Options Trading Blog
Options Trading Tips and Strategies
Why Did RIMM Shares Reverse from $15.50 to $12.50 In After Hours? 12.21.2012
In the later hours of the after-market session, RIMM shares began to plunge as much as 10% after the company announced plans to modify its service revenue model. This announcement caused investors to question RIMMs profitability since the company relies heavily on revenue incurred from service charges. This announcement also received attention from analysts, who also grew increasingly skeptical towards RIMM. Brian Colello, an analyst at Morningstar said, “RIMM provided few details regarding the economics of these changes, thus adding a large cloud of uncertainty to the primary driver of its profitability, which we view as especially worrisome given risks already surrounding the firm’s massive BlackBerry 10 transition.”
In addition to announcing the modification of their service revenue model, RIMM also reported its first ever loss in subscribers. The loss of subscribers also contributed to the decline in share price. RIMM shares fell to $12.50 in the late after-hours session.
These intended changes to the service revenue model and the loss of subscribers may prove to be very troublesome for RIMM. The company is depending on the success of its soon to be released Black Berry 10 smart phone, and any shred of uncertainty in the profitability of the Black Berry 10 could potentially spell disaster for RIMM.
Author: Tyler Sciortino
Current Student at Roosevelt University, Majoring in Finance.
Contact for questions or inquiries at tsciortino@mail.roosevelt.edu
Short the Russian Drought Wheat Pop? (/ZW) 12.21.2012
On the fundamental side, during the June 2012 rally, Russian wheat was severely stricken by stressful heat of nearly 95 F (35 C). This quickly wiped out moisture levels vital for the crop. The subsequent crop was also reportedly damaged when the winter wheat harvest in Russia started. Reports showed about a 30% decline in wheat yields when compared to year over year figures. To make matters worse, torrential downpour lasted 2 weeks after the drought, halting the harvest, nothing seemed to go right.
With the fundamentals in mind, the volume profile presents an interesting opportunity. Market profile suggests that long-term traders overwhelm short-term traders when price readjusts to higher levels. This readjustment can occur in a variety of ways, but specific to wheat here, fast moves are examined. Brisk adjustments to higher prices tent to not provide support and resistance, for volume is scarce at these prices. This is displayed in the volume profile, the rally was swift and on low volume, the chart lacks a proper distribution during this time frame or from June to August of 2012.
Current prices are about 2% above the 200 DMA, but aside from a probable bounce, the chart seems to be bearish. Price consolidated for nearly six months, so the potential for overhead supply at the $850 level (where price bounced many times) is large. The 50 DMA also recently crossed below the 100 DMA, strengthening the bear case. Either way, wheat will be an interesting product to trade in the coming weeks.
Below is the aforementioned chart and the wheat futures curve.
Feel free to e-mail any comments, feedback, suggestions, or general inquiries to…
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Possible Fiscal Cliff Outcomes 12.21.2012
Well, at around 8 p.m. EST House Majority Leader Eric Cantor, announced that John Boehner’s ‘Plan B’ would not go up for vote as planned. A real deflator for the optimists that thought things could be worked out. There is still time, but obviously as more time passes people begin to worry. Knowing that, I believe the drop tonight was simply panic selling from another failed attempt of trying to close the deal.
But the question going forward is where will the S&P 500 futures be if a deal gets done, does not get done, or is a temporary deal that pushes back the talks?
Deal Done:
Lets start with the optimistic point of view that we get a deal by end of year. The easy answer is to say we explode higher off great news…well I beg to differ. Personally, I believe the market is moving in a way that it thinks the deal is already done and we have moved on. Since Monday we have rallied from 1410 all the way up to 1444 set on Wednesday, with Thursday closing right up near the highs at 1440. The sell-off that brought us down to 1406 tonight has already captured back 15 points, as it now sits at 1423.95. We would not be bouncing this hard off the lows if investors were really worried about the ‘fiscal cliff’. I believe it’s a non-event, and if a deal is done investors and the market will continue its slow melt-up that we have been seeing for the past month now.
Over The Cliff:
Now lets take the doom and gloomers point of view that a deal is not reached and we take a nosedive off the cliff! That sure doesn’t sound too appealing but I promise it’s not as bad as it sounds. Like I said up above, I believe the fiscal cliff is a non-event and its all a way for the media to suck you and believe we are going into a dark place. Not true, you need to listen to what the market is currently telling you to know what will happen if we go off the cliff. Right now price action is great, and we are consistently making higher highs as we go. Also, the internals are breaking out such as the transports and emerging markets…this would not be happening if we were going to collapse off of bad news. Period. If bad news were to come out of the White House, that a deal was not reached I would expect just a small sell-off initially, and then a rally to kill the shorts that entered based off of just news.
Middle Of The Road:
I promise this one will be shorter since I’ve already been ranting for to long. So what happens if nothing is reached and it’s pushed back to 2013?? As you can probably imagine the most I expect is a small sell-off (10-20 points) and then a push for higher-highs. This is a non-event, and I truly believe price tells the story and so far there is no reason to believe we don’t go higher if there is a stand still between the to parties.
Author: Peter Nitso
Twitter: @PeterNitso
Market Recap 12.20.2012
S&P Emini Pivot points for 12.21.2012
Apple & Google Pivot Points for 12.21.2012
Options Take on Herbalife 12.20.2012
Long Straddles on Low Volatility Stocks? (WMT, PG, CLX) 12.20.2012
First of all, the ATR indicator is rather misleading when it comes to long straddle trades, for who is to say that one bought the absolute bottom or sold the high, the chances of the former are low. Moreover, the straddles are priced very efficiently with multiple exchanges competing for volume and stocks like JNJ and PG don’t move much right?
Contrary to popular belief, many consumer staple stocks have been moving much more than one would think. PG, JNJ, CLX, and even PFE are all within striking distance of 52-week highs. This slow grind higher represents complacency in the market. In many names implied volatility is near historical averages, however the market is not in an average period of time. Multiple unordinary measures have been taken to ensure a bullish market, with that said and considering the VIX came in 5% yesterday; perhaps it is time to look at long Vega trades as the fiscal cliff looms ahead.
For example, CLX Jan 13 (30 days) strangles can be put on for nearly $1.20 at the $77.5/$75 line or 1.5% of the stock. Other volatility can be bought, like in WMT, the $70 straddle can be bought for $2.70 or 3.8% of the stock. The bottom line is that volatility seems to be coming in as a massive macro event comes closer.
Feel free to e-mail any comments, feedback, suggestions, or general inquiries to…
Author
Pregame Earnings: Options, Stats, & Charts (RIMM, AAPL, QQQ) 12.20.2012
The first graphic is a daily bar chart of price’s reaction to the past six earnings announcements from RIMM. Action after the event is rather bearish; in most of the sample set, four of the six observations, RIMM went down, but when it did indeed go up it promptly filled or reversed the day after. The gap is price’s way of adjusting to new news. While this gap may seem inefficient, the derivatives market, in most cases, was expecting said move given RIMM’s implied volatility.
Now to what is implied for the coming event, because the RIMM weekly options only have one day until expiration, they will be an organic way to derive what is implied for the event today after the close. Using a KOTM implied volatility & time-based model, we calculated the one-sigma move (68% probability within) to be roughly $1.32 up or down (or about 68% chance we settle between $$14.95 and $12.30 by the close on Friday). The two-sigma move (95% probability within) is $2.65 either way (or between $16.28 and $10.97). This is important because traders can place long/short strikes at these probability levels. The implied volatility curve (IV being a measure of risk, supply and demand, relative price, and an input into theoretical models) is displayed below, for it is vital to know, especially if one is trading two different months in a spread.
The following chart includes the one and two sigma rolling probability cone, volume profile, and major moving averages (50, 100, 150, & 200). RIMM has been raging since September’s report, up over 100%. With that in mind, RIMM has been rejecting lower price levels as long-term traders take hold, moreover we are at the upper portion of the 6 month volume distribution. The 50 DMA will cross over the 200 DMA any day now forming the golden cross. On expiration Friday, the 50-day will sit n
early 27% away from current prices. This rally seems to have the characteristics of a short squeeze, for candlesticks have been long and violent. The ATM (at the money) front month $13.5 straddle (lifting the offer) is at about $1.48 (10.8% of stock). Deltas move to one faster near expiration, it is therefore easy to calculate immediate post event break evens, $15.11 & $12.15.
Feel free to e-mail any comments, feedback, suggestions, or general inquiries to… Author@ salernoma@mx.lakeforest.edu
