EOT Position Update – September 17, 2008

| September 17, 2008

September 17, 2008

NOTE:  Watch for a new trade alert on Thursday or Friday.

Market Snapshot

The Dow Jones Industrial Average just closed at 10,609.  It appears the market’s picked a trend, and that trend is down.  Today’s 449 point freefall was only eclipsed by Monday’s 500 point fall.  We’re now trading at levels last seen in 2005.

The big news is all about financials.

Over the weekend we witnessed Lehman Brothers, the 4th largest bank in the US file for bankruptcy.  This was followed by the announcement that Merrill Lynch would accept a hastily thrown together buyout offer by Bank of America.

The only other investment banks of any stature – Morgan Stanley and Goldman Sachs were slaughtered in trading.

The News about AIG didn’t help much either.  They started looking for a bridge loan and as the days wore on the amounts grew.  I thought they were looking for $20 billion.  Then the number was $50 billion.  This quickly became $70 billion then $80 then $90.  The amounts are staggering.

Realizing the failure of this insurance giant could cause huge problems, the Federal Reserve stepped in and loaned them $85 billion.  At least Treasury Secretary Paulson negotiated a good deal.  The government gets a note at 11+% and the rights to almost 80% of the business.

Maybe when the AIG, Freddie, and Fannie investments become really valuable the government will lower our taxes.  Wishful thinking no doubt.

The Fed held pat on interest rates and the US Dollar continued showing strength.

Now for the trade updates.

Position Updates

Just a quick note: Remember, we won’t update every open position every week.  I try to focus on the positions that have some significant news or price movement.

 CVX December 2008 $75 Puts (CVXXO)
Our option traded up almost 70% on Tuesday’s oil price fall.  We gave a bit back today, but the trend is still in our favor.  Remember we want the stock to fall.  Support levels are $76.50 and $71.  Resistance is $88.50 and $92.50.

  CSCO January 2009 $27.50 Calls (CYQAY)
CSCO hosted its analyst day and all the good news was lost in the recent market turmoil.  The company reiterated their long term growth projections of 12% to 17%. Support is at $22.50 and $21.  Resistance will be at $27 and $28.75.

  CLHB January 2009 $95 Calls (QPBAS)
CLHB fell through both support levels over the last few days.  Support was $72 and $68.

Parting Shots…

Another question from a subscriber.

Why are we not getting stock puts on these financial companies that are going broke, like AIG or Lehman Brothers?  We could all be wealthy right now if we were.  Do they offer stock puts on these types of companies?

Great question.

Keep in mind that I look at numerous criteria when I’m selecting options for the service.  Unfortunately, it’s not as simple as pointing at a stock and saying “Let’s buy that one.”

Let me give you a perfect example.

Goldman Sachs (GS) is in the financial industry, and we all know how difficult that industry has been.  I looked at options on GS . . . both calls and puts.  Here’s the problem.

The market makers know the industry is having a tough go of it.  So they expect volatility in the stock prices.  Because of this volatility, they jack-up the prices of the options.

Right now GS is priced around $114.50.  Let say you thought it was going to bounce back up.  You could buy a $115 call option for $725 per contract.  Think it’s going to go down?  That $115 put option would set you back a cool $1,415.

And that’s for options expiring in 2 days!

Say you wanted to buy a little time . . . till January 2009.  Those same options would cost you $2,575 and $3,200 EACH!

We’re not looking to take on that kind of risk in the service.  Besides, I don’t know about you, but those options look a little pricey to me.

Finding undervalued options is always a challenge, but it’s a key component of maximizing our investments.  That’s why we haven’t seen many opportunities in the financial industry.

Hope that helps.

Category: EOT Update

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