Bad start to the week

Good Morning,

DJIA opened the week with advances in almost every sector bolstered by new signs economies in Asia are well on their way to recovery and investors brace for the government's first reading on the economy in the third quarter later in the week and fresh earnings reports and debt auctions. However, the market dropped in broad-based fashion after they failed to extend an early gain and the U.S. dollar made another strong move off of its yearly low and as stocks stalled, sellers stepped in and undercut the early advance. That caused stocks to drop sharply and spend the rest of the afternoon trading in negative territory. There were 74% declines against 23% advances for the DJIA and 68% declines against 28% advances for the broader based Nasdaq.

PTEN traded below $17.00 in the morning (US time) and as planned to buy on dip, I bought at $17.00 and $16.98 respectively. The stock performed badly and it lost 4.12% to close at $16.30. CAH ranged between $28.62 and $29.04 in the morning. In fact, all the stocks I screened yesterday for the week opened higher last night but failed to hold on to the gains. Only CAH ended positive to close at $28.71 and WTS at $30.85. Since I decided to trade only PTEN and CAH this week, I have started the week in the negative territory and I am glad that I have faithfully applied my 30-20-50 money management rule. I have lost buy it is still early and I am sure the stocks will rebound.

My friend told me yesterday that he attended one of the options class and he was taught to analysis both calls and puts open trades to determine the stock’s direction. He said that if there are more calls than puts, the stock will be bullish, and vice versa. It is interesting as observing open positions in options are also one of my stock selection criteria, though not a main factor I use to choose the stock. However, I don’t quite agree with his options lecturer. I believe most of the trades in options are to hedge against stock traders’ position. I have observed that when there are more calls, the stock is most likely to decline and when there are more puts, the stock is more likely to advance. Why is it so?

As mentioned, if options are used as a tool to hedge against a position in this volatile market, longing a call is to hedge against a stock trader’s short stock position and longing a put is to hedge against his long stock position. So if the stock traders’ stock positions are the reverse of their options positions, I can know the stocks market outlook by analyzing the options open positions. What is your view? I will be very glad if you can share your observations.

Have a great day ahead!

Francies Cheng
BBus MAppliedFinance