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What a difference a week makes. If you have been a regular reader of the blog then you know how bearish I’ve been about the financials since we started the blog in April 2008. It’s been amazing to watch the stock prices of some of the most powerful names you will ever hear fall from triple-digits to single-digits. The fall from grace has made options traders a lot of money if you were buying puts but is that strategy starting to fade?
I took a look back at all of my notes from the blog and wanted to review what I have been writing and what my thoughts were on when I would be bullish. It’s hard to say if I’m “bullish” on financials but there has been some really good news coming out of the sector this week. But before I get to that, lets take a look at just how bad it was getting…
The quotes are from that day’s blog:
From 10/1/08
“JPMorgan Chase (JPM, $46.70, up $5.70) did not set a 52-week high yesterday but the 14% surge has me believing it could be the one to “buy” if a bailout is approved. There was heavy action in the October 47.50 calls (JPMJW, $2.73, up $0.54). If you have some “house money” to play with you’re getting 50/50 odds. Either the financial stocks get a short-term lift with the bailout or they plunge even further”.
6/4/08
“Are you kidding me? Just when the bears were circling the wagon on Lehman Brothers Holdings (LEH, $31.40, up $0.79) an analyst comes out and gives the stock a “Buy” rating. There’s no problem with that but the upgrade came from the same analyst who just downgraded the stock to “under-perform” two days ago.
I have never really paid attention to analysts upgrades or downgrades and the price targets they give for stocks. But their comments sway the market and stocks usually rise and fall on an upgrade or downgrade.
Lehman is no different, but this type of quick-trigger ratings can be confusing for individual investors. Not only that, when a stock is downgraded then upgraded it can cause option prices to fluctuate immensely”.
From 5/29/08
“Wachovia (WB, $23.80, down $0.59) is a mess and even at 52-week lows, the stock doesn’t appear to be headed for a recovery anytime soon.
I still don’t trust Financial sector and there will be a time when these stocks will appear to be dirt cheap. Maybe they are right now but I would wait for two consecutive quarters of good earnings before even thinking about buying a bank stock right now. I will be keeping an eye on the Financial Select Sector (XLF, $24.64, down $0.14) for any signs of a turnaround”.
Those were some of my comments but I went in reverse order because this one phrase caught my eye.
“Maybe they are right now but I would wait for two consecutive quarters of good earnings before even thinking about buying a bank stock right now.”
The point I’m trying to make is that this could be happening so much sooner than anyone could anticipate. There have been numerous banks that have come out this week that have said they were profitable through the first two months of the current quarter. So they are on track for a profitable quarter. Now, it’s hard for me to imagine that they would be profitable this quarter and not next so here we are.
We all know the market looks forward and maybe that is what we are seeing right now. However, I’ll be honest. It’s like dating an ex-girlfriend that cheated on you. You know how it goes. It feels good this week but what about next?
The fact that the Dow closed above 7,000 and the S&P above 740 was a great sign and we go into Friday feeling good about ourselves. Lets take a look at the financial trades we have going and go from there.
The JPMorgan (JPM, $23.20, up $2.80) trade has been a monster. I did an update today right before noon and JP went lights out the rest of the day. The April 25 calls (JSADE, $1.95, up $0.90) were going for $1.31 and we got in for 81 cents. As much as I was loving the gains the more I was thinking of protecting my profits. I did that by selling half of my position at $1.89.
The total cost of the trade was $810. I didn’t pay commissions because I opened a new options account just for the blog. More on that later. When I sold the 5 call options, $945 was placed back into my account. I still have 5 contracts that are worth $950.
My initial target was $1.60 for the call options but they blew through that when JPMorgan’s stock traded above $22. Since my initial target was met, I closed half so that it would protect my profits. If the stock continues higher, those 5 calls will make money. If they start to fade, I can get out.
This how how you build your options account up so that you can go for the fences. I only expected a single out of JP but so far it’s a homerun. Maybe we can make it a two-run homerun…
As far as Bank of America (BAC, $5.85, up $0.92), its shares had an outstanding day as well. The company’s CEO said the bank was profitable for the first two months of 2009 and expected to make money for the full year. They echoed JPMorgan’s and Citigroup’s (C, $1.67, up $0.13) comments.
The May 6 calls (BYOEF, $1.54, up $0.51) were going for 75 cents on Wednesday and the July 10 calls (JLWGB, $0.53, up $0.13) were going for 30 cents. Both have nearly doubled.
There could be more room to run for the financial stocks and if so, we will enjoy the ride. These call positions may be worth keeping and they have plenty of time left before they expire. However, just don’t marry them if they start to cheat on you again.
Rick Rouse
Rick@OptionsMentoring.com
Lehman Brothers Making Market Nervous
Wednesday, June 4th, 2008
The market went on a wild ride Tuesday after opening higher on positive comments from Federal Reserve Chairman Ben Bernanke. He said the Fed still expects the economy will recover during the second half of the year thanks to interest rate cuts, Fed loans to the Financial institutions, and tax rebates. The Dow took those remarks and ran, trading 160 points higher before the wheels came off.
Word that Lehman Brothers Holdings (LEH, $30.61, down $3.22) was planning to raise $4 billion in capital totally took the wind out of the sails for the market as everyone’s attention turned towards the Financials again. The Dow finished 100 points lower and closed at 12, 402. In two days the Dow has lost 235 points.
Lehman took a bloodbath falling to a low of $28.90 before slightly recovering. Rumors surfaced that the company approached the Federal Reserve to borrow money sent the stock sharply lower. If you are borrowing money from the Fed it means you are having trouble getting financed. The fact that Lehman is trying to raise money was a story all morning but when the rumor mill got cranked up, we saw heavy trading in Lehman’s options.
Get this. The June 30 puts (LYHRF, $3.35, up $1.35) opened yesterday morning just under $2.00 and traded as high as $4.40. They still closed 68% higher but an easy double was made if you were following this story closely yesterday. Volume was absolutly sick – nearly 39,000 contracts traded. The June 25 puts (LYHRE, $1.66, up $0.62) traded up to $2.44 before pulling back. Volume there checked in at a whopping 24,000 contracts.
Lehman quickly squelched the rumors that it had borrowed directly from the Fed but the damage was already done. Some analysts now believe the company will post a second-quarter loss deeper than the $300 million that they were expecting in late June. With the recent Bear Stearns debacle there’s no wonder investors started heading for the exits.
The stock is at five-year low and today will be a test for Lehman.
Rick Rouse
Rick@OptionsMentoring.com
Tags: Lehman Brothers Holdings, puts
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