YTD Performance Snapshot 2-26-10

Here is the updated file of year-to-date performance as of February 26, 2010 of both open and closed positions.  

Have a great weekend!

Taking Another Shot at TBT/TLT (3rd Time)

We first bought a calendar spread on TBT when it was at $47, made excellent money as it went to $50 and got out.  Then TBT went back to $47 and we jumped in again with a call spread in early Feb.  Subsequently, TBT went to $50, we made over 100% profit and got out.  

Now, TBT has fallen back again to the bottom of the channel now trading around $46.67, and I am going bullish again.  For those who don't know, TBT is 2x inverse of TLT which corresponds to long-term bond yields.  Right now, the yield of 10-year has fallen to 3.60% level that I perceive as a floor.  I am looking for yields to go back to 3.70% which equates to $90 on TLT and $49 on TBT.  


I like the following call spread:


- Buy to open April $47 calls
- Sell to open April $50 calls


I just filled the order for net debit of $0.77.  By the way, by the end of year I anticipate yields to go to 4.5% or even higher, unless you believe we are in a full blown deflationary environment.  Given perpetual issuance of debt by current administration, and the Fed bringing an end to MBS purchases and last week raising discount interest rates, these are all signs that interest rates in the long run are going higher.  


The trade above will not be the last time.  Follow the charts and put this on your radar for many years to come.  Buy the dips, sell the rips.  


Good luck!

Research in Motion (RIMM) Ready to Breakout?

Folks, it is slow out there.  Really slow.  With earnings already behind us, I keep looking for set ups that provide nice risk/reward and there are very few.  


Right now, I am looking at Research in Motion (RIMM).  First, here is the latest commentary from Credit Suisse:



"Raising above consensus estimates. We raise our FY10/FY11 EPS to $4.38/$5.45 from $4.37/$5.32, and introduce our FY12 EPS of $6.00, which is 13% above consensus. Trading on a P/E of 11.6x our FY12 EPS, we believe RIMM (CS focus list stock) is inexpensive given a revenue/earnings CAGR of 24.0%/20.4% (FY09-12), sustainable margins and improving FCF conversion.


Raising smartphone market estimates. Today, in our report titled ‘Lower prices unleash volume’ we materially raised our smartphone market estimates for 2010/2011 to 230mn/293mn units, implying robust growth of 5%/27% yoy respectively. Our view on smartphone growth is driven in large part by smartphone factory ASP range of $100-$250. 


RIM’s global share is sustainable. We believe RIM will maintain global share of ~21% in 2010/2011 with NA share loss being offset by international share gains. Specifically in NA we expect smartphone share to decline to 43%/39% in 2010/2011 from 51% in 2009, owing to our expectation for Apple to go nonexclusive in the US in mid-2011 (see our Feb 4, 2010 report ‘Apple exclusivity: not imminent as some fear’). This being said, we would also highlight two potential offsets to NA share loss: 1) sustained international momentum (WE, LA and MEA) – less than 200bps of incremental international share in 2011 would fully offset NA share loss. 2) Our view on the timing for Apple to go nonexclusive in the US provides RIM with time to strengthen its offering and further grow the base. We model FY11/FY12 units and ASPs of 51.2mn (+38% yoy)/61.0mn (+19% yoy) and $297 (-11% yoy)/$268 (-10% yoy)."

Additionally, on Feb 16 and 17, three analysts (Broadpint, Caris, and Stifel Nicolaus) came out with positive commentary and asserted that the stock provides good risk/reward.  RIMM trade at only 13x forward earnings, while smart phone market is growing at 27% yoy.  The smartphone pie within the mobile handset market is the fastest growing sector any where.  And RIMM enjoys #2 position in terms of growth.  


Technically, the stock is setting up very nicely here.  Take a close look at the attached daily chart above.  There is a huge gap remaining to be filled all the way to $82-$85 level.  There is strong resistance at $72 and we are just grinding along here for a long time while the volume is slowly drying up.  If the stock can push higher and break $72 on volume, the buzz will go off and momentum to the upside can easily fill the gap.  


I am looking at the following call spread:


- Buy to open June $75 calls
- Sell to open June $85 calls


The spread is going for net debit of $2.70.  But I am not jumping in yet.  I would rather pay a little higher price, but I want to see the stock break above $72.25 before getting in.  Put this on your radar. 


Good luck!

Housekeeping (FSLR again)

We have another excellent trade here folks.  First we did an earnings play.  See the link here: http://fahadstockworld.blogspot.com/2010/02/first-solar-fslr-earnings-play-21910.html

We made money as March 130/110 strangle expanded from $4.40 to $5.00.  Then we sold March $115 straddle:  Here is the link: http://fahadstockworld.blogspot.com/2010/02/housekeeping-fslr.html

Now, the stock has collapsed as expected trading at $100 and we have made the most amount of money we could have on both trades. Instead of tying up cash any longer, I am closing the entire position.  The net result is 52% profit since Feb 18.  

Booyah! 

Two Stocks with Monster Earnings (IPXL and CNK)

Quick note:  Watch these two stocks take off this morning:


- Impax Laboratories (IPXL):  A blow out quarter.  They reported EPS of $0.61 vs. the highest estimate of $0.19.  Revenue came in $176 million vs. highest estimate of $103.  This is a monster beat folks.  This is a small cap $921 million company.  If they can repeat this kind of growth in 2010 then the forward PE just shrunk from 16 to under 10.  All depends on what they have to say in the conference call that starts at 11:00 am EST to discuss future guidance.  Watch the option action.  This stock is going to fly off the radar.  


- Cinemark Holdings (CNK):  The owner and operator of 429 theaters and 4,783 screens reported EPS of $0.36 vs. highest street estimate of $0.28.  Revenue came in at $536 million vs. the highest street estimate of $514 million.  Attendance in theaters rose 21.2% and tickets sales prices up 10.8%.  The conference call will start at 8:30 am EST to talk about future guidance.  My first thought was they benefited greatly from 3D motion pictures such as Avatar and Transformers II, and can they really duplicate the performance in 2010.  But the press release states they had only 16 3D auditorium operating in 2009 and they will have 30 more in 2010.  Will be watching closely for option activity.  


Good luck!

Palm (PALM) Unusual Option Activity

At 12:40pm, an institutional trader put on a very large crazy trade on PALM.  Take a look:


- Sold to open 9,500 contracts of April $7 puts for $0.43 credit
- Bought to open 19,000 contracts of April $9 calls for $0.68 debit
- Sold to open 38,000 contracts of April $11 calls for $0.21 credit


Previously established open interest on each of those strikes was less than 1200, so these are all opening positions.  Now, take a look at the attached P&L chart above.  Basically, the trader expects the stock to rally back to $11 by April expiration, but not above $13.  On the downside, the trader is fully protected with no loss or gain as long as the stock stays above $7.  This is roughly $2.5 million bet.  


If you want to piggy back on this unusual activity, I would suggest the following unbalanced skip-strike butterfly spread:


- Buy to open 2x April $6 calls
- Sell to open 3x April $8 calls
- Buy to open 1x April $9 calls


The whole butterfly spread is going for a net debit of $2.20 as of Wednesday market close.  The trade remains profitable as long as the stock stays above $7 by April expiration.  The trade will produce a profit of nearly 80% if the stock is at $8 on April expiration.  If the stock goes above $9, the trade will generate 35% profit.  I like these odds much better than the monster trade above.  I will place the order when the market opens on Thursday.  

Keep in mind that there has been very negative coverage of PALM lately by analysts.  On 2/23/10, BofA and Macquarie both downgraded the stock to Neutral and Underperform, respectively.  On 2/12/10, there was a rumor that PALM was halting production in some facilities, but Kaufman Bros. later suggested that it was a mere slowdown not a full halt due to Chinese New Year (I wonder why didn't Apple or RIMM or others made similar announcement).  Lastly, just today Canaccord went cautious on PALM on rumors that Verizon might be considering dropping PALM altogether due to lackluster sales.  


Whether these issues are real or not, PALM shares have precipitously dropped from $14 to $8 in one month and short interest has soared to ridiculous 45%.  Earnings are expected on March 18 after the close, so this could be setting up for a monster rally.  Or at least this one trader with a monster bullish bet seems to think that way.  


I like the odds of my butterfly spread because it also meets the 5-10-20 rule.  More on this rule, go to: http://fahadstockworld.blogspot.com/2010/02/5-10-20-rule-easy-way-to-passive.html


Good luck! 

The 5-10-20 Rule: AK Steel (AKS)

For those who haven't read, before you read any further, I recommend getting yourself familiar with 5-10-20 rule here: http://fahadstockworld.blogspot.com/2010/02/5-10-20-rule-easy-way-to-passive.html 


Here is the quick note on fundamentals on AKS by Credit Suisse as of 1/25/10:



"Following Q4 results, we are maintaining our Neutral rating. We are raising our target price from $18 to $24. Our target price represents 6.0x and 5.5x our 2010 and 2011 EBITDA estimates, respectively. We are raising our 2010 EPS estimate from $0.76 to $1.26. 2010 Operating Targets…40% y/y volume growth appears conservative. AKS is targeting 2010 shipments of ~5.5m tons, +40% y/y, with a Q1’10 volume target of 1.37m tons. However, the Q1 and full-year targets imply basically flat quarterly volumes when compared with Q4’09 actual results. In our view AKS 2010 volume target will likely prove conservative, given the generally weak Q4’09 operating environment and given AKS own comments that their mills are now running at 85% utilization rates, vs. 70% average for Q4 (our full-year 2010 volume estimate is 5.7m tons, +45% y/y). AKS is targeting operating profits/ton for Q1’10 of $35 (vs. our previous est of $31), with further improvements beyond Q1 as the full benefit of price increases flows through results. Given ongoing raw material price pressures, we are raising our 2010 price assumptions (Our US HRC price increases from $550/ton to $600/ton). We maintain our broader view that US prices will be capped on the upside by underutilized capacity, but supported on the downside by the impact of higher raw-material costs on the high-end of the global cost curve. 

Bottom Line – LIFO credits boosted Q4 results, but these credits won’t last. Looking ahead, 2010 outlook is promising vs. 2009 and vs. our previous estimates, driven by strong volume growth and price sustainability. While in our view AKS is the relatively better investment alternative among the US integrated steel producers, on an absolute basis we believe the shares are approaching fair value, based on what we believe to be reasonable EV/EBITDA multiples of 6.0x and 5.5x our 2010 & 2011 estimates. Accordingly, we maintain our Neutral rating."


Given the fundamental outlook and valuation, it appears that the stock is fairly valued currently trading between $19 and $24.  On a technical basis, those levels coincide with support and resistance lines, respectively (see the daily chart).  Therefore, I like the following iron condor that combines both credit call and credit put spreads:

- Buy to open March $25 call
- Sell to open March $24 call
- Buy to open March $18 put
- Sell to open March $19 put

Does it meet the test?

5% - Check
10% - Stock closed on Wednesday at $21.37.  $19 strike is 11.1% below and $24 strike is 12.3% above - Check
20% - The mark on this trade is $0.30.  I am going to try for no less than $0.25 credit, which is 0.25/0.75 or 33.33% profit before commissions - Check

Additionally, if you closely look at the P&L chart, you will see three vertical red dotted lines.  I have set the two corner ones on break even points, which reveals that there is a 16.67% probability of stock falling below $19, and 14.36% probability of stock going above $24 by March expiration.  Think or Swim calculates these probabilities using net Delta on the trade being done.  From my experience, they're pretty reliable.

Risks:  I reviewed all historical option activity since Feb 1st (yes, I have a way to go back in time), and I don't see any unusual activity.  The biggest risk here is its competitor Cliff Natural Resources (CLF) has seen its stock outperform both AKS and US Steel (X).  CLF also has had call buying lately.  Another competitor STLD also saw heavy call buying in March, but the stock has yet to perform.  The risk is AKS can catch a bid or upgrade on a relative strength basis that could move the stock above $24.  Also, I believe the US Dollar is a bit overextended in its rally.  If US Dollar turns back down, it could add fuel in resource stocks.  These are the risks we have to monitor.

Overall, I like the odds of the trade.  Good luck! 

The 5-10-20 Rule: The Easy Way to Passive Trading

Here I am about to describe in detail my most important rule for one of the most basic option strategies that anyone can do with a peace of mind.  It is called the 5-10-20 Rule and it applies to vertical credit spreads.  Every month, I allocate about 40% of my portfolio to this strategy.  


I think we are going into an economic cycle for several months where the market just cannot continue to grind higher or break down to new lows in a fast blistering speed.  We will remain range bound which at this point for S&P seems to be 1050 and 1150.  Until a better picture emerges, going forward most of my trading ideas will be based on how to make the most out of your money while the market doesn't do anything.  And that's where 5-10-20 Rule can make a difference.  Note that this is not meant to hit home runs, but rather take a passive approach and let Theta decay work for you.  


Most of my readers are familiar with credit spreads.  They are done when you buy a lower OTM strike puts and sell a higher OTM strike puts to bet that the stock will remain above certain strike by expiration.  We sold put credit spreads in AAPL and GS in Feb and they expired worthless (see the archives).  A similar bet to the downside can be made when you buy an OTM higher strike call and sell an OTM lower strike call.  When you combine both calls and puts, it becomes an iron condor.  


Here is the breakdown of the strategy:


5% - When trading options, never ever in your life time allocate more than 5% of your portfolio in a single trade.  It doesn't matter you have $10,000 or $1 million in your account, stick with the rule and it will serve you good in the long run.  


10% - When doing a credit spread, the OTM strike you're selling or shorting, the difference between that and where the stock is currently trading at must be at least 10%.  This is important because if the stock runs against you, it gives you 10% cushion before your shorted option can get in the money.  


20% - The total return or profit by selling the spread must be at least 20% each month.  So, if it is $5 spread, it should be done for no less than $1 credit; $1 spread should be done for no less than $0.20 credit.  


To give you an example.  Look at DNDN right now.  There is no event in the horizon before March expiration that can move the stock significantly.  The stock is currently trading at $31.  First rule, no more than 5% of your money should be allocated to this trade.  Second rule, if you decide to do a credit spread by buying March $27 puts and selling March $28 puts, the difference between current stock price of $31 and the strike you're selling $28 is in fact just about 10%.  So, that meets our test.  Third rule, this 27/28 credit spread is $1 spread, so it should be done for no less than $0.20 credit.  If done correctly, you will make 20% on your money as long as the stock stays above $28 by March expiration, and you have 10% cushion in case the stock falls.   


The idea here is to sell credit spreads each month and take in 20% on each trade when stocks are trading sideways or in a range.  You must also combine technical elements to do the trade and the ideal would be to sell a put spread that is below support line, or sell a call spread that is above resistance line.  


The best time to do this is at the beginning of each option cycle.  I normally start out by printing out the entire list of S&P 500 stocks.  I break it down by sectors and review the best of breed stocks in each sector.  I eliminate those that have earnings risk before the option expiration.  I look at technicals, fundamentals and latest reports by Tier 1 analysts.  When all things line up and the stock meets the 5-10-20 rule, I put on a trade and expect the spread to expire worthless on expiration.  


With 5% rule in place, you can do 20 such trades if you wanted to allocate 100% of your portfolio.  If done right, take a calculator out and punch in 20% compounded monthly and see what the results will be after one year.  This is how I had a fantastic year in 2009.  


Exit Strategy:  There will be times when despite all your research and check ups, the stock moves enough by expiration that the shorted call gets in the money.  A word of caution and I'll use Cramer's rule here.  Do your homework every day.  Try to allocate at least 1 hour every week per trade to make sure your trade is doing fine.  Watch the technicals, the analyst commentary and general sentiment from the option activity.  Try to identify scenarios early on when there is such a danger.  And when you find one, cut your losses and move on.  There will always be another day to make money, but if the principal capital is lost, there will not be many days to get back in the game.  


Over next several days, I will be presenting many ideas for March expiration based on this 5-10-20 Rule.  Stay tuned and feel free to ask questions.  


Good luck!

More Airline Consolidation Coming Our Way?

Scanning through unusual activity tonight, here I find something interesting.  On Feb 23, 2010 at 3:12 pm EST, the CFO of United Airlines, Kathryn Mikells, openly expressed interest in merger discussions and further consolidation in the airline industry during a Reuters Travel & Leisure Summit in New York.  


This reminded traders when in 2008 United Airlines was aggressively pursuing merger talks with Continental, Delta and US Airways.  The CFO declined to comment when asked whether she meant merger talks was definitely back on the table, but that didn't stop at least one trader taking a shot in the option market.  


Half hour after the presentation and 15 minutes before the closing bell, at least one trader bought large at-the-money straddles across all three names.  Specifically:


US Airways (LCC) at 3:53pm EST:
- Bought 7500 of Sept $7 calls for $1.6 (bid/ask $1.50 x $1.60)
- Bought 7500 of Sept $7 puts for $1.7 (bid/ask $1.55 x $1.70)


Continental (CAL) at 3:46pm EST:
- Bought 3000 of Sept $20 calls for $3.35 (bid/ask $3.25 x $3.35)
- Bought 3000 of Sept $20 puts for $3.45 (bid/ask $3.35 x $3.45)


Delta Airlines (DAL) at 3:48pm EST:
- Bought 3900 of Sept $13 calls for $2.1 (bid/ask $1.95 x $2.10)
- Bought 3900 of Sept $13 puts for $2.45 (bid/ask $2.30 x $2.45)


As you can see, all orders were filled on the offer and the volume was more than 9x open interest.  Total value of the combined trade is ~$6.3 million.  Two things are clear here.  One, with United CFO talking mergers, the implied volatility will remain sharply elevated and will probably get even higher as more analysts start the chatter.  This will expand and benefit the straddle.  Second, it is reasonable to assume that a merger with one airliner is an automatic loss for the other.  Thus, a straddle on all three makes sense.  


I like this set up and will buy all three straddles.  But to further reduce the cost and avoid any damage from Theta decay, I'd be selectively selling front month out-of-money strangle each month where necessary.  I will buy the above straddles when the market opens, and will inform my readers if and when I decide to sell strangles against the long positions.  


This trade requires patience and management of your inventory of calls and puts each month, but the payoff could be huge depending on the outcome.  


Good luck!

Garmin (GRMN) Earnings Play 2/23/10

Garmin will report earnings tomorrow before the market opens.  I have long maintained that Garmin's core business model is broken.  We did a perfect trade on Garmin back in Jan.  Here is the link: http://fahadstockworld.blogspot.com/2010/01/what-does-future-hold-for-garmin-grmn.html


The major issue with Garmin is its PND business is saturated.  The average price of PNDs are on a decline for 3 years.  And in the last year or so, the threat from smart phones providing free satellite navigation has become real.  


There is a plethora of negative commentary by analysts all pointing to these facts.  On the other hand, however, Garmin trades at 12x earnings and 3x cash flow.  Plus, it has almost 10% short interest.  The question you have to beg is how much the bad information is already discounted in the stock price.  


The last three times Garmin reported earnings, the stock made an average of 13% move.  This time, at the time money straddle is going for $3.70, implying about 11% move.  However, take a look at the technicals in the daily chart.  There is converging triangle in play and the stock only needs to make about 7% move in either direction to break outside of the triangle.  And you know when stocks breakout from a triangle, they tend to keep moving as it implies a change in trend.  


That makes me think the straddle is actually underestimating the potential move despite 51 implied volatility in March.  Going into the earnings, I think the right trade is to buy $34 straddle and sell $4 or $5 out of money strangle to lower the cost.  This could also be placed as two verticals as given the P&L chart.  Specifically, 


- Buy to open March $34 calls
- Buy to open March $34 puts
- Sell to open March $39 calls
- Sell to open March $29 puts


In TOS, the spread has to be entered in two separate orders as I have broken down in the attached P&L chart.  This is a $5 spread on both directions, which is currently going for $3.  So the stock will have to move in either direction by at least $3 before break even by March expiration.  I like the odds.


For those willing to take a bit higher risk, just buy the straddle without selling out-of-money strangle.  This will cost you a bit higher price, but you have unlimited profit profile in either direction.  


Good luck!

Taking Another Shot at Goldman Sachs (GS)

Late yesterday, I noticed call buyers flocking into Goldman Sachs.  This morning the market is down ~1% including most financials, while Goldman is up 1.5%.  As of this writing, according to ISE Sentiment at 10:54am, call buyers are hitting offers 3 to 1.  That's a pretty bullish sentiment, and this is despite a horrible consumer confidence reading earlier today.


Depending on your risk appetite, there are two ways to play GS.  One through the following ratio spread:


- Sell to open 1x March $155 calls
- Buy to open 2x March $160 calls


Keep in mind that on March expiration, the break even on the upside is $166, so the stock must make a move above that level to remain profitable.  Also, $162 will provide significant resistance as both 50-day and 200-day MA reside at $162.  


Second, a more conservative approach would be to sell the following bull put spread:


- Buy to open March $150 puts
- Sell to open March $155 puts


The trade can be done for a net credit of $1.35 as of this writing, which provides a fixed 27% profit by March expiration as long as the stock remains above $155.  


The ratio spread provides higher return, but also higher risk given that the break even point is far out at $166.  Ratio spread also provides better protection and only a fraction of loss compared to a call spread if the stock plummets for any reasons.  On the other hand, the bull put spread provides further cushion to the downside but very limited profit.  


I went for the ratio spread and just filled the order for $1.00 debit.  


Good luck!

Housekeeping (LPX)

Folks, we have a monster winner working here.  Back on Feb 9, we bought outright March $7.50 calls for $0.40 before they announced earnings.  Here is the original post: http://fahadstockworld.blogspot.com/2010/02/louisiana-pacific-corp-lpx-earnings.html


As of this morning, these calls have doubled in value now trading for $0.80.  But this $8 level has been a tough resistance for the stock in the past.  This is a double people, so I am taking half off the table and leaving the rest.  

iShares South Korea ETF (EWY) Unusual Activity

Typically, I don't play with ETFs because I can do a better job trading individual stocks myself and don't need the diversification.  But here is something unusual this morning.  


At 10:19am this morning, a trader went decisively bearish on emerging market, specially Korean stocks.  The trader did the following skip-strike butterfly:


- Bought 5,000 contracts of March $46 puts at $1.3 (bid/ask $1.25 x $1.35 at the time)
- Sold 10,000 contracts of March $43 puts at $0.45 (bid/ask $0.45 x $0.55 at the time)
- Bought 5,000 contracts of March $41 puts at $0.30 (bid/ask $0.20 x $0.30 at the time)


The open interest on those strikes is less than 600, so these are clearly opening positions.  The butterfly spread was done for net debit of $0.70.  This is a $350,000 trade that will produce peak profits of a little over $1 million if EWY falls 8% and trade at $43 on March expiration.  


Keep in mind that many large institutional investors who have large holdings within individuals stocks, they tend to hedge their positions by buying puts on ETF.  I see this with XLF all the time.  Samsung has 18.8% weighting in EWY.  The second largest is Hyundai at 3.8%.  So, whether this is a hedge or a straight bearish bet, if there is going to be a sell-off in Korean shares, it would have to be driven down by Samsung.  


I am not able to find who are the largest shareholders of Samsung as they might be the ones potentially hedging with this trade.  If you do, please feel free to comment.  Samsung alone represents 20% of South Korea's export.  It is big enough many regulators have called to break up the company, but that's an old story.  If this is a straight bearish bet, I am not sure what the catalyst will be.  


Regarding technicals, Interestingly $43 (the body of this butterfly) is the support level and has bounced off from there several times since Sept '09.  So, this trade could very well be a bet that it is going back to retest $43 level.  


I just did the exact same trade and the order was filled for net debit of $0.60.  The P&L and daily charts are attached.  


Good luck! 

Housekeeping (FSLR)

Sorry for delay folks, crazy night at The Banks in Bellagio last night, and it is 7:30 in the morning here. 



Anyway, with Feb options almost zero, the spread has expanded to about $5.00 with stock trading at $117.50.  If you like, you can take profits here and call it the day.

Since I already own March $110 puts and $130 calls, I am closing out Feb options and selling March $115 straddle for $12.00.  See the attached P&L chart of how the trade looks like after I do this.

Good luck!

First Solar (FSLR) Earnings Play 2/19/10

First Solar will report earnings tonight after the market close.  First, here is a latest note by Credit Suisse on fundamentals of the company:


"Expect C4Q09 upside. We expect FSLR to report C4Q09 results at the high end of guidance, rev/EPS could track closer to $600mm and $1.60+, versus street cons at $579mm and $1.50. Upside in 4Q09 should be driven by: (i) System project completions of 45MW – expect system revenue upside to high end of guidance; (ii) FSLR’s unhedged euro assumption of $1.45 has slight upside to ~$1.48; (iii) FSLR had built over 50MW of inventories from 1Q09-3Q09 – draw down of inventories to meet Q4 demand would help; (iv) FSLR’s module gross margin guidance of 50-51% (versus 50.9% in 3Q09) could have upside from lower rebates.



Negatives since Dec analyst day. (i) German uncertainty: German FiTs are likely to decline 16% for roof-top and 15-25% for ground mount; (ii) European macro uncertainty: Sovereign credit risk among some European countries has led to a sharp decline in value of Euro versus the dollar – the Euro is now at $1.37 versus FSLR’s 2010 guidance assumption of $1.40; (iii) US pipeline uncertainty in 2H10: Some newsflow on delays in approvals of some FSLR pipeline projects in US.


Positives since Dec analyst day. (i) Sentiment: FSLR stock has pulled back ~10% since Dec 17 analyst day, and investor sentiment appears quite negative following news of accelerated German FiT declines on Jan 14; (ii) Near term demand strong: Channel checks have consistently suggested Q4 and Q1 solar demand is extremely strong given demand pull ins in Germany; (iii) FSLR pricing upside: FSLR projects appear to receive premium pricing at system level compared to Chinese c-Si projects; (iv) France strong: EDF-EN had fairly positive comments on solar intent."


It is the technical picture where a lot of difficulties reside.  First, take a look at the declining resistance line from June 2009.  Stock has not been able to break above this resistance and there is no reason to believe it will after the earnings.  It currently stands at $133.

Second, when company reported 1Q09 earnings, the stock made a $36 or 23% move; 2Q09 report made a $19 or 11% move; 3Q09 report made a $25 or 17% move.  Despite all this volatile history, the at-the-money straddle this time for 4Q09 earnings is going for only $10 which implies an 8.5% move, even with sharply elevated implied volatility of 136 in Feb vs. 55 in March.

If history is any guide, then it looks like straddle is cheap and should be bought going into earnings.  However, with one day left to expiration, if there isn't a big enough move the straddle will go poof, and that's too much risk for a trade.  So, I am going with the following double diagonal calendar spread:

- Buy to open March $130 calls
- Buy to open March $110 puts
- Sell to open Feb $130 calls
- Sell to open Feb $110 puts

I just filled my order for net debit of $4.40.  The P&L and daily charts are attached.

Good luck!

JP Morgan (JPM) Pin Action Iron Butterfly

Before I describe anything here, please note that this is extremely risky trade with two days left for Feb expiration.  It appears to me that they're trying to pin JPM at $40.  If that turns out to be correct, then the following iron butterfly trade could produce as much as 100% profit by 4pm tomorrow.  


- Buy to open Feb $39 puts
- Buy to open Feb $41 calls
- Sell to open Feb $40 puts
- Sell to open Feb $40 calls


Basically, you're buying 39/41 strangle and selling 40 straddle, thus creating an iron butterfly.  See the attached P&L chart.  The theory here is JPM will be pinned at $40 by 4pm Friday.  But again this market has no memory day to day, so this is extremely risky and speculative and keep position size small.  As of this writing, the above iron butterfly is going for net credit of $0.58.  This credit will slowly bleed to zero by 4pm tomorrow if JPM stock stays right here at $40.  


Good luck!

Watch the Pin Action

For those not very familiar, this is the time when you have two or three days left to option expiration, you will find that many big cap stocks will seamlessly get pinned to one strike where market makers can do the most damage to calls and puts buyers.  We see this every single option expiration.  


While many people hate this kind of action, but in reality it provides a fantastic opportunity to sophisticated option traders.  For instance, if you believe JPM will get pinned at $40, then why not do 39/40/41 butterfly spread in Feb?  Currently, this butterfly spread is going for $0.35 debit but it will slowly expand to $1 if the stock stays right here at $40.  That's almost 200% return by tomorrow 4pm.  


The key here is to identify that particular strike.  Also, this kind of trade is extremely risky and speculative, so keep position size small and be nimble to cut your losses if its not working out.   


I will be scanning the list of several large cap stocks through out this morning.  But from the first sign, it looks like GS is getting pinned at $155, JPM at $40, ZION at $18, etc.  


Good luck!

Housekeeping (BAC, DNDN and RVBD)

Sorry folks, traveling this afternoon to Vegas at 2:35pm flight, so I am a bit out of pocket today.  Logged in from the airport.  I am closing out all three positions below:

Bank of America (BAC) - We did a bullish risk reversal on this just yesterday and the stock is already up almost 7% since then.  The Aug 11/14 bull put spread has shrunk from $0.82 to $0.65, while Aug $17 calls have gone from $0.82 to $1.06.  I don't think the run is over, but no one ever lost money by taking profits early!  I am closing the full position for about 20% gain on the bull put spread and 30% gain the calls in just 24 hours.  Love it!

Dendreon (DNDN) - We have May 30/40/50 butterfly spread that we bought for $2.35.  The spread has expanded to $2.75 this morning.  The stock broke out earlier in the week.  I think there is further room to the upside here as well, but I am taking profits and closing the entire position for about 16% profit in 2 weeks.  

Riverbed Tech (RVBD) - We did a June 25/30 bull call spread for $1.9 when the stock broke out from long consolidation.  The spread has now expanded to $2.25.  Again, I think there is more room here but this market has no memory from day to day.  Taking profits and locking in approx 18% profit in one week.  

There will be other times to get back into the names above again.  

YTD Performance Snapshot 2-16-10

Many readers have been in touch with me lately to see if there is any easy way to separate current open and closed trades as well as their performance.  Attached you will find a snapshot of all trades since the beginning of 2010.  It is important that we look back at our performance and see how well we have done, or where we could've avoided the mistake.  Hopefully, this snapshot will provide us the starting tool.  

We did many trades since beginning of 2010 where we took advantage of elevated volatilities without making much of a directional play.  The results are clear and we had a great run.  But now the earnings season is mostly coming to end, the next month I believe will be about macro picture (more on this later).   


I will update this file each night and will provide the link once a week.  Anyone who likes to see this file more frequently, please contact me by email.  

Priceline (PCLN) Earnings Play 2/17/10

Priceline will report earnings before market opens tomorrow.  I think it is going be all about international revenues and opportunities there.  Here is the latest note from Credit Suisse:



"Another Big Beat Expected: Feedback suggests 4Q buyside expectations are well above consensus adj. EPS of $1.68 (+31% y/y) vs. $1.52-1.62 guide. While this view appears reasonable, overperformance across key metrics, above-consensus 1Q guide and favorable fwd-looking commentary also likely required to satisfy elevated momentum-driven expectations.


Favorable Fundamental Update Anticipated: While outlook commentary likely to reflect warranted optimism on cont’d strong secular/share capturedriven growth, enthusiasm likely somewhat tempered by uncertainty regarding multiple puts/takes including pace of unit volume deceleration, timing/magnitude of ADR improvement as an offset and sustainability of peak 55% 2009E EBITDA flow through (incremental EBITDA as a % of GP).


Fine Tuning Estimates: Lifting 2009E adj. EPS from $8.30 to $8.38 on strong 4Q finish and 2010E EPS from $10.00 to $10.36 (roughly in line with Street consensus but seemingly still well below buyside expectations) on
higher int’l growth driven by faster ADR recovery partially offset by stronger US$ (€€ /USD of 1.36 and ₤/USD of 1.56 vs. 1.44 and 1.62 prior).


Compelling Multi-Year Growth Story Intact: Strong secular tailwinds remain firmly in place and the rationale to own the stock remains sustainable strong growth driven by deployment of proven potent agency distribution model against an attractive $300b global lodging market opp’y.


Content to Wait for an Entry Point: The space’s dynamic nature and inherent puts and takes in the business model have historically combined to create elevated volatility and material misperception opportunities.


TP Unchanged: Our $210 TP still consistent with estimated yr-fwd value range of $206-219 that assumes 9-10x 2010 domestic EBITDA and 14-16x int’l EBITDA (represents low end of precedent private market transactions)."


Noted a few put sellers today in small blocks at $200 strike.  Technically, the stock put a nice double bottom around $194.  A break below that could take the stock quickly to fill the previous gap which is all the way down to $180.  But I don't see that happening.

On the upside, the stock is likely to find some resistance at previous 52-week high of $231.  I am bullish on the stock and want to play directionally to the upside with the following calendar spread:

- Buy to open March $230 calls
- Sell to open Feb $230 calls

The implied volatility in Feb is sharply elevated at 95 vs. 46 in March.  The calendar spread is going for $2.50 as of this writing.  This is a bit risky as I am looking for a retest of $230 after earnings which is 20% away.  A less risky trade would be to use $220 calendar currently going for $3.30.

Good luck!

Whole Foods (WFMI) Earnings Play 2/16/10

Whole Foods (WFMI) reports earnings tonight after the market close.  If you scan the Tier 1 analysts' commentary, the reactions are nothings but a bag of mix opinions.  

The stock has a little over 10% short interest and perhaps that's the reason why we're seeing some speculative buying in March $35 calls where over 2000 contracts have exchanged hands against open interest of only 58.  But all this actions seems to lack institutional interest, which generally corresponds to trade blocks of over 1000 contracts.  Specifically, at this March $35 strike, largest three orders (363, 199, 287 contracts) all traded on the offer price of $0.32 around 9:54am this morning.  Given the exact timing, this could all be part of one order. 


Looking at today's option action in general in WFMI, as of this writing approx 16,000 contracts have exchanged hands on both calls and puts (total slightly over 32,000 contracts).  There is no single block order of more than 500 contracts on any strike.  Only 15% of all puts and 28% of calls traded so far were bought on the offer, mostly suggesting no clear direction after earnings.  We still have a little less than 4 hours to go, so this whole picture could easily change.  


Lastly, at-the-money $30 Feb straddle is going for $2.50, suggesting approx 9% move by this Friday.  Note that the implied volatility in Feb is ridiculously elevated at 100, while March is at 49.  That's a sharp IV skew.  I will continue to monitor any unusual option activity into the close, but for now with lack of institutional interest and no clear direction, I like the following double diagonal calendar spread:


- Buy to open March $32 calls
- Buy to open March $28 puts
- Sell to open Feb $32 calls
- Sell to open Feb $28 puts


The trade can be done as of this writing for a net debit of $0.95 or less.  The daily and P&L charts are attached.  The trade remains profitable as long as the stock stays between $27 and $34, which is slightly outside the bands of at-the-money straddle.  If you believe the stock can get out of this range, then you must also believe that the straddle is cheap despite IV of 100.  In that case, you're better off just buying the straddle.  


Unless I see change in sentiment in the option market by the market close, I like the odds of above double diagonal calendar.  


Good luck!