Option Investor

Daily Newsletter, Thursday, 02/21/2008

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Table of Contents

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

Market Wrap

Sunny in the Morning, but Storms Rolling in by Afternoon


Our markets have been treated to a number of days over the last few weeks when an early sunny outlook was to darken by afternoon. This morning, our Central Texas skies might have been gloomy, but the financial skies appeared to be bright with promise as dawn arrived across the world. Asian and European markets gained. Citigroup upgraded Cisco (CSCO) to a buy rating, sending its shares higher in Germany. Cisco might shine like the sun on the several indices in which it was a component stock, the move suggested.

Some clouds, barely noticed, had already gathered on the horizon, however. The bond insurers were back in the news, with MBIA (MBI) rejecting what was called the "Ackman" plan to split up insurers. As you may remember from last Thursday's Wrap, William A. Ackman of Pershing Square Management, LP, wrote an article detailing the losses he anticipates in MBI. MBI said that Ackman, a short seller of the stock, was only attempting to benefit his own short positions. Many hearings were going on last Thursday, and MBI wanted Congress to take action to curtail the influence of shorts. However, it was Eric Dinallo, superintendent of the New York State Insurance Department, who had first announced this time last week that the department was considering splitting the municipal-bond units from the more troubled structured-finance units.

The department's plan involved making the municipal bond insurance units a direct subsidiary of the main holding company. Yesterday Ackman submitted a new plan for splitting the bond insurers. Ackman's plan is complicated but would involve splitting off the muni bond insurance units into a separate entity, while the old business units would be left to pay any claims on the structured-finance securities. The old business units would continue paying until the policies expire or until the units went into liquidation, whichever came first. Let's guess which would come first if this subprime crisis isn't resolved.

Dinallo reportedly said the department was concerned that the Ackman plan would result in a significant downgrade on the structured side, a result that would hurt banks. Criticism of the department's "lame brained" plan last week centered around the same concerns, however, so it's difficult to evaluate from this vantage point whether either plan lessens the potential damage to banks. I'm looking forward to what Jim Brown has to say about it this weekend.

The Federal Reserve's weekly figures on outstanding commercial paper suggested that another gathering storm cloud, of the credit-crunch variety, might still threaten our skies, too. Four out of the last five weeks, outstanding commercial paper has fallen, suggesting that companies are having difficulty placing this paper and obtaining short-term funding by this method.

Soaring crude costs darkened the horizons, too. Boone Pickens appeared on CNBC this morning, confirming that he is shorting crude-related securities. However, he also said that, barring a worldwide recession, crude would reach $150 a barrel if steps weren't taken soon to harness other forms of energy. Citigroup must have agreed with Pickens' short-term outlook. The firm downgraded British Petroleum (BP). BP has a strategy day planned for next Wednesday.

Bearish economic reports swept those gathering storm clouds across the sky. The Philly Fed survey proved shocking, and the usually little noticed Conference Board's Leading Indicators served to confirm the Philly Fed's information. The economy appears to have weakened quickly, the Philly Fed results indicated.

At first, it appeared that market participants would ignore the storm clouds, but the heavy atmosphere soon sent them scurrying for cover. Let's look at what damage was done, if any.


Annotated Daily Chart of the SPX:

The SPX's weekly 200-ema and -sma's are at 1322.71 and 1296.84, respectively, lending some validity to the possibility of support in the 1320-1324 area. Next support appears to be in the 1296-1306 area, but you know that if the markets are cascading lower, prices plow through supposed support levels.

The possibility of a loss of the triangle support exists of course, and you should spend some time tonight planning how you'll react if that happens. However, such a loss of support is not a given, as should be proven by the alternating up-and-down candles over the last week or two.

Market participants don't know quite how to position their portfolios when it's unclear yet what will be done with the bond insurers, what the result will be of those decisions, and how the banks will ultimately fare. For those who don't know, the U.K. had to take action to nationalize lender Northern Rock this week to keep its troubles from hitting its banking sector. That happened while we were closed for a holiday, so we heard little news about it.


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As I'll show later with the Russell 2000's chart, I've become concerned over the last couple of days about the foregone conclusion that a triangle breakdown will necessarily result in cascading lower prices. While I'm firmly in the "we need to retest lows" and maybe even in the "I'm not sure they'll hold" camps, I'm not sure that the retest is a given for the immediate time period. I believe that traders ought to assess their risks if such a test occurs and if the January lows fail. I've done that. I'm not entering as many bullish credit spreads as I do bearish ones, for example, since when prices cascade lower, it's harder to adjust them, at least for me, than it is to adjust the bearish ones when prices move higher.

However, foregone conclusions have a way of proving to be contrarian indicators. I'll show you what I mean when we look at the Russell 2000's chart later. Those doubts and the propensity lately for one big down day to be followed by a bounce means that bears ought to assess their trades, planning for a possible bounce up to test triangle resistance, too, in case that happens next.

Annotated Daily Chart of the Dow:

The Dow's weekly 200-ema and -sma's are at 11741 and 11476, respectively. As with other indices, a retest of the January low can't be precluded, but neither can a bounce up through that triangle again or even an initial drop, followed by steadying at those red trendlines.

Annotated Daily Chart of the Nasdaq:

The Nasdaq closed the day--but not yet the week, of course--below its weekly 200-ema, with that average at 2311.65. The weekly 200-sma is at 2253.68, and there's vulnerability to that level if the Nasdaq does not pull it together tomorrow morning. If it instead sustains levels below yesterday's low, then it might indeed soon see a weekly 200-sma test. Those hoping to avoid a retest and maybe a violation of the January low would want to see the Nasdaq steady near 2250 if it drops because it just doesn't seem to have much protecting it from a retest if that level fails.

Spend some time tonight planning what you'll do if the Nasdaq falls out of the triangle and then doesn't hold next support. Do not close your mind to the possibility that it could instead bounce up through that triangle again. Day before yesterday, you might have been sure that yesterday was going to be a down day, for example. While inside a triangle like this, you really can't predict anything but chop and more chop.

Annotated Daily Chart of the SOX:

I've been talking about a big potential triangle setup on daily charts for the indices since the day after the last FOMC meeting, mentioning it first on the live portion of the site and then on the first Wrap I wrote after that. I like triangles. Although there can be false breakouts, you have sound boundaries on which to determine that something is going wrong with your breakout trade. Many times the breakouts are in the direction of the trade and provide good entries.

However, now everyone has discovered and begun expounding on those triangles, and the contrarian in me says "Uh, oh," because that makes me wonder if any breakdown might have a greater likelihood of being reversed or of prices just trading sideways out of the triangles. If you had lots of money you wanted to put to work and wanted to make sure first that support was going to hold, wouldn't you consider pushing prices lower and seeing if buyers jump in, when you have such nice little parameters upon which to base such tests?

The Russell 2000's daily chart confirms my fears, and I wonder if what's seen on that chart won't be seen on others.

Annotated Daily Chart of the RUT:

The RUT's weekly 200-ema and -sma's are currently being tested. The RUT closed the day beneath both. The 200-sma is at 699.54.

Usually, you would expect to see a breakdown below the triangle's support level met by a sharp decline. Perhaps after the first sharp decline, there would be a bounce to retest that trendline before another rollover, but this isn't what's happening here yet. So far, there's a sideways move out of the triangle and then a lot of chopping. That chopping around is becoming increasingly volatile, however, so there may soon be a move that either produces the sharp decline or else a strong bounce off the support level being carved out. For now, however, that sideways trading suggests the possibility that "breakouts" either direction on other indices could be met with similar sideways moves.

The RUT, then, may give us our first insight tomorrow and next week. Some other charts give a more bearish outlook than is given here. The RUT currently has a potential downside target of just under 684 on its weekly Keltner chart, a level that will remain a potential downside target until and unless the RUT produces weekly closes above about 714.

If you're trading the SPX, OEX or Dow, the TRAN might also give you particular insight. It's been stuck in its own congestion zone, and I wouldn't expect those other indices to go far in either direction unless the TRAN had broken out of its congestion zone in the same direction.

Annotated Daily Chart of the TRAN:

Some subscribers who are new might wonder why I follow the TRAN. I do because the TRAN is sensitive to both crude costs and economic concerns. It serves as a good barometer. Often, too, its direction tends to lead the SPX, OEX and Dow. When it doesn't, the divergence can be important and can alert traders that something might be wrong with their SPX, OEX or Dow trade. I don't use the TRAN as a trading vehicle, of course, and it's not always great on market timing, so just use it as you would an indicator on a chart: a warning that must be corroborated by price action.

Today's Developments

Today's pre-market release of the weekly jobless claims revealed figures that proved misleading. Reports touted the 9,000 drop in initial claims, but that 9,000 drop was from a revised higher figure from the previous week. The previous week's 9,000 drop was revised to a climb of 1,000. So, although articles touted the drop of 9,000 in initial claims, the 349,000 initial claims was actually higher than the previously reported 348,000 claims from last week's report. It was also higher than the anticipated 340,000-345,000. In addition, a holiday in California may have meant that fewer were able to file claims and that next week's claims might be higher.

The four-week moving average rose 10,750 to 360,500. Continuing claims rose 48,000. The four-week moving average of continuing claims climbed 28,750.

February's Philly Fed Survey, one of the most important of the Fed District surveys in predicting the ISM's report on manufacturing in the country, proved shockingly weak. The diffusion index fell to -24 from the previous -20.9. Zero is the benchmark that measures contraction versus expansion. Any negative number indicates contraction, and the larger the negative number, the sharper the contraction.

Economists had predicted that the index would rise to -10, so the sharper decline proved a disappointment. In addition, the component that measures the outlook for the future dropped to a more-than-decade low, to -16.9 from the previous +5.2. Components for future employment and shipping dropped.

Some components showed glimmers of light. New orders rose and the prices-paid index saw a welcome drop from 49.8 to 46.6. Also, despite the fears about future employment, the employment index rose to +2.5 from its previous -1.5.

The Conference Board also released its January Leading Indicators during the same 10:00 am ET period. This number does not usually move the markets. Coming at the same time as the Philly Fed, it wasn't likely to garner too much attention, either, other than as a corroboration of the weakness shown by the Philly Fed. It was expected to ease by 0.1 percent, and it did exactly that. Five component indices dropped.

This was the fourth straight month of declines in this number, and the sharpest six-month decline since early 2001, a Marketwatch.com article noted. Moreover, the Conference Board's economist believes that February's number will also likely decline, perhaps sharply.

Clouds might have been moving in, but glimmers of sunlight showed through, too, as transient as they were to turn out to be. The coincident economic indicator, the component that measures where the economy was at the time of the index was calculated, rose 0.1 percent. The Conference Board's labor economist purportedly concluded on the basis of the coincident index that the economy was not recessionary in January.

The EIA, the U.S. Energy Information Administration, released the weekly crude and natural gas inventories at 10:30. The crude inventories had been delayed a day due to Monday's federal holiday. Crude inventories rose 4.2 million barrels. While one article noted that industry watchers had expected a rise of 3.2 million barrels, a guest commentator on CNBC had mentioned that he had expected 5.0 million barrels. Gasoline supplies rose 1.1 million barrels, about in line with expectations, and distillates dropped 4.2 million barrels. Refinery capacity dropped to 84.9 percent.

Natural gas inventories were also released. Those dropped 1.72 billion cubic feet.

Crude has of course drawn much attention with its first-ever close above $100 earlier this week. Jim Brown has been pointing out the likely expiration-related effect, sending shorts scurrying to cover when the about-to-expire contract did not retreat as expected. After today's reports, crude, now with the new contract, dropped, closing the regular trading session at $98.23 a barrel.

Two releases during the day related at least obliquely to the subprime and credit crunch worries. One was the weekly Freddie Mac survey of mortgage rates. Thirty-year fixed-rate mortgages averaged rates of 6.04 percent, much higher than last week's 5.72 percent. It's still lower than the year-ago rate of 6.22 percent, Freddie Mac pointed out. Many had hoped that a Fed easing would result in lower mortgage rates, helping those who were transitioning out of ARMs and into more traditional loans to afford those more traditional loan rates. Instead, Freddie Mac's chief economist believes that the widening spread in rates for long-term fixed-rate mortgages and ARMs might lead ARMs to become more popular again than they have been recently.

The other release related to the credit crunch. The Federal Reserve released its weekly figures on outstanding commercial paper, a measure of how well companies and other entities are succeeding in placing the commercial paper they use to fund their operations. During the worst of the credit crunch, outstanding paper was falling sharply every week, and last week, it had continued and even sharpened a decline from the previous week.

Unfortunately, that trend continued. For the third week in a row and the fourth out of the last five weeks, outstanding commercial paper has fallen. Moreover, the drop has been steepening. This week, outstanding commercial paper fell by 17.8 billion. In the previous two weeks, it had fallen 8.6 and then 13.3 billion. Asset-backed paper dropped 11.3 billion.

For those not familiar with commercial paper, here's the Fed's definition: "Commercial paper consists of short-term [30-270 days], promissory notes issued primarily by corporations." The money the corporations garner provides an alternative to bank loans and is used for current transactions.

Microsoft (MSFT) starred in company-related articles. The company announced technology and business changes that will benefit developers, customers, partners and competitors, too. The company said that the changes will enhance interoperability and openness. The European Union apparently wasn't impressed and reportedly will continue with its antitrust suit against MSFT.

Research in Motion (RIMM) also had its time in the sunshine today. The company raised its guidance for net subscribers. It also reaffirmed revenue and EPS guidance for the fourth-quarter.

Tomorrow's Economic and Earnings Releases

Only one release appears for tomorrow: the ECRI Weekly Leading Index. That number does not usually prove market moving.

What about Tomorrow?

Annotated 30-Minute Chart of the SPX:

What if the SPX bounces immediately or after dropping to that trendline? Where is resistance? Look for potential resistance from 1346-1347.50 first. If the SPX can't get past that, the likelihood increases that it will roll down and retest the support again, if not break through it.

Annotated 30-Minute Chart of the Dow:

If the Dow bounces immediately or after dropping to test that Keltner and trendline support, watch for rollover potential in the 12300-12330 zone. If the Dow rises but can't sustain values above that zone, then the potential increases that it will roll down to test support again.

Annotated 30-Minute Chart of the Nasdaq:

If the Nasdaq bounces immediately or after testing that trendline support, watch for rollover potential at the descending 9-ema on the 15-minute and 30-minute charts. They're at about 2305.25 and 2309.25 currently, but will have changed a little tomorrow, depending on the price action. If the Nasdaq can't sustain values above them, it's more likely to roll back down to test support.

Annotated 30-Minute Chart of the Russell 2000:

The RUT is the index closest to 30-minute Keltner support. It may be our first guide for tomorrow as to whether the approaching support will hold or be broken. If it bounces tomorrow, watch for rollover potential from 698-700. If it can't sustain values above that, it's more likely to roll back down to test support again.

So what's it going to be for tomorrow? Will indices bounce immediately, drop down through the current potential support zones but then bounce or just cave?

That's the trouble with triangles. Prices chop around inside them, turning around on a dime. Days that see closes on the low of the day, indicating that not all sellers were able to get out, are followed by days of gains instead of days where there's some follow-through to the selling. The thing to do with triangles is to try not to anticipate or think you know the next action.

However, if these were normal times, which they are not, the most likely or best-guess action tomorrow morning would be retreat further through the support zones detailed earlier, followed by a bounce attempt. If the day is moderately bullish, a doji-type day might be produced or indices might even bounce back to the top of their recent congestion zones. If they're not at all bullish, any bounce attempt would be met by selling and the indices would roll down again, either to produce a doji that closes on support again or into a real breakdown.

These are not normal times, so use any best-guess scenario only as a test against which to measure initial action, not as a prediction of what will happen..


New Plays

New Option Plays

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

Play Editor's Note: The major averages have been consolidating sideways in a wedge-shaped pattern. Normally patterns with higher lows and lower highs are neutral. The breakout could go either way. However, history would suggest that the prevailing trend, in this case lower, tends to reassert itself. That means odds are greater that the markets will breakdown not break higher. A large number of bearish engulfing candlestick patterns today also suggest the next significant move will be lower. Now whether or not the market merely tests the January lows or surpasses them is a good question. At this point I would hesitate to open new bullish positions and start looking for new bearish plays.

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: 121.54 change: -2.28 stop: see details

Trading in AAPL has been bearish all week long as traders continue to sell the rally attempts. The stock has a clear short-term trend of lower highs. AAPL is now close to testing support near $120 and its February low of $117.27. A breakdown under $117 would be very bearish!

AAPL play #1 - directional calls

Directional call plays are getting killed if you bought the initial bounce a week ago. Sadly AAPL has not produced the explosive rebound we were expecting. The current pull back to the $120 level does offer another entry point to buy AAPL near support but we'd really like to see some sign of a bounce first. Of course that is challenging in this market. Today is a great example of what that is challenging with AAPL opening higher and then sliding the rest of the session. We have been warning readers that we might get another dip to the $120 region. Our stop loss is under the early February low. More conservative traders may want to use a stop closer to $120. Our target is the $139.00-145.00 range.

AAPL play #2 - Credit put spread

The pull back toward $120 is great but we don't want to consider opening new positions until we see signs of a bounce. At this time wait for a new rally over $126.50 (Thursday's high). The alternative would be to open positions on a dip in the $120-118 zone but quickly close your play if AAPL breaks under $117. The options we suggested were buying the March $110 put and selling the March $120 put.

AAPL play #3 - Sell Naked Puts

It is the same story here. Before you consider selling naked puts we want to see a decent bounce first. We would wait for a rally over Thursday's high (126.50). The alternative is sell puts on the dip in the 120-118 zone but if it breaks under $117.00 we would close the play. 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: - 3.94
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 44.4 million


Atwood Oceanics - ATW - cls: 92.27 change: -3.09 stop: 87.45

Oil service stocks got hammered with profit taking today even through crude oil pretty much held its recent gains. Shares of ATW lost 3.2% and produced a very clear bearish engulfing candlestick pattern. Normally these patterns are one-day bearish reversals so bullish traders need to be defensive here. Readers might want to tighten their stops closer to the $90.00 level. Our target is the $99.00-100.00 zone. FYI: ATW has a moderate amount of short interest, about 7.4% of the 27.6 million-share float. That is about 4 days worth of short interest.

Picked on February 17 at $ 90.37
Change since picked: + 1.90
Earnings Date 05/08/08 (unconfirmed)
Average Daily Volume = 654 thousand


CF Industries - CF - close: 122.96 change: -4.04 stop: 109.49

Ouch! CF just took a chunk out of our unrealized gains with a 3.18% loss. Today's session also produced a bearish engulfing candlestick pattern (see the ATW update above). We would wait and watch for a dip and bounce near $120 or its rising 10-dma near $117 before considering new bullish call positions. Our target is the $138.00-140.00 zone. The Point & Figure chart is bullish with a $141 target. FYI: The most recent data puts short interest at 6.8% of the 53.4 million-share float.

Picked on February 19 at $121.03 *triggered/gap higher
Change since picked: + 1.93
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 2.8 million


Monsanto - MON - cls: 116.43 change: -2.62 stop: 107.85

It's the same story but different stock with MON. Up in the morning and down throughout the day, this stock hit some profit taking. Unfortunately, it also produced a bearish engulfing (reversal) candlestick pattern. We would wait for a decent bounce near $115 or a new high over $120.50 before considering new positions. 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.

Picked on February 12 at $118.09 *gap higher entry
Change since picked: - 1.66
Earnings Date 04/03/08 (unconfirmed)
Average Daily Volume = 7.1 million


Mosaic - MOS - close: 111.75 change: -2.29 stop: 99.45

Shares of MOS hit another new high, this time at $116.00, before sinking into a 2% loss on the day. If the market breaks lower then these high-flyers, like MOS, could really see some profit taking in hurry. Right now we would watch for a bounce near $105-106 or its 10-dma as a potential entry point for new bullish positions. MOS has already hit our first target near $110. Our second target is the $118.00-120.00 zone. These are very volatile stocks with a lot of intraday spikes. We would consider this a more aggressive, higher-risk play.

Picked on February 12 at $101.83 *gap higher entry
Change since picked: + 9.92
Earnings Date 04/09/08 (unconfirmed)
Average Daily Volume = 5.8 million


Nucor - NUE - close: 64.15 change: -1.84 stop: 59.95

Steel stocks were not immune to the profit taking today. NUE lost 2.7%. A bounce near $62.50 or is its 10-dma could be used as a new bullish entry point. Our target is the $68.00-70.00 zone since the $70.00 level is likely to be significant resistance. The P&F chart is bullish with a $76 target.

Picked on February 17 at $ 62.01
Change since picked: + 2.14
Earnings Date 04/17/08 (unconfirmed)
Average Daily Volume = 5.0 million


Petroleo Brasileiro - PBR - cls: 118.20 chg: -2.34 stop: 109.45

PBR hit another all-time high, this time at $121.89, and then gave it all back. Shares lost 1.9% and closed back under broken resistance/support near $120. Look for a dip back into the $116-115 zone. Currently, 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 $150 target (it was a $138 target last week). 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: + 2.20
Earnings Date 02/12/08 (unconfirmed)
Average Daily Volume = 7.6 million


Potash - POT - close: 156.87 change: +0.87 stop: 144.75

POT grew to a new high this morning at $159.40. The stock eventually pared its gains but still closed in the green. If the market continues lower then look for POT to retrace toward the $150 region. POT has already achieved our first target in the $158-160 zone. 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.

Picked on February 12 at $147.50 *triggered
Change since picked: + 9.37
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 5.9 million


Smith Intl - SII - close: 61.46 change: -2.23 stop: 58.45

Ouch! The profit taking in the oil service stocks was vicious today. SII lost 3.5% for no real reason other than traders trying to lock in a gain. Look for a dip or bounce near $60 and its 10-dma as a new bullish entry point to buy calls. Our first target is the $64.25-65.00 range. Our second target is the $68.00-70.00 zone. We would expect SII to pull back initially when it hits $65.00 since shares will encounter additional resistance with the 50 and 100-dma. If you're looking for a new entry point wait for a dip in the $61-60.00 zone. The P&F chart for SII is very bullish with a $77 target.

Picked on February 17 at $ 60.52
Change since picked: + 0.94
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 3.5 million


Yahoo! Inc. - YHOO - close: 28.42 change: -0.41 stop: n/a

YHOO continues to drift lower. We do not see any changes from our prior comments. This remains a very speculative (high-risk) play but there is still a strong camp that believes MSFT will up their bid. We would suggest the March $30 or March $32.50 calls.

Picked on February 17 at $ 29.66
Change since picked: - 1.24
Earnings Date 04/17/08 (unconfirmed)
Average Daily Volume = 54 million

Put Updates

Ambac Fincl. - ABK - cls: 9.23 change: -0.71 stop: n/a

ABK continues to slip. The stock lost 7.1% albeit on relatively low volume. Overall we do not see any changes from our previous comments. 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: - 2.31
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 10.9 million


W.W.Grainger - GWW - close: 74.70 chg: -0.22 stop: 78.26

We don't see any changes from our prior comments on GWW. The trend continues to look bearish. Our target is the $70.75-70.00 zone.

Picked on February 10 at $ 76.65
Change since picked: - 1.95
Earnings Date 04/16/08 (unconfirmed)
Average Daily Volume = 1.0 million


iShares DJ Financial - IYF - cls: 86.78 chg: -1.07 stop: 91.85

The IYF just produced its seventh failed rally under $89.00 in the last several days. We remain bearish here. More conservative traders will want to strongly consider adjusting their stop closer to $90.00. 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: - 1.84
Earnings Date 00/00/00
Average Daily Volume = 1.1 million


MBIA Inc. - MBI - close: 11.90 change: -0.28 stop: n/a

Initially resistant to the idea of breaking up their business models now MBI and ABK are strongly considering how they might do just that. One business would keep the profitable (and safer) municipal bond business. The other business would handle everything else, which is currently poisoning the financial water supply. Our outlook remains bearish. 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. (at this point you may want to consider the March $20 call instead)

Picked on January 27 at $ 14.20
Change since picked: - 2.30
Earnings Date 01/31/08 (confirmed)
Average Daily Volume = 15.2 million


Mohawk Ind. - MHK - cls: 73.10 chg: -1.37 stop: 78.05

Thursday proved to be something of a volatile session for MHK. The stock spiked higher to $76.60 this morning and quickly gave back all of its gains. We remain bearish and see this as another entry point for puts. There is potential support at $70.00 but we're aiming for the $66.50-65.00 zone near its January 2008 bottom.

Picked on February 14 at $ 73.70
Change since picked: - 0.60
Earnings Date 02/13/08 (confirmed)
Average Daily Volume = 907 thousand


Myriad Genetics - MYGN - cls: 36.83 chg: -0.95 stop: 40.51

MYGN came within 14 cents of our target today. Shares plunged to $36.14 before bouncing late this afternoon. The trend remains bearish. More conservative traders may want to tighten their stop closer to the 10-dma (near 38.30). Our MYGN 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: - 2.92
Earnings Date 02/05/08 (confirmed)
Average Daily Volume = 801 thousand


Sears Holding - SHLD - cls: 96.00 chg: -2.48 stop: 100.55 *new*

Once again shares of SHLD look weak and we're tempted to open put positions here. However, we've waited this long we'll stick to our plan. 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 (now confirmed) earnings report.

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


Simon Properties - SPG - cls: 83.73 chg: -1.24 stop: 90.15

SPG continues to churn sideways. We remain bearish. You could argue that today's session is another failed rally under $86.00 and thus a new entry point for puts. Our target is the $76.00-75.00 range.

Picked on February 07 at $ 84.39 *triggered
Change since picked: - 0.66
Earnings Date 02/01/08 (confirmed)
Average Daily Volume = 2.7 million


Legacy Vulcan - VMC - cls: 68.12 chg: -0.14 stop: 70.86

VMC's rally from yesterday stalled near $69.40. This might be a new entry point for puts. Our target is the $60.50-60.00 zone. The stop loss is a little bit wider than we would like but VMC can see some big $3-$4 swings intraday so readers should consider this an aggressive, higher-risk play.

Picked on February 17 at $ 66.64
Change since picked: + 1.48
Earnings Date 04/30/08 (unconfirmed)
Average Daily Volume = 2.1 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.)


CROCS Inc. - CROX - close: 26.12 chg: -1.32 stop: n/a

CROX continues to sink following its recent earnings report. The stock lost another 4.8% today and is nearing the January lows. We are not suggesting new strangles at this time. The options we had suggested were the March $40 calls (CQJ-CH) and the March $25 puts (CQJ-OE). Our estimated cost was $2.50 and we wanted to sell if either option hits $4.25 or higher.

Picked on February 17 at $ 33.43
Change since picked: - 7.31
Earnings Date 02/19/08 (confirmed)
Average Daily Volume = 5.2 million


Genentech - DNA - close: 71.75 change: -0.62 stop: n/a

If you missed your entry point today we'll get another chance tomorrow. The FDA decision on Avastin isn't due out until late Friday afternoon probably in the last hour or half hour of trading, potentially after the closing bell. We would not open positions after the decision is known. We are suggesting a strangle to capture any post decision move. The options we suggested were the March $75 calls (DWN-CO) and the March $70 puts (DWN-ON). However, now that DNA has moved closer to $70.00 you'll want to try and balance your investment on both sides of the strangle. Our estimated cost was $2.80. We want to sell if either option hits $5.00 or higher.

Picked on February 20 at $ 72.37
Change since picked: - 0.62
Earnings Date 04/10/08 (unconfirmed)
Average Daily Volume = 3.5 million

Dropped Calls


Dropped Puts

Bear Stearns - BSC - cls: 82.23 chg: -0.82 stop: 85.05

Murphy's law is alive and well. This morning's market strength was just enough to push BSC above resistance near $85.00 and hit our stop loss at $85.05. BSC and the rest of the broker-dealer sector promptly reversed lower and look poised to continue lower. We might reload this play and try again if BSC trades under $78.00. We had been aiming for the $71-70 zone.

Picked on February 11 at $ 79.49 *triggered /stopped 85.05
Change since picked: + 2.74
Earnings Date 03/13/08 (unconfirmed)
Average Daily Volume = 7.4 million


FedEx - FDX - close: 89.32 change: -0.62 stop: 90.55

Our put play in FDX is another casualty of the market's volatility today. Shares spiked to $90.68, which was just enough to hit our stop loss (90.55) and close the play. We would be tempted to try this play again if FDX trades under $88.00 or $87.00. We were aiming for the $81-80 zone.

Picked on February 10 at $ 88.00 /stopped 90.55
Change since picked: + 1.32
Earnings Date 03/20/08 (unconfirmed)
Average Daily Volume = 3.2 million

Dropped Strangles


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


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