• Citigroup (C) missed earnings by almost 50%, cut their dividend, and took a huge writedown to their balance sheet. The stock took a 7% hit to all time lows.
• Intel (INTC) missed earnings after the bell resulting in the stock being crushed 14% as well as bringing the entire Nasdaq down with it after hours. Others such as Google, Amazon, EMC took 2-3% hits AFTER the markets closed. Expect the tech sector to open down hard tomorrow.
• Markets posted another 2-3% decline today, bringing their YTD totals to about 6% to the downside. We’re in a bear market and don’t let anyone tell you otherwise.
• Options expiration is this week. On Fast Money, they commented on how the Fed cut rates last year on Friday expiry. Could the Fed do the same this Friday as a surprise? If the markets continue to tank, it’s a good possibility. Currently, the markets are pricing in a 50bp cut with a 44% chance of a 75bp cut. A 75bp cut would be a cause for alarm signaling to the markets that things may be as bad, if not worse, than it seems

I had a rough day, taking a huge hit to the portfolio with my GILD play. GILD failed the ascending triangle breakout I had drawn last week and as a result I had to bail.  I may take the rest of the week off and let this mess sort itself out but we’ll see.  Any time I take a day off, the urge to jump back in the markets grow.  I know part of the problem, besides not being able to day trade, is the small account size I’m trading with, but I’d rather play the game with something than with nothing at all.

Good luck the rest of the week.  Looks like everyone’s going to need it.

Options Strategy: The Straddle

The straddle consists of purchasing a call and a put at the same strike price in the same month. Here’s a graphical interpretation from Investopedia:

Here’s the issue with a straddle. If there’s very little movement in your target, you’ll lose out on both the call and the put. Lately, the market’s been either up triple digits or down triple digits. What I’ve been doing is playing a modified SPY straddle, that is, where the calls and puts are on different strikes but in the same month. I’ve been doing this primarily to lower the overall cost of the straddle. My profits will be much smaller, but I’ll have less capital tied up. So far it’s worked well with the put side bringing in a 30% profit on Monday and the call side bringing in a 25% profit on Wednesday. I’ve been extremely quick to lock in gains because, as you’ve noticed, the markets are still fairly volatile. The last thing I’d want is to lose out on a nice gain by wanting to squeeze out another few points of profit. I’ve learned from my mistakes trust me!

Looks like we’re somewhat flat this morning. How long the markets stay flat is anyone’s guess. I think we’ll see some profit taking, at least in the early morning after the huge run up the past couple of days. It’s only natural. Good luck!

What is the XLF: Quite simply, anything and everything financial can be represented in the XLF ETF. Largest holdings in the XLF include Citigroup, Bank of America, Wachovia, Wells Fargo (Cramer favorite), etc. As you can see, the XLF incorporates big name financial institutions.

Why use the XLF: Wide exposure to the financial sector, plain and simple. The XLF is diversified in terms of the types of different financial institutions (banks, investment brokers, etc.) but in today’s market, anything financial is seen as a negative until the subprime mess has passed.

XLF Options Structure: Currently, the XLF trades in $1 strike price increments with $0.01 bid/ask spreads near the money.

Currently, the XLF is being used as downside protection against the financial sector and more broadly the market. I’m not exactly sure but I believe the financial sector is the largest, by percentage, in the S&P 500 with the oil sector a close second (I’ll go back and recheck that statement). Even with the current string of rate cuts, the XLF has fallen from a high of about $38 to today’s closing price of about $30.

If you’re in need to playing with fire, the XLF may be the torch you need. Personally, if something has anything to do with anything financial, I’m passing right by. The play is just too risky and unknown for my taste.

What is the OIH: The OIH gives you broad exposure to oil and oil / oil service companies without having to purchase individual companies. Largest holdings in the OIH ETF include Transocean (RIG), Schlumberger (SLB), and Haliburton (HAL).

Why use the OIH: As the price of oil increases, theoretically, profits from oil and oil services increase as well, in turn increasing their stock price and as a result increasing the value of the OIH ETF. Since the OIH trades as equities, all of the tools options traders have are available for use with the OIH.

OIH Options Structure: At the present time with the OIH nearing $200, strike prices are in increments of $5 with $0.05 bid/ask spreads. Liquidity is much less than the larger ETFs such as the QQQQ or SPY but you shouldn’t have issues finding a buyer or seller. At the time of this article, open interest with both calls and puts is about 50-60k.

Oil’s reaching $100 a barrel whether the market likes it or not. The key is whether or not oil will make a retreat once the $100 level is reached. I’ve noticed about a 2:1 put/call open interest signaling a potential downtrend in oil and oil companies as the $100 level approaches. Options traders believe, at least from the open interest ratio, that oil will meet heavy resistance at $100. Barring any political or economical situations, expect oil to make a retreat and as a result the price of the OIH should follow suit.

The OIH is a great way to speculate on how oil and oil service companies will behave as oil reaches record levels without having to purchase options in individual companies. Remember that oil’s liquid gold. Speculate appropriately!