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Daily Newsletter, Monday, 10/03/2005

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. Options 101

Market Wrap

Market Wrap


New Plays

New Option Plays

Call Options Plays
Put Options Plays
HAR None

New Calls

Harman Intl - HAR - close: 102.39 chg: +0.12 stop: 98.99

Company Description:
Harman International Industries, Incorporated (www.harman.com) is a leading manufacturer of high-quality, high fidelity audio products and electronic systems for the automotive, consumer and professional markets. (source: company press release or website)

Why We Like It:
HAR has recently broken out of a six-week consolidation and looks poised to begin a new leg higher. Market wise we're feeling a bit cautious. October is infamous for its volatility and we tend to see market declines in the first half of the month. We're willing to speculate on HAR because the stock tends to march to the beat of its own drum instead of following lock step with the major market averages. Today's dip to and bounce from round-number support near $100.00 looks like a great entry point to consider short-term bullish positions. We say short-term because HAR is expected to report earnings around October 19th (so far it's an unconfirmed report date). We do not want to hold over the report even though last time (in August) the stock exploded higher after guiding earnings higher. Technically HAR looks positive with a new MACD buy signal and a Point & Figure chart that has recently produced a new buy signal that points to a $114 target. We're going to set the stop loss at $98.99 but more conservative traders may want to set their stop near $99.90 instead to really minimize any risk. If HAR did traded under $99.90 we'd probably be looking for the exits. HAR can be volatile so we're going to aim for a move into the $109.00-110.00 range.

Suggested Options:
Readers can choose between the October or November strikes. Just remember that we plan to exit ahead of HAR's October 19th earnings report. We're suggesting the November calls.

BUY CALL NOV 100.00 HAR-KY OI=197 current ask $8.10 (last 6.70)
BUY CALL NOV 105.00 HAR-KA OI=207 current ask $5.40 (last 4.70)
BUY CALL NOV 110.00 HAR-KB OI=200 current ask $3.40 (last 2.45)
*Double check these prices with your broker!

Picked on October 03 at $102.39
Change since picked: + 0.00
Earnings Date 10/19/05 (unconfirmed)
Average Daily Volume = 720 thousand
 

New Puts

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Apache - APA - close: 75.15 change: -0.07 stop: 72.49

Energy stocks are still seeing some profit taking but sentiment for the group remains bullish. We are suggesting that readers watch for a bounce from $74.00 (or 73.50) as a new bullish entry point. Technical traders may want to be more cautious. The MACD indicator does not look very healthy on APA.

Picked on September 18 at $ 73.42
Change since picked: + 1.73
Earnings Date 10/27/05 (unconfirmed)
Average Daily Volume = 2.6 million

---

BP Prudhoe Bay - BPT - close: 79.38 chg: +0.26 stop: 73.99

No change. We remain on the sidelines with BPT. Our suggested plan is to buy calls when BPT hits our trigger at $80.11, which would be a breakout over significant resistance at the $80.00 mark and the top of its trading range. If triggered our December 15th target is the $89.50-90.00 range.

Picked on October xx at $ xx.xx <-- see Trigger
Change since picked: + 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 175 thousand

---

Broadcom - BRCM - close: 46.92 chg: +0.00 stop: 43.49

It was a relatively volatile day for BRCM. The stock broke out over resistance at the $47.00 level and hit new all-time highs. Unfortunately, BRCM could not hold its gains and closed unchanged on the session. The early move higher did help produce a new MACD buy signal but we suspect that BRCM will see more profit taking tomorrow. Watch for a bounce from the $46.00 level as a new bullish entry point. Our target is the $49.00-50.00 range.

Picked on September 25 at $ 45.05
Change since picked: + 1.87
Earnings Date 10/21/05 (unconfirmed)
Average Daily Volume = 7.0 million

---

Bear Stearns - BSC - close: 109.35 chg: -0.40 stop: 102.49

Merrill Lynch was the big winner in the broker-dealer sector today after a positive Barron's story this weekend. That doesn't change our bullish outlook on BSC. Readers still have a choice. Choose a bullish entry point on a dip toward $107.50 or a breakout over $110.25 (we said 110.20 over the weekend). Our ten-week target is the $119.50-120.00 range.

Picked on October 02 at $109.75
Change since picked: - 0.40
Earnings Date 09/15/05 (confirmed)
Average Daily Volume = 1.2 million

---

Cardinal Health - CAH - close: 62.94 chg: -0.50 stop: 59.85

It was a quiet session for shares of CAH. We see no changes from our weekend update. Our target is the $66.00-67.00 range.

Picked on September 25 at $ 61.95
Change since picked: + 1.05
Earnings Date 11/04/05 (unconfirmed)
Average Daily Volume = 2.0 million

---

Cameco Corp - CCJ - close: 54.32 chg: +0.82 stop: 49.49

CCJ displayed some relative strength today and the stock is nearing resistance in the $55.00 region. Our target is the $58-60 range and we plan to exit ahead of CCJ's early November earnings report.

Picked on September 18 at $ 53.30
Change since picked: + 1.02
Earnings Date 11/01/05 (unconfirmed)
Average Daily Volume = 862 thousand

---

Cigna - CI - close: 118.19 change: +0.33 stop: 111.49

CI continues to show strength. The stock dipped to $116.00 this morning but traders were there to quickly buy the dip and push shares to a new all-time high. We do expect some resistance near the $120 level but our early November target is the $124.00 level.

Picked on September 29 at $116.51
Change since picked: + 1.68
Earnings Date 11/02/05 (unconfirmed)
Average Daily Volume = 991 thousand

---

Intuitive Surg. - ISRG - close: 73.86 chg: +0.57 stop: 70.99

The good news with ISRG is that there was almost zero follow through on its Friday decline. We remain cautious. Right now we're watching to see if shares rebound from a test of technical support at its 50-dma, which is now at 71.30. We're still not suggesting new plays at this time.

Picked on September 28 at $ 75.11
Change since picked: - 1.25
Earnings Date 10/24/05 (unconfirmed)
Average Daily Volume = 962 thousand

---

Altria Group - MO - close: 74.16 change: +0.45 stop: 69.90

Positive comments from Goldman Sachs today helped push Dow-component MO to a new all-time high over recent resistance at the $74.00 level. This looks like a new bullish entry point. Our target is the $78-79 range. Remember that we plan to exit ahead of its October earnings report.

Picked on September 18 at $ 73.14
Change since picked: + 1.02
Earnings Date 10/19/05 (unconfirmed)
Average Daily Volume = 6.7 million

---

Noble Energy - NBL - close: 47.79 chg: +0.89 stop: 44.49

Most of the energy sector was under water today but shares of NBL displayed another session of relative strength. The stock added 1.89% on decent volume and now NBL looks poised to breakout over short-term resistance at the $48.00 mark. Our target is the $49.00-50.00 range.

Picked on September 11 at $ 44.90
Change since picked: + 2.89
Earnings Date 11/02/05 (unconfirmed)
Average Daily Volume = 796 thousand

---

Total S.A. - TOT - close: 134.39 chg: -1.43 stop: 131.99

No surprises here. TOT did indeed see more profit taking on Monday and shares fell toward minor support near $134.00. The question now is whether this energy stock bounces from here or continues lower toward the bottom of its trading range near $132.00.

Picked on September 28 at $137.23
Change since picked: - 2.84
Earnings Date 08/05/05 (confirmed)
Average Daily Volume = 872 thousand
 

Put Updates

Black & Decker - BDK - close: 81.25 chg: -0.84 stop: 85.05

So far so good. BDK continue to descend under a trend of lower highs even though its technicals are trying to rebound. The next challenge is support at the $80.00 level. Our target is the $78-77 range.

Picked on September 14 at $ 83.31
Change since picked: - 2.06
Earnings Date 10/25/05 (unconfirmed)
Average Daily Volume = 636 thousand
 

Dropped Calls

None
 

Dropped Puts

Hershey Co. - HSY - close: 57.91 change: +1.60 stop: 58.01

Time to go! UBS upgraded shares of HSY to a buy this morning suggesting the stock is relatively cheap. We have not yet been stopped out (the high was $58.00) but suspect we will be stopped out soon. We will keep an eye on HSY for another failed rally under resistance at the exponential 200-dma or the $60.00 level.

Picked on September 14 at $ 57.90
Change since picked: + 0.01
Earnings Date 10/20/05 (unconfirmed)
Average Daily Volume = 760 thousand
 


Options 101

So youve got the GOLD Bug?
Try trading the XAU Gold and Silver Index

The Theory Behind the Practice

Gold has been traditionally, the safe haven, when inflation and higher commodity prices, which help fuel inflation, take center stage in the investment community. Golds recent rally has been intensified by reports of high demand for the medal and a lack of selling by the central banks in Europe in regards to their 5 year deal of holding back Gold sales.

Now couple the fact of sky rocketing energy prices which cold have a negative effect on, not only fuel and transportation costs, but on any oil derivative product currently sold in the open market. With the federal reserve meetings closely being monitored Gold could end up being a safe haven for those worried about the threat of rising inflation. However, if the concern over the US economy regarding a slow down, due in part to hurricane Katherines recent devastation should take center stage, the exit door to golds recent run up may be left swinging wide open from all the people dumping their positions in the precious metal. This possibility is quite possible if the Federal Reserve Board felt the US economy would be still on an ok course, regardless of what energy prices do.

Whenever there is an inflationary scenario possible, the precious metal traders first get bitten by the Gold bug. For you option traders that find this precious metal intriguing to possible trade. The Options market offers you that opportunity with the Philadelphia Gold and Silver Index, Symbol: XAU. The XAU offers and excellent opportunity to participate in the movement of this precious metal.

The Real World

Gold historically has been the center of the trading market whenever we have entered or left an inflationary cycle. From the days of the euphoria of the South African Gold mining stocks to the U.S.plays in Homestake Mines, Phelps Dodge and South African Depository receipt ASA, the appeal of the GOLD PLAY has only rarely lost its Glitter. The recent movement of this precious metal over the last few months totally lends credence to the magnitude of this potential financial profit if a trader happens to be on the right side of this traditional precious metal favorite. Lets examine the XAU index chart.

FIGURE A: XAU CHART

The XAU is like the QQQQ or the SPX or OEX. It gives you the option of trading a basket full of Gold related issues knowing that if you are right about the direction of the commodity of gold, then you dont have to worry about an individual gold stock moving marginally or not at all with a sharp movement in gold, rather up or down. (See figure 1-1 below for a chart breakdown of the XAU components.

FIGURE 1-1: XAU COMPONENTS BROKEN DOWN IN WEIGHTED AVERAGES

FIGURE 1-2: INDIVIDUAL STOCKS THAT MAKE UP THE XAU AND THEIR WEIGHTED PERDNETAGES. (click image to enlarge)

In addition to the XAU index itself there are other gold stocks that are option able that lend themselves to high profit potential when on the right side of the gold market. (See Figure 2-2 below ASA (BERMUDA) LTD

FIGURE 2-2: CHART OF ASA (BERMUDA) LTD GOLD STOCK

To get an idea of how much in tandem that gold moves with the XAU index see the following chart below.

FIGURE 3-3: GOLD BULLION VERSUS XAU GOLD & SILVER INDEX (click image to enlarge)

Notice the correlation that exists between the XAU and the actual GOLD BULLION itself.

The Bottom Line

So the age-old question once again presents itself. Do I trade the commodity gold itself or the Index presented by a basket full of gold issues? Once again, with any option if you are going long or short, a long purchase has only a limited risk affiliated with a purchase, with the commodity itself, you are leveraging, but you have the potential for enormous losses. It seems to me that if you are an option trader and would like to take advantage of a potential situation in the gold market, I suggest, You stay with what brought you. Let the commodity players play commodities, you can participate in the gold market with options on the individual gold stocks or and index like the XAU. You have several choices. The choice is up to you.
 

Today's Newsletter Notes: Market Wrap by Jonathan Levinson, Options 101 by Steven Gail, and all other plays and content by the Option Investor staff.

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