Options Trading Blog
Options Trading Tips and Strategies
In commodities, Crude rallied sharply in early U.S. trading and sits up 1.2% near $103 p/barrel. Natural gas, after rising in prior sessions, fell 2% to below $2.10 p/bcf.
Gold prices are also reversing some of yesterday’s losses, with futures up 0.8% to $1,626.
Throughout the rest of the trading day, we are looking at a whole lotta nothing. There could be some position liquidation towards the closing bell, since the March jobs report is released tomorrow morning. Analysts are calling for a 203,000 jobs. We’ll have to wait until Monday to figure out how equities will react.
Gold has gained $10, or 0.66%, after more than 3% losses yesterday. Crude futures are unchanged.
The CBOE Volatility Index (VIX) is near 17 today, with the ETF that tracks the VIX, VXX, higher by 1.9%.
We are expecting trading to be slow today ahead of the holiday tomorrow. As a reminder, the Department of Labor will still release the monthly employment report tomorrow morning at 8:30 a.m. ET. The ADP report issued this week showed 209,000 private sector jobs were created in March, compared with an expectation of 203,000 for tomorrow’s report.
If trading is slow, we recommed taking a look at “The Dimon Manifesto,” from Bloomberg. Among the gems in Dimon’s annual letter: “I have no doubt that our own actions made the recovery worse than it otherwise would have been.”
Bloomberg also reports some interesting figures: JPM makes about 1.5 cents p/share trading equities; $70 p/trade in foreign exchange; and $1,500 p/trade in credit markets. Just 10% of trades generate more than $50,000.
The S&P 500 futures had a tight range intraday despite the huge sell-off. The Vix was only up $.75 and I still think as long as the futures can hold 1378-1380 we rally higher. Volume was weak, along with oil and gold taking it on the chin and down more than $57.
After the bell we got strong earnings from Bed Bath and Beyond with Carmax reporting tomorrow am. With a 3 day weekend, look for an inside day tomorrow with more lite volume. Have a great night and Monday we will launch brand new subscriptions.
Unprofitable: I lose money on this trade if KMX closes under $32.45 or above $36.55 by April 20, 2012. The most I can lose on this trade is the Price of the Spread, $1.00 minus the price I sold it for $.55 for a total of $.45 per 1 lot.
Reason I Like This Trade: I like selling premium instead of buying it for earnings. This trade is an even money bet that KMX will close between $32.45-$36.55
Despite the Fed’s news yesterday that additional quantitative easing was unlikely, the 10- and 30-year Treasuries are higher, each up 0.33%. Gold futures are taking a large hit – down 3%, while Crude futures lost 2.2% to $101.70. Today’s Crude inventory data saw inventories rise nearly 4-times more than expected, while output rose to its highest level since 1999. Traders could target support at the $100 p/barrel mark in Crude over coming sessions.
ISM Non-manufacturing data was released this morning at 10 a.m. ET, coming in lower than expected. The March Non-manufacturing index dropped to 56 from 57.3 in February. Looking to data later in the week, traders will eye Friday’s employment report, though equity markets will be closed.
More News and Numbers:
– Yahoo (YHOO) dropped 1% despite announcing it would cut 14% of its staff
– CBOE Volatility Index (VIX) gained 9% to 17.10. VXX, an ETF tracking the VIX, rose 5.4%
– JPM is lower by 2.6%. Today, JPM announced it would settle the CFTC suit over Lehman for $20mln
– SanDisk (SNDK) shares fell nearly 10%. SNDK said quarterly sales would come in $100mln lower than previously forecast
Reason I like this Trade: I saw someone buy 30,000 TK Jan13 35 Calls for $1.80, so I knew I had to jump on board for a LONG position. This is the largest open interest volume I have seen since Jan 2011. This is the kind of trades I wait all week for, then pounce. I will be looking to get out of this trade as the stock trades higher. Please feel free to email me with any questions at [email protected].
UPDATE 3.19.2012 With the stock rallying to $32, I took off 25% of my position off at $2.25, but these Calls are still worth $2.50. This was another HUGE winner, but I want to let my profits run.
UPDATE 3.22.2012 With the stock rallying even higher yesterday, I sold another 25% of my Calls out for $3.10. So, I have sold 50% of my position for a 40% profit, and I still have a 50% position and the Calls are currently worth $2.80
UPDATE 4.2.2012 With the stock rallying to $35, I sold another 25% of my position at $3.50. I am offering the final piece of my calls at $4.30. What a great trade and realizing that sometimes owning Calls does work out.
UPDATE 4.3.2012 I sold my remaining 25% at $4.30 for a nice profit. The average sale was $3.2875 for a 96.3% gain ($1.6125) on the position.
Florida Population Growth
The population of Florida is roughly 19 million people. Out of these 19 people roughly 30% of Florida residents either reside in Miami Dade or Hillsborough counties. These two counties are highlighted in bright red in the respective graph below. Over 17% of Florida’s population contains senior citizens who are 65 years or age or older. This represents an astronomical opportunity for Metropolitan to grow in the future. In order to be enrolled in Medicare you must be 65 years or older and Florida has the second largest Medicare market in the United States. Over 3 million people are enrolled in the state. Medicare spending by residence in the state of Florida is $39,119. The only state that has a higher Medicare spending by residence rate is California. The annual growth rate of Medicare spending is 8.6% from 1991-2009. This is higher than the average 8.0% rate for the rest of the United States.
MDF Strategic Positioning
One of the most important aspects of Metropolitan Health is how well they can operate in their niche market. Through the Humana contracts, the company has a stronghold in 18 out of the 30 Florida counties. The company also has a lucrative network agreement with CarePlus Health Plans which is a fully owned subsidy of Humana. Customers who choose CarePlus as their health care provider will still have all their medical needs serviced by Metropolitan. At the start of 2011, the company had a presence in 10 out of 22 counties that are covered by CarePlus. Starting in 2011, Metropolitan started to receive capitation fees through CarePlus. CarePlus receives premiums from the Center of Medicare services and then a portion of these premiums get passed on to Metropolitan.
Business Growth Strategies
Metropolitan plans to grow organically as well as make strategic acquisitions when it feels that new synergy will be beneficial to the company. Metropolitan’s revenues are received from health insurance contracts where a capitation fee is paid on a monthly basis. The company assumes all the economic risks of providing all the medical care a patient requires. The company’s revenue is recognized when their customers receive healthcare services. The PSN network that Metropolitan owns receives revenues on a fee-for-service basis. These services are billed to customers. This only represents 0.5% of the company’s total revenue. For the third quarter in 2010 and 2011, Metropolitan received 99.6% and 99.4% of their revenues from Humana. This contract can be terminated at any given time.
In July of 2011, the company took over Continucare Corporation. Continucare was Metropolitan’s biggest competitor and also operated out of Florida. The acquisition was finalized on October 4, 2011. With the Continucare acquisition, Metropolitan now serves over 68,000 Medicare Advantage and Medicaid customers. It owns 33 primary care medical facilities and has access to over 250 health care experts and professionals. Metropolitan has a presence in 18 Florida counties.
As well as providing outpatient care, Continucare also owned and operated over 70 sleep diagnostic centers in 15 states. These centers test patients for a variety of sleeping disorders. Sleep Apnea, which is commonly known as “OSA” in the medical world is one of the most serious misdiagnosed health problems in the United States. The condition can be life threatening because the brain will not send the proper nerve signals to breathing muscles throughout the body for natural respirations. The National Center on Sleep Disorders Research explains that approximately 18 million people suffer from the disease. Continucare tested patients for sleep apnea in two ways. The first way was through a Polysomnography test, which records all the body functions that occur during sleep. This test can determine the severity of sleep apnea. The second test is called a Multiple Step Latency Test. This test measured the rate at which individuals fall asleep. Sleep apnea triggers a variety of other medical issues such as high blood pressure, heart disease, hypertension, memory, sexual dysfunction, mood and depression.
Continucare was acquired for $6.25 per share in cash and for 0.0414 shares of Metropolitan common stock. Metropolitan paid $405.5 million as well as 2.5 million in shares to shareholders of Continucare. The total value of the transaction was roughly $417 million. Previous Continucare shareholders now own 6% of Metropolitan Health.
Forward P/E =9.6x
EV/EBITDA = 10.5x
Price/Sales = 0.87
Price/Book = 3.83
Book Value per Share = $2.40
OCF = $24.2M
LTD = $308M
Current Ratio = 2.50
The last quarter, MDF had a gross margin of 24% with was 600 bips higher than Q4 of 2010 while operating margin was 14%. Company is expected to earn $200M in Q1 with an EPS estimate of $0.25.
One of the prettiest charts of 2011 and I see no reason why the trend should not continue. MDF is in a clear uptrend, and climbing steadily. Florida will only grow in population and senior citizens will have more discretionary income to spend on outpatient services as the economy improves.
It was revealed yesterday that none of the FOMC’s voting members thought additional stimulus was necessary, killing some hopes for a QE3. Overnight, the market further digested the news, selling off equity markets, crude, metals, and buying the US$.
S&P front-month-futures are lower by 11 handles (0.8%) and back below 1,400. DJIA futures are off 0.75%, but holding above 13,000. Crude futures lost 1% overnight, while Gold dropped 2.7% to $1,627.50 p/ounce. Of note, the 10-year and 30-year bond futures are holding steady, higher by 0.2% at the moment.
Yesterday, a shareholder filed a lawsuit against Groupon (GRPN) alleging it mislead investors with its financial results. Shares are another 1.5% lower in premarket activity.
EUR/USD is two handles lower from pre-minutes, falling from 1.3340 to 1.3130 at present. USD/JPY, which moved higher in the immediate wake of the minutes, has sunk back to 82.30. This “risk-off” environment should also see the CBOE Volatility Index (VIX) spike higher. VXX, an ETF tracking the VIX, is indicated 3.25% higher in premarket.
This morning, the ECB left interest rates unchanged at 1%. ECB President Mario Draghi will hold a press conference at 8:30 a.m. ET to discuss where rates might go in the future. ADP Employment was released, showing private sector job growth of 209,000 in March, led by gains in service-sector jobs. The Labor Department will issue its jobs figures on Friday at 8:30 a.m. ET. Later this morning, ISM Non-manufacturing is released at 10 a.m. ET, and EIA weekly petroleum inventories hit the wire at 10:30 a.m.