Trade: Buying the $DF Oct 17 Calls for $.30
Risk: $30 per 1 lot
Reward: Unlimited
Notes: Good risk vs reward that stock in the next 4 weeks
UPDATE 9.21.2012 With the Stock Selling off, the Calls have gone from $.30 to $.20, but I not adding or punting on this trade just yet.
Oracles software sales have seen tremendous growth, with software license sales of $4 billion and total software revenue of $8 billion. The Oracle Cloud did well enough to increase the company’s software business and if revenues continue they will be in line to match the lagging hardware system business, helping Oracle continue its growth in 2013. Oracle announced its purchase of SelectMinds on Wednesday, a recruiting, could-based, software.
Earnings were up in 2012 $0.24 from 2011, and are expected to grow an additional $0.21 in 2013 to $2.67. Earnings perform seasonally, starting Q1 at a low and gradually growing with the best performance in Q4. Earnings are projected to be $0.53 for Q1 2013, a five-cent growth.
Oracle stock has been in an up-trend since late May, up $7.00 to open today at $32.60. The stock is up 27.5% year-to-day with a 52-week range of 24.91 – 33.81. The market cap is 159.95B. Oracles biggest competition, SAP (SAP) and IBM (IBM) are trading up 36.77% and 12.03% respectively.
Options traders are bearing on ORCL with 41% of trades today being bearish and only 23% bullish. The ATM implied volume is 23.4 and the Oct ATM 33 straddle is implying a $1.83 move, or 5.5%. Oct open interest calls are highest at the straddle and Oct open interest puts are biased lower, highest at the 31 strike price.
My trade is to buy the Oct 31-34 Call condor for $0.30. My risk is $0.30 and my reward is $0.70. My break-even points are at $31.30 and $33.70.
It can be argued that the Federal Reserve is the most powerful institution on the face of the earth. America is the center of world economy…especially as bond bears squeeze Europe and China slows with delinquent loans rising by nearly 333% since the end of 2011 all while their repressed population is starting to speak up.
The E-mini S&P 500 Index Future has had an average true range (ATR) of 13 points over the last 14 days; this is compared to nearly 25 points over the past year. Consequently, the volatility index is low too. The CBOE’s VIX, a measure of implied volatility in the SPX, is down 40% year-to-date as a result of the small ranges that have slowly become a reality. While on the topic of options, the SPX currently has an implied one-sigma move of up or down $46 with 28 days to go in the October options. This is against, during this time last year, the October standard deviation was up or down about $99. This was however during the USA debt downgrade fiasco and debt ceiling, but the market came to the conclusion that America would still be a staple in the investment world, for rates actually proceeded to fall, proving the downgrade wrong in the short and medium term. The low ATR, VIX, and implied move in the SPX could all be a direct result of the Fed manipulating the market with their various programs not allowing for true capitalist price discovery to occur in the free market.
This contraction in volatility and price action has become a reality since the Federal Reserve started to communicate their intentions to further stimulate the economy via additional quantitative easing. More specifically, The Federal Reserve said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing as it seeks to boost growth and reduce unemployment; while keeping an eye on inflation, and while still undergoing operation twist…swapping out shorter term maturities for longer term (increasing the duration of the portfolio). “The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.” To the contrary the implied inflation rate is currently (as measured by the 10 year less the 10 year TIPS) 2.50%. Perhaps the committee does not look at market prices, for they believe that they are the market.
The Fed in general has come into question. The dual mandate has been dropped by other developed areas and countries including Canada, the European Central Bank, the Bank of England, and the Bundesbank. This should all be questioned for the “wealth effect” has caused a fool’s rally, real income to fall, and confidence in policy makers to fall. The only way to fight the inflationary “Bernanke Put” is to buy gold and silver calls.
E-mail the author with any comments or inquiry…
Data courtesy of Thinkorswim
This rally has been one of the most deceptive as it has been sparked, and supported by the so called, “Bernanke Put” and NOT by healthy macroeconomic conditions. The Bernanke Put refers to the notion that Federal Reserve intervention will save the stock market from downside risk by way of easy monetary policy. Despite the consistent negative economic data reports, and gloomy forecasts out of the US and global economies, stocks traded at a 10-12% premium on hopes of a third round of quantitative easing. Markets reacted positively to bad news, and negatively to good news, based on the logic that clearer signs of a weakening economy will push the Fed to act.
Markets finally got what they wanted last Thursday when the Fed announced a third and likely perpetual round of quantitative easing in which it will buy $40 billion of mortgage-backed securities each month. The Fed hopes to revitalize our sluggish economy by bring down mortgage rates to create housing wealth in hopes of increasing consumer spending to ultimately aid the suffering labor markets. It is important to note that the first two rounds of QE were not very effective. The stock market is up 2% from the announcement and is trending higher, but what has changed fundamentally? Nothing. The only reason for QE3 is a weak economic consisting of anemic GDP growth of 1.7%, unemployment above 8% for the last 43 months, and weak consumer spending. I see nothing to celebrate.
I believe this is a fool’s rally, and the opportunity is to the downside. Stocks will most likely continue to rise throughout the election before making a hard reversal. “The bull goes up the stairs, the bear jumps out the window.” I would look to take some profits off the table before he jumps.
History proves the only thing certain with easy monetary policy is inflation. While the annual rate of inflation from 1985 – 2011 has been tame at 2.1%, an open-ended quantitative easing policy certainly increases inflation fears. With inflation risk on the table, accompanied by the fiscal cliff and the ongoing European debt-crisis, investors and policymakers have little to celebrate. The end result will not be pretty.
Ciro J. Lama is currently an undergraduate studying Finance at the Zicklin School of Business – Baruch College
Website: CantalinoAssetManagement.com
Follow me on Twitter: @TraderCantalino
Bad news across the Atlantic continues with a sharp loss in the services industry for European countries. Yesterday, housing starts and permits reports were lower than expected, but still within range of analysis expectations. Existing home sales grew 7.0%.
Rite Aid Corp. (RAD| +0.77% [1.34]) released earnings reports this morning and posted 41.4M in losses, an improvement from the same quarter of last year’s 94.8M losses. Analysts expected a loss of $0.07 a share and Rite Aid beat the expectation, losing only $0.05 a share.Weekly jobless claims reports are released this morning at 8:30am EST with an expected claim drop at about ten thousand this week. The Philadelphia Fed survey will follow at 10:00am, which is an index of general business and manufacturing conditions. The index is expected to decline, but at a lesser pace than last month.
Other post-earnings stocks to keep your eyes on are Bed, Bath, and Beyond (BBBY | 68.79) which is down $-3.44, or 5%, after higher costs left earnings unable to meet analysts’ expectations. Expectations were higher this quarter because of improved government data on same-industry sales.
