Option Investor
Market Wrap

Drifting Higher

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The day started with the futures up ahead of the Initial Claims, NY Empire State Index and Net Foreign Purchases economic reports. The Initial Claims came in pretty much in line at 371k versus the 370k expected. Todays number was a little higher than the 365k prior number. The big surprise was the NY Empire State Manufacturing Index for May came in at -3.2 versus the expected flat reading. The S&P futures declined to up 2 points above fair value. At the open the S&P and Nasdaq 100 quickly declined and bounced to trade near the flat line for about the first hour of trading. Actually the trading in stocks was fairly subdued with little to motivate investors to buy. At any point the market looks as though it could go either direction. However, once the equity markets got out of this initial congestion the advance was fairly steady up until the last hours surge.

The amount of volatility experienced today is normal around option expiration; especially on the Thursday prior to expiration. One reason is that cash settled indices like the SPX, NDX and RUT settle the price at tomorrows open price. So you have a bunch of institutions trying to adjust their positions and reposition for June expiration which causes the markets to act irrationally. Then theres the push at the close that is probably a play to get long prior to tomorrow mornings economic reports.

One of my favorite retail stocks, Tiffanys (TIF), helped the retail sector today by reporting their 1st quarter guidance and also increasing their quarterly dividend 13% to $0.17. The company is supposed to report earnings on May 30th. I find it strange that they couldnt wait another two weeks to announce this news with their earnings. I guess if I were a CFO of a company I would separate the news to try to get a double pump in price. It really makes sense to report good news in advancing markets.

Intel Corp. (INTC) got a boost midday after a Freidman Billings analyst recommended buying semiconductor stocks. Banc of America analyst, Sumit Dhanda, decided to join the party and reiterate that he too likes Intel because Intels new chip for low end and laptop computers could be the largest growth driver since the Centrino chip.


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Crude Oil seemed to be the initial reason for the broader markets to begin to advance. Oil dropping can be a double edged sword. While lower costs of energy can help the consumer related issues, the energy heavy weighted indexes can be dragged lower from the decline in oil related stocks. But today was a difficult day for short Crude traders that might have left the NYMEX early at 1PM to party only to find the volatile contract closing up $0.255. TransOcean Inc (RIG) closed up $9.71 on reports that US deep drilling is the place to invest. Perhaps that why Ultra Petroleum (UPL), Schlumberger Ltd (SLB) and Apache (APA) were either down or only slightly up while RIG was up over 6%.

Oh yeah, if you have been in a cave until now Billionaire activist investor Carl Icahn is making a play for Yahoo. He even helped the company by giving them 10 biographies of potential board nominees. YHOO closed up $0.61 at $27.75. Even though Microsoft is out of the way it appears YHOO is still in play. Last week the market thought Google might make a bid. I guess we have to see. I have been writing puts for the last few months in the Option Writer newsletter. The premium is especially high due to the uncertainty of a deal being completed and for what price.

After the Bell

In the gaming sector, Multimedia Games (MGAM) reports installed base of player terminals and product mix at April 30, 2008. MGAM reports its total player terminal installed base and product mix. The co had 2,006 Reel Time Bingo, 563 Legacy & Other, 2,569 Total Class II & Other; 5,312 Class III units, 4,338 Mexico Electronic Bingo Units; 2,369 Charity units for a total of 14,688 units.
Kohls beats EPS estimates by $0.05 and reports revenues in line. The company provided 2nd quarter and FY09 guidance in line. Reports Q1 (Apr) earnings of $0.49 per share, $0.05 better than the First Call consensus of $0.44; revenues rose 1.5% year/year to $3.62 bln vs. the $3.63 bln consensus. KSS sees comparable store sales of (3%)-(5%) for FY09. Co issues in-line guidance for Q2, sees EPS of 0.70-0.74 vs. $0.72 consensus. Co issues in-line guidance for FY09, sees EPS of 2.95-3.15 vs. $3.11 consensus. I think this isnt very good news. The fact is that the revenues were lower than the consensus which shows that the price conscious consumer is slowing down their spending.

Also in the consumer sector Nordstroms (JWN) beat the Q1 (Apr) earnings of $0.54 per share, $0.05 better than the First Call consensus of $0.49; revenues fell 3.6% year/year to $1.88 bln vs the $1.9 bln consensus. Same-store sales decreased 6.5% for the quarter, below the company's planned 3 to 5% same-store sales decline. Co issues in-line guidance for Q2, sees EPS of $0.65-0.70 vs. $0.69 consensus. Fo Q2 co sees same store sales of (5%-(7%). Co issues in-line guidance for FY09, sees EPS of $2.65-2.80, previous $2.75-2.90, vs. $2.76 consensus. For FY09 co sees same store sales of (4%)-(6%). I had thought the high line consumer that normally shops at stores like Nordstroms and Saks would be somewhat insulated from an economic slow down. I might be wrong in this assessment. It should be very interesting to see how this news is played out in tomorrows trading.

The Markets

SPX Chart

The $SPX continued to advance today into some serious resistance from the 200 day SMA at 1428 and from price resistance at 1430 from January 2008 intraday highs. There is a strong uptrend that was just successfully tested on last Friday. A break above this resistance would be very bullish. Especially since sentiment indicators like the $VIX continue to decline further to levels not seen since October 10th, 2007 (16.08). The $SPX still has momentum from the RSI and Slow Stochastics. But those can change very quickly if this is just a phantom rally into resistance.

VIX Chart

The above chart is of the CBOE Volatility Index (VIX) and shows back to October. The black line drawn shows the October low mentioned above. Todays close, 16.30, is very close to that level. My take on this chart is that we should hold the low at +/- 16.00 level and move back up from it. This may be done tomorrow as option prices are being adjusted from the roll forward of the option sellers. Option writers generally cause option prices to decline from supply shrinking. The market may open strong and run into the resistance about 8 points higher and therefore force the VIX lower to its support. Once the VIX decidedly advances back up you could take a short position on the SPX or SPY.

NDX Chart

The Nasdaq 100 (NDX) broke above the 200 day SMA two weeks ago and successfully tested the old resistance new support level. It had a strange day yesterday with a good intraday advance and a weak close. Today shrugged the close and moved up over 34 points to 2031. There is a gap that at 2040 that is acting like a black whole sucking the index up into it. Once that gap is filled the market could decline and take an exhaustion break. Both RSI and Stochastics are overbought.

Expiration Strategy

Even though I am new to this I thought it would be fun to run through a fun strategy. It is the SPX expiration strategy. The reason there is a play is that the options actually expire tomorrow morning. Once settlement is calculated, usually around 12:00 PM EST the profit and loss and margin requirements are adjusted. This all probably seems confusing and you may wonder why someone would trade this strategy. The reason is that it is a way to make some quick bucks over night if you are on top of your execution platform.

Here are a few things to note. The settlement price isnt the actual Open print of the index. It is the index weighted market open price of all of the indexs components. Here is the trade setup for tomorrow. Toward the close you could have sold the $SPX May 1430/1435 Call Spread for $0.80 per contract and also the May 1415/1410 Put Spread for $0.50 per contract. This trade is called an Iron Condor.

It is essentially two vertical credit spreads. The total credit is $1.30 per contract or $130 credit per contract. In the above example, I am selling 20 contracts which produced $2,600 initial premium. That premium can help pay for the $10,000 margin requirement to do this trade (20 contracts multiplied by the 5 point spread multiplied again by the number of shares per contract 100). If this trade works, it will produce a 26% return on the margin. Thats pretty good money for having to hold over night. I start to give back premium if the settlement price is above 1430 or below 1415. But I have 7 points in either direction. 7 points used to be a lot last year. The trades biggest risk is foreign market turmoil and the Housing numbers due at 8:30 am EST. I will try to get tomorrows writer to post the conclusion of this trade at the end of Fridays Market Wrap. By the way, there is no way to trade this until next month. However, SPX and OEX options have weeklies. So if you all like this type of trade, we can try it next week.

Robert J. Ogilvie

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