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Court of Justice Of The European Union Rules On Used Software Sales

In a recent release from the Court of Justice of the European Union has ruled that the author of software can not prevent the resale of that software on the used market. The case involves UsedSoft who sells used software licenses. Consumers of these licenses then download the software from the creator’s website. Oracle ($ORCL) had sought to block this practice. The court has ruled that a copyright holder who sells in the EU loses the right to oppose the resale of the intellectual property. The ruling applies to both physical copies and to downloaded copies of the software. It also nullifies any language in the license agreement binding the purchaser to not resell the software. It also entitles the purchaser to updates and patches for an unlimited period. If the creator updates the software, the license holder is has the right to obtain those updates even if the maintenance agreement is for a limited period.

This has some interesting business implications in the EU. Companies can now buy used software at a fraction of the cost of going to the creator. UsedSoft is only selling the license. Malware should not be an issue since the license holder is entitled to downloads of the most recent version from the software vendor’s website. This new ruling can benefit companies of all sizes who have an office in the EU. Open Source solutions are useful in some circumstances, but an ERP system will most likely be a commercial purchase due to capabilities and workforce experience with a particular platform. Another interesting implication is for multi-national companies to consider running their IT operation out of their European subsidiaries. Since a legal entity in the EU would be making the purchases of used licenses they would fall under the coverage of this ruling. Offices outside the EU could “outsource” their IT needs to the European subsidiary. The accountants and attorneys would need to determine the best structure for that business. It is unlikely that a company would open a European subsidiary for the sole purpose of taking advantage of used software licensing; however, if a European office is in your company’s future, software will be much cheaper in Europe.

From an investment perspective, this may somewhat disruptive and will push companies to pursue a SaaS model if revenues from new boxed/downloaded software begin to decline. If legislation in other countries allows for this it could be very bad for traditional software sales. Entrepreneurs should take note if there is legislation in your country that has a possibility of passing. Setting up a used software business could be quite lucrative like the used CD/DVD business was, but in this case electronic distribution is covered as well so it should have even better longevity.

Fast Cash Financial Services Trade FCFS

FCFS came up on one of our screens this week. They operate a large number of pawn shops (488) and short term loan stores (124) in The US and Mexico. The economy is not going to turn around for individuals any time soon, so it would be reasonable to make a bullish call on the pawn and payday loan industry. Prior resistance was at the 40 level which has turned into support since then with a few dips below on bad market days. FCFS is also resting on trend line support from February 2010. The 50 SMA is currently around 45 and the 200 SMA is around 40. The 200 SMA is trending up so 40 seems like a reasonable support point.

There are several ways of approaching this trade. An equity limit buy at the trend line with a stop below the trend line for a tight stop, Setting a wider stop below 40 might also be viable, but that’s a $3 loss from where we are right now.

Another angle would be to enter this trade using options.

For this trade we would sell the October 40 PUT at the MID for .45 Then buy the November 35 PUT for .50. This is done for a net debit of .05. The maximum loss is $500 per contract. In this strategy we are looking to get assigned the stock at 40. Essentially we’ve put in a limit order to buy at 40 and are collecting .45 for placing that order. The November 35 PUT acts as a hedge in case the stock has a large decline. At expiration of the October 40 PUT we can roll them into a November 40 Put to create a Bull Put Spread. The MID is worth about 1.35 credit. After accounting for the debit of .05, the net credit is 1.30 If the stock does drop below the short put by options expiration we get to keep the 1.30 credit. The widest stop should be around the 36 level if this is approached as a short term trade. A longer term option would be to accept assignment and sell the long put for an extrinsic/intrinsic value. This approach gives defined risk and allows for multiple exit strategies. As always a good trader should pick the best strategy and stay with it.

The Hartford to Offer Data Breach Insurance

Good news for small firms. The Hartford (NYSE: HIG)is now offering data breach insurance targeting small business. Insurance is a good control to invest in to supplement other information security controls or as the main control if your business is very small. Some E&O policies may also have riders that cover data breaches. If you own a business you should review all your policies to be sure that your coverage objectives are met.

Relying on insurance is a form of risk transference. The policy holder is transferring some of the risk in the form of impact costs to another party. This can be useful and could potentially save a small business from severe financial damage if it has to absorb the costs of investigating a breach or cover the cost of credit monitoring for its customers.

In trading terms buying a Put is the same as buying insurance. The purchaser is given the option to sell their investment for potentially more than the current market price. An unexpected oil spill or embezzling scandal could be the equivalent of intruders or dumpster divers getting their hands on your customer’s data.

There’s a very small range in HIG. There is support around 16 so this could be played different ways. Shorting the stock with a stop above the trend line is one option. The Oct 18/16 Bear Put Spread is going for .69 and has a max profit of 131. Since front month IV is higher than November a put calendar may be an alternative if you want to play the descending triangle pattern. The 16 Oct/Nov Put calendar is going for .47. There is a possibility the stock could drop to 12 if the descending triangle follows through.

AUDJPY Ascending Triangle Setup

There is an ascending triangle forming on AUD/JPY with a triple top. Ascending triangles tend to be a bullish pattern. Positioning a buy stop order above resistance is a good strategy to grab the break out. This one reversed but was worth 20-30 ticks with a tight trailing stop. Always be on the lookout for patterns to give guidance for buy and sell stop entries.

USDCHF Short

Today there are some nice technical indicators showing on the USD/CHF pair. The pair topped out at around .82 before turning lower. Today the Persons Proprietary Signal indicated a sell along with MACD, Stochastics, and RSI starting to point down. A short entry today should be able to run for a few days.

QQQ Put Hedge

QQQ retreated from the 50 SMA and is below the 200SMA. There’s also an inverted hammer that should hold for today. This should be a good reversal down to support at 50. A bear put vertical could be a good play here. The Oct 54/50 is going for about 1.10.

Apple Trade Strategy Post Jobs

Steve Jobs announced that he is resigning today, sending Apple stock lower. Apple went as low as 350 in the after hours session. This is a pull back but may not be the time to step into the fire.

On a daily chart we have several areas to look at. Around 350 is current support in a descending triangle. Since there’s bearish news this could completely break down. Goldman Sachs recommended that their subscribers Sell the January 2012 $300 PUT. This means the seller agrees to take around $11 in premium and agrees to buy the stock for $300 regardless of how low it goes. It’s like being an insurance company. That idea lost 30% today so be glad you didn’t do it. There are support levels around 325/320 and 300/295.

On a one year chart the 320 level corresponds to the 50% Fibonacci level and 300 corresponds to the 61.8% Fibonacci level. 300 seems like a reasonable target. That is about the height of the descending triangle subtracted from its base.

A two standard deviation move from this afternoons close is 291.19. Three standard deviations is 273.44.

The September 290/285 Bull Put Spread could be a reasonable bet to leave a limit order on. Less likely but safer would be the 275/270 Bull Put Spread. The order should be for 25% of the width of the spread, in this case 1.25 minimum.

Order size would need to be according to individual taste and risk. Buying some long puts in QQQ as a hedge with some of the proceeds of making this trade could lessen the pain if the stock plummets past either the second or third standard deviation.

Swiss Franc Setup For Rebound

Swiss Franc Futures have triple bottomed at an area near resistance from the end of July. MACD, Stochastics, and RSI haven’t completely reversed yet and the Persons Proprietary Signal has not indicated a buy yet. This may be worth watching if it goes sideways for a bit and then reverses its downtrend. The Chaikin Oscillator is about to move above 0 so this could indicate a bullish move on the Swiss Franc in the next few days. Any negative news item from Europe should improve the value of the currency along with any discussions of QE3 from the US.

Next Step In The Rollercoaster

Friday points to a very unhappy day next week. SPY printed an inverted hammer at the close which is a bearish sign. Volume was almost as high as the previous day which was also bad, and both days volume is higher than any of the recent good days except 8/9.

Other technical indicators are also pointing down, including MACD, Stochastic, and RSI. The Persons Proprietary Signal also gave a sell on Thursday. There may be some support around 112, but after that it could be serious sailing lower.

If you have long positions that are working keep the stops tight, other positions should be cut loose until this volatility blows over. At the very least getting delta neutral or slightly negative delta would be a good idea in the short term. Bonds and precious metals seem to be the current hot spot for hedging or speculating. TLT has been up for the past 4 weeks and GLD has been up for 6 weeks, both showing buy the Persons Proprietary Signal for the same amount of time.

Some straight Bear Puts on SPY could be a good hedge or speculative position. Shorting the ES futures is also an option. In and out trades into some of the 3x Bear ETFs might also work here. If you are not into trading a wild market it may be best to sell everything and sit this out until we see that things have really turned around. That will probably be a break above 124-125 on SPY. There we have old support from mid March, which may be some solid resistance. Be prepared to short again if it bounces off that point.

Websense misses EPS

Websense managed to stink up earnings. EPS posted was $0.35 actual vs. $0.38 estimated. Websense lost about 15% after earnings were announced.

The earnings call discussed “the new normal” of attacks being persistent and the “bad guys” wanting our corporate crown jewels. Fundamentally, we can assume that their sales and marketing force will be able to capitalize on the activities of groups such as Anonymous and LulzSec. They noted that they have increased sales of Triton products. Growth of 47% Year over Year $44.4M. 1st quarter Triton exceeded non-Triton billing. On the call Websense said they are clearly a Triton company as they look to the future. This still does not mean that we should be bullish on DLP technology, even though it is part of Triton. More than likely the bundle of Web, Email, and DLP will see Web and Email use, while the DLP sits on the shelf.

Since Websense is still above the 200MA and it held the 200MA back in March now may be a good time to get bullish, regardless of how well their technology works. There’s enough marketing hype to continue to propel them along.

The August 22.5/20 Bull Put Spread is currently pricing at $0.57. If it stays above 22.5 by August options expiration that would be a gain of 29.53%. Max loss per contract would be $193 vs. a max gain of $57. Volatility is high so selling options is a good idea here.

A bearish play would be to use the August/September 22.5 Put Calendar. This would be a debit of approximately $0.50 and would be a reasonable bearish bet since August Implied Volatility is higher than September. The Put Calendar may be a good play if we are feeling bearish about the overall market and US Debt Ceiling issues dragging everything down.