Boo-Yah Skee-Daddy!!!! – End of the Quarter Fun and Games

September 26, 2006 at 12:40 pm  ·  Category: Options, Technical Analysis

This week (Sept 25-29) is the final week of the 3rd quarter.  Institutional money managers are judged, and frequently compensated, based on their quarterly performance and so their is alot of funny business that goes on towards the end of a quarter.  One manuever is known as Portfolio Window Dressing and Jeff Clark describes it this way in today’s Growth Stock Wire, “The REAL Way to Profit on Portfolio Window Dressing”:

It’s a legitimate form of market manipulation.

Portfolio window dressing is one of those Wall Street phenomena that occurs at the end of every quarter.  Institutional money managers, anxious to improve their portfolios’ appearance, engage in the most well known shell game on The Street.

Managers unload shares of stocks that have performed poorly all quarter and then buy up shares of stocks that have done well.  This way, when the list of the portfolio’s holdings is printed up at the end of the quarter, the manager can proudly say, ‘See – I own all the best performing stocks.’

It’s a ridiculous game designed to boost the short term performance and appearance of the institutional portfolios.  The artificial demand for the top performing shares boosts the prices even higher at the end of the quarter, just as the artificial supply of the weaker performing shares weighs down their stock prices.

But something interesting happened this time around.  Jim Cramer, host of CNBC’s “Mad Money” and a guy who I love so much that I recently read his autobiography Confessions of a Street Addict, recommended that his viewers try to profit from this by getting in ahead on certain hot stocks.  In his Friday show, which airs after the close of the market at 6pm EST, he recommended 9 hot stocks he thought money managers would be buying as portfolio window dressing.  He singled out one of these hot stocks and recommended that his viewers pick up shares on Monday and then sell them to the money managers on Wednesday and Thursday:

Buy these nine on Monday and sell them on Wednesday or Thursday morning, Cramer recommended.  If people want to buy one, Cramer tabbed Charming Shoppes. 

So what happened?  First thing Monday morning, Cramer’s hordes of faithful fans were out in force buying up Charming Shoppes (NASDAQ: CHRS).  More than 8 million of Charming’s 122 million shares traded hands on Monday, most of them in the first hour of trading (to see this dramatic spike in volume, click on the above link, then click on “Period” and “5-Day Intraday” which shows you the volume of trading in a stock, in 5 minute increments, for the last 5 days).  All this demand pushed up Charming’s price from a $14.31 close on Friday to a $15.04 open on Monday. 

What’s going to happen when all these Mad Money fanatics try to sell Charming on Wednesday and Thursday?  As usual, Jeff Clark has a pretty good idea:

I’ll be shocked if anyone who purchased CHRS first thing Monday morning is able to turn a profit by Thursday.  In fact, I’ll bet that everyone loses money on this trade.  You see, Mr. Cramer’s forceful recommendation created more artificial demand for CHRS shares than portfolio window dressing ever could.

CHRS, which normally trades an average of about 2.1 million shares per day, traded over 8.1 million shares on Monday.  It’s a fair bet that the 6 million extra shares wound up in the portfolios of CNBC viewers.

Now that the CNBC-generated artificial demand is out of the way, tell me, what do you suppose will happen to CHRS when those 6 million extra shares are offered for sale on Thursday?

If you really wanted to bet on this, how might you do it?  One way is to buy an option called a put, which gives you the right to sell a stock at a certain set strike price anytime up until its expiration date.  If a stock falls, the right to sell it at that certain set price becomes more valuable. 

More specifically, in the case of CHRS you might want to buy the Oct 06 $15 puts.  These puts give you the right to sell CHRS for $15 at any time from now up until the third Friday of October (Friday October 20).  As of right now (12:21 PST), according to Scottrade, those puts can be had for 80 cents a piece. 

With CHRS trading at around $14.80, the 80 cent price for a put represents 20 cents for the difference between the strike price and the current market price (its worth 20 cents right now because you could sell it for that much higher than the market price right now) and 60 cents in time value – in other words, the insurance of being able to sell the stock at $15 at any time over the next 3+ weeks. 

If the stock drops 4% or 67 cents in the next couple of days to $14.13, that would give the options a 87 cent value just in terms of the difference between the market price and the strike price – more than the current price of the option.  Plus, since there would still be 3+ weeks until the option expired, the time value of the option would mean its market price would be even higher than that. 

Alot of people are making just that bet today.  According to Scottrade, 177 Oct 06 $15 put contracts (each representing 100 shares – you have to buy options in batches of 100) on CHRS have traded hands today, more than the 137 outstanding at the start of trading today.  Many of them probably got the idea, as I did (6 of those are mine!), from Jeff Clark. 

Still, more people have taken the other side of the bet, probably more Mad Money fans, as 332 Oct 06 $15 calls have traded hands today.  And according to Shaeffer’s, almost 2000 call options on CHRS were purchased on Monday. 

I want to get this post out before the market closes in 22 minutes so here are the relevant numbers as of right now (12:38pm PST):

CHRS price: $14.77

CHRS Oct 06 $15 put: 80 cents

UPDATE (7:04pm PST):

Charming Shoppes closed today up 1 cent at $14.81 on pretty average volume of 1.575 million shares. 

The Oct o6 puts closed flat from the open at 75 cents, though down from the 85 cents and 80 cents that they were trading at when I was thinking through and writing the above post. 

507 Oct 06 calls and 533 Oct 06 puts traded hands according to Scottrade – all at strike prices of $12.50, $15 and $17.50.  Interestingly, almost all of the calls (410) that traded hands were at the $15 strike price but 299 of the puts, more than half, were at the $12.50 strike price.  That is noteworthy because $12.50 is a long fall from today’s close of $14.81 (it represents a 15.6% drop), so its somewhat surprising that so many people were interested in buying those – though at 15 or 20 cents each that only represents about five or six thousand dollars. 

All in all, I’d say this is shaping up to be rather interesting.

Posted by Greg Feirman  ·  Trackback URL  ·  Link
 

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