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-- Posted Thursday, 15 May 2003 | Digg This Article
I still infer weakness from the market’s inability to rise significantly into today’s expiration of the May option series. The broad rally at the beginning of the week created seemingly ideal conditions for a short-squeeze that would have keyed off May out-of-the-moneys. Instead, stocks went flat for the next three days, suggesting the Smart Money was not feeling quite confident enough about the underlying tone of the market to chance goosing stocks higher with a short-squeeze. As a result, most issues will likely remain dormant today, pegged to at-the-money strikes (assuming there is no spectacular bullish surprise in the news: “Bin Laden Calls Off Jihad in Latest Message”). Expiration week can affect the stock market in several discernible ways, but mainly it’s either by holding stocks in check, or by fostering a short-squeeze that propels them sharply higher. In the current circumstances, as I have just noted, it is the damping effect that is being felt. In a somewhat bigger picture, evidence that the bear rally begun in October may have run its course would come if shares remain flaccid early next week. Little Guys Trade ‘Size’ Just how this relates to the expiration of May options can be seen in the case of IBM. As of Thursday afternoon it looked almost certain that the stock, which has been a relative-strength winner recently, would be pegged today to the $90 strike. The reason is that May puts and calls will have shed nearly all of their time premium by this morning, and the options will therefore be trading for just pennies above their intrinsic value. This makes them very easy to arbitrage, since there is little premium risk to the floor trader. For instance, with the stock trading at $90 early today, the professional trader might buy 200 May 90 IBM calls for 0.25 while selling 200 May 90 puts for 0.20. This would give the trader the wherewithal to risklessly short 20,000 shares of stock, and if it can be done for more than 90.00, a certain profit will be earned. To generalize from the case of IBM, the most striking effect of expiration days is that even traders with relatively small accounts can in that single day maneuver hundreds of thousands of shares around the $90 strike without taking much risk. And so they will. What If? But let’s assume, to take the example a step further, that very bullish news propels IBM w ell above the 90 strike today – say, to 93.50 in the first hour or so. In such circumstances the out-of-the-money calls – in this case the May 95s – would no longer weigh the stock down, but rather would pull it magnetically to 95. The reason is that traders who shorted the May 95s for 0.05 in the last week or so thinking they were raking in “free money” would be scrambling to buy the calls back for 20 times as much, were the stock to get above 95. So with the stock at 93.50 early this morning, the market makers would start paying up for May 95s, and this would attract sellers in a position to take the opposite site of the trade. Under the circumstances, they would short May 95 calls for theoretically exorbitant prices (i.e., 0.20 – 0.30) while simultaneously buying stock and May 90 puts. The resulting position is called a “conversion,” and it would not only be riskless, but lucrative as well if the May 95 calls could be sold for a relatively high price. You can see how the short-squeeze effect works in the example above. Come next week, however, after stock positions resulting from the May expiration have been unwound, IBM will be on its own once again. And if this bellwether stock cannot get past 90 without the May 90 calls in the way, then bulls would surely have cause to worry. [The + symbol means we have an open position, while $ means there is actionable advice.] | | 125% TUITION REIMBURSEMENT PROGRAM | | 125% TUITION REIMBURSEMENT PROGRAM: Through our partnership with Terra Nova Online, MarketWise Trading School provides its graduates with the education necessary to adapt to these volatile markets, while taking advantage of our Tuition Reimbursement Program designed to provide 125% of the graduate's tuition back to them. click here |
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Gold
JUN GOLD (352.00): My outlook for the intermediate term has turned cautious, since the dollar index could be in the process of making an important low in the range 92.50-95.00. Don’t expect much of a selloff from these levels, but neither should you look for fireworks to the upside. A print above 361.50 would put a much more bullish spin on things.
GoldCorp (NYSE:GG)Quote - Options - News - Profile - Message Board - Website
+ GG (11.16): We hold 400 shares for an average 7.20. No change. There are two impediments immediately above – at&n bsp; 11.61 and 11.83 – as well as conventional resistance near 11.50 from a prior peak, so don’t expect too much from the stock.  
DURBAN DEEP (NasdaqSC:DROOY) Quote - News - Profile - Message Board - Website
+ DROOY (2.55): We hold 200 shares for 2.41. DROOY has blasted free of the gravitational pull of a hidden-pivot support at 2.16, but there would appear to be little upside potential over the near term. Significant resistance from prior highs near 2.80 and 3.00 is likely to inhibit the stock’s upward progress.
+ RANGY (13.11): Once again there is no change. We hold 200 shares for 10.35. We see little upside potential over the near-term, although there is not much to impede the stock between here and 14.  
Royal Gold (NasdaqNM:RGLD)
$ + RGLD (18.18): We’re risklessly long the July 17.50 – May 17 .50 calendar spread eight times. Let’s try to roll into the July 17.50 – June 17.50 call spread by selling the June 17.50 – May 17.50 call spread eight times. You should try to get between 1.20 and 1.30 for the spread, but this may be more easily accomplished by buying 800 shares of stock and simultaneously selling the June 17.50s for 1.30 over their intrinsic value. Please note that doing so will be riskier, the closer the stock is to 17.50.
 
DJIA (8713.14): Our upside target at 9035 remains viable. There are two lesser impediments just above that we should monitor: 8725.16, which was penetrated yesterday, though not on a closing basis; and 8841.94, a hidden pivot that will become an odds-on bet to be reached if the first number is exceeded by more than 6 points intraday. JUNE-MINI S&Ps (939.50): More flirtation at a by-now-familiar hidden pivot at 947.75, but this time the futures got past it, if only slightly. That’s enough to inspire a slightly bullish bias for today, although we shouldn’t expect too much for reasons elucidated above. A modest target: 944.25; but if the futures surpass that number by as little as a point, expect them to reach 953.00 (or perhaps 954.00; the pivot is not precisely clear). JUN BONDS (118.13): The futures extended their move above a longstanding target at 118.09 with a thrust to 119.05. There is just one last upside target I have to proffer before the bonds use up all the hidden pivots on the weekly chart: 120.13. That’s my minimum projection from here, and it could prove to be a very significant high. OEX (477.68): Our minimum upside projection remains 484.93, although we’ll introduce a new hidden-pivot impediment that could conceivably stop a rally today: 482.41. $ + QQQ (28.92): We hold twelve June 30 calls for an average 0.33 and 24 July 23 puts for an average price of 0.175. There’s almost no chance of shorting May 30s against our June 30s, but you should nonetheless be prepared to do so in the very unlikely even that cubes trade above 30 today. You should also continue to offer eight of the puts to close for 0.35, good-till-canceled.
NASDAQ E-MINI (1163.50): My immediate upside target is still 1169.00, buy anything above it would imply there is sufficient energy to reach 1175.00. Both are hidden pivots, but the second one offers a better place to go short. You can do so until the final hour, using an 1176.50 stop. Thereafter, you’ll be on your own. *** $ + IBM (88.70): We hold eighty July 105 calls for an average 0.13. Our immediate upside target is now 91.72, a hidden pivot. Continue to offer 80 June 105 calls short against the Julys for 0.10, g-t-c. $ FNM (72.91): There’s a minor hidden pivot at 74.34 that I’ll offer as a minimum upside target for the near term. You can try shorting there, but I’d recommend risking no more than 0.03 (!) on the initial stop-loss. You’ll be on your own for this one. C (39.45): We’re biding our time for now, but if Citi should catch fire, the first hidden-pivot obstacle it would encounter lies at 40.49.
KLAC (41.97): Nothing to suggest at the moment, since a long in KLAC would simply compound our “long-ness” in IBM and Citi. EBAY (98.08): No change. eBay is feeling the magnetic pull of 100, but this holds no special opportunities for us. Remain on the sidelines.
-- Posted Thursday, 15 May 2003 | Digg This Article
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MarketWise Black Box is published on weekdays 240 times per year. Copyright 2003 by MarketWise. For further information please go to www.marketwise.com. All information was gathered from sources believed to be reliable The risk of loss in futures, stocks or options can be substantial; therefore only genuine risk s should be used for such trading. Futures, stocks and options may not be a suitable investment for all individuals, and individuals should therefore carefully consider their financial condition in deciding whether to trade. Commodity option traders should be aware that the assignment of a short position will result in a futures position. Past profits are not indicative of future profits.
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