August Positions Initiated
| Ares Trading | |||||||
| August 2008 Open Positions Unrealized Profit/Loss | |||||||
| Total Invested: | $873 | ||||||
| Total Return: | $896 | ||||||
| Unrealized Profit: | $23 | ||||||
| Unrealized Profit %: | 2.63% | ||||||
| Total Positions: | 5 | ||||||
| Average Days Held: | |||||||
| Date | Qty | Company | Contract | Strike | Expiration | Price | Cost Basis |
| 7/25/2008 | 1 | DBC | Call | 40 | August 08 | $1.50 | $150 |
| 7/25/2008 | 1 | DBC | Call | 40 | August 08 | $1.50 | $150 |
| Days | 0 | Profit % | 0.00% | Profit | $0 | ||
| 7/25/2008 | 1 | DIA | Put | 113 | August 08 | $2.04 | $204 |
| 7/25/2008 | 1 | DIA | Put | 113 | August 08 | $2.12 | $212 |
| Days | 0 | Profit % | 3.68% | Profit | $8 | ||
| 7/25/2008 | 5 | F | Put | 45 | August 08 | $0.34 | $170 |
| 7/25/2008 | 5 | F | Put | 45 | August 08 | $0.35 | $173 |
| Days | 0 | Profit % | 1.47% | Profit | $3 | ||
| 7/25/2008 | 1 | QQQQ | Call | 44 | August 08 | $1.72 | $172 |
| 7/25/2008 | 1 | QQQQ | Call | 44 | August 08 | $1.88 | $188 |
| Days | 0 | Profit % | 9.30% | Profit | $16 | ||
| 7/25/2008 | 1 | XLF | Call | 20 | August 08 | $1.77 | $177 |
| 7/25/2008 | 1 | XLF | Call | 20 | August 08 | $1.74 | $174 |
| Days | 0 | Profit % | -1.69% | Profit | ($3) | ||
There is an inverse correlation between the Dow Jones Industrial Average (measured by the DIA Diamonds ETF) and the DBC (Commodities Tracker ETF). This is a logical relationship since when oil costs are high, the market, in particular, industrials do poor. Thus, when oil prices rise, gold, and other commodities will rise, all part of the DBC ETF. In response to higher oil and commodity prices, the Dow Jones index will suffer, as the market will turn bearish on stocks.
Ares Trading believes the recent upswing in the Dow Jones average will be corrected as oil returns to above $135 a barrel. Consequently, Ares Trading has bought naked calls on the DBC Commodity Index ETF and naked puts on the Dow Jones Industrial Average (DIA ETF).
Ford Motor is having a tough year. Rising fuel costs have ended the “Big-Vehicle Era”, and Ford is having a hard time adjusting. Ares Trading believes the recent rally is a perfect opportunity to be bearish on Ford. Thus, naked put contracts, at $5 strike, have been purchased for August expiration. Ares Trading believes Ford will retest $4.5 lows set early in July.
Technology is a safe bet right now. In the recent rally, Financials have been the only sector to experience a large upswing. However, during the sell-off all sectors were hit very hard, especially technology. This has created unusual valuations for many strong technical companies, many of them being underbought. Ares Trading believe there is strong upside risk for Tech, and thus bought naked calls on QQQQ (Nasdaq Index ETF).
The final position Ares Trading initiated today was in XLF. This is a contrarian position and is being used as a hedge against the QQQQ and DBC position. Ares Trading believes that if Financials are to perform well, then Commodities (DBC) and Technology (QQQQ) will suffer. Why? This is because any positive news will provide enough for a large upside swing for Financials. This will cause market makers to sell off Commodities and Tech, in order to switch assets into Financials. In addition, Ares Trading believes that Financials have been highly oversold. Although fundamentals problems exist, they will continue to exist until 2010, and there is no way to predict a bottom for Financials.
If there is any movement in Financials, it will be dramatic and thus Ares Trading believes the upside risk outweighs the downside risk. Using naked calls on XLF (Financial Sector ETF), Ares Trading is betting on a dramatic momentum shift before the third week of August, similar to the recent market rally.
Thomas Tan’s Predictions for 2008 are Quite Accurate
This article was found from Seeking Alpha.
Thomas Tan, a 15-year market veteran decided to follow a hedge fund manager’s “10 predictions for the year” and wrote this article for Seeking Alpha. He speculates about 10 things to happen in 2008 and he is quite accurate. Here are some of the highlights:
“The price of gold will reach quadruple-digits in U.S. dollars ($1000) for the 1st time in human history. Gold has entered the 2nd phase of its uptrend, and will have more explosive up movements, and become more volatile. We should see $50+/- intraday movement in 2008. But this gold bull market has a long way to go beyond 2008.“
“Energy prices will continue to rise. We should finally see oil hit triple-digits ($100 and more), and a decent recovery of the natural gas market with inventory level declining. Against popular opinion, higher oil prices will neither reduce global demand, nor increase global supply.”
“Citigroup (C) will drop into the teens (below $20), and there is more bad news to come in the banking industry. Less than half of the subprime write-downs were announced in 2007, with the other half still to come. The OTC derivative market is full of land miners, and like steroids in professional baseball, we still don’t know all of the ramifications, or situation of each player (bank). We know many of them are having problems and will hear more explosive news in 2008.“
“After a temporary rebound, the U.S.dollar will continue its downtrend, as an inverse mirror image of gold. The U.S. dollar will lose another 10% of its value, and the U.S. dollar index will hit 70 sometime during 2008.”
June – July Performance Update
| Ares Trading | |||||||
| June-July 2008 Positions Realized Profit/Loss | |||||||
| Total Invested: | $1,811 | ||||||
| Total Return: | $2,319 | ||||||
| Realized Profit: | $508 | ||||||
| Realized Profit %: | 28.05% | ||||||
| Total Positions: | 7 | ||||||
| Average Days Held: | 23.29 | ||||||
| Date | Qty | Company | Contract | Strike | Expiration | Price | Cost Basis |
| 6/18/2008 | 5 | PIR | Put | 5 | July 08 | $0.15 | $75 |
| 6/20/2008 | 5 | PIR | Put | 5 | July 08 | $0.52 | $260 |
| Days | 2 | Profit % | 246.67% | Profit | $185 | ||
| 6/18/2008 | 2 | PRGS | Call | 30 | July 08 | $0.70 | $140 |
| 7/11/2008 | 2 | PRGS | Call | 30 | July 08 | $0.05 | $10 |
| Days | 23 | Profit % | -92.86% | Profit | ($130) | ||
| 6/18/2008 | 5 | SJM | Call | 45 | July 08 | $0.28 | $140 |
| 6/20/2008 | 5 | SJM | Call | 45 | July 08 | $1.27 | $635 |
| Days | 2 | Profit % | 353.57% | Profit | $495 | ||
| 6/18/2008 | 1 | ZMH | Call | 70 | Sep 08 | $4.50 | $450 |
| 7/17/2008 | 1 | ZMH | Call | 70 | Sep 08 | $4.70 | $470 |
| Days | 29 | Profit % | 4.44% | Profit | $20 | ||
| 6/18/2008 | 1 | SSL | Call | 60 | July 08 | $2.30 | $230 |
| 7/11/2008 | 1 | SSL | Call | 60 | July 08 | $0.40 | $40 |
| Days | 23 | Profit % | -82.61% | Profit | ($190) | ||
| 4/10/2008 | 2 | CCRT | Put | 7.5 | July 08 | $1.51 | $301 |
| 6/27/2008 | 2 | CCRT | Put | 7.5 | July 08 | $1.52 | $304 |
| Days | 78 | Profit % | 1.00% | Profit | $3 | ||
| 7/11/2008 | 1 | LEH | Call | 15 | July 08 | $4.75 | $475 |
| 7/17/2008 | 1 | LEH | Call | 15 | July 08 | $6.00 | $600 |
| Days | 6 | Profit % | 26.32% | Profit | $125 | ||
The American and global financial markets are currently very volatile. The financial firms are still in the process of writing down their illiquid securities and the market sentiment is strongly bearish due to high oil prices, inflation, and a much lower dollar. Any negative news, such as rising oil costs, or a sector leader missing their earnings can cause a quick intra-day sell-off. Ares Trading cannot speculate in the current market state, rather there are larger macro issues which can be used for proper investment.
Financials have been hit hard, which can be seen by the Sector ETF: XLF performance in the last month. However, many firms have been hit harder than others due to the overall bearish sentiment for the financial sector. These firms face an upside risk. Research is being conducted on which Financial firms are currently drastically undervalued and have the potential to return to normal multiples.
An example of this was the quick trade made on LEH (Lehman Bros). Naked calls were purchased the day the share price hit $12.80 (18% decline in one day). Rumors were out that Dick Fuld, CEO, would take the firm private if the firm wasn’t valued higher. Sure enough, Lehman hit its support and had an upside momentum since. A quick 26% return within 6 days.
Other bets didn’t fare as well, i.e. SSL and PRGS calls. PRGS (Progress Software) was an earnings play which didn’t work out because although the company did beat consensus, they lowered their guidance. This sent the stock price into a strong downward movement. The calls should have had been sold by STOP-LOSS before they lost over 90% of their value. SSL (Sasol Ltd.), the South African integrated Oil and Gas company was simply a wrong pick in the short term. Although the company has strong fundamentals, it has been a victim in the recent sell-off. In the future there has to be more discipline and losses have to be cut at 30%.
CCRT Puts Have Been Sold
Markets continued to sink lower in Friday’s trading session. The US Consumer Confidence data for June came in below expectations at 56.4 (56.5 expected). This shows a drop in Consumer Confidence from May, when the data was at 59.8.
CCRT was down 7% at one point, which is when the put positions were in the green. They have been sold for negligible profit. Ares Trading was able to avoid the 75% loss the position had incurred two weeks earlier, before the FDIC announced its plans to penalize CCRT for “deceptive marketing practices”. PRGS, ZMH, and SSL will all be closed out in the next 2 weeks.
Current Position Performance:
| Total Invested: | $1,336 | ||||||
| Total Return: | $1,682 | ||||||
| Unrealized Profit: | $346 | ||||||
| Unrealized Profit %: | 25.86% | ||||||
| Total Positions: | 6 | ||||||
| Average Days Held: | |||||||
| Date | Qty | Company | Contract | Strike | Expiration | Price | Cost Basis |
| 6/18/2008 | 5 | PIR | Put | 5 | July 08 | $0.15 | $75 |
| 6/20/2008 | 5 | PIR | Put | 5 | July 08 | $0.52 | $260 |
| Days | 2 | Profit % | 246.67% | Profit | $185 | ||
| 6/18/2008 | 2 | PRGS | Call | 30 | July 08 | $0.70 | $140 |
| Open | 2 | PRGS | Call | 30 | July 08 | $0.10 | $20 |
| Days | Profit % | -85.71% | Profit | ($120) | |||
| 6/18/2008 | 5 | SJM | Call | 45 | July 08 | $0.28 | $140 |
| 6/20/2008 | 5 | SJM | Call | 45 | July 08 | $1.27 | $635 |
| Days | 2 | Profit % | 353.57% | Profit | $495 | ||
| 6/18/2008 | 1 | ZMH | Call | 70 | Sep 08 | $4.50 | $450 |
| Open | 1 | ZMH | Call | 70 | Sep 08 | $2.78 | $278 |
| Days | Profit % | -38.33% | Profit | ($173) | |||
| 6/18/2008 | 1 | SSL | Call | 60 | July 08 | $2.30 | $230 |
| Open | 1 | SSL | Call | 60 | July 08 | $1.85 | $185 |
| Days | Profit % | -19.57% | Profit | ($45) | |||
| 4/10/2008 | 2 | CCRT | Put | 7.5 | July 08 | $1.51 | $301 |
| 6/27/2008 | 2 | CCRT | Put | 7.5 | July 08 | $1.52 | $304 |
| Days | 78 | Profit % | 1.00% | Profit | $3 | ||
Market Continues Downward Movement
Current Position Performance:
| Total Invested: | $1,336 | ||||||
| Total Return: | $1,628 | ||||||
| Unrealized Profit: | $292 | ||||||
| Unrealized Profit %: | 21.82% | ||||||
| Total Positions: | 6 | ||||||
| Average Days Held: | |||||||
| Date | Qty | Company | Contract | Strike | Expiration | Price | Cost Basis |
| 6/18/2008 | 5 | PIR | Put | 5 | July 08 | $0.15 | $75 |
| 6/20/2008 | 5 | PIR | Put | 5 | July 08 | $0.52 | $260 |
| Days | 2 | Profit % | 246.67% | Profit | $185 | ||
| 6/18/2008 | 2 | PRGS | Call | 30 | July 08 | $0.70 | $140 |
| Open | 2 | PRGS | Call | 30 | July 08 | $0.10 | $20 |
| Days | Profit % | -85.71% | Profit | ($120) | |||
| 6/18/2008 | 5 | SJM | Call | 45 | July 08 | $0.28 | $140 |
| 6/20/2008 | 5 | SJM | Call | 45 | July 08 | $1.27 | $635 |
| Days | 2 | Profit % | 353.57% | Profit | $495 | ||
| 6/18/2008 | 1 | ZMH | Call | 70 | Sep 08 | $4.50 | $450 |
| Open | 1 | ZMH | Call | 70 | Sep 08 | $3.10 | $310 |
| Days | Profit % | -31.11% | Profit | ($140) | |||
| 6/18/2008 | 1 | SSL | Call | 60 | July 08 | $2.30 | $230 |
| Open | 1 | SSL | Call | 60 | July 08 | $1.38 | $138 |
| Days | Profit % | -40.22% | Profit | ($93) | |||
| 4/10/2008 | 2 | CCRT | Put | 7.5 | July 08 | $1.51 | $301 |
| Open | 2 | CCRT | Put | 7.5 | July 08 | $1.33 | $265 |
| Days | Profit % | -11.96% | Profit | ($36) | |||
The Dow dropped ~360 points and the S&P has retreated below 1300. Oil Futures spiked above $140 a barrel. Is the current oil spike caused by a fundamental supply/demand issue or is it being affected by speculators? The Fed didn’t change the Interest rate, which means that it will be at 2% through Q3.
Current positions:
All the open positions, except for CCRT, are currently calls (ZMH, PRGS, SSL), thus being effected very negatively today. CCRT continues to go down and the position should be closed with profit by the end of the first week of July. ZMH, PRGS, and SSL calls will need to be sold by the first week of July as well, because they are uncovered and are way too volatile in this market.
Progress Software (PRGS) actually beat their earnings but they lowered their guidance, which in turn lowered their multiple. The call positions have lost practically all their value. This was a speculative play based off PRGS beating their earnings.
Ares Trading believes it would be prudent to write off these positions, with loss, and start fresh with hedged positions better acclimated to the current market environment. The positions are currently around 3 weeks from expiration.
Locked in Gains on SJM and PIR
Here are the realized gains for the SJM and PIR puts. They were bought just before earnings announcements revealed weak earnings and a lowering of their yearly guidance.
Realized Gain
| Date | Qty | Company | Contract | Strike | Expiration | Price | Cost Basis |
| 6/18/2008 | 5 | PIR | Put | 5 | July 08 | $0.15 | $75 |
| 6/20/2008 | 5 | PIR | Put | 5 | July 08 | $0.52 | $260 |
| Days | 2 | Profit % | 246.67% | Profit | $185 |
| 6/18/2008 | 5 | SJM | Call | 45 | July 08 | $0.28 | $140 |
| 6/20/2008 | 5 | SJM | Call | 45 | July 08 | $1.27 | $635 |
| Days | 2 | Profit % | 353.57% | Profit | $495 |
The other positions can be see in the positions page. They haven’t been closed yet and are slightly down. PRGS (Progress Software Inc.), which also released earnings on Thursday, lowered their Q3 guidance. They were able to beet estimates for their EPS but since they lowered guidance and said it was going to be a slow year their stock fell. Ares Trading considers PRGS a long hold and believes that the PRGS July Call will be out of the red by expiration.
Betting on Earnings
With the dramatic shift in price commonly occurring when a company releases earnings (up or down depending on whether they meet analyst expectations), the strategy is to speculate whether a company will report favorably or negatively. Instead of using complex spreads, the strategy is to use naked calls and puts to simply bet whether the company will be going up or down.
Out of the 3 earnings speculation positions, 2 were spot-on and the third was incorrect. Ares Trading initiated positions on the following companies:
PIR (Pier One Imports Inc.) Earnings came out today – Short
PRGS (Progress Software Corp.) Earnings came out today – Long Incorrect
SJM (Smuckers Co.) – Earnings came out today – Short
SSL (Sasol Ltd.) – Medium Term Long
ZMH (Zimmer Holdings Inc.) – Medium Term Long
Unrealized Profit/Loss
| 6/18/2008 | 5 | PIR | Put | 5 | July 08 | $0.15 | $75 |
| 6/19/2008 | 5 | PIR | Put | 5 | July 08 | $0.45 | $225 |
| Days | 1 | Profit % | 200.00% | Profit | $150 | ||
| 6/18/2008 | 2 | PRGS | Call | 30 | July 08 | $0.70 | $140 |
| 6/19/2008 | 2 | PRGS | Call | 30 | July 08 | $0.33 | $65 |
| Days | 1 | Profit % | -53.57% | Profit | ($75) | ||
| 6/18/2008 | 5 | SJM | Call | 45 | July 08 | $0.28 | $140 |
| 6/19/2008 | 5 | SJM | Call | 45 | July 08 | $1.03 | $513 |
| Days | 1 | Profit % | 266.07% | Profit | $373 | ||
| 6/18/2008 | 1 | ZMH | Call | 70 | Sep 08 | $4.50 | $450 |
| 6/19/2008 | 1 | ZMH | Call | 70 | Sep 08 | $4.45 | $445 |
| Days | 1 | Profit % | -1.11% | Profit | ($5) | ||
| 6/18/2008 | 1 | SSL | Call | 60 | July 08 | $2.30 | $230 |
| 6/19/2008 | 1 | SSL | Call | 60 | July 08 | $2.40 | $240 |
| Days | 1 | Profit % | 4.35% | Profit | $10 |
These positions haven’t been closed so neither the profit nor loss is recognized yet. They will be closed tomorrow and a realized profit/loss statement will be posted.
February Performance Posted
The current state of the market is very murky. There are many issues to consider: increasing crude oil and commodity prices – is it a bubble?, increasing wholesale inflation caused by the 2% Fed Funds Rate, further financial write-downs on sub-prime and CDO assets, and the general state of the economy. Before opening positions, Ares Trading is looking at all the factors and determining the broad sector trends to exploit through options and other financial products.
In the meantime, the performance for February has been posted. Ares Trading had approximately $2,000 to invest but managed to gain 31% through 11 positions and an average holding period of 4 days. Details of February can be found in the “Performance” page. In addition, an excel with all the holdings can be downloaded.
Picks for July, with rationale, will be posted Sunday June 22nd.
Potential Plays
Ares Trading is currently looking at a few potential movers. Here is the initial perspective. Further analysis and due diligence are required before opening any positions.
ZMH – Zimmer Holdings Inc. Long
LEH – Lehman Brothers Inc. Short
SSL – Sasol Ltd. Long
CCRT – CompuCredit Corp. Short
AAPL – Apple Inc. Short (near short term)
GS – Goldman Sachs Group Inc. Long (Earnings Tomorrow)
Ares Trading is now online!
Stay tuned for the latest picks, research, and market analysis.
