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Daily Newsletter, Tuesday, 11/28/2006

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Table of Contents

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

Market Wrap

Economic War

There is a war underway between economists over the conflicting economic numbers. Some say a recovery underway and others are warning of an impending recession. Unfortunately we will not know who is correct until some point in the distant future. The recession bears are pointing to reports like today's Durable Goods and inverted yield curve while growth proponents point to a continued surge in corporate profits, low unemployment and a firming housing sector. The equity markets are being pulled by both sides like a rope in a tug of war. With only 21 trading days left in 2006 the year is rapidly drawing to a close and there is little or no chance of resolving the recovery or recession question in that period. This could mean the rest of 2006 may be a rocky road for equities.

Dow Chart - Weekly

Nasdaq Chart - Weekly

The markets were rocked at the open by the -8.3% drop in the Durable Goods report for October and the sharpest drop since July-2000. The market reaction was a knee jerk prompted by the headline but it was entirely unjustified. If you recall the Durable Goods for September spiked +8.7% in another completely unexpected event. When that report broke most analysts expected the numbers to reverse in the current report. Analysts felt it was a statistical glitch caused by a +28% spike in aircraft orders that would be corrected the following month. Okay, it corrected as expected and the net for the two months is still a +0.4% gain and right inline with normal expectations. The internals were right inline with normal growth patterns with shipments rising +0.6% compared to a drop of -2.7% in the prior month. Back orders rose +1.2% although less than the +4.1% rise from the prior month it was the 9th consecutive month of gains. The majority of order losses came from the airline sector with a drop of -44% after that +28% gain in the prior month. Aircraft orders are typically very volatile given their high dollar value and random timing. The second largest decline came in computer orders with a -25.6% drop. This was the primary focus for traders as they felt this was a more telling indicator of economic activity. Personally I still believe the drop in computer sales is related to the delay in Microsoft's Vista operating system. Almost nobody wants to buy new equipment and be forced to pay for Windows XP only to have a new operating system arrive 60 days later. Those planning to buy computers are simply holding off on that purchase until Vista is released and probably for several weeks after that release just to make sure there are no problems.

On the positive side Existing Home Sales rose slightly in October from 6.21 million to 6.24 million on an annualized basis. While one month does not make a trend it is encouraging and could be further signs of a bottom forming. The price of existing homes fell again for the third consecutive month to an average of $221,000. This represents a -3.5% drop in existing home prices over the last 12 months. Inventory of unsold homes rose to a 7.4 months supply and the most since 1993. The +0.5% rise in sales was also bolstered by an upward revision of +0.3% in the September number. Despite the small gains sales are still -12% below year ago levels. Helping the housing market is the sharp drop in interest rates. Yields on the ten-year note fell to 4.485% this morning and the lowest level since January. This is a positive signal for those waiting for a sign before buying a new home. The Mortgage Bankers purchase applications index has begun moving back up again on this drop in rates.

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Despite the small rise in home sales we saw Consumer Confidence fall unexpectedly to 102.9 in today's report. This was a drop from the last reading of 105.1 and well below the consensus for a further rise to 106. The decline was led by a -2.7 drop in the expectations component and a lesser -1.5 drop in the present conditions component. These changes are not material but underlying consumer buying trends also weakened. The number of consumers planning on buying a car fell to the second lowest level on record while those considering purchasing a home also slipped. Those planning on buying a major appliance rose due to expectations of holiday electronics purchases. Those flat screen TVs are flying off dealer shelves. The strong jobs market is a growing challenge with a rise in those perceiving jobs are hard to get.

The last economic report for the day was the November Richmond Fed Survey, which jumped to +7 from -2 in October. This +9 point gain put the index back in positive territory after the first dip below zero since the Dec/Jan pause, which dipped to -4. Shipments and New Orders both rebounded to +6 from -7 and -1 respectively. Order backlogs improved only slightly to -11 from -13. The Jobs component rose from +6 to +10 indicating employers are hiring in expectations for business conditions to improve. The Richmond Survey joined the Philly Fed and New York surveys, both of which also improved in November.

On Wednesday we will see the first GDP revision for Q3 with an expected rise to +1.8% from the initial reading of +1.6%. New Home sales for October will also be released with expectations for a slight drop to 1,050,000 from 1,075,000 homes on an annualized basis. The Fed Beige book, an indicator of economic conditions on a national basis will also be released at 2:PM.

Ben Bernanke took center stage with a noon speech where he provided a balanced look for the economy. He said economic growth would continue to be under trend for the rest of 2006 but would return to trend in 2007. Trend is normally seen as 3.0-3.5% growth. He did note that there was some weakening in economic conditions but emphasized that this was expected and needed to push inflation lower. He said the core inflation rate was still uncomfortably high but moderating. The Fed continues to watch the job market for signs of wage inflation. He also said the economy could rebound faster than currently thought driven by strong jobs growth, the decline in unemployment and increasing capital investment. If that should happen Bernanke warned that it could supply additional inflationary pressures requiring further action by the Fed. Overall Bernanke's speech was balanced with a nod towards slower growth but a reminder that the Fed was ready to raise rates again if a quick rebound in growth rekindled inflation pressures. Ten-year yields spiked significantly from the morning lows once Bernanke took to the stage and made his cautious comments. The equity markets also rebounded from a morning loss once the speech was aired. Expectations for a rate cut prior to March were diminished but chances were already slim to begin with. Overall this was a market neutral to slightly positive speech that should remove the Fed as a factor for the rest of the year although we are likely to see further caution around the December Fed meeting on Dec-12th.

Former Fed Chairman Alan Greenspan also spoke saying the worst of the housing adjustment is over and reiterated his prior stance. He also said he was not concerned about the falling dollar as long as the economy remained flexible. These comments also helped provide support for the afternoon session.

Also moving the markets today was a profit warning from Nokia and Palm. Nokia cut its profit estimates for the next two years based on falling profit margins and slowing industry growth in global phone sales to +10% and slightly less than prior forecasts. Nokia said the more mature European, North American and Latin American markets were expected to grow by less than 10%. Margins were expected to drop to 15% from 17%. NOK only lost -22 cents but remains nearly -$1 below last Thursday's high after two days of sharp drops.

PALM also warned on earnings for the current quarter. PALM said earnings would be more in the range of 10-11 cents rather than previous guidance of 15-18 cents. They blamed a delay in the Treo 750 smart phone for the drop. Analysts were quick to downgrade PALM saying the shipping delay came at the worst time just ahead of the holiday season. Palm lost -1.18 or -8% on the news. RIMM also lost ground after the PALM warning and a downgrade from BMO Capital to neutral on valuation. RIMM had risen from $63 to $142 since August.

Apple rose +2.27 after UBS noted that iPod sales were strong for the holiday season and outpacing the new Zune player offered by Microsoft. Google, at $489, also recovered +4.75 of its loss from Monday but that is even more spectacular given its drop to $477 this morning. That is a +$12 rebound for the day. Strong rebounds from Monday's drop were also seen in CME, GS and BSC.

Harrah's Entertainment (HET) spiked +1.91 after news broke that Penn National Gaming (PENN) may consider making a higher offer for HET than the $15.5 billion offered by Apollo Management and Texas Pacific Group. For my money Harrah's is the premier casino company and the bidding could go even higher. Apollo and TPG said they had been taking their time doing the due diligence because they knew the PENN group was considering a bid.

January Crude Chart - 120 min

Oil prices rose to $61 for the second day of strong gains and came to rest right at strong resistance. Pushing oil and natural gas higher was a warning of colder weather over the next two weeks, terrorist attacks in Iraq and a Dec-14th meeting for OPEC. OPEC is already making noises about a further cut but analysts feel it is just an effort to talk prices up rather than a material chance of a cut. In Iraq a mortar attack on an oil facility started a major fire that shut off the supply of crude to a major refinery. Officials said it could be offline for weeks. Oil inventories are due out tomorrow and expectations are mixed. TFS Energy is expecting a build in all categories while JP Morgan is expecting a draw in all categories. Fimat is only expecting a draw in gasoline supplies. Gasoline should show a decline as dealers replenish supplies from the Thanksgiving travel holiday. With a new forecast of colder weather across most of the US the demand for heating oil and natural gas should increase. The December natural gas contract expired today and closed at its high for the month at $8.29. The energy complex dipped intraday after oil made its high at $61.20 after news appeared suggesting the sanctions on Iran would be weaker than expected. Once that news faded oil resumed its upward path to close right at $61. Assuming we don't have an unexpected rise in crude inventories tomorrow we could be on the verge of a breakout in crude prices. A continued fall in the dollar would almost guarantee a further rise in oil prices since it would take more dollars to buy the same barrel of oil. That is good for those of us who have been long oil in anticipation of the historical winter bounce.

I just returned from a three-week road trip with a stop in New Orleans where the Blanchard Investor Conference was held. I was greeted with Monday's -158 point decline in the Dow and better than -54 point drop in the Nasdaq. That is a heck of a day to return to the markets. I had felt the markets were stretching their luck after weeks of slowly creeping higher and this dip took most of the extreme bullishness away. The drop took the Dow back to strong support at 12100 and the S&P to 1380. Despite the large short interest that support held. Unfortunately Tuesday's rebound was lackluster but at least there was no follow through to Monday's selling. We appeared to be poised on the edge of the proverbial cliff and everyone is holding their breath to avoid tipping the scales to the sell side. I was asked today if investors should be buying calls or puts. I said yes. The market direction for the next week could be perilous but there are pockets of strength. It will be a stock pickers market with gains to be made with both calls and puts. Energy stocks continue to be strong and I would be a call buyer in that sector. Brokerage and exchange stocks would be another place to dip buy. I would avoid retailers and any high profile stocks in other sectors with strong gains over the last quarter. We are approaching the period where we could see an increase in tax selling towards year-end. Most estimates for the year-end S&P were in the 1385-1400 range with some as high as 1425. Having November close near 1400 could be a sell signal for many fund managers. With little more to gain and a lot of profits to lose the trigger fingers are going to be itchy. Bonuses are paid on profits taken and not profits lost. By any metric the +185 point S&P gain since June (+15%) is very strong and until the economy actually starts posting some stronger results we could be very close to a short-term top.

S&P-500 Chart - Daily

Using the S&P as our market guide we have decent support at 1380 followed by stronger support at 1360. I would not be concerned about any further drops as long as 1360 holds. A dip to that level would be a short term buy signal for me. I am neutral with a slightly bullish bias at 1380 and I would be bearish at 1400 and above. We could be looking at a volatile range between now and year-end. Longer term I would be looking to go short on any weakness after Dec-31st. We are due for a major correction and early January would be my target for that event.

As I stated earlier I was on the road for the last three weeks and I appreciate and want to thank Linda and Keene for filling in for me on the market commentary. Because many of our readers are highly mobile I have a couple recommendations for your future travels. I have stayed in a lot of hotels in my life and two of my best stays were during this trip. If you venture to Branson Missouri I would highly recommend the Chateau on the Lake for your stay. A truly great hotel! In New Orleans I stayed at Harrah's new hotel across the street from their downtown casino. This was also a major upgrade in casino lodging and definitely a five star stay. Their goal is to exceed expectations and they did it in every way. Lastly I strongly recommend the Garmin Nuvi 660 navigator if you are in the market for a GPS companion. I have had other makes and this one puts them all to shame. Because of my disappointment with prior devices I researched literally dozens of models before making my selection. I can honestly say it was one of the best $800 purchases I ever made. With a larger screen for those of us with aging eyesight and six million points of interest including restaurants, hotels, etc, it proved to be worth its weight in gold. It has more features than I could ever remember and it is so user friendly a caveman could use it. It charted the way for more than 4000 miles of driving without a single error. Pardon me for my shameless plugs for these products but I felt those planning future trips would appreciate a heartfelt unpaid testimonial. If I can slam Overstock.com as a stock in these pages or recommend Marathon Oil for your retirement account a couple of personal recommendations should not be out of line. Enjoy!
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
ERF ESS None
GD    
PBR    
RIMM    

Play Editor's Note: The market's sell-off on Monday failed to break the rising bullish channel for the S&P 500 and the NASDAQ. Lack of follow through lower today suggests that we can buy this dip inside its bullish trend. We chose to add some new plays to the newsletter but we continue to suggest caution about adding new bullish positions.


New Calls

Enerplus - ERF - close: 45.41 change: +0.90 stop: 43.85

Company Description:
Enerplus Resources Fund is a publicly traded energy income trust based in Calgary. The company is involved in crude oil, natural gas and the oil sands of Canada.

Why We Like It:
It has been a rocky couple of months for ERF. It looked like shares were on the way to recovery in late October. Then without warning the stock gapped down as investors reacted to news that the Canadian government had issued a new proposal to tax publicly traded income trust in Canada. This proposal, if approved, would not take effect until 2011. The initial reaction has worn off and shares of ERF on rebounding again. The stock's long-term up trend has been broken and shares now appear to be trading in a wide, descending channel over the last three months. We suspect that ERF can trade back toward the top of the channel in the $50-51 region. More aggressive traders might want to consider long positions now with today's rise over $45.00. We're going to suggest a trigger to buy calls at $46.01. If triggered our target is the $50.00-51.00 range. FYI: The P&F chart for ERF is still bearish but it's trying to make a comeback.

Suggested Options:
We are suggesting the January calls. Our suggested trigger to open plays is at $46.01.

BUY CALL JAN 40.00 ERF-AH open interest= 833 current ask $5.70
BUY CALL JAN 45.00 ERF-AI open interest=4309 current ask $2.10
BUY CALL JAN 50.00 ERF-AJ open interest=2336 current ask $0.60

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/10/06 (confirmed)
Average Daily Volume = 973 thousand

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General Dynamics - GD - cls: 73.54 chg: +0.98 stop: 71.90

Company Description:
General Dynamics, headquartered in Falls Church, Va., employs approximately 81,100 people worldwide and expects 2006 revenues of approximately $24 billion. The company is a market leader in mission-critical information systems and technologies; land and expeditionary combat systems, armaments and munitions; shipbuilding and marine systems; and business aviation. (source: company press release or website)

Why We Like It:
Defense stocks produced a decent bounce on Tuesday. Shares of GD rebounded from the $72.00 level. If you look at GD's charts the recent consolidation looks like a bull flag pattern. Aggressive traders might want to consider positions now. We want to see the breakout from the flag pattern first so we're suggesting a trigger to buy calls at $74.35. More conservative traders may want to wait for a new relative high over $75.15 before opening new plays. The P&F chart points to an $82 target. If we are triggered at $74.35 our target will be the $78.00-80.00 range.

Suggested Options:
We are suggesting the January calls. Our suggested trigger to open plays is at $74.35.

BUY CALL JAN 70.00 GD-AN open interest=7701 current ask $4.80
BUY CALL JAN 75.00 GD-AO open interest=9141 current ask $1.60
BUY CALL JAN 80.00 GD-AP open interest=2946 current ask $0.25

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/24/07 (unconfirmed)
Average Daily Volume = 1.4 million

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Petroleo Brasileiro - PBR - cls: 90.61 chg: +1.53 stop: 87.99

Company Description:
We are Petrobras, Brazil's largest energy company. Currently have 97 production platforms (73 fixed and 24 floating) producing, in 2005, more than 2,0 million barrels of oil equivalent , and 16 refineries, with a nominal installed capacity of 2.1 million barrels a day. We also have 30,343 kilometers of pipelines and 6.933 service stations throughout the national territory. Seven hundred sixty three (763) of these stations are self-owned, so wherever you go, whether in Brazil or abroad, you will find Petrobras. We are now present in 23 countries. (source: company press release or website)

Why We Like It:
PBR is still trading with a bullish pattern of higher lows. However, that is in contrast to the more short-term trend of lower highs over the last couple of weeks. We suspect that PBR is poised to breakout and begin a new leg higher. Helping the bullish is a bullish Brazilian stock market and rising crude oil futures. We're going to suggest a trigger to buy calls at $91.51. More aggressive traders might want to jump in now. Conservative traders may want to set their trigger above $92 or above $94. Our target is the $98-100 range. Currently the P&F chart points to a $104 target.

Suggested Options:
We are suggesting the January calls. Our trigger to open plays is at $91.51.

BUY CALL JAN 90.00 PBR-AR open interest=8662 current ask $4.50
BUY CALL JAN 95.00 PBR-AS open interest=5789 current ask $2.15

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 2.6 million

---

Research In Motion - RIMM - cls: 134.29 chg: -1.01 stop: 129.99

Company Description:
Research in Motion is a leading designer, manufacturer and marketer of innovative wireless solutions for the worldwide mobile communications market. (source: company press release or website)

Why We Like It:
This is an aggressive, high-risk play. Shares of RIMM look very overbought and due for a more prolonged consolidation to digest its $60 to $140 run over the past few months. However, the sell-off yesterday in the major averages did not break the rising channels and the pull back in RIMM has not broken its bullish trend either. The stock did gap down this morning after one analyst firm cut their rating to a "market perform" due to valuation concerns. Meanwhile, on the plus side, rival PALM was crushed for a 7.6% loss after announcing an earnings warning. Turning back to RIMM, we see the bounce from the $130.00 level as an aggressive entry point to buy the dip. We'll put our stop under $130 and aim for the recent highs at $142. More aggressive traders may want to aim higher thanks to RIMM's amazing momentum.

Suggested Options:
We are suggesting the January calls. We do not want to hold over the December earnings report.

BUY CALL JAN 130 RUP-AF open interest=10444 current ask $12.40
BUY CALL JAN 135 RUP-AG open interest= 2305 current ask $ 9.60
BUY CALL JAN 140 RFY-AH open interest= 4787 current ask $ 7.40
*please note the root symbol changed at the $140 strike

Picked on November 28 at $134.29
Change since picked: + 0.00
Earnings Date 12/21/06 (unconfirmed)
Average Daily Volume = 7.2 million
 

New Puts

Essex Property Trust - ESS - cls: 127.50 chg: -1.03 stop: 130.01

Company Description:
Essex Property Trust, Inc., located in Palo Alto, California and traded on the New York Stock Exchange (ESS), is a fully integrated real estate investment trust (REIT) that acquires, develops, redevelops, and manages multifamily residential properties in selected West Coast communities. Essex currently has ownership interests in 129 multifamily properties (27,520 units), and has 551 units in various stages of development. (source: company press release or website)

Why We Like It:
REITs have been popular with investors lately. ESS has certainly delivered over the last few years. In spite of this long-term bullish trend we're seeing some very definite bearish signs that the stock may be due for a consolidation lower. The easiest bearish signal to spot is the double-top pattern formed over the last month. Next would be the bearish technical indicators. Following that is the bearish divergence between price and some of its technical indicators. We want to be ready if ESS does break its bullish trend. Aggressive traders might want to jump the gun with an entry under $126.00. We noticed that ESS bounced from $125 about three weeks ago so we're suggesting a trigger to buy puts at $124.90. If triggered we will have two targets. Our first target is the $120.50-120.00 range. Our second, more aggressive target will be the $116.50-115.00 range. FYI: The P&F chart remains bullish (for now).

Suggested Options:
We are suggesting the January puts. Our suggested trigger to open plays is at $124.90.

BUY PUT JAN 130 ESS-MF open interest= 0 current ask $6.80
BUY PUT JAN 125 ESS-ME open interest=10 current ask $5.00
BUY PUT JAN 120 ESS-MD open interest=78 current ask $?.??

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/01/06 (confirmed)
Average Daily Volume = 147 thousand
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

B.P.Prudhoe Bay - BPT - close: 74.66 chg: +1.14 stop: 72.45

Oil stocks were the hot spot on Tuesday thanks to further gains in crude oil futures, which are nearing $61 a barrel. The OIX rose 1.3% and the OSX oil services index rose 1.7%. Shares of BPT managed a 1.5% rebound and came close to breaking out over resistance at the $75.00 level (again). Currently we're waiting for just such a breakout with a trigger to buy calls at $75.25. If triggered our target is the $79.75-80.00 range. Keep an eye on the 100-dma near $77, which might offer some resistance. The P&F chart is bullish with an $85 target.

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 219 thousand

---

CNOOC - CEO - close: 87.24 change: +0.22 stop: 84.45

CEO is another oil stocks that got a lift from rising crude oil prices. Traders bought the dip in CEO near $86.20 this morning. The trend remains positive and today's rebound takes the bite out of yesterday's short-term bearish reversal. Our target is the $89.50-90.00 range.

Picked on November 21 at $ 85.94
Change since picked: + 1.30
Earnings Date 03/23/07 (unconfirmed)
Average Daily Volume = 261 thousand

---

FedEx - FDX - close: 115.90 chg: -0.20 stop: 113.90

Transportation-related stocks continued to sell-off as investors reacted to another rise in crude oil futures. However, today's session for the transportation index and shares of FDX produced a decent bounce from its lows. We do note that the MACD for both FDX and the transports has turned negative so more conservative traders should remain defensive. Yet today's bounce from the lows might be the beginning of the end of this consolidation. Aggressive traders might want to consider new positions with a stop under today's low ($114.42). For the rest of us we'd wait for another rise past $117 before considering new positions. We do expect some resistance at the $120 level but our target is the $124-125 range. The P&F chart is more optimistic with a $153 target. FYI: We do not want to hold over the December earnings report.

Picked on November 15 at $117.15
Change since picked: - 1.25
Earnings Date 12/21/06 (unconfirmed)
Average Daily Volume = 1.9 million

---

Fomento Econo. - FMX - close: 101.86 chg: -0.35 stop: 99.49

FMX dipped to $100.85 before traders decided to step in and make it a buying opportunity. We remain optimistic here and would consider new positions now but more conservative traders may want to wait for another rise past the $102 level before initiating new positions. Our target is the $107-110 range.

Picked on November 08 at $102.09
Change since picked: - 0.23
Earnings Date 10/27/06 (confirmed)
Average Daily Volume = 314 thousand

---

KLA-Tencor - KLAC - close: 51.10 chg: +0.94 stop: 49.49

Shares of KLAC out performed its peers in the semiconductor sector and the NASDAQ on Tuesday. Traders bought the dip near $50 and the stock closed with a 1.8% gain on almost average volume. This looks like a new entry point for bullish positions. More conservative traders may want to think about tightening their stop loss. Our target is the $54.50-55.00 range. The stock appears to have solid resistance at $55.00.

Picked on November 14 at $ 50.81
Change since picked: + 0.29
Earnings Date 01/00/07 (unconfirmed)
Average Daily Volume = 3.9 million

---

Sepracor - SEPR - close: 54.93 chg: +0.88 stop: 52.35

SEPR bounced from its rising 10-dma this morning. Unfortunately, the rally was beginning to falter this afternoon. The stock has struggled with the $55.50-56.00 region for the last several days and it remains a lid on the stock. If the last hour is any indication then we'd look for SEPR to trade lower tomorrow, probably towards the $54 level again. We're aiming for the $59.50-60.00 range because the daily/weekly charts have resistance near $60.00.

Picked on November 19 at $ 54.69
Change since picked: + 0.24
Earnings Date 01/25/07 (unconfirmed)
Average Daily Volume = 2.3 million

---

Thomas & Betts - TNB - close: 51.54 chg: +0.40 stop: 49.90

TNB managed a bounce from technical support at its simple 200-dma this morning. The rebound could be used as a new bullish entry point to buy calls. However, we remain cautious given the stock's bearish MACD indicator. More conservative traders may want to exit early anyway to limit losses. Our target is the $56.00-57.00 range. Currently the P&F chart points to a $77 target.

Picked on November 12 at $ 51.36
Change since picked: + 0.62
Earnings Date 01/23/07 (unconfirmed)
Average Daily Volume = 471 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.)

---

Caterpillar - CAT - close: 61.60 chg: -0.37 stop: n/a

Our strangle in CAT is in trouble. The bounce from $60 stalled this week and we're running out of time. We have less than three weeks before December options expire. More conservative traders may want to try and salvage some of their trading capital with an early exit. For this play to have any hope of being successful we need to see CAT trade above $66 or under $54 before expiration. The options in our strangle are the December $65 call (CAT-LM) and the December $55 put (CAT-XK). Our estimated cost was about $0.75. We want to exit if either options rises to $1.50.

Picked on November 08 at $ 60.10
Change since picked: + 1.50
Earnings Date 01/19/06 (unconfirmed)
Average Daily Volume = 7.7 million

---

Blue Nile - NILE - cls: 34.08 chg: -0.78 stop: n/a

More concerns over retail and this holiday season sent shares of NILE to a 2.2% loss. More importantly for us the stock broke down under technical support at its 100-dma and exponential 200-dma. Our estimated cost was $2.40 and we're planning to sell if either side of our strangle rises to $3.90. The options in our suggested strangle are the January $45 call (JWU-AI) and the January $35 put (JWU-MG).

Picked on October 29 at $ 38.92
Change since picked: - 4.84
Earnings Date 10/30/06 (confirmed)
Average Daily Volume = 226 thousand
 

Dropped Calls

Cummins Inc. - CMI - close: 118.23 chg: -2.62 stop: 119.90

Shares of CMI failed to find any support at the $120 level near its 100-dma. The stock's failed rally from Monday turned into a larger retreat with today's 2% decline and breakdown. It's possible that CMI might find support near $118, which is where the stock bounced back in early November but we're not waiting to find out. It was our plan to buy calls on a breakout over $125, which looks like it might be a while before that occurs. We're dropping CMI as a potential play.

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/30/07 (unconfirmed)
Average Daily Volume = 1.1 million
 

Dropped Puts

None
 

Dropped Strangles

None
 

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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