9:00am (EST)
The bulls extended their winning streak to 3 sessions on Wednesday and managed to break through key resistance levels in the process. It wasn’t an easy win as the bears battled back at the open and late in the afternoon to draw blood but they were only scratches as the bulls plowed forward.
There wasn’t much drama on Wall Street as there was in Athens but there were plenty of fireworks yesterday that were jaw-dropping. We will cover these stories in a minute.
First, let’s talk about the Dow. Wow. The index easily surged past our 12,200 mark and traded to a high of 12,284 before settling at 12,261, up 72 points. We mentioned the next target would be 12,350 and if broken, put 12-6 on the Watch List. Support is light at 12,200 with backup at 12,000.
The S&P 500 was higher by 10 points and closed at 1,307 after kissing 1,309. The 1,300 level wasn’t cleared on the open as the bears made the bulls work for it but the flag was planted on the hill before lunchtime and stayed there into the close. The bulls are King of the Hill, for now. There is slight resistance at 1,310 but we mentioned a run to 1,325 was in the cards if our target was taken out. Support is at 1,295 then 1,275.
Surprisingly, the Nasdaq brought up the rear as it managed an 11 point pop, or 0.4%, to finish at 2,740. We were looking for a run and close above 2,750 and Tech reached a high of 2,746. We are still a little cautious because these two factors mean Tech lagged when it is has usually been the leader on rallies.
Meanwhile, it’s hard to imagine the Financial stocks having a sustained rally because last week they were left for dead but we all know exact bottoms are hard to pick.
Take a look at Mastercard (MA, $309.70, up $31.47) and Visa (V, $86.57, up $11.29) which surged 11% and 15% yesterday, respectively. Both stocks were flat as pancakes but we totally missed the option action that was unfolding. Late in the afternoon, the “Durbin Ruling” came out which lowered the rate Credit Card companies can charge Retailers but it wasn’t as bad as feared.
The Federal Reserve said banks will only be allowed to charge stores $0.21 per debit card transaction, down from a current $0.44 per transaction, plus an additional 0.05% of the purchase price to cover the cost of fraud protection.
Mastercard and Visa exploded on the news which were bracing for cap fees to fall to as little as $0.12 per transaction. We don’t actively follow Mastercard options because it is a $300 stock and usually the premiums are expensive and not worth the risk. You can accomplish the same goals on stocks under $100.
For instance, Mastercard was at $278 at the start of Wednesday’s session and the closest “out-of-the-money” calls were the July 280 calls (MA110716C00280000, $29.80, up $22.80) were at $7 to start the session. This meant one call option would have cost you $700. A 10 contract trade would have cost $7,000.
As a trader, if you were expecting the Financial sector to rally this week, in general, and you were factoring in a favorable Durbin Ruling, then the July 280’s would have been the flavor of choice to play a short-term move. Although these options surged over 325%, for us, we usually don’t like playing options that cost over $2.
Now, the Mastercard July 300 calls (MA110716C003000000, $13.00, up $12.00) were at a $1 at the start of Wednesday’s trading session but it would have been hard to bet Mastercard moving $25 in 16 days so we probably wouldn’t have taken the bait on that trade although it was up a whopping 1,200% return! In other words, $1,000 would have been worth 13g’s by the close.
As for Visa, well it has been a regular visitor on our Watch List this year and in the past we have played options on Visa,. So yes, we are red in the face we missed this move.
Visa opened near $76 yesterday and the nearest call option would have been the July 77.50 calls (V110716C00077500, $9.50, up $7.50, or 370%) which opened at $2.10. With the premiums over $2, would have focused our attention on the July 80 calls (V110716C00080000, $7.00, up $5.85) which opened at $1.20 but traded down to $0.78. These options returned over 500% by the close.
We aren’t sure if there is any fluff left in these trades but yesterday’s options action was indicative of a huge move coming. We are just sorry we missed it.
In any event, we still have some hot performers in our current portfolio. We are winding down the end of June which has been super good to us and we hate to see the month end. Although we missed the Visa trade, we are still on track to close 5 triple-digit winners for the month. A couple of trades might carry over into July but we keep reminding you now is a great time to playing options with the market as volatile as it is.
We didn’t take a trade yesterday because we didn’t want to chase certain trades but we getting close to bagging an elephant. Our biggest trade so far this year has been RIMM which returned our subscribers 357%, but, we can feel bigger trades on the horizon with the way things are shaking out.
We will have more tidbits in our afternoon update but we have lots more to cover in our Members Area. As we head to press, futures are showing a slightly higher start to today’s action. Subscribers, check for the updates.
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