Option Investor
Newsletter

Daily Newsletter, Saturday, 09/22/2007

HAVING TROUBLE PRINTING?
Printer friendly version

Table of Contents

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

Market Wrap

Hangover Week Ahead

Friday's closing swoon my have indicated the rate cut party is over and the hangover is about to begin. The enthusiasm traders exhibited to the stronger than expected cut carried over for three days after the Fed meeting but on Friday you could clearly tell the buzz was fading along with premium values in expiring options. Volume on Friday was strong but that was mostly related to options expiration and the S&P rebalance. Monday will be a key day for the markets. Do traders head to work on Monday ready to charge higher or do they grab a bottle of aspirin and amble into work in a fog in hopes of a flat market and no need to trade? It appears the fear of earnings is beginning to edge out the rate cut euphoria as a market mover next week. That could restrict any further gains until earnings warning season passes.

Dow Chart - Daily

Nasdaq Chart - Daily

Friday was lackluster in terms of economic reports with the Mass Layoffs report showing a small drop in layoffs to 118,120 workers in August from 124,835 in July. This is still elevated from earlier levels and it is not expected to decline materially until 2008. Manufacturing still produced the most layoffs by sector with a loss of 23,361 jobs. Credit and mortgage services also made the leader board clinching the 3rd and 7th largest loser spots. Ironically mortgage applications hit a six-week high this week led by a +4.6% increase in refinance applications.

Next week we have a full economic calendar but there are only a couple reports that could move the market. Those are durable goods on Wednesday, our last look at Q2 GDP on Thursday and the Chicago Purchasing Manager Index (PMI) on Friday. There are several housing reports with existing home sales on Tuesday and new home sales on Thursday. Everyone expects home sales to be even lower than before so any positive news could produce an unexpected market bounce.

Advertisement

QQQQ
The Most Profitable 4 Letters in Trading

Master them with Hotstix QQQ Trader. We'll show you exactly when to buy and sell the QQQQ and turn you into a master trader who knows how to cut your losses, nail short term gains and rack up some incredible profits.

30-Day FREE Trial:

http://www.hotstix.com/public/defaultqqq.asp?aid=755

The S&P/Case Shiller Home Price Index on Tuesday showed a -0.9% drop in prices from Q1 to Q2 when it was last released on August 27th. That was also a -3.2% drop from Q2-2006. This was reflected in the national index, 10-city composite index and the 20-city composite index. At the time Shiller said the drop in real estate prices was showing no signs of abating. Now that the prime selling season has passed it will be interesting to see if the trend is continuing or has gotten worse. Detroit was the biggest loser in the August report with prices falling -11% year over year. Seattle was the biggest gainer at +7.9% year over year.

Last week we saw the number of nationwide foreclosures climb to 243,947 for August. This was up +36% over July and +115% over August 2006. The top three states showing increases from July to August were Florida +77%, California +48% and Nevada +21%. Rising foreclosures are pressuring home prices as banks try to quickly flush the foreclosed homes to free up cash. I was talking to a realtor here in Denver on Friday and the inventory of bank owned homes is increasing rapidly but there are plenty of active bidders locally. Investors are stepping up with offers at about 80% of value with plans to either fix and flip or fix and rent. With so many homeowners losing their homes the rental markets are getting stronger.

Economic Calendar

The biggest loser on Friday was Harman (HAR) with a -27.25 drop (-21%) after KKR and Goldman Sachs pulled out of their deal to buy Harman for $8 billion. Harman said they were notified on Friday morning that the firms were not going to complete the deal due to a supposedly material adverse change in Harman's financial condition. Harman claimed no such change and blamed the cancellation on the buyer's inability to finance the deal. The deal included a break up fee of $225 million but I am sure Harman will have a fight to collect it. The deal was supposed to pay shareholders $120 per share and far more than Friday's $88 closing price. Nobody will say what the adverse change was so details remain sketchy. An analyst at RiskMetrics said inventories were rising at +40% while sales were only rising +11%. This could be a factor of the credit crunch on consumers who are no longer buying high dollar speakers at the same time they are paying $3 for gasoline. There was also a filing showing 25% of Harman's sales through June-30th were to DaimlerChrysler. Since Chrysler has been taken private and cost cutting will be of primary importance it may have been concerns that the new Chrysler will cut back on purchases of expensive speakers and GPS devices from Harman. Regardless of the reason for the break up shareholders saw a nice payday at $120 collapse and Friday's close at $88 is not likely to be the bottom.

The problem for the market was not the 21% haircut in the Harman stock price but the appearance of a large LBO deal gone bad. KKR and GS can claim it was a change in conditions at Harman but suspicious traders will be focusing on the bigger picture and suspect it was a breakdown in funding instead. Since the credit markets were thought to have been improving this will be a negative blow for the week ahead. Until a major deal or two closes there will be a shadow over any pending transaction. The brokers reporting earnings last week admitted to writing off $4 billion in loan losses and having to eat tens of billions in hung loans until conditions improve. There are also reports of banks asking LBO firms to postpone or breakup deals rather than be forced to carry the loans on their books. Some were even reported to be offering to pay the breakup fee. This is not a positive sign for the credit markets.

BEA Systems (BEAS) is still under attack by Carl Icahn. The billionaire raised his stake this week to 9.88% or 38.72 million shares. This is an addition of 5.3 million shares from the prior week. Under pressure from Icahn to sell the company it was reported that the two sides would likely meet over the next two weeks to try and come to some agreement. BEAS said last week it is not for sale and felt it could continue to innovate better as an independent company. Hedge funds are starting to smell a deal and have begun accumulating shares in BEAS. J&W Seligman accumulated 10.7 million shares and Third Point 9.7 million. The largest shareholder is activist investor Bruce Sherman with 41.4 million (10.6%) but he has been a silent owner for some time. Looks like a food fight brewing among billionaires as BEAS share price nears 52-week resistance at $14.25.

BEAS Chart - Daily

Texas Instruments announced plans to buy back another $5 billion in shares bringing its outstanding buyback plans to about $9 billion. TXN also raised its dividend 25% to a dime. Since 2004 TXN has authorized $20 billion in share buybacks including this latest authorization. They reduced their outstanding shares by 17% through June 30th. Last week they raised their earnings guidance to the high end of the previous range. Fewer shares produces higher earnings per share without any increase in earnings. This is a common trick by large companies when earnings are under pressure. Friday's announcement pushed the stock over resistance at $36 but the current uptrend is still lagging the market.

Oracle (ORCL) turned in another strong quarter with +25% growth and investors finally found the story positive enough to break through resistance at $21. Oracle has been on the ignore list for so long there was probably a large number of shorts hoping for another sell the news event. Oracle's license growth was strong enough to attract some buyers and the resulting post earnings squeeze pushed the price past resistance.

Oracle Chart - Daily

Morgan Stanley (MS), Lehman (LEH), Bear Stearns (BSC) and Goldman Sachs (GS) finally reported their long awaited earnings. Overall they were better than expected and after Lehman reported on Tuesday the sector saw a strong bounce. BSC was the stinker as expected with a -88% drop in profits. The punctuation mark for the week was the Goldman Sachs earnings where they earned a whopping $2.85 billion for the quarter. This was after a charge for $1.48 billion in losses on mortgages and broken LBO agreements. They beat the street by $1.78 because of their diverse business segments and their trading book. Apparently they bet against their own hedge funds and shorted mortgage instruments to capitalize on the mortgage problem. In theory any trading business is lucky to get by with 55% or maybe even 60% wins. With hundreds of traders placing thousands of trades the law of very large averages should produce an average won/loss ratio of roughly even. Goldman has the cream of the crop of traders and managed a 75% win ratio quarter after quarter. Unfortunately they don't give that same trading benefit to their hedge funds with many of them down 25% for the year. Evidently betting against your own fund strategies is an acceptable game plan. Remind me not to subscribe to any Goldman funds. Also, Goldman raised their set aside for bonuses to $16.9 billion for the first three quarters. This is 21% over 2006 levels and represents a bonus of $565,000 per employee. Of course those traders and partners will get the majority of the bucks and not the rank and file employee. The punch line here is "work for Goldman but don't let Goldman work for you." If you bought GS on that breakout over $180 you were rewarded with a touch of $210 on Friday.

Goldman Sachs Chart- Daily

FedEx (FDX) needs more than a buyback to rescue its shares after warnings this week that earnings would be well under street expectations and cut its full year forecast. The FedEx CEO has been on CNBC several times in recent weeks whining that the slumping economy was worse than the economic numbers showed and the Fed had to act quickly to rescue the economy from a recession. FDX has lost $7 from its $111 level when the CEO became a regular complainer on CNBC.

FedEx Chart - Weekly

The FedEx warning is a critical warning for the market. Comments about a nonexistent holiday shipping bounce suggest this retail season will be terrible. Retail analysts are already saying sales will be the worst in five years and possibly even ten. If you follow this train of thought through the economy is suggests earnings for Q3/Q4 are not going to be exciting. So far this quarter we have seen mixed earnings guidance but we are just now entering into the critical warnings cycle for Q3. Analysts will be shifting their estimates based on this warning cycle and that hits high gear next week.

Believe it or not we are only one week away from the 4th quarter and less than 100 days until Christmas. The year is rapidly drawing to a close and mutual funds, hedge funds and analysts have yet to agree on a direction. The post Fed honeymoon is over and now the focus will turn back to the economy and the coming end of quarter reports. We are only a week or so away from the ISM on Oct-1st and the next Jobs report on Oct-5th. The current forecast for new jobs is for a gain of 120,000 in September. That is very optimistic in my view today. If it does come to pass that jobs are revised upward and we are back in the +100,000 range for September the market would go crazy. These are major economic milestones in the Fed's next decision at the Halloween meeting.

There is an increasing feeling among analysts that the Fed scared the bond market by moving out of character with the larger than expected 50 point cut. What do they know that the bond market didn't? There is lots of head scratching in progress and now analysts don't know what to wish for at the Halloween meeting. Of course the Fed said future moves were data dependent so the next cycle of economic reports will be crucial. Add in the earnings warning cycle over the next two weeks and the picture should become clearer. Data from the business sector suggests the economy is still slowing despite the relatively tame economic reports. It will be interesting to see how this plays out in the markets.

Gold seems to be predicting a recession as it reached 27-year highs this week at $746. The gold bugs are all a twitter with projections of a retest of the Jan-1980 high of $850 if the dollar continues to weaken. Inflation adjusted that would be over $2000 an ounce but nobody seems to be keeping track. I am hearing opinions that the dollar may have run its course for this dip and is currently oversold. That could slow any attempt at that $850 level for gold.

The various market internals have reversed substantially over the last week. TrimTabs reported that more than $13.6 billion flowed into mutual funds over the last week ending on Wednesday. That was five times more than the prior week and showed how investors were playing the Fed announcement. Global funds saw inflows of $4.76 billion. Inflows on Wednesday at $8.49 billion were the largest single day inflows since Jan-4th 2001. This compares to only $568 million the prior week.

Margin loans fell by -$51 billion to $331 billion while the short interest dropped by -5%. That was the largest monthly drop in short interest in years and suggests retail investors either closed short positions or were blown out on Tuesday by the monster post Fed short squeeze. I am assuming that margin drop was due to short positions because traders long on margin over the Fed meeting would likely still be long. Did those short on margin decide not to reverse to longs on margin? Are they not convinced the bounce will hold? Are they planning on going short again when this bounce begins to fade? Nobody knows but a drop in short interest does remove some of the bounce potential from the market. Strong short interest makes rallies explosive, as we have seen many times recently.

Friday's quadruple witching produced record volume at the NYSE with 704 million shares in the first 30 min and 805 million for the first hour. That rate declined for the rest of the day until the market on close option settlements and S&P rebalance volume hit at the close. Overall there were 6.5 billion shares across all exchanges and that is far below the recent record of 11.769 billion hit on August-16th but still a decent day. Now that those option positions taken out during the August crash have expired traders will be entering a new series of trades to take them through this earnings cycle. Are they going to be longs are shorts? Next week's earnings warnings should determine that direction.

The Dow rallied +377 points for the week or +2.81%. Most of those gains came with the +335 post Fed short squeeze to 13865 but we have not been able to hold that Tuesday high. After a Thursday decline the post Goldman/Oracle open on Friday saw another retest of that 13865 high but the Dow closed back at 13818. To be fair it was an expiration Friday and traders were just content with holding over 13800 and not give back its gains for the week. They were successful and they escaped the week with their gains. Next week could be a different story. Those expiring option positions will not be there to support the indexes and a new series of positions will be entered. The Dow looks vulnerable here without a material bout of profit taking. Funds will not want to buy here but they should be willing to buy any material dip. Don't fight the Fed and the Fed appears to be on the side of the market.

The Nasdaq ran headfirst into apparent resistance at 2675 and valiantly held at that level. The Thursday decline was bought and the Nasdaq closed the week only about 10 points off its high. Google set a new high at $560 after gaining +35 points from its pre Fed level. EBAY ran to a new 52-week high at $39 on a sharp increase in listing volume. Yahoo hit a new 2-month high at $26 and Cisco hit a new multiyear intraday high at $32.56 on John Chambers continued comments that the global economy is the strongest he has ever seen. Intel is within 75 cents of a new high and AAPL is closing in on a new high as well. The bullishness is breaking out all over on the Nasdaq and that should help keep the broader market rally alive.

The S&P-500 rallied to 1540 on Wednesday and could not hold it. That was the resistance high set back in June and it was too strong to conquer on the first attempt. There was an extreme amount of open interest on both the calls and puts and 1530 appeared to be a solid top on Friday. Next week the index will be free to move again and direction will be dependent on the earnings warnings making the news. The S&P could pull back to something in the 1500 range and still manage a bullish trajectory. Assuming there is not a deluge of negative news I would continue to buy the dips.

S&P-500 Chart - Daily

Russell-2000 Chart - Daily

The Russell sprinted over 800 on Tuesday and continued to 823 on Wednesday before running out of steam. Now at 821 and over the 200-day average at 807 that should become support. This is still our fund manager sentiment indicator and I would continue to be long over that 200-day average. If it slips back below that average at 807 it could be trapped again by the undertow and be doomed to repeat the 780-800 range bound trade for a few more weeks. I sincerely hope this does not happen but hope has never been a credible market mover.

Watch the earnings news next week for warnings and the Russell-2000 200-day average at 807. Those are the only two indicators you need to follow the market action. Everything else is just smoke and will cause you to become distracted if you start worrying about it. The Russell direction will tell you what the big fund money is doing and you can never go wrong following the money.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
LMT ALEX None
TSL CEPH  

Play Editor's Note: We are only adding four new plays to the newsletter this weekend but I wanted to let you know we're keeping an eye on BCSI and MBT as potential bullish candidates and LAMR as a potential bearish candidate.


New Calls

Lockheed - LMT - cls: 103.20 change: +2.16 stop: 97.99

Company Description:
Headquartered in Bethesda, Md., Lockheed Martin employs about 140,000 people worldwide and is principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. The corporation reported 2006 sales of $39.6 billion. (source: company press release or website)

Why We Like It:
The defense/aerospace sector has been showing a lot of relative strength. Currently the DFI index is near a new all-time high. Meanwhile shares of LMT look like they are about ready to end the sideways consolidation. Shares have developed a bullish pattern of higher lows and look ready to breakout over resistance near $103.50. We're suggesting a trigger to buy calls at $103.75. If triggered our target is the $109.50-110.00 range. More aggressive traders may want to aim higher. The P&F chart points to a $117 target. We do not want to hold over the late October earnings.

Suggested Options:
We are suggesting the October calls although you may want to consider using November strikes. October options expire in four weeks. Our trigger is at $103.75.

BUY CALL OCT 100 LMT-JT open interest=396 current ask $5.00
BUY CALL OCT 105 LMT-JA open interest=895 current ask $2.20

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/24/07 (unconfirmed)
Average Daily Volume = 2.7 million

---

Trina Solar - TSL - cls: 51.89 chg: +3.70 stop: 47.49

Company Description:
Trina Solar is a well-recognized manufacturer of high quality solar PV modules and has a long history as a solar photovoltaic (PV) pioneer since it was founded in 1997 as a system installation company. (source: company press release or website)

Why We Like It:
We normally try to avoid chasing a big one-day move like Friday's 7.6% gain in TSL. However, Friday's rally was a bullish breakout over resistance at the $50.00 mark and the move was fueled by strong volume. The P&F chart is bullish with a $73 target. We suspect that Friday's gain could be the beginning of a new run towards $60.00. We're suggesting call positions now. If you're the patient type then wait for a dip back towards $50, which should be new support. Our target is the $58.00-60.00 range.

Suggested Options:
We are suggesting the October calls but readers should know that October strikes expire in four weeks. You may want to consider using November calls.

BUY CALL OCT 50.00 TSL-JJ open interest=1020 current ask $5.90
BUY CALL OCT 55.00 TSL-JK open interest= 581 current ask $3.70

Picked on September 23 at $ 51.89
Change since picked: + 0.00
Earnings Date 11/22/07 (unconfirmed)
Average Daily Volume = 1.1 million
 

New Puts

Alexander & Baldwin - ALEX - cls: 49.50 chg: -1.58 stop: 52.01

Company Description:
Alexander & Baldwin, Inc. ("A&B"), headquartered in Honolulu, Hawaii is engaged in ocean transportation and logistics services, through its subsidiaries, Matson Navigation Company, Inc. and Matson Integrated Logistics, Inc.; in real estate, through A&B Properties, Inc.; and in food products, through Hawaiian Commercial & Sugar Company and Kauai Coffee Company, Inc. (source: company press release or website)

Why We Like It:
ALEX has been showing a lot of relative weakness lately. Last week's rally on the Fed news turned into a failed rally and a bearish double-top pattern. Friday saw ALEX lose 3% and breakdown under support near $50.00 on big volume. The combination of the topping pattern and the breakdown under support looks like a good spot for a put. The P&F chart is already bearish with a $36 target. There is some support near $47.50 but we're aiming for a decline into the $45.50-45.00 range. We do not want to hold over the late October earnings.

Suggested Options:
We are suggesting the October puts although November puts would also work.

BUY PUT OCT 50.00 XQD-VJ open interest=204 current ask $2.05
BUY PUT OCT 45.00 XQD-VI open interest= 47 current ask $0.45

Picked on September 23 at $ 49.50
Change since picked: + 0.00
Earnings Date 10/25/07 (unconfirmed)
Average Daily Volume = 337 thousand

---

Cephalon - CEPH - cls: 73.25 chg: +0.64 stop: 74.25

Company Description:
Cephalon, Inc. is an international biopharmaceutical company, recently inducted into the World Economic Forum Community of Global Growth Companies. For 20 years, the company has been dedicated to the discovery, development and commercialization of innovative products in four core therapeutic areas: central nervous system, pain, oncology and addiction. (source: company press release or website)

Why We Like It:
Shares of biotech stock CEPH have been under performing the market and its peers this past week. The oversold bounce following the September 13th sell-off ran into resistance near $75 and its 200-dma. Now shares look like they are rolling over into a new leg down. Aggressive traders may want to open put positions now. We want to see a new relative low so we're suggesting a trigger to buy puts at $71.70. Please note that any time we trade a biotech stock it should be considered higher-risk. You never know when there is going to be a surprise announcement about an FDA approval or lack thereof or a surprise announcement on some new breakthrough or clinical trial. It's tough to defend against this sort of headline risk that could send a biotech stock gapping one way or the other. If we are triggered at $71.70 our target will be the $68.00-67.00 range. More aggressive traders could aim for the $65 region. The P&F chart is very bearish with a $50 target.

Suggested Options:
We are suggesting the October puts although November puts would also work. Our trigger to open positions is at $71.70.

BUY PUT OCT 75.00 CQE-VO open interest=1782 current ask $3.60
BUY PUT OCT 70.00 CQE-VN open interest=2092 current ask $1.30

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/01/07 (unconfirmed)
Average Daily Volume = 1.5 million
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Apple Inc. - AAPL - cls: 144.15 change: +3.84 stop: 135.99*new*

The gloom from Thursday's news that Steve Jobs had been subpoenaed over the option backdating scandal has already been forgotten. Positive analyst comments and estimates for AAPL's earnings due to strong sales of the iphone and its computers lifted shares to a 2.7% gain. Shares closed at a new two-week high and look poised to challenge resistance at the early September high soon. The intraday high on Friday was $144.65. We have two targets. Our first, more conservative target is the $144.75-145.00 range. Our second, more aggressive target is the $149.00-150.00 range. Please note that we're adjusting our stop loss to $135.99. This is still a wide, aggressive stop and readers might want to use a tighter stop for their own positions. The P&F chart is still bullish with a $180 target. We do not want to hold over the mid October earnings report.

Suggested Options:
If AAPL provides another dip and bounce near the $140 region then we would suggest new positions using the October calls.

Picked on September 17 at $140.25
Change since picked: + 3.90
Earnings Date 10/18/07 (unconfirmed)
Average Daily Volume = 39.9 million

---

Broadcom - BRCM - cls: 36.12 change: -0.28 stop: 33.95

Shares of BRCM have been under performing rival QCOM this past week. BRCM's trend of higher lows is bullish but readers can wait for a dip and bounce near $35.50 or a new relative high over resistance at $37.00 as a new entry point. We have been cautioning readers that the $37 level has been somewhat significant resistance in the past. More conservative readers will definitely want to wait for a new high over $37. Our target is the $39.85-40.00 range. The Point & Figure chart is bullish with a $49 target. Please note that we do not want to hold over the mid October earnings report.

Suggested Options:
If BRCM provides another entry point (see above) we would use the October calls.

Picked on September 12 at $ 35.85
Change since picked: + 0.27
Earnings Date 10/10/07 (unconfirmed)
Average Daily Volume = 11.0 million

---

Citigroup - C - clos: 47.51 change: +0.31 stop: 45.65 *new*

Last week's rally in the financials seemed to fade pretty quickly. Shares of C surged from $46 to $49 and ended up retracing half of its gains. Overall we are still optimistic on the financials after last Tuesday's fed meeting but Friday's news about the Harman deal going bust could definitely cast a long shadow over the sector. Looking at C we see Friday's intraday bounce near $47.00 as a new bullish entry point to buy calls. We're going to try and reduce our risk by raising the stop loss to $45.65 near last week's low. Our initial target is the $49.85-50.00 range but we might decide later to add a more aggressive target at the 200-dma. Please note that we do not want to hold over the October 19th earnings report.

Suggested Options:
We would suggest the October calls.

BUY CALL OCT 45.00 C-JI open interest=11905 current ask $3.40
BUY CALL OCT 47.50 C-JW open interest=30160 current ask $1.55
BUY CALL OCT 50.00 C-JJ open interest=24372 current ask $0.50

Picked on September 16 at $ 46.64
Change since picked: + 0.87
Earnings Date 10/19/07 (confirmed)
Average Daily Volume = 40.7 million

---

Intl. Bus. Mach.- IBM - cls: 116.78 chg: -0.08 stop: 113.90

IBM's closing numbers on Friday weren't that bad but the internal action for Friday's session looks bearish. We would expect another dip toward the $115 region soon. Shares of IBM continue to have resistance near $119 (and probably the $120) level. A bounce near $115 could be used as a new entry point but more conservative traders might want to wait for a new relative high. The stock has already hit our $118-120 target range. Our second, more-aggressive target is the $124.00-125.00 zone. FYI: The Point & Figure is very bullish with a $177 target. We do not want to hold over the mid October earnings report.

Suggested Options:
If IBM provides another entry point we'd suggest the October calls.

Picked on August 26 at $113.24
Change since picked: + 3.54
Earnings Date 10/17/07 (unconfirmed)
Average Daily Volume = 9.5 million

---

Stryker - SYK - cls: 68.01 change: -0.23 stop: 65.90

Unfortunately, we're still in a wait-and-see mode with SYK. We are suggesting that readers wait for a breakout to a new high and use a trigger at $70.65 to open positions. If triggered at $70.65 our target is the $74.90-75.00 range. Given the length of SYK's consolidation we would actually aim higher, maybe the $77.50-80.00 range, but we don't have much time and plan to exit ahead of the mid October earnings report. The P&F chart is bullish with an $83 target. FYI: There was a huge surge in volume on Friday with most of it coming in during the last hour of trading. We couldn't find any news but it looks like SYK was part of the index rebalancing.

Suggested Options:
If SYK hits our trigger to buy calls at $70.65 then we would suggest the October calls.

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/17/07 (confirmed)
Average Daily Volume = 1.4 million

---

Thornburg Mtg - TMA - cls: 13.33 chg: -0.17 stop: 11.90 *new*

We are running out of patience with TMA. The stock failed to rally with the markets last week. You may recall that TMA, a high-quality mortgage lender, has been painted with the same broad brush strokes of worry and fear that is plaguing the entire industry. Yet TMA doesn't have any subprime exposure. At this point we would think twice about opening new positions. In an attempt to reduce our risk we're raising the stop loss to $11.90. We have two targets for TMA. Our first target is the $16.25-16.50 zone. Our second target is the $17.50-19.00 range. The P&F chart has reversed into a new buy signal with a $19.50 target. We do not want to hold over the mid October earnings report.

Suggested Options:
We would hesitate to open new bullish positions in TMA.

Picked on September 16 at $ 13.63
Change since picked: - 0.30
Earnings Date 10/15/07 (unconfirmed)
Average Daily Volume = 5.4 million
 

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.)

---

Bear Stearns - BSC - cls: 117.32 chg: +1.86 stop: n/a

Shares of BSC held up pretty well this past week after reporting a disappointing earnings cycle. The stock's consolidation under resistance near $120 seemed to narrow in the last couple of days. It would seem that most analysts and market pundits are saying that the worst is behind BSC and that's why shares are holding up. However, at least one analyst firm was reiterating their "sell" rating on the stock on Friday. We're not suggesting new positions at this time. Currently our strangle involves the October $115 call (BSC-JC) and the October $95 put (BVD-VS). Our estimated cost was $9.50 and we want to sell if either option hits $14.00 or more. This should be considered a more aggressive play.

Suggested Options:
We are not suggesting new strangles on BSC at this time.

Picked on September 09 at $105.37
Change since picked: +11.95
Earnings Date 09/20/07 (confirmed)
Average Daily Volume = 8.7 million

---

Dow Jones Industrial Avg. - DJX - cls: 138.20 chg: +0.53 stop: n/a

The Dow Jones Industrial Average (DJIA) continued to rally on Friday. This lifted the DJX, a 1/100th version of the DJIA, to a 0.38% gain. Our aggressive September options strangle on the DJX has now expired. We were fortunate with Friday's intraday gains in the September options. Our estimated cost on the September $137 call and the September $132 put was $1.25. On Thursday night we adjusted our exit to close the September strangle at breakeven ($1.25). The intraday high on the September $137 call (DJY-IG) was $1.33 allowing us to exit. We are not suggesting new positions on the October version of our strangle. The options listed for our October strangle were the October $137 calls (DJY-JG) and the October $132 puts (DJW-VB) with an estimated cost of $4.75. We want to sell if either option hits $6.75.

Suggested Options:
We're not suggesting new strangles on the DJX at this time.

Picked on September 16 at $134.43
Change since picked: + 3.77
Earnings Date 00/00/00
Average Daily Volume = million
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

AutoZone - AZO - cls: 113.91 change: -0.12 stop: n/a

Our speculative strangles on AZO did not pan out. Shares did see a post-earnings move but it wasn't big enough. Our suggested strangles involved the September $115 calls (AZO-IC) and the September $105 puts (AZO-UA) with an estimated cost of $2.50. Our second combo suggested the September $120 calls (AZO-ID) and the September $100 puts (AZO-UT) with an estimated cost of $0.95.

Picked on September 16 at $109.90
Change since picked: + 4.01
Earnings Date 09/18/07 (confirmed)
Average Daily Volume = 812 thousand

---

Diamonds - DIA - cls: 137.90 chg: +0.20 stop: n/a

Our strangle play on the DIA, which is an ETF on the Dow Jones Industrial Average, has expired. The DJIA and thus the DIA did see some big moves midweek but not quite big enough to hit our target. We wanted to salvage some capital so Thursday night we adjusted our exit to $1.50. Fortunately, the September $137 call (DAZ-IG) hit an intraday high of $1.70. Our estimated cost on the strangle was $2.05.

Picked on August 30 at $132.57
Change since picked: + 5.33
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 20.8 million

---

Lehman Brothers - LEH - cls: 62.70 chg: +0.39 stop: n/a

LEH produced a strong 10% rally last Tuesday on the earnings and FOMC news. Yet it wasn't enough for our aggressive, short-term strangle. We gambled with the September strikes and lost. We suggested the September $65 calls (LES-IM) and the September $55 puts (LES-UK). Our estimated cost was $1.55.

Picked on September 16 at $ 59.50
Change since picked: + 3.20
Earnings Date 09/18/07 (confirmed)
Average Daily Volume = 15.4 million

---

S&P 100 Index - OEX - cls: 713.35 chg: + 3.54 stop: n/a

Time has run out for our September strangle on the OEX. It wasn't looking good as of Thursday so we adjusted our exit to breakeven at $14.30. Fortunately, the September $700 calls (OEZ-IT) hit an intraday high of $15.29 on Friday allowing us to exit the play (@ $14.30). Our strangle strategy suggested using the September 700 call (OEZ-IT) and the September 660 put (OEY-UL).

Picked on August 30 at $680.46
Change since picked: +32.89
Earnings Date 00/00/00
Average Daily Volume = 1306 thousand

---

Financial SPDR - XLF - cls: 34.60 chg: -0.12 stop: n/a

We were expecting some big moves in the financial sector this past week with the FOMC meeting and multiple brokerage earnings report. While the XLF did see a nice rally on Tuesday and Wednesday it wasn't enough for our strangle. We had suggested a speculative, higher-risk play using September options, which have expired. Our suggested strangle used the September $35 calls (XLF-II) and the September $33 puts (XLF-UG) with an estimated cost of $0.65.

Picked on September 16 at $ 33.98
Change since picked: + 0.62
Earnings Date 00/00/00
Average Daily Volume = 69.1 million
 


Trader's Corner

New Vocabulary

Why should you care what a bunch of bankers in the U.K. are doing? If you have an ARMs mortgage, you should care a lot. Your mortgage rate might depend on what those bankers decide.

How does that work, that bankers in the U.K. could have any input on mortgages in the U.S.? That's because some ARMs mortgages are tied to the BBA LIBOR rate, at least the USD version of the BBA LIBOR rate. Investopedia.com defines LIBOR as the London Interbank Offered Rate. In fact, the term is a trademarked one. Each day, the British Bankers' Association fixes a 3-month rate at which banks can borrow from other banks that are part of the London interbank market, with the BBA LIBOR the trademarked version. Individual banks may calculate their own Libor rates, the BBA site notes.

The BBA website says, " Central banks (such as the Bank of England, the US Federal Reserve and the European Central Bank) may fix official base rates monthly, but BBA LIBOR reflects the actual rate at which banks borrow money from each other." Watching the BBA LIBOR can provide information on how the world's financial markets are reacting to market conditions. According to Nick Hasell in a September 8 article for THE LONDON TIMES, BBA LIBOR rates are usually about 0.12 percentage points above the Bank of England's base rate, but that's been changing lately.

Member banks include familiar names such as Citigroup, Credit Suisse, Deutsche Bank, JP Morgan Chase Bank, Lloyd's TSB Bank and Mizuho International. The member list also includes the newly infamous Northern Rock, the bank that experienced a run on many of its branches on September 14 when it went to the Bank of England for help.

It might surprise many to learn that the U.S. as well as Canada, Switzerland and England use the BBA LIBOR as a reference or benchmark for short-term interest rates. Until recently at least, the world's best credit risks were able to borrow at or near BBA LIBOR rates while other borrowers might be required to pay several points over LIBOR.

Some would-be borrowers can't borrow at all. Recently, that list of turned-away borrowers grew, as did those who were not able to borrow at anything close to BBA LIBOR. In his September 5 Wrap, Keene Little pointed out that the actual interbank rate had soared much higher than the BBA LIBOR, something that was also being noted in the financial press. Compounding this problem was the fact that the BBA LIBOR itself has soared far above the Bank of England's base rate. According to that September 8 article by Nick Hasell, the LIBOR rate had jumped from its typical 0.12 percentage points above the Bank of England's base rate to 1.14 percentage points above that base rate. He quoted this as the largest gap in 20 years.

Central banks across the globe were using their open market operations to increase liquidity and bring loan rates back down toward their target rates. However, the increasing gap in the Bank of England's base rate and the BBA LIBOR, and in the BBA LIBOR and the points above that at which loans were actually offered were signaling trouble. They signaled that the central banks weren't being entirely successful in increasing liquidity because banks would rather hoard money than give out loans.

Lately, we've heard former FOMC head Alan Greenspan confess that the FOMC's efforts to lower rates had not been successful in lowering interest rates at the short end of the spectrum of U.S. treasuries, and something analogous was happening into early September with the BBA LIBOR and the benchmark rates of central banks. And that was scary.

Finally, on September 18, the day of our last FOMC meeting, THE LONDON TIMES reported that the three-month LIBOR rate had fallen to a three-week low. Articles in THE LONDON TIMES and on the BBA (British Bankers' Association) website make it clear that the move lower came only after a spike the previous day. The BBA's Chief Executive Angela Knight CBE noted that the Sterling BBA LIBOR rate was improving but was still significantly above the EURO and USD LIBOR rates. The decline was only temporary, with the BBA LIBOR rate jumping higher and then sinking again later this week.

Some financials may have already been hit. Hasell quotes Credit Suisse banking analyst Jonathan Pierce as saying that the mismatch in the BBA LIBOR and central bank base rates could result in downgrades of at least 10 percent in 2008 profit forecasts for some financials. It could cause worse problems than downgrades, too. At the time of that September 8 article, Pierce was already noting that both HBOS and Northern Rock, the bank that was to experience such trouble on September 13, were particularly vulnerable to problems engendered by BBA LIBOR's rise above the Bank of England's base rate.

In addition, banks might have to resort to their own depositors for their fund-raising efforts if they can't find funds elsewhere. That means that banks will compete more for depositors, and that means they'll have to offer higher rates on savings. That cuts into their bottom line another way, by leaving the banks with less profit from retail deposits. The slipping of LIBOR to a three-week low by September 18 and the sinking again on September 21 must have been a welcome development.

How can you find out what the BBA LIBOR rate is? It's published daily in Reuters. The BBA website also notes that it's made available by Thomson Financial, Bloomberg, Infotec and others. I go to thelondontimes.com for analysis of what's happening.

If you want information on how the rate is calculated or a source for news on the BBA LIBOR as well as historic rates, you can find that at the BBA website.
 

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.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

E-Mail Format Newsletter Archives