Throwing darts at the board to find shorts!!!

 Not really, but I want to short every stock, except for those with earnings due in the next 3 sessions. Back in October every stock was oversold. Now, every stock is overbought. I see too many stocks for which I can sell the bear call spreads, and finding it hard to choose from.

 For the Feb options cycle, I am selling bear call spreads for the following:

LinkedIn (LNKD): I lucked out, in liquidating my puts before earnings, but I will be a bear on this stock, until it gets below $60. I am selling $87.50 calls for Feb and buying $92.50 calls for a credit of $1.40.

Regeneron Pharmaceuticals (REGN): Sure enough the best estimates for sale of Eylea have doubled from $160 million to $300 million, but it is ridiculous that stock has doubled in the last 40 days, raising the market cap by $5 billion. I am selling $110 Feb calls and buying $120 calls for a credit of $2.80.

Intuitive Surgical (ISRG): I love this stock, but it has gained almost 15 %( more than $60) in last 2 weeks. I am only betting that its rise will stall for the next few days, 3 days to be more precise. I am selling $515 Feb calls and buying $525 calls for a credit of $2.30.

 With only 3 days left in this options cycle, I feel the best way to trade is to sell bear call spreads, for that stocks that had extraordinary runs.

Going long on GameStop (GME)

   I have cashed out my LNKD puts today, ahead of tomorrows earnings. I did not want to take chance especially after my trade gained better than 50% in 3 sessions. I will be holding my NFLX short options until next weeks options expirations to realize full gains.

    GameStop Corp (GME) is trading higher today after the company announced dividend for the first time. I see several positives for the stock and I am going long on GME today. GME is a very profitable company adding more than $400 million to bottom line every year.

Stock chart pattern has completed a triangle, in the last three months and stock will break either to the upside or the downside. There could be a quick move in the stock price once it breaks out.

     My guess is that, it will break to the upside because of the following reasons:

1. Stock is very cheap, trading at 7.75 times forward earning, 1.1 times book value and no debt. In a world where investors are paying 1000 PE for a social media company and valuing a gaming company with couple of thousand paid subscribers as a $10B company, it makes more sense to invest in GME. 
2.  Dividend announcement will bring new class of investors, into the stock.Yield is better than the US treasury and the payout ratio is very low, still leaving room for company to make investments or buyout shares.
3.  There is too much, short interest in the stock. 34.8% of total floating stock is shorted. After the company has tripled its earnings in past 5 years and the stock has stayed flat, its time for GME to move and short covering will fuel a nice rally.

Courtesy: Yahoo Finance

    While, my reasons for trading the stock the stock are purely technical, its gives great comfort in knowing that the company is doing great fundamentally. I found a bullish article written by Paul Franke and here is the link: http://beta.fool.com/quantemonics/2012/01/29/why-ben-graham-would-love-gamestop/1393/?source=eogyholnk0000001

  

      Factors standing in the way for upside are:

1. Significant resistance around $25 and
2. Disintegration of Europe that might take the entire market down.

February, 2012 option trades for NFLX and LNKD

  Looks like, I got off the train too early. I wish, I held my bullish portfolio for few more days than I did. Markets seem to be jubilant this morning, with good news from all sides. They have come a long way, in last three months. Stocks are not cheap any more and in most cases, reached the price targets for the year. It makes more sense to be a bear now. I will remain bearish on the markets until there is a 3 to 5% correction.

    For February options cycle, I am placing bearish trades on Netflix (NFLX) and LinkedIn (LNKD).

Netflix: There was no reason to celebrate the 600000 new subscribers added by the company in last quarter, especially after the company lowered its forward earnings. It only makes sense, to use a free subscription offered by NFLX for a month during holidays. NFLX was the most hyped company and now a broken one. It is only a matter of time before Amazon starts subscription streaming with its cloud and Kindle fire, and do it more efficiently.

  NFLX has almost doubled from its November bottom and trading today at $126. Price targets range from $90 to $110. Stock is due for a pull back and also faces resistance at $130. I am selling credit spread by buying February $140 calls and selling $130 calls. Net credit for the spread is $2.40. If the trade moves against me, I could have a max loss of $7.60. It seems stupid, to risk $7.60 for $2.40, but it makes sense to me today.

LinkedIn: This is probably the most overpriced stock in the continent, trading at 140 times forward earning. It’s almost a gift that stock has gained $8 in two days. Stock is trading today above $80. I am buying a put spread by buying February, $77.50 calls and selling $70 calls for net debit of $1.90. My max loss will be $1.90 and max profit will be $5.60.  Earnings are due on February 9^th. Stock had an excellent run and I don’t see upside potential even if there is a positive earnings surprise. Stock is in a down ward channel and has reached the resistance line.

                                      Chart courtesy: Finviz.com

  

Is it time to short Plum Creek Timber (PCL)?

 Plum Creek timber, a timberland management company is down today, following earnings report and downgrades to sell by analysts. In my opinion, the down grade was well deserved. In yesterday’s earnings report, company lowered its outlook for 2012, sighting weak timber demand. While the street was expecting earnings to be around $1.35, company now estimate the earnings to be between $1 and 1.25 for 2012.

 Does Plum Creek Timber deserve its rich multiple of 34 times earning?

 PCL earned $1.31 per share for 2010 and $1.19 per share for 2011. Like the company said, 2012 earnings could come in lower than 2012 because housing market doesn't seem to be rebounding any time soon.

 Only thing saving the stock price is its dividend. Stock has a current dividend of $1.68 yielding better than 4%. That is pay out of more than $270 million in dividends by a company that expects to earn around $170 million for 2012. PCL assured that dividends will be intact because it plans on selling real estate worth $275 to $325 million in 2012.

  This stock is worth no more than $35 and will test its December lows in the next 4 weeks, in my opinion. I am buying March, 2012 $38 puts, to test my theory. 

Courtesy: Yahoo Finance

Do the market indicators really work?

  Recently, a friend of mine was questioning, how can a stock not follow the performance of the company and follow a market indicator. I, myself have asked this question at one time.

  Yes, if you are a long term investor in a stock and your company performs well, your stock will perform well, most of the time and yes, market indicators will predict direction for the short term. Any time you open a position, you will be questioning yourself if the entry point is good. If the stock has been on down trend for the last few days, there is good chance you are buying for a bargain and conversely if the stock has been on uptrend for few days you might be paying premium. So, why not use an indicator if one is available to predict this condition.

  Over bought/over sold indicator are tools used by traders to find buying or shorting opportunities or to predict the market direction.

Williams % R and Relative Strength Index  are couple of technical indicators you can find on many stock charts and are very easy to understand. They oscillate between 0 and 100. While 80 to 100 indicate the underlying equity is overbought, 20 to 0 indicate oversold condition. These are based on most recent trading days, usually set for past 14 days and can be changed as you want. Following is a 6 month chart of Caterpillar with Williams % R, courtesy of stock charts:

\                                                 Source: stockcharts.com

  The above picture shows that indicator predicted right most of the times. But you can also see that the indicator hit over bought condition around December 30^th and stayed there for past 17 days, and during that period, stock has appreciated more than 10%. So it simply tells you to be on look out for buying and selling opportunities. It can’t predict exact buy and sell points because markets can stay overbought and oversold for a while.

Conclusion: If you like a stock and want to buy, it’s not a bad idea to buy the stock in phases during oversold conditions and to sell the stock in phases in overbought conditions, if you are thinking of selling your stock. Besides, if millions of traders or programs try to buy and sell the stock using this indicator, it is bound to work even betterJ.

IOC January options Iron condor looks attractive

 InterOil Corporation (IOC) an energy company had an excellent run in the past 20 days gaining more 30% from Dec 19^th low of $45. Stock is currently trading at $58.48 at close of today’s market.

 IOC has crossed both the 50 day and 200 day moving averages in the last few days. 200 day moving average is at $54.23 and might provide support level in the short term. Stock is likely to face resistance around $60 based on trading patterns from July 1^st to September 20^th.

  Iron Condor: This is a combination of credit option spread and credit put spread. Following trade was selling for a credit of $4 towards today’s close.

Buy 1 January,2012 $50 put

Sell 1 January, 2012 $57.50 put

Sell 1 January, 2012 $60 call

Buy 1 January, 2012 $67.50 call

 

If the stock is trading between the inner strikes of $57.50 and $60 on options expiration date, this trade will make a profit of $4. If the stock crosses the outer strikes of $50 and $67.50 maximum loss will be $3.50.  Since 1 contract is 100 shares, max profit is $400 and max loss is $350. Break even for the trade is $64 on high side and $53.50 on low side.

 I do not expect to collect the entire $4, but if the stock trades between the support and resistance levels in the next 7 trading sessions, this trade can be closed for profit on or before January 20^th options expiration.

 The graph below illustrates profit and loss for this trade:

 Source: Yahoo finance.

  Disclosure: I own the above trade.

Will 30 year Treasury bond fund, TLT continue its uptrend in 2012?

 Investors chasing performance, tend to push an expensive stock or asset even higher and in fear of even loosing more, tend to push a cheaper stock or asset even lower. It is like mass hysteria.  This mass hysteria coupled with investors trying to find safe haven in dollar from euro mess, global recession and currency devaluations in emerging markets, has pushed TLT to new heights. TLT had a phenomenal run in 2011, returning almost 30% and is trading today at $119.50.

   Past performance of TLT shows that it mostly found the floor at $85 and topped around $95 for several years, with only exception being 2008. It broke the upper range in 2008 and returned almost 25% only to give up all the gains next year.

   If global economy led by china does not go into recession, or euro does not blow up as expected or US economy shows growth, investors will flee this bond fund pushing it back to normal levels. It would hurt loosing more than 15% trying to chase a 3.38% yield.

How to trade?

   For those wanting to bet on the downside of TLT can look into buying put spreads or butterfly for cheaper trade.  Following is an example of TLT butterfly put spread costing today around $1.50.

Buy 1 Jan 2013 105 put

Sell 2 Jan 2013 95 puts

Buy 1 Jan 2013 85 put

  In the above trade, if TLT is trading between $86.50 and $103.50 by options expiration date, trade will be profitable. Maximum possible profit is $10.00 if TLT is trading at $95. Maximum loss on trade is $1.50 if TLT is trading outside the range of $85 and $105 on options expiration date.

Disclaimer: This article is not an individual investment advice, it is only for entertainment.

Source: Yahoo Finance.

Disclosure: I do not own any position in TLT. Do not plan on initiating any position in the next 72 hours

Four ways to trade Rio Tinto plc (RIO)

In this article we will look at four strategies using our tools of the trade, options and puts, to trade RIO and possibly buy the stock below market price.  Rio Tinto plc (RIO)  is  a mining company with almost half of the revenues derived from Iron ore and around a quarter of revenues from gold, but also mines and process several other metals and minerals. RIO has an operating cash flow over $19 billion and pays a dividend of $1.07.  RIO currently earns $8.16 per share, has an average price target of $92 and currently trading for half that price.

Covered call option:  This is the most basic and safest strategy for an options trader. You simply buy the stock and sell later dated options, at the strike price, you are happy to sell the stock. While RIO is trading today at $47.40, options for January, 2013 $60 strike price can be sold for $4.50. So, using this strategy, one can buy the stock for roughly 10% below market price and still have a chance for $17.10 in upside. Also, earn a $1.07 in dividend.

Covered call option and option spread combo: In this strategy you buy the stock and open, a one by two credit spread. RIO January, 2013 $50 strike price option is trading for $8.50 and $60 strike price option is trading for $4.50. So following this strategy, for every 100 stock bought, you buy 1 contract of $50 strike price and sell 2 contracts of $60 strike price option, getting a credit of $0.50. You not only bought this stock for $0.50 below market price, but also have a chance to gain $2 for every $1 increase in stock price, up to $60.

Selling a put option: While waiting for the stock to fall to the predetermined price, you may generate revenue by selling put options at that strike price. So if you want to buy RIO for $40, you can sell April, 2012 $40 puts for $3.  Sell 1 contract for every 100 stock you want to buy. If the stock doesn't fall to $40, by April, 2012, you have made $3 in profit. If the stock dips to $40 or below, you are obligated to buy the stock and our buying price is $37.

Put and put spread combo: In this strategy, you buy one put at the money and sell two puts out of money. RIO April 2012, $45 strike price puts are trading for $4.60 while $40 puts are trading for $3. So, for every 1 contract of $45 puts bought, sell 2 contracts of $40 puts and you get a credit of $140. If stock falls to $40 by April, you made a profit of another $500. If stock falls below $40, you are obligated to buy the stock for $35, no matter how much the stock dips below $40. If the stock continues to climb higher from today, this trade can still be closed for profit before expiration, because with time, $40 puts deteriorate faster than $45 puts.

  This article is just a starting point. Do your due diligence before investing and according to your risk tolerance.

Source: Yahoo Finance

Disclosure: I do not own any position in RIO, but might initiate in the next 72 hours