Dissecting Nathan's Oracle Trade

This is so amazing that I just jumped off my seat and felt compelled to come back to my computer to talk about it.


On Friday March 26, Nathan (don't know his last name) came on Option Action on CNBC to suggest the following bullish risk reversal when Oracle (ORCL) was trading at $25.25.


- Sell to open June $23 puts for $0.55


Use the proceeds from above to partially finance:


- Buy to open June $26 calls for $0.80


The whole structure would cost $0.25 net debit.  First of all, there is one thing outright wrong about this trade.  This show comes on Friday after close.  Using the thinkBack feature on TOS, on Friday at the close, the bid on June $23 puts was $0.31 and the ask on June $26 calls was $1.00.  Since the show comes out after close, you would think they would double check their facts, because these prices are way off the chart.  The whole structure would've actually cost you $0.69 net debit versus $0.25 they suggested.


But that is not even the real issue.  Today, Melissa Lee of Option Action alluded that Nathan's bullish risk reversal produced 300% profit because ORCL has rallied 3% since March 26.  


I have no idea how they calculated that.  At today's close, June $23 puts are marked $0.25 and June $26 calls are marked $0.78.  So, if you unwind the whole trade, it will produce $0.53 net credit, while the original cost was $0.69 net debit.   If anything, this is a loss!  I have no idea where they came up with 300% profit.


Finally, there is even a larger issue here.  Lets just forget about all price discrepancies and just assume that trade in reality could've been done at Nathan's price of $0.25 net debit and is currently going for $0.53.  As with any bullish reversal involving sale of naked puts, there will be a margin requirement based on risk that you will have to buy the stock if it falls below the strike where the put is sold.  In this case, using 33% margin requirement and $23  put strike, the maximum cash at risk for every 1 contract sold is $759.  


Assuming you got in at Nathan's price of $0.25 net debit and closed the trade today for $0.53 net credit, you made a whopping $28 on every $759 or about 3.68%.  After subtracting commissions, the real return is probably 1-2%.  And guess what?  The stock is up 3% during this time.  You would've been better off just buying the stock.  I can't get my head around where CNBC calculated 300% profit.  


When you do a bullish risk reversal by selling naked puts, you cannot ignore margin requirement because that is the cash at risk that your broker will not allow to use for other purposes as long as you are in the trade.  You must take that into account when calculating percentage profit.  


If it wasn't this way, then I could've easily announced that I made 52,800% profit on DNDN call ratio spread yesterday.  But I know I didn't.  It would be a lie to say so.  These bozos on Option Action are not trying to properly educate the public.  They're trying to get your attention so the next commercial could be sold for higher price.  


Sorry for my ramblings, but I can't stand people on national TV who create lies to get your attention.  If any of you readers out there strictly followed Nathan's trade and made 300% profit, I beg you to please drop me a note below how you did it.  

Taking Another Shot at Goldman Sachs (GS)

I am selling the following bull put spread:


- Buy to open May $125 puts
- Sell to open May $130 puts 


The spread is currently going for $0.80.  I am placing the order to execute for $1.00 credit which will require GS to drop further in this last hour.  I will only do this if I can get $1.00 for it.  


Good luck!

Housekeeping: Netflix (NFLX)

We made an earnings play and bought May/June $80 and $90 double calendar for $2.60.  The stock ripped higher on major short covering which seems to be coming to an end.  Regardless, this was an earnings play and I don't want to stay in the game forever.  The spread is marked $2.70 as of this writing, so I am placing the order for $2.60 (original cost) to close the trade for scratch and move on.  Spreads are wide, so it may take a while for the order to execute.  


No loss, no gain.  

Taking Another Shot at Dendreon (DNDN)

I continue to believe the market is significantly under estimating the impact of this blockbuster drug and its future prospects on the company.  The only issue here is in order to increase the distribution network, the company may have to do a large secondary which could put a lid on the stock temporarily.  But if that happens, I expect the market to easily absorb the dilution given the bright future.  Regardless, I am buying the following calendar spread:


- Buy to open Aug $60 calls
- Sell to open May $60 calls 


I just filled the order for $2.90 net debit.  


Good luck!

Market Digest 4-30-10

 American Electric upgraded at Jefferies
AEP was upgraded from Hold to Buy, Jefferies said. Valuation call, even though first quarter earnings missed estimates. $38.50 price target.

 Athenahealth downgraded at Leerink
ATHN was downgraded from Outperform to Market Perform, Leerink Swann said. Company lost key customers and failed to add new providers. Estimates also lowered.

 Baldor Electric downgraded at Longbow
BEZ was downgraded from Buy to Neutral, Longbow Research said. Stock is pricing in the company's strong market share and operating leverage.

 Commscope upgraded at Baird
CTV was upgraded from Neutral to Outperform, Robert Baird said. Company had a strong quarter, given better enterprise spending and wireless CapEx. $39 price target.

 Goldman Sachs downgraded at BofA/Merrill
GS downgraded to Neutral from Buy on reports that federal prosecutors have opened an investigation of GS in connection with its trading activities, raising the possibility of criminal changes, Bank of America/Merrill Lynch said. $160 price target. 

 Halliburton downgraded at FBR
HAL was downgraded from Outperform to Market Perform, FBR Capital Markets said. $35 price target. Gulf of Mexico tragedy could hang over the stock.

 Harman upgraded at Baird
HAR was upgraded from Underperform to Neutral, Robert Baird said. Valuation call, based on a $45 price target. Company had a good quarter and guidance could still prove to be conservative.

 ITC downgraded at Deutsche
ITC was downgraded from Buy to Hold, Deutsche Bank said. Valuation call, as the company has few near-term catalysts. $58 price target.

 Jarden downgraded at Goldman
JAH was downgraded to Neutral, Goldman Sachs said. Estimates also cut, as the company is facing margin headwinds. $38 price target.

 Mead Johnson Nutrition downgraded at Credit Suisse
MJN downgraded to Neutral from Outperform on valuation, Credit Suisse said. Estimates lowered through 2012. Maintain $54 price target. 

 Microstrategy downgraded at FBR
MSTR was downgraded from Outperform to Market Perform, FBR Capital Markets said. Expenses are running above expectations. $90 price target.

 O'Reilly Automotive downgraded at FBR
ORLY was downgraded from Outperform to Market Perform, FBR Capital Markets said. Company is facing difficult comps and may struggle to deliver continued earnings upside.

 PPL downgraded at UBS
PPL was downgraded from Buy to Neutral, UBS said. Estimates also lowered, as the Kentucky utility deal should dilute earnings. $26 price target.

 Transocean downgraded at FBR
RIG was downgraded from Outperform to Market Perform, FBR Capital Markets said. $87 price target. Deepwater Horizon catastrophe could weigh on the name.

 Spirit AeroSystems upgraded at Credit Suisse
SPR upgraded to Outperform from Neutral. Upward pressure on BA production rates boosts SPR forecast, Credit Suisse said. Price target lifted to $30. 

 Thoratec upgraded at BofA/Merrill
THOR upgraded to Buy from Neutral based on the better than expected early launch of Heartmate II highlighted in the company 1Q10 results, Bank of America/Merrill Lynch said. Price target raised to $47.

 Thoratec estimates, target boosted at UBS
Shares of THOR now seen reaching $44, according to UBS. Estimates also upped, as the company can continue to grow sales and margins throughout 2010. Buy rating.

 Thoratec upgraded at Wells
THOR was upgraded from Market Perform to Outperform, Wells Fargo said. Estimates also raised, as pipeline visibility is improving.

 Trimble Navigation upgraded at Deutsche
TRMB was upgraded to Buy, Deutsche Bank said. $36 price target. Company boosted guidance, and is seeing an improving E&C market.

 DENTSPLY International initiated at Credit Suisse
Credit Suisse initiated coverage on the largest dental consumable manufacturer with a Neurtral rating and $41 price target. XRAY 2010 and 2011 EPS estimates set at $1.94 and $2.12, respectively. 

 Aetna target, estimates lifted at Barclays

AET price target improved to $38 from $36. Strong earnings and stronger quality, Barclays said. 2010 and 2011 EPs estimates jumped to $2.80 and $2.90, respectively. Overweight rating.

 Acme Packet numbers raised at Goldman
Shares of APKT now seen reaching $25, according to Goldman Sachs. Estimates also increased, given improved operating leverage. Neutral rating.

 Avnet estimates, target upped at UBS
AVT estimates were boosted through 2011, UBS said. BELM acquisition is adding to earnings. Buy rating and new $37 price target.

 Autozone estimates, target raised at Goldman
Shares of AZO now seen reaching $192, according to Goldman Sachs. Estimates also increased, as the industry is showing higher growth. Neutral rating.

 BorgWarner estimates, target increased at Goldman
BWA estimates were raised through 2012, Goldman Sachs said. Company is seeing productivity gains and should benefit from the Dytech acquisition. Neutral rating and new $46 price target.

 Colgate-Palmolive numbers reduced at Goldman
Shares of CL now seen reaching $98, according to Goldman Sachs. Company is seeing a lower currency benefit. Buy rating.

 Colgate-Palmolive target, estimates higher at Barclays
CL price target increased to $87 from $84 after the company delivered another classic high-quality earnings report, Barclays said. 2010 and 2011 EPS estimates lifted to $4.83 and $5.38, respectively. Equal Weight rating. 

 ConocoPhillips target, estimates raised at Barclays
COP price target lifted to $60 from $55 on 1Q10 EPS beat, Barclays said. 2010 and 2011 EPS estimates increased to $5.95 and $7.35, respectively. Equal Weight rating. 

 Covance estimates, target lowered at Goldman
CVD estimates were cut through 2012, Goldman Sachs said. Company had a poor quarter and will struggle to recover. Neutral rating and new $54 price target.

 CVS Caremark numbers increased at Morgan Stanley
CVS estimates were raised through 2012, Morgan Stanley said. Company should gain PBM market share in 2011. Overweight rating and new $42 price target.

 City National numbers raised at FBR
Shares of CYN now seen reaching $56, according to FBR Capital Markets. Estimates also increased, because of improving credit trends and a higher net interest margin. Market Perform rating.

 Emergency Medical numbers upped at Goldman
EMS estimates were boosted through 2012, Goldman Sachs said. Favorable refinancing should drive numbers higher. Neutral rating and new $65 price target.

 Hartford Financial numbers upped at FBR
HIG estimates were boosted through 2011, FBR Capital Markets said. Company is seeing better margins in the mutual fund business. Market Perform rating and new $32 price target.

 Health Management price target boosted at Barclays
HMA price target increased to $11 from $9 as the company is well positioned to benefit from health care reform, Barclays said. Reiterate Overweight rating. 

 Starwood Hotels numbers raised at FBR
Shares of HOT now seen reaching $53, according to FBR Capital Markets. Company is seeing a strong recovery in demand. Market Perform rating.

 International Paper numbers increased at Goldman
IP estimates were raised through 2012, Goldman Sachs said. Company should benefit from rising containerboard, pulp and uncoated freesheet prices. Buy rating and new $35 price target.

 International Rectifier numbers upped at Goldman
IRF estimates were boosted through 2012, Goldman Sachs said. Company is seeing continued recovery and has strong margin leverage. Neutral rating and new $22 price target.

 KBW estimates, target increased at FBR
KBW estimates were raised through 2011, FBR Capital Markets said. Company is seeing higher investment banking activity. Market Perfor rating and new $27 price target.

 Kennametal estimates, target raised at Goldman
Shares of KMT now seen reaching $32, according to Goldman Sachs. Estimates also increased, as the company is realizing higher margins. Sell rating.

 MetLife estimates, target boosted at FBR
Shares of MET now seen reaching $52, according to FBR Capital Markets. Estimates also upped, given higher investment income. Outperform rating.

 McAfee estimates, target reduced at Morgan Stanley
Shares of MFE now seen reaching $43.50, according to Morgan Stanley. Estimates also lowered, to match the company's new guidance. Overweight rating.

 Mohawk Industries numbers raised at UBS
Shares of MHK now seen reaching $80, according to UBS. Estimates also increased, as the company can see improved operating leverage. Buy rating.

 Mead Johnson numbers boosted at Goldman
Shares of MJN now seen reaching 2012, according to Goldman Sachs. Estimates also upped, as the company is seeing higher sales growth. Buy rating.

 Maxim Integrated numbers boosted at Morgan Stanley
Shares of MXIM now seen reaching $22, according to Morgan Stanley. Estimates also upped, as the company should be able to quickly address supply constraints. Overweight rating.

 OfficeMax estimates, target upped at Goldman
OMX estimates were boosted through 2012, Goldman Sachs said. Company should be able to hold onto recent margin gains. Neutral rating and new $22 price target.

 Oshkosh estimates, target boosted at Goldman
Shares of OSK now seen reaching $47, according to Goldman Sachs. Estimates also upped, given an improved outlook for military vehicle parts. Neutral rating.

 Procter & Gamble numbers cut at Goldman
Shares of PG now seen reaching $68, according to Goldman Sachs. Estimates were also lowered, as the company will raise its marketing spending. Neutral rating.

 Procter & Gamble target, estimate increased at Barclays
PG price target raised to $70 from $68. 3Q10 results provide evidence that PG's new strategy is effectively repositioning the company, Barclays said. 2011 EPS estimate lifted 5 cents to $4.10. Overweight rating. 

 Perrigo estimates, target raised at Goldman
Shares of PRGO now seen reaching $61, according to Goldman Sachs. Estimates also increased, given higher margin assumptions across the board. Neutral rating.

 QLogic estimates, target upped at Morgan Stanley
QLGC estimates were boosted through 2012, Morgan Stanley said. Company is seeing higher sales and a lower realized tax rate. Overweight rating and new $23 price target.

 Ryland estimates, target lowered at Goldman
Shares of RYL now seen reaching $24, according to Goldman Sachs. Estimates also cut, as the company is seeing a slower ramp in new communities. Neutral rating.

 Skyworks Solutions target, estimates boosted at Barclays
SWKS price target raised to $19 from $16 as the RF leader delivered another strong quarter, Barclays said. 2010 and 2011 EPS estimates raised to $1.14 and $1.31, respectively. Equal Weight rating. 

 Time Warner Cable numbers raised at Morgan Stanley
Shares of TWC now seen reaching $63, according to Morgan Stanley. Estimates also increased, because of accelerating subscriber growth. Equal-weight rating.

 Viacom estimates, target boosted at Goldman
Shares of VIA.B now seen reaching $43, according to Goldman Sachs. Estimates also upped, given higher advertising and affiliate fees. Buy rating.

 Wynn Resorts numbers increased at UBS
WYNN estimates were raised through 2011, UBS said. Company is seeing higher margins in Macau. Buy rating and new $109 price target.

 ExxonMobil price target lower at Barclays
XOM price target cut to $88 from $92. Solid production, but missed EPS, Barclays said. Overweight rating. 

 ExxonMobil estimates cut at UBS
XOM estimates were reduced through 2011, UBS said. Copany is seeing lower downstream results. Neutral rating and $72 price target.