on Yellow. I wouldn’t short it but it’s real hard to buy…
FDX has earnigs this week and an upside surprise there can give us Dow 12,500. With on-line spending up 24% this year, you would think either FedEx or UPS must be going like gangbusters regardless of what the bulk truckers are doing…
FDX already announced a 5.5% price increase for next year, that’s $1,900M more money for doing the same thing they did this year! Let’s say that costs them 10% of their clients – that’s the same money for doing 10% less than they did this year. Even if they fail to scale back 50% of what they should reduce in order to cut back – that’s still $500M+ dropping to the bottom line (currently $2B).
Perhaps FedEx is so busy and the labor market is so tight that they don’t want any more business and raising prices is simply an exercise in pricing power (I ran a service business and made this choice at one point as it made more sense than expanding).
I think there’s 2 ways FedEx can go at earnigns, good an bad. Just kidding… If they are bad, they will be very very bad so I like the Apr $100 puts for $1.45 as a hedge against the Juy $120s for $7.50, selling the Apr $120s for $5. So you are spending $2.50 for a July $5 out of the money call. We already see the April call is $5 at $5 out of the money so you are getting a pretty good deal if we stay flat. If the stock goes down you’ve got your $100s and the time advantage that should get us out even(ish) but, even if it goes up to $150 in April – you will owe your caller $30 but your call should be worth about what the April $85 is currently worth, $31.70, a loss of .80 (plus probably another .80 on the puts) in a very worst case but many chances at making $2 on a $3.95 outlay.
I’m likely to go for the puts early on Monday if the markets are weak as transports have been pathetic in general and could lead a downturn but I’ll want to get in on calls around $111 into Wednesday’s earnings so we’ll see how it goes.
Meanwhile, LSTR is like a number on a roulette wheel I have a feeling about – I know it’s stupid but I really want to make the bet! Earnings are 2/1 and perhaps we play them on mo if FedEx pops the sector but I’ll be bottom fishing these guys if FedEx disappoints as that has nothing to do with them (and they’ve averaged a 6% beat for the past 4 quarters).
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We were discussing the DIA’s in comments and I see some interesting possibilities. You’ll have to excuse the hedgy betting but we have a whole spreadsheet full of risky plays and I will assume that most of you aren’t in for our super long-term picks from last year so I’m just doing some new set-ups that are safer than what we usually mess around with.
If you want risky stuff this week (aside from the fact that I’m bound to find some as the week goes on) go to the short-term section of the spreadsheet and look for anything that isn’t working yet or, even better, that we recently double downed as it means we still have faith but it just broke the wrong way at first.
Where was I? Oh yes, the DIAs! Since August the Dow has gone from 10,683 to 12,500 and the DIAs (a proxy) have gone from $105.82 to $124.15. In the 4 previous months it had been as high as $115.28 (May) after coming off a low of $100 in October. Anyone who was here in ’04 and early ’05 knows that we yawned through $5 moves as they happened monthly.
So while the VIX gently sleeps we are being offered a chance to buy the June $124s for $5.70. That’s a pretty good premium in anticipation of Dow 13,000 – you are paying about $1 per month to wait and hope while some other guy (who owns the underlying security) risks $119 while being obligated to hold on to it for you all the way until then.
Meanwhile there’s a guy who’s so excited about the prosects of the Dow going up by Jan 19th that he’s willing to pay you $1.90 for the Jan $124, that’s a $1.75 premium against your $1 premium. Now if the DIA ends up down just .15 by 1/19, your poor caller will get wiped out and you will be out about $1 of time value but your basis will now be just $3.80 with 5 months left to go and the June $124 will be worth about $4.70, a nice 25% gain! If we are still iffy about the direction, we can sell the $124 again but if we think things looks good, we can sell the $125s for $1.10 instead and give ourselves a cushion.
On the downside, we have reduced our basis by selling the Januarys, to $3.80. $3.80 is the price of the June $127 so the Dow would have to drop roughly 300 points, all the way to the 50 dma at 12,150 within 30 days for us to be out of pocket. Of course that can happen – but if it does there are a lot of things we can do on the way down that should let us exit with a manageable (less than 30%) loss.
It’s very hard to go into all the possibilities of these trades but I want to make some "set and forget" trades like this that we only touch base on when the underlying makes a big move. We’ll see what the open looks like tomorrow but hopefully we’ll get a small downturn that will let us ease into this position.
OH! If you are bearish (and maybe even if you’re not) the DIA June $124 puts are just $3.70 while the Jan $124 puts can be sold for $1.20 but I would take the puts against my calls as additonal insurance and then sell the closer puts on the first big drop – it won’t evaporate too quickly at that price and we have a nice chance of getting paid over half what we lay out in the first month!
If the market is choppy for a couple of months, you can end up owning the $124 puts and calls for almost no basis and you can cash out a free $5 or $6 or just pray for a 1,000 point move in either direction…
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I’m sure you guys can see how this just is not the kind of thing I could possibly do with 6,000 visits a day! There are currenly only 973 outstanding June $124 DIA”s, but at $600 per contract, I figure most of us will be happy to buy 10 or less. The close ones are very liquid (1,000 per day) so we will be able to sell them or take out our callers at will, also very important for these kinds of plays where nickels matter!
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Speaking of Google (and I was at some point today), it’s time to run a set-up again!
Check out that nice 3 weeks of virtual flatlining into expirations. The stock will run right into the rising 50 dma in the next 7 sessions (unless it runs up and away from it) and we will get a heck of an inflection point!
Notice that Google hasn’t really moved from the Oct 19th earnings jump and the set-up coming in here (coinicdently or "nothing is a coincidece") is EXACTLY $100 over where it was when I wrote my first major Google call back in September. I can’t sit on this one long as my public reputation will hinge on getting this article out BEFORE it happens but I’ll certainly wait until later Monday so all you guys can get in ahead of anyone else who might read it.
I’m not going to have to do much work on it due the the exact $100 move so here’s a heads up on the article I’ll be updating by tomorrow mornign which will only be for us at least until mid-day.
I wrote this one around Sept 1 and showed it to Tom who said I was dead wrong and Google was going to crash so I waited a week but by the weekend of 9/9 I decided to put it up on my blogspot blog and on 9/11 seeking Alpha ran with it and it got placed in the regular news (not blogs) section of Yahoo Finance (along with 20 other articles mentioning Google that day). A week later, I was suddenly famous as the accidental timing made me look like a total genius. That was very lucky but the premise now is almost identical:
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Here’s an article on airline consolidation that’s as good as taking a course on the subject! This is why I love the WSJ (it’s much better in print with all the charts and graphs) and I do assume you are all serious enough about investing to subscribe. I generally try to avoid linking to subscription sites (other than the NYT which sometimes publishes things that are too good not to mention) but I read the Journal every day and link to it pretty much every day so I recommend at least an on-line subscription highly.
You can very often find a free version in Yahoo finance if you dig but for $79 a year, it’s a pretty good investment…
