Option Investor

Daily Newsletter, Friday, 07/06/2007

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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

Holiday Hoopla

The bulls celebrated their independence last week with a very broad based rally that returned the major indexes to near their recent highs. The rally came on low volume and without any associated hoopla. It was as stealthy as any we have seen in recent months with gains coming slowly on that low volume. It appeared the bears took the holiday and the bulls celebrated by grazing calmly on a few tech stocks.

Dow Chart - Daily

Nasdaq Chart - Daily

The big economic report on Friday was the Non-Farm Payrolls for June. The headline number of +132,000 new jobs came in almost exactly as expected compared to estimates for a gain of +130,000. The surprise came from a revision to May from 157,000 to 190,000 and April was revised up to 122,000 from 80,000. This +75,000 two-month revision brought the three-month average to 148,000 new jobs per month. This is exactly where it needs to be to accommodate the 150,000 new workers moving into the market each month. This was slightly higher than the +142,000 monthly average for the first quarter. The unemployment rate remained unchanged at 4.5%. Job gains were grouped mostly in the health and hospitality sectors. Manufacturing lost -18K, Retail -24K, Construction gained +12K, Hospitality +39K and Education and Health +59K. Government jobs accounted for an additional +40K gain. Year over year average earnings were up +3.9%.

Some analysts expect jobs gains to slow as the year progresses do mostly to a further slowdown in housing construction. As the new mortgage underwriting rules begin to be enforced the homebuilding sector, a prime employer nationwide, is expected to see another round of layoffs as summer ends.

The stronger than expected payroll report, when you take into account the +75,000 in upward revisions to prior months, sent the equity market into an opening tail spin. That dive was quickly erased once analysts hit the wires saying there was nothing in the report that would cause the Fed to change its current stance on rates. The next big economic events will be the GDP for Q2 on July 27th and the Bernanke testimony to the House and Senate on the 18th and 19th. Since this is an election cycle year you can bet Bernanke will be seriously grilled on all matters economic in an effort to make election points for the questioner. This is Bernanke's state of the economy testimony and traders are hoping for a little insight into the Fed mindset other than the canned FOMC statements. The first reading on Q2-GDP on the 27th is producing street estimates from the high 1% growth range (+1.8-1.9%) to the low 4% range for Q2. Expectations are all over the map with the official numbers in the mid 3% range. There is a serious opportunity for expectations to be crushed if the housing implosion caused a bigger drain on GDP than expected. Any GDP number under 2% would be nearly disastrous given the rising whisper numbers over 4%.

Economic Calendar

Next week there are plenty of economic reports but none are material enough to be market movers without an extreme deviation from expectations. The economic calendar gets busy towards the end of the week but nobody will be watching. The highlight for next week will be the beginning of the Q2 earnings cycle. That reporting cycle kicks off on Monday with Alcoa (AA) as the first Dow component to report. The earnings calendar for the week has only a few names you would recognize but it does signal the official start of the Q2 cycle.

Earnings Table

Oil prices have clearly broken out over resistance at $70 with Friday's close at $72.81 an 11-month high. The same old reasons are still there and consist of violence in Nigeria, Iran's defiance, US and China demand increases and less production from OPEC. Brent crude is also rising to $75 on fears of a -300,000 bpd drop in output from the North Sea due to a variety of factors including a steep increase in depletion rates and some individual platform outages. Locally things are looking up with the 85 Kbpd Sunoco refinery in Tulsa restarting after a 30-day outage. Conoco's 150 kbpd refinery in Borger restarted after a 6-week outage. Exxon also is restarting its big Beaumont refinery. There is no target date yet for the restart of the Kansas refinery that was flooded out last week. These refineries will be running flat out trying to catch up with lagging product production in various areas. Crude inventories may be at decade highs but refined products are well below normal levels. Gasoline is -4.7% below 2006 levels but heating oil is -42% below 2006. The reason for the big discrepancy is a shift by all operating refineries to gasoline to avoid summer shortages and capture the high crack spread on gasoline. Some of that refinery capacity will have to be diverted back to heating oil soon or there will be shortages this winter. Because of the refineries coming back online the price of gasoline has resisted moves higher but with the spike in oil prices over $70 this week we did see August gasoline futures move to a new 11-month high at $2.31 on Friday. According to AAA the average retail price of gasoline last week was $2.95 but you can bet it will be higher soon. Demand in the U.S. actually dropped about -85,000 bpd in the prior week compared to 2006 but odds are good the July 4th week made up for it. Those numbers will be out next Wednesday.

August Crude Oil Chart - Daily

Gasoline Futures Chart - Daily

Microsoft is going to take a $1.15 billion pre tax charge in this quarterly cycle due to extending warranties on its Xbox-360 game consoles. Many of the Xbox game consoles have shown a general hardware failure error on the console lights and Microsoft said they were extending the warranty on those consoles to 3-years from the date of purchase. Customers who previously paid for those repairs will be reimbursed. Even though Xbox sales have failed to reach Microsoft targets the company reiterated on Friday that they expect the division to be profitable in 2008. Microsoft also reported that regulators had failed to request any additional information in the allotted 30-day time period for their announced $6 billion acquisition of aQuantive. By failing to request further documents in the 30-day period the deal is automatically cleared by regulatory rules. Google's $3 billion acquisition of DoubleClick was not so lucky. Regulators responded to calls by Microsoft and many others about the GOOG/DCLK acquisition and they have requested documents for further review. Many industry watchers feared a GOOG/DCLK combination would put too much advertising power in one firm and be non-competitive.

Macy's Chart - 30 min

The takeover speculation we saw in Macys (M) back on Friday June 22nd had fallen silent in the two weeks that followed with the stock returning to its previous levels. Just like clockwork that speculation returned on Friday and the stock shot up nearly +$4 intraday to touch $43 once again. Options volume reached hysterical levels with 75,700 call contracts traded compared to 42,161 puts. Normal volume for all their options is around 45K. Only weeks after changing its name from Federated to Macys and securing the coveted single character NYSE listing of (M) it appears the LBO vultures are circling.

Takeover speculation hit Monster Worldwide again with the stock spiking +3% on Friday. This speculation is almost a monthly event so little attention is paid to the rumors.


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Boeing (BA) will formerly present the first 787 Dreamliners in ceremonies on Sunday. More than 640 787s have been ordered but until now nobody has actually seen a real one. In Seattle, Qwest Field will host the 787 activities with about 50,000 current and former Boeing employees expected to attend. In Everett Washington Tom Brokaw will emcee the activities with 15,000 expected to attend. The six test aircraft are expected to begin flying in late August or early September. Various major customers will each receive one of the six aircraft. All Nippon Airways will receive one of the six because of its large order for 50 planes. On Friday Quantas increased its order by another 20 planes. Boeing sees no delays in its production schedule and although it took months to produce the first six planes Boeing expects to be cut that down to six days each once full production begins and then to three days each once those production lines gain experience. Boeing expects to produce 100 planes per year with a target eventually exceeding 2000 total planes. The first aircraft to be presented on July 8th will still have over 1000 temporary fastener bolts due to a shortage of titanium parts that Boeing said could take up to nine months to resolve. Here is your test plane. We ran out of bolts but we used plenty of duck tape.

Only two days after the National Association of Realtors said its index of pending home sales fell to 97.7 in May from 101.2 in April, the homebuilders were rebounding strongly. The reading was the weakest on record since the 9/11 low. Friday's gains included TOL +3%, CTX +3%, HOV +4%, LEN +3%, NVR +3.7% and even BZH +4%.

RIMM fell -84 cents despite having its price target raised to $350 from $205 by Crown Capital. I believe profit taking was offset by the upgrade and the announcement RIM has received approval to sell the BlackBerry in China. RIM said it was finalizing delivery availability to corporate customers in mainland China.

RIMM Chart - Daily

The major indexes returned to near their highs last week with the exception of one. The Nasdaq exceeded its recent high and surged another +30 points to 2666 in only three days of trading. Why did the Nasdaq suddenly take flight on July 2nd? A little research provided the answer. The Nasdaq is a modified form of a capitalization-weighted index. The bigger the company the more of the index it controls. One company is responsible for 9% of the Nasdaq 100 index. It is not Intel, Cisco, Oracle or even Microsoft. Those giants are in the top ten but not at the top. The largest weighted company in the Nasdaq index is Apple at 8.98% of the index value. Apple spiked +12 from Monday night to Friday morning. RIMM at 2.27% spiked +16 in the same period. Google at 4.49% rose +$20. Add in strong gains by Cisco with a 3.68% weighting, Intel at 2.95%, Oracle at 2.58% and Ebay at 2.0% and you have a seven stock rally. Remember when one stock or a handful of stocks in the Nasdaq catch fire it causes the value of the QQQQ to rise. Traders don't see the individual components moving only the price of the QQQQ. They jump on the bandwagon and buy more Qs and that causes Q shorts to cover. Buying in the Qs causes QQQQ managers to buy the entire index to cover the new demand. The rise in the Qs causes the entire index to rise even when the rally may have only been in a handful of stocks. The top ten Nasdaq stocks account for nearly 39% of the total index.

Nasdaq Index Weightings

I said last Sunday that should the Nasdaq rally continue it could spread to the other indexes. The seven stock rally in the Nasdaq did carry over to the other indexes to some extent but none of the others with the exception of the NYSE Composite tested their prior highs. The NYSE Composite did exceed its prior high by +7 points. For an index at 10,074 that 7 points is infinitesimal.

I think the major indexes did an outstanding job of following the Nasdaq higher. The Dow gained +203 points for the week and the Wilshire 5000 nearly +300. It was one of the better weeks we have seen this year. Unfortunately it came on low volume with most institutional traders off on an extended holiday. Next week will be the real test to see if this rally has legs. If the major indexes can reach their old highs and then breakout over that resistance then everyone will jump on the wagon with the tech bulls and go along for the ride.

What do you think would happen if we suddenly saw some profit taking in those highflying techs I mentioned above? AAPL +12, RIMM +16 and GOOG +20. Those are pretty strong gains for low volume trading. Those same index percentages work on the downside as well.

Apple Inc Chart - 15 min

Google Chart - 120 min

I believe we are poised for some consolidation. With earnings just ahead and expectations fading over the last couple weeks we could see some positive surprises. I am not sure fund managers will want to take profits ahead of the earnings cycle. They may want to hold on to see what surprises lay ahead. At the same time I doubt they will be adding to positions at these levels with the normal summer doldrums just ahead. The Q2 earnings cycle is normally peppered with guidance warnings for Q3. The summer quarter is not normally a strong quarter and guidance will reflect this. Eventually we are going to see a real correction between now and the 4th quarter. Normally that correction comes or ends in October. It can last several weeks or drag on for months but it normally ends in October. That means the timing for any potential dip is getting shorter as each day passes. The ideal time for a summer dip is after the Q2 earnings. Not all of them but enough that we know how the story ends. That would be 2-3 weeks from now.

S&P-500 Chart - Daily

That sets up several possible scenarios. If the rally continues next week and the other indexes breakout to new highs then we party on until the punchbowl goes dry. If we fail to make those breakouts and consolidate at these levels then I believe it is a warning that confidence is slipping or that the number of stocks bulls are willing to buy is dwindling. Apple and RIMM can't continue to power the rally by themselves. It has to broaden out to have any chance for success. The third scenario would be a failure at these levels and the beginning of another decline into August. That is the scenario I see least possibility of occurring so it may be the one most likely to happen. I think the one with the most chance of occurring is a consolidation at this level while we wait for earnings. If by some miracle earnings are a blowout across the board then we could move higher. Eventually there will be a correction but that scenario could put it off for another month or so. Picking a market direction ahead of Q2 earnings is the mission of fools. I can't say I am the head fool today because another website has already got dibs on that title. Let's just say that without any material economics or material earnings events the market will be left to find its own direction and in its overbought state it may take a few days for that direction to be determined. I would gladly go long over S&P 1540 or short a failure under 1535. I don't care which direction the market goes just as long as it maintains that direction for more than a few hours. It is the indecision that chews up trading accounts.

New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays

New Calls

GulfMark - GMRK - cls: 54.05 change: +1.33 stop: 52.45

Company Description:
GulfMark Offshore, Inc. provides marine transportation services to the energy industry through a fleet of sixty-one (61) offshore support vessels, primarily in the North Sea, offshore Southeast Asia, and the Americas. (source: company press release or website)

Why We Like It:
We remain bullish on the oil sector. Crude oil futures broke out past resistance and hit multi-month highs last week. This helped fuel a rise to new record highs in the oil and oil service sectors. Shares of GMRK are nearing new record highs. The stock has been consolidating sideways the past couple of months and one could argue it has produced an inverse or bullish version of the head-and-shoulders pattern. Aggressive traders may want to jump in now. We're going to suggest a trigger to buy calls at $55.05. If triggered our target is the $59.50-60.00 range. This is somewhat aggressive because time is growing short. We don't want to hold over the late July earnings report.

Suggested Options:
We are suggesting the August calls. Our trigger is at $55.05.

BUY CALL AUG 50.00 GIU-HJ open interest= 59 current ask $5.60
BUY CALL AUG 55.00 GIU-HK open interest= 97 current ask $2.45
(we don't see any AUG 60 calls yet)

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/27/07 (unconfirmed)
Average Daily Volume = 284 thousand


Joy Global - JOYG - cls: 60.96 chg: +1.36 stop: 57.99

Company Description:
Joy Global Inc. is a worldwide leader in manufacturing, servicing and distributing equipment for surface mining through P&H Mining Equipment and underground mining through Joy Mining Machinery. (source: company press release or website)

Why We Like It:
The world economies are humming and that means rising demand for commodities, which means big business for JOYG as it provides mining equipment to companies around the globe. The stock has a bullish trend of higher lows and we're tempted to buy the Thursday-Friday bounce from last week. More aggressive traders may want to jump in now. We are suggesting readers wait. There is some resistance at $62.00 so we're suggesting a trigger to buy calls at $62.05. If triggered our target is the $68.00-70.00 range. Our time frame is six to eight weeks. The Point & Figure chart is forecasting an $81 target.

Suggested Options:
We are suggesting the August or October calls. We do not want to hold over the late August earnings report. Our trigger is $62.05.

BUY CALL AUG 60.00 JQY-HL open interest=842 current ask $3.80
BUY CALL AUG 65.00 JQY-HM open interest=571 current ask $1.65

BUY CALL OCT 60.00 JQY-JL open interest=2430 current ask $6.00
BUY CALL OCT 65.00 JQY-JM open interest=4831 current ask $3.70
BUY CALL OCT 70.00 JQY-JN open interest=1604 current ask $2.15

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/30/07 (unconfirmed)
Average Daily Volume = 1.9 million


Toro Co. - TTC - cls: 59.85 change: +0.67 stop: 57.95

Company Description:
The Toro Company is a leading worldwide provider of outdoor beautification products, support services and integrated solutions. With sales of $1.8 billion in 2006, Toro is committed to providing environmentally responsible products of customer-valued quality and innovation. (source: company press release or website)

Why We Like It:
TTC surged back in May after beating earnings and guiding higher. The stock has spent the last six weeks digesting those gains. The recent strength suggests that TTC may be ready for the next leg higher. It's summer time and investors might want to position themselves ahead of TTC's next earnings report, which should be a strong one for the company. We are suggesting a trigger to buy calls at $60.75. If triggered our target is the $64.95-65.00 range. More aggressive traders may want to aim higher. The P&F chart points to a $77 target.

Suggested Options:
We are suggesting the August or September calls. Our trigger to open plays is at $60.75.

BUY CALL AUG 60.00 TTC-HL open interest=31 current ask $2.05
BUY CALL AUG 65.00 TTC-HM open interest= 0 current ask $0.45

BUY CALL SEP 60.00 TTC-IL open interest=126 current ask $2.90
BUY CALL SEP 65.00 TTC-IM open interest= 30 current ask $1.05

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/23/07 (unconfirmed)
Average Daily Volume = 354 thousand

New Puts


New Strangles

Chaparral Steel - CHAP - cls: 75.72 chg: +0.54 stop: n/a

Company Description:
Chaparral Steel Company, headquartered in Midlothian, Texas, is the second largest producer of structural steel beams in North America. The Company is also a supplier of steel bar products. In addition, Chaparral is a leading North American recycling company. (source: company press release or website)

Why We Like It:
CHAP's earnings are coming up and the stock is presenting us with an opportunity to play a strangle. Actually, you could play a straddle, where you buy both a call and a put at the same strike, which in this case would be the $75 strike, but we find it's cheaper to play a strangle. CHAP is due to report earnings on July 11th after the market's closing bell. Wall Street expect earnings of $1.37 a share. We are suggesting positions in the $76.00-74.00 range and the closer to $75.00 the better. We're going to play the July options, which expire in two weeks, because we're looking for the quick post-earnings pop.

Suggested Options:
A strangle requires that investors buy both an out of the money call and an out of the money put. We're suggesting the July $80 calls and the July $70 puts. Our estimated cost is $1.60. We will plan to sell if either option hits $3.20 or higher.

BUY CALL JUL 80 ZHQ-GP open interest=2497 current ask $1.00
BUY PUT JUL 70 ZHQ-SN open interest= 522 current ask $0.60

Picked on July 08 at $ 75.72
Change since picked: + 0.00
Earnings Date 07/11/07 (confirmed)
Average Daily Volume = 1.0 million


Genentech - DNA - cls: 75.10 change: -1.60 stop: n/a

Company Description:
Founded more than 30 years ago, Genentech is a leading biotechnology company that discovers, develops, manufactures and commercializes biotherapeutics for significant unmet medical needs. (source: company press release or website)

Why We Like It:
Biotech giant DNA has been in a bearish trend for months. The stock has a bearish pattern of lower highs dating back to the January 2007 peak. With so much pessimism in the stock DNA might surprise to the upside with its upcoming earnings report. We're suggesting a strangle to capture any post-earnings reaction. The company is due to report on July 11th after the closing bell. Wall Street expects a profit of 71 cents a share. We are suggesting positions in the $76.00-74.00 range but the closer to $75.00 the better. We're going to play the July options, which expire in two weeks, because we're looking for the quick post-earnings pop.

Suggested Options:
A strangle requires that investors buy both an out of the money call and an out of the money put. We're suggesting the July $80 calls and the July $70 puts. Our estimated cost is $0.45. We will plan to sell if either option hits $0.90 or higher.

BUY CALL JUL 80 DWN-GP open interest=11891 current ask $0.25
BUY PUT JUL 70 DWN-SN open interest= 7747 current ask $0.20

Picked on July 08 at $ 75.10
Change since picked: + 0.00
Earnings Date 07/11/07 (confirmed)
Average Daily Volume = 3.5 million

Play Updates

In Play Updates and Reviews

Call Updates

Avery Dennison - AVY - cls: 67.32 chg: +0.02 stop: 64.90

The two-month trend in AVY is still bullish. Most of the daily and weekly technical indicators are still bullish. However, momentum is slowing and that's weighing on the technicals. Last week's breakout over the $67.00 level is a positive for the bulls and looks like another entry point for calls. Yet traders may want to take a cautious approach to new positions. If you read the market wrap for this weekend then you know we are not expecting much from the markets in the next couple of weeks. Readers may want to tighten their stops. AVY's Point & Figure chart recently produced a new buy signal with an $80 target. Our target is the $69.75-70.00 range. We do not want to hold over the late July earnings report.

Suggested Options:
We are suggesting caution when it comes to new plays on AVY. August calls would work but remember our plan to exit before the late July earnings.

Picked on June 11 at $ 66.05
Change since picked: + 1.27
Earnings Date 07/24/07 (unconfirmed)
Average Daily Volume = 728 thousand


BP Plc. - BP - close: 73.50 change: +0.58 stop: 68.75

Shares of BP were upgraded to a "buy" on Friday. This accounted for the stock gapping up at the open. Unfortunately, BP was unable to build on the opening move and shares traded sideways for the rest of the session. Overall the trend is still very bullish but BP looks short-term overbought and due for a correction. A dip back toward $72 and its rising 10-dma would be normal. We're not suggesting new positions at this time. The P&F chart points to a $90 target. Our target is the $74.85-75.00 range. More aggressive traders may want to aim higher.

Suggested Options:
We're not suggesting new positions in BP at this time.

Picked on June 22 at $ 70.25
Change since picked: + 3.25
Earnings Date 07/24/07 (unconfirmed)
Average Daily Volume = 3.5 million


Chevron Corp. - CVX - close: 87.68 chg: +1.11 stop: 81.59*new*

A strong week for crude oil futures lifted shares of CVX to new all-time highs. Shares posted a 1.2% gain on above average volume Friday. More conservative traders may want to lock in a gain now. We're inching up our stop loss again to $81.59, just under the 50-dma. We're not suggesting new positions at this time but a dip or a bounce near $85 or the 10-dma might be a new entry point for bullish positions. CVX's Point & Figure chart is positive with a bullish catapult breakout buy signal and a $120 price target. Our target is the $89.00-90.00 range.

Suggested Options:
We're not suggesting new positions in CVX at this time.

Picked on June 18 at $ 83.75
Change since picked: + 3.93
Earnings Date 07/27/07 (unconfirmed)
Average Daily Volume = 9.1 million


Deere Co - DE - close: 123.71 change: +0.65 stop: 116.90

Unfortunately, we have little new to report on for DE. Shares are still well situated in their long-term rising trend. The stock did post gains this past week but they were not very inspiring and DE appears to still have resistance in the $125 region. Odds are good that the markets might see some profit taking so look for DE to dip back into the $122.00-120.00 range, which is where we'd look for a new entry point. More conservative traders may want to raise their stop loss toward the June 27th low or the rising 50-dma near $118.30. A move over $125.00 or a new relative high over $125.65 could also be used as a new entry point. We have two targets. Our first target is the $129.50-130.00 range. Our second, more aggressive target is the $134.00-135.00 range.

Suggested Options:
We're suggesting the August calls.

BUY CALL AUG 120 DE-HD open interest=327 current ask $7.80
BUY CALL AUG 125 DE-HE open interest=470 current ask $5.00
BUY CALL AUG 130 DE-HF open interest=562 current ask $2.90

Picked on June 20 at $123.55
Change since picked: + 0.16
Earnings Date 08/15/07 (unconfirmed)
Average Daily Volume = 2.6 million


Russell 2000 iShares - IWM - cls: 84.80 chg: +0.33 stop: 81.35

The IWM has rallied back toward resistance near $85.00. The short-term trend looks bullish but we would not be buying new positions right under resistance. Our target is the $86.50-87.50 range.

Suggested Options:
We're not suggesting new positions at this time.

Picked on June 24 at $ 82.85
Change since picked: + 1.95
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 71.6 million


Manpower - MAN - cls: 94.26 change: +0.38 stop: 89.90

MAN is still trying to breakout higher. The stock pierced overhead resistance at the $95.00 level on Friday but the move reversed and shares failed to close over this level. The path of least resistance appears to be up for MAN but we remain wary. Shares have been trading sideways for over a month now, which would kill any option values. We are repeating our previous comments. More conservative traders may want to tighten their stops toward $91.00. Meanwhile readers may want to wait for a breakout over $95 before considering new positions. The P&F chart has a triple-top breakout buy signal with a $110 target. Currently our target is the $99.50-100.00 range.

Suggested Options:
We would suggest the August calls but plan to exit ahead of the late July earnings report.

Picked on June 20 at $ 94.15
Change since picked: + 0.11
Earnings Date 07/20/07 (unconfirmed)
Average Daily Volume = 829 thousand


Pacific Ethanol - PEIX - cls: 14.43 chg: -0.12 stop: 11.90

We are repeating our previous comments. More conservative traders may want to lock in a gain now following PEIX's big rally last week. Shares hit technical resistance at the 100-dma and look poised for some profit taking back toward $14.00 and maybe back down to the 50-dma. We're still bullish on PEIX given what appears to be a new bottom and a bullish reversal but we're not suggesting new positions at this time. We are adjusting our target to the $15.40-15.60 range to account for potential resistance at the descending 200-dma. FYI: We cannot find a future earnings date for PEIX but suspect it will be in August or September.

Suggested Options:
We're not suggesting new positions at this time.

Picked on June 24 at $ 12.83
Change since picked: + 1.60
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 892 thousand


Penn National Gaming - PENN - cls: 60.82 chg: +0.46 stop: n/a

A quick history on the PENN play - On June 15th it is announced that FIG and Centerbridge partners will pay $8.9 billion in cash to take PENN private. The deal values PENN at $67 a share. PENN gets 45 days to solicit a better offer and more than one analyst believes additional suitors will show up and push the buyout price closer to $80 a share. We are suggesting high-risk, speculative call positions on the gamble that a new suitor does show up and offer more. Thus far there hasn't been any news and PENN has less than 30 days to find another bidder. Shares of PENN hit some profit taking but found support near $60.00.

Suggested Options:
The July calls, which have two weeks left until expiration, show a lot of open interest. The July 65 calls (UQN-GM) are going for about 20 cents each. Meanwhile the better play is probably the August $65 calls (UQN-HM) which are going for 25 cents a piece.

Picked on June 17 at $ 62.12
Change since picked: - 1.30
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume = 1.0 million


SanDisk - SNDK - cls: 49.20 change: +1.11 stop: 44.85

Positive analyst comments about the pricing environment for the memory market lifted SNDK to a 2.3% rally. The stock looks poised to challenge round-number resistance near $50.00 soon. SNDK has already hit our conservative target in the $49.50-50.00 range. We're currently aiming for our aggressive target in the $52.50-55.00 range. We don't want to hold over the mid July earnings report, which doesn't give us a lot of time so you may want to avoid launching new positions.

Suggested Options:
We're not suggesting new positions at this time.

Picked on June 17 at $ 46.40
Change since picked: + 2.80
Earnings Date 07/19/07 (unconfirmed)
Average Daily Volume = 7.6 million

Put Updates

Allegheny Tech - ATI - cls: 107.72 chg: -1.02 stop: 110.15

ATI is slowly fading lower from its recent failed rally under the $110 level. Friday's relative weakness looks like another entry point to buy puts. However, readers may want to wait for a new decline under the 10-dma near $106.25 before initiating new positions. The stock has already hit our conservative target in the $100.50-100.00 range. We are adjusting our aggressive target to $97.00-96.00 to account for the rising 200-dma, which is likely to be support.

Suggested Options:
If you're looking for new positions we'd suggest the August puts. FYI: Double check your option symbols. The CBOE is listing the Aug. 110 put as -TX but it should be -TB.

BUY PUT AUG 110 ATI-TX open interest=271 current ask $6.70
BUY PUT AUG 105 ATI-TA open interest=487 current ask $4.20
BUY PUT AUG 100 ATI-TT open interest=320 current ask $2.45

Picked on June 12 at $106.70
Change since picked: - 2.04
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 2.1 million


Gilead Sciences - GILD - cls: 39.12 chg: +0.14 stop: 40.15 *new*

GILD is still trading under its bearish trend of lower highs. However, downward momentum has slowed significantly. We're not suggesting new positions. More conservative traders may want to exit early. Studying the intraday chart we noticed a lot of volume on the late Friday afternoon rebound and shares of GILD continued to climb in after hours (up toward $39.70). We are adjusting our stop loss down to $40.15. More aggressive traders may want to leave their stop above the 50-dma near $40.60. Our post-split target is $37.62-36.25.

Suggested Options:
We're not suggesting new positions.

Picked on June 07 at $ 39.95 *split adjusted
Change since picked: - 0.83
Earnings Date 07/18/07 (unconfirmed)
Average Daily Volume = 4.1 million


Mettler Toledo - MTD - cls: 97.71 chg: +1.77 stop: 99.11

Uh-oh! The bears may be in trouble with MTD. The stock spiked higher on Friday, rising 1.8% and challenging resistance near its 50-dma. The MACD indicator on the daily chart has produced a new buy signal on Friday. The move over short-term resistance near $97.00 is also bad news for the bears. Resistance at the 50-dma is holding for now but more conservative traders may want to cut their losses. We're going to stick it out and re-evaluate after Monday's session.

Suggested Options:
We're not suggesting new positions at this time.

Picked on June 19 at $ 96.75
Change since picked: + 0.96
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume = 215 thousand


QUALCOMM - QCOM - cls: 43.58 change: +0.04 stop: 44.05

Thus far resistance at the $44.00 level is holding for QCOM but the stock has also developed a bullish trend of higher lows. We are not suggesting new put positions at this time and we repeat our previous suggestion that more conservative traders may want to exit early. Investors are ignoring the negative news regarding QCOM, its losing battle in the patent infringement case with BRCM, and the ITC two-year ban on importing new phones with QCOM's latest chips.

Suggested Options:
We're not suggesting new positions at this time.

Picked on June 10 at $ 41.87
Change since picked: + 1.71
Earnings Date 07/18/07 (unconfirmed)
Average Daily Volume = 18.0 million

Strangle Updates


Dropped Calls


Dropped Puts


Dropped Strangles


Trader's Corner

Who Are Wade Chambers, Robin Dayne and Jason Alan Jankovsky?

Two of these people term themselves trading coaches, and one, a trainer of traders. At least one has been featured on CBNC, TheStreet.com and other well-known trading-related venues. All have written trading-related books and numerous articles.

They also have something else in common. They've all presented www.cbot.com webinars that deal with handling emotions when trading.

I can hear you groaning all the way here in my Texas office. You want technique tips in these Trader's Corner articles. You want optimized trading systems. You want the holy grail of trading.

Managing emotions is the holy grail of trading.

Emotions can impact your trading so strongly that Jankovsky asserts that psychology comprises 95-99 percent of your trading success. Dayne likens trading under emotional duress to setting up conditions for a forest fire. Let a Santa Anna wind of emotional upheaval blow through your life and the conditions are set for you to burn through a trade or your entire trading account. Dayne claims that the overwrought mind simply cannot focus on logical solutions in the same way that a rested mind can. Solutions for ameliorating losses just do not occur to the mind operating under the influence of strong emotions. "Pity, wrath, heroism, filled them, but the power of putting two and two together was annihilated" is the way that E.M. Forster explained the damage that strong emotions do to logical thought when writing A PASSAGE TO INDIA.

The three webinar presenters might agree that the first method of controlling emotion is to avoid trading or limit the size of trades when your life is out of kilter. If you're already overwrought when coming to your trading day, you're not going to make the best decisions.

All three agree that traders must realize that some trades are going to result in losses. Jankowsky warns that most trading systems have about as many losing trades as winning ones, with a 52-percent ratio of winning trades to all trades being characteristic of a good system. Chambers wants traders to have a better win/loss ratio than that, saying that traders should concentrate on what he calls "quality" trades, trades that have a 70-85 percent chance of success.

Dayne reminds traders that, even if they have found a system that results in a high degree of success, a string of losing trades is inevitable. She wants traders to realize that when that string does occur, the trader hasn't changed. The system hasn't changed. Market conditions have. Accept it as a fact of business.

Don't look for the perfect trading system. Chambers and Jankowsky both assert that it does not exist. Dayne says that traders need to accept the idea that they'll take home losses. If traders do not fully recognize that they do and must take risks, Chambers says they're engaging in an "account-destroying activity."

Put the work into your trading so that you feel that you are executing those quality trades Chambers mentions. Having confidence in yourself and your system helps you control emotions. How do you start that hard work? You keep a trading journal.

I know. You're groaning again. Honestly, though, how are you going to know that you trade better on Monday than you do on Friday unless you keep a trading journal? I used that example because that's what I once discovered about my own trading, but you might learn that you always lose money on weeks that include an FOMC meeting or that your trades are more successful in opex week if you use back-month options rather than rapidly expiring front-month ones. You might learn that you trade better using a particular vehicle or at a particular time of day.

Both Dayne and Chambers assert that traders must keep trading journals. On his CBOT webinar, Chambers provided examples of the details that should be included. At the start of a day's journal, write a paragraph including relevant background about the markets. I advise including relevant background about your life, too. Write down your approach to the market for that day. Do you believe that any early downdraft is likely to be quickly reversed? If so, write that down. You'd be surprised how often you forget the impressions you formed while calmly studying the markets and jump into a play because you get caught up in the heat of the battle.

Chambers adds that you should note whether your market selection is complete. In other words, do you know whether your intended bullish play should best be executed with the QQQQs or SPX calls? Do you believe that a long-term move is setting up in commodities, and, if so, will you participate by using futures or an ETF? Is your analysis complete?

Are any caveats identified? Perhaps you believe that gold will move a certain direction on a particular market day, but you've learned that Japan's Fukui will also make a statement about the pacing of any interest-rate hikes in Japan. That could impact currency markets, you reason, which could then impact gold. Note this caveat. Perhaps you'll elect to let that trade pass because of the uncertainty of the impact that Fukui's statement could have.

What will be your entry strategy? Have risk-management and exit strategies been developed?

Having those risk-management and exit strategies help manage emotions in a trade, as you might imagine. Chambers warns that when you get into a trade, you already know that three possibilities exist: the market goes your direction, the market goes against your direction, or the market stays flat. Before you get into the trade, you have to know how you'll handle each situation. We options traders know that a market that stays flat for any length of time is equivalent to one that's going against our trade.

Jankovsky expounds on how psychology changes when you've entered a trade. You initiate trades, and then you liquidate those trades. Liquidation psychologies prove much different than initiation psychologies. They prove much more difficult to handle.

This teacher of traders points out that when initiating a trade, traders are usually working under a system that has given them a signal, whether that system is objective or a combination of objective and subjective parameters. Although Chambers feels that the top 10 percent of all traders go into a trade cognizant of those possible three outcomes, both he and Jankovsky believe that traders initiate a trade because that particular trade has a good probability of succeeding. The entry is made, the trade initiated, at a specific point because of specific entry criteria.

That's when the problems with emotions begin. Each point after that is a potential exit or liquidation point, Jankovsky notes. At each moment, a decision must be made. Even if a trader has a specific system, each moment involves making the decision to stick to that system or abandon it. No longer is the system guiding the trade; it's the trader who will accumulate or lose money. Your system told you that it was time to make the entry, Jankovsky notes, but your system doesn't and can't tell you if the trade will be successful.

Your emotions have been engaged. You might have been able to carry on with other business while you were waiting for the entry signal, but once the trade is initiated, you're often glued to the screen, making those moment-by-moment liquidation decisions.

So what do you do in order to handle the emotions, the trading psychology that switches the moment you enter a trade? All three presenters make the same suggestion: set a hard stop. You might be surprised to learn where they suggest setting that stop, however. That hard stop is only a get-me-out-if-the-trade-falls-apart stop, most suggest. It's far enough away that it's there for insurance only, in case something drastic happens or a trader is pulled away from the computer and needs such insurance. However, they all advise that if a trade is going wrong, you act before that insurance kicks in.

When Dayne's clients tell her about some anecdote about how they were stopped and lost money, she asks them why they let the trade get so far that they were stopped before they made the decision to get out. Still, having the stop there in case of a disaster removes some of the emotion from the trade and also prevents a trade from going so wrong that it blows out a trading account, Dayne suggests. Nothing makes trading more emotional than having blown through an account. Jankovsky echoes her words, with the first of his two rules for handling liquidation pressures being that traders should never trade without a stop.

Jankovsky's second rule for handling emotions may be harder to put into effect. He suggests that when the pressure to liquidate mounts, when traders get that gotta-get-out feeling, that they always wait one full bar on the time frame in which they're trading.

The purpose? Jankovsky says that two things could result: traders will lose more than they would have originally lost, or the system will be given time to work as intended. Traders whose primary shortcomings are cutting winning trades too short will benefit. Jankovsky says that the majority of shoulda-woulda-coulda statements he hears are from traders who either cut their profits short or else took a quick loss when waiting one bar longer before succumbing to liquidation pressure might have allowed the trade to work. Waiting would certainly have allowed a little more assessment time.

Annotated 5-Minute Chart of the SPX:

Of course, waiting one bar beyond the point at which liquidation pressure builds up doesn't always work out so felicitously. Of course it doesn't. If markets are sprinting higher or diving lower, moving against your trade, you just may not be able to wait that one extra bar, either.

In summary, grouping the advice of the three coaches produces the following suggestions. Do the hard work first to determine that you're entering quality trades. That hard work includes, always, keeping a trade journal that notes why you entered or plan to enter a trade, what conditions were present in the market and your life, and the outcome of that trade. Recognize that you're taking a risk, even though you've done that hard work, and that risk is that you might lose money on any particular trade and most certainly will lose money occasionally. Be willing enough to lose that you have an exit plan as well as an entry plan. Set a just-in-case hard stop so that you'll be automatically taken out on a market order if prices move swiftly against your trade, but plan on making an exit decision ahead of that stop being hit. Give your trade time to work, perhaps even an entire bar of decision time on the time frame chart you're watching if you follow Jankovsky's suggestion.

If your system formerly produced mostly winning trades but now does not, then market conditions have mostly likely changed. Dayne would advise that you stop trading after a number of losing trades in a row, using your trade journal to reevaluate what has changed. Dayne, as well as the others, however, says that you have to be able to recover from a trading loss, noting that the best traders have figured out ways to do so quickly.

I don't believe it's possible to remove all emotion from trading. I'm not even sure that you should remove all emotion, but traders have to understand the psychology of trading. That understanding lets us know that the psychology changes after a trade is entered, whether traders apply a specific system or a seat-of-their-pants decision-making process.

I hope I haven't misrepresented the statements of these three presenters, but, if so, the mistakes are mine. If you've recently let a trade blow up or uttered that "shoulda, woulda, coulda" sentiment, you might be interested in listening to their presentations. They can be found at www.cbot.com under the "Education" tab, with some presentations taking place this year and some in 2006. Happy listening.

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


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