Sirius XM Radio Inc (SIRI) is a satellite radio company broadcasting music, sports, comedy and news through a subscription based model. The stock is trading around $3.96 in a 52 week range of $2.55-$4.18. The stock has been performing very well this year, outperforming the broader market, rallying over 38% year to date. Recent usual options activity in SIRI suggests that the stock could continue its rally through the end of the year. Early in yesterday’s trading session a trader sold 32,000 SIRI Nov 4 puts for $0.07. This is a very bullish trade that obligates this trader to buy 3.2 million shares of stock on expiration anywhere below $4.00. This provides us with a great setup for a covered call.

Trade: Buying 100 shares of SIRI for $3.96 for every Nov 4 call for $0.10
Reward: $14 per 1 lot
Breakeven: $3.86

If the stock is above $4.00 on expiration this trade will net its maximum profit of $14 per 1 lot. This trade also profits anywhere above $3.86. Should the stock close above $4.00 on expiration this trade will net an annualized return of 79.8%.

Zoetis Inc (ZTS) develops and commercializes animal health medicines for animals. The stock is currently trading around $32.65 in a 52 week range of $28.81-$35.42. The stock has rallied over 5% year to date but is still underperforming the broader market.  Options action in ZTS is suggesting that the stock could head higher through April of next year. In today’s trading session a trader bought 1,400 ZTS Apr 35 calls for $1.25. This trade will make the Apr 35 call line the largest open interest in April. This is a bullish trade that suggests this trader believes the stock will be above $25.00 on April expiration. The stock is also trading in bullish territory technically. Shares of ZTS are trading above the Ichimoku Cloud indicating there could be more upside in ZTS. We believe that this technical strength and the unusual options activity provide a great set up for a swing trade in ZTS

Trade: Buying ZTS Stock at $32.65 with a stop at $30.21.

Risk: $2.44 per share

Target #1: $33.87

Target #2: $35.09

Target: #3: $37.53

“Sequester” is a nasty sounding word. When I close my eyes and say “sequester,” I think of a rotting hut in the desert, infested with rodents and insects and disease. It is “sequestered” from all humans and animals.

In Washington, “sequester” refers to a deal cut between D’s and R’s in 2011. Every January,
Federal spending levels are lowered across the Board. The thinking at the time was that D’s would object to social spending cuts, R’s would object to Defense spending cuts, and thus sequester would never occur.

WRONG!!!!

This logic did not consider the hatred of all spending by the Tea-publicans. They embraced sequester as their own—defense cuts and all. Sequester 1 went into effect in January 2013. Sequester 2 occurs as of January 15, 2014.

Logic indicates that Defense Stocks would have been hurt greatly by Sequester 1. But so far this is not the case. Many defense contractors are up about twice as much as the major indices this year. However, Sequester 2 is bigger than Sequester 1. Defense stocks have just announced a strong, high priced lobbying effort to take on Congress and change Sequester 2.

Thus, sequester is a key part of the DC budget battle. R’s are saying they will reduce Sequester 2 (or at least make it more flexible) in exchange for Entitlement cuts by the D’s.
This logic assumes that the D’s will be totally unwilling to endure the severe spending cuts in Sequester 2.

However, this R strategy ignores the nature of Sequester 2, which is almost all defense spending cuts. Most social programs are exempt from Sequester 2. The R position is likely just an opening offer. However, to think that D’s will cut entitlements in exchange for defense spending cuts is naïve at best, another tragic miscalculation at the worst.

For example, in the 2012 campaign, Romney’s proposed budget increased defense spending, Obama’s cut defense spending.

As it now stands, the battle over Sequester 2 could possibly even align this way:

For Sequester 2: Tea-publicans + far left D’s who would LOVE to cut defense spending

Against Sequester 2: Moderate D’s, many pro-defense R’s (like John McCain) and Defense Contractors.

What a crazy, mixed up alignment. D’s working WITH defense contractors! Tea-publicans and far lefties sharing a goal!

But that’s very possible how it will line up.

As indicated above, Defense stocks have done very well despite Sequester 1. However, if Sequester 2 comes about, their future is far less rosy. For this reason, some are selling these stocks and even shorting them. I don’t know if this is the right decision or not. But I do know that Defense stocks—more than most others—will be affected greatly by Budget Battle II, coming in January.

Follow me on Twitter @USKOTM.

NO MORE SHUTDOWNS

The last three weeks were very interesting for the markets.  Strong, strong upward movement with a couple of dips in the middle.  Clearly, the markets were pricing in the eventual resolution of the debt ceiling crisis: government reopening with no debt ceiling default.  FYI, Andrew Keene was predicting this all along.

Now the markets seem to be pricing in smooth sailing: either a grand bargain between D’s and R’s, or at least a mini-bargain.  This seems appropriate when very powerful people like Sen. Minority Leader Mitch McConnell (R, KY) state outright that there will NOT be another shutdown soon.  McConnell is up for re-election in 2014. Apparently, he believes it better to be seen as a compromiser in the general election, than as an ideological purist in his R primary.

However, the question remains whether the market’s rosy picture is justified.  Clearly, the market has strong upside momentum.  But, if the shutdown cost the country $24B and 0.5% to 0.6% in GDP, weaker economic numbers will have to be discounted as one time events, for the market to continue strong.

Follow me on Twitter @USKOTM.