Archive for March, 2011

Intraday market notes & observations – March 21

Monday, March 21st, 2011

2:15pm ET: One way to play the rebound in uranium
Tags: URA, commodities, options, call-debit spreads

The Global Uranium ETF (URA) is definitely on the rebound. After having dropped 40% from it’s recent $22 high, it held support at $13.50 during last week’s nuclear meltdown. Last Friday, the stock gapped up on heavy volume only to continue its upward push (+8%) today.

Options volume has increased both on the call and the put sides (maybe put positions were closed out). There’s enough open interest in the April calls to warrant a viable play.

The April 17.5/20 call debit spread sports a very nice risk/reward profile.
April 17.5 Call @ $0.45 (OI = 380)
April 20 Call @ $0.10 (OI = 400)
Net debit = $0.35 per contract

In this example you’re risking $0.35 to make $2.15 ($2.50 – $0.35). That’s a 6:1 reward to risk, but remember that you can lose all of your investment should the stock fall below $17.50 at expiration. Your breakeven point is at $17.85.

The daily chart of the URA is shown below.

1:27pm ET: Intraday support/resistance
SPX 1281.5/1307.5
DTX 506/520
DJIA 11860/12140
Nasdaq 2675/2705
OEX 574/584
VIX 20.1/22.1
Average VWAPs: +52/-40
Trin range: 1.10 – 2.50 (rising Trin could mean morning rally fizzling out)

Intraday market notes & observations – March 18

Friday, March 18th, 2011

2:20pm ET: Trade Alert! Lead ETN (LD) breaking major $67 resistance on heavier than normal volume. See yesterday’s article for trade details.

1:25pm ET: Intraday support/resistance
SPX 1277/1293
DTX 502/512
DJIA 11775/11975
Nasdaq 2640/2666
OEX 572/578
VIX 22.75/25
Average VWAPS: +45/-64
Trin range: 0.72 – 1.00

On the Watchlist: Lead ETN testing major resistance

Thursday, March 17th, 2011

The LD, the Lead ETN, is testing major support at $67 for the fourth time since January. It’s strength as of late could be the result of backwardation in the metal, meaning that the future price of lead (as determined by the price of futures contracts with further out expiration dates) is less than the current spot price.

This is a happy situation for futures-based vehicles as roll-over positions can be replaced with cheaper instruments–sell high, buy lower.  The take-away from all of this is to know that backwardation will most likely cause the price of futures-based vehicles to rise.

According to an article appearing on Seeking Alpha yesterday, lead is one of the few lucky commodities to be in this position. (Cotton (BAL) and sugar (SGG) are the other two.)

Should the LD break above major resistance, a run up is likely. One way to play it would be to buy the stock on the breakout and hold it until the shape of the futures curve begins to flatten. Unfortunately, there are no options on the LD, but it could be used as the bullish part of a metals pair trade.

The weekly chart of the LD is below. Note that support levels occur at the $5 marks.

[Note: The author has no positions in the LD.]

[Tags: LD, ETFs, Pairs trade, Technical analysis]

Intraday market plays & observations – March 17

Thursday, March 17th, 2011

*** Happy St. Paddy’s Day! ***

2:00pm ET: Lead ETN testing major resistance
The LD, the Lead ETN, is testing major support at $67 for the fourth time since January. It’s strength as of late could be the result of backwardation in the metal, meaning that the future price of lead (as determined by the price of futures contracts with further out expiration dates) is less than the current spot price.

This is a happy situation for futures-based vehicles as roll-over positions can be replaced with cheaper instruments–sell high, buy lower.  The take-away from all of this is to know that backwardation will most likely cause the price of futures-based vehicles to rise.

According to an article appearing on Seeking Alpha yesterday, lead is one of the few lucky commodities to be in this position. (Cotton (BAL) and sugar (SGG) are the other two.)

Should the LD break above major resistance, a run up is likely. One way to play it would be to buy the stock on the breakout and hold it until the shape of the futures curve begins to flatten. Unfortunately, there are no options on the LD, but it could also be used as the bullish part of a metals pair trade.

The weekly chart of the LD is below. Note that support levels occur at the $5 marks.

[Note: The author has no positions in the LD.]

[Tags: LD, ETFs, Pairs trade, Technical analysis]

1:08pm ET: Intraday support/resistance
SPX 1266.5/1283.5 (1275 is major pivot point)
DTX 495.5/508.5
DJIA 11615/11825
Nasdaq 2643/2663
OEX 564.5/577.5
VIX 25/27.5
Average VWAPS: +48/-47 (neutral sentiment–for now)
Trin range: 0.50 – 1.00

Intraday market plays & observations – March 16

Wednesday, March 16th, 2011

2:00pm ET: Update on yesterday’s VXX trade
The volatility is up big today making yesterday’s bull-call debit spread a winner already. Currently, the April 24 call is at $5.50 and the April 29 call is trading at $3.30, giving a net profit of $0.45/contract for a 26% return on the trade. [Note that if had you just bought the lower strike call, you’d be up $2 per contract for a one day return of $2.00/$3.50 = 57%!]

Now wouldn’t be a bad time to take profits but I’d wait until we have a clearer picture on how Japan’s nuclear situation will play out, and that might not be for several days. (Let’s keep our fingers crossed that the situation doesn’t turn into a huge disaster.)

1:20pm ET: Intraday support/resistance
SPX 1261/1285
DTX 496/505
DJIA 11660/11860
Nasdaq 2620/2670
OEX 566.5/578.5
VIX 24/29
Average VWAPs: +33/-115 (bearish)
Trin range: 0.85 – 2.50 (currently 2.30 which is bearish but close to a contrarian reading)

Intraday market plays & observations – March 15

Tuesday, March 15th, 2011

11:10pm ET: Making volatility your friend: An options strategy on the VXX
Today’s broad sector and commodity sell-off might tempt those looking to play the heightened market volatility, but how to do it? One way is to consider long strategies on the VXX, the S&P 500 VIX short-term futures ETF.

This ETF is highly traded; over 26 million shares have already changed hands today. It also sports a very liquid options field, making options plays a natural.

The stock put in a low last month and has been rising ever since. Today, it broke near-term resistance and is looking to move higher (see chart below). One way to play it is to just buy the stock. The problem with this is that given the uncertain geopolitical climate, any good news (especially if the Japanese can prevent a nuclear meltdown) will send the VIX plummeting and the VXX along with it.

You can limit your downside risk by buying options. To minimize the volatility effects, buying a bull-call debit spread is an attractive strategy. VXX options trade in strikes set at the dollar levels offering you a lot of flexibility in your strategy decisions.

I’m partial to the April 34/39 call debit where the lower strike can be purchased for around $3.50 (at the time of this writing) and the higher strike can be sold for around $1.75. This gives a net debit of $1.75 per contract which is as much money as you can lose on this position (less commission costs). Your break-even point is $35.75 which the stock easily traded through today ($37.05 was its high, it’s now at $34.62). The maximum amount of money you can make on this trade is $3.25 for a maximum possible ROI of 185%.

Given the shaky market climate, I’d look to close out this trade sooner rather than later. Remember that bulls and bears both make money; pigs get turned into bacon which I guess isn’t so bad if you happen to be Homer Simpson.

12:50pm ET: Intraday support/resistance
SPX 1260/1290
DTX 491/507
DJIA 11700/11950
Nasdaq 2620/2680
OEX 566.5/578.5
VIX 21.75/25.75
Average VWAPs: +120/-30 (bullish, but has come down from earlier levels (+170/-23)

Trading Strategy: Is the nuclear implosion a buying opportunity?

Monday, March 14th, 2011

In light of the grave situation in Japan, nuclear energy stocks took a huge hit today. Though the two industry leaders, Cameco (CCJ) and Shaw (SHAW), were both down 23% and 28% respectively at one point, they both managed to regain some ground, ending the day down “only” 13% for Cameco and 9% for Shaw.

It’s tempting to want to pick up these stocks at fire-sale prices, but I, for one, am hesitant. Why? Because we still don’t know how the nuclear meltdown in Japan will play out nor can we know how it will impact the global construction of nuclear power plants. On the plus side (if there is a plus side to any of this), an analyst on CNBC today said that China is slated to build 40 nuclear power plants in the next several years and he felt that no matter what happens in Japan, China will build them (he didn’t say what companies will be involved in their construction).

If you still feel that you need to get in on this action, there is a way you can reduce your downside risk: buy long-term call options.  By purchasing at-the-money (ATM) calls, you’ll get to participate in almost all of the upside but your downside will be limited to the price that you paid for the option.  On top of that, you can write out-of-the-money (OTM) calls against your position every month which will reduce your cost basis.  By the time options expiration rolls around, not only could you have paid off your initial position, but you easily could make money on top of it, even if the stock goes nowhere.  Not too shabby!    

Here’s some of the numbers we’re looking at:  

Cameco (CCJ; $32.62):  2012 Jan30 call @ $7.80 (Open Interest (OI) = 160)

Shaw (SHAW; $34.87): 2012 Jan35 call @ $4.15 (OI = 2.59k)

As with any trading strategy, there are a few downsides.  The first is that as an options holder, you are not entitled to any dividends.  Here, you’d be losing out on the Cameco dividend but the good news is that it’s only a small one (1% yield).  A downside of the covered call strategy is that you could get called out of your position, forcing you to sell your underlying option.  Should this ever happen, you could re-enter your long position, albeit at a higher strike price. 

Below are the daily charts of both stocks.  The long bottoming tails and wide green bodies (especially on Shaw) indicate investor support.

Intraday market plays & observations – March 14

Monday, March 14th, 2011

The nuclear implosion–a buying opportunity?
In light of the grave situation in Japan, nuclear energy stocks took a huge hit today. Though the two industry leaders, Cameco (CCJ) and Shaw (SHAW), were both down 23% and 28% respectively at one point, they both managed to regain some ground, ending the day down “only” 13% for Cameco and 9% for Shaw.

It’s tempting to want to pick up these stocks at fire-sale prices, but I, for one, am hesitant. Why? Because we still don’t know how the nuclear meltdown in Japan will play out nor can we know how it will impact the global construction of nuclear power plants. On the plus side (if there is a plus side to any of this), an analyst on CNBC today said that China is slated to build 40 nuclear power plants in the next several years and he felt that no matter what happens in Japan, China will build them (he didn’t say what companies will be involved in their construction).

If you still feel that you need to get in on this action, there is a way you can reduce your downside risk: buy long-term call options.  By purchasing at-the-money (ATM) calls, you’ll get to participate in almost all of the upside but your downside will be limited to the price that you paid for the option.  On top of that, you can write out-of-the-money (OTM) calls against your position every month which will reduce your cost basis.  By the time options expiration rolls around, not only could you have paid off your initial position, but you easily could make money on top of it, even if the stock goes nowhere.  Not too shabby!    

Here’s some of the numbers we’re looking at:  

Cameco (CCJ; $32.62):  2012 Jan30 call @ $7.80 (Open Interest (OI) = 160)

Shaw (SHAW; $34.87): 2012 Jan35 call @ $4.15 (OI = 2.59k)

As with any trading strategy, there are a few downsides.  The first is that as an options holder, you are not entitled to any dividends.  Here, you’d be losing out on the Cameco dividend but the good news is that it’s only a small one (1% yield).  A downside of the covered call strategy is that you could get called out of your position, forcing you to sell your underlying option.  Should this ever happen, you could re-enter your long position, albeit at a higher strike price. 

Below are the daily charts of both stocks.  The long bottoming tails and wide green bodies (especially on Shaw) indicate investor support.

1:07 pm ET: Trade Alert!
The SPX is trading below its 40dma for the third day in a row which is the confirmation we needed to initiate a bearish stance. What this means for you is that now is the time to either lighten up on your long positions or protect them with puts.

12:53 pm ET: Intraday support/resistance
SPX 1283/1301
DTX 496.5/512.5
DJIA 11860/12040
Nasdaq 2695/2715
OEX 575/584
VIX 21.3/23.1
Average VWAPs: +32/-77
Trin range: 0.55 – 1.10

Intraday market plays & observations – March 11

Friday, March 11th, 2011

4:05pm ET: Japan Notes
First of all, our prayers and sympathies to the victims and residents of those affected by the Japanese quake. Let’s hope that the effects of any projected aftershocks are minimal.

On a trading note: Japanese stocks and ETFs took a beating today but is now the time to sell? It’s hard to know. Typically, the investment community (being a collection of sentient beings) tend to over-react to major disasters and crises, driving stock prices to unreasonable lows.

That being said, I wouldn’t rush out and buy the Japanese market for two reasons. The first is that more aftershocks (that are projected to occur) could cause further damage, and the second is that we still don’t know how much damage has really been done.

My advice would be to wait until the aftershocks are done shaking people up (both literally and figuratively). You’ll know when this happens when you see prices begin turning up–your signal to initiate new positions or add to previous ones.

Major Japanese stocks that tooking a drubbing today: Panasonic (PC), Sony (SNE), Toyota (TM), Honda (HMC)

Those traders who are bullish on Japan might wish to consider buying the double long Japan ETF, the EZJ, when it begins to rebound. The weekly chart of the fund is shown below.

1:35pm ET: Intraday support/resistance
SPX 1292/1306
DTX 506.5/515.5
DJIA 11940/12040
Nasdaq 2690/2722
OEX 580.5/586.5
VIX 19.75/21.75
Average VWAPs: +67/-31
Trin range: 0.45-0.70

Intraday market plays & observations – March 10

Thursday, March 10th, 2011

1:07pm ET: Intraday support/resistance
SPX 1295/1310
DTX 503/515
DJIA 11990/12160
Nasdaq 2695/2745
OEX 582/592
VIX 19.75/22.25
Average VWAPs: +62/-34
Trin range: 0.8-1.10

12:34pm ET: HGSI trade update
The good news is that the FDA did approve HGSI’s lupus drug and the stock did jump this morning. The (sort of) bad news is that the stock gained less than the investment universe thought it might, meaning that my March 30 call that I bought for 40 cents per contract yesterday “only” gained 38% instead of doubling (at least) which I thought it might well do. I just exited the position for a 38% gain, which still ain’t too shabby for a one day hold.