It was another rough week for the markets. They boomeranged lower after a promising rally Wednesday, with disappointing earnings reports in the tech sector sending the Nasdaq down for the third straight week. RealMoney's bloggers were all over the market action, and once again this weekend, we'd like to share the "Best of the Blogs" with readers of the These posts best captured the intent of these blogs, which is to provide intelligent discussion on the issues each writer sees as most pressing that day.

Let's take a look at Jim Cramer on how to game options expiration, Rev Shark on market timing, Cody Willard on Intel's inventory problem, Steve Smith's lesson on IV crushes and Tony Crescenzi on what it would take to convince investors that the economy will stay strong enough to sustain earnings.

Click here for information on, where you can see all the blogs -- and reader's comments -- in real time.

Cramer's Blog: Options Pressure and the Indices

Originally published on 7/21/2006 at 8:59 AM

Expiration plays more havoc than ever, except people simply don't understand it. They don't understand it because they have never had to flatten positions out, they have never had to try to reconcile the stocks themselves with the indices.

Yesterday I commented that the Oil Service HOLDRs ( OIH), when it was at $137, looked like it had to go to $135 because of the options pressure. The exchange-traded fund (ETF) went to $134.65 when I left last night, which is a rounding error to $135. It happened due to the fact that there were puts and calls that both needed to be sold while they had any value left because they expire today.

Think of it this way: If you see a call that has a couple of dollars' worth of value that could be worth nothing tomorrow, which is how the calls were positioned at $136 and change, you blow them out. That's something you understand, right? You don't chance it. You don't bet it stays there. You take the money and run.

The call buyer, in turn, has to sell the ETF itself against that call. With a couple of hours left, he has no desire to own it either, but he can hedge it by shorting the index against it.

So, let's go back. The ETF is at $136.70. The call is at $1.80. You sell the call to me. I immediately short the index at the same time. I am long the call at $1.80 and short the index at $136.70. That's a fabulous position, because if the ETF breaks below $135 everything is gravy on the short side.

Plus, I know there will be a lot of people just blowing the darned calls out without this level of sophistication, and that will simply put more downward pressure on the ETF. Nobody wants to hold a call that is diminishing that quickly. So the index and the ETF that tracks it will have momentum to the downside.

Ah ha! It overshoots, however, and goes to $134.30. What should I do there? I am short the index and long the call, remember. The smart bet would be to buy back the ETF for a nice gain ($136.70-$134.30=$2.40.) But when I do that, of course, I put upward pressure on the index.

Sure enough, when it hit that level, the ETF started going back to the $135 strike. But as it gets higher, what do I do? I blow out the call for a little change -- in this case 30 cents, as the index started to go back up.

So, now let's calculate. I lost $1.50 on the call (bought it for $1.80, sold it for $0.30=$1.50 loss). But I made $2.40 on the short index. So, my profit is 90 cents ($2.40 on the short minus $1.50 on the long).

Now, you can only imagine. When I did this stuff I would do it thousands of times on a Friday. I regarded it as free money. It would happen like this every Friday of expiration. I would simply look for situations where the index was close to a strike, the calls were relatively flat and I could go to work.

Sometimes I would even oversell the index, shorting it on a 3-to-2 basis, say, to lean on it a little to make it all come my way because the big profit can only come from driving it below the strike. If it doesn't go below the strike, then there's nothing ventured, nothing gained.

Now, all of this is not occurring in a vacuum. There are guys who get long the index when I short it. But they can't risk the pain of getting killed, either. So what do they do? They short the underlying stocks against the index. So anyone who buys my ETF is a short-seller of common. He's long the ETF at $136.70, where I sold it to him. He is in a very precarious situation because he has unlimited downside. (His pain isn't stopped out at the strike, he can lose a lot more.) So what does he do? He really blasts out his short, so he is not caught. He hits every one of the big names in the index hard to be sure he is hedged.

That's the downward pressure you saw Thursday in Halliburton ( HAL), Baker Hughes ( BHI) and Schlumberger ( SLB) and Nabors ( NBR). It was hideous and sudden and gut-wrenching, but in the end it was really just the hedging of the guy who bought my ETF and was therefore long all of these and didn't want the risk.

I know this stuff is complicated. But when I say that an index is manipulated down because of the pinning, just imagine this process happening all over the place with every ETF that has options. Many people who are long calls and short the index need the indices down to make things work. They have the firepower and the protection, so they do it.

Now even if a group was fundamentally strong this could happen. But there's panic in this patch, so it abets this process. I would go after indices that looked like they were rolling over when I did this stuff. It helped the momentum.

Let me give you another secret. I made fortunes every expiration doing this stuff. When I say that I see it happening, you have to believe that I could not have been the only guy doing it.

Yesterday, some wise-guy emailer told me I didn't know what I was talking about and how I was just making it up, that the pinning doesn't exist, that the index won't go down because of it.

I laughed to myself and said, "No wonder I made so much money doing it." Nobody even understands or believes it. That's why I was always able to make money. If the secret had been out, I couldn't have! There would be too many players!

Now the secret's out.

Be my guest.

At the time of publication, Cramer was long Halliburton and Nabors Industries.

Rev Shark's Blog: Turn-Catching a Fool's Game

Originally published on 7/18/2006 at 8:10 AM

"An ounce of patience is worth a pound of brains."

-- Dutch Proverb

Most investors place too much emphasis on trying to catch the market at exact turning points. They develop all sorts of theories and reasons about why the market is going to turn at some exact point. It is very exhilarating and satisfying when we can actually catch a turn, but as far as determining our ultimate success as investors, it isn't all that important.

Good investing results are not a function of precise market timing. It can be helpful to time things accurately, but the key to good results is cutting losses and protecting capital when the market is weak and catching uptrends and riding them when the market is strong. You need not catch the exact bottom or top to do such things. It is the bulk of the move that will determine your success.

We are at a point now where there is increasing pressure to call for some sort of market turn. The indices have sold off big, the news is uniformly negative and earnings season is starting to heat up. Those are the conditions that usually lead to some sort of turn, or at least a decent bounce.

It is extremely important that we stay patient and not be overly aggressive in trying to catch a turn. First, the losses you can rack up while constantly trying to catch a bottom can cut into any gains you ultimately realize. In many cases you are better off missing the early part of a move rather than overanticipating, because the downward moves have a tendency to last longer and go further than seems reasonable.

It is also important not to become overly excited at the first sign of strength. In this sort of market there is a strong inclination for trapped bulls and aggressive shorts to sell into strength. We saw this yesterday when the markets couldn't gain any upside traction although the move to the downside had slowed.

Stay patient. The market will make a lasting turn at some point, and when it does there will be plenty of time to participate in the festivities. If you miss the early part of the move you more than likely will still be ahead because you missed the tail end of the downward move. Precise timing is nice, but it's more about ego than it is about making money.

We have the makings of another challenging day. Overseas markets, particularly the Nikkei, were weak overnight, oil has bounced back after a selloff yesterday and the conflict in Israel remains very active. Earnings from Merrill Lynch this morning looked good and the stock is trading up. We have PPI data coming up and that may attract a little attention.

At the time of publication, De Porre had no positions in stocks mentioned, although holdings can change at any time.

Cody Willard's Blog: Intel's Inventory Issue

Originally published on 7/20/2006 at 11:44 a.m.

The bulls should be very pleased with the mostly sideways action this morning, along with the "sensible" reactions to the earnings reports. Apple's ( AAPL) 12% pop is driving a spike of fear into the hearts of the shorts, who had been about the only type of trader consistently getting paid in this market for the last few months.

Of course, countering that is the 5% hit to Intel ( INTC). Speaking of Intel, I think the conventional wisdom that a price war with AMD ( AMD) is what's roiling Intel misses the biggest part of the story. It's the pushout of Vista that's really hitting the company, as it has to deal with all the inventory that it's building that nobody really wants to buy until the new operating system and dual processors become mainstream. They have no choice but to cut prices to move that inventory through the chain so that they can be ready to take off with Vista. Seriously, would you want to buy a Windows-centric PC this year? No. That said, the wait for Vista is indeed a clear positive for Apple for the next couple of quarters, as the latest MacBook Pro is indeed a compelling offer .

And recall that Microsoft ( MSFT) doesn't have this same inventory problem in any way, shape or form, since it sells software, and there isn't much of an inventory dynamic when it comes to digital bits and bytes.

I'm doing no trading so far today, as I remain mostly focused on cash.

At the time of publication, the firm in which Willard is a partner was long Apple and Microsoft, although positions can change at any time and without notice.

Steven Smith's Blog: A Lesson in Apple's Options

Originally published on 7/20/2006 at 11:56 AM

Reader JOAT wonders what IV crush I could possibly have been talking about or expecting in Apple ( AAPL) following its good earnings, which has the stock up some 11% to $61 per share this morning. The IV of Apple options prior to earnings had been running around 75% in July and 58% for the August. Note that the July reading gets very skewed, as the value of the time decay, which must constantly drip away at an accelerated rate, essentially gets rerouted into the IV component of the five things used to calculate an option's value.

For example, the IV in July options has declined some 20% to the 60% level, and the August options have also declined some 20% to 40% so far this morning. That is a premium crush in anyone's book.

But because the options had only been pricing in an 8% move, this morning's 11% gain far outweighs the premium crush, allowing those long calls, or better yet, short puts, to profit handsomely. But, as economists like to hold a bunch of variables constant to prove some meaningless point, let's assume this was not an earnings report and therefore had no expectations for a change in IV. That would have us turn to the option's delta to gauge our expectations for what size of a price move we could expect on a $6 move in the underlying.

With Apple at $54 yesterday, the delta on the July $60 call was around 30%; this means when including the sloping nature that, given a $6 price move in the stock, one could reasonably expect the value of the call, all else being equal, to increase by about $2 on today's move. The call is up $1, or a 300% increase, so it's certainly a big winner. But be sure there is a premium crush occurring behind those gains.

This is shown more dramatically if you had sold puts. The July $52.50 puts had a delta of 0.25, which would translate into a decline of $1.50 on today's move. So far it has dropped $1.25, and the fact that it can't get below zero is what's mostly keeping it "pumped" with value. The July $55 put, which had a -0.34 delta, translating to a $2.20 decline on a $6 price move, is actually down $2.50 to a nickel this morning.

Tony Crescenzi's Blog: Putting the Data in Context

Originally published on 7/20/2006 at 11:50 AM

Now that the durability of the U.S. expansion is being questioned, many are asking what it would take to convince investors that the economy will stay strong enough to sustain earnings momentum.

In terms of data, many weekly reports will be telling. I am very interested in weekly data on chain-store sales, mortgage applications and jobless claims. The data on chain-store sales, for example, will tell us a great deal about the health of the consumer.

I would also track data on the issuance of commercial paper and commercial and industrial loans, which correlate well with the production sector of the economy and with employment. If companies are raising working capital through these vehicles, it is likely that conditions won't weaken as much as many now fear.

Just what will convince the markets that the economy is holding up depends upon context, as one can't know for sure. In other words, a shift back toward confidence in the economy could in fact be a process rather than an event.

That is why it is often difficult to predict when an overbought or oversold condition will end -- we might know that the fundamentals justify an end but often must wait on an unknown catalyst. So there is no certain answer as to what specific data point will convince investors about the durability of the expansion.
David Morrow is editor-in-chief of In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback; click here to send him an email.

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