Silver Consolidates: Technology Leads Indices Higher
The market pulled back hard yesterday. The selling
was intense and financials led the indices lower after problems in Europe
surfaced in the morning. Despite the 2% decline, all indices held their
must hold support levels: SPX 1301, Nasdaq 2700 and Russell 800.
The troubles in Europe resulted in a positive move for the dollar,
which in turn resulted in a decline to industrial commodities. That
downward selling pressure then bled into the other indices. The decline
in the euro stemmed from insufficient stress testing in Europe, which
increased the perception of contagion by the weak banks. Despite the
fundamental concern surrounding the euro I have a long position in the
unloved currency.
I took the long position on Friday, but held it through the
pathetic emotional sell-off yesterday. I am looking for $1.44.
Two market giants reported earnings:
Bank of America (NYSE: BAC) and IBM (NYSE: IBM). BAC beat dampened
expectations and recorded $0.33 EPS from revenues of $13.5 billion.
Analysts expected $0.29. Of course using GAAP accounting BAC lost $0.90,
but the stock already sold hard over the past week and these earnings
should provide shares with solid footing.
IBM also had a nice quarter. The technology blue chip recorded
$3.09 EPS from sales of $26.7 billion. IBM increased its guidance to
$13.25 EPS for 2011. Both top and bottom line beat lofty expectations of
$25.6 billion and $3.01 EPS. Strangely, and despite the pessimism we hear
from Europe, IBM reported $8.6 billion of its sales came from
Europe/Middle East/Africa, which is a 16% increase from last year's
second quarter.
Full report here.
The positive results from both IBM and BAC should result in a
positive session today. Additionally, financials are extremely oversold.
If the news from BAC can help build bullish momentum, the financial
sector could put in a nice bottom and rally hard. The bulls have a big
edge today. If the group is as strong as I think that they are the
indices should begin a rally to new highs.
Approximately, three weeks ago TradeMaster sent
out a report on gold and silver aptly titled, “Top
5 Gold and Silver trades for Summer”.
Most of those stocks have done great, GPL is up 33%, GBG is up 10%, IPT
is up 25% and SSRI is up 20%. While I still think there is more upside
for each of those 4 stocks, they will first need to consolidate in the
week ahead.
Within the report I asked our new options strategist to formulate a
silver trade. Andy Crowder, our resident options guru, placed an options
trade using the highly liquid iShares Silver
Trust (NYSE: SLV) as his underlying.
Given the prior price action he decided to place the following
trade.
· Sell to open Aug11 SLV 28 puts
· Buy to open Aug11 SLV 26 puts
for a total credit of $0.24
(or higher) for a return of 12 percent.
At the time silver was
trading for roughly $33. While I was bullish on silver Andy still wanted
some downside protection which is why he sold the Aug11 SLV 28/26 put
spread.
The SLV credit spread allowed for a 15% decline in the underlying before
the trade was in jeopardy of becoming a loser. As long as SLV closed
above $28 at August expiration we would make 12% on the trade. Amazing,
right? This is why options are a necessity in any portfolio. If used
correctly, they can be a powerful tool to enhance returns in your overall
portfolio even if the market slips lower.
And as an update, TradeMaster will team up with Andy Crowder in September
to unveil a brand new options service. Wyatt Investments has never had an
options product before, and we are limiting the number of subscribers at
launch, but as a MarketForecast member you will receive advance notice
for this brand new product.
With July options expiration behind us and August expiration 32 days away
the credit spread that we placed is only worth $0.03 so I have decided to
take all risk off the table and buy back the spread. Here is the
trade:
· Buy to close Aug11 SLV 28 puts
· Sell to close Aug11 SLV 26 puts
for $0.03
Some of you might be asking
why would we not just let the spread expire worthless which would allow
us to reap the entire $0.24?
While we don’t think SLV will move 28% lower over the next 32 days we are
not willing to take a chance of silver breaking to new lows just to make
an additional $0.03.
Trading, particularly options trading, is about taking profits when it
makes sense; and being prudent, staying disciplined and most importantly,
looking at the long-term picture.
As Andy always mentions, opportunities are made up easier than losses and
trying to squeeze $0.03 out of a trade just isn’t worth the risk. The
trade was successful, now it is time to move on to the next opportunity.
I look forward to bringing you just that in the next few days.
