If you bet Valero (crude oil refining and retailing) would drop today on the bad refining margin news by Chevron or their pre-open lowering of earnings forecasts, you thought wrong. And you got killed.
Showing posts with label Puts. Show all posts
Showing posts with label Puts. Show all posts
Wednesday, October 10, 2007
Ouch! (VLO Today)
If you bet Valero (crude oil refining and retailing) would drop today on the bad refining margin news by Chevron or their pre-open lowering of earnings forecasts, you thought wrong. And you got killed.
Sunday, August 05, 2007
CAT Puts Are a Better Way to Short the Dow Jones
From a purely technical standpoint, the broad market and many individual stocks are headed decisively lower. As you can see in this Dow Jones Industrial Average weekly chart below, the index has broken and closed below previously strong support in the 13,250 area. Using a Fibonacci 61.8% pullback one gets a target of 12,735, the 40 week (200 day) moving average lies at 12,817 and the prior high in February was 12,796. So I'm going to average these targets an round up to suggest the Dow is headed for 12,800.
Now the federal reserve is meeting early next week with their statement at 2:15PM Tuesday but there is no economic data to be released Monday. I'm thinking the momentum we saw Friday will continue Monday and some may be trying to pressure the fed (via a broad market decline) into a rate cute or at least towards a change in bias towards a cut later this year. Of course this is speculation, but with Cramer begging on TV for a rate cut there are clearly those who are desperate to get one. However, if the fed raises rates or talks about sympathizing with the bond speculators who are loosing their ass right now, we may see a powerful short covering rally Tuesday. For this reason I suggest you keep tight stops on all shorts.
There are a few ways to play this decline, but my favorite is to buy puts on CAT. I mentioned CAT a few weeks ago as a short which worked out great. After a dead cat bounce (pardon my pun) the stock was able to briefly regain it's 50 dma before closing below it once again on Friday.
The reason why I like shorting CAT as a way to play an industrial decline is threefold. First, they reported earnings a few weeks ago that disappointed wall street with an unexpected 21% earnings per share decline. CAT is somewhat levered to residential construction in the US, which is part of the reason why earnings were so bad. Second, CAT is one of the 30 DJIA stocks and was until recently the second biggest gainer in the group for 2007. So it trades very closely with the index which I believe to be headed lower. Finally, the options on CAT are highly liquid and have a relatively low implied volatility (they are cheap). Volumes are typically in excess of 1000 on near the money contracts and spreads are frequently less than .05. You can get in and out of those options quickly without having to pay a spread penalty.
From the weekly chart above you can see how CAT has broken it's 10 week (50 day) moving average after a sustained rally a few times in the last two years (I've circled those breaks in blue). In each case this break was followed by a test of its 40 week (200 day) moving average in 2-3 weeks. The indicators and candlesticks looked similar in those situations to how CAT looks right now and based on the CAT chart alone I would say it 's headed to at least $70. However, since CAT trades so closely with the DJIA, I would sell those puts when the DJIA hits 12,800. Although, its worth noting that my target on the dow is it's 200 dma and my target on CAT is it's 200 dma, so why shouldn't these events occur simultaneously? If they both reach their targets CAT will have fallen substantially further on a percentage basis, hence CAT is a better way to play the drop in the dow.
As a side note, the glorious momentum stock DECK has lost it's momentum and fallen completely off the IBD 100 after being number #6 just two weeks ago. This stock is still above 100, a miracle of miracles for the longs who own it, and I think it is about to get slammed big time. Especially with the growing concerns that consumers are going to feel the pinch with all thats going wrong with credit and housing, investors may be seeking to take profits on this low floater. Tough decision: Pay mortgage or buy a new pair of UGG sheepskin booties...
Any thoughts on the new logo? Comments on the poll? If you haven't yet, please take a moment to vote in poll on the right. There are many more people stopping by than have voted. Happy trading next week.
Disclosure: I own DECK and CAT puts.
Now the federal reserve is meeting early next week with their statement at 2:15PM Tuesday but there is no economic data to be released Monday. I'm thinking the momentum we saw Friday will continue Monday and some may be trying to pressure the fed (via a broad market decline) into a rate cute or at least towards a change in bias towards a cut later this year. Of course this is speculation, but with Cramer begging on TV for a rate cut there are clearly those who are desperate to get one. However, if the fed raises rates or talks about sympathizing with the bond speculators who are loosing their ass right now, we may see a powerful short covering rally Tuesday. For this reason I suggest you keep tight stops on all shorts.
There are a few ways to play this decline, but my favorite is to buy puts on CAT. I mentioned CAT a few weeks ago as a short which worked out great. After a dead cat bounce (pardon my pun) the stock was able to briefly regain it's 50 dma before closing below it once again on Friday.
The reason why I like shorting CAT as a way to play an industrial decline is threefold. First, they reported earnings a few weeks ago that disappointed wall street with an unexpected 21% earnings per share decline. CAT is somewhat levered to residential construction in the US, which is part of the reason why earnings were so bad. Second, CAT is one of the 30 DJIA stocks and was until recently the second biggest gainer in the group for 2007. So it trades very closely with the index which I believe to be headed lower. Finally, the options on CAT are highly liquid and have a relatively low implied volatility (they are cheap). Volumes are typically in excess of 1000 on near the money contracts and spreads are frequently less than .05. You can get in and out of those options quickly without having to pay a spread penalty.
From the weekly chart above you can see how CAT has broken it's 10 week (50 day) moving average after a sustained rally a few times in the last two years (I've circled those breaks in blue). In each case this break was followed by a test of its 40 week (200 day) moving average in 2-3 weeks. The indicators and candlesticks looked similar in those situations to how CAT looks right now and based on the CAT chart alone I would say it 's headed to at least $70. However, since CAT trades so closely with the DJIA, I would sell those puts when the DJIA hits 12,800. Although, its worth noting that my target on the dow is it's 200 dma and my target on CAT is it's 200 dma, so why shouldn't these events occur simultaneously? If they both reach their targets CAT will have fallen substantially further on a percentage basis, hence CAT is a better way to play the drop in the dow.
As a side note, the glorious momentum stock DECK has lost it's momentum and fallen completely off the IBD 100 after being number #6 just two weeks ago. This stock is still above 100, a miracle of miracles for the longs who own it, and I think it is about to get slammed big time. Especially with the growing concerns that consumers are going to feel the pinch with all thats going wrong with credit and housing, investors may be seeking to take profits on this low floater. Tough decision: Pay mortgage or buy a new pair of UGG sheepskin booties...
Any thoughts on the new logo? Comments on the poll? If you haven't yet, please take a moment to vote in poll on the right. There are many more people stopping by than have voted. Happy trading next week.
Disclosure: I own DECK and CAT puts.
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