Fast Money Clarity

Well, its 12:40 am, just woke from a nap after a long, but enjoyable day doing 3 shows on CNBC.

I was compelled to write this after reflecting on the busy week I just had on TV and getting several dozen emails about how I should have been more vocal about Guy's response to my trade.

One of my goals as a trader/educator is to enlighten people to the way I view the markets and risk, but more importantly,inform them about options and how to use them to increase the probability of success in your trades and as a way to provide real protection for your stocks.

As it was my premier on the FAST MONEY desk, live in NYC, I choose to keep myself more low-key,reserved and learn the dynamics of the show and get more aggressive with time. (this was maybe a bad choice on my part :))

My whole life I have dealt with traders of all sorts. Since I have been in this game since my teenage years and after trading on 3 exchanges, I have traded beside and now work with some of the most talented and brightest traders in the world. We all have our own strengths, weaknesses and personalities. I know that I have my mine, that's for sure.

One of the traits that I feel makes a trader successful, is the ability to listen and be as objective as possible, especially with subjects they do not know. I consider myself expert in options trading, knowledge and theory, but I am always learning and I know there are people out there that are not only smarter than I, but with unique perspectives that could possibly increase my probability of success in my trading and methods.

There are a multitude of ways to view, correlate and trade the markets. Fast Money is a fantastic show the is heavily focused in fundamentals, with minor technical touch. I agree with both of these approaches in my trading. I feel that in the long run, fundies typically trump, but the short term price fluctuations in a stock, can be read more easily by reading the tape and using technicals. These fluctuations are the result of emotional shifts, correlations with indices and/or indexes amongst other things. The bottom line is that a stock's price is just what people are willing to pay for it.

Predicting stock price moves with accuracy is like predicting the drunken walk of a college freshman after 8 shots of tequila. But even the drunks have limits. Like people, stocks have different behavioral characteristics. I am not going to get into detail here, but to oversimplify, Let's say the drunk has to take 10 steps forward and its my goal to stay out of his way, where should I stand?

Normally his stumbling leads him to step either 1 foot to the right or one foot to the left at each pace forward. What are the chances that every step he takes, he stumbles left 10 times? He probably will have to take a step to the right to re balance himself. To get out of the way of the drunk I could move 9 feet to the left of him at the end of his walk and there is a very good possibility I wont be in his way.

As strange as this may seem, stocks tend to behave alot like this. When was the last time you saw a stock go up 15 days in a row with out closing down 1 day? Its not that common.

The point of this whole thing is that, I combine my fundamental and technical beliefs, make my decision on what I think the direction of the stock is, then use options to to increase the probability of my success, using several measures.

On the show today, I suggested the traders should look to sell the FSLR July 145 Put @ 3.40 (where it was trading at the time) If they are bullish and agree with me there.

I said that this trade had roughly a 75% statistical probability of success in terms of price distribution till July expiration.

Meaning that with the stock at $174.00 and using a 63% volatility factor (At the money implied vol) there was a 25% chance the stock would touch $141.60 (my break even point) and roughly a 14% chance it would go below that.

I have a feeling that Guy Adami is not an options trader (I do have a great amount of respect for him) and I didn't feel it was appropriate for me to embarrass anyone on the show. So I figured I would use this forum as well as a special show on put selling this week on ONN.tv.

Anyway, Guy said that 'it's the 25% that blows you out', well I respect the fact that he was most likely warning traders of risk, as trading anything involves risk, but he's wrong in this case. In fact this trade is MUCH less risky and less costly than buying the stock today at $174.00.

The short put obligates you to purchase the stock at the strike price you sell, so in this case, I would be obligated to buy FSLR at 145 ($29.00 discount to current price) and I would get paid $3.40 to do so. Which means that my cost basis is actually 145-3.40 or $141.60

The short put is also like me owning the stock at 145 and selling the 145 call at 3.40 ( a covered call).

The best part of this trade is that all the stock has to do is stay above 145 by July Expiration and can go all the way down 141.60 and I will break-even in the trade. (I like those odds)

As for the 'blow out' I certainly do have risk here, but the stock trader who buys FSLR at $174 will have a 'bigger blow out' than I :)

Happy Trading!

I really do feel privileged to be a part of the Fast Money Team and promise to 'chime in' more with specifics :)

Jared A Levy

Retail … Really??

It doesn’t take a rocket scientist to know that higher oil prices equal higher fuel costs, which in turn may equal higher costs to produce and ship goods, etc. Before the world starts piling into retail at these levels, step back and smell the wilting roses.

I always say, give me a market situation and I will find a way to trade it, preferably with options - J (for you emoticon lovers out there).

The 0.5% increase in retail sales in May from April was less than the 0.7% forecast by economists, but upward revisions to March and April put total sales receipts for May close to expectations. Sales fell 1.2% in March and 0.2% in April. If you pick apart the report, the word "sales" doesn’t mean just the number of things sold - PRICE is a big part of that and prices are moving higher, obviously centered around energy. It’s always a challenge to find out what is wagging what in the marketplace.

With oil up more than 115% in the past couple months, and the average price for gas in the U.S. rising 62% to from $1.60 to over $2.60 per gallon, this will certainly put a damper on excess spending. If the average person drives 16,000 miles per year and(according to the EPA) the average car get around 20 miles per gallon, that’s about 800 gallons, per driver. So a family, where both parents work and drive would consumer an average of 1,600 gallons per year.

Between January and today, you have incurred an additional cost of $1,600 per year, or $135.00 per month. This was imposed on you in a short period of time with no notice. Considering the average family makes about $50,000 per year, that’s 3.5% of your income taken away without notice. If gas goes back to $4.00, you’re talking about another $2,400.00 in gas costs to your family; that’s not counting what it may cost to heat your home, power your lights, or fire up your grill.

Another way to think about it -- energy, industrial and materials comprise 27% of the S&P. Those names will rally with oil and commodities, and that’s a good chunk of the market. Perception is everything; if people perceive a rally in oil and commodities as a sign of a good healthy economy, then there is a good chance they will flood equities with buy money. At the end of the day, if the costs of high energy and materials cut into the profit margins of the bulk of the consumer discretionary stocks, which I think they will, retail (other than Wal-Mart) will have a hard time maintaining strength.

I think at the end of the day, inflation will be the last man standing. With or without growth, it’s inevitable and both soft and hard commodities should stand to benefit. Not to mention humans will have to EAT through all of this (I usually like to have that constant). I would be cautious with the all out run into retail, if anything, limit your exposure with options in that sector.


Jared A. Levy
@jaredalevy on twitter

Bull Call Spread on U.S.Steel

Investors are beginning to take a more bullish stance on United States Steel (X).

Looking at the July 33 calls, around 7,300 contracts traded at roughly $2.40 per contract with the stock trading at $30.52. Heading into today's trading, open interest at this strike stood at just 800 contracts. In addition, more than 12,000 July 40 calls have traded today, crossing the tape at roughly 75 cents per share. There were about 20,000 July 40 calls already open earlier today. This is a bullish call spread that can illustrate how one could try to take advantage of potential upside in X.

At 11 a.m. EDT, one investor bought 7,000 July 33-40 call spreads for $1.45. That means the customer bought the 33 calls and sold the further out-of-the-money 40 calls, paying $1.45 (net) for the transaction. The investor will be profitable at July expiration if X shares finish above $34.45 (the strike of the long call plus the premium paid).

X reached a 52-week low on March 2, when the shares dipped to $16.88. Since then, the shares have nearly doubled in value. X shares closed at $$29.94, up $1.41, or 4.94% on the day. X shares rallied today, along with other U.S. steel makers AK Steel Holding (AKS) and Nucor (NUE), thanks in large part to analyst predictions that demand for steel will rise soon as steel makers continue to report slight increases in weekly production.

Bullishness in X suggests investors could be betting that X shares will be advancing farther off the lows the company saw in March. We didn’t see significant X volumes today compared to normal daily volume of around 36,000, but at least one investor is striking while the steel is hot.

Jud Pyle, chief investment strategist

Put Buying in SPDR Retail ETFs

The news hasn’t been good so far this week for retail stocks, and big put activity in the SPDR Retail Exchange Traded Fund (XRT) today could suggest investors are hedging against a further downturn.
Looking at the Sept. 20 puts, we see that more than 15,300 of those contracts changed hands for around $1.00 versus open interest of 18,100 during the first 10 minutes of trading today. The bulk of that volume happened even earlier when one customer wasted little trading time and bought 15,000 Sept. 20 puts for 98 cents with the stock around $25.50. What’s interesting about this trade is the current stock price for XRT is up 46 cents so far today to $25.98, which is about 25% higher than the strike price.
In order for the customer to make money, the ETF needs to be trading below $19.00 at September expiration, or is the difference between the strike price and the premium the customer paid. XRT shares have not hit $19.00 since March 9, but the stock price has dropped about $1.00 since the beginning of the week.
These puts are currently down seven cents and more than 30,400 have traded so far today. Current implied volatility is 55.6.
Put buying activity such as this does not mean investors should run out and sell all of their retail stock holdings. But it does demonstrate that at least one customer could be bearish on this sector. It is also noteworthy that several retailers are posting earnings in the next month, and the more retail stocks that miss estimates or post unexpected losses, the more bearish activity we might see.

Jud Pyle, chief investment strategist

www.ONN.tv

Put Buying in Costco Wholesale (COST)

Bearish options positions took over the retail sector for the second straight day today after sales numbers missed consensus estimates by 0.3 percentage points. We forecast yesterday that options positions in Best Buy (BBY) indicated bearish sentiment among retail investors, and we saw even more bearish activity in Costco (COST) today.

Looking at the July 45 puts, nearly 17,770 contracts traded today with the stock down around one dollar to $45.82 at the close. A put buyer bought the bulk of that volume, about 17,750 contracts, for $2.45 each before 11 a.m. EST. This computes to implied volatility of 37.2 versus open interest of 4,613, indicating that today's volume is likely to translate as new open interest.

COST shares rallied about one dollar between Monday and Tuesday, but after retail sales proved worse than expected, investors could be buying puts because they are looking for a potential pullback. COST shares have not hit a 52-week low of $38.44 since March 6, but at least one investor could be betting that they are retreating once again.

In other news, consumer spending numbers due out Friday are not expected to remove the bearish sentiment taking over retail investors, as far as consensus estimates suggest.

On Tuesday, a customer bought more than 8,500 June 35 puts for around $2.05 with the stock trading at $36.88 versus open interest of 4,000. BBY shares closed Monday and Tuesday at $21.00 and closed slightly lower today at $20.50. Today, BBY June 35 puts increased by 60 cents and 2,200 contracts traded versus open interest of 120,000. Again, it’s noteworthy that investors continue to buy puts to hedge some of the gains over the last couple months.

Put buying such as what we saw in COST today does not mean investors should run out and sell their shares. But it does demonstrate that at least one investor could be buying downside protection against further declines in retail stocks.

Jud Pyle, chief investment strategist
www.ONN.tv

Potential Call Spread on Agriculture Stocks

Investors selling calls on The Mosaic Company (MOS) could still be bullish in the hope that shares of the agriculture nutrient producer will continue their week-long ascent.

Yesterday morning, a customer sold more than 10,100 Sept. 65 calls for around $2.00 versus current open interest of 1,148. MOS shares closed down $1.29 to about $46.34 while the value of these calls declined 33 cents. But the 11% rise in MOS shares so far this week could potentially tell an overarching bullish tale for the equity.

MOS, along with other agriculture stocks such as MON and POT, rallied through Tuesday when the USDA released the World Agriculture Supply and Demand Estimates report. The WASDE report said U.S. commodities production will slightly decrease while consumption will increase in May compared to last month, resulting in a reduction in world stocks. Corn supply, specifically, will decrease slightly while demand could increase by 3.5%, which computes to an 8% drop in world corn stocks compared to May last year.

It’s worth noting that first-quarter earnings reports have already passed for MON, MOS and POT, so investors are more willing to be long these stocks because of the positive planting expectations from the WASDE report. In addition, China trade data showed a 55% increase in soybean imports since last year, according to the USDA. Such demand gains helped push MOS stock up, but analysts anticipate a major decline in China’s import demand as commodity futures prices increase.

Call selling such as this does not mean people should run out and sell their shares. In fact, on Tuesday a customer bought 5,000 Sept. 55 calls for $3.80 with stock at $46.00. Such activity could indicate that an investor bought the Sept. 55 calls to let the stock run and sold the Sept. 65 calls today as a way of legging into a bullish call spread. This call selling could also demonstrate that at least one investor is long MOS shares but hedging his profits by selling calls. This creates a covered call position in light of the stock's recent sprint higher.

Jud Pyle, chief investment strategist
www.ONN.tv

The Obama-Nation Continues

Last Tuesday, when I wrote about why Obama’s Chrysler intervention was worse for America than any of us have yet imagined, a wise market mentor told me I should also pay attention to the Hart Schaffner Marx saga unfolding right here in Chicago. In the heat of bank stress tests, auto bailout angst, and the S&P near my bear rally target of 940, I completely forgot the story. Until this afternoon when I saw Illinois State Treasurer Alexi Giannoulias vs. former Dallas FED president Robert McTeer on CNBC.

It seems that the Obama administration has been pressuring Wells Fargo for weeks to extend more credit to the struggling clothing manufacturer, restructure its debt, or even forgive some loans that Wells inherited from its acquisition of Wachovia. This is more government strong-arm tactics to make sure we don’t look like we just handed the candy store over to the banks via the TARP. To quote Giannoulias "unless the company remains open, [Wells Fargo] will not be doing business with the state of Illinois any longer."

McTeer, who we knew as a conservative, plain-spoken “dove” on the FOMC for over a decade through the 90’s bull and post-bubble crash, was typically skeptical today of Obama’s meddling where it didn’t belong. He, of course, has always been mindful of the slippery slope of government dictates for private enterprise. On CNBC today he compared Giannoulias’ plans to that of Chinese central planners.

Is Wells Fargo acting irresponsibly in the face of hero Obama’s job-saving program and all the TARP, etc. assistance the bank has received? Maybe a little ungrateful? Or are they trying to right their own banking ship according to how the business should be run? Let’s let them speak for themselves:

“Financial institutions must lend prudently, consistent with safety and soundness principles. Advancing more funds with no reasonable likelihood of being repaid is not consistent with sound banking.”

Isn’t this how we want banks to think now?

Here’s some good, recent reporting on the story by the Chicago Sun-Times: http://www.suntimes.com/business/1568066,hartmarx-wells-fargo-051109.article

Kevin Cook, ONN.tv