Friday, January 19, 2007

GOOG Poll Results And A New Poll

Well it appears that the NO voters won the poll. GOOG did not close above 513 today. Oh well, wishful thinking on the pollster's part, right?

Stay tuned for the next poll question.

Check Out BLINGO!!!

After a weak day of market action, I thought that I'd introduce something a little different than option speak.

You may have noticed lately that I like tinkering with all these new Web 2.0 "widgets". You know these little quirky plug-ins or links to interesting and weird sites. Well, this time the widget is located to the left called BLINGO.

All you do is click on the BLINGO link and sign up for free. Everytime you use BLINGO to search for anything like you do on GOOGLE, you get a chance to win a prize. If you win, Option Jungle wins. I love win-win situations, don't you?

Anyway, just trying to break up the monotony. Have fun with it and I hope you all win so that I can win.

Swing on in and grab a vine and let me know what you think about BLINGO.

Poll Results

The trading day is not over for GOOG but it looks pretty slim chances that it will close above 513 today. Stay tuned for the results and my next poll for next week. It looks like the naysayers will be winners.

AAPL/Market Thoughts Continued

I would have to agree with ODA125's take on doing nothing with AAPL at the moment. We are at expiration Friday for the January options and so the best course of action for now will be to let all this commotion clear and look for a new week next week.

I'm looking to the QQQQ's right now to give me a cue on the strength of the tech stocks which seems to be the focus of attention lately. Any breakdown of the 42.50-43 level should be a sign of considerable structural weakness to the overall uptrend since August 06.

Some folks are concerned that we might repeat last year's first half of market action where we had a relatively strong run from January to May 2006 but then had a large correction from May to August.

If that is the case then our June/July/August options should perform well.

Again, I'll be looking for a put hedge position in the QQQQ's at the aforementioned breakdown level.

Thursday, January 18, 2007

AAPL Thoughts

I'll be posting my take on AAPL later whether or not there is a play on the recent pullback. I know ODA 125 at Options Made Easy is looking for some input on how to play AAPL.

Stay tuned or feel free to chime in now and give your take.

GOOG Poll Results

I can't believe that the majority of you "swingers" who participated in the GOOG poll to the left are such fair weather GOOG fans.

I guess I can't blame you. Down 23 points from 513 does not bode well for a close above it's all-time high. I'd probably make the bet with you against GOOG closing above 513 tomorrow.

Though I must tell you that I've seen stranger things happen in the markets. Remember also, that tomorrow is options expiration so we should be in for some whacky swings throughout the day.

OJ Portfolio Update

Am I not a great market timer or what?

Ok. All sarcasm aside, the bears are getting emboldened as the Nasdaq specifically has been hit hard. It seems as if Cramer's call to sell tech was taken seriously by both retail and institutional traders. The selling volume has increased and it looks like the stocks in the OJ portfolio closed at their lows.

So what to do? Brian over at Alpha Trends is cautious about the QQQQ 42.50 level as being critical support for the tech market. I'm not so concerned about shorter term support and resistance levels but I'm not exactly pleased with my timing. I guess that a correction was due and we'll see if this has legs. Since I have time on my side and have not entered into large positions, I'll be looking to scale into certain positions if the market continues to see red.

Having said that, I'm not opposed to being a buyer of puts if the market gets into a selling frenzy mode to hedge the portfolio.

Let's analyze my positions.

MSFT-I'll look to add to this position if it pulls back to the 29-30 level.
MA-I'll be looking to add to this position as it pulls back or settles down at the 100 or 95 level.
NYX-I'll also look to add to this position as it finds any support near the 95-100 level.
CSCO-I added to my position today and will continue to do so at 25-26.
NMX-I'll look to add at 116 if it gets there.
YHOO-I'll look to add at 27
GOOG-I added to the postion today when it was down about 7 and will continue to add if it reaches the 480 level.
DELL-I'll give this bad boy to 24 and reassess at that point.

There you have it. It will be interesting to see if we get any rebounding that will be real or if it will be a dead cat bounce in the market. All eyes are on the Nasdaq and Oil right now.

Grab a vine and let me know how you feel about my very unproductive portfolio thus far.

Wednesday, January 17, 2007

Rack Up RACK?

Caltrader talks about a straddle play example on RACK which you'll find enlightening for uncertainty plays. The stock just got "racked" or should I say "whacked" today down $12.44 (-38%).

With earnings coming up and IV potentially jumping higher into the earnings report not to mention some serious put buying and call selling growing it might be time to review a straddle play or even a value call play.

My inclination might be toward playing a directional value call play. J. Kahn at In The Money, mentions that the last time RACK got whacked it bounced back considerably. Check out the chart below and he's right. It looks like it took about 3 months to double from its 52 wk low after the beating in mid august. Will history repeat?

I'll investigate and get back to you.

Market Technicals Via Trader Mike

For those of you out there that are visual learners, I thought it might make sense to just link you to Trader Mike's blog on his recaps. I tend to agree with his technical analysis on the markets. Besides, I'm too lazy to do what he does.

Trader Mike's 1-17 Stock Recap

Grab a vine and let me know if this helps or hinders.


No this is not a post about my credit card. It's a post about the company and its stock and why MA looks good to me for a long term bullish call play.

Technically, the chart looks extremely bullish and new highs have been the news of late. Would I like an entry at a lower price? Yes. Might it happen? Yes. Will I buy then as well? Yes. Why now? Because like many of my other plays so far, I think it's a runner both on price and IV into earnings and beyond.

What about option pricing? I scaled into the JUL 105 Calls today at 12.11. The FTV is close to 16.00 for these calls and the IV for these calls is currently at 37.6% (52 wk lows).

MA's earnings release is scheduled for 2/9/07 and though Morningstar analysts think its fair value is at 105 other analysts still see the 115-120 range as reasonable, foreseeable, targetable (sorry about all the "ables").

Bulls say leading brand in global payment industry (about 31% of world's credit cards 2nd behind Visa), huge barrier to entry for competitors, and plenty of growth potential for its own processing network which would increase its margins.
Bears say too many anticompetitive lawsuits looming, decreasing merchant fees, too much processing revenue shared with rivals and losing market share to AMEX and VISA.

Finally, if I had to choose between VISA, AMEX, Discover, and Mastercard as a growth play in the stock, I'd choose MA because: A. Visa is not publicly-traded B. AMEX is a value play C. Discover is part of Morgan Stanley for now.

Grab a vine and tell me your thoughts on MA.

NYX Position

I scaled into a NYX long term call position today as my previous Does Anyone Else Other Than Me Like NYX post explained I would by buying the JUN 105 Calls fro $12.40.

I like the consolidation action of the technicals right now and I like the prospect of a run into their next earnings report slated for 2/2/07.

We'll see if we get some similar movement in NYX like ICE has enjoyed lately. Those JUN 105 calls are over $3.00 under FTV which I hope in the near future will become over valued theoretically.

IV's currently at 42% (moderately low level IV).

I plan on adding to this position if we get further weakness looking ahead.

OJ Portfolio Update

For those "swingers" out there who care, the OJ portfolio has been updated and you'll notice some new positions that I'll be talking about in the next posts.

Remember, long term option positions use time to their advantage which means I don't have to be absolutely right and have perfectly timed entries to ultimately profit from option positions. The counterattack to inevitable time decay (theta) of options is buy more time. That's why you'll notice my positions typically tend to have expirations 90 days or more away.

And judging from some of my position P/L, you're probably wondering if I've done this before. Time will tell.

GOOG Update

Am I still googly for GOOG? Yes. In fact, I will be adding to my position as it pulls back some more from here. I'm considering the MAR 500 Calls which are almost $3.00 under FTV currently trading at 27.50.

GOOG earnings are expected to be released the first week of February. That's what I'm anticipating with these calls as I buy into earnings and hopefully get some IV increases as well as the underlying.

I notice that half of you think that GOOG will close above 513 in two days (see the poll to the left). I'd say that's rather bullish.

Grab a vine and persuade me out of GOOG if you can.

Tuesday, January 16, 2007

Option Education Program Lesson 1: Buying CALLS

I want to preface this and all subsequent lessons by stating that I am not a self-professed option expert with decades of option trading experience and professional floor trading experience and that what I say is the law. My experience, however, has been mostly self-taught through trial and error coupled with theoretical learning extracted from "self-professed" option trading experts that I think can be helpful.

The sole intention and objective of these following lessons is to provide a foundation to understanding options as a viable investment vehicle.

Part of understanding any subject well is understanding the vernacular, you know, the parlance, the terminology, the language and so forth. The option industry is no exception. It has all kinds of terms that can make one quickly confused and frustrated. These lessons will hopefully help you interpret the option language without feeling left out.

I also want to add that one of the multi-faceted purposes of this and subsequent lessons on options is to help you realize that you can find plenty of free and credible information and resources about options on the web. The point being that you need not spend incredible amounts of capital getting educated and prepared to trade options.

Having said that, I am sensitive to those readers out there who have already spent options education "tuition". I certainly don't want to mislead readers into thinking that this is an option education program "bash". There are quality option educators out there that meet and have met the needs of many an option trader at any level.

I just think that given the exponential growth of option trading both on a retail and institutional level, the advancements in internet capability and access, and the fact that more and more people are becoming more aware of options as a viable investment vehicle, more efficient and effective ways of educating people about options are also growing.

I believe that with the advent of the user-generated content mechanisms that are now so easily, readibly and inexpensively available to anyone who is now remotely used to a computer and the internet that it only makes sense that option education ought to be free and equally accessible.

Now the question for option education is, what should be taught and who should teach it? In other words, should any person out there post option education blogs and if so should there be some sort of validation or regulation. As to what should be taught, I believe that there should be an emphasis on certain elements of options that everyone should know. As to who should teach, I believe that those who have actually traded and have traded options on a regular basis whether professionally or individually ought to be able to teach others.

As to validation of the content being taught, I believe that is where the community of readers such as the Option Jungle "swingers" (aka: readers/commentators) can play an important role. I think that in order for any free exchange of ideas to be effective, the participants need to question the sources and justifications of a writer even that of an option trader blogger.

That is why I will refer any and all optionateurs (my fancy way of saying interested option parties) to two sources of option education to validate any option educator. The first is run by the Option Industry Council (OIC) in conjunction with the Option Clearing Corporation (OCC). The second is the CBOE. You can also find a plethora of option specific information at Investopedia that I've found to be informative and educational as well.

Alright. Enough long-winded formal speak. It's time to dive into the material for this lesson 1.


The Basics:

What is an option? There are basically several types of options. The most common are equity options (equity in this regard means stocks or "equity" participation in a publicly-traded company that is typically traded and listed on the U.S. stock exchanges such as the NYSE and the Nasdaq).

Other types of options can consist of index options (you know, Dow Jones Industrial Average, S&P 500, Nasdaq Composite, etc.), and real estate option contracts (these are agreements that a buyer and a seller of a real property use). Because most option traders focus on equity (stocks) options I will talk primarily about these types of options.

An equity option is actually a contract. It does not convey any ownership at all of any company's stock. It really only conveys a "right" to its owner to buy or sell the underlying asset which in this case is the actual stock.

Option contracts are considered a "security" which basically means that it trades just like a stock on any exchange that lists equity options such as the Chicago Board Options Exchange (CBOE), the American Stock Exchange (AMEX), the Boston Options Exchange (BOX), the NYSE Arca (formerly the Pacific Exchange), the Philadelphia Stock Exchange (PHLX), and the International Securities Exchange (ISE) as primary U.S. exchanges.

You may or may not have heard of an option contract as being a "derivative". This term implies that the value of the contract is in part based on, or "derived" from, the value of a particular underlying stock.

Basic Terms:

Alright now that you understand that there are different types of options let's get more specific about the terminology of options, specifically equity options.

Remember, an equity option is a contract much like a standard legal binding contract that one would see in all kinds of daily business transactions. In order for the contract to be valid, there must be certain material items included such as the agreed upon price of the underlying asset and since time is material to the existence and essence of the contract a date must be pre-determined whereby the contract becomes worthless. There must also include an opportunity for the buyer of the option contract to exercise his/her right to buy or sell the underlying asset. There must also be a binding obligation to the seller of the underlying asset to sell that asset upon the buyer's right to it being exercised. Finally, there is a cost for entering this contract called a premium. This basically means that there is a monetary value of that contract right that needs to be agreed upon by both the buying and selling parties to the contract.

I've basically just bored you to death at this point with a legal example of an option contract which outlines the similar guts of an equity option contract; exercise price of the underlying asset, expiration date, and premium for the contract.

An equity option investor can basically do two things with the option. You can either buy the option or sell the option. An investor who buys an option is essentially buying a right to either own or sell the underlying stock.

There are two types of standard equity options:


In this lesson we will only cover CALL Options.


The most common and simplest method of investing using options is to "buy" calls. This means an investor is buying (paying a premium-a transaction whereby funds will be debited from your brokerage account) the "right" (that is exercisable) but not the obligation to "buy" (own) the underlying stock (100 shares per contract) anytime on or up to a date (expiration) at a specific price per share (exercise price aka strike price).

One common reason an investor will buy a call is because they believe that the price of the underlying stock will rise and in so doing hope that the value of their option contract premium will also rise. In Wall Street terms anticipating a stock price to rise is called being "bullish". "I'm bullish on Microsoft stock" means that you think that the price of Microsoft's common stock will go higher.

So when an investor tells you that they just bought 1 MSFT JUL 07 30 Call option contract for $1.00 per share you have all the information that is needed to know about that option contract.

1. How many contracts are being bought? 1 contract which is equivalent to potentially owning 100 shares of Microsoft stock in this example.
2. What stock can the investor exercise if desired? MSFT is the common stock symbol for Microsoft Corporation.
3. At what price can the buyer of this option exercise his/her right to buy 100 shares of MSFT? $30.00 per share.
4. What is the cost or premium for owning this contract? $1.00 per share x 100 shares = $100. This cost is what a seller of that particular call option contract was willing to sell it for.
5. When can the buyer or holder of this call option contract exercise his/her right to buy 100 shares of MSFT for $30.00/share? This investor has until the close of the third Friday of July 2007 to exercise. Technically, it is the third Saturday but because the option markets close on Friday after 4pm ET that is the trading expiration date.
6. Is this call option buyer/holder obligated to exercise his/her right to own MSFT stock? No.

Let's review key terms of a call option contract.

Buy Call =Buy the Right to Buy 100 Shares/contract
Contract=100 shares of the underlying stock
Exercise/Strike Price=agreed upon price at which buyer/holder of the option can exercise his/her right to buy the underlying stock
Expiration date=always referred to as the 3rd Friday of the month in which the option will expire
Premium=market value of the contract that both buyers and sellers agree upon
Underlying Stock=the actual stock and its market price that the option contract is tied to
Debit=money taken out of your brokerage account to pay for the premium of the contract

Alrighty then. If this is new to you then let it soak in because it does take time to absorb all of this and besides, you'll need to be clear on this before I explain puts. If this is not new to you then just stay tuned for the next lesson on PUTS.

Grab a vine and feel free to add or question this lesson.

Anyone Else GOOGLY for GOOG?

Why am I GOOGLY over ?

I did not want to resort to the "bandwagon" approach to option trading but I just can't resist. I must warn fellow "swingers" that this trade falls outside of the typical disciplined longer term approach that I have posted on the jungle.

But before you all pass judgment please hear me out. People like Cramer from and Mad Money have also been getting awfully Googly about GOOG. Did we miss the major move or is a predicted breakout above 513 (All time high) about to happen?

I would say that in light of earnings coming up the first week of Feb that the euphoria might be well deserved. Given that GOOG has run from the a 452 low as of 12/21 to its current price of 513 high as of this post, you'd be right in thinking that I've lost my trading mind. In my defense, one can't help think that recent analyst price targets have been almost self-fulfilling prophecies thus far. The analysts' targets have ranged from the 415's to 650 with a mean of 550 or so.

Alright, fundamentals are difficult to guage on GOOG and morningstar's fair value estimate is 315 (only about 200 below current prices) does not produce any warm and fuzzies for the fundamentalist. But then how can one even get a pulse on the true earnings growth potential of this pervasive and obiquitous search giant.

I hope that I've given enough downside explanation specifically by the fact that we are at technical resistance levels to make this trade.

So what about the justifications for this trade consideration and how to play?

IV has been rising as it typically does up to earnings anticipation and that bodes well for premiums and will only inflate them even more as the underlying stock price moves higher from these extraordinary levels.

In addition, the latest report posted today about both YHOO's and GOOG's U.S. web search market share that has increased only fosters added bullish sentiment/fervor/fever etc.

So what to play? I looked at the Feb calls and they came in overvalued as to the pricing model's theoretical fair value so I looked at the Mar calls and I found that surprisingly the MAR 520 Calls show about a 1.00 below TFV currently trading around $26.00/contract. Now that does necessarily mean that these are the best options but to me it gives greater piece of mind knowing that I'm definitely not overpaying at these levels.

These Mar 520 Calls carry a .50 delta which is at a moderately rising IV level of 33% which is slightly below ATM IV levels and below Feb call levels of 38%. BTW, previous pre-earning IV levels reached the low 40 levels then dropped like a rock. Having said that this play is a momentum play into earnings and if the underlying has risen sufficiently profit taking can be the rational reaction prior to earnings.

If you want to play the potential gap up move on earnings that is something you'll have to grapple with at that point.

One last thing, I'm certainly scaling into this position and would expect any kind jungle "swinger" out there to rationally talk me down from this GOOG bandwagon.

Stay tuned for more about my GOOG position.

My CSCO "Double" Take

Because I have a position in CSCO, I naturally have to defend today's double downgrade by both Prudential and BofA as another leg in opportunity for my longer term call play. As shown in my portfolio update post I am long the Jul 27.50 Calls with a cost basis of 3.25.

I'll be waiting to see how the stock reacts over the next day or so before I make additions.

Stay tuned "swingers" and remember to grab a vine and let me know if the analysts are either trying to get in at lower prices or are intentionally trying to make it go lower or if the latter is just a conspiracy theory.