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Daily Newsletter, Tuesday, 02/12/2008

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Table of Contents

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

Market Wrap

Buffet Bounce

Warren Buffet spiced up the trading day with his offer to the troubled bond insurers to take up to $800 billion in municipal bonds off their hands. He offered to reinsure them for a fee of 1.5 times the remaining premium on the debt. On the surface this would provide greater liquidity to the insurers since they would no longer have to maintain reserves on those bonds. The market spiked over 200 points on the news but it was all a mistake.

Warren is not stupid. While it appeared on the surface as a bailout for the troubled bond insurers it was in fact a shrewd offer by Buffett. Municipal bonds rarely ever default and are considered one of the safest debt instruments you can buy. Add in the AAA insurance and it is just like cash. The hundreds of billions in municipal bonds that MBI, ABK and FGIC currently insure are not the problem. The problem is the structured finance debt or collateralized debt obligations called CDOs.

Ambac Chart - Daily

Here is where the Buffett offer breaks down. I am going to call the monocline insurers (ABK, MBI, FGIC) MONO in the rest of this commentary to simplify the sentence structure. Assume our generic company MONO has insured $500 billion in various debt. $400 billion is in muni bonds and $100 billion in CDOs. The muni bonds are equivalent to gold bars in a bank. The CDOs are equivalent to radioactive waste since they are the residue of the subprime implosion and currently worth about 15 cents on the dollar. For the sake of brevity let's assume a municipality did a $10 billion 20-year bond sale and insured it through MONO. They would have paid a small premium, say $100 million to MONO when the deal was done. MONO receives the premium fee up front. They recognize the premium as income at the rate of 1/20th per year as the bonds mature. That means all the money has been received but they have not yet counted it as income. It is in the bank and in their reserves calculation assuming they have not cheated and already used it to pay CDO claims.

Using round numbers let's assume that bond issue is 5-years old and 5-years of that 20-year premium (25%) has been counted as income and the rest is theoretically in the bank. Assume they wanted to take Buffett up on his deal. They have $75 million in unearned fees. Buffett will provide insurance for 150% of the unearned premium. That means MONO has to come up with $112.5 million to let Buffett take over the asset. Remember, they only received $100 million in premium and now they would have to cough up $112.5 million to give their most valuable asset away. This is not going to happen simply because these companies are in trouble because they don't have enough cash. Buffett said Ambac had already declined the offer. Secondly if they give away their gold bar collateral and are left with only the radioactive waste then MONO itself would turn radioactive and there would be no reason for anyone to structure a bailout of the remaining waste products.

Since MONO is reporting prorated income from the bond premiums over the length of the term they are technically going to show a profit for the next 10-15 years. It is not a cash profit but only a book profit. That means they will be bleeding cash as they pay claims on the defaulted CDOs while reporting income that was received years earlier. If they give away their gold bars of municipal bonds then they can no longer claim that yearly income, it will cost them extra cash they don't have to do the deal and profits for future years will plunge into deep losses and those losses will be actual cash losses.

The Buffett offer was nothing more than an advertising ploy for Berkshire Hathaway Assurance Corporation or BHAC. By offering to take up to $800 billion in municipal bonds or roughly half of those currently outstanding he put the regulators on notice that he had that capability and was ready to write the check within 5-days of a deal. He copied the regulators on the offer just to make sure they got a copy. The regulators are already making plans to shutdown the insurers if a broad bailout deal cannot be reached. A bailout is looking less likely every day now compared to strong hopes just a couple weeks ago. With the CDOs now valued at 14-20 cents on the dollar there is simply too much exposure and where the original talk was for a possible $15-$30 billion bailout that number has climbed to something in the $75 billion range today. If the regulators decide to let these companies go under they can reduce a significant amount of pain by accepting Buffett's offer and moving $800 billion of muni bonds out of harms way before they flush MONO. They can force MONO to pay the 150% fee out of reserves and then shut them down.

Fitch said there are approximately 137,000 Ambac insured municipal bonds of which 132,000 were downgraded to AA from AAA in late January and were placed on rating watch negative suggesting there would be further downgrades as the Ambac problem worsens. These municipalities are all being forced to pay higher payments as a result of this downgrade and are more than likely applying plenty of pressure to the Ambac bailout situation. Buffett's offer will give these municipalities something to lobby for as a takeout of their problems. Since Ambac has insufficient unallocated cash to take the offer there will need to be some regulator control exercised if it is going to happen.

All of this jockeying for position by the various companies and regulators is keeping the market off balance. The risk of an additional $75-$150 billion write-down cycle if MONO goes under is weighing on the banks. The banks no longer have enough capital to bail out MONO and the counterparty risk problem is growing. Analysts now fear that for the banks to invest $30 billion into companies that may owe them several hundred billion is a conflict of interest that could eventually force all the debt to be written off anyway. It is a lose-lose for the banks and there does not appear to be any way out short of a government funded bailout.

It was a good day for Buffett and the millions in free advertising for his new BHAC company. He will probably have more bond insurance business than he can write over the next several months. Nobody is going to be taking business to any of the MONO group but that debt still has to be sold in order to fund roads, schools, utilities, city halls, etc. This is going to be a very profitable business for Berkshire Hathaway. He is in the right place at the right time once again. His sterling credit can command a premium fee.

On the economic front the Job Openings Labor Turnover Survey (JOLTS) showed that the labor market was continuing to weaken but this was a trailing report covering the December period. The market ignored it given the Buffett announcement. Hiring declined to 3.3%, down from 3.6% in the prior period. The gross number of jobs created fell to 4.2 million for the year compared to 4.66 million in Dec 2006. Separations fell to 3.1% with 4.0 million people leaving their jobs compared to 4.25 million in Dec-2006. Available jobs declined to 2.8% at 3.6 million and down from 3.9 million in Dec-2006. It was a pretty boring report.

The weekly chain store sales continued to be volatile with a -0.7% drop after a +1.7% gain in the prior week. Cold weather in some areas depressed sales while warmer weather in others provided a lift. It is hard to get excited about this weekly report and traders completely ignore it unless there is a sharp deviation from the norm.

The ABC News/Washington Post consumer comfort index fell to -37 from -33. The drop of 17 points since early January makes it the second largest decline on record. Only the 1990-1991 recession was worse. I am not going to list all the components but one was worth a mention simply because of its disparity. Confidence among Republicans was only -8 but for Independents it dropped to -41 and for Democrats -50. I thought this election was going to be a Democrat win for sure so why are the Democrats so discouraged? Could it be they really don't like either candidate and they are faced with choosing the lesser of two evils? Is the Democratic message so negative that even their own constituency is depressed? I am not choosing sides here or trying to make a political point but this component of the survey shocked me.

Consumer Comfort Chart from Economy.com

The homebuilders took another hit today after Masco (MAS) said sales through 2008 were going to continue to decline. Masco makes cabinets, Delta and Peerless faucets and Behr paints. MAS reported a loss that was less than analysts had expected but the guidance was dreary. Masco said it sees a continued decline in housing starts of another 25-35% in 2008. Masco said 2008 was expected to be a difficult year for the U.S. economy. Masco also said it was seeing weakness in its overseas sales. Masco has cut 11,000 employees since Q4-2006. Bank America cut their estimates for 2008 earnings to 85 cents from $1.53 per share. Moody's put Masco under review for a possible downgrade on $4 billion of Masco debt.

Monsanto (MON) gained a buck after the company raised guidance for 2008. Monsanto said earnings could be in the range of $2.70-$2.80 compared to prior estimates of $2.50-$2.60 per share. The company is seeing strength in its herbicide business and rising demands for specialty seeds. In the same general sector Potash (POT) said 2008 gross margins will be 2.5 times larger than they were in 2007. The CEO said it was due to their leverage in the fertilizer sector. They have the majority of the world's excess fertilizer capacity and are bringing it to market at a premium price. They are planning on spending $5 billion over the next 4-years to bring idle production back online. One analyst said POT could also be a takeover candidate. POT gained +5.20 for the day to close at $149.

Yahoo rejected the Microsoft offer of $31 saying they had far too many projects in progress that would improve their market share and profitability. Bill Miller, the manager of the Legg Mason Value Trust, is a major stockholder of Yahoo with 6% of the outstanding stock. Miller was actively trying to talk up the Microsoft offer saying Yahoo was worth $40 a share. Yahoo shares eased slightly to $29.56 because almost everyone expects Microsoft to up their bid. Microsoft can't afford to let Yahoo get away.

After the bell today Applied Materials reported earnings of 23 cents after items compared to estimates of 20 cents. Sales were stronger than expected at 2.09 billion but still lower than the prior quarter. AMAT rose a buck in after hours trading.

The administration made another plug to ease the foreclosure process for more than a million homeowners behind on their payments. They announced a 30-day reprieve on any foreclosure with a loan at the six largest lenders to give homeowners some breathing room to solve their problem. Most analysts say this will only give them 30 days longer to pack their bags since the majority of owners are already seriously underwater. It was not seen as a major new initiative.

GM reported a loss for the full year of $38.7 billion despite a near record for global sales. GM also offered a new round of employee buyouts for all 74,000 union employees. The goal is to replace the older more experienced and highly paid employees with younger, cheaper workers. Under the offer eligible workers could get between $45,000-$62,500 as an incentive to retire early with full pension and health benefits. Other workers could get up to a $140,000 lump sum buyout with no retirement benefits. GM maintained its global manufacturing edge but only barely. They built only 3,000 more vehicles than Toyota.

Wynn Resorts posted a $65.5 million Q4 profit that was helped in part by the Macau property. Unfortunately it was not as much as the street expected and the stock was crushed for a $6 loss in after hours trading. Analysts said they were hoping Macau would generate significantly higher profits to offset weak conditions in Las Vegas.

Late in the day Venezuela said it was suspending oil sales to Exxon (XOM) because Exxon had courts seize Venezuelan assets around the world last week. Exxon quickly put out a press release saying the lack of oil from VZ would have no impact on Exxon's supplies. This was simply a political announcement by Chavez in an attempt to regain some lost face from the Exxon win last week. On Sunday Chavez said it would cut off all exports to the U.S. if the U.S. continued its economic attacks on VZ. Since the refineries in the U.S. are almost the only ones that can refine the VZ heavy crude his threat is groundless. If he had to ship his low quality oil around the world to get it refined and sold the shipping charges and the discount required to get somebody else to buy it would drastically impact his net revenue. Talk is cheap and Chavez is the king of talk. Crude rose nearly a buck on the news to $93.18.

The markets rallied on the Buffett announcement with the Dow rising over 230 points early in the day. Momentum slowed immediately after the initial bounce but the gains held until 3:PM before sellers showed up in volume. The Dow declined -158 points off its highs to a gain of only +72 points by 3:30 but there were dip buyers waiting and we closed in the middle of the range at +133. On a technical basis the morning bounce was right to the top of initial resistance and failed at that resistance. At 3:30 I was expecting the Dow to close negative given the severity of the selling. I was surprised to see the rebound so strongly and it definitely changed my bias.

Dow Chart - 120 Min

Nasdaq Chart - 120 Min

The Nasdaq rebounded less than the Dow and failed to recover from the afternoon selling. The Nasdaq ended fractionally lower with big caps weak like AAPL losing -4.58, RIMM -2.88, GOOG -3.11. The Nasdaq ended right in the middle of its 3-week congestion range and giving us no clue where it is headed. Hovering just over support at 2310 we could be ready to launch but we saw resistance at 2350 solid as a rock.

The S&P-500 had a nearly identical chart to the Dow with a dead stop at initial resistance at 1360 and a close in the middle of its range. Initial support is 1320 and should survive any further weakness without a massive news event turning sentiment sour.

S&P-500 Chart - 120 Min

Russell-2000 Chart - 120 Min

The most positive index was again the Russell 2000 with a steady uptrend still in place. A -7 point drop into the close was not enough to push it negative and a +5 point gain to 705 was above the uptrend support. I still see the Russell as our indicator that the bulls are alive and well and we could see the fund managers continue to nibble away as the Fed cuts rates.

This is an option expiration week and we saw the same week in January produce a monster drop. I do not expect that this week and I think we have established a bottom unless/until a fatal decision is reached in the bond insurer scenario. My recommendation still stands to buy dips to Russell 685 and you had two chances to buy within 5-points of that level in the last 5-days. Earnings are basically over except for a bunch of stragglers and there are no major economic reports for the rest of the week. The daily news is going to be the key and the focus will be on the bond insurers. Be patient and wait for your entries unless solid volume appears on a breakout.

Jim Brown

 


New Plays

New Option Plays

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

New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Apple Inc. - AAPL - close: 124.86 change: -4.59 stop: see details

It would be natural for AAPL bulls to be scratching their heads in puzzlement at today's relative weakness. AAPL did lose 3.5%. Yet we warned readers yesterday that the stock was challenging resistance and was probably due for a minor retracement. Our biggest concern today was the bearish engulfing candlestick pattern. The dip to $125 could be used as a new bullish entry point. However, at this time, we would wait to see if shares slip any further into the $122-120 zone and look for a bounce there as a new entry point.

AAPL play #1 - directional calls

The directional call play on AAPL took something of a beating given the sharp decline. Look for a dip and then a bounce in the $122-120 zone as a potential entry point for new positions. We are suggesting a stop loss at 116.99 under last week's low. More conservative traders may want to use a stop closer to $120.

AAPL play #2 - Credit put spread

Today's pull back provides a better entry point to open new credit put spreads but tomorrow might be a better entry point if AAPL dips toward $120. The options we suggested were buying the March $110 put and selling the March $120 put.

AAPL play #3 - Sell Naked Puts

Wait for signs of a bounce before considering new naked put positions. We had suggested selling the March $150 put with plans to buy it back when AAPL hits $139.00.

Picked on February 10 at $125.48
Change since picked: - 0.61
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 44.4 million

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Apollo Group - APOL - close: 72.93 chg: -0.10 stop: 69.95

In some of APOL's short-term technical oscillators we're starting to see more weakness Yet until APOL breaks support we don't see any changes to our strategy. We would use any dip near its rising 100-dma (72.04), which is technical support, as a new bullish entry point to buy calls. Actually any dip in the $72.00-70.50 zone is probably a good spot to buy calls but if APOL is under $71 wait for signs of a bounce before jumping in. Our target is the $80.00-81.00 range.

Picked on February 10 at $ 73.94
Change since picked: - 0.91
Earnings Date 04/07/08 (unconfirmed)
Average Daily Volume = 3.1 million

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CONSOL Energy - CNX - cls: 76.98 change: -3.98 stop: 73.85 *new*

Ouch! Shares of CNX just got slammed today with a 4.9% decline following yesterday's breakout to new highs. It looks like the culprit was a disappointing earnings report from coal producer ANR. Traders used the news as an excuse to lock in profits across the industry. Normally one might consider the pull back toward $75 and the 10-dma in CNX as a potential entry point for new call positions. However, today's session has painted a very clear bearish engulfing candlestick pattern, which is normally seen as a one-day bearish reversal pattern. This is definitely a warning for the bulls that this group isn't quite as strong as they thought it was. We would use a bounce from here as a new bullish entry point. Please note that we are raising the stop loss to $73.85. More aggressive traders may want to leave their stop under support near $70.00. We have two targets for CNX. Our first target is the $84.50-85.00 range. Our second, more aggressive target is the $88.00-90.00 zone. The P&F chart has a brand new triple-top breakout buy signal with a $124 target.

Picked on February 10 at $ 77.54
Change since picked: - 0.56
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 3.3 million

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Monsanto - MON - cls: 115.05 change: +1.02 stop: 107.85

All the fertilizer stocks popped higher this morning thanks to news from MON. The company raised their earnings guidance from $2.50-2.60 per share to $2.70-2.80 per share compared to Wall Street estimates of $2.81 a share. There appeared to be a mix of analysts comments. Some analysts were bullish on MON's herbicide sales and the company's international business. While another analyst worried that the rising cost of wheat will prompt more farmers to plant wheat instead of corn, which will negatively impact MON who makes more on farmers planting corn (see note below). Shares of MON gapped open at $118.09 and traded to $119.95 before giving back most of its gains. We were suggesting a trigger to buy calls at $117.05 so we would have been triggered at the opening bell ($118.09). Look for signs of a bounce before jumping into new call positions. Short-term a dip into the $112.50-110 zone would look like a new bullish entry point. We have two targets. Our first target is the $127.00 level. Our second target is the $137.00-140.00 range. As we discussed earlier a move over $118 triggered a new P&F chart buy signal, which now forecasts a $157 price target. These have been very volatile stocks so readers should consider them aggressive, higher-risk plays. FYI: MON is presenting at the Morgan Stanley Basic Materials Conference 2008 on February 21st.

Note: We have heard some chatter today about the USDA agricultural projections for 2008/2009 and how U.S. farmers are planting less corn and more wheat. This is a potential negative for the fertilizer companies since wheat requires significantly less fertilizer than corn. However, these fertilizer companies are seeing huge business overseas and many of the phosphates and similar materials are still sold out or seeing shortages here in the U.S.

Picked on February 12 at $118.09 *gap higher entry
Change since picked: - 3.04
Earnings Date 04/03/08 (unconfirmed)
Average Daily Volume = 7.1 million

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Mosaic - MOS - close: 100.41 change: +0.88 stop: 89.45

Shares of MOS gapped open higher thanks to the bullish earnings guidance from rival MON this morning. This positive trend was further fueled by bullish comments from MOS at their investor presentation at the AgForum this morning. We were suggesting a trigger to buy calls at $101 so this morning's open at $101.83 is our new entry point. The afternoon sell-off looks like a new bullish entry point. Broken resistance in the $100-101 zone should be new support. If you prefer then wait for signs of a bounce first. If MOS surprises us and turns lower tomorrow then look for a dip or bounce in the $97-98 region as a potential entry point to buy calls. We have two targets. The first target is $109.75, just under the January highs. Our second, more aggressive target is the $118.00-120 zone. These are very volatile stocks with a lot of intraday spikes so we're playing with a very wide stop loss. More conservative traders may want to use a tighter stop in the $94-95-96 zone. We would consider this a more aggressive, higher-risk play.

Note: We have heard some chatter today about the USDA agricultural projections for 2008/2009 and how U.S. farmers are planting less corn and more wheat. This is a potential negative for the fertilizer companies since wheat requires significantly less fertilizer than corn. However, these fertilizer companies are seeing huge business overseas and many of the phosphates and similar materials are still sold out or seeing shortages here in the U.S.

Picked on February 12 at $101.83 *gap higher entry
Change since picked: - 1.42
Earnings Date 04/09/08 (unconfirmed)
Average Daily Volume = 5.8 million

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Petroleo Brasileiro - PBR - cls: 113.75 chg: -1.35 stop: 104.95

An intraday breakout over resistance near $116 was enough to trigger our bullish call play on PBR. Unfortunately, the market's rally faded and PBR faded with it. Shares gave back all of their gains and lost 1.1% on the day. A rebound from here would look like a new bullish entry point but we would prefer to wait and see if shares dip and bounce near $110, which would be a more attractive entry point at this time. Our target is the $128.00-130.00 range. The move over $116 has produced a new Point & Figure chart buy signal. Actually it is a quadruple-top bullish breakout buy signal with a $138 target. FYI: Another risk is PBR's earnings report. We can't find an earnings date and they normally report in mid February. That is a risk because we do not like to hold over an earnings report.

Picked on February 12 at $116.00 *triggered
Change since picked: - 2.25
Earnings Date 02/12/08 (unconfirmed)
Average Daily Volume = 7.6 million

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Potash - POT - close: 149.28 change: +5.20 stop: 136.99

It was another strong day for POT. The stock gapped open higher at $147.00 thanks to bullish earnings comments from rival MON. We were suggesting a trigger to buy calls at $147.50 so the play is now open. POT hit $154.63, a new all-time high, before paring its gains this afternoon. We are going to go ahead and list two targets. Our first target is the $158.00-160.00 range. Our second, more aggressive target is the $168.00-170.00 zone. More aggressive traders may want to aim significantly higher. The Point & Figure chart is forecasting a $222 target. Again, this is a very volatile stock. Readers should consider it an aggressive, higher-risk trade. Aggressive traders could put their stop under the 50-dma. We're going to try and get away with a stop loss under Monday's low.

Note: We have heard some chatter today about the USDA agricultural projections for 2008/2009 and how U.S. farmers are planting less corn and more wheat. This is a potential negative for the fertilizer companies since wheat requires significantly less fertilizer than corn. However, these fertilizer companies are seeing huge business overseas and many of the phosphates and similar materials are still sold out or seeing shortages here in the U.S.

Picked on February 12 at $147.50 *triggered
Change since picked: + 1.78
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 5.9 million
 

Put Updates

Ambac Fincl. - ABK - cls: 8.90 change: -1.58 stop: n/a

News that Warren Buffett was willing to buy the municipal bond businesses from the bond insurers may have fueled the market rally but it did not help stocks like ABK and MBI. Shares of ABK slipped 15% and broke down under support near $10.00. If you were looking for the stock to make a move out of its recent sideways consolidation this looks like the signal. Currently we are suggesting the May puts and a speculative out of the money March call as a hedge to protect us if a bailout deal does get done. Many on Wall Street expect something to occur this week but it could drag out to next week. The options we suggested were the May $5 or $2.50 puts and the March $20 call.

Picked on January 27 at $ 11.54
Change since picked: - 2.64
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 10.9 million

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Avalonbay - AVB - close: 93.70 change: +4.64 stop: 95.05

The volatile REIT stocks continued to produce some big swings. Yesterday AVB broke down under support. Today the stock completely reversed higher with a 5.2% move, fueled initially by some short covering. The Buffett bid for the municipal bond business sparked a rally in financials and shorts panicked in the REITs. We warned readers that AVB had above average short interest. If you did open positions this morning you may want to close them given today's rally past its 50-dma. We are not suggesting new positions at this time unless AVB reverses back under $90 again. Our target is the $81.50-80.00 zone. A big risk with AVB is the above average short interest. The most recent data puts short interest at 12% of the 70 million-share float. Depending on which figure you use for "average" volume this equates to about 6.5 to 9.0 days of short interest and raises the risk of a short squeeze.

Picked on February 11 at $ 89.06
Change since picked: + 4.64
Earnings Date 02/06/08 (confirmed)
Average Daily Volume = 1.2 million

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Bear Stearns - BSC - cls: 78.93 chg: -0.83 stop: 84.31

BSC also reacted negatively today and the stock continued to slip lower under support near $80.00. The initial pop this morning failed at $82.00. Our target is the $71.00-70.00 zone. Our biggest risk is that a bailout plan for the bond insurers does get done (and probably this coming week). If plan is announced and the street thinks it has a good chance of actually coming to pass then shares of BSC are bound to rally sharply due to its exposure to the sub-prime mess.

Picked on February 11 at $ 79.49 *triggered
Change since picked: - 0.56
Earnings Date 03/13/08 (unconfirmed)
Average Daily Volume = 7.4 million

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FedEx - FDX - close: 88.10 change: -0.35 stop: 92.05

Shares of FDX tried to rally again today but produced a mini-double top, which is bearish, near $89.65 today. This looks like another entry point to buy puts. Of course FDX and the transports might rally tomorrow morning if the weekly oil numbers show another strong build up of inventories. We would expect any bounce to be temporary. There is potential support at $86 but our target is the $81.00-80.00 zone.

Picked on February 10 at $ 88.00
Change since picked: + 0.10
Earnings Date 03/20/08 (unconfirmed)
Average Daily Volume = 3.2 million

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W.W.Grainger - GWW - close: 75.85 chg: -0.52 stop: 80.05

This morning before the opening bell GWW reported that January 2008 sales were up 8% versus 2007. This sounds like good news but the stock failed to react on it. The trend continues to look bearish. We would expect any rebound to roll over in the $77.50-80.00 zone so look for a failed rally as a new entry point to buy puts. Another alternative would be to wait for a breakdown under support at $75.00. Our target is the $70.75-70.00 zone.

Picked on February 10 at $ 76.65
Change since picked: - 0.80
Earnings Date 04/16/08 (unconfirmed)
Average Daily Volume = 1.0 million

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iShares DJ Financial - IYF - cls: 87.73 chg: +1.02 stop: 93.01

The IYF managed a bounce fueled by the Buffett-driven rally in financials. However, it is worth noting that the bulls struggled with the $89 level twice today. We remain bearish and another failed rally in the $89-90 zone could be used as a new entry point. We're aiming for a test of the $80.00 region. Our official target is the $81.00-80.00 zone.

Picked on February 06 at $ 88.62
Change since picked: - 0.89
Earnings Date 00/00/00
Average Daily Volume = 1.1 million

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MBIA Inc. - MBI - close: 11.50 change: -2.08 stop: n/a

MBI also got hammered for a 15% decline. The offer by Warren Buffett to buy the best part of the bond insurers, the municipal bond business, was not received well by shareholders. Shares of MBI definitely look like they are headed lower. Currently we are suggesting the May puts and a speculative out of the money March call as a hedge to protect us if a bailout deal does get done. Many on Wall Street expect something to occur this week but it could drag out to next week. The options we suggested were the May $7.50, $5.00 or $2.50 puts. We recently added a deep out of the money call, the March $22.50 call, as a hedge in case a rescue plan does get announced and the stocks react to it.

Picked on January 27 at $ 14.20
Change since picked: - 2.70
Earnings Date 01/31/08 (confirmed)
Average Daily Volume = 15.2 million

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Myriad Genetics - MYGN - cls: 38.30 chg: -0.35 stop: 43.01

We don't see any changes from our previous comments. MYGN continues to look bearish here. The stock did not move on the strength in the DRG drug index and the BTK biotech index is still languishing near its lows. Our target is the $36.00-35.00 range. More aggressive traders may want to aim lower. The Point & Figure chart is bearish with a $34 target. FYI: We always consider a biotech stocks to be a more aggressive, higher risk play because you never know when an FDA decision will be released or some clinical trial info will come out that could send the stock moving sharply either direction.

Picked on February 07 at $ 39.75 *triggered
Change since picked: - 1.45
Earnings Date 02/05/08 (confirmed)
Average Daily Volume = 801 thousand

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Sears Holding - SHLD - cls: 99.07 chg: -2.00 stop: 100.25

We seriously considered new put positions in SHLD right here. The stock under performed the market and its peers and gave back most of yesterday's gains. However, the company is due to present tomorrow at an investor conference. While we don't expect any surprises we're going to wait. Currently our official entry point to buy puts is at $94.75. If triggered at $94.75 our target is the $86.00-85.00 range. We do not want to hold over the end of February (unconfirmed) earnings report.

Picked on February xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/28/08 (unconfirmed)
Average Daily Volume = 3.0 million

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Simon Properties - SPG - cls: 86.07 chg: +2.47 stop: 90.61

The REIT stocks popped higher with the market this morning but the rally in SPG stalled near $86.50 multiple times. That doesn't mean it's not going higher tomorrow but the bulls have their work cut out for them. Look for a failed rally near its 50-dma (88.25) or the $90 level as a new bearish entry point to buy puts. Our target is the $76.00-75.00 range.

Picked on February 07 at $ 84.39 *triggered
Change since picked: + 1.68
Earnings Date 02/01/08 (confirmed)
Average Daily Volume = 2.7 million
 

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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DJIA 1/100 Index - $DJX - cls: 123.73 chg: +1.33 stop: n/a

We are down to our last three days before February options expire. Due to this time frame we are now adjusting our suggested sell target to $4.00. Keep an eye on those puts. We are not suggesting new strangle positions at this time. The options we suggested were the February $127 calls (DJW-BW) and the February $122 puts (DJW-NR). Our estimated cost was $3.36.

Picked on January 29 at $124.80
Change since picked: - 1.07
Earnings Date 00/00/00
Average Daily Volume = million

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Google - GOOG - close: 518.09 chg: - 3.07 stop: n/a

It looks like the rebound in GOOG is running out of steam. Shares plunged from the high near $530 to an intraday low of $513 before bouncing back. We're still in trouble here with just three days to go and option expiration on Friday. Even if GOOG started trading lower again odds are pretty good that it would be pegged at the $500 strike price for expiration on Friday. We need to start selling on any dips into the $510-500 zone. We are not suggesting new positions. The options we suggested were the February $600 calls (GOO-BT) and the February $500 puts (GOP-NO). Our estimated cost was $17.00. We want to sell if either option hits $24.00 or more.

Picked on January 30 at $548.27
Change since picked: -30.18
Earnings Date 01/31/08 (confirmed)
Average Daily Volume = 5.6 million
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 

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

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