I read an article this morning on CNBC.com about the asset allocations people are making into longer- term bond funds.  I must admit, I was somewhat frightened after reading it.  The portfolio manager interviewed did not believe the bond investors’ motives were sound, but he claimed the massive inflows into bond funds basically came from two camps.

First, since money-market returns are basically zero, people are moving money into longer-term bond funds in order to improve yield.  The second reason was around the fact that risk managers are forcing more long-term allocations into “risk-free” asset classes.

The fact of the matter is that there are risks to long-dated Treasury bonds.  Now, because the U.S. government can print more money, it will be highly likely to meet its obligations on the bonds.  This is true. For example, if an investor buys a 30-year bond with a 3.75% coupon and yield to maturity, he or she will likely get the coupon and the principal over that time frame.  However, this depends on the investor committing the money for the next 30 years.  Right now, rates are at historic lows because prevailing views around the economy are that the recovery will be weak for the extended future.

If for some reason that changes 12 months from now and inflation expectations come back to the marketplace at an annual rate of 4%, an investor holding a 30-year bond with a yield of 3.75% will be receiving a “real” return (basically defined as the return less the inflation rate) of NEGATIVE 0.25%.  That is not good. Continue Reading

I’m certainly not here to be a “Debbie Downer” and in all fairness, there could be some real positives in the latest round of economic data. Before I dive into productivity, however, it wouldn’t be a balanced argument if I didn’t fold in Wednesday’s unexpected jump in the Purchasing Managers’ Index (PMI), which showed a reading of 56.3%. This was a 0.8% increase when compared to July’s reading of 55.5%.

The Institute for Supply Management’s (ISM) latest PMI figure was a testament not only to manufacturing growth in August, but continued growth for the 16th consecutive month in the overall economy. (A PMI reading in excess of 42%, over a period of time, generally indicates an expansion of the overall economy). The reading also indicated expansion in the manufacturing sector for the 13th consecutive month. A reading higher than 50% indicates that the manufacturing sector is generally expanding; below 50% suggests contraction.

Eleven of the 18 manufacturing industries enjoyed a positive growth month in August. Here is the list of industries, in order of growth rate:

• Primary Metals
• Apparel
• Leather & Allied Products
• Transportation Equipment
• Fabricated Metal Products
• Electrical Equipment
• Appliances & Components
• Miscellaneous Manufacturing
• Computer & Electronic Products
• Paper Products; Chemical Products
• Food, Beverage & Tobacco Products
• Printing & Related Support Activities Continue Reading

The OptionsHouse Hotlist is a scan of unusual option volume throughout each trading day. The Hotlist is accessible by all OptionsHouse customers, including those with virtual trading accounts.

Housing stocks saw some attention from option traders Wednesday after Tuesday’s Case-Shiller data offered a faint glimmer of hope for the housing sector.  The index, which tracks home prices in 20 major U.S. metropolitan areas, rose for the third consecutive time.  Prices increased in 17 of the 20 regions and are collectively 4.2% higher on a year-over-year basis.

Homebuilding name Lennar (NYSE:LEN) is closed more than 4% higher yesterday and investors appeared to make a modestly bullish bet with a large block of short puts.  In mid-morning trading on Wednesday, a block of 11,000 out-of-the-money October 13 puts crossed the tape right at the bid price of 70 cents per contract (the investor would have collected $770,000 in overall premium).  Open interest at this strike was just 254 contracts heading into the session, suggesting this volume traded to open.  Continue Reading

A couple of weeks ago, we took a look at Deere & Co. (NYSE:DE) the day before its earnings report and outlined option strategies investors could use whether they expected positive or negative results.  As it turned out, DE surprised to the upside (by 22 cents, no less) and still moved lower over the next few days.  Some call this the “buy the rumor, sell the news” phenomenon.

If the bears had sold a December 67.50/72.50 call spread ahead of the report for $1.90, they’d be able to buy it back today for $1.50 (buying the 67.50 call and selling the 72.50 call), netting a small profit.  The bulls, however, wouldn’t have been so fortunate, especially if they had opted for a short-term strategy.

Deere is an interesting stock and it seems to have settled down from its post-earnings volatility, so we thought it might be time to revisit it. The agriculture company was in the news Tuesday after agreeing to sell its wind energy unit to Exelon Corp. (NYSE:EXC) for a cool $900 million. The sale is expected to close in the fourth quarter.

DE gained almost half a percent in Tuesday’s trading, outperforming the market.  At the close, the shares were trading at $63.27, up 29 cents.

For investors looking to learn more about option strategies that could work in their portfolios, we’ve outlined two potential trades below in Deere: one bullish covered strangle and one bearish long put spread. These are not trading recommendations, merely examples of different options trading strategies for educational purposes. For a complete dissection of the strategies including profit/loss information… Continue Reading

The OptionsHouse Hotlist scans unusual option volume during the trading day. This tool is available to all OptionsHouse customers, including those with virtual trading accounts.

Omnicare, Inc. (NYSE:OCR) is modestly higher today, keeping pace with the broader market.  An enthusiastic spread trader expects considerable upside in the intermediate term, however, and traded this thesis by buying a large block of out-of-the-money bull call spreads today.

Just over an hour into the trading day, a large-scale investor bought nearly 5,000 of the March 25 calls and simultaneously sold 5,000 of the March 30 calls.  The net debit for the spread was 63 cents each, or more than $300,000 in premium for this trade. These calls were traded to open, as open interest was minimal on both strikes heading into the trading day.

The most the investor can earn on this spread is $4.37 per spread (the difference in strikes less the premium paid).  Maximum profit is achieved if OCR is trading above the 30 strike when the options expire in roughly 200 days.  This would require a jump of more than 50% from the stock’s current level of $19.54.  Continue Reading

In listening to the President speak yesterday – after he got the audio fixed- I couldn’t help but wonder if:

1. A jobs bill will really have a significant impact

2. Small business owners are even really aware of this bill and are indeed waiting to hire based on its passing? In other words, will “holding the bill hostage” deter these business owners from extending job offers?

Here is the transcript.

The businesses of investing and trading both have their complicated moments, as does the analysis of economic trends. But I do believe there are some major problems that actually have a more simple solution. Sometimes (in this business especially) many of us tend to think that a solution, method, or path to success must involve layers of complex analysis and in turn very complex solutions. I like to try and reduce things down to the simplest terms any time I can and relate a seemingly large situation or problem to something I can wrap my head around.

I first set out to quiz a couple of friends who are business owners in Dallas, Philadelphia, and southern New Jersey.  Did they even know a jobs bill was in the works?  The answer was a resounding NO.  (Although my realtor was familiar with it, she didn’t think it would help her business much). Continue Reading

The recall drama isn’t over for Toyota Motor (NYSE:TM), which last week announced the recall of 1.1 million 2008 Corolla and Matrix vehicles, citing engine control troubles.  The potential flaw may result in stalling, which is ironic given that the automaker’s recent high-profile recall dealt with unwanted acceleration.

There hasn’t been any acceleration in the stock of late – unwanted or otherwise.  Since mid-June, the stock has been see-sawing between the 68 and 74 levels. At their current perch, TM is within a chip-shot of its 52-week low and 25% south of its 52-week high, reached in mid-January.

Range-based trading such as Toyota’s can be frustrating for stock traders who see their investments heading nowhere fast. The options market, however, has some potential solutions for sideways-trending stocks, and the short straddle described below is one of them.  We’ve also outlined a bearish put ratio spread for investors who believe this latest recall could spur further downside in the shares.

These are not trading recommendations, merely examples of different options trading strategies for educational purposes. The prices are taken as of Friday afternoon, when TM shares were trading at $69.15, up 43 cents on the day. For a full dissection of the strategies including profit/loss information, Continue Reading

I ended my blog on the 3PAR (NYSE:PAR) situation earlier this week with the following paragraph:

What will happen next?  Michael Dell may reach deeper into his corporate pockets and up the bid once more.  Or if Dell walks away, the shares will likely fall quickly back to the 24 dollars that Hewlett is bidding.   In either case the trading in the stock and options will remain a special situation for the near term.

This is an old-school bidding war!  After Hewlett-Packard (NYSE:HPQ) bid $24 per share, Dell Inc. (NYSE:DELL) responded by bidding 30 cents higher with a $24.30-per-share bid, which was quickly accepted by the PAR board of directors.

Hewlett wasn’t going away, however, and they bid $27 per share. Dell matched that increased bid and again the 3PAR board accepted Dell’s bid.  Hewlett quickly bid $30 dollars a share Friday and the stock is now trading above 32 dollars per share!  Let’s look at an updated stock chart.  Friday’s price was more than three times what the shares were going for two weeks ago! Continue Reading

The Hotlist, which scans unusual option volume during the trading day, is available to all OptionsHouse customers, including those with a virtual trading account. Refer to this article for more information on Hotlist functionality.

With the broad market wearing its rally cap once again (due in part to vaguely upbeat murmurings from Ben Bernanke), International Game Technology (NYSE:IGT) shares are a definite underperformer.  The stock is off nearly 1% today (at $15.01) with the Dow and the S&P 500 Index up roughly the same amount. Other than one downgrade earlier this month, news has been light around this manufacturer of slot machines and other gaming hardware.

One large-scale investor appears to have sold an at-the-money straddle on the stock today.  This strategy is typically used when the investor expects little volatility from the underlying.  Just before noon Eastern Time, a block of 12,500 contracts traded on both the September 15 put and call.  The puts changed hands at the bid price of 40 cents while the calls traded at the bid price of 50 cents.  Continue Reading

Watching yesterday’s market action, I realized that we are indeed in a bearish trend.  I noted this a week or so ago in my article referencing technical indicators that were recently violated to the downside.

As the S&P 500 Index (SPX) continues back toward its July lows, which are just above the 1,000 mark (1,010.91, to be exact), many technical analysts – including me – are concerned about a continuation back to that level.  There currently doesn’t seem to be much technical support from the current SPX price down to the July low.

Ever since the dreaded “death cross” that occurred in July, I have been monitoring the price action of the SPX (partially to check the validity of the cross).  After the cross occurred, which you can see in the chart below, the index actually rallied.

The 200-day simple moving average (in yellow) crossed above the 50-day simple moving average (green) early on.  The exponential 200-day (red), crossed the 50-day later in the month.  Regardless of which trendline you prefer, the index will view these cross points as levels of potential resistance.

Continue Reading