Weekly Update: October 11, 2012
Weekly Update: October 11, 2012
What To Watch
It seems like it’s been a rough week for stocks, with mostly down days since our last update. However, the major indices are only down about 1% over that period.
Some of the weakness is due to further concerns over China’s slow growth. The world’s most populated country buys a lot of goods and services from the US, so a significant slowdown there is problematic. Fortunately, they still have plenty of stimulus levers to pull.
On the domestic front, the bad news came in the form of Alcoa’s (AA) earnings. The world’s largest aluminum supplier lowered forecasts and spooked the markets. While slower growth may be on its way, don’t forget that the market tends to overreact to AA earnings.
What’s more, on the bright side, the job market is slowly improving. Both the September jobs report and today’s jobless claims came in better than expected. If this trend continues, it bodes very well for the domestic economy.
Next week starts the flood of major earnings reports, so be ready for action!
Portfolio Recap
Position #1: DryShips (DRYS) November 2012 $2.50 Calls
Price Paid: $0.16 or better
Current Price: $0.12
Time Until Expiration: 37 Days
As we expected, DRYS has held at the support level provided by the 50-day moving average. The stock is slowly closing in on our strike price and the options are trading at just under our entry price.
The dry shipping industry is ripe for a turnaround – and DRYS is one of the industry leaders. With our options holding most of their value, the stock moving higher, and 37 days left to expiration, we’re going to continue holding our November calls.
Position #2: Sprint (S) November 2012 $5.50 Calls
Price Paid: $0.30 or better
Price Sold: $0.57
Well, that trade couldn’t have gone much better. Our average buy price for the options was $0.28 and most of our readers sold the options for at least $0.57. That’s over 100% gains in just a week!
Once again, I expected Sprint to be part of merger and acquisitions rumors. That being said, I’m not sure anyone expected Sprint to become an acquisition target for a major Japanese mobile company like Softbank. Regardless, the end result was what we were looking for… and then some.
Nice work everyone!
Position #3: SkyWest (SKYW) November 2012 $10 Calls
Price Paid: $0.95 or better
Current Price: $1.17
Time Until Expiration: 37 Days
Our trade today, SKYW calls, got off to an interesting start. Actually, this situation serves as an excellent learning opportunity.
Basically, I recommended SKYW because I felt the stock’s 6% plunge yesterday was too severe given the news. However, right around the time my trade hit your email inbox, the stock starting moving up. The shares jumped 2% in a very short period of time.
As such, the call price climbed from below $0.95 to around $1.10. Some of you may not have gotten in – others may have gotten filled at a higher price.
Here’s the thing…
This type of thing will happen now and then in the fast-moving options market. What’s important is that you don’t chase the options higher. I know it can be frustrating to miss out on trade that’s moving in the right direction. But, you definitely don’t want to overpay for an option.
Now, it’s okay if you get filled at $1.00 instead of $0.95, but I wouldn’t go any higher. For those of you who got in, clearly investors want to take this stock higher – so we’ll hold our calls for now. If you missed the trade, don’t buy in unless the options drop back down to around $0.95.
Category: OTW Weekly Updates
