The market started off today’s session with slight gains but has traded in negative territory for much of the day. There was hope that the European Union leaders would announce aid for Greece at a meeting tomorrow but that is unlikely to happen. Instead, the group will likely ask Greece to provide more details about its budget cuts. France and Germany are in the mix for providing help to Greece but nothing concrete, yet.
We were expecting to see Bernanke today but the snow in DC forced him to issue a written statement. In his prepared remarks the House committee, he said the Fed likely will begin tightening credit by raising the interest rate it pays to banks on the money they have deposited at the Fed. This would lead to an increase in borrowing rates for consumers and businesses but he cautioned that the central bank is not yet ready to boost interest rates, which stand at record lows.
These remarks weighed on the market but as we head to press, things have turned around.
The Dow is currently at 10,055 and is only down 3 points while the S&P 500 is off by 2 points to 1,068. The Nasdaq is holding steady at 2,150.
One stock we want to highlight today is Baidu (BIDU, $475.59, up $40.58).
The company reported earnings after the close last night and we talked about the options yesterday in the Members Area. Here were our thoughts with the quotes:
“The options are super inflated and there is no good trade we see using any combination of options. The February 400 puts (BPJ100220P00400000, $5.50) would not be “in-the-money” unless Baidu dropped 10%, or 40 points. There may be an opportunity to make a small return by going short but it’s not worth the risk.
The February 500 calls (BPJ100220C00500000, $2.40, down $0.44) are “cheap” but Baidu would have to impress the hell out of Wall Street to take it past its 52-wek high of $470, let alone $500. Although that is possible, we also don’t like the risk of going long.” (END)
Today, the February 400 puts (BPJ100220P00400000, $0.45, down $5.45) are down 93% while the February 500 calls (BPJ100220C00500000, $3.40, up $1.80) are up over 100%.
We didn’t want to risk going long or short as you can see. If we would have used a “strangle” option trade the premiums would have been $7.90. Today, they are worth $3.85 so you would have lost 50% by trying to be “safe”. This is what we mean when we say options prices are “inflated”.
A strategy that WOULD have worked could have been to SELL these two options. This requires a lot of capital because you are going “naked” unless you owned 200 shares of Baidu. This would have meant you were “covered” and you could have “bought back” the options you sold. Then you would have MADE 50%.
We do not sell options because of the risk but that strategy has been working to some degree in the current market environment.
We still think the market trend is lower but we expect a relief rally once the Greece situation gets better. If it gets worse then it will only accelerate the selling pressure.