Wall Street had a positive day but you gotta have that feeling that the bulls stomachs feel just a little empty. There was all sorts of good little nuggets that were fueling the bulls fire such as the Goldman Sachs (GS, $149.66, up $0.22) numbers, PPI and Retail sales. However, it was easy to tell the outcome even before the opening bell sounded as the futures market did little after the wave of positive news before the bell. As a result, the market was up and down all day until the final couple of hours.
The bulls were not going to lose today’s battle but the gains were small given the huge numbers we got. I mean, come on…Goldman reports earnings of $4.93 a share versus $3.54 and the stock is rewarded a 22 cent pop? That is why I always preach the “buy the rumor, sell the news” line here in the blog at least once a month. I knew it was going to happen, you knew it was going to happen but the little guys did’t. After the upgrade and $8 run on Monday this was baked into the cake.
That is why we “scalped” the trade and had our stops set going into the closing bell. The July 160 calls (GPYGL, $0.11, down $0.68) fell a whopping 85% because Goldman failed to make the huge jump that many option traders bet on. I use the term “scalped” because that is what I feel like we are doing. Think about it.
We knew the Goldman Sachs earnings were out on Tuesday morning and on Friday I had these calls on our Watch List. Think of it as if we were selling tickets to the Goldmanan Sachs show/ concert and we got the best price we could before the concert started. Once the concert started, the tickets dropped liked a rock just like the call options. Yes, I told you to wait on Friday because I didn’t like the weekend exposure but we were right back on them Monday morning. So, that is how I coined “scalping” a trade. I had a few emails on the subject…
Now, here is the other lesson for today. This is what I mean by cheap out-of-the-money (OTM) options. Pick any given stock and look at the just out-of-the-money call and put options. The Goldman 160 call options are still $10 out with the stock at $150, BUT, if Goldman trades to $161 by Friday, these calls will be worth at least $1.00, or 900% higher than where they are currently trading at. The trade is over and I’m not suggesting these as a play again but I wanted to show you an example of cheap OTM’s which is how we played Goldman.
Another example would be if we were looking at a stock like USEC (USU, $5.84, up $0.76) which jumped 15% today. The July 7.50 calls (USUGU, $0.10, up $0.05) are OTM but gained 100% today on news the company is expecting word on a loan by early August. USEC is an interesting story and one I started to research but put on the back burner. The pot got hot while I was away, huh?
To make a long story short, the company is involved in our nuclear efforts and is expecting a loan guarantee from the government that would allow them to continue doing what they do. Now, some option traders will continue to pile on the July 7.50’s in hopes of the stock going higher but that is also asking a lot. There has been some unusual option activity in this stock over the past few weeks and know we know why. The July 5 calls (USUGA. $0.95, up $0.65) gained 215% today.
Here is another trade where cheap OTM’s paid off in a big way. I’m still doing research on the trade but add the USEC August 7.50 calls (USUHU, $0.41, up $0.16) to your Watch List. If the stock falls back these options will get cheaper. If the stock can break $7 it could run to a new 52-week high. Again, I don’t know USEC’s business too well or the story so hold off…
I am looking at a few other plays right now but nothing is exciting me. The market could be stuck in a trading range or possibly be setting the bulls up. Either way, if the King of Financials (Goldman Sachs) couldn’t get Wall Street excited, nothing will.
Yum Brands (YUM, $36.23, up $0.56) beat the Street after the bell but shares were lower in after-hours to $34.80, down $1.43. I was listening to the talking heads beat the drum on an earnings play for Yum but that ain’t looking too good going into Wednesday.
Intel (INTC, $16.83, up $0.34) also beat estimates but its shares were up $1.19, to $18.02, in after-hours trading. If the gains hold, look for Intel to be a catalyst for a Nasdaq rally on Wednesday.