Google (GOOG) Pin Action

Closer to every expiration we start getting pin action across many large cap stocks.  It looks like it may already be developing in Google.  


At 3:40pm, a trader did the following butterfly;


- Bought 2025 contracts of March $580 calls
- Sold 4050 contracts of March 590 calls
- Bought 2025 contracts of March $600 calls


The spread was done for net debit of $2.20.  The trader stands to make nearly 350% profit by next Friday if the market gets to pin Google at $590.  


This is a bit early in the game as I normally try to find setups on Tuesday/Wednesday of option expiration week.  But with this convincing volume, I will try for $2.15 tomorrow morning.  The mark is $2.03 as of today's close.  Note that by 12pm tomorrow, a lot of Theta will come out of these options because of the weekend.  If Google only pauses above $580 tomorrow, the spread will continue to expand all day.  


Playing pin action is no different than betting on a specific number at a roulette table.  Keep position size small.  Where I normally recommend no more than 5% in each option trade, betting on pin action deserves no more than 2-3%.  


Good luck! 

General Electric and UPS: Next Breakout Candidates

The largest trade yesterday in GE was at 1:16pm when a trader sold 20,000 contracts of June $15 puts to finance the purchase of 20,000 June $18 calls, for a net credit of 5 cents.  The trade remains profitable above $14.95.  The same exact trade repeated again at 2:14pm with 3350 contracts.  


Interestingly, this goes along with bullish risk reversal in UPS yesterday when traders sold at 11:22pm and 3:15pm a total 7959 contracts of July $50 puts to finance the purchase of July $70 calls, for net credit of 27 cents.  


Both stocks are trading in a well-defined channel and traders are betting GE and UPS to breakout to the upside from their channel (see chart to the right).  I love these bullish risk reversals since they're done for net credit and stocks have to fall below their current support line to turn into a loss.  


I am not taking any actions yet.  Watching both GE and UPS and setting triggers in TOS.  GE is a buy on a breakout above $17 through purchase of June $16 straight call options.  Currently, GE June $16 calls are going for $1.17.  


UPS is a buy above $64 through July 65/70 call spread.  Currently, the call spread is going for $0.93.


In both cases, the trigger is set 2 cents above the mark on the breakout.  I'll post a housekeeping note when the trigger is hit.  


Good luck!

S&P 500 (SPY): Adding Insurance to Portfolio

The current portfolio holds several long positions that are working very nicely.  This includes TBT, RIMM, AAPL, V, LVS, LPX, MCO, YUM, C, YRCW, ZION, LEAP and AMLN.  However, I am also looking at SPY just inching to breakout above 52-week high and VIX at all time low.  This concerns me a bit as I believe the market is once again getting too complacent.  There is a possibility that SPY could have a double top formation here.  

I want to take out a small insurance policy through following SPY butterfly spread:


- Buy to open 1x April $104 puts
- Sell to open 2x April $109 puts
- Buy to open 1x April $114 puts


I fully expect the trade to expire worthless and lose money.  But, having this can at least assure me a good night sleep.  I just filled the order for $0.90 debit. 


I am reluctant to initiate any new long positions with S&P near 1150.  Though I like CTXS, MU, ETN, NUVA, RF and a few others.  I want to see high volume breakout of S&P above 1150 before I jump in.  


Good luck!

Housekeeping (Taking Care of Two Losers)

Folks, two trades in current portfolio are bothersome and warrant attention.  Not everything we will do is going to pan out on the winning side.  The important thing is to cut your losses as soon as possible and let your gain runs as long as possible.  Specially when you're dealing with front month options, one of my strict rules is, similar to how you should sell half when you have a double, you should cut your losses and exit position completely when you have a 50% loss or more.  


AZO - We bought March 170/175 call spread and 165/160 put spread.  This was an earnings play and the expectation was for a big move either way.  Didn't happen.  With less than two weeks remaining, the spread has shrunk from $3.1 to $1.65 (about 45% loss).  I think its time to cut loss and move on.  


GRMN - Similar to AZO, we bought March 34/39 call spread and 34/29 put spread.  Also an earnings play but the stock is dead.  The spread has shrunk from $3 to $1.85 (about 45% loss).  Its time to cut losses and move on.  

Taking Another Shot at Citigroup (C)

That's right.  I am warming up to Citigroup after almost giving up in mid-Jan.  Here is a snapshot from Credit Suisse: 



"Overall, Citi remains cautiously optimistic as it is largely through the mark-to-market cycle, nearing the peak of the consumer cycle, and has limited exposure to CRE relative to peers.


Capital position solid: Regulatory standards for capital levels are still unclear; however, Citi’s balance sheet remains strong with more than $50bn of reserves post FAS 166/167 (representing 6.6% of loans) and $118 billion of tangible common equity.


Emerging markets focus: In 2009, emerging markets comprised 46% of total revenues and 36% of the asset base. This should continue to grow over time as Citi is investing aggressively in Asia and Latin America consumer banking businesses.


Expense management to continue: The declining expense base in Citi Holdings should support incremental business investments within Citicorp particularly branch expansion, customer acquisition, and card usage in geographies outside the US.


Maintain Neutral rating: Citigroup has made significant strides improving its capital and liquidity; however, the clarity surrounding the timing of the company’s return to normalized earnings power is less clear given the significant portfolio run-off and elevated credit costs. Our $4.50 target price represents 1.1x year-end 2010 tangible book value per share."


From a technical basis, the stock is grinding along $3.75 resistance line which also coincides with 200-day moving average.  Again, the longer the stock stays here, the higher the chances the stock will breakout.

As of this writing, the ISE Sentiment Index shows 276,000 calls traded.  Almost 55% of them are bought on the offer.  Yesterday, the scan was also bullish with 57% bought on the offer.

Citigroup options are cheap and very liquid.  I am taking a small gamble and buying straight call options:

- Buy to open June $3 call options for $0.76

For more conservative traders, wait for a breakout above $3.80 for full confirmation before jumping in.

Good luck!

Housekeeping (LVS)

Quick note: LVS trigger hit.  The stock went above $19 and the order for June 19/22.50 call spread was filled for $1.28.  For more on the trade: LVS


Good luck!

MGM Mirage (MGM): Technical Picture No Different

Folks, I didn't mention MGM in my last post because I personally believe LVS and WYNN provide higher possible returns in the long-run due to their exposure in Macau and Singapore.  


But you can't argue with MGM technical set up, which is also forming an excellent converging triangle ready to break-out or breakdown within two months.  A similar conditional order can be set up here as well.  


On a break above $12.25,


- Buy to open June $12 calls
- Sell to open June $15 calls


At the price of 2 cents above the mark.  Currently the mark is $0.77.  


Good luck!

Las Vegas Sands (LVS) and Wynn Resorts (WYNN)

If we learn anything from RIMM breakout this morning, it always pays to keep an eye out early in the game when stocks are starting to move.  RIMM trade is working very nicely.  

The street has shut its eyes on casino stocks for a while.  LVS is making fourth attempt to breakout above $19 in six months.  The volume is a bit light, but the longer we just grind near $19, the better the chances the stock will push higher.  


The catalyst I believe will be opening of LVS's first casino and resort in Singapore called Marina Bay Sands.  The $5.5 billion project is schedule to partially open this April.  


On the other hand, WYNN chart shows a very similar picture.  The stock is clinging to get above $72.50 which is the upper band of the converging triangle.  WYNN Macau operations are much more leaner than LVS and the growth there will continue to unfold as Wynn depicted in its previous earnings report.  

I am bullish on both stocks, but I need to see a clear break out (LVS above $19 and WYNN above $72.50) before jumping in.  I am setting the orders below to execute automatically on a breakout $0.02 above the mark:


LVS Call Spread:
- Buy to open June $19 calls
- Sell to open June $22.50 calls (currently mark is $1.09)


WYNN Call Spread:
- Buy to open June $75 calls
- Sell to open June $85 calls (currently mark is $2.38)


Good luck!

Visa (V) Breaking Out

First, here is a snapshot from Credit Suisse when Visa reported earnings last time:



"Visa reported fiscal 1Q EPS of $1.02 (CS: $0.90, Cons: $0.91). The difference relative to our estimate was $0.05 in stronger revenues, $0.06 in better operating expenses, and $0.01 in a lower tax rate. Half the operating expense differential related to a one-time gain. Overall, the quarter showed more revenue growth acceleration than we had projected, leading to a superior operating margin. Management also updated its 2010 objectives to reflect higher revenue growth and operating margin expectations and a lower full year tax rate. We view management’s guidance as conservative since it does not assume the trends over the past two months persist.


Reiterate Outperform rating. Following the strength in the quarter, management’s outlook, and accelerating payment and cross-borders trends, we are raising our 2010 and 2011 EPS estimates to $3.80 and $4.60 (old: $3.50 and $4.25). Our target price increases to $100 (old: $88), implying 25x the next-twelve-months earnings.

Acceleration in payments volume. In the September quarter, payments volume totaled $720Bn, a 2.7% increase from a year ago (+2.5% Fx adjusted), a 440 bp acceleration from June. Visa also provided December quarter statistics -- payments volume grew 13.8% year/year (8.5% Fx adjusted). In the US, both debit and credit rebounded nicely. Outside the US, all geographies with the exception of Canada posted positive year/year trends on a local currency basis. Through January 28, US payments volumes grew 10% year/year, mostly in line with the month of December and 300bps faster than the quarter. Additionally, as discussed below, crossborder
accelerated 700 bps in January from the December quarter level."


On a technical note, after a long consolidation between $80 and $90, the stock is finally breaking out from the range and I believe the momentum could carry it all the way to $100 before going back into a range-bound trading and more consolidation.

I like the following June/April calendar spread:

- Buy to open June $95 calls
- Sell to open April $95 calls

I just filled the order for $1.60 debit.  I plan to take profits if the stock goes to $95 by April expiration.  If it doesn't, we'll have another opportunity to convert into May/June calendar and then eventually into June 95/100 call spread. Note that buying June calls also help because earnings are not expected until late April.  As such, I expect June IV to slowly rise as we get closer to earnings helping the spread.

Good luck!

Housekeeping (TBT, LPX, AKS and RIMM)

Folks, wonderful start for the week.  


TBT is rallying again this morning.  We bought April 47/50 call spread on Feb 26 for $0.77.  Here is the link: TBT Call Spread.  I am closing half of my position at $1.45 or just over 100% profit.


Remember, we bought LPX March $7.50 calls for $0.40 as an earnings play and closed half for 100% profit.  The stock has extended gains even further, but I am still holding the remaining half.  The stock is still way undervalued in my opinion.  Will assess later this week.  Link: LPX Straight Call


AKS is finally cracking lower again this morning as Goldman downgraded the stock from Buy to Neutral.  I am still holding my iron condor and expect it expire worthless.  Link: AKS Iron Condor


I had a trigger set for RIMM to go long June 75/85 call spread as soon as the stock breaks $72.25.  I filled the order for $2.90 this morning.  RIMM Call Spread


Good luck!

InterMune (ITMN): Four Other Ways to Trade

InterMune judgement day will be Tuesday, March 9.  I already own unbalanced 20-25-30 butterfly spread in April.  For more on this, go to InterMune Butterfly


Analysts' commentary is very mixed and price targets are all over the place from as high as $50 and as low as $6.  The stock closed around $23 on Friday.  As with any biotech, you can never be even remotely assured of what's going to happen.  In my personal opinion, chances of approval are high and any further gains from here will be limited given nearly 60% run the stock already had on Friday.  However, that's just my opinion and the market believes otherwise.  Interestingly, on Thursday at $14/share, the straddle was pricing $9 move.  On Friday at $23/share, the straddle is still pricing $11.50 move.  Go figure.


My inbox is full of readers this weekend asking me to provide other ways to trade the stock going into FDA decision that provide the best risk/reward.  So, here they are:


1. If you believe the treatment will get approved and the straddle is under-priced despite 60% run on Friday, then I suggest the following bull ratio spread:


- Sell to open 1x March $25 calls
- Buy to open 2x March $30 calls


The spread is going for 5 cent credit.  If the stock collapses, you lose nothing (and hopefully 5 cent will pay off your commissions).  If the stock takes off above $35, sky is the limit.  


2. If you believe the treatment will be disapproved, then you sure also believe that straddle is way under-pricing the potential move to the downside given 60% run on Friday.  In that case, I suggest the following bear ratio spread:


- Buy to open 2x March $30 puts
- Sell to open 1.5x March $35 puts 


The spread is going for $1.80 credit.  Keep in mind this is 1.5x/2x spread.  The trade starts turning a profit on a move below ~$17.  If you're wrong here, you will still make money if the stock goes above $35 as $1.80 credit will be retained and puts will expire worthless.  

3. If you believe the drug will get approved and the straddle is over-priced given the move the stock already had, then I suggest the following butterfly spread:


- Buy to open 1x March $20 calls
- Sell to open 2x March $25 calls
- Buy to open 1x March $30 calls


The butterfly is going for $0.60 debit.  The trade will produce monster profits anywhere between $20.60 and $29.40.  

4. Like many other times, if you believe FDA decision will be delayed, therefore the straddle is probably over-priced, then I suggest the following calendar spread:


- Buy to open Jan'11 $15 puts
- Sell to open March $15 puts


The spread is going for $1.45 debit.  Note that I am suggesting Jan'11 options instead of April to avoid a situation where it gets delayed later than April.  Also, I am suggesting $15 puts because any delay should easily bring sellers out knocking the stock down.  Also, note that I have adjusted IV down to 75 for both March and Jan'11 to show true nature of P&L.


One reader asked about Mar/Apr 12.50/30 double diagonal calendar spread, similar to so many other times when we took advantage of sharply elevated front month IV.  That would not work.  The issue is Vega.  The difference between March and April Vega on both strikes is 0.01.  Meaning, the decay in IV in April will have at least 1.5x more negative impact on April options than March.  Unless, the stock can be pinned exactly or very close to $12.50 or $30, the trade will most likely remain at a loss after the announcement.  


Lastly, one reader asked about setting up ITMN in exactly the same way as I suggested AMLN trade on Thursday.  For more info, go to AMLN Trade.  My issue with this set up on ITMN is the bid/ask spread in Jan'11 options is ridiculous and they're not very liquid.  I am afraid of overpaying.  Also, the ratio of calendar spread against straight call would have to be very high (near 10-1) for the trade to work, which sharply increases the cost.  


Folks, I am giving you the setups, you make the call.  I will never advise just buying calls or puts in a biotech company waiting FDA decision in two days.  If that's what you want, you're searching in a wrong place.  The idea here is to make the best risk/reward play given your sentiment.  


Good luck!

VeriSign (VRSN) Unusual Activity

Take a look at June options.  Here is the tally:


Puts: 
- June $25: 14,100 traded, almost all sold on the bid at $0.90 and $0.95 in huge blocks (1356, 4636, 2595, 1000, 2000)
- June $24: 2,490 traded, 100% sold on the bid at $0.65 (largest block 1013)
- June $23: 2,000 traded, 100% sold on the bid at $0.40 (several small lots under 1000)


Calls:
- June $27: 14,167 traded, almost all sold on the bid at $1.25 in huge blocks (1356, 4636, 2595, 1000, 2000)
- June $27: 3,969 traded, 100% sold on the bid at $0.60 and $0.55 (several small lots under 1000)


This is a continuation I am seeing across many names implying this market is going nowhere any time soon.  The IV is pushing down slightly in VRSN and the trader is most likely betting that IV will go to low 20's from currently in upper 20s in June.  


If you have patience, I suggest the following iron condor:


- Buy to open June $23 puts
- Sell to open June $24 puts
- But to open June $29 calls
- Sell to open June $28 calls


The trade provides 100% return as long as the stock remains between $24 and $28 by June expiration (see the attached daily chart).  Following the unusual activity, I like the odds.  


Good luck!

Apple (AAPL) Breaking Out

Love him or hate him, but you can't argue against Cramer who gets the credit for breakout in Apple today.  $215 was stiff resistance and as of this writing the stock is already trading up near $219.  I keep hoping and looking for any pull back to get in, but we can't even get 50 cents pull back since the market opened.  


Normally, I would recommend a simple out-of-money call spread on a breakout, but given only 2 weeks remaining in March options, I think a better risk/reward is thru the following calendar spread:


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


I just filled the order for $2.85 debit.  This is not a volatility play.  The plan is if the stock makes a run above $230, I will close the calendar.  If it doesn't, March $230 calls expire worthless and I'll sell April $240 calls effectively converting it into a call spread.


Good luck!

Amylin Pharmaceuticals (AMLN): FDA Decision Imminent

Amylin Pharmaceuticals, Inc. (AMLN) is a biopharmaceutical company engaged in the discovery, development and commercialization of drug candidates for the treatment of diabetes, obesity and other diseases. AMLN markets two medicines to treat diabetes: BYETTA and SYMLIN. 


Here is a note from CNBC reporter Mike Huckman earlier:


"This morning, BMO Capital Markets biotech analyst Jason Zhang downgraded shares of AMLN to "Sell."


On or before March 12th, the FDA is scheduled to decide whether to approve the first once-a-week drug for diabetes. It's a reformulated version of twice-a-day Byetta. Zhang thinks the FDA is going to punt. He tells clients in the research note that he believes the agency will want more data about possible side effects, which will push approval of the drug until mid or late 2011. His call moved the stock, which Zhang now targets as being headed for $12, down from his previous $14.


But on the flip side, biotech analyst Thomas Wei at Jefferies put out a note this morning saying, "We acknowledge a higher chance of approval....We see the risk-reward on AMLN as favorable." He has a $27 target on the shares. Wei's call is based on his conversation with a former senior FDA official. "We were surprised by his assessment that our previous thesis on the need for AMLN to add more thyroid data is unlikely to cause a delay in approval." The thyroid data he's referring to is a problem that was seen only in lab rodents given a similar drug from Novo Nordisk."

That's two conflicting analysts.  Separately, Credit Suisse and Goldman are also divided on the decision.  CS believes the stock is heading to $28 regardless of FDA decision and simply using the revenue generation from existing pipeline.  CS doesn't expect more than 5% sell-off on a bad news.  However, GS is cautious like BMO Capital Markets.

March at-the-money straddle is suggesting 25% move.  Implied volatility is sharply elevated to 130 or higher.  Sentiment from ISE data suggests 6.6 puts being bought for every 1 call.  I also checked all block order option trades of greater than 1000 contracts for last two weeks.  It appears traders are generally dumping calls and buying puts (probably as a collar against long equity), though there were a few with bullish stance.

I like the following trade going into FDA decision in two separate orders (calendar and straight call):

- Buy to open 3x Jan'11 $12.50 puts
- Sell to open 3x March $12.50 puts, for a net debit of $0.95 or less (that's slightly above mark)

- Buy to open 1x Jan'11 $30 calls for $1.10 or less (also slightly above mark)

Note that I am buying 3x calendar spreads than the straight call.  The reason is I am using Jan'11 calls as an insurance policy in case the stock shoots up.  This has an affect of keeping the trade profitable anywhere above $9.50 (see the P&L chart).  Also note that in the attached P&L chart I have adjusted March IV down to 65 to see the true nature of P&L potential.

Also, I am using Jan'11 instead of any earlier months to minimize any erosion in IV after the news.  Jan'11 IV is around 60 vs. 130 in March.  Lastly, there is always a risk with FDA that the final decision will be delayed as BMO Capital Markets suggested in the note above.  By using Jan'11 for long options, if a delay is announced it gives us an opportunity to continue to hold Jan'11 options and keep selling front month options against them.  We can keep doing this for next nine months if we choose to, and there will be many opportunities to trade it around through iron condors, calendars, etc.

This is a low risk trade because it remains profitable above $9.50 (50% below current price) and the most bearish analyst on Wall Street has $12 price target.  Straddle is pricing 25% move.  I like the odds.

Good luck!

Housekeeping (GS)

Folks, I am sitting on monster profits here on GS.  On Feb 23, I suggested buying GS 155/160 ratio spread.  Here is the trade: GS Ratio Spread.  The trade was done for net debit of $1.00.  The spread has now expanded to $1.55 debit.  GS is the strongest of all banks trading up 3.6% and breaking through critical resistance at $162.  


I don't believe this momentum is over and it can continue until the stock reaches pre-earnings level of $168.  But I want to take caution before the job report tomorrow and I am closing the entire position for 55% profit.  I will reevaluate after the job report and might get back in.  


Love it!

5-10-20 Rule: Taking Another Shot at First Solar (FSLR)

We played FSLR when they announced earnings last time, and after making one quick adjustment we profited 52%.  Here is quick update on fundamentals from Credit Suisse:


"C4Q09 results vs expectations. FSLR reported 4Q09 Rev/EPS of $641.3mm and $1.65 above CS estimate of $588.7mm/$1.55 and street estimates of $577.6mm/$1.51.Upside relative to our estimates was driven by (i) Higher panel production; (ii) Higher system completions; (iii) Lower tax rates; (iv) Offset by lower gross margins and higher opex.

4Q09 key metrics. (i) Module GM of ~49.3% was lower than guidance of ~50- 51%, company claimed due to lower pricing for 21MW AC Blythe project, need also 10-K color; we think energy from the Blythe project was priced below 2007 MPR of $9.84c/kWh; (ii) 4Q shipments were 311MW (up 6% q/q), slightly better than our estimates of 293MW as panel efficiencies and line throughputs were higher than our model; (iii) We estimate there was ~45.6MW of system installs in 4Q09 (comprising of Blythe and Sarnia projects) for a systems revenue of $151mm in 4Q09 (we will revise this after company’s 10-K is filed), this was likely ~$15mm more than our estimate; (iv) We estimate module ASPs were $1.66/watt in C4Q09 (down ~4.4% q/q) lower than our assumption of $1.70/watt (contributed to GM miss mentioned above); (v) Panel manufacturing costs were 84c/watt (down 1% q/q) – but “core” manufacturing cost excluding ramp costs was down 2c/watt q/q to 82c, which was better than our estimate of 84c/watt.

Valuation. We have lowered our CY10 EPS from $6.58 to $6.25 to reflect a more conservative currency assumption of $1.35. We are lowering our price target from $132 to $115, representing an average of 20x CY10 EPS and 15x our new CY11 EPS of $7 (we were at $7.5 before)."

Going with my theses that many stocks are likely to stay range-bound over coming months and implied volatility will come down further, I am selling the following iron condor on FSLR:

- Buy to open April $125 calls

- Sell to open April $120 calls
- Buy to open April $90 puts
- Sell to open April $95 puts

I just filled the order for $1.55 credit.  Does the trade meet 5-10-20 test?

5% - No more than 5% of your portfolio - Check
10% - Trade has 12% cushion on the upside and 14% cushion on the downside - Check
20% - Max profit on the trade is 45% return after commissions - Check

For more on my 5-10-20 rule, go to 5-10-20

Good luck! 

Netflix (NFLX) To Stay Range-Bound?

As of this writing, NFLX is trading at $67.35.  This morning three analysts (Susquehanna, BofA, Kaufman Bros.) all downgraded the stock on valuation.  Here is a quick snapshot from Credit Suisse when NFLX reported last quarter on Jan 28:


"Action/Event: NFLX reported better than expected 4Q09 earnings after the close, beating our estimates (as well as consensus) and prior company expectations. NFLX also introduced new 2010 guidance that was better than

we expected, as such, we raised our 2010 estimates. We raised our 2010 revenue estimate to $2.1 billion (vs. $2.02 billion previously), up 26% y/y and EPS to $2.47 (vs. $2.07 previously), up 25% y/y.

Investment Case: NFLX reported strong 4Q09 results with revenue of $445 million, up 24% year over year, in line with our estimate. Operating income in 4Q09 was $53 million, up 41% year over year (vs. our $44 million estimate), as lower cost of revenue drove operating income. EPS (GAAP) in 4Q09 was $0.56 (vs. $0.39 last year) and ahead of our $0.47 estimate.

Valuation: NFLX currently trades at 21 times P/E based on our 2010 estimates, about 2% above historical P/E multiple (since 2005). We believe investment in the streaming and int’l initiatives will keep margins in check and lead to decelerating earnings growth over the next few years."


I like the following butterfly spread:


- Buy to open 1x April $60 calls
- Sell to open 2x April $65 calls
- Buy to open 1x April $70 calls


As I stated in my previous posts, I believe market will remain in range-bound trading for several months to come.  As such, I am looking for setups that provide decent risk/reward.  I just filled the order for above butterfly for net debit of $1.10. 


Good luck!

Medivation (MDVN) Trade: From a Different Angle

Medivation (MDVN) closed today up 5% at $40.25.  Data from the CONNECTION study (Alzheimer treatment data) is expected to be available in Q1 or Q2 of 2010.  MDVN's David Hung, President and Chief Executive Officer, will present at The Cowen Healthcare Conference on March 8.  MDVN March 40 straddle is priced at $18, April 40 is at $28.  March implied volatility is sharply elevated at 290.  


Just take a look at those juicy options across all months.  I am already in an unbalanced skip-strike butterfly spread that I highlighted in early Feb and I am comfortable staying in that position going into FDA decision.  Here is the link for the trade I suggested: MDVN Butterfly

Today at 3:01pm, one trader did a really nice ratio spread on MDVN.  Specifically, the trader:

- Bought 1500 of March $45 calls at $6.2 (bid/ask $6.0 x $6.3)
- Sold 3000 of March $60 calls at $3.1 (bid/ask $3.0 x $3.2)

The ratio spread was done for net cost of $0.  The beauty of this trade is in the attached P&L chart to the right.  Very similar to my original butterfly spread (see link above), this ratio spread loses nothing if the stock collapses.  But if the stock takes off, the trade makes money anywhere between $45 and $75.  The trade loses money above $75.  The trader must be looking at current at-the-money March $40 straddle which is going for $19.  If the stock runs up $19 to $59 on good news, the trade will handsomely pay-off nearly 150% return by March expiration.

Interesting, after the trade was done, the implied volatility in the last hour continued to run up.  Now the same ratio spread is going for $1.30 credit, which is even better than $0.  If done for a credit and the stock collapses, you will still make money as you will end up keeping the credit.

I like the odds of both this ratio spread and my butterfly spread (though the butterfly has significantly more upside profit potential and much lower risk).

Good luck!

My Two Cents About the Market

Several of my readers have approached me about I have been a bit inactive since Feb expiration.  Folks, as I alluded in the past, I believe the market will stay range bound until May/June which right now happens to be between 1050 and 1150.  We're approaching the upper limit, the VIX is back to under 19 and I think complacency is returning to market fast.  


What we saw yesterday was a mutual fund Monday.  It shouldn't surprise anyone that the market rallied because billions poured into 401ks and other retirement funds that mutual funds had to immediately allocate because it was Monday and 1st of the month.  


Capital preservation always trumps aggression for profits.  


That's my mantra and I don't want to push my luck too hard on the long or short side until the picture is bit more clear.  Many many stocks are trading between 50- and 200-day moving averages, which is an area that can lead them in any direction.  


I think this market could take another leg down to retest 1050 area.  There is a long list of economic headwinds from regulatory reform, 10% unemployment, Fed potentially draining liquidity, European debt crisis, etc.  Any one of them could have investors hitting the panic button, and with VIX getting back under 19, just be careful.  


I will post as I find trades with better risk/reward.  

Autozone (AZO) Earnings Play 3-2-10

Autozone is expected to report earnings tomorrow morning before market opens.  First, here is a quick run-down on fundamentals by Credit Suisse when they reported earnings the last time:  



"AZO reported F1Q10 EPS of $2.82 versus consensus of $2.66 and our $2.60 estimate. The outperformance was broad based with better than expected top-line and gross margin. A lower than expected share count added $0.08 in EPS relative to our estimate while a lower tax rate served as a $0.02 benefit. Overall operating results reflect yet another strong, consistent quarter out of AZO with strong same store sales in both retail and commercial, gross margin expansion despite a modest negative impact from mix, along with the support from efficient capital  allocation including $200 million of share repurchase during the quarter.


While we acknowledge that top-line trends will slow beginning in the current quarter (F2Q) due to much more difficult comparisons (SSS -1.5% in F1Q09 vs +6.0% in F2Q09), we believe AZO is well positioned to continue to
gain market share in both Retail and Commercial and expand gross margins. In addition, we expect the company to moderate SG&A spend to accommodate slower top-line growth due to the tougher comparisons. We believe the company is capable of earnings outperformance throughout F2010 based on continued strong secular tailwinds, market share gains, accelerating growth in commercial, and supported by another year of large share repurchase activity given significant free cash generation (8.5% yield).


We are raising our target price from $179 to $182 which is based on 13.5x and 12.0x our F2010 and F2011 EPS estimates. Shares of AZO currently trade at 11.3x our F2010 EPS estimate and 7.4x on an EV/EBITDA basis. We view current valuation as compelling given our expectation for low-to-mid teen’s EPS growth in 2010 fueled by modest top-line growth and supported by another year of significant share repurchase."


The implied volatility in March is slightly elevated to 26 compared to 21 in April.  With shares trading near 52-week high, I think volatility is cheap and could be setting up for a big move.  I like the following trade going into earnings:

- Buy to open March 170/175 call spread for $1.35
- Buy to open March 165/160 put spread for $1.75

I just filled both orders at above prices.  The stock will have to move either above $173.1 or below $161.9 by March expiration for the trade to turn a profit.  That's about 4% to the upside or 2.5% to the downside.  Currently, at-the-money straddle is going for $8.60.  In other words option traders are expecting about 5.5% move in either direction.

The max profit on the trade is 61%.  I like the odds.

Good luck!

SanDisk (SNDK) Raises Guidance

SanDisk is getting a lot of buzz this morning.  The company raised Q1 revenue forecast from $875M - $950M million to $925M - $1B.  Additionally, they raised Q1 margins to 40%.  The stock is trading around $31.50  

Immediately we already have at least 3 analysts upgrading the stock and raising the price target to upper $30's.  I think all this should put a floor under the stock.  Fundamentally, stock is cheap trading at 13.5x forward earnings (before raising the guidance) and 3.5x cash.  

I would generally take a rather much aggressive bullish stance with this kind of raised guidance, but given that the stock is already up some 8.5% this morning, I like the following bull put spread:

- Buy to open March $29 puts

- Sell to open March $30 puts

I just filled the order for net credit of $0.24.  As long as shares remain above $30 by March expiration, the trade pays 31% profit before commissions over next three weeks by expiration.  I like the odds.  

Good luck!