Can Unusual Options Activity Predict the Future (CIE)

Cobalt International Energy, a deepwater oil exploration company that explores off the Gulf Coast reported Friday morning that it hit a monster well. The flow rate of the well was in excess of 20,000bopd. Deutsche Bank and Morgan Stanley raised price targets substantially. The upside potential in CIE is limitless as the Angola property seems to be de risked. Vaalco Energy, another oil giant owns property in the Angola region. CIE is an attractive takeover candidate In my opinion.Friday morning CIE stock is now trading above the $35 level (up 50%) and seems to be gaining strength as the morning progresses. CIE stock and option volume is trading well above average volume.

Morning Rage 2.10.2012

Other news around the world, “Iran is seeking to close grain purchases using gold and oil as payment..” Brent crude futures settle at 118.59/bbl and the USD was up 1.5% for the trading session. Crude oil is down 3%. Copper/gold also weak. Looks like Risk is back off for the time being.
After the bell Thursday: LinkedIn Posted earnings of .12 a share. Quarterly profits beat analysts’ expectations, LNKD showed strong subscription growth. Its Revenue doubled. Activision posted earnings and revenue that beat analysts’ expectations. Also, Activision raised its dividend to .18 cents (16.5 cents in 2011s). Rio Tinto also hiked its dividend.Rios revenue came in light as its aluminum business slowed. Investors should be cautious on how strong the US economy really is. PepsiCo’s Revenue rose 15 percent to $66.5 billion from $57.84 billion.2011, its net income rose 2 percent to $6.46 billion/$4.03 per share. That compares with $6.33 billion/$3.91 per share. PepsiCo also plans to increase dividends and share buybacks in 2012 says CFO Hugh Johnston.

Cam at the Close 2.9.12

The TVIX mirrors a 200% move in the VXX. These two ETN’s can be incredibly lucrative trading vehicles if traded properly. There is a very important difference between an ETN and an ETF. An ETN is an “Exchanged Traded Note”, which contains investment products issued by a bank or institution. An ETF is an “Exchange Traded Fund” and contains actual securities. ETN’s use futures, derivatives and options to mirror their underlying instruments. One of the two most important factors that an investor or trader needs to be aware of is backwardation and contango. When the VXX is in backwardation that means that spot prices exceed forward prices and in contango forward prices exceed spot prices. When you get big run ups in volatility, curves get skewed towards backwardation which is exactly what happened from August to October in 2011. The VXX was up over 150%. When the premiums for put protection came down, the VXX cratered and went from $50 to $27. Meanwhile during this time period, the Inverse Volatility (XIV) ETN has rallied over 90%. Think of normal market conditions as equilibrium between where the backwardation and contango curves intersect. As outliers occur, such as the August crash, this equilibrium gets stretched. This is where the most money is to be made. A $55 high on the VXX on October 3, 2011 was made when the ^Vix hit $45 that day. Only once in history has the ^Vix hit $45 and been higher two months later. The only time was in 2008 when the ^Vix ran to $90. “I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms.” – Paul Tudor Jones.

Earnings Trade of the Day (LNKD) 2.9.2012

Reason I like this Trade: I looked at the amount of movement that LNKD has moved and the stock has not moved over 5.5% once over the last 4 quarters.  I think that the stock should sell-off as GRPN trades lower and a sell-off in MWW for earnings.  If the stock breaks the 100 Day Moving Average at $80 then I want to be out of this trade, so I bought the 85 Calls and MY stop and I will leave this trade on all day tomorrow.

Date      PreEarn PostEarn     Change

11/04/11   $87.50   $82.37  $-5.13 (-5.9%)
08/05/11   $95.52   $91.36  $-4.16 (-4.4%)
Average Magnitude of Post Earnings Return 5.1%

UPDATE: 2.10.2012 With LNKD ripping more than expected, I am short LNKD at $80, but I stopped out at $85.  I will leave this trade on and hope the stock sells off to $83, so my losses are not as much.  This trade has not been a winner, but I still have time left to hope this works out.  On to the next trade

UPDATE 2.11.2012 This spread expired worth the maximum it could be worth, $5.  I was stopped out at $5, I risked $3.50 to make $1.50 and I thought it was a great risk vs reward, so yes sometimes I do lose money so on to the next trade.   

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