Option Investor

Daily Newsletter, Tuesday, 11/08/2005

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Table of Contents

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

Market Wrap

Homebuilder Blues

A warning from Toll Brothers that the housing market was weakening knocked the stock market for an early morning loss but dip buyers appeared right on schedule. Tonight, many may be wishing they had remained on the sidelines. There was fear this was real evidence of an imploding housing bubble and the impact rippled through the construction sector, appliances and building materials. The stock market was already struggling at its recent highs and fighting resistance but it shook off the early morning dip rather well only to give up those gains into the close.

Dow Chart - Daily

Nasdaq Chart - Daily

SPX Chart - Daily

Tuesday was setup to be a lackluster trading day before the Toll Brothers warning. Economic reports were minimal and those reports were less than exciting. The Job Openings and Labor Turnover Survey (JOLTS) showed that job turnover was flat in September with 4.59 million people hired and 4.61 million workers leaving their jobs. The job openings rate increased only slightly in September by +2.7% but the hiring and separation rate remained unchanged at 3.4%. While the net jobs loss was minimal and likely related to hurricanes it was only the second time in a year that a loss was seen. The available jobs rose more in the south by +3% and slightly over that national rate of +2.7%. This was mostly due to the hurricane rebuilding effort.

The Risk of Recession for the October period fell to 19.2% from 25% in September. This was also impacted by the rebuilding effort in the hurricane areas. A flattening yield curve also produced a positive impact while weak consumer confidence produced a drag. The leading economic indicators have been pointing to a rebound in growth and this is borne out in the lower risk of recession. However, continued rate hikes by the Fed and a drop in market levels in 2006 could erase this dip very quickly. The fourth quarter is typically a period of better economic conditions and we are seeing that now. Economists are expecting 2006 GDP to fall to 2.5% growth and earnings are expected to fall back into single digits.


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The Toll warning rippled across an already overbought market and it was only natural that traders took profits. Toll lowered estimates below the low end of its prior forecast and said it was seeing a softening of demand in several market areas. In a CNBC interview CEO Robert Toll said materials prices had risen about 20% this year and retail prices of homes had been rising at an unsustainable rate. Toll cited rising interest rates, now the highest in 16 months, and falling consumer confidence as the main reason for cooling sales. He also said delayed openings in new developments pushed closings farther into the future. Despite the warning Toll still expects profits to grow more than +20% in 2006. Toll now projects sales between 9,500 and 10,200 homes in 2006 compared to prior estimates of 10,200 to 10,600 units. In 2005 Toll reported 8,769 homes sold. It is clear that Toll is not going to be hurting for profits with that increase in sales but it is still less than the overly optimistic rates that investors had expected. Toll lost -5.50 today with losses in other builders slightly less. DHI -3.15, KBH -3.71, PHM -3.70. TOL at today's close of $34 is currently trading at a PE of 6. The stock price has fallen from $58 over the last four months as worries of a bursting housing bubble increased. Toll has a monster backlog of better than $6 billion with roughly 25% of Toll communities having backlogs of more than 12 months. In the last quarter that backlog jumped +36%. In the year just reported in October TOL reported revenue that jumped +50% to $5.76 billion and contracts that increased +27% to $7.15 billion. I would be a buyer of TOL at these levels except that Robert and Bruce Toll and several other officers have been sellers of TOL stock for the last six months to the tune of more than 4.3 million shares. There have been no insider buys in the last six months. I do believe there will be a recovery in the shares but we need to wait for it to appear before taking a position. I would be targeting a dip under $30 for traders to begin bargain hunting. Long-term support is around $28 and coincidentally represents a -50% retracement.

After the close today Pixar reported profits of +22 cents that doubled expectations for +11 cents. The gain was due in part from stronger than expected DVD sales of older titles. PIXR jumped nearly +10% in after hours but quickly gave back some of those gains. Pixar's last movie under the Disney contract will be "Cars" due out in June 2006. They also said they have been talking to Disney over the last couple months about a new deal that could be completed by year-end. Disney is a very strong marketer of animated movies and Pixar needs their strength to maximize profit on future efforts. Steve Jobs had walked away from Disney's prior management but appears open to a new deal now that management has changed.

Oil prices continue to hold over support at $59 ahead of tomorrows inventory report. Crude levels are expected to rise +2.3 mb, distillates +1.1 mb and gasoline +1.5 mb. Natural gas is sticking to the $11.50 level as traders cling to the hope that cold weather will eventually appear. Warmer than normal weather continues to allow gas storage levels to rise but we know this is only temporary. Average temperatures typically fall -5 degrees in November and -15 degrees in December. To date the nation is experiencing a very mild fall and energy prices have cooled more than the temperature.

On Wednesday we will get a televised look at the Oil Pricing and Profits hearing in Washington. Exxon CEO Lee Raymond will give the leadoff speech prior to questioning by lawmakers. Exxon, Chevron, COP, BP and Shell will lead the list as oil companies try to avoid a windfall profits tax. The Exxon CEO said on CNBC that they have invested more in exploration and production over the last ten years than they have made. He is under fire for the $10 billion in profits for last quarter. Lee explained that the cyclical nature of the business produced large profits in some years and very low profits in others. Last year XOM invested $15 billion in capital expenditures. In 1998 when oil was $10 a bbl they also invested $15 billion. If their profits are taxed significantly they will be unwilling and unable to continue investing at that rate. This would guarantee that oil prices would hit $100 a bbl even faster than already expected. Current oil finds are in progressively harsher locations requiring grossly expensive investments in equipment and technology to produce. Lee was questioned about exploration opportunities and he was uncharacteristically candid. He said there was no oil left in the U.S. and most other countries. Only Nigeria, Angola, Russia and Venezuela had the potential for significant new production. Obviously all of those are politically unstable and not particularly friendly to the U.S. I believe Lee Raymond is continuing the party line that there is plenty of oil available as long as they can afford to find and produce it. Afford it is the keyword in that sentence. It means oil prices will continue to rise because the remaining oil deposits are more expensive to produce. Oil that is unprofitable at $60 a bbl to produce might be profitable at $100 a bbl. I hope the oil CEOs get across their point that their profit margins are only about 9% and the same level as they were in 1998 when oil was $10. There are many other sectors like banking, drugs, homebuilding, etc where margins are much higher and they operate with considerably less risk. They would not think about taxing the banking sector so why tax the oil companies?

The International Energy Association World Energy Outlook released this week said they expect global energy demand to increase by 50% before 2030. They also said there would need to be significant investment of $17 trillion in exploration and production to meet that demand. In what could be called their strongest warning ever the IEA said global dependence on the Middle East and North Africa would rise to 44%. Saudi Arabia and Iran are expected to meet 45% of that demand growth. The IEA said oil production in those countries would have to increase by +75% while gas production would have triple. The IEA said those countries would have to invest $56 billion a year to meet those goals. Since Saudi could not ramp production in 2004 to meet only a marginal increase in demand it is highly unlikely they can double or triple production in the future. Read Matthew Simmons book "Twilight in the Desert" for an in-depth laugh at these IEA projections. To put these projections in perspective the IEA said the average price of oil would rise to $39 by 2030. Duh? If countries are expected to invest $17 trillion to find and produce this energy at progressively lower depths in harsher environments and at greater costs why would they be expected to sell it for only $39? This is stupidity at its highest level. One IEA note even suggested that Middle East nations could chose to deliberately develop production capacity more slowly with the effect of getting more money for reduced supplies of oil. I think it is obvious which route those nations will take given their dependency on oil dollars to fund their national budgets.

The IEA produced two different scenarios. One, called the "deferred investment scenario" suggests that if investments are delayed oil prices could rise to $52 by 2030. It would produce a slowdown in global GDP growth and a slowdown in energy consumption as a consequence. The second scenario called the "alternative policy scenario" calls for consuming countries, primarily the U.S., to change their policies to reduce global demand. Under that scenario demand would rise only +37% by 2030. That has as much chance of happening as an alien spaceship landing in Washington DC.

William Ramsay, Deputy Executive Director of the IEA warned that these projections lead to a future that is not sustainable. He said, "At a time when experts debate whether the world will run out of energy, these results are particularly relevant. We must change these outcomes and get the planet onto a sustainable energy path." The IEA said the need for more comprehensive and transparent data on oil and gas reserves in all regions is now becoming "a pressing concern". It points to inconsistencies in the way reserves are defined and measured and to "a lack of verifiable data". "Uncertainties about just how big reserves are and the true costs of developing them are casting shadows over the oil market outlook and heightening fears of higher costs and prices in future," warned Ramsay. The UK Dept of Trade and Industry is so concerned about the future that they announced an investigation into the arrival of peak oil beginning in the next few weeks. "PEAK oil" is the moment when global oil production reaches its all time high and then begins a permanent decline back to zero. Most independent researchers are predicting that in 2007 or sooner. We will not know PEAK oil has passed until well after the event due to the ebb and flow of global production. I am going to a PEAK Oil conference beginning on Wednesday and will report on my findings in the Sunday newsletter.

Locally there was a new forecast on when the Gulf production will be back online. Currently 47% of gas production is still offline and 1 bcf of onshore production in Louisiana is still offline. Currently it is estimated that more than 25% of oil and gas production will remain offline until late in June-2006. Anticipated additions to existing production originally slated for Dec-2005 have been pushed back until Dec-2006. The U.S. is walking a very thin line with warmer temperatures helping to keep demand low while Gulf operations recover. Should a prolonged cold front appear this offline production will eventually bite consumers in the wallet.

December Crude Futures Chart - Daily

The Dynergy CEO said in an interview Tuesday afternoon that gas prices will rise from the current level. This is contrary to the report from the EIA (not the same as the IEA) that home heating bills would not be as high as previously expected. They now expect rates for natural gas users to rise +41% instead of the previously expected +50%. Heating oil users are now expected to pay only +27% more to heat their house for the winter. The EIA also said gasoline prices could dip below $2 in some areas but only in certain parts of the country. Currently gas on the West Coast averages $2.69 with the Midwest at $2.33. Highest in the country is Miami at $2.72 with Cleveland the cheapest at $2.16. The EIA also said U.S. oil demand had fallen by -160,000 bpd due to hurricanes and the impact of high prices but that demand was expected to return soon and then increase by +470,000 bpd in 2006. This demand will continue to increase despite the price of gas. The major automakers sell about 15 million cars per year in the U.S. Less than 2 million are crushed. Do the math. 60% of oil consumption in the U.S. is for transportation.

I thought the markets were going to shake off the Toll news and struggle into the green by the close but it did not happen. The Dow failed to trade above yesterday's highs or lows giving us an inside day with no material directional clue. Given the recent upward bias this could be construed as just another profit taking day for an overbought index. The Dow has broken above its prior channel and is now using that prior upward resistance as support. Downtrend resistance from March weighs in around 10560 with 10570 token resistance from October. The Dow is entering a congestive range where moving higher is going to become increasingly difficult. Once over 10600 the congestion thickens with a breakout over 10700 a breath of fresh air. That could be a tough break to accomplish and hopefully there are some fund managers ready to pull the buy program triggers on any stall over 10600. The best way to break that 10700 level would be one really strong day from the bottom of the congestion rather than a slow climb and repeated abuse as 10700 draws near. We can at least hope for a quick break scenario but that won't make it happen.

The Nasdaq is wedging up just below resistance at 2185 and has the best chance of breaking the jam we saw today. The SOX has recovered from last week's weakness but is struggling to move much over 450. The SOX recovery helped push the Nasdaq higher but it appears to be losing traction. The other Nasdaq support pillar, the Russell, is also having troubles of its own at downtrend resistance at 663. The Nasdaq is probably the most overbought index and is the one most likely to correct sharply if the current uptrend fails.

The S&P is also wedging up with resistance at 1225 and a symmetrical triangle of lower highs and higher lows suggesting a breakout is imminent. However, the S&P has been stuck at this level for four days now and the upticks are beginning to fade. Today's homebuilder implosion did not help the SPX with the dozens of builders and feeders all taking losses. Appliance makers, furniture stocks, carpet manufacturers and construction materials all took a dive and took the S&P with them. I was encouraged by the limited drop of only -4 points on the S&P. I consider this a moral victory that no real damage was done.

SPX Chart - 90 min

Wilshire-5000 Chart - 90 min

NYSE Composite Chart - 120 min

The worst performing index was the NYSE Composite with a -29 point drop to close at 7489. This was -61 points off last weeks high. The $NYA is a potential problem for any continued rally scenario. Offsetting the potential negativity of the $NYA is a slightly more bullish pattern in the Wilshire-5000. Since it is the broadest of the indexes I am giving it more weight in tonight's analysis.

I believe we are just pausing here to rest and the markets would have found something to complain about if TOL had not warned. Tuesday's volume was the lowest since Oct-17th and internals were not that bad. We have seen some nice gains and it is normal to see some profits come off the table. Actually the minor pause is much tamer than it could have been. Remember the volatility in late October with alternating triple digit days as the rally went through its birthing pains? There is still plenty of overhead resistance on any index you care to chart but the trend is still up. If the Oil Pricing and Profits hearing goes smoothly tomorrow and the majors state their case clearly it could kill that tax virus before it can make the human-to-human jump from committee to Congress. If that happens the markets could give a sigh of relief and begin to move higher again. Unfortunately the oil companies face a less than impartial joint committee with a couple of members already calling for a tax on oil profits. You can elect them and send them to Washington but you can't teach them basic math.

With just over two weeks left before Thanksgiving and no major economic events on the calendar until next week, traders should try to take the averages higher. Without any further surprises like Toll all the money managers will be trying to squeeze the last dollar into their bonuses. To do that they have to keep painting the tape for several more weeks. The dips should be bought as the indexes creep higher. I doubt we will see any triple-triples again as we saw in October but there is nothing to keep us from moving higher. Economic growth is improving, profits were good, Katrina, Rita and Wilma are behind us and warmer weather is keeping energy prices down. Consumer sentiment due out on Thursday should rise and the holiday shopping season is almost upon us. While none of this guarantees a continued rally there is little negativity to offset those positive signs. The S&P needs to clear 1225 to start a new leg up and that would be my confirmation the Thanksgiving rally has farther to climb. Continue to enter any position passively and be ready to exit aggressively if the trend you expected changes suddenly.

New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None None FS

New Calls

None today.

New Puts

None today.

New Strangles

Four Seasons - FS - close: 55.37 chg: -0.56 stop: n/a

Company Description:
Dedicated to continuous innovation and the highest standards of hospitality, Four Seasons invented luxury for the modern traveler. From elegant surroundings of the finest quality, to caring, highly personalized 24-hour service, Four Seasons embodies a true home away from home for those who know and appreciate the best. The deeply instilled Four Seasons culture is personified in its employees - people who share a single focus and are inspired to offer great service. Founded in 1960, Four Seasons has followed a targeted course of expansion, opening hotels in major city centers and desirable resort destinations around the world. Currently with 67 hotels in 29 countries, and more than 20 properties under development, Four Seasons will continue to lead luxury hospitality with innovative enhancements, making business travel easier and leisure travel more rewarding. (source: company press release or website)

Why We Like It:
Investors didn't react very well to the company's last earnings report so we'd like to try and capture any post-earnings volatility this time with a strangle play. FS is due to report earnings on Thursday morning (Nov. 10th) before the market open. Estimates are for the company to earn 37 cents per share. We are going to suggest an entry window of $55.50-54.50 and the closer to the $55.00 mark the better. Tomorrow is our only day to try and initiate positions ahead of earnings.

Suggested Options:
We are going to suggest the January strikes although traders could also use the December strikes. This is a strangle so traders should buy an out of the money call and an out of the money put. Our time frame is about eight weeks. At current prices this strangle should cost about $2.60 Try not to pay more than $2.75. We'll target a rise to $5.00.

BUY CALL JAN 60 FS-AL open interest= 49 current ask $1.45
BUY PUT JAN 50 FS-MJ open interest=330 current ask $1.15

Picked on November 08 at $ 55.37
Change since picked: + 0.00
Earnings Date 11/10/05 (confirmed)
Average Daily Volume = 319 thousand


Spectrum Brands - SPC - close: 20.63 change: +0.20 stop: n/a

Company Description:
Spectrum Brands (formerly Rayovac Corporation) is a global consumer products company and a leading supplier of batteries, lawn and garden care products, specialty pet supplies, shaving and grooming products, household insecticides, personal care products and portable lighting. Spectrum Brands' products are sold by the world's top 25 retailers and are available in more than one million stores in 120 countries around the world. Headquartered in Atlanta, Georgia, Spectrum Brands generates approximately $2.7 billion in annualized revenues and has approximately 10,000 employees worldwide. (source: company press release or website)

Why We Like It:
SPC is another stock that has been consolidating (mostly) sideways as investors wait for the company's earnings report. The company is due to report on Thursday morning (Nov. 10th) before the market's open. Estimates are for earnings of 13 cents a share. There was a big reaction to the company's last earnings report so we're looking for another dose of volatility to make our strangle play effective. We are suggesting an entry window of $20.00-21.00 and we only have one day to launch positions ahead of earnings.

Suggested Options:
We are going to suggest the December options for this strangle play. At current prices this strangle should cost about $1.25. Try not to pay more than $1.40. We'll aim for a rise to $2.50.

BUY CALL DEC 22.50 SPC-LX open interest=134 current ask $0.80
BUY PUT DEC 17.50 SPC-XW open interest=335 current ask $0.45

Picked on November 08 at $ 20.63
Change since picked: + 0.00
Earnings Date 11/10/05 (confirmed)
Average Daily Volume = 576 thousand

Play Updates

In Play Updates and Reviews

Call Updates

Peabody Energy - BTU - close: 80.98 chg: +1.00 stop: 76.99

BTU bucked the general down trend in the markets today and added another 1.25% and closed back above the $80 level. We remain bullish on the stock but traders might want to take a wait and see approach on new positions. The major averages still look a little vulnerable to more profit taking. Our seven-week target is the $89.50-90.00 range.

Picked on November 06 at $ 81.36
Change since picked: - 0.38
Earnings Date 10/18/05 (confirmed)
Average Daily Volume = 2.6 million


Intel Corp. - INTC - close: 24.55 chg: +0.05 stop: 22.75

The SOX semiconductor index is still struggling under technical resistance at its simple 50-dma and 100-dma, which have converged near the 457 level. Meanwhile shares of INTC continue to inch higher. The stock got a boost after Banc of American started coverage on Intel with a "buy" rating and a $33 price target. We remain bullish on INTC but suspect there will be another pull back toward the $24.00 level again or at least the simple 50-dma near 24.20 where traders can buy the dip. Our year-end target is the $26.00-26.50 range.

Picked on November 06 at $ 23.99
Change since picked: + 0.56
Earnings Date 10/18/05 (confirmed)
Average Daily Volume = 51.6 million


Legg Mason - LM - cls: 111.63 change: -0.44 stop: 106.95

There wasn't much change in LM today. The recently volatile stock traded in a sideways pattern today. Traders might want to watch for another dip to the $110 level and buy a bounce there. Our seven-week target is the $119-120 range.

Picked on November 02 at $111.69
Change since picked: - 0.06
Earnings Date 10/25/05 (confirmed)
Average Daily Volume = 904 thousand


Rockwell Autom. - ROK - cls: 55.85 chg: -0.51 stop: 53.49

ROK pulled back with the rest of the market. If the markets continue to pull back we would watch for a stronger dip to the $55 level and use it as an entry point. Our seven-week target is the $61.00-62.00 range.

Picked on November 03 at $ 55.90
Change since picked: - 0.05
Earnings Date 11/03/05 (confirmed)
Average Daily Volume = 804 thousand


Sears Holding - SHLD - cls: 119.42 chg: -4.63 stop: 121.99

The warning from Toll Brothers sent shivers through the market and investors began to worry about the consumer again. That pushed the retail sector lower and shares of SHLD lost 3.7%. We remain on the sidelines. Our plan is to buy a breakout from its current trading range. Our suggested trigger to buy calls is at $128.51. If SHLD falls under $114.00 we might want to think about buying puts instead.

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 12/07/05 (unconfirmed)
Average Daily Volume = 3.2 million

Put Updates

Bard C.R.- BCR - close: 62.85 change: -0.15 stop: 63.55

Hmm... lack of reaction to the market's decline today doesn't help our bearish case with BCR. The stock has marked its fourth day in a row churning sideways in a very tight range near the $63 level. We are not suggesting new plays at this time and if we do not see a move lower in the next couple of sessions we'll exit early!

Picked on October 26 at $ 61.70
Change since picked: + 1.15
Earnings Date 10/18/05 (confirmed)
Average Daily Volume = 745 thousand


Career Educ. - CECO - cls: 35.09 chg: +0.27 stop: 35.01

CECO is moving the wrong way. The stock bucked the weakness in the markets today after being upgraded this morning. Shares spiked to $35.72 but could not hold their gains. The stock has technical resistance near the $36.00 level with its simple 50-dma and simple 200-dma are converging. This may prove to be a failed rally and a new bearish entry point but we're going to stick to our plan for now. Currently our trigger to buy puts is at $32.95 under support at the $33.00 mark. If triggered our target is the $30-29 range.

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/02/05 (confirmed)
Average Daily Volume = 1.3 million

Strangle Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)


AmerisourceBergen - ABC - cls: 76.94 chg: +0.35 stop: n/a

We see no changes from our weekend update on ABC. There are less than two weeks left before November options expire. That means more conservative traders may want to adjust their target on the November strangle from $3.50 to $2.10(breakeven). The options in the November strangle were the November $80 calls (ABC-KP) and the November $70 puts (ABC-WN). We also suggested a December strangle and the options for the December strangle are the December $80 calls (ABC-LP) and the December $70 puts (ABC-XN). We are leaving our target at $5.00 for the December position. We are not suggesting new plays.

Picked on October 16 at $ 74.81
Change since picked: + 2.13
Earnings Date 11/03/05 (confirmed)
Average Daily Volume = 900 thousand


Genentech - DNA - close: 93.90 chg: +0.79 stop: n/a

DNA helped lead the BTK biotech index into the green today. We see no changes from our weekend update. We still have seven weeks left before the December options expire. Our target was for a rise to $4.50-5.00 in the strangle and the December $95 calls (DWN-LS) look like they'll be the winning side.

Picked on October 20 at $ 84.83
Change since picked: + 9.07
Earnings Date 10/10/05 (confirmed)
Average Daily Volume = 3.9 million


eBay Inc. - EBAY - close: 42.30 chg: +0.43 stop: n/a

Tuesday was a bullish day for EBAY. The stock broke through resistance at the $42.00 level. Shares hit a high of $43.36 and began to fade back toward broken resistance. Over the weekend we adjusted our target to breakeven at $1.05. The options in our strangle were the November $45 calls (XBA-KI) and the November $35 puts (XBA-WG).

Picked on October 18 at $ 40.42
Change since picked: + 1.88
Earnings Date 10/19/05 (confirmed)
Average Daily Volume = 18.3 million


General Dynamics - GD - cls: 117.26 chg: +0.76 stop: n/a

GD displayed some relative strength today and closed in the green but failed to breakout over technical resistance at its simple 50-dma near 117.40. We recently adjusted our target for the strangle from $4.00 to breakeven at $2.00. The options in our strangle were the November $115 puts (GD-WC) and the November $125 calls (GD-KE).

Picked on October 09 at $119.59
Change since picked: - 2.33
Earnings Date 10/19/05 (confirmed)
Average Daily Volume = 713 thousand


Harman Intl - HAR - cls: 103.05 chg: -1.50 stop: n/a

HAR pulled back to retest minor support (previous resistance) near $102 and only managed a meager bounce late this afternoon. Over the weekend we adjusted our target to $2.75, which is actually a loss compared to our cost of $3.80 but we're trying to recover some of our capital. The options in our strangle were the November $110 calls (HAR-KB) and the November $90 puts (HAR-WR).

Picked on October 18 at $100.80
Change since picked: + 2.26
Earnings Date 10/19/05 (confirmed)
Average Daily Volume = 739 thousand


Hutchinson Tech. - HTCH - cls: 25.47 chg: +0.25 stop: n/a

We see no change from our weekend update on HTCH. The options in our strangle are the January $30 calls (UTQ-AF) and the January $20 puts (UTQ-MD). Our target is for a rise to $3.00. We are not suggesting new strangles at this time.

Picked on October 26 at $ 24.89
Change since picked: + 0.58
Earnings Date 11/01/05 (confirmed)
Average Daily Volume = 666 thousand


Inamed Corp. - IMDC - close: 75.37 change: -1.46 stop: n/a

IMDC was looking overbought so we're not surprised to see some profit taking today. We are not suggesting new plays at this time. The options in our strangle are the December $75 calls (UZI-LO) and the December $65 puts (UZI-XM)). Our target is for a rise to $5.00 or more.

Picked on October 30 at $ 70.63
Change since picked: + 4.68
Earnings Date 11/01/05 (unconfirmed)
Average Daily Volume = 533 thousand


Kos Pharma - KOSP - close: 57.44 chg: -0.42 stop: n/a

KOSP lost another 0.7% today and looks poised to test and probably breakdown under its simple 200-dma near 55.50. We are not suggesting new plays. There are only two weeks left before November options expire and conservative traders may want to seriously consider adjusting their targets lower. Our target is for a rise to $5.00 or more. Our hypothetical cost in the play is about $2.90. The options are the November $65 call (KQW-KM) and the November $55 put (KQW-WK).

Picked on October 20 at $ 59.80
Change since picked: - 2.36
Earnings Date 11/03/05 (confirmed)
Average Daily Volume = 460 thousand


Lear Corp - LEA - close: 29.84 chg: -0.36 stop: n/a

LEA continues to trade in a very tight range near the $30.00 level. This provides a great opportunity to launch new strangle positions. We're suggesting an entry window of $30.50-29.50. The options in our strangle are the January $35 calls (LEA-AG) and the January $25 puts (LEA-ME). Try and keep your costs under $1.75. We are targeting a rise to $3.20 or more.

Picked on November 06 at $ 30.24
Change since picked: - 0.40
Earnings Date 10/26/05 (confirmed)
Average Daily Volume = 1.8 million


Legg Mason - LM - cls: 111.63 chg: -0.44 stop: n/a

LM spent most of the session trading sideways between $111 and $112. We see no changes from our weekend update. The call side of our strangle is currently the winning side. Watch the November $110 calls (LM-KB). Our target is for a rise to $5.00 or more.

Picked on October 12 at $102.59
Change since picked: + 9.04
Earnings Date 10/25/05 (confirmed)
Average Daily Volume = 966 thousand


Loews - LTR - close: 95.51 change: +0.90 close: n/a

LTR showing some strength with a gain on a down day for the markets. We're not suggesting new strangle positions in LTR. The options in our strategy are the December $95 calls (LTR-LS) and the December $85 puts (LTR-XQ). We'll plan to exit if either option rises to $5.00 or more.

Picked on October 23 at $ 89.94
Change since picked: + 5.57
Earnings Date 10/27/05 (confirmed)
Average Daily Volume = 602 thousand


Microsoft - MSFT - close: 27.05 change: +0.04 stop: n/a

Shares of MSFT just marked their seventh gain in the last eight sessions. Today's strength may have been fueled by news that the company expects to sell about three million of its new Xbox 360 console games in the first ninety days following the November 22nd launch. We are not suggesting new strangle positions. Our strangle is based on the December $27.50 call (MSQ-LY) and the December $22.50 put (MSQ-XX). We are aiming for a rise to $0.80-0.90 for either side of the strangle.

Picked on October 25 at $ 25.03
Change since picked: + 2.02
Earnings Date 10/27/05 (confirmed)
Average Daily Volume = 64 million


O'Reilly Auto. - ORLY - close: 30.36 chg: -0.32 stop: n/a

ORLY hit some profit taking today but bulls where there to buy the dip near the $30 region. The target on our strangle play was for a rise to $1.20 but recently we've been suggesting that more conservative traders consider exiting around breakeven in the $0.75 region. The call side of our November strangle is the November $30 call (OQR-KF).

Picked on October 09 at $ 28.23
Change since picked: + 2.17
Earnings Date 10/25/05 (confirmed)
Average Daily Volume = 513 thousand


Oshkosh Truck - OSK - close: 43.00 chg: -0.29 stop: n/a

We are very quickly leaning toward an early exit for this play. OSK is not making any moves toward a breakout from its trading range. Instead shares are doing just the opposite. The stock moved sideways in a very narrow 30-cent range today. We are not suggesting new strangles. The options in our suggested strangle are the December $45 call (OSK-LI) and the December $40 put (OSK-XH). We're targeting a rise to $3.00 or more.

Picked on October 30 at $ 42.82
Change since picked: + 0.18
Earnings Date 11/01/05 (confirmed)
Average Daily Volume = 405 million


Verifone Holdings - PAY - cls: 24.81 chg: -0.18 stop: n/a

We see no changes from our previous updates. The stock is overbought and due for a dip. The simple 10-dma near $23.50 is the most likely area to find support. The January $22.50 calls (PAY-AX) appear to be the winning side of our January strangle but our target is for a rise to $4.50.

Picked on October 12 at $ 19.98
Change since picked: + 4.83
Earnings Date 11/18/05 (unconfirmed)
Average Daily Volume = 259 thousand


Protein Design Labs - PDLI - cls: 25.74 chg: -0.15 stop: n/a

There was little change in shares of PDLI today as the stock traded in a narrow range under the $26 level but above technical support at the 100-dma. We are no longer suggesting new strangle positions. The options in our hypothetical strangle are the December $30 calls (PQI-LF) and the December $25 puts (PQI-XE). We'll plan to sell if either side rises to $3.25.

Picked on October 30 at $ 27.70
Change since picked: - 1.92
Earnings Date 11/01/05 (confirmed)
Average Daily Volume = 1.8 million

Dropped Calls

Building Mat. - BMHC - cls: 81.65 chg: -9.07 stop: 84.49

Ouch! BMHC has experienced quite a reversal of fortunes. Luxury homebuilder Toll Brothers (TOL) issued a warning for its 2006 sales forecast this morning. Investors panicked and sold anything home building related. Naturally BMHC was a big target since they supply materials to the homebuilders. Looking at today's reaction in the share price you'd think BMHC had warned. The stock gapped down to open at $84.56 and quickly dipped to $79.01 before rebounding. The move wiped out the last several days of gains and we've been stopped out at $84.49.

Picked on November 02 at $ 87.55
Change since picked: - 5.90
Earnings Date 10/25/05 (confirmed)
Average Daily Volume = 536 thousand

Dropped Puts


Dropped Strangles


Today's Newsletter Notes: Market Wrap by Jim Brown and all other plays and content by the Option Investor staff.


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