Option Investor

Daily Newsletter, Thursday, 03/10/2005

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Market Wrap

New Plays

New Option Plays

Call Options Plays
Put Options Plays

New Calls

Red Robin Burger - RRGB - close: 48.00 chg: +1.80 stop: 43.99

Company Description:
Red Robin Gourmet Burgers (www.redrobin.com) is a casual dining restaurant chain that serves an imaginative selection of high quality gourmet burgers to America's families, particularly women, teens and tweens. Red Robin serves gourmet burgers in a variety of recipes with bottomless fries, as well as many other items including salads, soups, appetizers, entrees, desserts, and its signature Mad Mixology. specialty beverages. There are more than 250 Red Robin locations across the United States and Canada, including both company-owned locations and those operated under franchise or license agreements. (source: company website)

Why We Like It:
We like RRGB for its relative strength and technical breakout. The relative strength is shown today with a 3.89 percent rally while the rest of the market went sideways (or worse). RRGB's technical breakout looks very bullish with a move over its two-month trendline of resistance, its 50-dma, and its 100-dma on volume that is over twice the average (see chart). The stock also has bullish breakouts in the MACD indicator and RSI oscillator. The P&F chart is currently bearish but RRGB is obviously bouncing and appears to have put in a double-bottom near the $44. There is a risk that RRGB could be channeling sideways but most of the signs above say otherwise. The median analyst target is $54 and we agree. Our eight-week target is also $54. Look for news next week when RRGB presents at the Bank of America conference on March 16th.

Suggested Options:
We are going to suggest the June calls. Aprils are available but the open interest (OI) is very low.

BUY CALL JUN 45.00 QZR-FI OI= 16 current ask $5.10
BUY CALL JUN 50.00 QZR-FJ OI= 51 current ask $2.65
BUY CALL JUN 55.00 QZR-FK OI= 54 current ask $1.25


Picked on March 10 at $ 48.00
Change since picked: + 0.00
Earnings Date 02/14/05 (confirmed)
Average Daily Volume = 199 thousand

New Puts

Genentech - DNA - close: 44.20 chg: -1.55 stop: 47.11

Company Description:
Genentech is a leading biotechnology company that discovers, develops, manufactures and commercializes biotherapeutics for significant unmet medical needs. A considerable number of the currently approved biotechnology products originated from, or are based on, Genentech science. Genentech manufactures and commercializes multiple biotechnology products directly in the United States, and receives royalties or other income from companies that are licensed to market its products outside of the United States. (source: company website)

Why We Like It:
This is simply a technical breakdown play. The BTK biotech sector index is in decline and now DNA has broken down below significant support at the $45.00 level on volume almost twice the average. The MACD has produced a new sell signal and its P&F chart points to a $38.00 target. We want to target a quick drop into the 41.00-40.00 range. Traders need to know there a couple of significant risks here. Normally when playing a biotech stock there is always risk of a failed clinical trial or a successful cure vaulting the stock one way or the other. For option traders that can mean the difference between a massive windfall or a total loss. However, this time we know what some of the risks are. DNA has a few significant clinical trials coming to an end or potential FDA filings that could move the stock expected to occur sometime in 2005. The company expects at least one sometime in the second quarter of this year. The second major risk for the bears is the upcoming ASCO conference in mid-May. Biotech stocks tend to rally the month before this conference and then they sell-off (a classic sell the news move). That means we, as short-term bears, only have about four weeks for DNA to hit our target.

Suggested Options:
We like the April puts.

BUY PUT APR 45.00 DNA-PI OI=7610 current ask $2.80
BUY PUT APR 40.00 DNA-PH OI=1811 current ask $0.85


Picked on March 10 at $ 44.20
Change since picked: + 0.00
Earnings Date 04/11/05 (unconfirmed)
Average Daily Volume = 3.8 million


Cheniere Energy - LNG - close: 70.14 chg: -5.61 stop: 75.01

Company Description:
Cheniere Energy, Inc. is a Houston-based energy company engaged in developing LNG Receiving Terminals and Gulf of Mexico Exploration & Production. Cheniere is developing 100% owned Gulf Coast LNG Receiving Terminals near Sabine Pass in Cameron Parish, La.; near Corpus Christi, Texas; and near the Creole Trail in Cameron Parish, La. Cheniere is also a 30% limited partner in Freeport LNG Development, L.P., which is building an LNG Receiving Terminal in Freeport, Texas. Cheniere explores for oil and gas in the Gulf of Mexico using a regional database of 7,000 square miles of PSTM 3D seismic data. Cheniere owns 9% of Gryphon Exploration Company, along with Warburg, Pincus Equity Partners, L.P., which owns 91%. (source: company website)

Why We Like It:
We normally do not like to play a stock this close to its earnings date but given the current sell-off underway in the oil sector we couldn't help but take the bait. LNG reported earnings today that were worse than expected. On top of disappointing earnings news the oil sector confirmed yesterday's reversal. The result was a 7.4 percent decline in LNG on volume more than three times the average. The stock has broken its simple 50-dma but is desperately holding on the $70.00 level. Given the massive run up in the stock price LNG is a huge target for profit taking. We will use a TRIGGER under today's low to open the play. Wait for LNG to trade at $69.49 before buying puts. Our target is the $60.00-62.00 range.

Suggested Options:
We are suggesting the April puts.

BUY PUT APR 75.00 LNG-PO OI= 17 current ask $7.60
BUY PUT APR 70.00 LNG-PN OI= 85 current ask $4.80
BUY PUT APR 65.00 LNG-PM OI=222 current ask $2.80


Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 03/10/05 (confirmed)
Average Daily Volume = 517 thousand

Play Updates

In Play Updates and Reviews

Call Updates

Barr Pharma - BRL - close: 49.77 chg: +0.61 stop: 45.99 *new*

BRL inches to another new relative high and looks poised to breakout over the $50.00 level. Investors are obviously not worried about Kos (KOSP) filing for a temporary restraining order against BRL's attempt to launch a generic version of Niaspan, a cholesterol treatment. We remain bullish but remember this play is going to take some patience as BRL doesn't move very quickly. We are raising our stop loss to $45.99.

Picked on March 01 at $ 48.53
Change since picked: - 0.20
Earnings Date 02/02/05 (confirmed)
Average Daily Volume = 800 thousand


Hartford Financial - HIG - cls: 71.75 chg: -0.01 stop: 69.95

No change from our previous update.

Picked on February 06 at $ 71.17
Change since picked: + 0.58
Earnings Date 01/26/05 (confirmed)
Average Daily Volume = 1.2 million


Ingersoll-Rand - IR - cls: 84.47 chg: -0.13 stop: 82.49

Shares of IR bounced where we expected it to in the $83-84 range above the rising 21-dma. Today's bounce could offer a new bullish entry point but we would look for some confirmation first since the stock began to fade just a bit this afternoon.

Picked on February 27 at $ 83.00
Change since picked: + 1.47
Earnings Date 02/01/05 (confirmed)
Average Daily Volume = 1.1 million


Loews Corp - LTR - close: 73.09 chg: -0.41 stop: 69.95

Watch for a bounce from the $72.00 level.

Picked on February 15 at $ 74.15
Change since picked: - 1.06
Earnings Date 02/10/05 (confirmed)
Average Daily Volume = 452 thousand


Nova Chemicals - NCX - close: 49.09 chg: -1.75 stop: 47.95

Ouch! We cannot find any news or catalyst to explain this morning's sharp drop in NCX. The breakdown under its 10-dma and the round-number $50.00 mark is bearish. Making us even more worried was the very big volume on the drop, which suggests investors are exiting. Conservative traders may to exit quickly to preserve any remaining profits. We will look for NCX to find support in the $48.50-48.00 range. We are not suggesting new bullish plays at this time.

Picked on February 22 at $ 48.01
Change since picked: + 1.08
Earnings Date 01/26/05 (confirmed)
Average Daily Volume = 383 thousand


Parker-Hannifin - PH - close: 68.26 change: +1.11 stop: 63.99

Good news! PH bounced back above the $48.00 level and its simple 50-dma.

Picked on March 03 at $ 68.11
Change since picked: + 0.15
Earnings Date 01/18/05 (confirmed)
Average Daily Volume = 1.0 million


PACCAR - PCAR - close: 76.15 chg: -0.08 stop: 71.99

PCAR has pulled back and bounced just where we expected at the $75.00 level. Readers can use this bounce as a new bullish entry point although it wouldn't hurt to look for some confirmation (a.k.a. follow through) on the bounce.

Picked on February 28 at $ 75.25
Change since picked: + 0.90
Earnings Date 02/01/05 (confirmed)
Average Daily Volume = 1.0 million


Progressive - PGR - close: 89.29 change: +1.20 stop: 85.80

PGR produced a decent bounce from its rising trendline of support. Readers can use today as a new bullish entry point although at this point we'd probably suggest looking for a move over $90.00 before initiating positions.

Picked on March 07 at $ 89.20
Change since picked: + 0.09
Earnings Date 04/21/05 (unconfirmed)
Average Daily Volume = 770 thousand


Texas Industries - TXI - cls: 64.05 chg: -2.00 stop: 63.49

Somebody must have put out a sell alert on coal stocks but we can't find it. The entire sector was hit pretty hard today yet there was no news. TXI lost three percent and broke down below what should have been round-number support at the 65.00 mark. Currently TXI is still holding up above long-time technical support at the 50-dma. If TXI can produce a bounce from here it will be a new bullish entry point but given the industry-wide sell-off today we're on the defensive.

Picked on January 09 at $ 60.18
Change since picked: + 3.87
Earnings Date 12/16/04 (confirmed)
Average Daily Volume = 238 thousand


Wellpoint - WLP - close: 124.35 chg: -0.20 stop: 119.99

WLP has not seen any follow through on last Friday's breakout to a new high. The overall trend of lower highs is still bullish and aggressive traders might want to consider buying the recent dip. We would prefer to see a new high over the $128.00 level or at least over $126.00 before going long again.

Picked on March 06 at $126.88
Change since picked: - 2.53
Earnings Date 04/20/05 (unconfirmed)
Average Daily Volume = 2.1 million

Put Updates

Apollo Group - APOL - close: 75.95 chg: +0.04 stop: 78.01

No change from previous update.

Picked on January 23 at $ 77.61
Change since picked: - 1.66
Earnings Date 12/16/04 (confirmed)
Average Daily Volume = 2.4 million


Career Education - CECO - close: 33.62 chg: -0.66 stop: 37.51

No change from previous update.

Picked on February 22 at $ 34.90
Change since picked: - 1.28
Earnings Date 02/15/05 (confirmed)
Average Daily Volume = 2.1 million


Google Inc - GOOG - close: 179.98 chg: -1.37 stop: 185.01

Hmm... GOOG gave us what we wanted - a breakdown under support at the $180.00 mark but unfortunately the stock managed a bounce right back toward this support. We are encouraged by the new P&F chart sell signal printed today (and its $156 price target) but would probably wait to see a confirmation that the $180 level is indeed broken before opening new plays. This play has been opened at our trigger of $179.49.

Picked on March 10 at $179.49
Change since picked: + 0.49
Earnings Date 02/01/05 (confirmed)
Average Daily Volume = 10.9 million


Ishares Dow Jones US Energy - IYE - cls 74.85 chg: -1.40 stop: 80.01

Today's decline looks like the follow through we wanted to see from yesterday's bearish engulfing candlestick pattern.

Picked on March 09 at $ 76.25
Change since picked: - 1.40
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 124 thousand


Oil Service Holders - OIH - close: 94.25 chg: -1.85 stop: 100.01

The OIH holders have confirmed the breakdown with today's drop under the $95.00 mark and its rising 21-dma. Volume was even bigger today than it was on yesterday's reversal.

Picked on March 09 at $ 96.10
Change since picked: - 1.85
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 3.1 million

Dropped Calls

Alliance Resource - ARLP - cls: 73.18 chg: -3.52 stop: 74.49

If you read the TXI update then you know that something happened in the coal industry stocks today. The whole group took a dive and ARLP was leading the way lower with a 4.5 percent drop on very big volume. Normally big drops on big volume are bearish developments and we still believe that. However, ARLP has a history of this high-volume drops that stop at the stocks' rising 50-dma. You can see it on the chart in October and December 2004. Shares did it again today. ARLP pierced the 50-dma on an intraday basis but managed a bounce off its lows to close above this long-term technical support. While we have been stopped out at $74.49 traders might do well to keep an eye on ARLP to see if it bounces again.

Picked on February 27 at $ 75.01
Change since picked: - 1.83
Earnings Date 01/27/05 (confirmed)
Average Daily Volume = 95 thousand


St Joe Co - JOE - close: 72.65 chg: -1.25 stop: 72.49

The lack of follow through on JOE's recent breakout is discouraging but we kept a relatively tight stop to minimize our risk. Readers can keep an eye on JOE to see if shares bounce from its rising 50-dma near the $70.00 level. Such a rebound could be used as a new bullish entry point.

Picked on March 07 at $ 75.51
Change since picked: - 1.61
Earnings Date 05/04/05 (unconfirmed)
Average Daily Volume = 500 thousand

Today's Newsletter Notes: Market Wrap by Jane Fox, and all other plays and content by the Option Investor staff.


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