Option Investor

Daily Newsletter, Saturday, 01/26/2008

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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

Cliff Dwellers

The markets raced back to resistance on Wednesday and then stalled once the buy programs and short covering ran its course. Traders turned back into cliff dwellers on Friday as the markets edged closer to the edge of the abyss. With a Grand Canyon sized cliff potential looming traders quickly took their rebound profits off the table fearing a repeat of last weekend's global implosion.

Dow Chart - Daily

Nasdaq Chart - Daily

There were no economic reports of note on Friday and we were left to trade based on the earnings news for the week. This was a very light week on the economic calendar but next week will be exactly the opposite. The week starts out with the State of the Union where President Bush will use the pulpit to lobby for a new round of tax cuts and economic stimulus. The markets will be paying close attention to see what the last year of the Bush presidency may hold. On Tuesday we get the latest Durable Goods report and expectations are for an increase of 1.6% and that would be a sharp departure from four months of flat to significantly lower orders. Why analysts think orders picked up in December is unclear. All other indicators suggest the economy was slowing significantly in December.

On Wednesday we will get the first look at Q4-GDP and current estimates are something in the 1% range. That compares to the 4.9% reading we saw in Q3. This report will be one of the key reports for the week. Also on Wednesday the Fed will conclude their 2-day FOMC meeting and odds are still very strong they will cut rates again. Currently the Fed Funds Futures are showing a 305% chance of a 25-point cut and an 86% chance of a 50-point cut. Either would be an amazing development given their 75-point cut early last week. I believe the market is setting up for a disappointment from the Fed for reasons most people don't understand.

You may have heard of the massive $7.15 billion trading loss at French bank Societe Generale last week. A 31-year-old futures trader made massive unapproved bets on Eurostox equity futures heading into 2008. When the positions went against him he compounded the bets by increasing the positions in a "huge scheme of elaborate fictitious transactions" according to Societe Generale. As the markets continued to decline his positions were increased until the fraud was initially uncovered around Tuesday the 15th but the full scope was not known until Friday the 18th. After dissecting the positions over the weekend the bank frantically unloaded the futures on Monday and Tuesday of last week (21/22nd).

Eurostoxx 50 ETF

The actual value of the positions is still unknown but it is believed to have been in the tens of billions and according to AFX News was in excess of the $70 billion market cap of SocGen. Reportedly the trader had amassed a long position of more than 1.5 million Eurostoxx 50 futures contracts and an undisclosed number of DAX Futures. Another news source claimed the total position was worth more than $103 billion. If you are long futures you are long the market. If you sell those long futures you are putting pressure on the market and that is exactly what happened last week. Selling $100 billion in the global futures market would be a monster crush of equities. The U.S. markets were closed on Monday and that put additional pressure on the more thinly traded futures markets. Traders could not look at the U.S. markets for reassurance that the bottom was not falling out. With Societe Generale in panic mode after realizing they were massively positioned on the wrong side of the market they were dumping positions on a massive scale. They probably decided not to follow in the footsteps of Barings and try to negotiate their way out of trouble. When Barings did it in 1995 the news leaked and the market went against them nearly doubling the loss.


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The trader, Jerome Kerviel, helped them unwind the positions because the complexity astounded the bank. He then disappeared along with many of his bosses. Reportedly the trader did not profit from the scheme and was trading for the benefit of the bank. The trader vanished on Tuesday and is only speaking through his lawyer. The bosses were fired for letting it happen. SocGen has filed charges against the trader. The $7.15 billion loss ranks as the largest ever to be suffered by a bank in a fraudulent trading scheme. The next largest was the $1.38 billion loss that bankrupted Barings in 1995. Amazingly SocGen still expects to post a profit for the quarter despite the $7.15 billion loss and another $2.5 billion loss in subprime mortgages. They are going to raise $8 billion in emergency capital in an offering underwritten by JP Morgan and Morgan Stanley.

Eurostoxx 50 Index

The Fed reacted in part to the massive sell off in global equities last Mon/Tue when they cut rates by 75-points at the open of the U.S. markets on Tuesday. Since a major factor in that sell off was Societe General dumping tens of billions in equity futures and not recession fears as previously thought this suggests the Fed may not want to follow that ill-timed rate cut with another cut that may not be needed. The Fed released a statement on Friday saying they were unaware of the SocGen trades when they cut rates on Tuesday but were comfortable with their decision. What are they going to say? Oops, we screwed up and will fix it next week by raising rates. Most people are completely unaware of the impact of the Societe Generale disaster on the global equity markets and are still expecting the Fed to pull another rabbit out of their hat on Wednesday. To say the announcement will be extremely important would be an understatement.

On Thursday there are ten economic reports with the headliner the Chicago PMI with expectations for a drop from 56.4 to 52.0 and possible under 50 and into contraction territory. On Friday the two biggest reports for the week could be the Non-farm Payrolls and the ISM Index. The payroll report is expected to show a gain of 57,000 jobs in January compared to only 18,000 in December. There are whisper numbers suggesting we could even see a negative number. If this jobs number is going to be negative it could push the Fed to act again on Wednesday. They will have an advance look and will be taking the payrolls into account when making their decision.

The ISM Index for January is expected to decline to 47.0 from 47.7 in December. That drop to 47.7 was the sixth consecutive month of decline and the first time that has happened since the decline into the 2001 recession. The 47.7 level is also the lowest reading since the 2001 recession. The ISM is probably our best indicator of the U.S. economy on a current basis and the Fed will also have this data before their Wednesday decision. If the economy is as bad as people claim we could see a number as low as 45 and clear recession territory.

Economic Calendar

Last week was a big week for earnings but next week will be even bigger. We can't match the star power of Intel, Microsoft or Apple but there are some big names led by YHOO, AMZN and Google from the Internet sector and OXY, CVX and XOM from the energy sector. Of particular note are the MBI earnings on Thursday. There are considerable fears of another rating downgrade and a cut to less than AAA could put them out of business. If their credit rating falls the rates on tens of billions in bonds they insured will rocket higher and force many firms to take additional write downs. This is a key earnings event for the week.

Amazon estimates are weakening on fears that they could warn for Q2 due to slowing consumer sales. Yahoo has already disclosed they are feeling the pain and will be cutting employees to reduce costs. Google has been sinking on fears they will spend billions on the discarded broadcast spectrums that the government is putting up for sale. If they win the bids for billions they will have to spend billions more putting a product on those airwaves. Eventually earnings will rise but fears of over aggressive goals have been depressing the stock price.

So far with one-third of the S&P already reported the earnings for Q4 have fallen -19% over the same period in 2006. It is primarily due to the carnage in the banking industry and the sudden explosion of subprime problems. Many of the tech companies that reported last week beat estimates and guided higher. That has not helped their stock prices. Microsoft reported sales that soared +81% over the comparison quarter and after opening 5% higher at $35 declined to close with a loss at $32.94. Apple reported strong earnings and was promptly knocked for a $30 loss on weak guidance. The good and the bad still lost ground. More than 633 companies will report next week and by far the busiest week of the quarter.

Earnings Calendar - Selected Companies

Gold prices hit a new record high at $924.20 after news broke that power outages in South Africa had shutdown some of the countries mines. Rolling power outages have been hitting various parts of the country over the past few weeks with power going out for up to five hours at a time as demand exceeds supply. AngloGold Ashanti (AU), Harmony Gold (HMY) and Gold Fields (GV) have all announced shutdowns or curtailment of underground mining and some above ground processing. Mining and smelting requires a lot of continuous power and they can't afford for the power to keep dropping unexpectedly. For those miners underground it is a major hazard knocking out lights and ventilation. The problem is not expected to be solved for up to 3-years when new plants come online. It is worse this month because of recent heavy rains. The coal used for power is low quality and when wet it produces even less heat and therefore less electricity.

February Gold Chart - Daily

Elsewhere on the energy front crude rebounded +1.30 to $91 and well off the panic lows of $85.42 we saw last Monday. Crude prices were depressed by the implosion in the European equity markets and the unwinding of the SocGen trades. When the liquidity lake is drained all the boats settle to the bottom. Next Friday OPEC meets again to discuss production levels. Short of somebody pointing a nuke at Saudi Arabia and blackmailing them to produce more oil there will not be a production increase. The drop to $85 last week sealed that fate and two weeks of inventory gains in the U.S. for 6.6 million barrels was another nail in the coffin. There will be a lot of conciliatory sound bites from the meeting but OPEC will not likely raise production rates.

I believe the markets rallied this week mainly on the possibility for a bailout of the monoline bond insurers Ambac (ABK), MBIA (MBI) and ACA Capital (ACA). Ambac rallied +67% for the week to close Friday at $11.31. That is impressive but it was well off the $16.45 high for the week. That was a +143% rebound off the prior Thursday's low of $6.76. The rebound was on news that Wilbur Ross a billionaire investor might take a run at buying them. He specializes in distressed companies but before the week was out the rumor was quashed by the Financial Times saying he would rather start a new company than take over the many problems of Ambac. Ambac's problems increased on Friday with the filing of multiple suits against them with one being a class action suit. Furthermore Ambac said it will no longer disclose any future filings of additional suits. That is not a good sign.

Ambac Chart - 45 min

I reported on this last Sunday and despite the +100% bounce on these stocks the situation has not changed. Ambac has insured $556 billion in debt from 137,000 customers. MBIA insured $31 billion including $8.14 billion in CDOs that were made up of other CDOs. These have nearly a zero chance of paying off or being able to claim on the insurance. ACA Capital has insured $69 billion and after taking monster losses only has about $425 million in capital left and has already been placed into receivership by the State of Maryland. That is a total of $656 billion in insured bonds that will eventually be revalued with monster write-downs. Banks and brokers have already written off nearly $100 billion and most analysts are now talking about another $200 million to go over the next few quarters. If you expand the scope to the bonds, CDOs and credit default swaps (a $45 trillion market) held by funds, hedge funds, banks, institutions and sovereign funds that could add up to another $2 trillion at risk.

Since they will all end with some value the risk is only in the short-term mark-to-market losses but many will require significant recapitalization. New York's Insurance Superintendent is trying to arrange a bank led bailout of those three firms rather than suffer the trillion dollar consequences of all three going under. He is having trouble since the main banks are all having capital problems of their own. Should the bond insurers fail, which is extremely likely, it would cast a pall over the entire sector and cause untold damage to the financial system in the process. Barclays said this week the stink is spreading to formerly pristine firms and even Financial Guaranty Insurance Company is likely to be downgraded. They insured $315 billion in bonds. Barclays also said banks will have to raise another $143 billion in capital to offset further write-downs as bond insurers begin to fail.

The key here is the downgrades and their impact on the banking system. John Mauldin said banks will suffer $22 billion in write-downs for every notch of credit downgrade on the insurers. ACA is already at junk (CCC) and Ambac and MBIA are just starting to crack below the investment grade rating of AAA on their way to junk status. Everyone in the business agrees that the three firms are going to fail. It is just a matter of time. Regulators, banking officials and some elected officials are pleading with the rating agencies to delay any downgrade on the group to give them time to sculpt a bailout plan rather than have the sector crumble to dust. So far the agencies have appeared willing to wait but time is growing short. A failure to downgrade when justified would subject the rating agencies to legal attack. Another domino fell on Thursday when Security Capital (SCA) was cut from AAA to A by Fitch. Traders immediately reported that they were unable to sell debt insured by Security Capital.

Citigroup said last week that it reserved another $900 million to cover exposure to bond insurers. The Louisville Arena Authority said it was going to drop Ambac as an insurer for their $340 million in bonds now that Ambac has lost its AAA rating. They had previously committed to pay $11.4 million to Ambac for insurance for those bonds. As more companies flee the insurer the company will have less money to pay claims and continue operations. Any rating below AAA effectively prevents the company from writing new business. ACA is already CCC, SCA was just cut to A, Ambac was cut to AA by Fitch. Ambac premiums written fell by 78% in Q4 as customers fled to more stable alternatives.

Bond Rating Scale

The problem for the markets was the news on Friday that no bailout is coming. Hopes were high for a Wilbur Ross takeover or a bank consortium bailout. Those options died on the vine and we can expect those stocks to return to $5 very quickly. The major financial stocks that rallied on hope last week will decline with them as that hope fades. This is going to be a major problem long-term and with financials the largest sector in the market they will cause a lot of damage.

The Dow fell to 11634 on Wednesday and repeated that decline with a touch of 11645 on Wednesday. The rebound was triggered by a monster buy program and some serious short covering on the potential bail out of the bond insurers. Once that completed the Dow was at 12325 and holding. It held for nearly two days at that 12325 level before the bailout hopes began to fade. Friday closed with a -171 point loss. We have already had more triple digit days in 2008 than we had in the first 3-months of 2007. The volatility is huge with the VIX closing just below 30 on Friday. Unfortunately I believe the volatility is going to continue.

I believe we have risk due to the continuing financial problem, economic numbers due out next week and a possible disappointment by the Fed. I already discussed the problem with the banks/insurers. The economics could be ugly with challenges in the Durable Goods, GDP, PMI, Jobs and the ISM Index. The potential for recessionary news is very high. The Fed, whether they admit it or not, was fooled by the SocGen futures dumping into a history making 75-point inter-meeting rate cut. Now they are faced with either admitting it (zero chance) or trying to bluff their way through with only a 25-point cut on Wednesday. If they don't cut at all with the market expecting 50-points it would be a disaster. They can't take a pass because that would be admitting they were fooled and caved in to market pressures. That means they have to cut and 25-points is the minimum they can get by with. The market will not be happy with 25-points.

There is another scenario that should be mentioned. If the Fed does cut 50-points even after realizing they were fooled by the SocGen trades then there is an even bigger problem ahead. It will suggest the Fed knows something we don't and whatever it is could be dangerous. It would be completely ignoring the inflation monster that they were so careful to guard against just a short time ago. It could mean the economy was even worse off than we thought.

OR, it could mean the Fed is aware of the mounting problems in the bond sector and is trying to head off a calamity in advance. The best thing the Fed could do for the economy today is to bring back housing inflation. By cutting the rates in half they could rekindle real estate demand within a couple months. No big bailout, no billions in support for mortgage companies, just quickly cut rates to the bone. Once the bottom appears to be behind us in the housing sector and with Fed rates around 2.0% those wanting to make a purchase would be racing to make a deal. Home inventories would shrink substantially by summer. This is also an ideal way to head off the 1.2 million foreclosures expected in 2008. Rekindle the housing bubble and suddenly those underwater could escape economic ruin with the help of a rush of buyers. Mortgage backed CDOs would no longer be plunging in value. Mortgage companies would be recovering and new loans being written. Add in the proposed economic stimulus package and we could be back to 5% GDP by year-end. The Fed could then pull back on the reins a little slower and let the inflation heat bleed off the economy over time instead of the implode track we are on today. The Fed wanted to deflate the housing bubble but they did not expect the entire global financial system to crash in the process. The Fed should see the beauty of a quick re-injection of liquidity into the housing sector but then again they are the Fed. They are always behind the curve and this crisis is no different.

For next week I think the odds are good we are going to see the indexes return to some lower levels. I know some analysts are expecting a retest of the lows at 11640 but my crystal ball does not see that clearly. Based strictly on the charts we still have risk to 10700 but that won't happen next week. I do believe we are going to see a couple down days with high volatility but there are far too events impacting sentiment to just roll over and drop back to 11640 without another SocGen futures program. That was a once in a decade type of event and I think it did flush out a lot of weak holders. Unfortunately the Fed made the surprise rate announcement on Tuesday morning before the U.S. markets really had a chance to duplicate the overseas losses. Many traders ready to pull the exit trigger heard the Fed news and decided to hold on. That limited the damage even though we had another margin call plunge on Wednesday morning.

S&P-500 Chart - Daily

The index I am going to use this weekend is the S&P-500. The S&P closed at 1330 on Friday after plunging to 1271 on Wednesday and rebounding to 1368 on Friday. That 100-point range is probably going to be the range for next week as well. 1350 is currently initial resistance and 1330 initial support. That gives us our trigger points. I would short a failure at 1330 and go long on a breakout over 1350. If we do get a dip back to the 1270 range I would reverse to a long around 1275. I used a 5-point cushion there to avoid the rush of traders wanting to buy a purely technical dip to 1271 and jumping the gun. I spent a long time trying to analyze the known events on the calendar and the combination of events and decipher their potential impact on the markets. The only one that fit the scenario for a serious market drop was the Fed. The rest are just additional chapters to a book where we already know the ending. The Fed is the wild card that could really sour the markets. That makes Wednesday D-day or drop-day if it is really going to happen. If this is really a bear market and last week's bounce just a bear market rally then the reasons for a continued drop are meaningless. It will happen regardless of the news. There will be several short squeezes along the way and every one will be assigned an excuse in the press. The key for me is to simply trade what the market gives us. I know the impulse is to buy Google or short Amazon ahead of their earnings but the key is to always trade in the direction of the market if a direction is present. If we are in a consolidation phase then trade anything you want. Otherwise turn (trade) in the direction of the skid. You always have three choices. Stay on the sidelines, trade what you want or trade what is right. The decision you make determines your long-term profitability. For me that means enter shorts of your choice on a failure of SPX 1330, enter longs over 1350 and buy a dip to 1275. All the rest is just noise.

New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None ABK None

Play Editor's Note: The market's oversold bounce failed right at resistance and most of the indices and stocks I examined this weekend have already produced a short-term bearish reversal. I was honestly expecting the rally to last a little longer before rolling over but we can only play what the market gives us. There is a growing chorus of analysts suggesting that we will see the market retest and potentially break last week's low. However, with so many people still bearish if the market can breakout over Friday's resistance levels then we could see a huge short squeeze. Monitor your stop losses carefully. We are adding a number of new bearish candidates. Don't try to play them all. Just pick the ones you like.

FYI: A few more stocks that look like bearish candidates...SPG, LTM, ICE, and CELG under $50.

New Calls

None today.

New Puts

Ambac Fincl. - ABK - cls: 11.54 change: +0.21 stop: n/a

Company Description:
Ambac Financial Group, Inc., headquartered in New York City, is a holding company whose affiliates provide financial guarantees and financial services to clients in both the public and private sectors around the world. (source: company press release or website)

Why We Like It:
It looks like the handwriting is on the wall for the future of ABK and MBI. It's only a matter of time before these companies have their credit downgraded, which would effectively put them out of business. There is the diminishing chance that a bailout does occur but we are going to speculate that it will not happen. There is no stop loss on this play. This is more of a lottery ticket. It should either win big or it's gone. We will have to play it by ear when it comes to exiting but we're looking for a decline to $5.00 or less.

Suggested Options:
We can choose February, March, May or August options. We do not know the time frame that ABK will go under so we're suggesting Mays.

BUY PUT MAY 5.00 GIY-QA open interest=1357 current ask $1.40
BUY PUT MAY 2.50 GIY-QZ open interest=2474 current ask $0.50

Picked on January 27 at $ 11.54
Change since picked: + 0.00
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 10.9 million


Hartford Fin. - HIG - close: 75.13 chg: -4.76 stop: 81.01

Company Description:
The Hartford, a Fortune 100 company, is one of the nation's largest diversified financial services companies, with 2006 revenues of $26.5 billion. The Hartford is a leading provider of investment products, life insurance and group benefits; automobile and homeowners products; and business property and casualty insurance. (source: company press release or website)

Why We Like It:
HIG recently turned in a good quarter but guidance was a little less than expected. We're not excited about playing HIG with such a wide stop loss but the stock's bearish reversal on Friday has shares poised to hit new lows. At the very least we suspect that HIG will retest last week's lows near $69. We are suggesting puts now but a failed rally under $80 would be more attractive as an entry point. Our short-term target is the $70.50-70.00 zone.

Suggested Options:
We are suggesting the February or March puts.

BUY PUT FEB 75.00 HIG-NO open interest= 481 current ask $3.10
BUY PUT FEB 70.00 HIG-NN open interest= 375 current ask $1.45

BUY PUT MAR 75.00 HIG-OO open interest=1118 current ask $4.90
BUY PUT MAR 70.00 HIG-ON open interest= 188 current ask $2.90

Picked on January 27 at $ 75.13
Change since picked: + 0.00
Earnings Date 01/24/08 (confirmed)
Average Daily Volume = 2.4 million


Harley-Davidson - HOG - cls: 37.96 chg: -2.16 stop: 42.51

Company Description:
Harley-Davidson Motor Company, the only major U.S.-based motorcycle manufacturer, produces heavyweight motorcycles and a complete line of motorcycle parts, accessories and general merchandise. (source: company press release or website)

Why We Like It:
HOG recently reported earnings and missed expectations. Management then warned that sales would not meet prior guidance as the consumer is cutting back. That is not what investors want to hear. The oversold bounce has reversed and bears look like they could be back in control. We have two targets. Our first target is the $35.25-35.00 range. Our second, more aggressive target is the $32.50-30.00 zone.

Suggested Options:
We are suggesting the February or March puts.

BUY PUT FEB 40.00 HOG-NH open interest=21786 current ask $3.00
BUY PUT FEB 37.50 HOG-NU open interest= 7504 current ask $1.60
BUY PUT FEB 35.00 HOG-NG open interest= 5970 current ask $0.75

BUY PUT MAR 40.00 HOG-OH open interest= 365 current ask $3.90
BUY PUT MAR 35.00 HOG-OG open interest=1710 current ask $1.55

Picked on January 27 at $ 37.96
Change since picked: + 0.00
Earnings Date 01/25/08 (confirmed)
Average Daily Volume = 2.4 million


MBIA Inc. - MBI - close: 14.20 change: -0.20 stop: n/a

Company Description:
MBIA Inc. is a premier financial guarantor and a leading provider of fixed-income investment management services. The Companys core business is credit enhancement of municipal bonds and asset-and mortgage-backed transactions in the new issue and secondary markets. (source: company press release or website)

Why We Like It:
MBI is another one of the trouble bond insurers that looks like it's head for bankruptcy. The recent bounce on hopes of a bailout is a gift of an entry point to buy puts. There is the risk that a bailout does get accomplished but that risk is wilting more every day. We're not listing a stop loss. This is a lottery ticket play. We'll win big or it's gone. This is one of the few times that we will hold over earnings. MBI reports earnings on Thursday morning before the bell. We will have to play it by ear when it comes to exiting but we're looking for a decline to $5.00 or less.

Suggested Options:
We do not know how long this will take to shake out so we're suggesting the May puts.

BUY PUT MAY 7.50 MBI-QU open interest=5307 current ask $2.00
BUY PUT MAY 5.00 MBI-QA open interest=2239 current ask $1.10
BUY PUT MAY 2.50 MBI-QZ open interest= 831 current ask $0.40

Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/31/08 (confirmed)
Average Daily Volume = 15.2 million


Millicom - MICC - close: 99.33 change: -3.54 stop: 105.35

Company Description:
Millicom International Cellular S.A. is a global telecommunications group with mobile operations in Asia, Latin America and Africa. It currently has mobile operations and licenses in 16 countries. The Groups mobile operations have a combined population under license of approximately 280 million people. (source: company press release or website)

Why We Like It:
The oversold bounce in MICC failed right where it was supposed to - at resistance near $105. The stock's bearish reversal has already pulled shares under round-number support at $100. We suspect that MICC can test its lows or worse. The P&F chart is forecasting a $78 target. We are suggesting puts now with a $90.50-90.00 target. We are going to list an aggressive target in the $86.00-85.00 zone but readers should plan on taking off most of their position near $90. It looks like this aggressive target should line up with the long-term trendline of support (see chart).

Suggested Options:
We are suggesting the February puts but we do not want to hold over the February 13th earnings report.

BUY PUT FEB 105 CQD-NA open interest=270 current ask $12.30
BUY PUT FEB 100 CQD-NT open interest=289 current ask $ 8.50
BUY PUT FEB 95 CQD-NS open interest=245 current ask $ 6.00
BUY PUT FEB 90 CQD-NR open interest=344 current ask $ 4.20

Picked on January 27 at $ 99.33
Change since picked: + 0.00
Earnings Date 02/13/08 (confirmed)
Average Daily Volume = 1.0 million


Perrigo Co - PRGO - close: 30.11 change: -1.57 stop: 32.11

Company Description:
Perrigo Company is a leading global healthcare supplier that develops, manufactures and distributes over-the-counter (OTC) and prescription pharmaceuticals, nutritional products, active pharmaceutical ingredients (API) and consumer products. The Company is the world's largest manufacturer of OTC pharmaceutical products for the store brand market. (source: company press release or website)

Why We Like It:
Drug stocks are not acting like the safe haven plays they used to be. PRGO has out performed the market for the first half of January and now it could see another round of serious profit taking if shares break support near $30.00. We're suggesting a trigger to buy puts at $29.85. If triggered our target is the $25.50-25.00 zone. The P&F chart has turned bearish with a $23 target.

Suggested Options:
We are suggesting the February puts. PRGO has earnings in early February and we do not want to hold over the report.

BUY PUT FEB 35.00 IQP-NG open interest=267 current ask $5.20
BUY PUT FEB 30.00 IQP-NF open interest=338 current ask $1.40
BUY PUT FEB 25.00 IQP-NE open interest= 27 current ask $0.25

Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/05/08 (confirmed)
Average Daily Volume = 1.3 million


Polo Ralph Lauren - RL - cls: 59.19 chg: -1.99 stop: 63.75

Company Description:
Polo Ralph Lauren Corporation is a leader in the design, marketing and distribution of premium lifestyle products in four categories: apparel, home, accessories and fragrances. (source: company press release or website)

Why We Like It:
Concerns over the consumer have been plaguing shares of RL for months. The stock's oversold rally failed right at resistance. The action over the last two sessions looks like a bearish reversal. We're suggesting puts now with RL back under $60.00. We're listing two targets. Our first target is the $55.50-55.00 range. Our second, more aggressive target is the $52.00-50.00 zone.

Suggested Options:
We are suggesting the February puts but we do not want to hold over the early February earnings report.

BUY PUT FEB 60.00 RL-NL open interest=3189 current ask $4.10
BUY PUT FEB 55.00 RL-NK open interest=4022 current ask $1.85

Picked on January 27 at $ 59.19
Change since picked: + 0.00
Earnings Date 02/06/08 (confirmed)
Average Daily Volume = 1.7 million


Teleflex - TFX - close: 56.60 change: -0.65 stop: 58.51

Company Description:
Teleflex is a diversified company that designs, manufactures and distributes quality engineered products and services for the medical, commercial and aerospace markets worldwide. (source: company press release or website)

Why We Like It:
Two weeks ago TFX broke down from a sideways consolidation pattern. Now that shares have bounced back to retest prior support as resistance this could be the beginning of a new leg down. We are suggesting puts here at current levels but more conservative traders could wait for a drop under $56.00 first. We're listing two targets. Our first target is the $52.75-52.50 zone. Our second target is the $50.50-50.00 range. The Point & Figure chart is bearish with a $43 target.

Suggested Options:
We're suggesting the February or March puts.

BUY PUT FEB 60.00 TFX-NL open interest= 10 current ask $4.20
BUY PUT FEB 55.00 TFX-NK open interest= 0 current ask $1.60

BUY PUT MAR 60.00 TFX-OL open interest= 0 current ask $5.40
BUY PUT MAR 55.00 TFX-OK open interest= 0 current ask $2.60

Picked on January 27 at $ 56.60
Change since picked: + 0.00
Earnings Date 02/28/08 (confirmed)
Average Daily Volume = 390 thousand

New Strangles

None today.

Play Updates

In Play Updates and Reviews

Call Updates

United States Cellular - USM - cls: 69.35 change: -3.39 stop: 67.89

Readers may want to reconsider adding bullish positions on USM. We were expecting a pull back toward $70.00 not a breakdown through $70.00. The U.S. market's reversal lower on Friday does not bode well for stocks. While USM is still holding on to very long-term support (see chart below) it would not take much for USM to break that support at which point this stock might become a bearish candidate in spite of its oversold condition. We would wait for a rally back above $70.50 before considering new call plays. If the market sees any follow through lower on Monday do not be surprised to have USM hit our stop loss at $67.89. Our target is the $74.50-75.00 range. Our entry point was $71.00.

Suggested Options:
If USM provides a new bullish entry point we would suggest the February or March calls.

Picked on January 25 at $ 71.00 *triggered
Change since picked: - 1.65
Earnings Date 02/26/08 (unconfirmed)
Average Daily Volume = 153 thousand


United States Oil Fund - USO - cls: 71.91 chg: +0.98 stop: 68.59

Crude oil futures have rebounded back above $90 a barrel and the USO exchange traded fund continues to bounce with them. If you're looking for a new entry point consider waiting for another dip near $71. Our short-term target is the $74.50-75.00 range. More aggressive traders could easily aim for the $77.50-79.00 region.

Suggested Options:
We were suggesting the February calls. Strikes are available at every dollar.

Picked on January 24 at $ 70.93
Change since picked: + 0.98
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 3.2 million

Put Updates


Strangle Updates


Dropped Calls

Blackstone - BX - close: 19.36 chg: -1.61 stop: 17.24

The market's oversold bounce rolled over a lot sooner than we expected it to. Shares of BX, like many of the stocks we saw on Friday, have produced a short-term bearish reversal. We are suggesting an early exit right here to cut our losses! Nimble traders who like BX can wait and see if support near $17.25 holds again.

Picked on January 10 at $19.84 /exit 19.36
Change since picked: - 0.48
Earnings Date 02/11/08 (unconfirmed)
Average Daily Volume: 2.7 million


Flowserve - FLS - close: 82.39 change: -1.15 stop: 75.49

We are suggesting an early exit on FLS. It still looks like FLS put in a short-term bottom last week near its 200-dma. Unfortunately, the market's rebound came to an abrupt end on Friday. We are now expecting stocks to continue lower this coming week and potentially retest the lows. We would rather exit FLS now and look for a new entry point down the road. We were aiming for $87.50 and FLS hit an intraday high of $86.60 on Friday morning.

Picked on January 23 at $ 82.35
Change since picked: + 0.04
Earnings Date 02/28/08 (unconfirmed)
Average Daily Volume = 736 thousand


Google Inc. - GOOG - cls: 566.40 chg: - 8.09 stop: 514.00

Target achieved. GOOG served up another volatile day on Friday. The stock gapped open at $591.81 and hit $595.00 before reversing course and to close $30 off its intraday highs. Our target was the $595.00-600.00 range. Investors are nervous over the company's upcoming earnings report on January 31st. We are considering a strangle to hold over earnings. Unfortunately, volatility is so high right now that options are very expensive.

Picked on January 23 at $548.62
Change since picked: +17.78
Earnings Date 01/31/08 (confirmed)
Average Daily Volume = 5.3 million

Dropped Puts


Dropped Strangles


Trader's Corner

TRINQ, YM and EMA: What Do They Mean?

A subscriber asked where he could find out more information about some the terms dashed off in the Market Monitor, the live portion of the Option Investor's site. A few terms and acronyms culled from a three-day period in early January included EIA, evening star, USDJPY and the term of the month: falling knives.

The best way to find out the meaning of a term employed by one of the writers on the Option Investor staff is to write Contact Support. Place the name of the writer in the "Subject" field and use the body of the email to ask the writer to clarify the term. Don't be shy about using this method. If you don't understand the term, chances are they many others don't, either. You'll be like the first warrior into battle, willing to take the bullet for those following you.

Most of us writers have been out there as subscribers at one time, too, so we won't really be taking pot shots at you for asking the wrong question. We'll be glad to clarify.

We'll do more in many cases. For example, a trader writing me to ask for a definition of an evening star formation would have been likely to find a chart attached to an email as well as a definition. (Note: The chart was snapped at Thursday's close and does not include current price action.)

Daily Chart of the NYSE with an Evening Star Formation:

In addition, a writer will often refer you to a website or book that will provide more information. Anyone writing me about a candlestick formation would certainly be referred to one of Steve Nison's books on candlestick charting, such as BEYOND CANDLESTICKS, just as anyone writing Jeff Bailey about a formation on a point-and-figure chart would likely be referred to Thomas J. Dorsey's book, POINT & FIGURE CHARTING. I bet Keene Little could refer you to one of his books on EW theory, and Jane has many favorites on market theory and controlling emotions.

Because of the way emails are handled on the site, however, you might seek other alternatives if you need a question answered quickly. In the past, I've received desperate questions about how OEX settlement value is calculated at three minutes before the close on Friday of option expiration week, and there's just not time to get an answer written and sent in time for the trader to make a decision based on that answer. If your question involves a trading-related issue and it's especially timely, your broker is the best person to contact.

If you need an answer quickly and you're fairly certain that the term relates to an economic number, another solution is available. If you don't understand the significance of the release and don't want to wait for answer from one of the writers, your broker can probably give you that information, too, but you can also find a definition for many such numbers at this link.

For example, a trader who was unfamiliar with the term "PPI" might want to know why it was so important week before last. Clicking through on "PPI" on this week's economic schedule returns the information that the Bureau of Labor Statistics releases this number. It's the Producer Price Index, and it provides information on the prices of goods at the wholesale level. The core PPI, in particular, helps measure whether inflationary pressures are present in the economy.

Not all terms relate to economic releases, of course, although many confusing ones do. Writers are often asked about the PPI, CPI, ISM, for example.

Sites such as Investopedia are great for providing quick definitions. Investopedia defined one of those terms listed above, "falling knife," as slang for a situation in which a security's price is plunging lower but may still lose more value. The term was employed quite often in the 2000-2003 period, usually when writers warned traders or investors against the dangers of attempting to "catch falling knives." One can be bloodied by such an attempt, creating a strong visual image of the dangers of attempting to catch a bottom in a security or market where prices have been falling hard over a short period of time. That term is being revived lately with good reason, isn't it?

Investopedia is a good place to start your search for information on unfamiliar terms, particularly if you're just interested in defining the term. If you're fairly sure the unfamiliar term might refer to an oscillator or other type of technical analysis tool, you might find more information at the Chart School at the www.stockcharts.com site. For example, it's on that site that you'll find a definition of TRIN or the Arms Index developed by Richard Arms. It's "[t]he advance/decline ratio divided by the advance volume/decline volume ratio." Moreover, you'll find charts that show you how the TRIN might be used to pinpoint extreme conditions in the market as well as giving some indication as to whether conditions are bullish or bearish. NYSE-listed stock's advancing and declining stocks as well as advancing and declining volume ratios are used to calculate TRIN. The same information from Nasdaq-listed stocks is used to calculate TRIN.Q.

Even if you've found a definition for the unfamiliar term or located information on how to use an indicator, you may not be able to find it through your feed provider. You'll have to check with that provider to find the symbol for the indicator or oscillator. For example, my provider's symbol for the advance/decline volume is JINT.Z. Go figure.

Last but not least, if you're using a great broker, as I do, that broker may be a great source of information. Should you worry about the FOMC's meeting? What's a "future" and should you consider trading it? How does this order page work anyway? All those are questions a knowledgeable broker might help you answer.

When I originally decided to write this article, my intention was to cull all terms that might prove unfamiliar to new subscribers from a week's worth of Market Monitor posts and define them all. That proved impossible. Writing about the advance/decline line itself would have required an entire article. I hope these few sources will prove helpful so that when you encounter an unfamiliar term, you'll be able to find the answer for yourselves.

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.


Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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

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