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Daily Newsletter, Saturday, 11/26/2005

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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

All Shoppers, No Traders

The emphasis on Friday was purely on shopping and not trading. The markets closed the week with another gain but it was touch and go on the Nasdaq. An afternoon sell program in a very thin market knocked the Nasdaq back to zero but buyers bought the dip once again to close the day with a gain.

Dow Chart - Daily

Nasdaq Chart - Daily

There was very little for traders to focus on during the day. There were no economic reports and the energy markets were closed for a long four-day weekend. Volume was seriously lacking with less than 1.5B shares across all markets. The NYSE only managed to trade 720,000 shares and the Nasdaq only 650,000. It was a day we could have skipped and nobody would have missed it.

The biggest news for the day was news that there were several different problems with the Xbox and Microsoft said they would replace or repair them as necessary. Buyers who had waited more than 24 hrs in the cold in some areas were highly frustrated to see the problems appear. MSFT fell -75 cents from Wednesday's level but regained it into the close to end down only -16 cents. Microsoft also announced it had hired the chief scientist from Cray computer, Burton Smith. Microsoft declined to release information on what his job would be at Microsoft. Could the software giant be heading into the hardware market? I seriously doubt it. Smith did hint that he had enjoyed his years in high performance computing and was eager to pursue a new and very different opportunity at Microsoft. It will be interesting to see what his new job will be.

Intel and AMD both managed gains on Friday after Caris and Company analyst Risk Whittington told investors that both could beat earnings estimates for Q4. He has a buy rating on AMD and an above average rating on Intel.

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There was no weakness in Google as it tacked on another +5.81 to close at a new historic high at $428.67. Analysts were talking up changes to its Froogle offering where shoppers can check inventory levels of specific items at stores in their area. Is there anything Google has not considered to make our life easier?

The biggest point gainer for the day was the Chicago Mercantile Exchange with a +$10.23 jump to $396.90. This came after the CME announced on Wednesday that option volume on their CME E-Mini equity index options exceeded 4,006,366 contracts year to date. This is a +727% increase over the 487,727 for 2004. This embarrassment of riches has kept the CME moving higher all year and Friday's close was a new historic high.

Another stock that is simply an embarrassment is Taser. TASR now TASRE has been notified it will be delisted from the Nasdaq due to a failure to file its Q3 report. Taser has said that it will have to restate earnings for Q1/Q2 due to errors in how it accounted for legal and professional fees. Remember Taser had been criticized in the past for payments to individual in positions of authority to obtain orders for guns. How do you account for payments like that? Recently Taser has fallen from grace as concerns mount over the safety of its products. Taser has appealed the Nasdaq delisting and has requested a hearing on the matter. Normally the attachment of the "E" to a Nasdaq symbol is the kiss of death but a few do return to favor. TASRE closed at $6.50, -90 cents, but well off the $33 level it saw in December 2004.

Conoco Phillips announced on Friday it was buying a refinery in Wihelmshaven Germany from Louis Dreyfus Energy Holdings. The amount paid was not disclosed but COP said it was paying cash. The refinery processes 275,000 bbls per day and increases Conoco's European capacity by +74%. Conoco also said it was adding 25 new wells in Norway's Ekofisk field in partnership with Total SA. They expect to add +100,000 bbls per day of oil equivalent. COP has a 35.1% interest in the field and TOT 39.9%. When completed in 2006 the +100K bbls per day will equate to 0.0011764% of our daily global oil consumption.

I posted the illustration below two weeks ago showing an average historical depletion rate of current global production at 5%. I illustrated that the world would be short 16 mbpd by 2010 at that 5% average. Last week the Schlumberger CEO gave a talk using an even more ominous 8% depletion rate. Why would he use that rate unless there was a danger of that becoming reality? SLB is the largest womb-to-tomb well servicing company on the planet. They are in the best position to know how quickly wells are drying up. Needless to say the outcome is not pretty at -8%. I have also discussed previously how new technology has allowed companies to extract oil from fields quicker and that could lead to faster depletion in the 8% range. Seems the Schlumberger CEO may be giving us a peak into the future.

Thursday was Peak Oil day according to Kenneth Deffeyes. Deffeyes is a geologist and a professor at Princeton and has been predicting for several years that 11/24/05 would be the peak in global production. He spent a lot of time and effort extrapolating the same facts M. King Hubbert used to correctly predict the peak in U.S. production in 1970 over 14 years in advance. Using the same methodology Deffeyes had projected a top in global oil production on Thanksgiving this year. It could be sometime before he will be proven right or wrong but even if he is wrong he probably did not miss it by much. It took until 1972 for Hubbert's 1970 U.S. production peak to become obvious since the ebb and flow of thousands of wells tends to make day-by-day tracking difficult. Only after time has passed and actual production figures have become history are we able to say the peak passed.

Schedule of Global Production Depletion at 5%

Also leading us to the same conclusion was a news article last week that Kuwait has announced that Burgan, its largest field and also the second largest field in the world has begun an irreversible decline. They said that peak output fell short of their previous estimates of 2 mbpd and 1.7 mbpd was now the optimum rate. They also said that despite additional investment in Burgan and other fields there would be a decline in overall production. Kuwait had predicted until just recently that Burgan would produce at 2mbpd for the rest of the fields 30-40 years of life. To admit now that not only could they not reach the 2mbpd target and production would now decline instead of remain flat should be a very sobering event for global oil watchers. This is exactly what we are expecting from Saudi and the other OPEC producers in the area as the spotlight of world concern focuses on their futures. Numerous analysts have already claimed the same thing has happened with the largest field in the world, Ghwar in Saudi Arabia, only Saudi is able to disguise it by not reporting production numbers by field. The Energy Analyst at the Bank of Montreal claims numbers obtained from various sources prove Ghwar is already in irreversible decline. Matthew Simmons showed slides at the ASPO conference last week that suggested the top seven Saudi fields are already in decline. However, until Saudi confesses the global charade will continue. There is an ongoing dispute on whether the Greater Burgan field in Kuwait or the Cantarell field in Mexico is the second largest field. Until the final production numbers are tallied several decades from now the question will continue to be argued. Either way, Pemex has already told the world that the Cantarell field was heading into decline as of May. The mainstream media is still not listening.

Retailers were reporting a mixed picture on Friday based on numerous onsite reports. Stampedes at several Wal-Marts produced minor injuries but shopping continued. Roughly 20% of holiday sales are rung up this weekend and many retailers hired scores of temporary workers to handle the load. One Best Buy store said they hired an extra 125 workers just for this weekend. The iPod remains the most sought after gift with lines for the Xbox attracting the most attention.

While it may be called Black Friday because that is when most retailers shift into the black for the year the coming Monday is called Cyber Monday. This is a new trend brought on by the vast array of websites selling thousands of items at highly discounted prices. The trend began several years ago as shoppers toured the malls of the Thanksgiving weekend comparing models and features of items they want to buy. On Monday when buyers went back to work where most offices have broadband connections they surfed the web for the models they had determined they wanted while mall surfing over the weekend. Cyber stores post huge sales numbers on Monday as those purchases are made online from the office. I have been bombarded with dozens of email ads this week from online stores I frequent to remind me they are waiting patiently for my business. My favorite store is NewEgg.com and the worst in my opinion is Overstock.com but I know everyone has their own preferences.

Despite the markets lackluster performance on Black Friday they finished the week with very strong gains. The Dow gained +165 and the Nasdaq +112. The Dow and S&P completed their fifth straight week of gains and the Nasdaq extended its string to six weeks. Those statistics should be worrisome to anyone long this market. Now that the pre-Thanksgiving rally is history we could be entering a period of weakness ahead of the Christmas holidays. Typically the Santa Claus rally covers the last five days of the year and the first two days of the New Year. Between now and then we have the January Effect (JE) to provide support but given the six weeks of rally the JE may have already run its course. Fund managers typically have bought small caps in January to refresh their portfolios after rotating out of winners late in the year and to put year-end contributions to work. Traders caught on to the January bounce and started buying ahead of the bounce to get in front of this surge of January fund buying. Over the last few years this front running buying has moved farther ahead of January to actually add to the pre-Thanksgiving buying. This can produce a lull in December with traders already long and funds short on cash until January. I discussed the low cash positions over the last couple weeks as a coming problem for December buying.

Next week could be a critical week with the markets at new highs and a new flood of economic reports ahead. The markets may have over reacted to the supposedly good news in the FOMC minutes and economic news could either feed that reaction or kill it. This is a very full week for economics with the PMI, GDP, ISM and Jobs leading the list.

Table of Economic Reports

Crude Oil Chart - Daily

Natural Gas Chart - Daily

While I would like to maintain a bullish stance I believe a more cautionary view is required. The cold front in the North East and the new cold front due to arrive in the Midwest on Sunday suggests a very strong possibility that gas prices will rally strongly and take oil with it. Since energy stocks have been ignored for months now there is a good chance traders will rotate out of techs and the broader market in hopes of a new rebound in energy. Should any of those economic reports above surprise negatively it could hasten year-end profit taking. The Dow sprinted to 10955 on Friday before giving up -40 of those points to close at 10915. This was very close to the 10984 resistance high from March and the psychological 11000 level. This would be a good spot for profit taking to begin. The Nasdaq struggled to stay in positive territory at 2260 and the weight of its +235 point sprint is weighing on the techs. For these reasons I would be cautious about adding any new positions and tighten my stops again to avoid a nasty surprise. We are pressing our luck that the rally will continue and it is time to take profits and hit the malls.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
D IVGN TXI

New Calls

Editor's note:

We encourage everyone to read this weekend's market wrap. If you have then feel free to skip ahead to the play updates. If not we want to caution you about initiating any new bullish positions. The Dow Jones Industrial Average is up 700 points in just the last four weeks and looks very overdue for some profit taking. To make matters worse the rally in the DJIA stopped right at major resistance (see chart) at its five-year trendline. Granted the DJIA is an index of just 30 stocks but the S&P 500 and the NASDAQ composite, while both have broken out to new highs, both also look just as overbought and due for a correction.

Chart of the DJIA:


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Dominion Res. - D - close: 78.24 chg: +0.64 stop: 74.75

Company Description:
Dominion is one of the nation's largest producers of energy, with an energy portfolio of about 28,100 megawatts of generation, about 6 trillion cubic feet equivalent of proved natural gas reserves and 7,900 miles of natural gas transmission pipeline. Dominion also operates the nation's largest underground natural gas storage system with more than 965 billion cubic feet of storage capacity and serves retail energy customers in nine states. (source: company press release or website)

Why We Like It:
So why are we suggesting D as a new call candidate after warning readers not to open new long positions? We like D because the company is both an electric utility and a natural gas producer. Its exposure to natural gas could help lead the stock higher if natural gas prices begin to surge again as winter begins to mature here in the U.S. Secondly, we like D because the stock has produced a new short-term bottom in the $74-78 range against rising technical support at its 200-dma. We are willing to initiate longs right here but readers have a choice. You can wait for a move over the simple 50-dma (currently at $78.97), wait for a move over $80, which could be round-number resistance, or look for another dip back toward the $76 region (specifically 76.40) and buy the dip or bounce there. We are aiming for a run into the $84.50-85.00 range before January options expire. We do not want to hold over the company's early February earnings report.

Suggested Options:
We are suggesting the January calls. We prefer the $75 or $80 strikes.

BUY CALL JAN 75 D-AO open interest=2447 current ask $4.90
BUY CALL JAN 80 D-AP open interest=9713 current ask $1.80
BUY CALL JAN 85 D-AQ open interest=1201 current ask $0.50

Picked on November 27 at $ 78.24
Change since picked: + 0.00
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume = 1.8 million
 

New Puts

Invitrogen - IVGN - close: 63.06 chg: -0.72 stop: 66.05

Company Description:
Invitrogen Corporation provides products and services that support academic and government research institutions and pharmaceutical and biotech companies worldwide in their efforts to improve the human condition. The company provides essential life science technologies for disease research, drug discovery, and commercial bioproduction. Invitrogen's own research and development efforts are focused on breakthrough innovation in all major areas of biological discovery including functional genomics, proteomics, bioinformatics and cell biology -- placing Invitrogen's products in nearly every major laboratory in the world. Founded in 1987, Invitrogen is headquartered in Carlsbad, California and conducts business in more than 70 countries around the world. The company globally employs approximately 4,500 scientists and other professionals and had revenues of more than $1 billion in 2004. (source: company press release or website)

Why We Like It:
IVGN has had a tough few months. The stock peaked in July and has been sinking ever since. In late October the company reported earnings and missed estimates by 8 cents and then guided lower. The stock reacted by gapping lower and bouncing from the $60 level. Now IVGN's oversold bounce has failed multiple times at the $66.00 level (new resistance). Technicals are beginning to fade again and IVGN looks ready for the next leg lower. There is potential support at the $60 mark but the BTK biotech index looks overbought and due for a pull back. We suspect that when the BTK corrects it could be enough to push IVGN under the $60 level. The P&F chart for IVGN points to a $56 target. We're going to aim for a decline into the $57.50-56.50 range. Our time frame is eight weeks. We do not plan on holding over IVGN's late January earnings report.

Suggested Options:
We're going to suggest the February puts although more aggressive traders might want to play the Januarys.

BUY PUT FEB 65 IUV-NM open interest= 66 current ask $4.40
BUY PUT FEB 60 IUV-NL open interest=663 current ask $2.35

Picked on November 27 at $ 63.06
Change since picked: + 0.00
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume = 1.2 million
 

New Strangles

Texas Ind. - TXI - close: 49.57 chg: +0.14 stop: n/a

Company Description:
TXI is the largest producer of cement in Texas and a major cement producer in California. TXI is also a major supplier of construction aggregates, ready-mix concrete and concrete products. (source: company press release or website)

Why We Like It:
TXI has been consolidating sideways for the last seven weeks and with earnings coming up it makes a tempting strangle candidate. The last couple of earnings reports have produced some big moves so we have a catalyst that can shock shares of TXI out of its current consolidation. We're going to suggest initiating positions in the $49.00-51.00 entry window although the closer to the $50.00 mark the better! TXI's earnings date hasn't been nailed down yet but it should announce sometime in the 12/15-12/19 range. This only gives us about four weeks after its earnings report to see a move in the stock before the January options expire. More conservative traders might want to pay more and use April options.

Suggested Options:
We're going to suggest January strikes for this strangle. As a strangle we need to buy an out of the money call and an out of the money put. At current prices this strangle costs about $2.70 We're going to aim for a rise to $5.00 or more.

BUY CALL JAN 55 TXI-AK open interest=3527 current ask $1.30
-and-
BUY PUT JAN 45 TXI-MI open interest= 767 current ask $1.40

Picked on November 27 at $ 49.57
Change since picked: + 0.00
Earnings Date 12/15/05 (unconfirmed)
Average Daily Volume = 354 thousand
 


Play Updates

In Play Updates and Reviews

Call Updates

Amerada Hess - AHC - close: 131.23 chg: -0.35 stop: 124.49

Friday proved to be a quiet session for oil stocks with crude oil trading closed for the day. Shares of AHC drifted back toward the $130 level. The stock is throwing off some mixed signals. Some of its oscillators are short-term overbought and look poised to turn lower. Meanwhile the stock does still have a steady two-week trend of higher lows (a.k.a. rising trendline of support). When we added this play to the list we labeled a more aggressive, higher risk candidate since crude oil is still stuck in a two-month downtrend. AHC remains a more aggressive play short-term, even though we're long-term bullish on the oil sector. Traders looking for new positions might want to watch for a bounce from the $130.00 level as a new bullish entry point. Our year-end target is the $139.85-140.00 range. We do think the Point & Figure chart is noteworthy with its bullish buy signal pointing to a $160 target (see below).

Suggested Options:
We are going to suggest January calls.

BUY CALL JAN 125.00 AHC-AE open interest=616 current ask $10.80
BUY CALL JAN 130.00 AHC-AZ open interest=942 current ask $ 7.70
BUY CALL JAN 135.00 AHC-AY open interest=585 current ask $ 5.20

Picked on November 16 at $128.49
Change since picked: + 2.74
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume = 1.9 million

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Apache Corp. - APA - close: 69.50 chg: +0.71 stop: 64.95

APA is another aggressive bullish play in the oil sector although its short-term trend looks slightly more optimistic than AHC's. We like APA as a bullish candidate because of its focus on natural gas production. There is still an expectation that natural gas prices could skyrocket again once winter's chill really hits the northeast, especially since we're still recovering from the setbacks caused by hurricanes this fall. The stock has rebounded smartly from its October lows and in the last month APA has broken through resistance at its 50-dma and 100-dma and at the $69 level. We have been suggesting new bullish positions with APA above $69 but more conservative traders may feel better to wait on a breakout over potential round-number resistance at the $70.00 mark. APA's Point & Figure chart is bullish and points to an $83 target. Our year-end target is the $75-76 range. A breakdown under the 50-dma near $68 would be bad news and could be used as a prompt for more conservative traders to exit early in an effort to minimize losses although currently we have a wide stop to give APA some maneuvering room.

Suggested Options:
We are suggesting January calls.

BUY CALL JAN 65 APA-AM open interest= 8925 current ask $6.40
BUY CALL JAN 70 APA-AN open interest=12758 current ask $3.40
BUY CALL JAN 75 APA-AO open interest= 7622 current ask $1.45

Picked on November 22 at $ 69.05
Change since picked: + 0.45
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume = 3.7 million

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Goldman Sachs - GS - close: 134.12 chg: +0.04 stop: 126.49

The rally in the broker-dealer sector, and in shares of GS, paused on Friday. Yet shares of the firm remain near all-time highs. We believe that the stock will continue to rise into its mid December earnings report. It's a common pattern for the big investment firms to see their stock's rally into earnings and then sell-off after the report even though they smash the earnings estimates. Right now GS looks a little overbought and we would not be surprised by a pull back toward $132 or even back to the $130 level. A bounce from either level could be used as a new bullish entry point. GS' P&F chart points to a $177 target. We are targeting a move into the $139-140 range.

Suggested Options:
We're not suggesting new positions at this time. Look for a dip back to $132 or $130 and buy a bounce. If that occurs we like the December or January strikes but we plan to exit before the company's earnings report.

Picked on November 20 at $131.58
Change since picked: + 2.54
Earnings Date 12/15/05 (unconfirmed)
Average Daily Volume = 3.6 million

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Hovnanian - HOV - close: 51.35 change: +0.28 stop: 47.45 *new*

The housing stocks have seen new strength this past month with many of them breaking out through multi-month trendlines of resistance. Boosting the group has been a pull back in mortgage rates. HOV is one such stock that has broken out from its three-month bearish trend and shares appear to have produced a new bottom in the $44-48 region. We liked the breakout over its 50-dma and its push past round-number, psychological resistance at the $50.00 mark. Right now we'd probably look for a dip back toward the $50 level as a new entry point. HOV's P&F chart has reversed into a buy signal that points to a $66 target. Our target is the $54.50-55.00 range and we plan to exit ahead of HOV's early December earnings report (12/6 or 12/7). That doesn't give us a lot of time so more conservative traders may want to pass or look towards other housing stocks as candidates. We are raising our stop loss on HOV to $47.45.

Suggested Options:
We're not suggesting new positions at this time. Look for a bounce from the $50 level. We like the December or January strikes but remember we're exiting in a couple of weeks.

Picked on November 21 at $ 49.25
Change since picked: + 2.10
Earnings Date 12/07/05 (unconfirmed)
Average Daily Volume = 1.5 million

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Intl. Bus. Mach. - IBM - cls: 88.80 chg: +0.00 stop: 84.85

Shares of IBM (and AAPL) helped lead the GHA hardware index higher this month with IBM's breakout over resistance at the $85 level two weeks ago. The stock remains bullish but short-term it's looking a little overbought as is the GHA hardware index (and while we're at it AAPL looks overbought too). The P&F chart for IBM looks pretty optimistic with a triple-top breakout buy signal and a $104 price target. We're only targeting a move into the $89.90-90.00 range and with IBM just a $1.00 away we're not suggesting new plays. More conservative traders may want to think about exiting early right here for a profit just in case the market sees a post-Thanksgiving pull back. We are prepared to hold IBM through the end of the year.

Suggested Options:
We are not suggesting new bullish plays at this time.

Picked on November 15 at $ 85.25
Change since picked: + 3.55
Earnings Date 01/16/06 (unconfirmed)
Average Daily Volume = 5.6 million

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Novastar Fincl. - NFI - cls: 32.13 chg: +0.48 stop: 29.24

NFI is a new bullish play from the Wednesday night newsletter. We see no changes from our original play description so we're reposting it here:

If Wall Street believes that we could be nearing the end of the FOMC's rate hike cycle it could be good news for mortgage lenders like NFI. It appears that this train of thought, following the release of the latest FOMC minutes on Tuesday, is what pushed NFI to breakout from its consolidation pattern. The high-volume breakout on Tuesday also pushed the stock above its simple 50-dma and above its 3 1/2 month trendline of lower highs. We are going to suggest new plays here at $31.65 but there is a good chance that NFI will pull back and retest the $30.50 region as support. Patient traders might do well to wait for a dip and then evaluate a bullish entry. NFI's next earnings report is not until February so we're going to target the 200-dma near $35 over the next eight weeks.

Suggested Options:
We are suggesting the January calls.

BUY CALL JAN 30 NFI-AF open interest=4837 current ask $3.10
BUY CALL JAN 35 NFI-AG open interest=2708 current ask $0.70

Picked on November 23 at $ 31.65
Change since picked: + 0.48
Earnings Date 02/06/06 (unconfirmed)
Average Daily Volume = 621 thousand

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NovAtel Inc. - NGPS - close: 31.35 chg: +0.44 stop: 27.75

We expected a pull back toward the $30.00 level, which as broken resistance should become new support. However, the dip was bought pretty quick on Friday near $30.50. Unfortunately, volume was so low on Friday we hesitate to put much weight with Friday's trading. NGPS remains a bullish candidate with the breakout from its three-week trading range and its breakout above its long-term trendline (see the weekly chart). We would still consider new positions here but odds are with the market so overbought we'll get another chance to buy a dip near $30.00, which would be the more advantageous entry point. The P&F chart for NGPS points to a $50 target. Our target is the $35.00-36.00 range by year-end.

Suggested Options:
We are suggesting the January strikes although Decembers and March options have more open interest.

BUY CALL JAN 30 QAZ-AF open interest= 12 current ask $3.50
BUY CALL JAN 35 QAZ-AG open interest= 63 current ask $1.50

Picked on November 21 at $ 30.45
Change since picked: + 0.90
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume = 292 thousand

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Phelps Dodge - PD - cls: 134.70 chg: +5.59 stop: 124.99 *new*

Copper-related mining stocks turned in a strong session on Friday and PD helped lead the way with a 4.3% gain and a new monthly high. Friday's rally, while fueled by low volume, is still a positive step in reaffirming its five-week trend of higher lows. Our year-end target is the $139.90-140.00 range. More conservative traders may want to target the October high near $138.50. We are adjusting the stop loss to $124.99.

Suggested Options:
We are not suggesting new bullish positions at this time but a dip back toward $130-132 could be used as a new entry point. We like the January calls.

Picked on November 18 at $131.25
Change since picked: + 3.45
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume = 2.7 million

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Polaris Ind. - PII - close: 49.44 change: -0.12 stop: 45.95

PII is a somewhat aggressive play since shares are in an eight-month bearish trend. Yet short-term it looks like PII may have finally found a bottom with its sideways consolidation in the $44-48 range over the past seven weeks. PII isn't so much a retailer as it is a maker of recreational motorized toys but now that retailers are moving higher into the holiday shopping season PII might be able to ride their coattails. Currently the stock has stalled under round-number, psychological resistance at the $50 mark. We would look for a dip back toward the $48.50-48.00 range and buy a bounce there as a new entry point. Our year-end target is the $54-55 range under its simple 200-dma.

Suggested Options:
We're not suggesting new positions right here. Wait for a dip back toward 48.50-48.00. We like the January calls although March options have more open interest.

Picked on November 21 at $ 48.47
Change since picked: + 0.97
Earnings Date 01/12/06 (unconfirmed)
Average Daily Volume = 467 thousand

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Rockwell Autom. - ROK - cls: 56.85 chg: -0.05 stop: 54.80

We have been growing more worried over ROK's relative weakness over the past week but viewing the larger picture shares of ROK still look bullish. Granted short-term technical signals have turned bearish and more conservative traders may want to exit here or near the $56 level to protect their capital. We're going to wait it out since broken resistance near $55.00 should act as new support. We do expect the stock to dip back toward the $55 level in the next several days if not early next week so be prepared. A bounce from the $55 level could be used as a new bullish entry point. The Point & Figure chart for ROK shows a triple-top breakout buy signal with a $69 target. We're targeting a move $61-62 range by year end. More conservative traders might want to exit early at $60.

Suggested Options:
We are not suggesting new bullish positions at this time.

Picked on November 03 at $ 55.90
Change since picked: + 0.95
Earnings Date 11/03/05 (confirmed)
Average Daily Volume = 804 thousand

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Walter Inds. - WLT - close: 51.66 change: +0.27 stop: 45.95

WLT is a construction services stock that has seen its shares breakout over major resistance at the $50.00 level to score new all-time highs. The P&F chart looks very bullish with a $67 target. We believe shares can run into the $57-58 range before year's end. We would consider new positions right here but traders might do well to wait for a dip back to the $50 level and buy a bounce, especially with the major averages looking so overbought. The options have already risen significantly even though shares of WLT have not.

Suggested Options:
We are suggesting the January calls.

BUY CALL JAN 50 WLT-AJ open interest=3403 current ask $6.40
BUY CALL JAN 55 WLT-AK open interest=3834 current ask $2.40

Picked on November 20 at $ 51.50
Change since picked: + 0.16
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: 79.39 chg: +0.11 stop: n/a

Hmm... we're moving into crunch time for shares of ABC. We only have three more weeks before December options expire. While December is historically one of the most bullish months of the year there's no guarantee, furthermore there's no guarantee that ABC will participate in any holiday rally. Currently shares of ABC still look bullish but the stock is trading under round-number resistance at the $80.00 mark. To have any hope of profitability with our December strangle ABC needs to breakout over the $80 level and soon. We are not suggesting new strangle positions at this time. 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.

Suggested Options:
We are not suggesting new strangle positions at this time.

Picked on October 16 at $ 74.81
Change since picked: + 4.63
Earnings Date 11/03/05 (confirmed)
Average Daily Volume = 900 thousand

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Amer. Eagle Out. - AEOS - cls: 24.11 chg: -0.77 stop: n/a

Some of the retailers were stumbling lower on "Black Friday", which traditionally signals the beginning of the holiday shopping season. AEOS was one such retailer, which lost more than three percent following Wednesday's failed rally at its exponential 200-dma. We are not suggesting new strangle positions at this time. 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.

Suggested Options:
We are not suggesting new strangle positions at this time.

Picked on November 13 at $ 25.47
Change since picked: - 1.33
Earnings Date 11/15/05 (confirmed)
Average Daily Volume = 3.6 million

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Abercrombie&Fitch - ANF - close: 62.87 chg: -0.26 stop: n/a

Apparel retailer ANF also experienced some profit taking on Friday but shares rebounded off their worst levels of the session. We wouldn't be surprised to see a dip back toward support at broken resistance near $60.00. 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.

Suggested Options:
We are not suggesting new strangle positions at this time.

Picked on November 13 at $ 59.67
Change since picked: + 4.07
Earnings Date 11/15/05 (confirmed)
Average Daily Volume = 2.7 million

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Chicago Merc. Exchg. - CME - cls: 396.90 chg: +10.23 stop: n/a

Wow! Shares of CME displayed lots of strength on Friday. The stock broke out and closed at a new all-time high just under the $400 level. We are 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.

Suggested Options:
We are not suggesting new strangle positions at this time.

Picked on November 20 at $375.90
Change since picked: +21.00
Earnings Date 01/24/06 (unconfirmed)
Average Daily Volume = 879 thousand

---

D.R.Horton - DHI - close: 36.62 chg: -0.05 stop: n/a

DHI is another homebuilder who saw its November rally take a post-Thanksgiving nap. Shares traded in a very narrow range. The overall pattern remains bullish but DHI could dip back toward the $35 level before moving higher again. 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.

Suggested Options:
We are not suggesting new strangle positions at this time.

Picked on November 13 at $ 32.56
Change since picked: + 4.06
Earnings Date 11/16/05 (confirmed)
Average Daily Volume = 3.2 million

---

Four Seasons - FS - close: 50.31 chg: -0.09 stop: n/a

FS' sideways consolidation continues. The good news is that FS has not participated in the market's rally. The bad news is that this sideways consolidation only makes our option time premium erode more quickly! We need volatility. Now the overall trend remains bearish and we expect shares to turn lower. 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.

Suggested Options:
We are not suggesting new strangle positions at this time.

Picked on November 08 at $ 55.37
Change since picked: - 4.34
Earnings Date 11/10/05 (confirmed)
Average Daily Volume = 319 thousand

---

Hutchinson Tech. - HTCH - cls: 26.85 chg: -0.17 stop: n/a

Last week's rally in HTCH has turned many of its technical indicators bullish. Unfortunately, turning its indicators positive was not much of a challenge since HTCH has been essentially churning sideways with a slight bearish tilt for the past three months. We were just about prepared to exit early prior to last week's rally. If HTCH fails to build on these gains an early exit may still be our best option to salvage any capital from our play. Short-term we do expect HTCH to dip but the $26 level should act as short-term support. If we don't see the bullish trend continue to develop this next week we'll re-evaluate an early exit next weekend. 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.

Suggested Options:
We are not suggesting new strangle positions at this time.

Picked on October 26 at $ 24.89
Change since picked: + 1.96
Earnings Date 11/01/05 (confirmed)
Average Daily Volume = 666 thousand

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Lear Corp - LEA - close: 27.88 chg: -0.56 stop: n/a

Automotive stocks like GM and LEA continue to sink and Friday saw shares of LEA drop almost two percent. The long-term bearish trend is still very much intact with technical indicators pointing lower. Last week LEA produced a new failed rally under the $30.00 level and odds are growing that we'll see a new relative low soon. The Point & Figure chart for LEA points to an $11 target. 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.

Suggested Options:
We are not suggesting new strangle positions at this time.

Picked on November 06 at $ 30.24
Change since picked: - 2.36
Earnings Date 10/26/05 (confirmed)
Average Daily Volume = 1.8 million

---

Loews - LTR - close: 97.80 change: +0.00 close: n/a

The consolidation in LTR is narrowing. The stock peaked under $99 on November 18th and has traded sideways since. The sideways action has narrowed significantly and we can expect a breakout either direction soon. Obviously we'd like to see LTR break higher but with the major averages looking overbought and due for a dip the next move may be lower. LTR's technical indicators are suggesting the next move will be lower. We only have three weeks left before December options expire. More conservative traders have a decision to make. The December $95 calls (LTR-LS) are trading around $3.50 right now. If you could exit now it would technically be a small profit. You have to decide. Do you exit now or hold on for a possible rally to the $100 level. We wouldn't be surprised to see LTR dip back toward $95 and then bounce back toward $100 but it would make for a volatile three weeks with the December calls. We're not suggesting new plays. 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.

Suggested Options:
We are not suggesting new strangle positions at this time.

Picked on October 23 at $ 89.94
Change since picked: + 7.86
Earnings Date 10/27/05 (confirmed)
Average Daily Volume = 602 thousand

---

Verifone Holdings - PAY - cls: 23.16 chg: +0.31 stop: n/a

This coming week could be an exciting one for PAY. The stock has spent the last three weeks consolidating its gains from October and early November. Now after testing support near $22 and its 200-dma we expect shares to rebound higher again. That could all change on Thursday. PAY is expected to report earnings on December 1st. Wall Street's estimates are for profits of 19-cents a share. Our current 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. Right now those calls (PAY-AX) are trading in the $2.00-2.25 range. If PAY misses earnings or issues some negative guidance the calls could evaporate into thin air. If PAY rebounds higher before its earnings report more conservative traders may want to exit early instead of holding over its earnings announcement. We do have January strikes and are planning on holding over the report.

Suggested Options:
We are not suggesting new strangle positions at this time.

Picked on October 12 at $ 19.98
Change since picked: + 3.18
Earnings Date 12/01/05 (confirmed)
Average Daily Volume = 259 thousand

---

Protein Design Labs - PDLI - cls: 28.69 chg: +0.02 stop: n/a

Reaction to PDLI's earnings report on November 1st was not as sharp as we expected. The stock began to slip lower following earnings but then in the last seven trading sessions the stock has surprisingly rallied higher. This back and forth action has been bad news for our December strangle. Here's more bad news. The rally in the biotech sector (see the BTK index), like the major indices, is looking tired. If the BTK consolidates lower we would expect PDLI to follow. That's the wrong direction. We need PDLI to pick a direction and go, especially with just three weeks left before December options expire. At the moment we're expecting PDLI to pull back, probably towards $27.50 or $27.00, which effectively puts us back at the starting line with no catalyst to move the stock and very little time. More conservative traders may want to look for an early exit and cut their losses. At this point we plan on riding the December options into expiration since the month of December tends to be bullish. 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.

Suggested Options:
We are not suggesting new strangle positions at this time.

Picked on October 30 at $ 27.70
Change since picked: + 0.99
Earnings Date 11/01/05 (confirmed)
Average Daily Volume = 1.8 million

---

Spectrum Brands - SPC - close: 18.42 change: -0.48 stop: n/a

Is the oversold bounce in SPC finally over? It looks like it might be. The stock failed to breakout over the bottom of its gap down and its 21-dma. Friday's weakness appears to correspond with its trend of lower highs. We are not suggesting new strangle positions at this time. 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.

Suggested Options:
We are not suggesting new strangle positions at this time.

Picked on November 08 at $ 20.63
Change since picked: - 2.02
Earnings Date 11/10/05 (confirmed)
Average Daily Volume = 576 thousand

---

Questar Corp. - STR - close: 78.09 chg: +1.38 stop: n/a

STR rallied strongly from May through the end of September fueled by a huge move in natural gas prices. Currently there is a lot of uncertainty about where natural gas will head next? Will it continue to sell off? Or will natural gas spike to new highs as the cold of winter pushes demand higher while the U.S. is still trying to recover from this fall's hurricanes. This uncertainty has lead to STR's sideways trading over the last few weeks and provided our entry point to launch strangles in the $75-77 window (although we prefer to enter as close to $75 as possible). Right now STR is outside this window and we're not suggesting new plays. If STR dips again we might use a $76-75 entry window. 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. FYI: while we're not suggesting new plays investors looking for a new strangle here in STR might want to consider using the April strikes to give you more time to catch any winter-inspired run in natural gas.

Suggested Options:
We are not suggesting new strangle positions at this time.

Picked on November 20 at $ 76.25
Change since picked: + 1.84
Earnings Date 01/26/05 (unconfirmed)
Average Daily Volume = 716 thousand

---

Valero Energy - VLO - close: 101.28 chg: +0.70 stop: n/a

Many stocks in the oil sector have begun to rebound from their October or November lows. VLO did see a rebound but has fallen again and the stock's overall pattern is a sideways consolidation with higher lows and lower highs. This sort of squeeze tends to produce a breakout sooner or later and that's what we're counting on with a strangle play. We're fortunate that VLO is consolidating near a significant strike price at the $100 mark. We opened the play with a $99.00-101.00 entry window to launch a strangle play. We suspect that VLO will dip again into this entry window so if you're looking for a new play be ready. We're suggesting the January $110 calls (VLO-AB) and the January $90 puts (VLO-MR). Our estimated cost is $5.85. We are aiming for a rise to $9.50. Post split that target will change to $4.75 as our cost will adjust to $2.825. VLO will split 2-for-1 on December 16th.

Suggested Options:
Watch for a dip back into our $99.00-101.00 entry window. At current prices this strangle is about $5.40.

Picked on November 21 at $101.00
Change since picked: + 0.28
Earnings Date 01/30/06 (unconfirmed)
Average Daily Volume = 10.7 million
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

Thankfulness

begin SECTION 4 BODY-->

While we're counting blessings this week, we options traders should perhaps spare a few minutes in quiet thankfulness to a guy named Joseph Sullivan.

To understand the role he played in our lives as options traders, visualize going back in time to a day before April 26, 1973. Imagine you believed that one of the stocks in your portfolio might decline over the next few months, but you didn't want to close your position. You wanted to protect your long stock holding by buying a put.

How did you accomplish that task? You certainly didn't do it by logging onto the site of your online broker. You called or visited your traditional broker, of course, but the process could not be completed with that call alone. Your broker then called his trading desk, and someone there contacted a put-and-call broker or maybe several if you wanted more than one quote. In the early 1970s, about 12 or so such firms existed, from the largest firms employing 20-25 down to the smallest employing maybe a couple of people. Each put-and-call broker contacted gave your brokerage's trading desk a quote, and that trading desk contacted your broker, who then contacted you again.

Not only was the process a convoluted one that would drive contemporary options traders mad, but also that quote wasn't even a standardized one. It wasn't for a standardized time period. At one time, if it was to be exercised, it had to be exercised in person. If it wasn't, it expired worthless, no matter how deep in the money it might be. The put-and-call broker had no limit on the spread between bid and ask. The put-and-call broker decided on a price based on his experience with the stock.

This was strictly an over-the-counter business with a low annual volume in options, with the buyer of the option left unclear as to whether the price paid had been a good or bad one. Perhaps we should add Fischer Black and Myron Scholes, the Nobel-prize winning creators of the Black-Scholes option pricing model, to that list of people to whom we're thankful.

The U.S.'s first options exchange was the Chicago Board Options Exchange, the CBOE. Trading on standardized, exchange-listed options began at 10:15 CST one Thursday morning in a windowless room variously described as the former lunch room or former smoking lounge of the Board of Trade.

The idea for the exchange had been born among Chicago Board of Trade's grain futures traders, so we can add those futures traders to the list of people to thank. We should also be grateful to the weather for waiting until 1972 and 1973 to create such a scarcity in grains that the Board of Trade saw record volume. The idea for the CBOE arose in the years immediately preceding that record volume, when Joe Sullivan, former reporter for the WSJ and then assistant to Chicago Board of Trade president Henry Wilson, started asking those put-and-call dealers questions. Business at the Board of Trade had been slow before that scarcity and the CBOT thought listed stock options might increase business. If that record volume had come along sooner, the idea might never have been born.

The CBOE's first day of trading saw options traded on 16 underlying stocks, with a total of 911 contracts traded. Joe Sullivan was tapped as the first president of the exchange. It was Sullivan who campaigned for standardizing options pricing and expirations, and who also wanted a separate entity, a clearing house, to guarantee settlement and performance and to issue contracts. Members on the CBOE paid $10,000 for a seat, although rumor has it that some paid only $100 for an option for a seat on the exchange and some had their option fees paid by founding members who grabbed them and urged them to go sign up. Some of the first members came from the put-and-call dealers, but also from other areas of the over-the-counter business in New York.

Sullivan worried that the exchange would flop, and trading did get off to a slow start, averaging around 1000 contracts a day. By the end of the first year, however, volume was 40 times higher than it had been in the beginning. None of that volume came from puts, however. Puts did not start trading on the CBOE until 1977, when the SEC finally allowed them to begin trading. The SEC had delayed their introduction all that time.

The SEC wasn't through with the fledging exchange or the other exchanges that had decided to trade listed options since 1973. In 1977, when listed puts began trading, those included the American Stock Exchange (AMEX) and the Philadelphia Stock Exchange (PHLX), both beginning to trade listed options in 1975, and the Pacific Exchange (PCX), trading listed options beginning in 1976.

After some wrangling between the CBOE and the AMEX, the SEC allowed the first multiple listing of a stock's options on more than one exchange, with Boise Cascade's options the first to be listed on two exchanges. It wasn't long after that multiple listing or the approval to trade puts that the SEC put a moratorium on additional listings.

That moratorium was to last until 1980. The SEC's regulators were still wincing over the discovery that it had not detected ongoing fraud at one of the exchanges and had been politically empowered to do a better job. They took their time studying listed options. According to some, the unfamiliarity of many regulators with options trading also slowed the process. Regulators studied whether there was unfair competition among the exchanges, among other issues. During those years between 1977 and 1980, other political changes and a greater understanding of the options market, among other reasons, gradually worked toward a lifting of the moratorium.

After that, options trading took off, with many changes. The exchanges added index options, the Options Clearing Corporation evolved its clearing operations, new exchanges jumped on board, and the totally electronic International Securities Exchange (ISE) pressured the other exchanges to change the way they did business, even before it was fully operational. Exchanges settled with the Justice Department and SEC over allegations that they were blocking competition, so that now we have many options listed on multiple exchanges. Exchanges linked with each other, and many other changes occurred that benefited traders.

Along the way to moving into this new electronic and linked world, the exchanges weathered the bloodbath of the crash of 1987, when computers figuring the options prices could not handle the day's traffic and "spit out garbage," according to Jim Porter of First Call, as reported in an article in 2003 SFO MAGAZINE. No closing prices could be given for options prices on all the new series that were required on the day of the crash, and First Call provided the Options Clearing Corporation with closing prices for days, using theoretical prices.

Jim Porter and others at First Call should probably be added to our list of those we options traders should thank, along with all the other multitude of people who had vision and persistence enough to make our trading lives possible.

And to my personal list of people to whom thanks are owed, I add Jim Brown, who structured his OptionInvestor website to provide information in his "teach a man to fish" philosophy. Along the way, he recruited a subscriber to write for the website, representing the self-taught options trader. I was that subscriber. Thanks, Jim.
 

Today's Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner by Linda Piazza, 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.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

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