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Newsletter

Daily Newsletter, Monday, 11/21/2005

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. Trader's Corner

Market Wrap

Op-Ex Bear-B-Cue

Bulls ran the ball on what proved to be a post op-ex fumble, with an opening decline bought on weak volume. A flat, boring sideways-upward drift followed for several hours, until it broke to the upside, gaining strength in the final half hour. Bonds, gold and oil were all strong throughout the day.

Volume breadth was weak on the Nasdaq until the final hour, strong on the NYSE throughout the day. Exchange volume was strong, though QQQQ traded only a fraction of Friday's volume. The NYSE was notably stronger than the Nasdaq throughout the session, with QQQQ never testing Friday's morning high while the Dow broke easily above it from the open. The NYSE made new record highs in the final hour.

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The big news this morning was from General Motors (GM), which held a press conference to announcing that it will eliminate 5,000 more jobs from its previous plan, bringing its projected 3-year total workforce reduction to 30,000 as it closes 12 North American facilities. The company aims to reduce its capacity to 4.2 million unites by 2008, a 30% reduction in production capacity from 2002's levels. The costs from its restructuring are expected to be "significant" but hops to reduce costs by $7 billion by the end of next year. It will reduce retiree health liabilities by 25% or $15 billion, and hopes to cut health-care costs by $3 billion per year.

S&P announced that it would leave GM, GMAC and related entities on Creditwatch without change from its October 3rd alert, expressing concerns about sales and pricing for GM products, the adequacy of its cost-cutting strategies, fallout from Delphi's bankruptcy and the continuing SEC investigation into GM's accounting practices. Deutsche Bank, however, had earlier upgraded GM debt to "buy" from "hold," evidently more impressed with GM's substantial efforts to restructure and reduce its liabilities and commitments.

GM rose on the news but could not hold its gains, finishing lower by 1.95% at 23.58 after reaching an intraday high of 24.95.

Daily Dow Chart

The Dow broke 10800 and never looked back, closing +54 at 10820. 20 day Bollinger resistance at 10861 was not tested, but rising trendline resistance on a possible rising wedge was. The daily picture has been muddy since the August high was taken out, causing the 10-day stochastic to begin trending in overbought territory. Despite the light volume and unconvincing price action during op-ex week, the current move remains entirely bullish, with new highs for the year being printed again today. 10700-720 is confluence support above which the daily cycle trending move continues. Only a close below that level would suggest something more serious than the bullish consolidations we've been seeing on every pause and pullback.

Daily S&P 500 Chart

The SPX also blew out Friday's high, reaching new highs for the year at 1255.89. The pullback at the close resulted in a 6.58 gain at 1254.86, also a new closing high. As with the Dow, the move has been looking extended for a week, cycle-wise, but price-wise is another story. Friday's break above the August high sets up support at 1245-46, with wedge support just below that. Again, while the move looks extended, the price trend is as strong as it's been at any time since the move commenced in late October. Until we see successive lower lows and highs for the day, the trend remains up.

Daily Nasdaq Chart

Although weaker than its peers, the Nasdaq tacked on 14.6 to close at 2241.67, a new closing high for the year and less than a point off its 2242.30 intraday high. The move stalled the downtick in the 10-day stochastic. There was a notable divergence between the Nasdaq, which made a higher high and higher low, and the QQQQ and NQ future, both of which broke nominally lower below Friday's low and failed to even touch Friday's high. In any event, support at 2220 was confirmed today (session low 2219), below which 2200-05 is the next confluence area.

Daily TNX Chart

Ten year notes were strong out of the gate this morning, and despite a pullback toward session's end, remained strong throughout. Ten year note yields (TNX) finished lower by 4.1 bps at 4.461%, holding above last week's low but spending the session below Friday's range. 4.44% remains confluence support for the move, 4.52%-4.54% immediate upside resistance.

On the liquidity front, the Treasury announced the size of the upcoming 4-week bill and 2-year note auctions. $18 billion of 4-week bills will be sold, paying down maturing debt and raising an additional $6 billion of new cash, which effectively drains that amount from liquidity available to the market. However, the 2-year note auction will be for $20 billion to refund $25.35 billion in maturing notes, paying down $5.35 billion and effectively adding that amount to the pool. Today's 13- and 26-week bill auctions totaled $34 billion against $32.9 billion maturing, raising $1.1 billion in new cash, the net result of all of which is a net drain of just under $2 billion in available liquidity.

That drain was supplemented by the Fed's open market operation from Friday, with $2 billion in weekend repos expiring. This drain was reduced by the coupon pass from Friday in the amount of $1.1 billion, however, and so there was only net $900 leaving the dealers' hands. The Fed stepped up with a $7.5 billion overnight repo this morning, for a net add of $6.6 billion against that $900 million expiring for the day.

At 1PM, the Treasury's $34 billion 13- and 26-week bill auction results were released. Foreign central banks took a solid $12.7 billion of the total. The high-rate on the 13-week bills was 3.94%, yielding 4.034%. The bid-to-cover ratio on the 13-week bills was 2.59. The 26-week bills sold for a high-rate of 4.155% yielding 4.303%, with a 2.52 bid-to-cover ratio. This was a strong showing, and treasuries held the bulk of their gains into the close.

Daily Chart of Crude oil

Crude oil opened higher this morning as the financial press reported the arrival of... you guessed it, snowstorms. Also reported, digging slightly below the headlines, was an announcement from Saudi Arabia that a "roadmap" will be needed in order to avoid production gluts and shortfalls. Recent supply issues, it said, have been due more to a paucity of information than of actual crude oil. Saudi Oil Minister Ali Naimi also blamed recent record price highs on "excessive and inaccurate speculation."

If you dug still further, there was news that Metrologix expects higher than normal consumption of heating fuel in Boston, Buffalo and New York City, which compounded a report from the Minerals Management Service to the effect that Gulf of Mexico output remains 47% below normal levels in the wake of the hurricanes. With roughly 50% of platforms still offline and winter upon us, there were few bearish newsbytes circulating in the oil markets today.

Crude oil rose .55 to close at 57.75. The daily chart suggests that Friday's low may have been a daily cycle low, with confirmation to come on a continuation of today's rise in tomorrow's trading. Another positive day should be enough to kick off the first 10-day stochastic buy signal, with confluence resistance at 59.50. A closing break of that level would targets descending trendline resistance at 60.25.

In other news, Beijing's State Reserve Bureau may be forced to disclose its copper position for the first time in what is proving to be a growing squeeze in copper. Still missing is trader Liu Qibing, reportedly missing after building an unmanageable short position. Estimates are placing the amount of copper that could be required to be delivered by the SRB at 200,000 metric tons, but the SRB has been quoted as saying that it has as much as 1.3 millions tons. Bloomberg reports last week's record high at $4,243 per ton, a 34% gain this year following last year's 37% gain.

Today's lone economic report was Leading Economic Indicators for October. At 10AM, the Conference Board reported that LEI rose .9% to 137.9 following September's large decline on the hurricanes. Expectations were for a .7% rise. September's decline was revised from -.7% to -.8%. 7 out of 10 leading indicators rose in October, while 2- building permits and stock prices- declined.

Jean-Claude Trichet, president of the European Central Bank, once again stated that the ECB is ready to increase the overnight rate at its next meeting, characterizing the move as "preventative" based more on the ECB's perception of risks than on hard figures. This has been a continuing theme for Trichet, but he followed it up with a statement to the effect that it's not "safe" to assume a series of rate hikes. The euro had been rising until that qualification, following which it gave back most of its earlier gains. Euros were trading -.31% at 1.1745 as of this writing.

Campbell Soup (CPB) reported Q1 earnings that rose from $230 million or 56 cents to $302 million. Net of items, the company earned $242 million or 58 cents on sales of $2.11 billion, up $200 million from the year-ago quarter. These results beat estimates by 2 pennies on EPS while falling short by $200 million on revenue. CPB closed higher by 4.21% at 30.95.

Sprint Nextel (S) announced its agreement to purchase Alamosa (APCS) for $4.3 billion in cash and the assumption of $900 million in debt, in a deal that values APCS at $18.75 per share. APCS is a Sprint PCS provider, and the deal will bring 1.48 million wireless subscribers in 242 service areas under S's umbrella. S expects the deal to close in Q1 2006, subject to APCS shareholder and regulatory approvals. S closed +.92% at 25.17, and APCS gained 12.85% to close at 18.35.

Intel (INTC) and Micron (MU) announced their intention to form a joint venture for the manufacture of flash memory. The companies reported that AAPL has already paid each company $250 million to secure a "significant portion" of the joint venture's production. INTC and MU will contribute roughly $1.2 billion to the new company, "IM Flash Technologies LLC" and intend on paying in an additional $1.4 billion each during the next 3 years. The company will be owned 51% by MU, 49% by INTC. INTC closed lower by .2% at 25.25, MU closed +.02 at 14.20, and SNDK closed lower by 16.65% at 46.84.

This Thanksgiving week is scheduled to be light for economic data, with the minutes from the Nov. 1st FOMC minutes to be released tomorrow, followed by Initial Claims, Michigan Sentiment, the Help Wanted Index, and the weekly mortgage and petroleum data on Wednesday. The bond market is scheduled for an early close on Wednesday, and the equity and treasury markets will be closed Thursday. The NYSE and the treasury markets will close early on Friday- 1PM for the NYSE and 2PM for the bond market.

Although ETF volume was light, volume for the broader indices was strong. The big question for tomorrow will be whether the final hour runs were the real deal, or a mere flash in the pan. On the one hand, the Fed was generous via its overnight repos, and we saw strong closes for gold, bonds and stocks. The op-ex hangover should be over, or close to it, and short call holders didn't seem to be in any hurry to dispose of their new stock. With so many citing the poor volume, poor breadth and dubious price action throughout much of this rally, sentiment has yet to reach the unanimous bullish extreme that would suggest a top. Wherever that top may or may not be, however, the trend is your friend, and it's not down. Given how toppy the daily and weekly cycles are in the process of becoming, there should be plenty of time for a new trend develop, once the current one ends. Until that time, however, the dips to support are just that. We will be analyzing the intraday action tick by tick in the Market Monitor and Futures Monitor- see you there tomorrow.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
APA None VLO
PII    

New Calls

Apache Corp. - APA - close: 68.41 chg: +2.37 stop: 64.95

Company Description:
Apache Corporation is a large oil and gas independent with core operations in the United States, Canada, Australia, the United Kingdom North Sea and Egypt. (source: company press release or website)

Why We Like It:
Oil stocks are coming back to life again and many are looking pretty tempting as bullish candidates. The OIX and OSX oil indices look positive but we feel these are still higher-risk plays with crude oil prices still stuck in a two-month downtrend. Therefore we're going to use trigger to launch a play in APA. The stock has resistance near $69.00 and its 100-dma (68.71). We're going to suggest a trigger at $69.05 to open call positions. More conservative traders may want to wait for a move over $70.00 instead. If triggered we will target a move into the $75-76 range. The Point & Figure chart for APA is already bullish and points to a $83 target. A move over $69 will produce another P&F buy signal.

Suggested Options:
We are suggesting January calls.

BUY CALL JAN 65 APA-AM open interest= 9121 current ask $5.70
BUY CALL JAN 70 APA-AN open interest=12215 current ask $2.90
BUY CALL JAN 75 APA-AO open interest= 8506 current ask $1.25

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume = 3.7 million

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Polaris Ind. - PII - close: 48.47 change: +1.53 stop: 45.95

Company Description:
Polaris is a recognized leader in the snowmobile industry; and one of the largest manufacturers of ATVs in the world. Victory motorcycles, established in 1998 and representing the first all-new American-made motorcycle from a major company in nearly 60 years, are rapidly making impressive in-roads into the motorcycle cruiser marketplace. Polaris also enhances the riding experience with a complete line of Pure Polaris apparel, accessories and parts, available at Polaris dealerships. (source: company press release or website)

Why We Like It:
Shares of PII look like they have built a bottom. The stock broke through its three-month trendline of lower highs (resistance) about a week ago. Shares then spent the last several days consolidating sideways and finally broke through the 50-dma with confidence today. Short-term technicals have produced a new buy signal but conservative traders may want to be patient when considering new entries. The $50.00 mark can still act as round-number, psychological resistance and PII still has to deal with its descending 100-dma, which can also act as resistance. This is definitely a more aggressive play since we're trying to buy a bottom with a stock in a definite downtrend. It will take a move over $51 to turn its P&F chart into a new buy signal. We're going to target a run into the $54.00-55.00 range by year's end (under its simple 200-dma).

Suggested Options:
We are suggesting the January strikes even though they look new since there is no open interest. If you want more open interest you have to move out to March strikes.

BUY CALL JAN 45 PII-AI open interest= 0 current ask $4.80
BUY CALL JAN 50 PII-AJ open interest= 0 current ask $1.75
BUY CALL JAN 55 PII-AK open interest= 0 current ask $0.45

Picked on November 21 at $ 48.47
Change since picked: + 0.00
Earnings Date 01/12/06 (unconfirmed)
Average Daily Volume = 467 thousand
 

New Puts

None today.
 

New Strangles

Valero Energy - VLO - close: 99.00 chg: +0.83 stop: n/a

Company Description:
Valero Energy Corporation is a Fortune 500 company based in San Antonio, with approximately 22,000 employees and expected annual revenue of more than $75 billion. The company is one of the nation's largest retail operators with more than 4,700 retail and branded wholesale outlets in the United States, Canada and the Caribbean under various brand names including Valero, Diamond Shamrock, Shamrock, Ultramar, and Beacon. The company owns and operates 18 refineries throughout the U.S., Canada and the Caribbean with a combined throughput capacity of approximately 3.3 million barrels per day, making it the largest refiner in North America. (source: company press release or website)

Why We Like It:
We do have a long-term bullish bias on the oil stocks and many stocks in the sector are now developing short-term bullish patterns. Yet there is still a lot of uncertainty about oil prices over the next few months and you can see the sideways consolidation in VLO, a major refiner, has narrowed near the $100 level. We do have a couple of bullish call plays in the oil sector in the newsletter already. We're going to add a strangle on VLO as an alternative so we can catch any move, up or down, in the oil group. We'll suggest a $98.50-100.00 entry window but the closer to $100.00 the better. VLO is due to split 2-for-1 on December 16th. That means that with the strangle play below, post split, the number of our options will double while the value should theoretically halve in price.

Suggested Options:
We are going to suggest the January strikes. As a strangle we need to buy an out of the money call and an out of the money put. At current prices this should cost us about $5.65. We'll aim for a rise to $9.50 in the strangle. Post split that target will change to $4.75 as our cost will adjust to $2.825.

BUY CALL JAN $110 VLO-AB open interest=5530 current ask $2.95
-and-
BUY PUT JAN $ 90 VLO-MR open interest=2764 current ask $2.70

Picked on November 21 at $ 99.00
Change since picked: + 0.00
Earnings Date 01/30/06 (unconfirmed)
Average Daily Volume = 10.7 million
 


Play Updates

In Play Updates and Reviews

Call Updates

Amerada Hess - AHC - close: 130.40 chg: +1.76 stop: 121.49

A minor bounce in crude oil prices helped push the oil and oil service sectors higher. The two groups were some of the best performing sectors on Monday. Shares of AHC enjoyed some strength and added 1.3% while breaking out back above the $130.00 mark. We remain bullish but it's worth noting that AHC does have some overhead resistance in the 131.50-131.60 region. Our seven-week target is the $139.85-140.00 range.

Picked on November 16 at $128.49
Change since picked: + 1.91
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume = 1.9 million

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Goldman Sachs - GS - close: 132.41 chg: +0.83 stop: 124.99

The XBD broker-dealer index hit another new all-time high on Monday with its 1.45% gain. Shares of GS lagged behind with a 0.6% gain but did set a new one-year high. If you look at the intraday chart you can see where bulls bought the dip at $130.50. We see no changes from our weekend update. Our target is the $139-140 range. We plan to exit ahead of the company's December 15th earnings.

Picked on November 20 at $131.58
Change since picked: + 0.83
Earnings Date 12/15/05 (unconfirmed)
Average Daily Volume = 3.6 million

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Hovnanian - HOV - close: 50.00 change: +1.64 stop: 44.45

We have been triggered. The homebuilding sector turned in a strong session with the DJUSHB home construction index rising more than two percent. Shares of HOV out performed most of its peers and added 3.39% and closing right at the $50.00 mark. Our trigger to buy calls was at $49.25 so the play is now open. Our target is the $54.50-55.00 range. We do not plan on holding past HOV's earnings report. In the news HOV announced it will present at the NYSSA homebuilding industry conference on December 1st.

Picked on November 21 at $ 49.25
Change since picked: + 0.75
Earnings Date 12/07/05 (unconfirmed)
Average Daily Volume = 1.5 million

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Intl. Bus. Mach. - IBM - cls: 87.29 chg: -0.48 stop: 83.99

The rally in IBM took a breather today. Shares pulled back about half a percent. We're not surprised. The stock looked a little overbought. The 10-dma near $85.00 and broken resistance at $85 should now act as new support. A bounce from this region can be used as a new entry point. Our target is the $89.90-90.00 range. FYI: IBM is one of the many component makers for MSFT's new XBox 360 that launches tonight at midnight. A big opening for this new XBOX could underpin both shares of MSFT and IBM.

Picked on November 15 at $ 85.25
Change since picked: + 2.04
Earnings Date 01/16/06 (unconfirmed)
Average Daily Volume = 5.6 million

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Intel Corp. - INTC - close: 25.25 chg: -0.05 stop: 23.45

News that Intel and Micron are joining forces to make flash memory chips sent stocks like SanDisk (SNDK -16.6%) tumbling. Meanwhile share of INTC are not moving much higher as the stock continues to struggle under its 100-dma near $25.50. The SOX semiconductor index also stalled its decline with a fractional gain today. We are not suggesting new bullish call positions at this time. Traders interested in starting new plays can watch for a potential dip back toward the $24.50-24.75 region. Our year-end target is the $26.00-26.50 range.

Picked on November 06 at $ 23.99
Change since picked: + 1.26
Earnings Date 10/18/05 (confirmed)
Average Daily Volume = 51.6 million

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NovAtel Inc. - NGPS - close: 30.78 chg: +0.97 stop: 27.75

Strength in the NASDAQ today helped propel shares of NGPS up and out of its three-week trading range. The stock broke out over resistance at the $30.00 mark and hit our trigger to buy calls at $30.45 opening the play. Volume came in well above average suggesting more strength to come. Our target is the $35.00-36.00 range by year-end.

Picked on November 21 at $ 30.45
Change since picked: + 0.33
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume = 292 thousand

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Phelps Dodge - PD - cls: 129.44 chg: -1.75 stop: 123.45

Some of the copper-mining stocks stalled today. Shares of PD did rebound off its lows of the session but we would not consider new bullish positions until PD trades back above $130.00 or even $131 depending on your own risk profile. Our target is the $139.90-140.00 range. The Point & Figure chart for PD points to a $150.00 target. More conservative traders may want to target the October high near $138.50.

Picked on November 18 at $131.25
Change since picked: - 1.81
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume = 2.7 million

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Rockwell Autom. - ROK - cls: 57.32 chg: -0.17 stop: 54.80

ROK's relative weakness today is not a welcome sign. The lack of participation in today's rally should have traders wondering. More conservative types may want to tighten their stops! We are targeting a move into the $61-62 range.

Picked on November 03 at $ 55.90
Change since picked: + 1.42
Earnings Date 11/03/05 (confirmed)
Average Daily Volume = 804 thousand

---

Walter Inds. - WLT - close: 52.55 change: +1.05 stop: 45.95

WLT added another two percent today on top of last week's gains but we noticed that volume dropped off significantly today. There is still a good chance that shares may pull back and retest the $50 level as support before climbing much higher. Our target is the $57-58 range by December 31st. More conservative traders can aim for an exit near $55.

Picked on November 20 at $ 51.50
Change since picked: + 1.05
Earnings Date 10/26/05 (confirmed)
Average Daily Volume = 927 thousand
 

Put Updates

None
 

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.)

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AmerisourceBergen - ABC - cls: 78.95 chg: +0.95 stop: n/a

ABC has broken out above resistance in the $78.00 and $78.75 levels. It looks like the stock is poised to make a run at the $80 mark. We are not suggesting new strangle positions. Our current strangle involves the December $80 calls (ABC-LP) and the December $70 puts (ABC-XN). Our estimated cost was $2.80. Our current target is for a rise to $5.00 in the strangle.

Picked on October 16 at $ 74.81
Change since picked: + 4.14
Earnings Date 11/03/05 (confirmed)
Average Daily Volume = 900 thousand

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Amer. Eagle Out. - AEOS - cls: 24.22 chg: +0.56 stop: n/a

Retail stocks were not exempt from the market rally today and AEOS rebounded for a 2.3% gain back over the $24 level. At this time we're not suggesting new strangle positions. The current strangle has an estimated cost of $2.35 with the January $27.50 calls (AQU-AY) and the January $22.50 puts (AQU-MX). We are targeting a rise to $4.70.

Picked on November 13 at $ 25.47
Change since picked: - 1.28
Earnings Date 11/15/05 (confirmed)
Average Daily Volume = 3.6 million

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Abercrombie&Fitch - ANF - close: 62.94 chg: +1.93 stop: n/a

ANF turned in a strong session adding more than three percent to close at a new three-month high. We are not suggesting new strangle positions at this time. The options in our strangle are the January $65 calls (ANF-AM) and the January $55 puts (ANF-MK). Our estimated cost was $5.15. We're looking for a rise to $8.50.

Picked on November 13 at $ 59.67
Change since picked: + 3.27
Earnings Date 11/15/05 (confirmed)
Average Daily Volume = 2.7 million

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Chicago Merc. Exchg. - CME - cls: 383.41 chg: +7.51 stop: n/a

Boy, you got your choice of entry points today. We suggested an entry window of $373-377 for our January strangle. Well shares of CME lived up to its volatile past and dipped to $372.15 today before rebounding higher and closing with a 2% gain at $383. We're not suggesting new strangle positions at this time. Our current play involves the January $400 calls (CMJ-AK) and the January $350 puts (CMJ-MA). Our estimated cost was $26.70. We're aiming for a rise to $40.00 in the strangle before January options expire.

Picked on November 20 at $375.90
Change since picked: + 7.51
Earnings Date 01/24/06 (unconfirmed)
Average Daily Volume = 879 thousand

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D.R.Horton - DHI - close: 36.14 chg: +1.33 stop: n/a

The homebuilding stocks turned in another strong session with the DJUSHB index added more than two percent. Shares of DHI out performed many of its peers with a 3.8% rally to breakout over its simple 100-dma. We are not suggesting new strangles at this time. Our current play involves the January $35 calls (DHI-AG) and the January $30 puts (DHI-MF). Our estimated cost was $3.15. We're aiming for a rise to $6.00.

Picked on November 13 at $ 32.56
Change since picked: + 3.58
Earnings Date 11/16/05 (confirmed)
Average Daily Volume = 3.2 million

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Four Seasons - FS - close: 50.49 chg: +0.39 stop: n/a

FS could not escape the upward pressure from today's rally and added 0.77%. However, there was something odd about today's trading in FS. The stock traded the entire session in a very narrow 20-cent range. Actually shares of FS have done this before, trade in a very narrow range, and this sort of action tends to precede a new breakout (up or down). We are not suggesting new strangles at this time. The options in our strangle were the January $60 calls (FS-AL) and the January $50 puts (FS-MJ). Our estimated cost was about $2.60. We're aiming for a rise to $5.00 or more.

Picked on November 08 at $ 55.37
Change since picked: - 4.88
Earnings Date 11/10/05 (confirmed)
Average Daily Volume = 319 thousand

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Hutchinson Tech. - HTCH - cls: 25.33 chg: -0.11 stop: n/a

Lack of movement has us thinking we need to bail out of this strangle early. We'll give HTCH just a few more days to make a move! We are not suggesting new strangles at this time. The options in our strangle were the January $30 calls (UTQ-AF) and the January $20 puts (UTQ-MD). Our estimated cost was $1.65. We have adjusted our initial target from $3.00 to breakeven at $1.65 since the post-earnings reaction was not as big as expected.

Picked on October 26 at $ 24.89
Change since picked: + 0.44
Earnings Date 11/01/05 (confirmed)
Average Daily Volume = 666 thousand

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Lear Corp - LEA - close: 28.89 chg: +0.00 stop: n/a

All the news regarding the future of GM probably makes investors nervous with LEA too. Shares of LEA rallied this morning but couldn't hold its gains. We are no longer suggesting new strangle positions. The options in our strangle are the January $35 calls (LEA-AG) and the January $25 puts (LEA-ME). We are targeting a rise to $3.20 or more.

Picked on November 06 at $ 30.24
Change since picked: - 1.35
Earnings Date 10/26/05 (confirmed)
Average Daily Volume = 1.8 million

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Loews - LTR - close: 97.72 change: -0.08 close: n/a

We see no changes from our weekend update on LTR. The options in our strategy are the December $95 calls (LTR-LS) and the December $85 puts (LTR-XQ). Our estimated cost is about $3.05. We plan to exit if our strangle rises to $5.00 or if shares of LTR hit 99.90.

Picked on October 23 at $ 89.94
Change since picked: + 7.78
Earnings Date 10/27/05 (confirmed)
Average Daily Volume = 602 thousand

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Verifone Holdings - PAY - cls: 23.79 chg: +0.09 stop: n/a

Hmm... normally we would have expected PAY to rebound more strongly with the market in rally mode. Our remaining strangle involves the January $22.50 calls (PAY-AX) and the January $17.50 puts (PAY-MW). Our estimated cost was $2.60 and we're aiming for a rise to $4.50 or more.

Picked on October 12 at $ 19.98
Change since picked: + 3.81
Earnings Date 11/18/05 (unconfirmed)
Average Daily Volume = 259 thousand

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Protein Design Labs - PDLI - cls: 28.57 chg: +0.77 stop: n/a

The bullish reversal in PDLI continues and the stock added 2.7% today following Friday's breakout over the 50-dma. We are not suggesting new strangle positions. The options in our strangle are the December $30 calls (PQI-LF) and the December $25 puts (PQI-XE). Our estimated cost was at $1.80. We'll plan to sell if either side rises to $3.25.

Picked on October 30 at $ 27.70
Change since picked: + 0.87
Earnings Date 11/01105 (confirmed)
Average Daily Volume = 1.8 million

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Spectrum Brands - SPC - close: 18.10 change: +0.30 stop: n/a

SPC is still bouncing from its oversold condition but we expect the bounce to struggle as is nears resistance in the $19.00 and $20.00 levels. Our estimated cost for this strangle was $1.25. The options in our suggested strangle are the December $22.50 calls (SPC-LX) and the December $17.50 puts (SPC-XW). We are aiming for a rise to $2.50 or more.

Picked on November 08 at $ 20.63
Change since picked: - 2.34
Earnings Date 11/10/05 (confirmed)
Average Daily Volume = 576 thousand

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Questar Corp. - STR - close: 75.60 chg: -0.65 stop: n/a

STR provided two dips to the $75 level today and both would have been a great entry point to open new strangle positions. Our own suggested entry window was/is the $75.50-77.00 range but the closer to $75.00 the better. Our strangle involves the January $80 calls (STR-AP) and the January $70 puts (STR-MN). Our estimated cost was $5.10 and we're aiming for a rise to $9.50 or more.

Picked on November 20 at $ 76.25
Change since picked: - 0.65
Earnings Date 01/26/05 (unconfirmed)
Average Daily Volume = 716 thousand
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 


Options 101

So you have decided to sell covered calls.

So which strike price do you sell?

The Theory Behind the Practice

The decision has finally been made. You are going to start a covered call writing program.
You have some great stocks, however its really only now that you come to that big decision. The decision to determine which month and strike price option to sell.

Out-of-the money

The out of the money calls is as its name suggests a call in which you sell that is several points away from the price the stock is currently trading at. It can be anywhere from 1-2 points out of the money to 5-10 points out of the money depending on the volatility and the dollar amount of the share price of the underlying. The individual this is selling this stock either would like to generate income from this stock but is willing to have the stock called away from them for a nice gain in addition to the small premium they receive if the stock price rises to that point.


At-the-money

This option is a little more conservative and offers a bit more downside protection then the out of the money option. This stock that the option is being sold against, usually trades right at the strike price and offers the most potential time value of premium. The optimum return is experienced when the stock trades sideways and closes slightly below, slightly above or at the strike price being sold. When this occurs, the seller of the option will usually buy it back for less then he received for it, if it is in the money slightly, or just let the option expire worthless if the stock is at or below the strike price that was sold.


In-the-money

This option offers the less return, but the greatest protection, this option is usually sold when the overlying market conditions are less then favorable in general or when the stock may be going through a cyclical period or consolidation or correction. The in the money call allows the seller to protect the price of his stock up to the amount he received for the call option that was sold. The deeper option is in the money, the greater protection the stock is afforded in times of a downturn in either the stock or the market in general. This type of option is often referred to as a deep-in-the-money option


The Real World - So what would you do?

So you currently own IBM at $ 80.22. What strike price would you sell (see Figure 1-1 below) to get an idea of some of your choices?

FIGURE 1-1: IBM LIKE MOST STOCKS OFFER THE INVESTOR NUMBEROUS OPTIONS TO CHOICE FROM, BOTH IN REGARDS TO TIME AND IN REGARDS TO STRIKE PRICE

IBM CURRENTLY TRADING AT $80.22

The choices are even more endless, when you consider that we are only illustrating the Oct and Nov services and have not included the further out series or the 1,2 or 3 year LEAP options. The decision to sell isnt nearly as overwhelming as the decision WHAT to sell.


The Bottom Line

Although there is no right or wrong strike price to sell, it is still a decision that needs to be made on a continual basis, whether that decision is monthly, quarterly, or longer. Deciding the perfect option write is never easy. The variables of a free market economy make it virtually impossible to make that choice, because too many events can effect the stock in a matter of minutes; and remember one is short that call for at least 30 days or longer. Thats 30 days composed of hours, minutes and seconds in which an array of events could transpire to affect your stocks performance while you are short. These events play no favorites; they can be favorable or not so favorable, bullish or bearish. Just remember, your option is always subject to the unforeseen events in the market, and these events significantly can impact your stock and the options you have written against them. As for the right (write) decision. This up to you and your ultimate believe in what will happen to your stock over the course that you have sold your covered call.

Until Next Time
 

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.

DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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