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October retail sales have stock futures higher

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The Commerce Department estimated that October total retail sales were unchanged in October, despite a 1.9% drop in auto sales. Excluding autos, sales rose 0.7%, the biggest gain in six months. The figures exceeded expectations of a 0.2% drop in total sales and a smaller 0.3% gain in ex-auto sales.

Sales at clothing stores jumped 4%, the largest increase since December, while sales at department stores rose 1.2%, the largest gain in 14 months. These figures exceeded expectations of a 0.2% drop in total sales and a smaller 0.3% gain in ex-auto sales.

The data show that, despite a nine-year low in consumer confidence, consumers aren't avoiding the malls and with the holiday shopping season just ahead, consumers seem ready to spend.

The retail sales numbers had stock futures reversing earlier losses and now have S&P futures (sp02z) jumping 12.3 points higher at 898. NASDAQ futures (nd02z) are gaining 18 points at 1,034.50, while Dow futures (dj02z) are higher by 65 points at 8,490.

Fair value for the S&P 500 today is $0.19. That price will not change during the session. HL Camp & Company has their computers set for program buying at $1.04 and set for selling at $-1.98. Fair value for the NASDAQ-100 today is $1.80.

While stocks are finding some bidders in the pre-market, Treasuries are finding some strong selling in the early part of their regular trading session across all maturities. The benchmark 10-year bond is seeing its December futures contract (ty02z) 114'175 -0.62% fall with YIELD ($TNX.X) jumping higher and back above its 50-day SMA to YIELD 3.96%.

Retailer Target Corp. (NYSE:TGT) $30.03 reported its third quarter earnings this morning, showing a profit of $0.30 per share, which was 2 cents better than consensus estimates. The company said revenues rose 9.2% year-over-year to $10.19 billion versus the $10.12 billion consensus. TGT remained confident it will continue to generate average annual EPS growth of 15% or more over time.

Shares of Intel (NASDAQ:INTC) $18.12 are adding 65 cents in the pre-market trade after the company announced that its board has authorized the purchase of an additional 480 million shares as part of the company's existing stock repurchase program. From the beginning of the program in 1990 through Q3 of 2002, Intel has repurchased approx 1.7 billion shares at a cost of about $29 billion. During Q3, Intel repurchased approx 57 million shares at a cost of roughly $1 billion.

Looking for a trade? Snoop around!

On Wednesday, I made a comment in the OptionInvestor.com 11:30 Intra-day update regarding Campbell Soup (NYSE:CPB) and "suspicious" call option activity from Tuesday in the November $22.50 calls, which made no sense to me as the stock was dropping like a 10-lb can of soup on my toe as I had previously profiled a bullish trade in late August for a seasonal bullish rally in CPB on the historical pattern of the stock doing well in the fall ahead of the cold winter season.

What didn't make sense was that the stock was falling to new multi-year lows, when historically, the stock did well as cold weather would build into the latter part of the year. What was some fool doing willing to buy $22.50 calls for $0.10 when the stock was dropping fast at $20? So, looking to save what was left of a $1.10 investment and still be able to afford lunch for a week, I sold my 5 puts for $0.10 and captured back $50, less commission.

That was on Tuesday. Wednesday morning, shares of CPB reported earnings that beat estimates by 3-cents, the stock jumped to a session high of $22.50 and closed at $21.42. Yesterday, you the trader that bought mine and several hundred other contracts for $0.10, might have gotten lucky at $0.35 per contract or good at $0.15. However, I don't think it was "luck" that had somebody buying those options from me, it was "smarter money than I" that new something about the future. Something the MARKET couldn't possibly have known on Tuesday as CPB traded multi-year lows.

However, me being the optimist, and having inquisitive subscribers, one subscriber asked me "how do you uncover suspicious option activity?"

Hmmmm.... good question I thought. The Chicago Board of Options Exchange (CBOE) tabulates various option activity at the end of each day and publishes those results the following day.

So, I went to the CBOE site and began looking for an example. Now, I just picked a weird option in some UAL puts, but when I started looking at the heaviest option contracts, I found a stock symbol I don't think I've every seen before. That was unusual to me and the volume in the puts was quite heavy.

So.... it was probably nothing, but when I pulled up the stock, Devon Energy (DNV), that kind of clicked. Energy.... Iraq concessions. Hey.... maybe somebody had the FIRM scoop on Saddam Hussein's U.N. concession. You don't think Saddam himself would buy puts on energy stocks before he conceded to U.N. weapons inspections do you? No probably not, he's got enough to worry about.

But... what was a bit unusual was that somebody was loading up on January $35 puts, when the stock was trading $45! That's a very HIGH RISK option play and a big move of 22% would be needed for the stock to ever trade $35 less the $1 the poor fool was paying for those far out-the-money puts. So the trader that was buying those calls must have thought the stock had downside to $34 minimum. Poor fool. Stock isn't going there right?

So, I pulled up a point and figure chart to see what the supply/demand situation was looking like an there it was. Wednesday had the stock violating a quadruple-bottom at $44, but managing to hold bullish support trend at $43.

Hmmm... In July DVN traded a triple-bottom sell signal at $45 and build a long column of "O" (supply) all the way down to $34, without so much as a 3-box reversal higher.

This warranted further investigation.

Devon Energy Corporation - Daily Chart

Wow! Volume has sure been picking up to the downside hasn't it? Stock has also broken below both its 21-day SMA (pink) and 50-day SMA (thick blue) moving averages and that's where volume really started kicking in. You can see yesterday's volume spike of more than 2 million shares really looking like the stock is under heavy distribution.

So... what I did then is back test not only previous observation of a triple-bottom sell signal at $45, which took place on July 11th, but tested it against the bar chart above.

On the above chart, I set the "data box" to give us the July 11th technical data (moving averages, Bollinger Band, MACD, Stochastics, etc.) and sure enough, we see some striking similarities.

I also set retracement from the relative "top" to $35, where the unusual put option activity took place. This perhaps defines a range that the put buyer might be thinking about.

Look at that $45.67 level serving resistance a couple of days ago. Isn't that peculiar? I think so. I thought I heard that the Iraq Parliament was saying "fat chance" to the U.N. resolutions and that the new guidelines would be "unacceptable." Who could have had the guts to short an energy stock, when we were most likely going to war with Iraq and oil would be sure to surge to $40 per barrel?

OK... looks kind of bearish doesn't it? DVN that is. But note how the stock kind of stopped in the middle of no-mans land yesterday. No moving averages nearby. Maybe my retracement is off a little.

But, one level of support that held yesterday was the bullish support trend on the point and figure chart and there may be an institutional bull nearby looking to buy a bullish trend. Maybe he/she things this Iraq thing will be short-lived.

OK, so there's an observation of caution, but still, very suspicious that somebody would load up on far out-the-money options and "boom," the next day, the stock actually trades heavy STOCK volume. Don't forget, its supply or demand for STOCK that drives a stock's price, not necessarily option activity.

Let's face it, if somebody was buying the DVN Jan. $35 puts, that trade gave the trader the right to SELL x-number of shares of DVN to somebody else at $35, less the $1 paid for the option, so that would be about $34.

On the other side of that trade, you might have the CBOE market maker taking the trade, so he/she is actually the seller of that option. His/her position becomes... OBLIGATED to buy x-number of shares of DVN at $35, less the $1 received from the buyer of the options contracts. Plenty of time to shift that risk if the stock starts falling right?

Now... here's the thought process. It only makes sense that the "suspicious" put option activity on Tuesday was a instigated by a put BUYER. Right? In my mind, the answer is "yes." Why? Because it makes little sense to sell a January $35 put, for $1, when the stock is trading near $45, and only get $1 per contract for about 2-month's risk!

Nope... that option action looks suspicious, especially with the stock really dropping of on heavy volume. The technicals on the bar chart also look somewhat "identical" to July also as the stock looks to be trading lower with the Bollinger Band.

Note how in July, despite Stochastics being "oversold" it was MACD trending below zero that seemed to be the overriding oscillator for further downside action.

A put trader that bought a 1/4, or even just 1/2 position back in July made good money when the stock traded below $38. Should the stock repeat history and trade into the $38-$35 zone, perhaps like at least one put buyer from Tuesday thinks it might, then a 1/4 or 1/2 position in the January $45 puts (DVNMI) $5.00 gets a bear some exposure, with a like-stock basis of $45.00 minus premium of $5.00, or $40.00.

If the stock trades $38, we know that the January $45 put would be worth $7 minimum ($45-$38= $7). If the stock break below $34, then the CBOE market maker that provided liquidity in the January $35 for a $1, had better be hedged!

Even the most bearish of bears can see it is smart to only leg in with partial positions right now, just in case the stock does get a bounce back near $45.67, or rounding 50-day SMA. At the same time, if the stock follows its lower Bollinger Band lower like it did in July, then a partial position will do just fine.

It is notable that RBC Capital Markets downgraded DVN to "underperform" from "sector perform" citing valuation and lowered growth projections on November 8th during market hours.

Every trader can visit the CBOE website each night and quickly look at that day's most active put and call options and look for suspicious activity. Something that just doesn't make sense. Then make a note of a stock, look at the stock's p/f chart or bar chart and try to figure out just what might be going on.

Here's a screen capture of Tuesday's "most active puts."

CBOE Most Active Put Series - Tuesday, November 12, 2002

You'll note that the QQQ and various S&P contracts are most active on a daily basis. For the most part, institutions sell or buy those as they balance risk in a much larger base of stock inventory. I've outlined the DVN Jan 35's that caught my eye and technicals seemed to be confirming that type of activity.

I've also placed two little ** by the Procter & Gamble (NYSE:PG) $85.80 symbol. Now, this is a stock I've profiled as bearish in a Dow component that also broke a triple-bottom at $87 on 10/28/02, but has been holding bullish support trend at $85. Now, that trade in the November $80's is a bit suspicious, but I think it is most likely a naked put seller, just looking to scalp some premium with expiration taking place on Friday. Let's see, sell 7,500 contracts (750,000 share equivalent) and look to capture approximately $0.15/share, or $112,500. Hmmmm... I can't afford that type of risk, but its probably pocket change to an institution. However, since I'm bearish on PG and hold the PG Jan. $90 puts, I can remain hopeful and if PG breaks bullish support trend and gives a confirming sell signal at $84, then I'll think back on this observation with a smile.

Roll up those shirtsleeves. Be a pig and root around in the mud. You never know what kind of truffle you might turn up. Don't over leverage in options, and you won't end up as bacon in the frying pan.

This technique of trade idea generation isn't just for option traders. Remember, institutions will use options to HEDGE RISK in an underlying stock portfolio or individual stock!

Just a idea of how a trader might try and uncover some trading ideas by looking for "suspicious" option activity that may not make sense at the initial time a large amount of options were traded.

Jeff Bailey

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