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Thursday, August 27th, 2009
12:45 pm (EST)
Wow. I knew last night/ this morning when I was writing the American International Group (AIG, $48.19, up $10.50) blog, I was thinking to myself… “this thing really could hit $50.” Folks, there are no shares to short and the only play has been long for the past few weeks. From 3:30am this morning:
“If AIG continues to shoot to the moon then the calls will continue to go higher and they could triple again if AIG goes to $50. They would be worth $15.”
AIG has hit $50 today and is currently up 30%. The call options I’m talking about are the September 35 calls (IKGII, $15.00, up $9.55) which closed yesterday at $5.45. As Biggie Smalls would say..”It Was All a Dream”…but this dream has come true. Bam, The September 35’s are right at $15, up 175%. Folks, they opened at $7.50 and have doubled.
Of course, the September 25 puts (AIGUY, $0.40, down $0.16) are trading lower BUT look at how much value they have despite the $10 pop in AIG.
The real story here is this. Remember, AIG did a 20-to-1 REVERSE stock split when the shares were at $1 so really shares are back up to $2.50. There is buzz that this thing could go to $100. In reality, that would get the stock back to $5 if the split wasn’t done.
I told you there were a lot of ways to play this stock and if you are in the September 35’s, you can sell now and lock in a 200% gain from the strangle trade or you can place a stop around $12 if you want to see if AIG continues to run.
For those who were thinking outside the box this morning when the opening bell rang…
The September 50 calls (IKGIX, $6.45, up $5.32) are up an astounding 470%. The calls opened at $1.65. So what does this mean? Well, if you would have bought 10 contracts this morning for $1,650 you would be looking at a profit of $4,800.
Now, the reason the put options haven’t dropped to zero is because options traders are selling a lot of the September 50 calls because there is no stock to short. Continue to hold the September 25 puts and make sure to set a stop on the calls.
Rick@MomentumOptionsTrading.com
Tags: AIG, American International Group, option picks
Posted in strangle option trades | No Comments »
Thursday, August 27th, 2009
3:30am (EST)
The early bird gets the worm…
Last week I had moved American International Group (AIG, $37.69, up $3.72) to the top of the food chain (our Watch List) as the stock stood at $33. Now, remember, AIG was at $13 at the beginning of the month. On August 20th, here were our notes (quotes from 8/20):
“American International Group (AIG, $33.49, up $6.85) is up 25% today and it’s hard to believe the stock has rebounded from a low of $13 since the beginning of August. Incredible. The September 35 calls (IKGII, $4.10, up $3.05) have soared nearly 300% after opening at $1.22. There is a combination of a lot of things going on with AIG right now and although I don’t trust this dog to go long, there may be a chance for a STRANGLE option trade. The September 25 puts (AIGUY, $1.65, down $1.05) have dropped 40%.
The stock is up on some CEO fluff who believes he can “maintain shareholder value”. Good grief. Give me break. He failed to mention that his company did a 20-to1 reverse stock split and right now the shorts are getting hammered. I’m going to do some more research on this one but a strangle trade is when you play both sides of the ball hoping for a big move. AIG is so volatile that it fits the bill. You can do 2-to-1 with puts to calls but it is expensive. I almost want to suggest the put options straight-up but short squeezes can be tough to predict. I do know that AIG is not worth $33 right this second but it’s a tough call. Don’t take any action just yet because I’m thinking out loud.” (END)
Here is how the “strangle” option trade is playing out. A strangle trade is like a “chicken trade” because if you don’t know the direction of the stock but you know it is going to make a big move, you buy an out-the-money call and put option about the same strike prices away. Sometimes you can go way out with the strike prices and I leaned heavier on the puts as I listed the 25’s.
The September 35 calls (IKJII, $5.45) were going for $4.10 and the September 25 puts (AIGUY, 56 cents) were at $1.65. That was $5.75 to do one contract of each option or $575 last week. Now, AIG was up 10% yesterday when news hit that its old CEO, Hank Greenberg, is being courted by the current CEO for tips on how to run the company. The stock zoomed in the last half hour of trading when word hit Wall Street and in after-hours trading shares stood at $39.29.
If things hold the call options will continue to go up and the put options will take another hit. However, here is the beauty of the trade. It may sound sexy and it may sound hard to do but I’m showing your first hand how strangle option trades work and how easy they are to do.
At current prices, before the opening bell rings, the call and put option are worth $6 total. $5.45 for the calls and 55 cents for the put options. Your entry price for both had you done the trade last week was $5.75 so now you are at $6. A small gain but you are not losing money.
Let’s say AIG opens to over $40..then the call options could be trading at $7. The puts will fall but don’t worry about that. Let’s say you can exit the call options at $8. That gives you a 33% return on the trade even if the put options expire worthless. If you sell the calls into a strong open or another rally then you have made your money AND you have a risk-free trade on the puts that you can leave open.
Now, let’s say the market tanks in September and everything starts to melt like candle wax. In the downturn, let’s say AIG falls back to $20. That would mean that the September 25 puts that were left for dead will be worth $5. That brings our total return to $12-$13. You sold the call for $7-$8 and you would sell the put for $5.
If your entry price is under $6 then you have just doubled your money folks!
If AIG continues to shoot to the moon then the calls will continue to go higher and they could triple again if AIG goes to $50. They would be worth $15.
As you can see, there are a lot of factors left that will determine how much you make on the trade but by knowing what your profit targets are AND what the outcome could be if this or that happened then you take out all of the emotion.
I wanted to update this trade because the market is acting weird. I don’t often say that but something is up. We get GREAT economic news yesterday and the day before and we get no big push to Dow 10,000. Before, we were getting crappy news and the market was banging out new highs. The indexes are still higher but it feels like we are reaching a ceiling. Once again, we either break through or we fall back down. It’s that simple.
The point is that RIGHT NOW this is a trader’s market which is why we are taking quick profits and going out 6 and 8 months on bullish option trades. Look, we haven’t dropped or had a 10% correction and we may or may not get one. The key is we have to be smart while others are worried on direction.
Market direction is easy to “feel” and you will get the same feeling once you know how this beautiful game is played. If we can make 33% in a week in this environment then we aren’t going to look a gift horse in th mouth.
Honestly, I wanted to get some of our other trades closed and lighten up before the holiday weekend before I came back to this trade. Many of our positions are now closed and I was going to take another look at AIG on Thursday with these same options. Well, the market threw us a curveball and we got caught looking in the bottom of the 9th. Congrats to anyone who took this trade while I was thinking out loud and there may be another way to play this puppy. However, we will have to see how the stock opens and where it trades afterwards.
If I see another setup, I’ll let you know in the 1pm update.
Futures are lower as I go to press. I may miss the opening bell this morning which is rare but I wanted to get this out in case I’m not back in time for the fireworks. I may do an update at 11am if needed but I will be back by 1pm (EST).
Tags: AIG, American International Group, strangle option trades
Posted in Option Trades, Strategies, Trading Tips | No Comments »
Thursday, August 6th, 2009
11:40am (EST)
Blame it on the jet lag…
It has been hard to get back on track after the weekend’s road trip but I’m getting there, folks…
Man, you have to love this market. I was updating the portfolio which by the way is available anytime you want to see the track record and I wanted to see when was the last time I recommended a put option trade…
It’s easy to say you “buy call options in a bull market” but sometimes that theory is so true. If you look back over the 2008 portfolio, you will see a lot of put option trades. Meaning, you “buy put options in a bear market”.
Anyway, the last put option trade I profiled was American International Group (AIG, $24.05, up $2.05) back on July 8th. For those of you who weren’t with us, the trade returned 130% after AIG did the reverse stock split. The company did a 1-for-20 when the share price was at $1 and on July 1st AIG was at $20. I explained how to play this and we rode AIG down from $13 to $9 and pocketed a double for our trouble.
AIG made a huge move yesterday, rising from $13.50 to a close of $22, a 60% gain. This morning, the stock popped to $29.39. Wow. The action is due to a huge short-squeeze and the fact that the company reports earnings on Friday. When there is chaos and confusion, there is a trade. But not right now. These options are so juiced with premium and the implied volatility is through the roof. AIG is still a dog with fleas but a good earnings report can do wonders for a dog that is itching.
Imax (IMAX, $9.84, up $0.34) finally turned a profit. We were in this trade like wool on sheep and Imax didn’t let us down. For the quarter, the company posted a profit of $2.6 million, or $0.05 a share versus a loss of $12.2 million, or $0.29, a year earlier. Revenue came in at $41 million or a 94% increase.
Talk about knocking the cover off the ball…
The Imax September 7.50 calls (IMQIU, $2.35, up $0.10) were profiled at $1.90 and have traded as high as $2.40 when the stock broke $10. The August 10 calls (IMQHB, $0.25, up $0.05) and the September 10 calls (IMQIB, $0.50, up $0.10) got a small pop but the trade was the 7.50’s.
It would be nice to see Imax close above $10 and start to build a base from here. If so, that could pave the way for a move to $12-$15 by year-end. The December 7.50 calls (IMQLU, $2.74, up $0.40) were profiled back in June 25th at $1.25 and we were forced out by Barron’s by July 6th at $1.60. The net was 28% and these call options traded lower after Barron’s ran a negative article. We still made money but now you can really see why Barron’s and I don’t agree on a lot of things…
Rick@MomentumOptionsTrading.com
Tags: American International Group, Imax
Posted in Company Commentary, Entertainment Stocks, Option Trades, Strategies, Trading Tips | No Comments »
Friday, July 10th, 2009
12:20pm (EST)
With the weekend coming up, it’s always good to plan ahead. Alcoa (AA, $9.20, down $0.02) may have “unofficially” opened earnings season this week but as Thin Lizzy would say…The Boys are back in town, again….
Goldman Sachs (GS, $142.60, down $0.61) will “unofficially” kick off earnings for the Financial stocks on Tuesday and it could set the tone for how they trade over the next few weeks. Also, next Friday is when the July options expire and it is one of my favorite weeks to play cheap out-of-the-money options.
When you have earnings and options expiration all in the same week it means the cost to buy options will be very low while market volatility will likely be very high. Remember the explosive more we saw in the Amgen (AMGN, $57.59, down $0.54) this week? There are trades out there that could cost just a few hundred dollars to enter and the returns can easily top 100%, 200%, or 300%.
For instance, the Goldman Sachs July 160 calls (GPYGL, $0.44, down $0.01) would only cost you about $450 to buy 10 contracts. If Goldman is at $161 by next Friday, you double your money because those 10 options contracts would be worth at least $1, or $1,000. If Goldman is at $159.99 by next Friday, you lose your entire investment.
The problem is that would mean Goldman’s stock would have to jump $18 from current levels. The stock doesn’t need to make it to $160 for these options to be profitable but I wouldn’t buy them today. Put them on your Watch List for Monday.
A lot of pros will tell you not to play these types of option trades because of the all-or-nothing type of trade it is. However, I think it’s fine to speculate but only if you can afford to lose or if you just banked a winning trade.
Speaking of which, American International Group (AIG, $10.63, up $1.16) has rebounded and I told you yesterday to have your stops in place and that we would be getting out of the trade today.
The July 18 puts (AIGSR, $7.90, down $0.40) hit a high of $8.30 and most of you were in around $4-$4.50. Close them now if you haven’t done so already. The July 15 puts (AIGSO, $4.60, down $1.15) hit a high of $6.20 this morning which also represented well over a 100% return from entry prices less than $3.
The S&P 500 is down 6 points to 877. It will be interesting to see how we hold up going into the close. I’ll be back Sunday night with the playbook on who will reporting earnings next week.
Rick@MomentumOptionsTrading.com
Tags: Alcoa, American International Group, Goldman Sachs
Posted in Company Commentary, Option Trades, Strategies, Trading Tips | No Comments »
Tuesday, July 7th, 2009
10:45pm (EST)
In what started out as a “steady” day for the bulls turned out to be a disaster waiting to happen. I have been warning of keeping an eye on the exit door in case the bull market takes a break and the exit door just opened. Just how many people on Wall Street decide to run out remains to be seen.
The market has struggled holding its support lines and I have been mentioning them almost daily here in the Blog. In Sunday night’s Weekly Wrap I had this to say:
“The widely tracked S&P 500’s break below 900 was not a good omen and after failing to bust through its 200-day Moving Average, the index is now battling to hold its 50-day MA. The key numbers you want to watch are 875-880. If the S&P fails this level and earnings come in worse-than-expected then we could see a sell-off.”
The S&P closed at 881, down 18 points, or 2%.
That is about as accurate as you can get, folks.
I have been profiling more put options of late and this has been the reason why. To you newbies, when trading options you want to buy calls when the market is going up and you buy puts when the market is going down. Of course, it isn’t always THAT simple but you get my drift.
The S&P 500 rolled over and fell below its 200-day moving average once again and the afternoon sell-off was just what we have been expecting. I have been profiling the The PowerShares QQQ’s (QQQQ, $34.53, down $0.88) July 36 puts (QQQSJ, $1.50, up $0.56) all week and I told you to use these once we got a break to the downside. These put options have traded under a $1.00 both days and if you saw the break in the market today or got in early then you just made 50% on your money. We still might see some fight from the bulls this week but the bears have ‘em on the ropes.
Speaking of dropping like a rock…you guys are going to hate me for this but some of our astute options traders that follow the Blog have been emailing me and thanking them for the trade in American International Group (AIG, $13.75, down $2.44).
For you readers that just signed up, last week I did a couple of write-ups on AIG when the stock was at $18. The stock was at a $1 when the company did a 1-for-20 reverse and here is what I said before the holiday weekend:
“When a company does a reverse split, they normally don’t turn out to well, meaning, the fundamentals haven’t changed. If the fundamentals or outlook hasn’t changed, what makes the stock attractive?
I’m not sure if we get a repeat performance if and when they do list options on the stock again but there may be an opportunity down the road to make something on a stock worth much of nothing.” (END)
Well, I had told you that some of the financial sites hadn’t listed any options on AIG but I did check the CBOE (Chicago Board Options Exchange) on Thursday and forgot to follow up on them. Some of our readers shorted the stock when it was at $18 last week and some of you bought options. Great job.
The July 18 puts (AIGSR, $4.60, up $1.80) were going for $1 and change on Thursday when the stock was at $18 and closed yesterday at $2.80. Today, they added another 65%. The July 15 puts (AIGSO, $2.53, up $1.54) traded over 1,000 contracts (plenty of volume) today and they gained over 150% from Monday’s close.
I can’t take credit for the option trades because I didn’t list them but I can GIVE credit to those of you who used the blog to do your own homework. I certainly didn’t expect AIG to drop like a rock so fast but the stock has lost 50% in two days. I haven’t heard many talking heads mentioning this fact so they will probably be talking about it later in the week.
AIG did all of the short sellers a huge favor when they did the reverse stock split and I wanted to make sure I mentioned this to you. I can’t catch every trade but I’m trying to teach you to be you own trader. Remember this down the road when and if another company decides to do a reverse stock split. As you can see, once you learn the tricks of the trade you will become a better option trader.
That’s all I have for tonight, people. I have a busy day on Wednesday (what else is new?) but I will do a morning Blog. The afternoon blog might be sketchy but I will be back Wednesday night, regardless.
Rick@MomentumOptionsTrading.com
Tags: AIG, American International Group, PowerShares QQQ Trust
Posted in Company Commentary, Market Analysis, Option Trades | No Comments »
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Random Thoughts for Thursday – AIG, Imax
Thursday, August 6th, 2009
11:40am (EST)
Blame it on the jet lag…
It has been hard to get back on track after the weekend’s road trip but I’m getting there, folks…
Man, you have to love this market. I was updating the portfolio which by the way is available anytime you want to see the track record and I wanted to see when was the last time I recommended a put option trade…
It’s easy to say you “buy call options in a bull market” but sometimes that theory is so true. If you look back over the 2008 portfolio, you will see a lot of put option trades. Meaning, you “buy put options in a bear market”.
Anyway, the last put option trade I profiled was American International Group (AIG, $24.05, up $2.05) back on July 8th. For those of you who weren’t with us, the trade returned 130% after AIG did the reverse stock split. The company did a 1-for-20 when the share price was at $1 and on July 1st AIG was at $20. I explained how to play this and we rode AIG down from $13 to $9 and pocketed a double for our trouble.
AIG made a huge move yesterday, rising from $13.50 to a close of $22, a 60% gain. This morning, the stock popped to $29.39. Wow. The action is due to a huge short-squeeze and the fact that the company reports earnings on Friday. When there is chaos and confusion, there is a trade. But not right now. These options are so juiced with premium and the implied volatility is through the roof. AIG is still a dog with fleas but a good earnings report can do wonders for a dog that is itching.
Imax (IMAX, $9.84, up $0.34) finally turned a profit. We were in this trade like wool on sheep and Imax didn’t let us down. For the quarter, the company posted a profit of $2.6 million, or $0.05 a share versus a loss of $12.2 million, or $0.29, a year earlier. Revenue came in at $41 million or a 94% increase.
Talk about knocking the cover off the ball…
The Imax September 7.50 calls (IMQIU, $2.35, up $0.10) were profiled at $1.90 and have traded as high as $2.40 when the stock broke $10. The August 10 calls (IMQHB, $0.25, up $0.05) and the September 10 calls (IMQIB, $0.50, up $0.10) got a small pop but the trade was the 7.50’s.
It would be nice to see Imax close above $10 and start to build a base from here. If so, that could pave the way for a move to $12-$15 by year-end. The December 7.50 calls (IMQLU, $2.74, up $0.40) were profiled back in June 25th at $1.25 and we were forced out by Barron’s by July 6th at $1.60. The net was 28% and these call options traded lower after Barron’s ran a negative article. We still made money but now you can really see why Barron’s and I don’t agree on a lot of things…
Rick@MomentumOptionsTrading.com
Tags: American International Group, Imax
Posted in Company Commentary, Entertainment Stocks, Option Trades, Strategies, Trading Tips | No Comments »