OPTION JUNGLE

Market Commentary

2007-03-02T09:09:00.000-07:00

Here are some thoughts about the current market conditions.

We have been in need of a correction after this bullish uptrend since August 06. Did we expect that kind of drop? No. Are investors on nerve right now? Yes. Will selling continue? I think so. Is it time to start looking for a short off a bounce? That's what I think. Are defensive stocks safe? Depends on how long you hold them and if you believe in dollar cost averaging. Here's some sobering realities.

In October 1987. GE saw its stock close at 50.75 on Friday, October 16, 1987. On the following Monday, known as Black Monday, it dipped to as low as 38.75. Even a safe, defensive stock like JNJ had more than 18 percent of its value disappear during that awful day.

I love it. Please investing world let the hedge funds have their year. More panic, more money for the contrarians and less for the herd.

Still in cash position right now looking for shorting opps.

OK BYE BYE BIDU

2007-02-15T14:37:00.000-07:00

The lower outlook seemed to be enough for traders today to take profits and take a hike. The stock was down over $13 earlier today but closed down just under $9 to 106.18.

No Bye Bye Yet On BIDU?

2007-02-14T15:20:00.000-07:00

Will this after market reaction turnaround at tomorrow's trading? So far BIDU up over $4.00 at 117.20ish.

In a Reuters report the company tempered revenue growth for the next quarter saying it was likely to decelerate sharply. Even so investors are excited for now it seems about the 4oo percent increase in 4th quarter net profits.

Maybe no bye bye yet....

NFI or NEW? You Choose

2007-02-12T14:39:00.000-07:00

I have been tracking the subprime lenders too long now. By that I mean I should have been putting/shorting these troubled companies a long time ago. Oh well, such is life as the saying goes always a day late and a dollar short.

Well maybe not this time. As of 2/9/07, Morningstar just posted a fair value valuation on NFI and NEW of "BANKRUPTCY". Yes that's not a typo.

Here's two reports to chew on that probably will be a negative going forward for these two bad boys. NFI Judge certifies class in suit against NovaStar bizjournals.com (Fri, Feb 9)

And, Subprime Lenders Face Challenging Market at Forbes.com (Fri, Feb 9)

So what will I do about it. Unfortunately, the bad news is being baked in to the stock price but I think there's more bite than bark to the downside. I'll wait for a rally of sorts if any and then look for an entry in either one. Even with extremely high IV, there is now lack of sharkbait.

I might take a bite at the NEW Mar 12.50 Puts currently trading around $0.65 with over double the option volume to open interest or the Mar 10 Puts with over 6 times OV to OI (already released earnings 2/8/07). Or the NFI Mar 12.50 Puts at 1.10 or Mar 10 Puts at .50 (next earnings 3/5/07).

Remember this is a deeply speculative play because any hint of good news could propel this stock higher.

Stay tuned...

Bye Bye BIDU?

2007-02-12T09:17:00.000-07:00

Is it time for BIDU to be the next sell on the news victim? Apparently, Cramer expects profit takers to emerge after the company reports earnings this Wednesday and since he's the mighty "oracle" we should all listen, right? Well actually in this case yes.

This is setting up to be a potential call credit spread play with the FEB 115/120 Call net credit trading around 2.20. Not the best r/r but should see some nice premium degradation from the IV decline that probably will result and maybe some underlying help.

Current IV levels on these calls are 90% which is above 52 wk highs (see IV chart below).

We'll see what happens....

Oh My OMTR

2007-02-08T14:26:00.000-07:00

Anyone heard of Omniture? Sounds like a furniture store for trendy people from Germany who wear black clothes and say "touch my monkey", doesn't?

Well apparently not. This web analytics company has been busting out of a sideways slump since last October after it went public last July and has not looked back. Looks like we need a pullback for a possible long entry.

Earnings just came out and looks like the uphill trend might be slightly altered. We'll see how traders react tomorrow.

Keep an eye on this one going forward for a possible rising bull or sleeping bear.

NTY Status

2007-02-08T14:22:00.000-07:00

Isn't amazing how I sometimes feel as though I have the non-midas touch? Right after I post about NTY they come out today and announce lower than expected sales for January and all of a sudden there is nothing but negative sentiment in the air for NTY.

Could that be a trend wrecker or a long entry opportunity?

We'll have to wait and see if the profit takers plow in. NTY closed down $3.32.

MA Earnings Expectations Too Lofty?

2007-02-08T14:17:00.000-07:00

Mastercard reports Q4 earnings tomorrow before the open. It's expected to earn 17cents/share on revs of $827M.

The Street.com's article discusses how expectations may be too high and that the stock now trades at a premium multiple. I'd have to agree. But I'll wait for the news and see if there is any IV declination and sufficient net credit going into next week to play.

We'll keep on eye on how the news is met.

Well I'll Be An ALB

2007-02-08T13:57:00.000-07:00

What is up with ALB? The chart, that's what's up. This beast has done nothing but gone up. Why? Well if the latest news is any indication it's because it keeps siding with shareholders by both announcing a 2-1 stock split and a 17% dividend payout increase.

Additionally, it engages in the development, manufacture, and marketing of specialty chemicals for consumer electronics, petroleum and petrochemical processing, transportation and industrial products, pharmaceuticals, agricultural products, and construction and packaging materials.

Can you say "diversified" product mix? It's like its own ETF. It is also a member of the S&P 400 Midcap index which is no slouch either. The problem is we need a pullback before getting excited about any entry soon.

Let's keep an eye on this one.

Do You Feel Lucky LVS Punk?

2007-02-06T09:27:00.000-07:00

How lucky can you get when your latest earnings report reflects a luckier than normal revenue from high roller tables at the Venetian?

Maybe not so lucky when your stock drops over $5 after the report. Will this slide continue as well as the normal IV slide?

I'm betting that it will. I'm looking at the FEB 95/100 Call Spread with a net credit of 2.80 if I can get it. That makes a 1.1/1 r/r ratio which is not the best but if the underlying continues on profit taking mode will give me some extra help.

Keep rolling the dice high rollers and soon you'll take some money away from LVS and so will profit takers.

Get Your Daily NTY Supplements Now

2007-02-05T21:15:00.000-07:00

That's right folks. Step right up. Get your nutritional supplements and while you're at it, get some of its maker's stock or options. Besides, a company with that kind of cheap-looking logo must be making money.

Check out the chart and tell me if we are too late to the game. The plan is to wait for a pullback and get into some calls. There is no real compelling r/r on the put credit spread action here. So I'll stick to directional calls for now.

I'm keeping an eye on the Mar 50 or 55 Calls currently trading around $5.00 and $2.00 respectively with low IV and earnings out of the way.

This stock is part of the S&P Small Cap 600 with profit takers not taking profits yet. I hope to get some discount on the premiums if it pullbacks sufficiently.

The simple 20 moving avg is still rising and way below current prices. I'd prefer to get an entry if it finds support around 51 or its 20 SMA. I'd also like to see some consolidation which may occur given the market sideways action lately.

Stay tuned.

RACKED Again?

2007-02-02T10:39:00.000-07:00

Rack dropped another 19% after its earnings report today and looks like a possible IV drop play setting up for a credit spread play.

The only question is will buyers step in here or will weakness continue? I'm considering selling the 15/17.5 calls for a net credit of $1.50 for a 1.5 reward/risk ratio with IV levels at around 59/55% respectively.

If we get some rebounding I might also add the 17.50/15 put spread for a hedge play against the upside.

Will reverse psychology prevail against discount buyers on poor old RACK? Stay tuned...

AMZN Credit Spread Play

2007-02-02T09:52:00.000-07:00

Thanks to Adam at Daily Option Report for the idea. AMZN just came out with earnings and the stock has dropped on the news as has IV.

I'm looking at selling the FEB 30/27.50 call spread for a net credit of $1.80 giving a risk reward of 2.5. If we get some continued weakness in the underlying and the IV which are currently at 30/27% respectively we should see premium degradation.

Anyone else game for this credit spread play?

GOOG Q4 Revenue Not Enough

2007-01-31T15:02:00.000-07:00

Oh well, the EPS of $3.29 beat consensus estimates of $2.91 but the revenue growth rate was 67% to 3.21B which beat consensus estimates of 3.14B but did not surprise. In other words, the revenue estimate had to beat the high of 3.27B in order for the stock to react positively.

GOOG after hours is trading around $486.

Nice try GOOG but not this time. IV will plummet and so will Call premiums. The longs will lose and the shorters will will tomorrow I'm sure.

Since no one made a bet I assume that most did not want to venture into this trap. Wise indeed.

Is GOOG's Growth Slowing?

2007-01-31T10:34:00.000-07:00

I wanted to ask all you "swingers" who care about Google (Nasdaq:GOOG) if you agree with this article about GOOG's slowing growth. According to the numbers from GOOG Finance there is no disputing the evidence. The growth rate has slowed.

But my question to you is will this afternoon's earnings report show an uptick on YOY growth?

All place your bets now. Will growth prospects be the catalyst to a sharp drop or decline in GOOG's after hours stock trading today?

Or will the Fed's announcement today overshadow GOOG's earnings report? It's a tough time for decisions right now. Hmmmm....maybe no decision would be the best decision.

I wish all you long GOOG players good luck including myself.

GOOG Q4 Earnings Game

2007-01-26T13:46:00.000-07:00

Since playing GOOG around earnings time can be equated to playing the roulette table at a casino, I thought it might be fitting to show you what theflyonthewallblog has found lately.

Henry Blodget, yes that Merrill Lynch internet analyst who used to hype up the internet fliers during the late 90's IPO bubble and who was barred from working in the securities industry ever since, has been asking for reader's Q4 earnings estimates on GOOG.

Here's his game:

Please submit your estimates of:
1) Google's Q4 NET REVENUE (excluding affiliate payouts), EPS estimate,
2) The price at which Google's stock will open the morning after the earnings announcement, and
3) BONUS: Your logic about both of the above. The more detail the better.

Please submit your bets to the comments section of this post by the market-close on Tuesday, January 30th. As usual, the winner will get his/her name (real or alias) in lights in a follow-up post--and will also presumably cash in on an overnight stock trade (although that part is up to you).

Note that the sweepstakes tests your ability to not only project fundamental performance, but to have a good enough handle on the market consensus that you can anticipate how the market will react to it.

For reference, below is the Street's printed revenue consensus, which is almost certainly low-balled. If Google hits this number, the stock will almost certainly tank. So the questions are, how much does the market think Google will beat this number by, and how much will it really beat it by? And what will happen to the stock in the morning?

I regret that we can't use EPS for this game, but the random ways that analysts choose to calculate Google's EPS make the number nearly meaningless. We could use operating margin, but then we'd still be arguing about whether stock-comp should be included (it should), and so on. And who has time for that...

So submit those revenue bets and let the sweepstakes begin!
Street consensus Google Q4 NET REVENUE estimate (per Yahoo Finance): $2.19 Billion (Yahoo Finance 2.05B-2.31B Low/High), with a range of $2.05 to $2.31 (Yahoo Finance avg estimate is 2.90 with 2.65-3.11 Low/High).

Here are the bets so far (in this order Rev, EPS, Open Price)
2.32B, 2.49, 512
2.30B, 3.00, 530
2.29B, 2.05, 438
2.50B, 3.10, 550

Alright "swingers", let's play this game as well except the closest will receive a gift certificate via email from OJ (you'll have to submit your email address when I post your comment name).

Here's my bet: 2.6B Rev, 3.15 EPS, 550 (I know you all think I'm crazy but it's anyone's game, right?)

Good Luck!!!

New OJ Poll Question

2007-01-26T09:01:00.000-07:00

New question same volatile friend (not for the weak of heart or stomach); GOOG. You all know where I stand on this since the OJ Portfolio contains call options on GOOG. Heck, I may even buy some short term OTM Feb calls for a speculative play.

BTW, here's an earnings preview to chew on (Click HERE).

So get on out and vote on GOOG's upcoming earnings report.

OJ Poll Results

2007-01-26T08:46:00.000-07:00

It looks like those of you who were YES voters on the YHOO and MSFT post earnings price increases were correct.

If that's any indication at all it could signal a mild bullish environment (very scientific poll you know).

Stay tuned for the next OJ Poll about our very volatile friend.

MSFT Update

2007-01-25T14:54:00.000-07:00

It appears that after hours traders liked MSFT's Q2 earnings with the stock up about $0.80 at 31.25 as of this post. The earnings came in at $0.26/share, a penny above the highest estimate of $0.25 and 3 cents above the consensus estimate of $0.25.

Revenue came in at 12.5B coming in above 12.1 consensus estimates and the company guided slightly higher on their outlook with 45 to 46 cents on 13.7 to 14b in revenue for Q3. Analysts were already expecting 46 cents and 14b in revenue.

After today's shelling on the markets overall, I'm not too optimistic about a rally on this so-so, lackluster news but I could be wrong like I was with today's expected rally on EBAY's report after hours yesterday.

Oh well, it will be interesting how IV levels on our short put spread play do and how well the stock trades tomorrow as well.

Until then, goodnight and good luck as a famous news reporter used to say. At least I didn't say good night gracie.

MSFT Earnings Play

2007-01-25T10:18:00.000-07:00

I thought that I might point out that MSFT's Feb ATM call/put IV levels of 27.50%-29% are at almost 52 week highs (see IV chart below).

So I'm thinking of playing this earnings after the close today by selling the FEB 32.50 Puts for about 1.80-1.85 and buying the FEB 30 Puts for .40-.45 for a net credit of 1.40-1.45 if possible.

That is still anticipating a bullish directional move which of course takes on its own risk. The reward to risk ratio is not great but it's not too bad with about 1.3-1.4/1. Again, I'm anticipating some premium decline as IV drops and the underlying to move higher after the anticipated earnings event.

If I wanted to hedge the directional play, I could also sell the FEB 30 Calls and buy the FEB 32.50 Calls for a net credit of 1.05-1.10 which would offset some of the short put spread premium increases. However, I'll stick with the one sided short put spread (aka bull put vertical spread).

The analyst consensus for MSFT's Q4 earnings is .23 with a low of .14 and a high of .25. The revenue estimate consensus is 12.07 B with a low of 11.72B and a high of 12.43B.

But what will be of course the most sought after information will be the forward revenue guidance based on estimated VISTA sales on the retail side after the Jan 31 product launch.

The next question also for all tech and market investors is will this outlook from MSFT's management provide the catalyst for the Nasdaq and the major indices to new highs again and more importantly, be a platform for a new uptrend level (technically speaking) or,

will it be a lackluster reaction much like today's reaction to EBAY and QCOM's earnings?

In my opinion that seems to be a lot of pressure for one company's performance to take on for the upside.

Warning: The following comments have no scientific, objective or empirical grounds other than a more of a sort of behavioral, subjective, and instinctual/sentimental perspective. In other words, just a few thoughts from the "gut".

But in a market environment where the bulls don't seem to be completely ready to take full profits and the bears are not quite sure whether to increase their short positions, I'd lean in favor of the bulls. It's a difficult task to pick both tops and bottoms; trust me, i've tried many times with few successes and more failures,

I think that given that the uptrend is still intact with the S&P and the DOW, the bears are a little more nervous than the bulls since selling lately has been met with heavy discount buying.

Alright, enough of my babbling. Let's hear some of your babble on this earnings play whether it might just be a non-event or a major event that many institutions are keeping a close eye on.

Did Everyone Forget About EBAY?

2007-01-24T14:53:00.000-07:00

I did. Apparently not the bulls after hours today. The AP reported that EBAY blew away analysts estimates and have upped their guidance for Q1 2007. The stock's trading up around $33.15 currently (+3.15 from today's close of $30.00 +10.5%).

I guess that I should have mentioned EBAY's earnings along with MSFT's tomorrow. Oh well, continued positive reactions to these tech stalwarts only bodes well for bullish tech positions.

Perhaps we'll get some continuation in the Naz tomorrow.

Latest Poll

2007-01-24T09:33:00.000-07:00

I have not seen any new voters at the OJ Poll lately. Is that because you "swingers" are a little gunshy or is it because you all have forgotten? Regardless, the odds might be in the YEA sayers favor.

OJ Portfolio Update

2007-01-24T08:44:00.000-07:00

What a turnaround on the OJ Portfolio positions! Thanks to the positive reaction to YHOO's earnings news, it appears that the tech market is finding some buyers so far and so has the OJ Portfolio.

What remains to be seen is if the bulls sustain their buying to move the Naz back above prior highs of 2508.

That's a long way from current levels but one never knows. Again, MSFT's earnings will be reported tomorrow 1/25 and so the market will be anxious to see the results and more importantly the guidance going forward.

GOOG has certainly found some renewed buying interest after the shelling it's taken lately. It may only be the short sellers closing out positions with some nice profits as of late.

All the big name tech stocks such as MSFT, CSCO, HPQ, AAPL, and even DELL are seeing improvement so far today which has been driving the Nasdaq which is up 21 points today to 2452 so far.

The million dollar question as always is this a true rally to new highs or is this a dead cat bounce? We shall see.

PEIX Update

2007-01-24T08:38:00.000-07:00

So much for continued bullishness in the ethanol stocks. According to MarketWatch, the expected news from the Prez was baked into the stock price.

PEIX is currently trading down $1.08 at 16.77. The 20/17.5 Put spread is currently trading for 2.00 putting the position down about 38%. The IV levels have actually moved higher from yesterday which is not for a net credit seller who wants premium degradation.

What's our exit strategy? I'll look for the stock to rebound a little today if it does at all and then might close out the 20 Put leg for a loss and hope that the stock continues to move lower.

This is a broken trade and should be treated as such at this point.

Any ideas on PEIX's sad move today, if so grab a vine.

Market Technicals Via Trader Mike

2007-01-23T18:35:00.000-07:00

Click Here for TraderMike's readings of the index charts.

I agree that the Nasdaq especially is waiting for some kind of catalyst to push it down or up. It will be interesting to see if YHOO's bullishly accepted report after today's close might break the short term downtrend. Or, maybe MSFT will be the catalyst after this Thursday.

Grab a vine and give me your reaction to the market action.

Retraction On No YAHOO For YHOO

2007-01-23T15:16:00.000-07:00

Alright. Not that things might not be different at tomorrow's open but apparently investors decided after further review that YHOO's report was acceptable and somewhat bullish.

The stock has reversed in after hours and is now trading at $28.10 up about a $1.10. BTW, GOOG is also up with the last trade at about 483 up $4.00 after hours currently.

Maybe there is hope yet for a YAHOO.

No YAHOO For YHOO!

2007-01-23T14:54:00.000-07:00

You guessed it. YHOO just reported its latest earnings report and the stock is trading down about a $1.00 after hours. Not good for tech in general, maybe alright for GOOG and other internet search competitors.

GOOG is up after hours by about a $1.50 as we write. I'd imagine that given this news on YHOO we'll probably see another down day for the Nasdaq tomorrow. Maybe MSFT will save the struggling tech market with its earnings report coming up 1/25.

GOOG's earnings will be released to the public 1/31.

Grab a vine and give me your prognostications if you dare.

PEIX Credit Spread Update

2007-01-23T11:19:00.000-07:00

Just got filled on the FEB 20/17.50 Put Spread for a $1.45/contract net credit. The stock has moved up to $18.46 as was expected in anticipation of tonight's SOU address by the Prez.

IV on those puts is 64% respectively and the FEB 17.50 Calls are now trading for 1.70.

Stay tuned for more updates and check the OJ Portfolio for the latest position status.

Anyone Up For A Leg Of RACK?

2007-01-23T11:00:00.000-07:00

That's right. I bought some JUN 20 Calls for 2.96 based on a nice rally in the tech market and the fact that RACK has been so beaten up.

Having said that, this is a longer term bullish call play and I'll be "legging" into the position as it proceeds. I'm certain that there will be profit taking today so I'm lightly in.

Anyone else like "lamb"? Grab a vine.

PEIX & ENER Plays?

2007-01-23T09:05:00.000-07:00

Who else wants to jump on the ethanol bandwagon in light of the Prez's state of the union address where he's expected to call for a sharp escalation in the federal mandate on use of ethanol as a renewable fuel alternative (click here for Yahoo Finance article)?

Since both Adam at Daily Options Report and J. Kahn at In The Money have talked about PEIX and ENER respectively I thought that I might add my plays on these two as well.

PEIX's IV has really shot up in anticipation of the expected address from the Prez which makes it difficult to play a directional bullish call play. So here's what I have in mind to play the bullish side of the equation while also anticipating a drop in IV after the address.

I'm looking at selling the FEB 20 Puts and buying the FEB 17.50 Puts for a net credit of $1.50. The 20's IV is at 67% and the 17.50 IV is at 66% which are way almost at 52 wk high levels.

Conversely, the Feb 17.50 Calls are currently priced at about $1.35 with a .60 delta and the 20 Calls are at .45 with a .27 delta. I post this info so that in the next few days we can compare the movements for measuring purposes.

The PEIX vertical spread play's reward to risk ratio looks acceptable with about a 1.5:1 ratio.

The ENER FEB 35/30's produce a less appealing r/r of .5/2 at a net credit of 1.70. The reason for the lower reward to risk profile is due to the larger spread between the strikes on ENER.

Doing some quick what if scenario in the pricing calc for the PEIX spread we get the following potential results:

If PEIX's stock rises $1.00 and IV drops 3 % after tonight's address the $1.50 credit turns into
1.20 (+20%)
If PEIX's stock drops $1.00 and IV stays the same the $1.50 credit turns into $1.80 (-20%)

The most one would lose in this play would be $1.00/contract.

Stay tuned for more on the PEIX spread play and grab a vine to share your thoughts/questions/concerns about the ethanol play.

GOOG And Tech

2007-01-22T15:56:00.000-07:00

Cramer keeps sounding the "sell tech" horn based on seasonality/cyclical reasons as well as for profit taking reasons (see today's video here). The latter makes more sense to me than the former. To his credit, we did see some selling in the Nasdaq at this time last year but not that looked like a valley. It seemed to be more profit taking from the January runup as evidenced in the chart below. Regardless of what I say I can't move markets with my comments as he can.

Speaking of tech, I added again to my GOOG Mar 490 Calls lowering my cost basis to 25.86. It will be very interesting to see if the stock can rebound significantly into earnings in 2 weeks or so. The bears and sellers have been definitely ruling the last few trading days for GOOG.

Maybe my next poll should ask, "when will the bleeding end" or "will GOOG close below 450 by week's end?" I'm rather confident most folks right now may be a YES voter on that poll question.

Can anyone help me justify my bullish stance at this point with GOOG's performance down over 31 points from its 513 all-time high since 1/16/07 (that's 5 trading days folks)?

I still maintain, however, that value buyers will step in soon and once the earnings expectations/hype kicks in we should see some rebounding. In fact, I think we might even see some short squeezing soon. Ever heard of the term, "shaking out the weak hands".

Hopefully, my hands don't get too weak.

New Poll Question (See Poll On The Side)

2007-01-21T11:01:00.000-07:00

Feel free to vote on the latest OJ Poll for this upcoming week 1/22-1/26/07.

I personally am bullish on both stocks but that's because I bought calls.

Earnings This Week

2007-01-21T10:03:00.000-07:00

Here are the earnings reports of concern slated for this week:

1/23 YHOO
1/25 MSFT

This week's poll will be based on these two earnings report outcomes.

Be sure to vote.

GOOG Poll Results And A New Poll

2007-01-19T15:11:00.000-07:00

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!!!

2007-01-19T14:45:00.000-07:00

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

2007-01-19T10:00:00.000-07:00

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

2007-01-19T09:33:00.000-07:00

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.

AAPL Thoughts

2007-01-18T16:23:00.000-07:00

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

2007-01-18T16:20:00.000-07:00

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

2007-01-18T15:55:00.000-07:00

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.

Rack Up RACK?

2007-01-17T22:40:00.000-07:00

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

2007-01-17T22:29:00.000-07:00

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.

My MASTERCARD (MA)

2007-01-17T21:43:00.000-07:00

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

2007-01-17T21:34:00.000-07:00

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

2007-01-17T21:23:00.000-07:00

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

2007-01-17T21:17:00.000-07:00

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.

Option Education Program Lesson 1: Buying CALLS

2007-01-16T16:21:00.000-07:00

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 888Options.com 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.

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:

1. CALLS
2. PUTS

In this lesson we will only cover CALL Options.

CALLS

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?

2007-01-16T09:59:00.000-07:00

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 thestreet.com 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

2007-01-16T09:12:00.000-07:00

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.

Do You Like Option Education Programs?

2007-01-13T14:35:00.000-07:00

Has anyone had an experience with an option education program where you've had to pay a lot of money for 3o minutes or 1 hour sessions over the phone or in person?

If so, feel free to share your negative or positive experiences with these programs.

Stay tuned because soon I'll be offering what you pay $5,000-10,000 for free on the OJ blog.

Grab a vine.

OJ Portfolio Update

2007-01-12T15:23:00.000-07:00

Click HERE to View latest OJ Portfolio.

MSFT Update

2007-01-11T14:49:00.000-07:00

Our JUL 27.50 Calls that we bought for 1.96/contract closed today at 2.50 (+28%). We'll see if the tech rally continues with MSFT leading the way for the Nasdaq.

NYMEX HOLDINGS (NMX)

2007-01-11T14:09:00.000-07:00

Since I'm still waiting for NYX to pullback a little bit more for a long call entry, I thought that I might add another exchange play.

That's right, the New York Mercantile Holdings, Inc. (NYSE: NMX). Why another exchange you say?

Just because I think it has been neglected and forgotten about by investors who have been involved in NYX, CME, ICE and BOT.

Just because the stock has been beaten down since it's IPO and just because analysts have downgraded I think its time to rise will be imminent.

So here's what I have done to show my bullish bias on NMX. I bought the JUN 07 120 Calls for $13.41/contract near the close yesterday.

There is no theoretical option pricing model on any of these options because they have no history due to recent availability of options on the IPO.

The JUN 120 Call IV level is around 30% which is 52 wk lows. The ATM option IV has recently started rising which can be good for the call options especially if the underlying continues to rise.

Having said that, I like the recent support at 115 and 118 and have seen a recent runup the last two trading days. The trick will be if it can break the 133 level.

The only fundamentals that have been at the forefront of this company's earning growth potential is that its trading volume of both futures and options contracts have recently hit records especially those contracts tied to oil and precious metals.

I intend on grabbing more contracts as it breaks out of recent highs or if it retreats back to support levels, nothing in between.

Grab a vine and tell me what you think about this NMX long term call play.

Stay Tuned For My Next Posts

2007-01-10T16:10:00.000-07:00

Look for my latest trades concerning DELL, NMX, and CSCO. Can you say tech and finance heavy?

Stay tuned for more.

Yahoo for YHOO?

2007-01-10T15:39:00.000-07:00

Do you for YHOO or do you YAWN?

What do you get when you start losing market share to GOOGLE? Could it be a beaten up internet giant that is undervalued or a beaten up internet giant that will remain beaten up?

According to my research, YHOO is fairly valued at around $34.00. It has found support recently at $25 and hit a 52 wk low at $23. I like this sleeping value play and here are the options that I like.

I legged into some JUL 07 27.50 Calls at 3.81/contract. Why? Because their theoretical value is at $4.20 with a .65 delta.

Those options are trading at a 33% IV level which is about the lower middle of the extremes of 25/50% levels. They look like they have been rising which coupled with a rising underlying is double whammy on the positive side.

Fundamentally, YHOO still has a large user base, still remains to be the most popular web destination on the web, still has a far-reaching global popularity, has plenty of cash for stock buybacks and potential headliner acquisitions, and with its reorganization plans unfolding there is a positive aroma in the air.

The downside is that YHOO's revenue primarily comes from search which has fallen behind Google and could see hard times in an economic recession. It has also executed poorly in launching its newest advertising platform and has lacked in acquisitions behind Google and NewsCorp's. The competition is stronger than ever from AOL, Google, Microsoft, and traditional media companies.

Having said all that, why Yahoo now? Mainly because I think that it has been awakened by the stiff competition and that it looks attractive at these prices given that it's in a bullish sector so far. Besides, I like Yahoo Finance.

Grab a vine and let me know if you are Yahooing for Yahoo or not.

MSFT Update

2007-01-10T14:17:00.000-07:00

Alright fellow "junglers" (please help me on a name I can call all readers). I entered my first scaling in position in MSFT.

I bought the JUL 07 30 Calls at $1.96/contract. I'll continue to scale in more as we go here. I'd still prefer a pullback in the overall markets which have been resilient at key support levels.

I liked the little pullback in MSFT today as it trades sideways here at the $29.50 level.

I'll keep all posted. I intend on posting a portfolio link soon as more positions start coming in for all to view at your leisure.

Feel free to grab a vine.

APPL 90/85 PUT Credit Spread Update

2007-01-10T14:03:00.000-07:00

The 90/85 put spread trade that I entered yesterday is now worth $0.50 putting our position up by $1.70/contract (+77%). Remember, that our net credit basis was $2.20/contract.

IV on those puts has not really moved that much. This has been more of an underlying move up that has sucked the life out the put premiums (remember, that's a good thing for a net credit play).

Well I exited the trade earlier today (too early I might add) for a net debit of $1.00. I just thought that with so much movement from yesterday and still a higher open today that it might make sense taking my profits now and if the stock loses momentum into earnings that there might be another entry point yet.

I'll keep all in the jungle posted.

Anyone Interested In Mr. Softy (MSFT)?

2007-01-10T09:35:00.000-07:00

Believe it or not, I am. Who likes paying a toll, so to speak, everytime you use a computer? Probably no one I know does. Who likes investing or trading a company who controls the toll and that toll bascially goes to its bottomline? Probably anyone I know does.
Well, whether you like it or not, Mr. Softy (no, not Mr. Softee) might be for you.

I noticed a blog called 24/7 Wall St posted their opinion on MSFT and I agree with their analysis.

Here's why I also think Microsoft (Nasdaq: MSFT) might be a solid longer term bullish call play:

UPSIDE

1. STRONG 2007 VISTA OS SALES

2. STRONG 2007 OFFICE SALES

3. STRONG 2007 XBOX SALES

4. UNDERVALUED STOCK PRICE: MORNINGSTAR FAIR VALUE PRICE IS $34.00

5. LIVE SEARCH UPGRADES FOR AD REVENUE GROWTH

6. IPTV VIA AT&T AND VERIZON

7. ZUNE UPGRADES

8. LOTS OF CASH ($43 Billion even after paying out a $32 billion special dividend in 2004)

9. WINDOWS HOME SERVER

10. WINDOWS MOBILE UPGRADES

11. SQL SERVER SALES GROWTH ASSOCIATED WITH VISTA OS

DOWNSIDE

1. WEAKER THAN EXPECTED (WTE) VISTA/OFFICE SALES

2. WTE XBOX SALES

3. WTE BUSINESS SOFTWARE SALES

4. WTE GROWTH ON SEARCH AD REVENUE

5. WEB-BASED SOFTWARE/SERVICES COMPETITIVE THREATS (GOOGLE AND YAHOO)

6. MORE REGULATORY AND ANTITRUST ISSES

7. GREATER SOFTWARE PIRACY

8. INTERNET EXPLORER COMPLACENCY VS FIREFOX ETC

9. LINUX & OPEN-SOURCED APPLICATION THREATS TO ENTERPRISE/MOBILE SOFTWARE MARKETS

10. GREATER SPENDING TO DEFEND AGAINST ON DEMAND SOFTWARE SERVICES VIA THE WEB AND APPLE IPHONE, APPLETV, IPOD ETC.

OK. So those are the fundamental pros and cons. What about the technicals and option pricing factors to be considered.

For one, the stock price has clustered around this 29-30 level for quite some time after making a nice move up from the low 20s in Aug 06. Having said that suggests that there is a possible breakout above the 30 level which would provide some nice premium increases in bullish call options.

Now, which options should I choose? Since I want time on my side, I'm looking at the JUL 07 27.50 Calls. These are slightly ITM and therefore cost a little more than the 1 strike OTM's; the 30 calls.

The JUL 07 27.50 Calls are currently trading for $3.40 and the 30 Calls are $1.85. The 30 calls are trading about $0.20 under fair value according the theoretical option pricing model I use and the 27.50's are about $0.10 below fair value.

That's good either way. Which ones would I choose? I like having a little intrinsic value-meaning the amount difference between the actual stock price and the strike price-to have in reserve. But if you prefer to be a little more aggressive than the 30's would not be bad either.

Both have deltas currently of .75/.55 respectively.

Now, let's talk about Implied Volatility (IV). Both call options have IV of 19.4 and 19.9% respectively. These have been rising the past month from lows of 14% but look like they have up to about 32% levels to go before getting too high.

Let's run a scenario on both 27.50/30 calls: The assumptions are that the stock price runs to $34.00 by April 10, 2007, the IV levels rise to 25% and includes a dividend payout of $0.10 per share paid in 2/13/07 and current interest rate of 5.25%.

Current stock price (1/10/07) = $29.53
Current IV = 19.4/19.99%
Current Jul 07 27.50/30 Call Premium = $3.40/$1.85

Upside scenario results:
Premium would be theoretically priced at $7.00 (+105%) /$4.75 (+156%)

Downside scenario results:
If the stock drops to 27.50 and IV drops a couple of percentage points, the premium would drop to about $0.50 (-73%) for the 30 calls and down to about $1.35 (-60%) for the 27.50's.

I'd prefer if MSFT would pullback to about $29.00 before I engage my longer term call play and I'd prefer to see the overall markets pullback some more before so that we can potentially see some new highs again (pull before you push).

Keep in mind that it's earning season again and we might see continued sideways to slightly upside movement in the short term.

If Mr. Softy breaks out above 30 the markets will most likely follow suit or vice a versa.

Any thoughts, comments, dislikes on my strategy, you know what to do. Grab a vine.

AAPL Update

2007-01-09T11:31:00.000-07:00

Well the announcement made headline news and it's official Apple Unveils Long-Awaited Phone, TV Box.

The iPhone and Apple TV products will be available soon.

What does mean for the credit spread. Well I tried to enter my 90/85 Put Spread at $3.00 but did not get filled after I modified the order to $3.10 when the stock dropped quickly before the news. So instead I waited and got filled at $2.20. Not at all a great entry price and does not provide a great risk/reward but nonetheless I'm in and the current net debit is 1.65 (up .55 +25%).

Now the stock is above 90 and IV has moved to 58/55 respectively.

I'll keep everyone updated about the management of the trade and any other thoughts.

More AAPL To Bite?

2007-01-08T22:53:00.000-07:00

Just by way of information. I have to add that one caveat to the explosive implied volatility levels for AAPL is that the Q1 2007 earnings report is scheduled to be released 1/17 which is two days before January expiration.

If most investors are betting that Q1 earnings will be great then IV will continue to rise up to that date most likely. So that still bodes well for our credit play which should see some premium degradation with the expected rise in the stock price up to earnings even with a contiuned rise in IV.

Additionally, if one does not want to play the earnings and there is sufficient profits in the position then it would make sense to close that position prior to 1/17. If you hold and the earnings report is better than expected then one could get an incredible IV drop immediately after that report regardless of the outcome.

Just more food-I mean-apple for thought.

Follow Up On NYX

2007-01-08T22:01:00.000-07:00

What can I say about NYX? The stock closed above 105 today (+10 from 1/4's closing stock price).

Those JUN 07 95 Calls that I posted about on 1/4/07 closed today at 18.70 (up 66% from 1/4's closing price). Now ask me if I got in? No. I now have to wait patiently for a pullback to get in which most likely will be tomorrow or the next.

So stay tuned because I now have to look at the 100's or even 105 strikes which are all under theoretical value so far.

Anyone else get in before I did? Grab a vine and let me know.

Is There Another Way to Buy AAPL?

2007-01-07T21:04:00.000-07:00

With the Consumer Electronic Show (CES) going on this week in Lost Wages-I mean-Las Vegas, all attention is being paid to Apple (Nasdaq: AAPL). All gadget geeks are awaiting the much anticipated iTV and iPhone (see Apple Expected to Launch New Product).

What does this mean to directional bullish option traders? To some it may mean be a buyer of call options or a seller of put options. Now which one should we choose.

Well here's what I'm considering (doesn't mean that you should): Being a bullish credit seller. What the heck does that mean? It means that you can either be a naked seller of puts or you can be a credit spread put seller. They are both bullish plays. But which one is better or less risky?

Here's the skinny: If you are long term bullish on AAPL then, yes, you could indeed buy call options either ITM, ATM, or OTM. It's your choice. But (here comes the big "but" not "butt") the problem is the current Implied Volatility levels of AAPL options especially on the front month Jan 07 calls and puts.

If you like just receiving premium and possibly owning the stock (assuming you have sufficient buying power), then you probably don't and won't mind getting assigned the stock by a put buyer who exercises his/her right to sell AAPL stock if the put option remains ITM (I hope that makes sense to some out there).

Right now, the JAN 07 85s and 80 puts have IV levels in the low 60% levels. So what? Well these are at 52 wk high levels which means that the anticipation of new product intros at the CES have been factored into the option premiums.

I'm still lost, you say. What I'm saying is that once any major announcement concerning Apple's new products or any non-announcement (not likely but probable) will most likely cause a sudden drop in IV which, correspondingly, will or could cause a drop in premium values.

The only way to offset this drop in IV in the premiums is if the underlying stock price moves higher quickly. So if you want to be a longer term call buyer of AAPL then it might make sense to wait until the IV levels regress to the "mean" of annual IV levels.

You might say, "well is there anything we can do to take advantage of this possible IV drop?". And I respond, "yes, indeed. Sell option premium, specifically put premium."

Here's what I'm looking at: Enter a ATM/Slightly ITM Bull Put Credit Spread position. That entails selling the JAN 07 90 puts currently selling for $6.80 (as of 1/5/07 closing price) and simultaneously buying the JAN 07 85 puts currently asking $3.90.

That would give you a net credit of $2.90. That basically means that if AAPL's stock price trades above 90 by January's expiration Friday which is in 12 days from today 1/19/07, one will get to retain the full net credit of $2.90/contract.

The maximum risk of this trade is the difference between the strikes (90/85) and the net credit (2.90) which would be $2.10 in this example (5-2.90). It's not the greatest reward-to-risk ratio but it nevertheless is better than most credit spread r/r ratios (take it from me, I've seen a lot of them).

Now does one have to wait until expiration to achieve full profit? Absolutely not. At any point if the stock makes a move higher say up to $90 by this coming Friday or sooner (AAPL certainly does have fast moving potential), and the IV levels drop, you can buy back the JAN 07 90 Puts at a much lower price than the original sales price and leave the JAN 07 85 Puts alone to either expire worthless (saves you a commission), or, you could close both positions at any point with a smaller net debit amount than your original net credit amount (that's good by the way-sell high and buy low in reverse).

Then at any point after IV has considerably dropped and/or stabilized you can research possible longer term call options to buy.

Alright, I realize for some that might be a lot to swallow so feel free to get further clarification or make any comments by grabbing a vine on the Option Jungle.

The Greeks of Options

2007-01-07T19:52:00.000-07:00

Here's a link to another option blogger who has basically done most of the legwork for us about the "moving parts" of options; namely, the greeks (thanks to ODA125 at optionsmadeeasy). I think that anyone who wants to venture into options or who has or is trading options ought to understand the variables that must be factored into option premiums.

This should take some time to review so factor that into your schedule.

Grab a vine and make some comments about any of this if you want.

Does Anyone Else Other Than Me Like NYX?

2007-01-04T23:04:00.000-07:00

I could not believe my eyes when I read Morningstar's report on NYX dated 11-21-06. I can email you the actual pdf or you can access it via their website as a premium subscriber (sorry).

They actually priced NYX's fair value at $128.00 which is way above where it is currently trading at around 95.00 today. Trust me. This is extremely uncommon for Mstar to make a higher target price. It, however, does not mean that it will go straight to $128 but I found it interesting.

I know, I know. What are they thinking? Here's what I'm thinking.

Technically, the stock has enjoyed a nice Q4 rally from the mid 70s to 110 but it has now pulled back to the mid 90s. I don't necessarily like the extension of the pullback but I like these levels better than 100.

The options I like for a longer term bullish call play is the JUN 07 95 Calls currently trading for $11.20. According to my option pricing model, fair value for the options is at $13.20. I don't know about you, but I like buying option premiums at a discount.

These contracts currently trade with a .60 delta and IV is mildly rising around 40% just above the 52 wk low levels. That gives a nice opportunity for the IV levels to rise and hence we might be getting some "jungle juiced" premiums.

I'm waiting for a little pullback in the overall markets just to feel better about being a long rider at this stage of the beginning of the year. I'll look for Monday or Tuesday to get into a position. I'll inform you all of my entry price and so forth.

Keep in mind that NYX is a little more volatile than my previous post selections so buyer beware.

Here's what Jim Cramer of thestreet.com and MadMoney host had to say about NYX (if anyone cares) .

Cramer's growth stock for the new year is the NYSE Group. "If you're comfortable taking a few risks to make more and more mad money, NYX is for you," he said. Cramer believes the NYSE will grow, blow away its estimates and "keep flying" because its main objective is to make money. The company is shutting down trading rooms and laying off people, replacing them with faster and cheaper machines.

Cramer said the stock has great revenue growth and a sound cost-cutting strategy, which should save the company millions of dollars. In addition, it has the lowest operating margins of all publicly traded exchanges and "low, beatable estimates," Cramer said.

The only reason NYSE shares are down is because of arbitrage pressure from its pending Euronext acquisition, said Cramer, and that pressure shouldn't last. The NYSE is ready "to conquer the world" and should go to $240 a share, Cramer said.

Grab a vine and let me know what your thoughts are on NYX.

2006 Year Of The Dragon

2006-12-29T15:26:00.000-07:00

CAUTION: The following post contains extraordinary graphical representations of incredibly ridiculous, extremely exponentially, jet-like propulsionary pie-in-the-sky stock charts that could create mild to severe delusions of greedy grandeur.

What do you get when you add "China" to a stock? Definitely not hari kari (I think that's Japanese which is close to China). Rather, you get small float stocks with incredible growth potential and short squeezes all the way up to atmospheric proportions.

Let me just say that these charts below tell what the China growth story can do to a stock.

Now here comes the always infamous "hindsight is 20/20" what if scenario.
We'll use China Life Insurance (LFC) for this whatif.

What if instead of buying the stock, you got an idea to buy the Dec06 or Jan07 Calls in August 06. And let's say that instead of buying 100 shares at around $25 per share (split-adjusted) at that time, you bought 1 Jan07 25 Call contract for $5.00/contract.

Let's do the math together just so everyone is on the same page:
Stock purchase= 100 shares x $25.00 = $2,500 total capital outlay (plus commission)
Option purchase= 1 contract = 100 shares x $5.00 (premium)= $500 (plus commission)

Theoretical Stock Proceeds if sold December 29th, 2006 (last day of trading for the year) = $50.00

100 shares x 50.00 = 5,000 (less commission) Total p/l = $2,500 (+100%)

Theoretical Option Proceeds if sold 12/29/06 = Jan07 25 Call Premium = 25.00/contract

1 contract = 100 shares x 25.00 = $2,500 (less commission) Total p/l = $2,000 (+400%)

Now what if you weren't so bullish on LFC and you instead bought puts. Then you're options would have been worthless had you held them for this long costing you your initial capital outlay of $500. Had you shorted the stock and did not cover you'd have incurred many margin calls and lost a lot more than your original investment.

I point this out to illustrate the benefit of longer term option plays in lieu of buying the stock. This can also be said for the reverse king of trade; that of buying puts. Keep in mind that this is an extreme example but nonetheless possible. One could have used trading Microsoft as well which is a large cap stock with less growth potential and performed almost as well.

Well, I warned you about the delusions that these charts and scenarios would cause you. It's up to you whether or not you want to entertain or eradicate them. Whatever you do, the million dollar question is what will 2007 hold for the dragon? Will it be a "gong" (sorry about that pun), or will it be an eragon (have not seen the movie but it seems to be popular)?

To be continued....
Happy New Years!!!

Boring Old USG Sheetrock Play

2006-12-29T10:23:00.000-07:00

I know, I know. You're probably thinking what kind of option trader even considers an old Berkshire Hathaway Buffett holding like USG? Well here are my reasons and as always in the Jungle, you're welcome to dispute these and/or wave them all off (that's the fun about optionocracy).

Ok here's my take:

1. Fundamentals (Fundies)-take a look at Seeking Alpha's A Closer Look at USG Corporation review of USG's recent action. I wanted to make sure that the whole Asbesto thing is behind USG, which it seems to be.

I know that Buffett's cost basis is around the $40s but he still could add to his position later. USG seems to have a buffer for a weak housing market with commercial construction continuing strong and of course, like Buffett, I think the brand "sheetrock" is strong like "coke".

2. Technicals-for longer term option plays I like solid companies (ie Microsoft in July 06) that get beat up once in a while. The chart below validates that USG seems to have found strong support in the mid-40 range.

The chart also shows some accumulation going on once it broke above the 50 level. A breakout above 58.50 with strong volume would definitely confirm a new uptrend beginning. Also, for you technicians out there, we are seeing the beginning of the famous "rounded bottom" recently. That tends to be bullish.

3. Option pricing-I'm looking at the Aug07 50 Calls that are currently priced at $9.80. Why the 50's? Because we have some plenty of intrinsic value and that is where I'd like the stock not to drop below.

A premium caveat is needed here however. The theoretical value for the Aug07 50 Calls is currently around $9.00. I'd like to see the premiums there if possible for entry.

The delta is currently 0.75 which gives you a nice .75 increase to your cost basis for every $1.00 increase in the underlying USG security (all things being equal).

4. Implied Volatility-the IV for the Aug07 50 Calls is currently around 35%. That is moderately above the 52 wk IV lows of 31%. That means that if we get an IV hike (usually around earnings or any anticipated event where there is an uncertain outcome) we'll get extra "juice" poured into the premiums (this could be a chance to insert an Option Jungle pun from now on-let's call any increase in IV "jungle juice").

5. Risks-the housing sector gets worse and the demand for sheetrock could decrease. Buffett decreases his holding in USG. Some sort of Asbesto claim rearises. The stock drops below $50 for a shorter term concern and then $46 for a longer term technical concern. The volume and open interest for these options is light but the spread between the bid and the ask is still reasonable.

6. Entry-I'd like to review the prices after the new year and look for an entry where the premiums start getting closer to fair theoretical value.

Grab a "vine" and swing by to post your comments as always welcomed.

Happy New Year and I'm still debating on my other healthcare stock that I wanted to discuss.

Has The UNH Scandal Been Priced In To The Stock?

2006-12-28T16:14:00.000-07:00

I have to admit that I'm no fan whatsoever of health insurers especially giant and unethical ones. Having said my purely subjective and baseless comments, I paradoxically give you my objective viewpoints about how I might possibly play UNH on another longer term option play.

1. Fundamentals (Jim Cramer of "Mad Money" calls these the fundies-which I like). Their founder has recently resigned and according to this report SEC Inquiry of UnitedHealth Becomes Formal Investigation he's adjusted his options to reflect the highest stock price during the 1997-2002 period (what a charitable guy-always looking out for the stockholder's value).

UNH has already told investors that they will take greater charges than previously predicted. I think that given all of these events, investors can now look forward to more price gauging and exploiting the human need for healthcare (sorry about the extra editorial but I had to throw that in there to remind you all that I don't fall in love with stocks or companies I trade).

2. Technicals. The chart below shows that the stock has endured plenty of selling pressure and is starting to find an uptrend. It seems to be consolidating here between the $52-54 range.

3. Option Pricing-Since UNH is not what a trader would consider a "fast mover", the Jun 07 50 or 55 Calls should give us plenty of time for it to make its gradual move higher. If you are a little more bullish on 07 for UNH and think that the breakout above the 54 level will occur soon than the 55 Calls would be your flavor.

4. Premium-Right now the Jun 07 50 Calls are trading at a fair theoretical value and the Jun 07 55 Calls are actually trading a little under FTV. Current premiums are $6.60 and $3.50 respectively.

5. Implied Volatility (IV)- IV on the above referenced calls are about 25 and 23% respectively which in accordance with the Ivolatility chart below is near 52 week lows and has potential of rising.

6. Risks-Given that the markets have had a phenomenal run and appear to finish strong for the year, UNH has also participated in this run since November even after the Democrats took control of the Congress. Shorter term downside risk would be a drop below $50 with intermediate to long term damage being done below $46.

7. Entry point-I'm planning on waiting after the new year to see what the first week of regular volume level trading will bring to the overall markets. Again, I'd like to see a breakout above 54 with above average volume before I pull the trigger but I'll post my entry decision at any rate.

Alright. That's my take on this play, grab a "vine" and feel free to tell me I'm "bananas" (excuse the Jungle puns but it makes life a little more interesting) or if you can vouch for my idea or if you have any questions.

"Swing" on by and post a comment.

Look for my other healthcare play coming next.

Is FDC As A LBO Candidate A Good Play?

2006-12-26T22:27:00.000-07:00

I want to preface this post by saying that I've done my fair share of chasing for the next buyout target and let me tell you, the odds have typically been against me. Having said that, I do like a couple of things from a trader's standpoint that make FDC an interesting longer term play regardless.

1. The fundamentals seem to support what Reuters posted
US CREDIT-First Data spread weakness to persist on LBO fear
(Thu, Dec 21) that "First Data has excellent cash flow and some high margin business", said Dave Novosel, analyst at New York-based Gimme Credit. The company also has different business segments that could be spun off or sold, he said.

2. A lot of technical support at the $24 level going on since late Oct as evidenced by the chart below:

3. The August ATM Call option IV levels are close to 52 wk lows of 22% which after a nice collaspe of IV due to a recent earnings annoucement makes for a potential IV hike if and when a LBO announcement is made:

4. The August options would make sense here to offset any time decay against any strike premium we choose.

5. The Aug 07 25 Call Option premiums are slightly below theoretical value which gives us a nice comfort level with regards to IV and premium cost.

6. The delta for the Aug 07 25 Calls is currently at .60.

Those are some of my reasons for possibly justifying a longer term position in FDC call options. I'd would prefer a breakout above the recent consolidated range high of about 25.50 to 26 with above average volume on the stock to confirm a move higher. The problem then would be a probable increase in IV.

The risk/reward ratio would be based on an exit out of the option if the stock closes below the 22.00 level which would more than likely put premium at about $1.00-1.20 level based on current price of $2.40-2.50.

So there you have my first possible play for those of you who might like a little longer term play that includes a possible LBO factor.

I certainly welcome your feedback on this idea. Grab a "vine". I'll certainly keep all abrest of any entry points that I may plan to make on this play in future posts.

Disclaimer

2006-12-22T21:12:00.000-07:00

This is a personal web site, reflecting the opinions of its author and commentators. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities. All participants may have positions in some or all of the names that are mentioned.

About Option Jungle

2006-12-22T21:03:00.000-07:00

Option trading can be likened to a "jungle out there". Option Jungle Blog is designed to enable all option traders or anyone interested in options alike to share option trade ideas and give and get feedback.

It is not a site to push a product or service or any particular strategy. It is to provide a path for all traders to be enlightened and empowered in using options as an investment strategy.

I am a self-taught option and stock trader since 1998.

I co-operated a small daytrading franchise in 1999 and later mentored self-directed investors in option trading. I use Interactive Brokers for my trade execution and I use prophet real-time java charts for my technical analysis.

My option trading focuses primarily on three approaches: short term momentum directional trading, credit spreads, and longer term "undervalued" or "overvalued" plays.

I hope that everyone will feel comfortable in participating in getting through the "jungle". Feel free to send me a "vine" anytime via email at tmk0427@gmail.com.

Terence

2006-12-21T21:31:00.000-07:00

The Real Me

2006-12-01T15:19:00.000-07:00