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  Jeff Bailey   3/7/02,  7:36:29 PM
Devil's Advocate I'm going to play "devil's advocate" in regards to Austin's 09:22 comments on Intel (INTC) and "determining directional bias/market sentiment on a stock by looking at call or put open interest."

I say there is no way you or I can determine a directional bias based on open interest. Here's why.

Let's use Intel (INTC) $32.98 as an example. The March 35 calls (INQCG) have the largest open interest at 51,070.

Do you believe that all 51,070 are truly open interest created by buyers of those calls?

What if I told you that I (Jeff Bailey) was a bear on Intel (INTC) and I sold 51,070 contracts to bring in a little income on part of my underlying 10,000,000 shares that I bought back in September at $21?

What if I sold all of those calls for a net of $1.25? If you want the stock that bad, I've got 5,107,000 shares for you at $35 still.

Now I say this hyptothetically of course, but how do any of us know if "smart money" is selling or buying the calls that created the open interest? We don't. The only way to really know is to be running the actual trades and understanding the order flow, or buy/sell induced trades.

I'd argue that just because the calls may have heavy open interest over the puts, doesn't necessarily mean that there's a bullish bias. If 70% of the calls were opened with a sell, then that is more bearish as it relates to the trade.

I think it can be "useful" to look where open interest is at, but you MUST think both sides of the trade.

Is it a coincidence that the March $35 call carries the bulk of open interest?

Slap a retracement on Intel (INTC) from the 01/31/01 relative high, to the 09/21/01 low near $20.50. Hmmm.... the 80.9% retracement bracket at 34.90 is pretty darned close to "$35." You don't think some big gun sold a bunch of covered calls on a position they own at $20 do you?

Open interest is interesting to observe, and stocks can "gravitate" toward a large open interest level, but I think it is dangerous for you and I to think we can determine any type of directional bias from open interest.

We can use it to try and get inside the heads of an option trader (covered, naked, or long) and put together a trading scenario that looks to be in play from the technicals.

But understand this. The options market was created to help/allow institutions hedge positions and sometimes find liquidity where liquidity in the stock market may be hard to find. For the most part, institutions DON'T trade option and very rarely "buy to open." They're more likely to be found "selling to open."

True. When a stock is either getting crushed lower, or surging higher, an institution with a big position that's on the wrong side of a trade that needs a hedge will turn to the options market. They understand there's a premium to pay in the options, but if you're holding a 500,000 share position and its moving away from you and you can't get the needed liquidity in the stock market as the stock moves away from you, then you don't mind paying some premium.

At $32.98, try and think to yourself... "who's the winner right now" in the March $35's?

  Jeff Bailey   3/7/02,  5:01:30 PM
Good question from subscriber "Jeff ... with all the bullish % charts at "overbought" levels, you sure are rather bullish with profiling stocks."

Excellent observation and NOBODY should be getting the impression that you/we/I are throwing money around at anything and everything.

The NASDAQ-100 Bullish % read 70% bullish last night. What if it goes up to 92% like it did in November 1999? What if it goes up to 100%, just the inverse of the 0% level achieved in September of last year? Link

Do I want to let some "bullish triangles" go and not give them a try? What about triple-tops? Remember there has been much "bearish" news in recent weeks/months on the economy and accounting issues. Stocks that have been rather "predictable" shorts for months, but have been range trading for 2-3 months that suddenly trade a higher level than a bear is used to, may suddenly have that complacent bear doing something about his/her position.

If any of us think that the recent rise in Caterpillar (CAT) was simply due to bullish buying, then think again. Where were all those bears that were saying "the economy stinks?" They were shorting the heck out of CAT at $53, then $51 and again at $51. But when $52 came, your bullish buying along with bears covering sent the stock on a very nice run. Link

If a subscriber then took some profits off the table in CAT today, he may have some money to put to work elsewhere. Where's the next opportunity with similar supply/demand characteristics that CAT had?

What about SanDisk (SNDK) at $16.50. This 5-day move to $20.91, is that just "crazy bulls" buying? Or do you think there were some bearsh short this one at $18, then at $17, then at $16.50, then at $16. When $16.50 came, your bullish buying along with bears covering sent the stock on a very nice run. Link

  Jeff Bailey   3/7/02,  4:30:45 PM
Intel (INTC) $32.98 +0.06% .... Company saying it sees Q1 revenue in the range of $6.6-$6.9 billion versus its prior range of $6.4-$7.0 billion; current consensus is at $6.77 billion. Stock trading down marginally at $32.50.

  Jeff Bailey   3/7/02,  3:52:21 PM
Peregrine Pharma (PPHM) $2.61 +5.24% ... getting upside alert here. Yesterday in market monitor we thought good bullish trade. Still targeting $3, so hang tough.

For aggressive bulls only.

  Jeff Bailey   3/7/02,  3:49:58 PM
CURE I didn't even ask, but pulled up the relative strength chart of CURE vs. SPX. I think I know why Eric thought the way he did. Link

Will understand that "sell signal" and bearish vertical count from point/figure chart.

For those that did play the puts or short the stock, I'd lock in gains. I think Eric would agree.

  Jeff Bailey   3/7/02,  3:45:58 PM
Curative Health Services (CURE) $8.35 -49% ... did anyone notice this one in the "watch list?" Link

Eric Utley is too humble to mention it here, so I'll do it for him.

  Jeff Bailey   3/7/02,  3:43:03 PM
Apache Corp. (APA) $56.09 +2.03% ... if holding March calls, would think about lightening up a bit here. Will also be looking for similar technicals as those found in APA from December's $46 and $50 levels. Now have some feel for these types of stocks and looking for others that may soon benefit. Link

  Jeff Bailey   3/7/02,  2:56:58 PM
Rockwell Collins (COL) $24.09 +0.16% .... making yet another 52-week high. They've been small gradual moves higher, but get the feeling some shorts may be using broader-market weakness to "get right" in their positions.

With treasuries selling off, there is now some competition for bears as there is now some sign that cash really is starting to free up from the Treasury markets. Bears don't like competition, especially in stocks breaking to new 52-week highs with bullish vertical counts still far above. Link

  Austin Passamonte   3/7/02,  2:23:16 PM
Been a nice, orderly session so far today. Just short the high when it failed below previous recent highs and all intraday charts rolled over. Hold on or keep shorting everytime a lower-high failed and 10/5 min chart signals reversed down from overbought extreme.

I really doubt walking out of the Denver mint with a bag full of fresh c-notes would be easier than this: we'd have to drive down there and clear all that security, while whacking the S&Ps from the comfort of our own home is much less fuss.

Not to mention a nice bike ride for exercise then erased by a McDonald's lunch. Haven't been there in weeks, so two cheeseburgers and iced tea sounded good. Then Wendy spotted their little cherry pies (2 for $1) and empty calories quickly got out of hand...

  Austin Passamonte   3/7/02,  2:16:03 PM
Looks like those little intraday H&S patterns via 30-min charts have broken to the downside. Neckline on OEX is roughly 586 and SPX 1185, so watch for retests there to now be short-term resistance.

  Jeff Bailey   3/7/02,  2:00:31 PM
Genentech (DNA) $52.05 +3.49% ... stock traded the $51 level and that sets off "triple-top" and break of downward trend. Stock looks fantastic right? Full position right? Link

Hmmm.... Relative strength vs. SPX is "sell signal, but column of X" Link

However... will note that RS chart does look stronger "historically" than SEPR rel. strngth. chart did, plus normal point/figure chart is breaking downward trend.

May still be full position stock, but "safer" way may be to take 1/2 position, then add to position once RS chart gives the "buy singal."

Just a way to try and think about risk, measure it, and add to your trading strategy.

  Jeff Bailey   3/7/02,  1:52:49 PM
SEPR could the relative strength chart of SEPR vs. the SPX helped? Link Perhaps. Relative strength was on a sell signal, but in a column of X. This type of RS along with stock still below downward trend may have had bull taking just 1/2 position, or waiting for the break of trend before getting long.

Yes, this is "hindsight" trading, but understand what happened, and perhaps it may save you a dollar or two in the future. May make you a buck or two also.

  Jeff Bailey   3/7/02,  1:49:18 PM
Sepracor (SEPR) $20.58 -56% ... The bar chart sure was looking bullish wasn't it? Nice upward trend from the May 2001 lows and stock looked ready to rock.

One thing that I found when I first discovered point/figure charts was I reviewed some old trades. In some of the "worst" ones, I found that I had actually bought a stock on a bar-chart breakout, but also bought the stock right when it was first testing its bearish resistance trend. Link

I then learned it best if trading bullish on what looks to be a breakout on the bar chart, to always check the p/f chart. Who knows how much "smart money" was getting upticks yesterday just before today's FDA announcment.

  Austin Passamonte   3/7/02,  1:32:46 PM
Strictly from a short-term basis, if we look at the Dow, OEX and SPX intraday charts we notice that price action is consolidating at current levels today in tiny wedges. These consolidation coils were entered in a downward position, which usually means the next break is a continuation in the same direction they entered which in this case is down.

Secondly, we notice the clear formation of Head & Shoulders bearish reversal patterns in 30-min charts and lower. For the very near future this evidence suggests price action should go lower and if current session lows break the neckline of these intraday H&S patterns, open put plays will perform well.

A subsequent pop higher above recent highs erases the "head" and negates this pattern so now we have clear pivot points of action to work with on short-term basis.

  Austin Passamonte   3/7/02,  1:21:01 PM
Adding to Eric's comments about risk/reward, most traders always factor this assessment based upon random price movement and zero market bias. In other words, a trade with three points upside and one point downside based soley on resistance or support assumes random market action or 50/50 guess on direction.

BUT... when we factor in market direction bias via technical analysis that too becomes a factor in our favor to manage risk. Any trader who can outguess market direction better than a coin toss is able to make money on 1 to 1 or 1 to 1.5 risk/reward scenarios.

We need to keep the ability to market time with greater than 50% success in mind! Almost every day I take trades with a 1 - 1 to 1 - 3 ratio in my favor, but I wouldn't dream of doing so without proper chart signal alignment and hardly ever lose on these micro-trades because of tech analysis as a base.

  Austin Passamonte   3/7/02,  1:13:44 PM
Intraday index traders wondering what to do next might be following the Swing Trade Gameplan charts and ascending channels. Right now we see price action resitng smack-dab on midline support for both S&Ps while the QQQ hovers just below resistance.

If/when both 60/30 min chart stochastic values reach oversold extreme and turn up in bullish fashion while price action remains on or breaks above current support, long plays can be risked with fair odds of success.

  Eric Utley   3/7/02,  1:12:24 PM
I'm noticing quite a bit of weakness in the housing stocks today, out pacing the pullback in the market. Beazer Homes (NYSE:BZH) is the only one on my list higher. Others such as Pulte (NYSE:PHM), Toll Brothers (NYSE:TOL), Lennar (NYSE:LEN), Ryland (NYSE:RYL), and Centex (NYSE:CTX) are lower. This group is coming off its most recent leg higher, which took most of these stocks to new all-time highs. Today's pullback may be routine profit taking.

The housing stocks have been a battle ground between the bulls and bears.

The bulls have jumped on the momentum in the housing stocks in a go-go fashion, driving valutions to all-time highs. The fundamentals of the housing business remain strong, but these stocks are pricey on most historical valuation metrics. The bulls say that the business can only get stronger ahead of an economic recovery.

The bear argument incorporates the valuation thesis and the bubble-like condition of housing. These housing stocks have pretty high short interest numbers, which has back-fired on the bears because the mo-mo guys keep driving them higher, resulting in additional demand from covering.

The one thing that could turn the tide in the bears' favor is a sharp rise in yields. I don't know how much of the pullback in housing stocks today is related to the rally in long-term rates. I don't know if it's routine profit taking or the beginning of a multiple compression. If yields continue higher, then I think the latter scenario will continue to unfold. It's simple: rising long-term rates increase the costs of mortgages; rising mortgage costs suppress demand for houses.

  Eric Utley   3/7/02,  12:54:06 PM
I received some constructive criticism for that Research In Motion (NASDAQ:RIMM) trade I put on last night from a few readers. The reason for the criticism was because of the 1-to-1 risk ratio I was using. I've made it clear, I hope, that risk is of paramount concern in all of my operations, and some readers caught on to my willingness to take on more risk in the RIMM trade. The reason for my willingness to take on more risk was because of my recent experience trading the patterns that RIMM completed yesterday. My experience told me that it was a higher probability trade, and because the odds were higher, I was willing to take on a bit more risk.

  Eric Utley   3/7/02,  12:47:17 PM
Another idea that I'm thinking, possibly explaining the sell-off in gold today, is that the rally in longer-term rates will in itself help contain prices. As I just posted, higher yields raise borrowing costs, keeping demand in check. So while there may be a firming in prices in the intermediate-term, the rise in borrowing costs (Benchmark Ten-Year Yield) will help to minimize that pressure.

Using that line of thought, the sell-off in gold might actually be a good thing today. A steep rise in inflation, which would be foreshadowed by a steep rise in gold, would be a detriment to this recovery.

  Jeff Bailey   3/7/02,  12:42:47 PM
Sony (SNE) $56.23 +5.29% ... stock up again today. Mentioned this one yesterday morning befor market open as bullish at $52. Link

Japanese Yen futures still strong vs. US$ and beginning to draw from Merrill's call yesterday on "Japan outperform US stocks" call. What I think may well be in play is a "relative valuation" type of thinking from Merrill. Not that Japan economy stronger, but perhaps stocks there have more upside under global economic expansion type of theory.

This may then be found in today's Treasury bond action. Japanese are BIG holders of US Treasury and may see some selling here to bring some cash back to Japan (thus currency action as US$ converted to Yen).

  Eric Utley   3/7/02,  12:42:12 PM
The gold market, using the Gold and Silver Index (XAU.X) and commodity, is lower today, which goes in the face of the bond market anticipating inflation. Separately, several sectors that I would expect to benefit from inflation are doing so today, such as energy and retail.

The bond market is expecting inflation, but gold is not, keeping in mind that gold has already had a good run in here. And I think that's a very important point. The gold market, going back to late last year, started pointing to inflation, which may have had the rest of the market (bonds) starting to think about price pressures.

  Eric Utley   3/7/02,  12:18:05 PM
We're seeing a major sell-off in bonds today, pushing yields measurably higher. From what I gather, the sell-off in Treasuries is because of Greenspan's bullish comments on the U.S. economy. The bond market, in light of the "economic recovery underway," is now worrying about inflation. The Fed Funds Futurues market is once again discounting an increase in rates this year.

With inflation generally comes economic growth, and with that growth generally comes an increase in corporate profits. Therefore, the sell-off in bonds is good for stocks.

The negative, however, is that rising bond yields increase corporate and consumer borrowing costs. The pillar of strength in this economy has been the housing market. If we see a swift rise in yields, mortgage costs will rise substantially, potentially tempering the demand for housing. Moreover, rising bond yields increase corporate borrowing costs, which could dampen profits during the recovery.

Finally, I'm wondering if some of the money coming out of the bond market is being used to buy Yen. As Jeff pointed out earlier, the Yen has been rallying following Mother Merrill's call yesterday. Just a thought, and something I'll be looking into...

  Austin Passamonte   3/7/02,  11:56:16 AM
The fact that I have no interest in upside plays today does not mean I think we've seen the top to this current rally. Right now we have D/60/30 min chart signals in bearish position or decline, which precludes me from playing the upside. If/when this situation reverses I'll happily get long again, but not a moment sooner.

Meanwhile we key off weekly charts for the trend. Right now that is still in bullish fashion but for the Dow and S&Ps it looks to be later stages in this rally. Tech issues look to have more upside room to run. When all weekly charts get overbought and turn bearish from there, it's lights out for the bulls once more.

  Austin Passamonte   3/7/02,  10:56:14 AM
All daily and intraday index charts are in the early stages of a full bear roll and lower price levels look to be ahead for this session and likely beyond. This time I'm short and staying that way for the most part until all charts go oversold extreme or profit multiples are so high I can't bear to leave the plays open!

It's a beautiful day here in Denver... think I'll enjoy a leisurely 10-mile bike ride and see what the afternoon action has in store. No adverse risk can touch me now, so all that's left is passing of time on the clock for open plays. I want to either be short or flat right now with zero interest in upside plays, so that gives me some freedom to play as well!

  Jeff Bailey   3/7/02,  10:49:19 AM
Caterpillar (CAT) $58.40 -1.05%.. If long full position, would sell 1/2 position at market. Will discuss in 11:00 commentary.

  Jeff Bailey   3/7/02,  10:45:53 AM
Triple-Witching is next Friday. Traders should consider this when entering any further positions (call/put, long/short). May want to look for large open interest on certain strikes to try and get feel for where a stock may gravitate toward if a position is unwound.

  Jeff Bailey   3/7/02,  10:42:22 AM
Caterpillar (CAT) $58.40 -1.05% ... stock treated us right on the triple-top, but thinking wise account management might have trader selling 1/2 of long position and looking for 3-4 box pullback. Link as bullish percent "overbought" and CAT looking a little overextended on p/f chart.

  Jeff Bailey   3/7/02,  10:39:36 AM
Dow Industrials (INDU) the $100 box of the Dow Industrials takes out some "noise" and we see that 10,600 was resistance back in July/August of last year, just prior to terrorist attacks. Link

May be a level where some institutions are trying to square up some things in their holdings. Never sure, but a thought.

The Dow Industrials bullish % ($BPINDU) is getting back to same levels of bullishness found in May of last year. This too may have some selling into strength in some Dow stocks. The 80% level sure sticks out doesn't it? Link

  Jeff Bailey   3/7/02,  10:33:38 AM
Dow Industrials (INDU) 10,536 -0.34% ... bar chart really looks like there's some type of seller at the 10,600 level doesn't it? Link

What's significant about 10,600? A bullish vertical count? Some type of retracment? An old support level? Need to ask some questions and look for possible answeres.

  Jeff Bailey   3/7/02,  10:19:19 AM
Conmed Corp. (CNMD) $22.18 -1.07% ... stock gave quad-top buy at $22 on 03/01/02. Link

I have stock as "healthcare" and according to Dorsey/Wright and Assoc. sector is "bull correction" (meaning bullish % for sector is currenlty in a column of O) at 46%. Would take a reading of 52% to get sector back in "bull confirmed" status.

CNMD looks to be a "leader" and at the head of the snake. Will most likely look back now and then to see what the rest are doing. Right now the bullish % hasn't shown much sign of group strengthening on a more near-term basis, and this may weigh on the stocks performance. This can always change, but an observation.

  Austin Passamonte   3/7/02,  10:15:04 AM
Quick drop in the S&P had me in and out within minutes, but fun-filled minutes they were! Could be a choppy session (what's new lately?) and could be plenty of opportunity to scalp either direction today for those who care to do so.

  Austin Passamonte   3/7/02,  10:13:08 AM
Amen to Jeff's talk of firm basing action for these markets. So long as bear-market rallies keep powering up the charts we can continue to sit back, wait for the indexes to start tipping over and short the bejabbers out of them with impunity!

I'll bet my full hand on back-month, OTM puts until the VIX reaches 27 or higher. That could be many weeks from now, but this is a twice-yearly (recent average) chance for us to buy & hold the downside with high, high-odds clarity.

Refer to charts in Market Wrap last night for historical evidence.

  Jeff Bailey   3/7/02,  10:10:57 AM
Research In Motion (RIMM) $28.12 +2.96% ... stock gave "bullish triangle" yesterday at $27. Link

According to Dorsey/Wright and Assoc., they have stock listed as "electronics" and that group is "bull confirmed" at 42%. Just turned to "bull confirmed" status in early March at 40%. January's high reading was 58% so some upside bullishness still can be found.

These are more the technicals that I would look for in a new bullish entry play.

  Austin Passamonte   3/7/02,  10:09:31 AM
Nice to see predictable market action still prevails now & then. Shorted right near the top of today's lead-pipe lock entry and happy to be there now. Stops resting below entry and we can relax, have a nice cup of lemon zinger herbal tea and let time take over from here. Nothing to lose and everything to gain today... just the type of parameters we like!

  Jeff Bailey   3/7/02,  10:04:08 AM
S&P 500 (SPX.X) 1,163 +0.05% ... in December (red C) and then again in January (red 1) the SPX found resistance and 1,170. With bullish % at higher levels of "overbought" then I begin to feel that General Electric (GE) becomes "key stock" once again.

Not sure the SPX Link can "make the break" above 1,180 at this point and may well take GE bullishness at $42 or higher to have market participants committing further. Will want to monitor closely.

  Jeff Bailey   3/7/02,  9:57:26 AM
Bullish Percents The NASDAQ-100 Bullish % ($BPNDX) Link

S&P 100 Bullish % ($BPOEX) Link

and S&P 500 Bullish % ($BPSPX) Link

Are all three now showing levels at 70% or higher. This is considered "overbought" and trader's/investors should be snugging up some stops on stocks that are looking overextended on their charts.

New bullish entries can still be taken, but looking for stocks in SECTORS where bullish % reversals just taking place, and where the stock is breaking out of a nice base.

Note ... a 5-day consolidation is not what I consider a "nice base." I consider a "nice base" spanning 3-months to 2-years.

  Jeff Bailey   3/7/02,  9:46:35 AM
Currency Japanese Yen march futures (jy02h) up 1.64% vs. the US$. Last night I was looking at some charts trying to "figure out" yesterday morning's call from Merrill as bing bullish on Japan.

Noticed that yesterday, the US$ was rather weak. This can be a slight positive from some US-based multinationals that derive a lot of sales from overseas and may have been having some problem competing on price due to strong US$. May have been sniffed out prior to move as Dow Industrials (full of multinationals) has really been on the move.

  Jeff Bailey   3/7/02,  9:42:38 AM
Biotech Index (BTK.X) 511 -0.45% ... a little bit of red, so willing to let a biotech like NEOL come to me.

  Jeff Bailey   3/7/02,  9:40:17 AM
NeoPharm (NEOL) $20.79 ... stock printed $21 as opening trade. That would be a spread-triple-top. Stock looks bullish and vertical count is bullish to $26.50. Look for entry here. Also gave "inside day" on bar chart, so short-term trader may look for pullback to $20 as entry, then stop under yesterday's low of $18.99. Link

  Jeff Bailey   3/7/02,  9:36:33 AM
Sepracor (SEPR) $47.27 ... stock getting hit to downside and trading $20.70 (-56%) after FDA non-approval letter. Stock rallies right to bearish resistance. Link

  Jeff Bailey   3/7/02,  9:34:41 AM
General Electric (GE) $41.55 ... will it trade $42 and give a triple-top? Link

  Jeff Bailey   3/7/02,  9:33:41 AM
Deere (DE) $48.97 ... that triple-top is looking powerful from $46 isn't it? Link

  Jeff Bailey   3/7/02,  9:31:58 AM
Meow! Caterpillar (CAT) $59.02 ... Credit Suisse raising 2002 estimates to $3.00 per share from $2.75. That triple-top from $52 was pretty powerful wasn't it? Link

  Austin Passamonte   3/7/02,  9:27:38 AM
For those who may have interest, Jeff's bullish watch call on GE late last night in here shows open interest on options "normally" balanced and no disparity of resistance or support. No worries here, and price action is free to roam. This relative measure is a nice little filter to quantify "weight" on a stock or "legs" under it when whittling down trade entry picks.

BTW Jeff... what are YOU DOING with posts in here past 11:00pm at night? Do the best traders never sleep? I myself was snoring away & getting kicked by the dog at that hour! [huge grin]

  Austin Passamonte   3/7/02,  9:22:37 AM
Pondering INTC's directional bias this morning, it's easy to measure investor sentiment. Simply pull up an option chain and note where heavy open interest lies. The March contracts between 27.5 and 37.5 are fairly balanced with a slight upside bias toward calls.

But April is not even close... a large disparity in calls versus puts in that month across those strikes. Will be very tough for INTC to move higher with all those April calls weighing heavily overhead. Far easier to move down should something happen to cause those calls to peel off in selling sequence.

Take a quick trip to the free, public website and see for yourself: www.cboe.com

  Austin Passamonte   3/7/02,  9:05:27 AM
Great Morning!

Once again we have pre-market futures popping as momentum leans to the upside out of an early gate. Interesting battle will be waged at resistance today... will the indexes smash thru, close above and convert resistance to support? My views are noted (and depicted) in last night's Market Wrap.


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