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Daily Newsletter, Saturday, 12/22/2007

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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

Ho, Ho, Ho!

The holiday spirit finally spilled over into the market and a +205 Dow day to end the week is a great present for traders, most of whom will not be back until the New Year. Sales of nearly 4 million Blackberry phones by RIMM, Oracle's street beat by 4 cents and good news from Merrill about a $5 billion infusion of cash prompted a huge gap open and shorts were crushed once again as their options expired. Ho, ho, ho!

Dow Chart - Daily

S&P-500 Chart - Daily

Depending on which side of the recession/inflation debate you are on there were economics to fit your bias. The Personal Income numbers showed a headline rise of +0.4% and right inline with most expectations. However personal spending jumped +1.1% and well above expectations. It was the largest increase since July 2005 and not a sign of a pending recession. Analysts point out that much of the gains were due to higher energy prices. However, the inflation indicator in the report showed year over year inflation accelerated. Top line inflation jumped to 3.6% and the core rate rose to 2.2%. Both of these numbers are over the Fed's comfort zone and suggest we have seen the last rate cut. If spending is rising unexpectedly fast and inflation rates are following then the Fed will be changing their bias to tightening very quickly.

The final Consumer Sentiment for December was a sleeper with the headline number of 75.5 only +1 point from the initial reading of 74.5. No excitement there but still the lowest level since Oct-2005 and the second lowest since the early 1990s. The expectations component fell to 65.6 but the current conditions component is holding the high ground at 91.0. It appears the individual consumer is not feeling very recessionary. You would expect all the recession talk and the drop in the markets could have further depressed sentiment. Evidently the holiday spirit is in full bloom.

Consumer Sentiment

The monthly Mass Layoffs report showed the number of layoffs involving more than 50 workers in November was 1,300 compared to 1,320 in October. The number of workers involved in November was 136,924 compared to 131,780 in October. There was no surge in layoffs, as you would have expected if we were rushing headlong into a recession. The numbers are still slightly elevated and should remain so for several months but not to a level that would give cause for concern.

Next week is holiday shortened by two days and it is going to be a slim week for economics. The only reports of interest will be the two Fed regional surveys and the Chicago PMI report. The PMI falls on a Friday that will see even less trading than we just saw last week. With no material reports and the way the holidays fall this year suggests any economics will be ignored until the New Year.

Economic Calendar

Friday was quadruple witching and options on the S&P-500 expired at the opening print. The RIMM earnings and the Merrill cash infusion just capped a long list of a dozen reasons not to go into the holidays short. The S&P expiration produced record volume in the first hour on the NYSE and then settled into boredom until the remaining shorts capitulated heading into the close. The overall volume across all the exchanges totaled 7.62 billion shares and the strongest volume day in December. Big earnings and big news always seems to catch investors leaning the wrong way going into expiration and Friday was no exception.

RIMM Chart - Daily

Research in Motion (RIMM) had the last laugh over the RIMM bashers of late by selling 3.9 million Blackberry phones sold over the last quarter. This compared with about 650,000 Palm Treos sold. RIMM had been knocked for nearly a $25 loss on comments from one analyst that Palm smart phones were selling faster than the BlackBerry. Maybe that is true in Podunk Kansas but it is definitely not true in the rest of the civilized world. RIMM profits surged 100% and analysts were racing to beat each other in raising their price targets. What a difference a month makes. Thanks to Apple pushing the bar higher on prices with their iPhone at $400 and $600 the Blackberry was no longer just the toy for the status conscious well to do corporate executive. If Jane and Johnny Highschooler can justify paying $500 for an iPhone suddenly the soccer moms and work at home dads could justify a similar expense for a real tool for both business and pleasure. The retail consumer has picked up on the corporate trend. Where the Blackberry was primarily a phone for business people RIMM reported the percentage of the subscriber base for no-ncorporate and non-government users at quarter end had risen to 34%. RIMM spiked +11% to $120 on the positive earnings news. Several brokers raised their price targets to the $140 range.

In contrast to RIMM, Circuit City (CC) fell -29% to $4.91 and a 4-year low after reporting a far larger Q3 loss than analysts had expected. CC lost 64 cents per share and analysts were only expecting a loss of 31 cents. Revenue fell 3% with a product mix that moved toward low margin sales. Analysts commented that losing money during a holiday season was not a good sign for the future. CC also said it expected a small loss in the current quarter and analysts had been expecting a profit of 56 cents. There were numerous comments that they could be heading for a death spiral with customers showing a fondness for Best Buy and a falling interest in CC. Analysts said they could easily face liquidity issues and the likelihood of a takeout was slim given Best Buy's lead in the sector.

Micron (MU) reported earnings on Thursday night with a loss of 24 cents per share compared to analyst's expectations for a loss of 19 cents. Micron said the price of DRAM chips fell -20% and the price of NAND chips fell -30% over the quarter. There is a serious chip glut and as always the chip companies claim it will be better next year when demand returns. Micron fell -5% to $7.50 and blunted a rebound attempt in the Semiconductor Index.

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Now that the Chicago Mercantile Exchange (CME) has snapped up the CBOT and controls over 85% of U.S. traded futures and options on futures a dozen financial institutions plans to create a new futures exchange. The players behind the move include BAC, JPM, MER, C, CS, BARC, Deutsche Bank, Royal Bank of Scotland and eSpeed (ESPD). It will be a fully electronic exchange that will start out in early 2008 with treasury futures as its first product. The technology will be on the eSpeed electronic platform. The group will meet early in 2008 to name the enterprise and layout the game plan. The CEO of eSpeed, Paul Saltzman, will become the acting CEO of the exchange. I know CME has plenty of clout but how would you like to have all those banks betting against you. You know they will be placing their trades on the new exchange rather than the CME. Prior to the after hours announcement CME gained +9 to within $4 of a new high. In after hours CME lost -$22 on the news and that is probably just the start of a big decline. It might be time to start cashing out on those CME profits.

United Rentals (URI) did not get the ruling they wanted in the trial against Cerberus. Cerberus cancelled a $4 billion takeover deal for the company and URI sued them. The court ruled that Cerberus was not obligated to consummate the deal specifically since there was a $100 million breakup fee outlined in the contract. URI fell -17% to $18 almost instantly when the ruling was announced. URI was trading at $34.50 when Cerberus initially announced they were walking on the deal. In hindsight a $100 million breakup fee is not a good trade off for a $1.46 billion drop in market cap.

Just before Friday's close the nations three top banks, Citi, Bank America and JP Morgan announced the potential $80 billion Super SIV was dead. Lack of demand was kryptonite to the deal and the group finally put it out of its misery. Various private rescues made the plan unnecessary. The banks said it was available if anybody wanted to use it but there were no takers. Possible users of the fund had made it known that they no longer had need of it and were finally able to trade their SIVs on their own. This is clear evidence the excess liquidity being pumped into the system is finally taking hold and the credit crunch is easing.

Merrill Lynch, with potentially another $10 billion in write-downs coming in Q4, is said to be close to a $5 billion capital infusion from Singapore's Temasek Holdings. Merrill has already taken $7.9 billion in write-downs from bad bets on mortgage-backed securities but analysts claim more losses are coming. The Temasek board has already given approval to the investment pending pricing, timing and regulatory issues. Some analysts speculate the number could rise to $8 billion if the terms are sweet enough. The Temasek fund was set up in 1974 to manage Singapore's investments and controls a portfolio of more than $100 billion. UBS announced last week that the Government of Singapore Investment Corp is investing $9.75 billion for a 9% stake in UBS.

Crude Oil Chart - Daily

The Energy Bill is now history and the government claims it will save 4 million barrels of oil per day by 2030. Unfortunately peak oil will occur long before then so that savings comment will just be a future footnote in history. The bill calls for automakers to raise the average miles per gallon on new cars to 35 mpg by 2020. Careful, let's don't upset Ma and Pa Babyboomer who grew up on the gas guzzling muscle cars of the 60s and 70s and morphed into the even larger gas guzzling SUVs. By 2020 most boomers will be driving golf carts at their retirement homes and conserving gas when they do venture out simply to try and get by on their social security checks. The new standards will never have to be enforced by law. Peak oil will enforce them well in advance of 2020. Consumers will be dumping SUVs faster than yesterday's coffee grounds when peak oil strikes and it will be here before you know it.

Whoever wins the presidential race next year is in for a major surprise. Just like President Bush was hit with 9/11 at the beginning of his term the next president is going to be hit with Peak Oil. Good morning Mr. President, oil hit $150 overnight and two more countries halted exports in order to save the oil for their own people. Would you like your eggs poached or fried? I say that in jest today but somebody is going to give the new prez those exact words in the not too distant future. I would venture that half the bozos running today would drop out if they actually knew what the future holds. You may think I am a crackpot today but five years from now it will be a different story. I just wrote a 100-page article for the year-end renewal promotion on how near we are to Peak Oil and the damage it is going to cause to American consumer wealth. It will be ugly and although all the signs are present the general public chooses not to see. I spent three days in October listening to presentations from 50 credentialed experts on why and when peak oil will occur and there was not a single reporter in attendance. You would think bad news would sell papers but this is the story nobody wants to print. It is not politically correct to warn Americans their love affair with their automobile is about to end badly. Readers of this newsletter will be years ahead of their neighbors when the oil bubble bursts. I am extremely happy about the hour-long documentary we acquired for this year's renewal special. It is professionally produced by a major studio and spells out the problem in pictures and plain English that anyone with an 8th grade education can understand. I guarantee you will be passing this DVD around to your friends. View movie trailer here: http://tinyurl.com/yryu6s Find the renewal email you got this weekend and make sure you don't miss out on this offer.

Meanwhile, the markets ran for a +200 point rally on Friday as good news broke out all over. At least that is what the talking heads on CNBC would have you believe. It makes a good sound bite ahead of the holidays and everyone that owns stocks will have an additional warm and fuzzy feeling over the weekend. What happened on Friday has absolutely nothing to do with the market's future. I wish it did. In a nutshell there were some news events that triggered a gap open on the one day per quarter that it matters. The S&P options expire at the opening print of the S&P. It does not matter where they closed on Thursday but where they open on Friday. When the flurry of news stories pumped the overnight futures to extreme levels option expiration panic ensued. Anyone managing their positions with the S&P stuck under 1460 all week were suddenly faced with an open around 1475. That 15-point difference is a huge amount of money. It is even larger when market sentiment was bearish going into Thursday's close. Put volatility was off the charts while call volatility was negligible. There were a lot of traders loaded up with shorts and the news and option expiration games blew them out. It was easily 90% short covering and odds are good this bounce will not have legs.

One analyst called it the St. Nick of time rally. In reality any fund or institution that wanted to be in or out of the market had to be out by Friday. That was the last high volume day of the year and funds need volume to enter and exit positions. The remaining five trading days will be only a shadow of the volume from last week. It will be mostly retail traders trying to decide where to invest their holiday bonus. Don't forget it is also markup week and that provides a positive bias. The market should also have a positive bias simply because the volume sellers are done. Tax selling should be over until Jan-2nd. Anybody who did not want to take gains in this tax year will have a green light on Jan-2nd. That normally takes 2-3 days and can sometimes be offset by the influx of end of year retirement contributions. The key point here is Friday's short squeeze has almost nothing to do with the real market other than possibly improving retail investor sentiment.

The Dow gapped open to just over resistance at 13400 and then fell back to use that level as support for the next four hours. There was no upward movement until 2:PM and it appeared there was not going to be a closing sell off. Shorts already in pain but hoping for an afternoon drop finally began to cover when faced with the closing countdown. The Dow managed to move over 13450 before new sellers begin to hit the tape. For Monday resistance is 13500 and support 13400. Those will be the key levels to watch. It is normally a bullish week for the reasons I laid out above about funds being out of the market and retail traders spending their holiday bonus.

Dow Chart - 15 min

Dow Chart - 5 min

The Nasdaq had resistance at 2670 and that was exactly the level broken at the open and then used as support for the next several hours. It was a classic short squeeze. The closing short capitulation produced a close at 2690. The next resistance band is 2690-2700 and that will probably be tested on Monday.

The S&P-500 had the absolutely perfect setup for the Friday
bear-b-que. The SPX declined under 1460 early in the week and tried to break back above that resistance every day with no luck. There was however a pattern of higher lows that suggested trouble was brewing as the quarterly options came to a close. That trouble exploded in the face of the bears at Friday's open and there was nothing they could do except cover their shorts and limp to the sidelines. For Monday those bears with chips left may try to establish new positions at long time resistance of 1490.

Nasdaq Chart - 30 min

S&P-500 Chart - 60 min

Here is the key to trading next week. That key is SPX 1490. That level has been the key so many times over the last year the 1-4-9-0 keys on my keyboard are worn smooth. I would short a failure at 1490 but only if you are an aggressive trader. Remember, the next several days until year-end are normally bullish even if only slightly so. The coming week is "markup week." This is where funds keep making small buys on stocks they own to make sure they finish the year as leaders. This dresses up their year-end statements and helps provide a little more bullish sentiment to the year-end bias. We could have several tests of 1490 so I would not want to be the first bear to place a bet. If we do move over 1490 I WOULD go long. Over 1490 the sentiment could change and we could see some more short covering from those traders who shorted it when we failed here in the prior week. The Friday spike probably caught those shorts off guard as well but until we get back to 1490 and begin to move over it they are still safe. If we do move over 1490 I would buy the move. It could become infectious and we need to go with it should a Christmas miracle arrive.

I have given you blurbs about the end of year renewal special for the last two weeks. You owe it to yourself to renew now. This is the cheapest way to subscribe plus you get a bunch of freebies including the peak oil video and 2008 mouse pad.

View movie trailer here.

Renew here: http://optioninvestor.com/public/eoy/subs.aspx

Thank you again for your continued support of the Option Investor family of products!

There will be NO NEWSLETTER on Monday or Tuesday as our employees observe the holiday and spend time with their families.

Jim Brown
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
ESRX None None
FWLT    
GR    

Play Editor's Note: After Friday's big rally higher we found a lot of bullish candidates but odds are we may get a better entry point on Monday or Wednesday next week. A few bullish candidates we would keep an eye on are: UTX, SLB, WFT, MCD, and PEG. We came very close to adding PEG tonight especially given the stock's recent consolidation along support near $95.00. A bearish candidate we would strongly consider is ATHN.


New Calls

Express Scripts - ESRX - cls: 71.09 chg: +1.27 stop: 67.99

Company Description:
Express Scripts provides integrated PBM services, including network-pharmacy claims processing, home delivery services, benefit-design consultation, drug-utilization review, formulary management, disease management, and medical- and drug-data analysis services. The Company also distributes a full range of injectable and infusion biopharmaceutical products directly to patients or their physicians, and provides extensive cost-management and patient-care services. (source: company press release or website)

Why We Like It:
This is our entry point to catch the next leg higher in ESRX. The stock has been channeling higher and shares just bounced from the bottom edge of its bullish channel (see chart). The stock is near its all-time highs and could benefit from any window dressing this week. We're suggesting a stop loss under last week's low. Our target is the $77.50-80.00 range. The P&F chart is very bullish with a $97 target.

Suggested Options:
We are suggesting the January or February calls. January strikes expire in four weeks so our preference would be for Februarys but we would not want to hold over the earnings announcement. It is always up to the individual trader to decide which month and which strike price best suits your trading style and risk.

BUY CALL JAN 70.00 XTQ-AN open interest=4759 current ask $3.10
BUY CALL JAN 75.00 XTQ-AO open interest=2571 current ask $0.90

BUY CALL FEB 75.00 XTQ-BO open interest= 619 current ask $2.35

Picked on December 23 at $ 71.09
Change since picked: + 0.00
Earnings Date 02/07/08 (unconfirmed)
Average Daily Volume = 2.5 million

---

Foster Wheeler - FWLT - cls: 165.15 chg: +6.57 stop: 154.99

Company Description:
Foster Wheeler Ltd. is a global company offering, through its subsidiaries, a broad range of engineering, procurement, construction, manufacturing, project development and management, research and plant operation services. Foster Wheeler serves the upstream oil and gas, LNG and gas-to-liquids, refining, petrochemicals, chemicals, power, pharmaceuticals, biotechnology and healthcare industries. (source: company press release or website)

Why We Like It:
FWLT is riding the current boom in oil. The stock has a steady trend of higher lows. Shares just broke out from a bull flag pattern that suggests a $190 price target. Aggressive traders may want to chase Friday's move. We would rather wait. Odds are good that the market might see some profit taking after Friday's pop higher. We're suggesting that readers look for a dip into the $162.00-160.00 range on FWLT and buy calls there. Our stop loss at $154.99 might seem pretty wide but the stock can be volatile and we need to give it some room. If we are triggered we will have two targets. Our first target will be the $169.00-170.00 range. Our second target is the $179.00-180.00 range.

Suggested Options:
We are suggesting the January or February calls. Januarys expire in four weeks but the Februarys are definitely getting expensive. Our preferred entry point is a dip into the $162-160 range.

BUY CALL JAN 160 UFG-AL open interest=1364 current ask $11.50
BUY CALL JAN 165 UFG-AM open interest= 458 current ask $ 8.50
BUY CALL JAN 170 UFG-AN open interest=2546 current ask $ 6.00
BUY CALL JAN 175 UFG-AO open interest= 667 current ask $ 4.20

BUY CALL FEB 165 UFG-BM open interest= 944 current ask $13.30
BUY CALL FEB 170 UFG-BN open interest= 684 current ask $10.70
BUY CALL FEB 175 UFG-BO open interest= 390 current ask $ 8.70

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/27/08 (unconfirmed)
Average Daily Volume = 1.7 million

---

Goodrich - GR - close: 72.57 change: +0.92 stop: 69.95

Company Description:
Goodrich Corporation, a Fortune 500 company, is a global supplier of systems and services to aerospace, defense and homeland security markets. With one of the most strategically diversified portfolios of products in the industry, Goodrich serves a global customer base with significant worldwide manufacturing and service facilities. (source: company press release or website)

Why We Like It:
The DFI defense index is bouncing off support and this looks like a good spot to buy the dip in GR's rising bullish channel. The stock has been consolidating near its rising 50-dma and Friday's move looks like our entry point. More conservative traders may want to wait for a rise past the 10-dma so look for a trade over $73.00 to buy calls. Our target is the $77.50-80.00 range. We're suggesting a stop loss under round-number support at $70.00. The P&F chart is bullish with a $99 target.

Suggested Options:
We are suggesting the January or February calls. Our preference would be for February strikes but we do not want to hold over the late January earnings report.

BUY CALL JAN 70.00 GR-AN open interest=151 current ask $3.80
BUY CALL JAN 75.00 GR-AO open interest=337 current ask $1.05

BUY CALL FEB 75.00 GR-BO open interest=997 current ask $2.25

Picked on December 23 at $ 72.57
Change since picked: + 0.00
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 1.2 million
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Cameron - CAM - close: 95.00 chg: +1.36 stop: 89.90

CAM continues to bounce. The stock actually gapped open on Friday and spent the rest of the session consolidating sideways. We remain bullish on CAM but we would not suggest new positions at this time. A dip back toward the $92 region could be used as a potential entry point. Our target is the $99.00-100.00 range. More aggressive traders could aim for $105 but the stock does have pretty clear resistance near $100. Since we're fighting the "trend" in the technical picture we're going to list this as an aggressive, higher-risk play. FYI: CAM is due to split 2-for-1 on December 31st, 2007. It is not uncommon for a stock to have a pre-split run up and then a post-split depression. You may want to consider exiting ahead of the stock split.

Suggested Options:
If CAM provides a new entry point we would suggest the January calls. Keep in mind these expire in four weeks.

Picked on December 18 at $ 91.85
Change since picked: + 3.15
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 2.1 million

---

ConocoPhillips - COP - close: 86.71 chg: +1.48 stop: 81.85

Crude oil is breaking out from a two-week consolidation pattern and that could lift the oil group. The OIX oil index is already breaking out to new all-time highs. COP just broke through resistance at the $85.00 level and looks poised to run toward resistance near $90.00. You can choose to chase COP here or wait for a dip back toward $85.00, which should be new support. Our short-term target is the $89.50-90.00 zone just under resistance at $90.00. The P&F chart is bullish with a $106 target.

Suggested Options:
At this point we'd look for a dip back toward $85. We are suggesting the January calls.

Picked on December 20 at $ 85.23
Change since picked: + 1.48
Earnings Date 01/24/08 (unconfirmed)
Average Daily Volume = 11.4 million

---

Energen - EGN - close: 65.98 change: -0.12 stop: 62.95*new*

The rally in EGN seemed to run out of gas on Friday. Shares failed to participate in the broad market surge higher. There seemed to be resistance near $66.50, which is what we said on Thursday may be a hurdle for the bulls. The overall trend is still bullish but readers may want to wait for a dip and a bounce near $65 again before considering new bullish plays. Our target is the $69.50-70.00 range. We're suggesting a stop under the 50-dma so we're adjusting our stop to $62.95. The P&F chart is bullish with a $74 target.

Suggested Options:
If EGN provides a new entry point we would suggest the January calls. Keep in mind the January options expire in four weeks.

Picked on December 18 at $ 65.32
Change since picked: + 0.66
Earnings Date 01/24/08 (unconfirmed)
Average Daily Volume = 700 thousand

---

Holly Corp. - HOC - close: 52.19 change: -0.11 stop: 47.45

HOC out performed the market almost all week thanks to news that it was raising its stock buy back program and an analyst upgrade to a "buy". Shares paused to catch their breath on Friday. We would watch for a dip back toward $50.00 as a new bullish entry point to buy calls. Broken resistance near $50 should be new support. Our target on HOC is the $54.75-55.00 range but readers will want to keep an eye on the descending 50-dma currently near $55.00 since it will probably be overhead resistance. We may end up adjusting our target to the 50-dma in the next couple of days. FYI: It does look like HOC has put in a bottom and the P&F chart now points to a $65 target. More aggressive traders may want to aim for the $58-60 zone.

Suggested Options:
If HOC provides a new entry point we would suggest the January calls.

Picked on December 03 at $ 50.58 *bad tick/gap open
Change since picked: + 1.61
Earnings Date 02/12/08 (unconfirmed)
Average Daily Volume = 859 thousand

---

Hologic - HOLX - close: 69.49 chg: -0.01 stop: 64.75 *new*

HOLX took a moment to rest on Friday after a big run up earlier in the week. The stock has already hit our initial target in the $69.50-70.00 range. Fueling the move is a technical breakout over its eight-week trend of lower highs and news that HOLX is being added to the NASDAQ-100 index on December 24th. Looking at the trading intraday on Friday, bulls bought the dip near $68 and the stock looks poised to move higher next week. We are raising our stop loss to $64.75. Our more aggressive target is the $74.00-75.00 range. FYI: The P&F chart is bullish and points to an $87 target.

Suggested Options:
If you feel like chasing the move in HOLX we would suggest the January calls and a higher stop loss.

Picked on December 18 at $ 66.22
Change since picked: + 3.27
Earnings Date 01/30/08 (unconfirmed)
Average Daily Volume = 2.8 million

---

Noble Energy - NBL - close: 81.64 chg: +2.00 stop: 75.75 *new*

NBL followed up its breakout over resistance at $78.00 with a breakout over potential round-number resistance at $80.00. The oil group is on the move again and Friday's bullish breakout in crude oil could be the beginning of another leg higher. NBL appears to be one of the leaders. At this point we would wait for a dip back toward $80 or its 10-dma. We are raising our stop loss to $75.75. Our target is the $84.50-85.00 range. The P&F chart is bullish with an $86 target.

Suggested Options:
If NBL provides us another entry point we would suggest the January or February calls.

Picked on December 19 at $ 78.25
Change since picked: + 3.39
Earnings Date 02/26/08 (unconfirmed)
Average Daily Volume = 1.5 million

---

Syntel Inc. - SYNT - close: 37.87 chg: -0.14 stop: 35.75

SYNT failed at resistance on Friday. The stock rallied Friday morning but couldn't breakout past its 50 and 100-dma. That's why we put our suggested trigger at $38.75 because we want to see a breakout. By the way... the intraday high at $38.65 looks like a bad tick. If you look at an intraday chart we don't see SYNT trading over $38.43. Our strategy still stands. If SYNT hits our trigger at $38.75 we are suggesting calls. Our target is the $44.00-45.00 range. The P&F chart has just produced a new buy signal with a $47 target.

Suggested Options:
We are suggesting the January calls. Our suggested trigger to open positions is $38.75. Readers may also want to consider the January $45 call.

BUY CALL JAN 40.00 DUB-AH open interest= 0 current ask $1.10

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 232 thousand
 

Put Updates

Amazon.com - AMZN - cls: 91.26 chg: +0.68 stop: 92.55

The bulls are still putting up a fight in AMZN. The oversold bounce this past week has lifted shares back above $90.00 and its 10-dma, both of which should have been resistance. Honestly, I'm surprised that AMZN did not hit our stop loss at $92.55 on Friday, especially with such a strong market-wide rally. If you look at the intraday chart for Friday it almost looks like a mini double top pattern but that might be wishful thinking. This is a seasonally bullish time of year and odds are good that AMZN will hit our stop next week. If the stock turns lower then look for a new decline under $89.50 or $89.00 as a potential entry point for puts again. AMZN has already hit our initial target in the $85.25-85.00 range. Currently we're aiming for the $81.50-80.00 zone. The P&F chart is bearish with a $74 target.

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

Picked on December 16 at $ 89.08
Change since picked: + 2.18
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 8.8 million

---

Boeing - BA - close: 89.07 change: +1.88 stop: 93.26

The DFI defense index is bouncing from support so it's not a surprise to see BA rebounding. Furthermore BA got a boost after news out late Thursday that the company had won a $700 million contract from NASA. Further spooking the bears was positive analyst comments Friday morning for BA. The short squeeze pushed BA above its 10-dma but the stock should have resistance near $90.00. A failed rally under $90.00 can be used as a new bearish entry point. More conservative traders may want to consider adjusting their stops toward $91.50. We're leaving our stop at $93.26 for now. We have two targets. Our first target is the $85.55-85.00 range. Our second target is the $81.50-80.00 zone. The P&F chart is bearish with a $75 target.

Suggested Options:
If BA provides a new bearish entry point we would suggest the January or February puts.

Picked on December 04 at $ 91.43 *triggered/gap down
Change since picked: - 2.36
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 7.0 million

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Genentech - DNA - close: 67.90 chg: -0.06 stop: 70.85

DNA suffered an initial spike higher but the rally ran out of steam under $69.40. Shares closed back in the red, which is pretty bearish considering the widespread market rally. This could be the failed rally under $70 we've been looking for. If you prefer to see more momentum then wait for a new decline under $66.75 to open positions. Our target is the $62.50-60.00 range. The main hurdle for the bear is potential support near the early December lows. The P&F chart is very bearish with a $54 target. FYI: Any time we play a biotech stock it should be considered high risk. You never know when news will come out about some successful or failed clinical trial or some FDA decision that could send the stock gapping one way or the other.

Suggested Options:
We would suggest the January puts.

Picked on December 16 at $ 68.43
Change since picked: - 0.53
Earnings Date 01/10/08 (unconfirmed)
Average Daily Volume = 4.3 million

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Garmin - GRMN - close: 102.50 chg: +2.39 stop: 107.25

GRMN's oversold bounce just marked its third gain in a row. The stock plunged on Tuesday and exceeded our first target in the $96-95 zone. Unfortunately, there was no follow through. We warned readers that GRMN has a lot of bullish fans and recent news that GPS sales have been soaring this holiday season gave the stock another boost late in the week. The rebound has reached a critical test. The stock is now trading just under technical resistance at its combined 50 and 100-dma. A failed rally from here (and a drop back under $100) would look like a new entry point for puts. More conservative traders may want to adjust their stops down toward $105 or even $104, just above those moving averages. Our second more aggressive target is the $91.00-90.00 range. The P&F chart is bearish with an $86 target but the P&F chart also shows potential support near $91.

Suggested Options:
If GRMN offers a new entry point we would suggest the January puts.

Picked on December 11 at $104.78
Change since picked: - 2.28
Earnings Date 02/14/08 (unconfirmed)
Average Daily Volume = 6.2 million

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Ralph Lauren Polo - RL - cls: 62.02 change: -0.17 stop: 66.26

In an up market like Friday all we can really hope for in our bearish plays is under performance. RL delivered that under performance with another decline. The stock has probably been suffering from tax loss selling and that could continue into next week. Shares broke down from its trading range a few days ago and definitely look poised to continue lower. The Point & Figure chart produced a quadruple bottom breakdown sell signal and points to a $55 target. We are suggesting puts with RL under $64.00. Our target is the $58.00-57.00 range although odds are good the stock will see an oversold bounce near $60.00.

Suggested Options:
We would suggest the January puts.

Picked on December 19 at $ 63.11
Change since picked: - 1.09
Earnings Date 02/07/08 (unconfirmed)
Average Daily Volume = 1.5 million

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Sears Holding - SHLD - cls: 102.00 chg: -0.48 stop: 110.55

Target exceeded! SHLD continued to under perform on Friday and shares hit an intraday low of $99.95. Our first target was the $100.50-100.00 range. This sort of relative weakness during the market's big rally on Friday is a good sign for the bears. However, SHLD is now at round-number, psychological support and after a two-week, 15-point decline you have to expect some sort of oversold bounce from here. We are not suggesting new bearish positions at this time. If you did not exit completely we strongly recommend that you lock in some profits here. Our second more-aggressive target is the $92.50-90.00 zone. The P&F chart is bearish with a $78 target.

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

Picked on December 11 at $110.28
Change since picked: - 8.28
Earnings Date 10/27/07 (unconfirmed)
Average Daily Volume = 3.3 million

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Shire Plc - SHPGY - close: 68.22 change: +0.50 stop: 71.01

After more than a week of consolidating SHPGY still can't breakout over short-term resistance near $68.50. We keep expecting a move higher because of its short-term trend of higher lows. Any breakout would run into additional resistance in the $69.50-70.00 zone so we've been suggesting readers wait for a failed rally under $70.00 as a new entry point. Our initial target is the $65.25-65.00 range and we have decided to add a second, more aggressive target in the $62.00-60.00 zone. FYI: Any time we play a biotech or even a drug stock we're dealing with a higher-risk situation. We are at risk that some FDA decision or some clinical trial news could send the stock gapping one direction or the other.

Suggested Options:
If SHPGY provides a new entry point we would suggest the January puts.

Picked on December 13 at $ 68.07 *triggered/gap down entry
Change since picked: + 0.15
Earnings Date 02/00/08 (unconfirmed)
Average Daily Volume = 956 thousand
 

Strangle Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)

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Encana - ECA - close: 68.15 chg: +0.63 stop: n/a

ECA is a new strangle play from our Thursday night newsletter. The stock does look like it's trying to breakout higher from its sideways consolidation pattern. Yet overall we don't see any changes from our previous comments so we're reposting them here:

ECA is part of the oil sector and we're fundamentally bullish on the group. However, shares of ECA have been trading sideways for almost five weeks and in a very narrow range for the last two weeks. Odds are good the stock will see a break out one way or the other pretty soon. My personal bias is bullish but shares could truly go either way so we're suggesting a strangle. Let me be up front here. This is pure speculation. I could not find any specific event or catalyst in the near future to spark a move and ECA could easily trade sideways for the next month. We're listing the $60 put and $75 calls but you could easily do a strangle with the $65 put and $70 calls. I repeat, this is an aggressive, high-risk, lottery-ticket style of play. We'd use the $68.50-66.50 zone as an entry point. FYI: The P&F chart is bullish with a $92 target.

Suggested Options:
A strangle involves buying both an out of the money call and an out of the money put. We're suggesting January options, which expire in four weeks. The options we suggested were the January $75 calls (ECA-AO) and the January $60 puts (ECA-ML). Our estimated cost is $0.65. We want to sell if either option hits $1.85 or higher. Remember, for a truly neutral strangle you'll want to try and keep your investment as close to evenly divided across both the calls and puts.

Picked on December 20 at $ 67.52
Change since picked: + 0.63
Earnings Date 02/14/08 (unconfirmed)
Average Daily Volume = 2.7 million
 

Dropped Calls

China Security - CSR - close: 22.16 change: +0.44 stop: 19.99

We expected more out of CSR this past week. Friday's 2% gain was a move in the right direction but the upward momentum is stalling. We're suggesting an early exit now. This was an aggressive play so readers may want to let it right and just ratchet up your stops toward $21.50 instead. We'll keep an eye on CSR for a breakout over $23.50 as a potential entry point down the road. Our first target was $26 and our second target was $29. The P&F chart is bullish with a $34 target.

Picked on December 16 at $ 23.25
Change since picked: - 1.09
Earnings Date 01/24/08 (unconfirmed)
Average Daily Volume = 525 thousand

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Energizer - ENR - close: 113.72 chg: +0.18 stop: 109.95

It was a tough decision to drop ENR. The stock's long-term trend is still bullish and the Point & Figure chart looks very bullish with a triangle breakout pattern and $157 target. However, we've been warning readers that short-term technicals were decaying. On Friday the stock failed to truly participate in the market's rally so we're cutting it loose. ENR came pretty close to our target on Wednesday, December 12th when it hit $118.88. We were aiming for the $119-120 zone. We'll keep an eye on ENR for a pull back toward $110 and its 100-dma and see if it can bottom again.

Picked on November 26 at $112.75 *triggered
Change since picked: + 0.97
Earnings Date 01/28/08 (unconfirmed)
Average Daily Volume = 511 thousand
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

That Time of Year Again

It's the end of the year, time to think about nasty stuff such as wash sales, mark-to-market and Section 1256. This article reprises one written last spring, but I thought I would move the discussion up a few months. I also thought I'd break the discussion up over several weeks.

Before I get started with the discussion, it's important to note that I'm not a tax professional. The purpose of this article and the ones that follow are to pinpoint areas you might need to discuss with your own tax professional. I cannot guarantee that the information I'm providing is up-to-date or correct, although I've course made every effort to ensure that it is.

The reason I'm writing sooner is related to wash sales. Wash sales can make reporting our trades a miserable task. As I noted in last year's article, it turns out that if you sell and take a loss in a stock or an option and then buy back "substantially identical stock or securities" within 30 days, you can't take that loss (IRS Section 1091. Loss from wash sales of stock or securities). Instead, that loss must be rolled into the cost basis for the repurchase. One website warns that the phrase "substantially identical" might apply not only if you were buying the same stock after selling it for a loss within 30 days, but also if you were buying the stock of an acquiring company within 30 days of taking a loss in the stock of the acquired company, for example. Don't think you can get your wife or husband to buy back the stock, either. The government likely counts that as a wash sale, too, some tax-related sites warn. Ditto buying it back through your company if you control the company.

One ticklish little problem exists. What happens if you take a loss in a security in a regular, taxable account, but then buy back a substantially identical security in your IRA account within 30 days? You're not required to report trades in your IRA to the IRS, so is this meet wash-sale requirements? Opinions differ. A writer for Fairmark.com, a source of much information about trading-related tax rules, argues that the wash-sale rules would apply. Even that author notes, however, that an IRS agent, when replying to a similar question, answered that it was acceptable to buy replacement shares in an IRA.

You're certainly going to have to consult a tax professional on this one, but according to Kaye A. Thomas, the author of the article mentioned, you're probably going to get a different answer from each tax professional you consult. Obviously, it's impossible for me to weigh the various opinions and draw a conclusion when tax professionals differ in their opinions.

If you're an active trader, the wash-sale rule can cause big headaches, especially if you tend to trade in and out of the same securities and if you occasionally go through periods when you're experiencing losses. If you're not occasionally going through periods when you're experiencing losses, you're a genius and you won't have a bit of trouble calculating those wash sales.

For the rest of us, even the mathematically inclined, the calculations can result in lots of hair pulling. For example, imagine that you like to swing trade the QQQQ's. You owned 1000 shares but were stopped out for a loss. On day 2 after that, you bought back QQQQ, but you weren't feeling particularly confident, so bought back only 300 shares. You lucked out and sold those for a gain. Then, on day 4, with that winning trade behind you, you bought back 1000 more shares, but sold them at a loss that same day when QQQQ headed down instead of up. You folded 7/10 (700/1000) of the original loss into the cost basis from the day 4 purchase. When you're ready to buy 500 shares of QQQQ again on day 5, you will have to fold 1/2 (500/1000) of the day 4 losses into the purchase of the 500 shares. Your schedule D will branch out like the most complicated of family trees.

Don't panic. The wash sale rule doesn't mean that you can never account for that loss or never quit folding it into future trades. Of course you can: you just have to wait thirty days before you buy that security back again. Also, some special rules apply to options on broad-based indices, so hang on for the next article in a week or two before you panic if that's what you trade.

The wash-sale rule can wreck havoc on your taxes. Perhaps your account value is down for the year, but you had some spectacular gains at the first of the year, only to suffer losses toward the end of the year that wiped out all your previous gains and then some. If you've traded in and out of that security in which you experienced the end-of-year losses through the end of the year and into the next year, you could owe unexpected taxes. You can't yet count some of the losses that are still being folded into repurchases of the same security. That means that you can't subtract them from the big gains you had earlier in the year. Unless your trades meet some special qualifications to be discussed in a future article, you could be paying taxes on more gains that your account balance says you've had for the year.

Oh, but you trade options, you're thinking, and you're always buying options with different strikes and expiration periods. You might be buying a call or a put. You're safe.

Not so quick. Remember that "substantially identical" clause from the IRS code quoted above? Legal interpretations and other language clarify that "substantially identical" clause. Options traders aren't going to be happy with the clarification. It doesn't matter what strike you're buying, what expiration your option has: the wash-sale rules apply if you're dealing with options on the same underlying. One day, you can buy an ATM current-month option on GOOG and take a loss, and then 15 days later, you can buy a deep ITM option two months out on GOOG, and you're going to have to fold that original loss into the cost basis for the second option purchase. The same is true if one day you're buying actual GOOG stock and taking a loss and the next week you're buying GOOG options. They're still considered "substantially identical."

We options traders need to have a talk with the IRS, don't we? We know that buying an ATM option and one deep ITM with different expiration periods is not a "substantially identical" purchase. Neither is going long a call and selling a credit spread. Neither is day trading a stock's options and owning the stock. The original purpose of the wash-sale rule was to prevent investors from taking a loss in a stock that they really intended to maintain a position in all along. We options traders know that when we're day trading options, we rarely have any intention of owning anything. One exception could be when you take an option position with the intention of owning the stock at a lower price, such as selling a put on a stock you really want to own, but at a lower price. Another exception could be when you sell a covered call against a stock you own and want to continue owning, to give you some downside protection or bring in some extra income.

For most active options traders, however, there's no intention to own anything. We're doing the same thing a retailer does, trying to move goods and benefit from the transaction. Retailers don't intend to own the goods in their stores, and, most times, options traders don't intend to, either. I suspect nothing good would come of trying to argue that point with the IRS with the goal of someday getting them to change the rules, and, for now, most options trades fall under wash-sale accounting rules. We'll discuss exceptions in a future article.

Are you weeping tears of frustration at the thought of making all those computations? Dry your tears. Search around and you can find software that performs the calculations. One is TradeLog. GainsKeeper is another software that reportedly automates wash-sale calculations and downloads them directly into the account. I haven't tried GainsKeeper for this purpose because when I first tried using them as a trading log many, many years ago, they weren't yet set up to handle options trades. Not having used them since, I haven't investigated whether the software makes smooth wash-sale calculations for options as well as stocks, but you might check it out if you're interested.

Some have used Turbo-Tax (R), but last year some traders were reporting that Turbo-Tax's (R) wash-sale computations didn't tend to work when traders were buying and selling different amounts of stock or options contracts. As I noted in last spring's article, I haven't tried the software or verified that problem for myself, so check it out before you take my word for it.

In fact, as I said earlier, I'm not an accountant or a tax professional, so you shouldn't take my word for anything written here. This article should be considered only fodder for further research.

Another way of performing the wash-sale computations is to let your accountant or tax professional make them for you. The problem is that not all accountants or tax professionals know about wash sales. If you're using an accountant or tax professional to prepare your returns, make sure that person understands how to account for these trades.

After you've used a software program to make these calculations, you might be able to export the forms directly into popular tax-preparation software such as Turbo-Tax (R). Last year, TradeLog's documentation warned that Turbo-Tax (R) might not be able to handle the complicated wash-sale calculations necessary for an active trader. I checked this week, and TradeLog at least was still offering a similar warning. TradeLog offered suggestions for dealing with this problem, but said that because the problem was Turbo-Tax's (R), there wasn't a true workaround. Again, this wasn't a problem I could verify.

I repeat: I'm not a tax professional. Although I've made every attempt to verify the information here, my interpretations may be erroneous, or recent code changes that I didn't find might impact the way wash sales are calculated. These are complicated rules, as the various interpretations of cross accounting between regular, taxable and IRA accounts show. Even tax professionals disagree. This article is meant to alert you to areas you should research and not to give tax advice I'm not qualified to give. Don't write me with questions that arise as a result of this article: consult your tax professional instead. Oh, and also consider going straight to the IRS publication on wash sales, found at this link: http://www.irs.gov/instructions/i1040sd/ch01.html#d0e440

Now that we've talked about ways to ease wash-sale computations, it's time to talk about how to avoid them entirely, but that will have to wait until the next article. If you can't wait and want to read the previous article, you can find it at this link but remember that the information there related to last year's tax code. I haven't fully researched any changes that might have been made in the mark-to-market and Section 1256 rules.
 

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.

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