Even the “Oracle of Omaha” Is Getting Creative

Dear SlingShot Trader Subscriber,

You know things are getting interesting on Wall Street when Warren Buffett — the “Oracle of Omaha” — announces that he’s going to buy back shares in his own company, Berkshire Hathaway Inc. You see, Buffett has been quite critical of stock buyback programs in the past, but apparently he now believes that prevailing market forces have driven his stock so far down (it currently trades for more than $100,000 per share) that it would be beneficial for shareholders if he were to buy back shares.

That’s the type of stock-market environment we’re operating in nowadays — one where arguably one of the world’s best value investor has to get creative and sees more potential in engaging in a share buyback program than in buying up shares in another company, as he has done so many times before.

It’s in that same spirit that we approach our trades this week in SlingShot Trader –because goodness knows we’re going to continue to see some volatility.

 

Momentary Calm Before the Storm

Politicians around the world have given the markets a little confidence this week as they’ve mustered the fortitude to take — or appear to take — some positive action to help reduce geo-political uncertainty. We’ll see how long this lasts, but it’s a step in the right direction.

It started this past weekend in Europe when leaders from around the eurozone stepped up and voiced their support (sometimes in public, and sometimes in private) for the potential of expanding the European Financial Stability Fund (EFSF) and giving it the teeth it would need to actually have a chance of helping struggling countries in the eurozone from bringing down the entire group. Not everyone is thrilled with the prospects of spending more money to bail out the likes of Greece, but we’re starting to see some progress. Maybe we won’t have to mention Greece so much next year.

The U.S. Senate, not wanting to be outdone, also stepped up and took some uncertainty off of the table when it passed a bill that would continue to fund the government for the next little while. Phew … no government shutdown at the end of this week.

All of this has helped lay the groundwork for a nice rebound on Wall Street this week. Unfortunately, we see this as only a momentary calm before the storm.

Greece still needs to secure its next round of funding by mid-October, the sovereign-debt crisis in Europe and the exposure European banks have to the crisis is far from over, and the U.S. Congress still has to deal with the recommendations — or lack thereof — of the Super Committee by the end of this year.

Plus, everyone still is waiting to see whether the U.S. economy will experience a double-dip recession. We don’t believe it will, but there are still plenty of analysts out there who are worried. Needless to say, the Gross Domestic Product (GDP) announcement this week will be closely scrutinized.

So just in case you were wondering if the volatility was going to end, we can reassure you that it isn’t.

 

This Week’s Events

Here are some of the news events that we may trade (or are trading) in the next week or so. We’ll be discussing some of these in tonight’s webinar.

9/29 – Gross Domestic Product (GDP)
9/29 – Weekly Jobless Claims
9/29 – Pending Home Sales
9/29 – Micron (MU) earnings announcement
9/30 – Chicago PMI
10/2 – Yum! Brands (YUM) earnings announcement
10/3 – ISM Manufacturing Index
10/4 – Fed Chair Ben Bernanke speaks
10/5 – ADP Employment Report

 

The Bottom Line for Next Week

So where does all this leave us? The fabulous part about trading options is that we can take advantage of high-volatility market environments. We don’t have our hands tied by only being able to buy stocks. We see plenty of opportunities out there, but like Warren Buffett, we’re going to have to be creative in where we look.

We’re watching the general back-and-forth of the market right now as it consolidates in its current range, and we’re identifying stocks that are on the extreme ends of the spectrum. We want to trade options on those stocks that rally strong when the market makes bullish moves, and we want to trade options on those stocks that fall hard when the market makes bearish moves.

As we head into earnings season, there will be plenty of these opportunities. There also will be some macro-economic trading opportunities in currencies, bonds and so on that we’ll be watching.

 

TRADE REVIEW

When it’s time to open or close a trade, we’ll send you alerts via email. You also can sign up to receive text messages regarding our trades. For more info about our SlingShot Trader portfolio, you can read trade alerts here and view our portfolios here.

 

Positions Opened

Micron (MU) — On Sept. 26, we recommended you “buy to open” the Oct 6 Puts for 40 cents or less. We still like this trade.

Yum! Brands (YUM) – Earlier today, we recommended you “buy to open” the Oct 50 Puts for 80 cents or less. We still like this trade.

 

Positions Closed

Finish Line (FINL) — On Sept. 20, we opened the Oct 20 Puts for $1.45. We had anticipated holding this trade through the company’s earnings announcement on Sept. 22 after the market closed. However, because the stock made such a dramatic move leading up to its earnings announcement, we decided to close the trade early. We recommended you “sell to close” the puts at market Sept. 22. We closed the position at $2.20, a 51% gain in two days.

 

Top Trades Now

Micron (MU) – See Positions Opened above.

Yum! Brands (YUM) – See Positions Opened above.

 

Webinar Preview: Join Us Tonight at 6 p.m. ET

Every Wednesday at 6 p.m. ET, we host our live webinar, in which we’ll review this weekly newsletter, discuss coming events in more detail and walk through our Top Trades. We also encourage you to submit your questions live during the session. We want to do everything we can to help you become a successful options trader, which is why you’ll have live access to us for an hour every week.

And if you have any questions or comments you would like to send us in advance of the live session — or anytime during the week — you can write to us at johnandwade@slingshot-trader.com.

If you can’t attend the session live, you can watch the archived version on our website in the “Live Weekly” section. It’ll typically be posted within about two hours of the end of the live session.

 

 

John Jagerson and Wade Hansen
Editors
SlingShot Trader