Tuesday, October 04, 2011
Another option tip for today is based on the Select Sector SPDR Financial ETF (NYSE:XLF) presenting a bullish credit PUT spread.
Financial Insiders are definitely showing some movement in their trading strategies and this paves the way for this option tip from S.O.M.E..
Before providing you with the crucial information, it is prudent to first present some facts as they stand. In the week ended September 30, there were recorded 471 open-market insider trades at 248 companies having a total value of $436 million. Transaction dollar volume was 22.9% lower than the previous week and 64.6% lower when compared to insider trading activity a year ago.
Purchases accounted for 50.7% of all open-market trades last week. Our insider sell-to-buy ratio, which excludes derivative conversions and certain other types of transactions, ended the week at 1.04, down from a previous reading of 1.27. On average, a sell-to-buy ratio below 4 is considered bullish, while readings above 7 are bearish.
It wasn't just Warren Buffett last week who came out with a history-making, first-ever share buyback announcement. Others, too, decided that they would be buying their own companies' shares and foremost among them were insiders from the financial sector.
For the 8th consecutive week, activity was the most concentrated in the Financials sector, where 114 insiders filed trades having an aggregate market value of $35 million.
Therefore, it is obviously clear that the last few weeks have seen an increase in the ratio of insider sells to buys, but by any objective measure, we're still scraping the zero line at this juncture, with readings more indicative of a market bottom than the beginning of any waterfall selloff.
For the week ending September 30, 2011 – a week that saw the banks slide precipitously – financial sector insiders bought an incredible amount of stock, far greater than the runner up Health Care sector that spent just $8 million on its own shares.
Here's the way the broad market buyback picture looks:
Buffett's planned buyback, incidentally, will likely also be directed toward his financial investments, which have taken a beating recently and which comprise 38% of his publicly traded holdings. Buffett's Berkshire Hathaway (NYSE: BRK.A) includes names like American Express, US Bancorp, MasterCard and Wells Fargo and are collectively worth approximately $18 billion.
The insider opinion seems to be that the financial sector has taken a beating, but, in actual fact are in better condition than the market acknowledges!
It appears that the market will be cruising in anticipation of a key jobs report due Friday, but it's also overshadowed by a host of other economic releases during the week. However, it is likely that the financials will begin a stealthy and meaningful ascent.
Therefore, with this outlook pending, the option tip will be to play the market with a credit PUT spread:-
Sell the October XLF 11 PUTS for $0.51, and
Buy the October XLF 9 PUTS for $0.11,
delivering an initial premium credit of $40 per pair traded.
Maximum risk here, from this option tip, is $160 per pair traded, should XLF drop from its current $11.53 price down to $9.00 by October expiration, a dramatic fall of 22%.
Maximum gain, as with all credit spreads, is the initial premium $40 per pair traded.
Therefore, the option tip from S.O.M.E. (Stock Options Made Easy) is a bullish credit PUT spread on the Select Sector SPDR Financial ETF (NYSE:XLF). Sell the October 11 strike and buy the October 9 strike.
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