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Daily Market Update – January 22, 2014 (Close)
Earnings continue this morning and most of the early talk was about once invincible IBM, which will open weighing heavily on the DJIA.
While there’s still a lot of earnings to go, following the script set by the financials over the past few earnings seasons, the remaining sectors have been lagging, even when expectations are lowered.
One factor mentioned this morning was the cautious mood expressed by those reporting good earnings.
Certainly, when you hear that forward earnings may be impacted by a variety of factors even good last quarter numbers become meaningless. But if there seems to be agreement that the near term future will be challenging, what becomes the basis for sending the market higher? Where is the economic growth?
So far January 2014 seems to be taking that issue much more seriously than at any point in 2013.
This morning started in a very interesting way and saw some wild gyrations in a couple of stocks that I was following for earnings. In both cases I decided yesterday that the reward for making the trades prior to earnings didn’t offset the perceived risk.
But this morning after both Coach and Cree released earnings I was ready to make some short term trades, albeit with the sale of puts, rather than covered calls.
In one case, I was able to sell $48 puts on Coach, but before I could even get the Trading Alert sent, shares reversed direction and the premium was almost cut in half.
Then I did get a Trading Alert sent on shares of Cree. In that case, it reversed direction almost instantaneously with having sent the alert.
I always like looking at the 1 minute charts to see the really wild moves and wonder what causes such pronounced and sudden shifts. In some cases it’s panic and in other cases it’s just fear of missing out (FOMO). I can’t really understand what other factors might be involved, especially when there is significant volume.
For example, take a look at the 1 minute charts of both Anadarko and British Petroleum today at 10:07 AM.
What they had in common was buying from those with uncontrollable FOMO, as news came out that David Einhorn had established large positions in both. For the casual investor that should suggest that a very smart person believes that litigation liabilities for both of those companies have been defined and as such, are no longer real liabilities.
At the time of the Cree Trading Alert, at 9:40 AM, options were trading at 0.89. By 9:42 AM it was down to $0.57, then a minute later $0.40 and then another minute later was down to $0.34.
The Coach movement was actually more dramatic, because for 2 minutes it was trading hands at about $1.70 and then went straight to $0.60 and then in another 2 minutes was at $0.37.
In the case of Coach, it has almost a 2 year history of disappointing on earnings and then simply recovering. Although it’s easy to be wrong, I didn’t expect shares to go much lower than where the pre-open trading had it. I was surprised, however, to see how quickly it had recaptured much of the early loss.
Cree, on the other hand started with a nice gain after yesterday evenings earnings release, but saw it pared a little in the pre-market.
It opened nicely higher, but then gave up much of the gain. At that point I thought it was a good time to sell puts expiring in just 3 days. Apparently at about the same time someone, possibly a single buyer, thought it was a good idea picking up shares, that maybe they thought were bargain priced. The option volume also jumped very quickly, normally suggesting that money was following other people’s money.
However, in this case, much of that option volume was in this Friday’s expiration.
That suggests that the very same people who bought shares also bought the options, because there’s otherwise too much of a risk of buying blindly options that expire in less than 3 days.
What I do know, however, is that while we hear and see significant spikes in option volume on short term contracts, most often they end up expiring worthless or are rolled over by the buyer, who adjusts his thesis by increasing the time frame.
Those are the kind of people that I like selling my options to.
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