Financial Calls Heating up in Today's Options Market

Could the bottom for financials be in? The top contracts traded today certainly were bullish on financials. The top ten contracts traded today were:
1: XLF FEB 10 CALL
2: XLF FEB 12 CALL
3: BAC FEB 6 CALL
4: BAC FEB 7.5 CALL
5: XLF FEB 11 CALL
6: XLF JUN 11 CALL
7: WFC FEB 20 CALL
8: XLF FEB 9 CALL
9: BAC FEB 2.5 PUT
10: EFA MAR 36 PUT

This certainly shows bullish signs in financials! This is the second of three days there has been focus on financial calls. It may be due to speculation of the bad bank however it could be looking ahead even further such as the XLF June 11 Call predicts. The last price for the June XLF 11 was $1.00 which assumes the ETF will be above $12 in June or about 25% higher than today's close. Many came out today and said BAC still has very good assets on the books, and that a nationalization is unlikely, however if this mess does not get better nationalization will be the only option for BAC and some other banks. Truly I hope the bottom is in, but it the market has a short term 10% pop or greater, I will certainly be adding to my SDS position.

Tomorrow some very important numbers come out, the unemployment rate. The expected is 7.5% anything worse could cause markets to tumble, and anything better could cause markets to rally. This will definitely have a major impact on the market.



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Top 10 Option Contracts Traded 2/4/2009

Today the top ten option contracts traded (puts and calls) were as follows:
1: QQQQ FEB 30 PUT
2: QQQQ FEB 29 PUT
3: TGT JAN 45 PUT (LEAP 10)
4: XLF MAR 7 PUT
5: SPY FEB 84 PUT
6: QQQQ MAR 28 PUT
7: SPY FEB 85 CALL
8: XRT FEB 19 PUT
9: QQQQ FEB 31 PUT
10: SPY FEB 80 PUT
As you can see most people (today) were betting on the market to go lower in the months to come. But after yesterday being so bullish on financials it does not make a great deal of sense. I think we will have to study the options activity for the next few days to get a better sense of which direction the market is heading. It looks as if most people think the Nasdaq is way over bought.

One great strategy is to check all the activity on options daily and see where people are placing there bets for that stock. For example: say someone thought SPY would be at 85 by Feb expiration (7th most traded contract), well it is at 83.33 so if one would pay the premium and get the rights to the stock at 85 it may be worth the investment if you want to follow the options market (which has been quite accurate lately).



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Short Term Rally Might be on the Way for Financials

As posted previously their was a massive amount of SPY PUTS being traded, and after that the market slid significantly. Today however there was an unusual amount of Call activity for Financials. 3 of the top 4 contracts traded today were for XLF Calls: 1: XLF June 9 Call, 2: XLF June 6 Put, 3: XLF June 11 Call, 4: XLF February 10 Call, also the 6th and 7th most contracts traded were: 6: WFC February 5 Call, and 7: C February 5 Call, and the 9th and 10th most traded contracts today were: 9: XLF June 10 Call, and 10: XLF June 10 Put.

This shows that many are betting on financials to go higher before they go any lower. This could be a sign that the financials could be due for a short term rally, but it could also be pure speculation about the "bad" bank plan that may come out in the next week or so. Either way I have decided to follow the options market, as it seems to predict the market quite well, and I will be buying some Call contracts to see if I can cash in.



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$819 Billion Stimulus Passed by House

Could have a major influence on the market tomorrow, but I doubt it will because nothing is certain yet- Senate still needs to vote. I guess not one republican voted in favor of this bill, while just 12 democrats voted against it... So much for bipartisanship.

My guess is that you could see major construction stocks open strong out of the gate tomorrow morning such as CAT, JEC, etc... They may even continue to get stronger throughout depending on how the rest of the market reacts to the news. This is why I have been selling PUTS for the 30 strike on CAT- if CAT gets a nice pop I will be buying the PUTS back.



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Thank You HOG!

While the markets heated up today I was able to sell all of my HOG 10 February Calls for $3.00 a share or $300 a contract. I purchased each contract for $60 on Monday, and after a 2 day quintuple, I needed to take my money. I would rather be safe than be a HOG and sorry... I may purchase these back possibly for the March 10 if I can buy the contract for less than $200 anytime within the next 2 weeks.



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Financials on FIRE After Hours

Some news came out after hours and is sending bank stocks higher. I have a feeling we could see a very strong open, but it may die off mid to late day. I will be selling most of my covered calls as early as possible bargaining for the best premiums. I hope the rally continues, it would be excellent for the market!

Earlier tonight while looking online I typed in the Google Finance BAC message boards about how I feel mark to market accounting should be done away with, well some other writers disagreed with that... Not like I care, I still stand by that honestly because I think it will get us out of this mess the quickest, cheapest, and easiest! I have pasted my post from the message board below. Click on the link to view that message board discussion.

ME at 6:44 PM:

Do away with mark to market for the short term... Don't nationalize
banks! No I don't see this stock at $10 unless this happens...

ME at 12:29 AM after numerous replies:

I am just saying they should do away with mark to market at least for
time being... Why mark assets at $0 when they haven't been realized
losses yet! Technically all of us that hold BAC at am unrealized loss,
haven't lost a dime, because it is not out of our portfolios yet... If
you don't take the loss realized, it is not a loss yet! When the asset
sells you can then see what the loss/gain is. We wouldn't need to
throw billions at banks and continue to see it disappear before our
eyes. This way would be a lot easier and cheaper! Why should we keep
granting billions to the banks when the problem can be solved without
the tax payers help! I stand with many brilliant minds on wall street.
This is not a transparency issue anymore, we already know its bad! Why
make these banks suffer to the point where they'll be nationalized?
Simply to make shorts happy? If banks get nationalized you'll see the
entire market sell off due to a lack of confidence; if they take over
banks why can't they take over other sectors etc...?

Option Maestro



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Update to CAT Earnings 1/26/09

Just as I thought CAT numbers came in weak, but who would have guessed that would revise 2009 numbers like they did. Cutting 20,000 jobs is bad for economy overall but good for CAT. Today as planned as the stock traded belwo $32 a share, I was out selling LEAP 11 PUTS for the $45 (VKTMI) and fetched $1890 a contract (cost basis come JAN 2011 assuming CAT is lower than $45 (which I don't think it will be) is $26.10). If CAT continues to sell off I will sell more. If CAT gets to the $25 range I will sell some more 2011 PUTS. I hope we've seen the worst for CAT but who knows...



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Today's Common is Tomorrow's Option

Today I picked up some FAS (Financial Bull 3X). for $8.35 a share and expect to write out a few covered calls on it tomorrow for the February $15 range. Looking at the last trade for this option (FASBC) it went for 55¢ a share. I will most likely try to get around 70¢ or so a share or $70 a contract. This is one I have been keeping my eye on and finally I pulled the trigger. Judging by the futures now I might be able to sell it within the first hour or so of trading for my desired premium.

I am also looking at selling some PUTS on one of my favorite stocks GLW (Corning Incorporated) tomorrow if earnings cause the stock to get beaten up. I am looking at the 7.50 leap 11 PUTS (VGCMU) which last traded at 1.70 a share, but I will try to get between $2 and $2.75 depending on how beat up (if it even gets beat up) it gets, I will also look at the leap 11 10 PUTS on GLW if I can get a better premium such as 40% down (meaning $4 a share) versus 36.67% (at $2.75) on the $7.50. I don't think GLW will be below this level come January 2011 therefore I am confident in this PUT strategy.



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Pre-Market Weak Sign or Strong Sign?

When it is earlier than midnight many argue that pre-market futures cannot predict anything. I think that they do predict a lot, and possibly the entire trading day. I always check the pre-market before I go to sleep or check on it throughout the night, and I have to say that it does indeed predict the market opening. It seems when pre-market is down and Asian markets open stronger, it influences the U.S. markets more than people think. I have watched the futures turn around after the Asian markets open many times, and it predicts the open for the U.S. markets. This gives me an idea of how the trading day should play out, or at least the opening (assuming that there is no ground-breaking news). Anyway I thought I would share this. I am working on a gadget that allows people to check the pre-market data on this blog, as well as the market throughout the day.



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Update to Wyeth and Pfizer Deal

Just released from the WSJ, Pfizer is doing a 2/3 cash deal 1/3 stock deal for roughly $50.19 a share. As stated in the previous blog entry this should heat up the sector and bring speculation to names similar to Wyeth.



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