-- Posted Wednesday, 17 May 2006 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
Wednesday, May 17, 2006
For investors who’d rather be smart than lucky
A watchful day, albeit one with a resurgent bullion threatening to chew up naysayers and hock them into a spittoon, Jim French-style. Unable to find much to trade myself, much less to inspire, I swapped louche videos with pen-pals on my e-mail joke list. You know who you are. Otherwise, it was a swell day to dodge trouble. I worked at exiting an option spread in Fannie Mae – a June 50–May 50 put spread that I’d legged into a few weeks ago for a quarter (0.25). The spread itself has performed nicely, quintupling in value as the stock has fallen from the mid-$50s down to around $50. But just try to get out of it. How many at-the-money, expiring puts do you think traded yesterday in Fannie Mae, one of the largest financial institutions in the world? Would you believe fewer than 30? Even the May 50 calls traded under 100 contracts.
My friend Larry, editor of The Amernick Letter, noticed it too: “I am watching weird option activity on the CBOE,” he wrote in an e-mail after the close. “Usually, volume in Open Interest troughs on the Monday after the expiration date and builds to a peak on the Friday of options expiration. This has occurred during every three-month option cycle since 1995 (the period for which I have comprehensive daily option data).
Meaning of Contraction?
“Yesterday's CBOE option data recorded a contraction of 22 million contracts! As I stated earlier, I would expect to see this type of volume contraction next Monday. May options expire this Friday. Therefore, I think I'm witnessing an early race for the sidelines by institutional option players. Certain players are heading to the sidelines to stay out of the way of Friday's expiration. Maybe these people believe that Friday's expiration will be accompanied by an increase in volatility. You know options better than anyone I know. Perhaps, you could explain the sudden squaring of positions so soon before the expiration date?”
I’d move to the sidelines myself if I could, Larry. But my hunch is that the expiring May puts in my Fannie Mae calendar spread are going to give me a good whipping on Friday, as FNM shares oscillate around $50 like an eel trapped in a garden hose. Fortunately, there may be an interesting distraction for my subscribers in the form of a trade in an airline stock that our friend Phil C. thinks is about to explode. He writes as follows:
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We’ll Trade This One
“Rick, in the last few years, I’ve focused mainly on Silver, Gold and the related mining stocks. However, an interesting play is about to take flight any day now. I believe XXX has bottomed and offers a very low-risk, high-reward opportunity for both the short and intermediate term. I know that someone famous once said never to invest long-term in airlines, but I see a lot of trading potential here, especially since it coincides with my belief that oil has topped out for at least the short to medium term.”
Looking at the chart (above), Phil, I’d say you’re on to something. Stochastic indicators in particular are showing the kind of divergence that can telegraph explosive rallies. What’s more, the stock is optionable, so we may be able to squeeze some high-powered leverage out of a rally, assuming one comes. Stop by Rick’s Picks before tomorrow’s opening and check out the “Current Touts” section if you’re interested to see how a risk-obsessed tightwad like me would play this one. And thanks for the heds-up.
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Hidden-Pivot Seminar
A subscriber has offered to produce a Hidden Pivot Seminar in the New York City area for those of you who were unable to attend my course in Colorado a while back. If you’re seriously interested in learning how to predict important swing points, often with two-decimal accuracy, please contact me by e-mail, stating your preference for September or October. I am also considering a West Coast seminar later this year or early next, so if you think you might attend, drop me a line
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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2006, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Wednesday, 17 May 2006 | Digg This Article | Source: GoldSeek.com
