Option Investor

Daily Newsletter, Thursday, 04/17/2008

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Table of Contents

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

Market Wrap

Market Wrap


March winds are supposed to be the strongest. This April day, however, winds swept across the market landscape, buffeting bulls and bears alike. Colliding weather bands of economic numbers, currency action, and earnings reports produced those winds. By the end of the day, daily candles had hunched down into cramped doji or inside-day type candles. The often-seen choppy consolidation days after big-range days were produced.


Annotated Daily Chart of the SPX:

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

Those who believe in inside-day trades believe them to be signals of a potential trend reversal. Basically, it indicates the same thing that a doji does--indecision. If markets have been trending, it can signal a waning of momentum in the direction of the trend. As we know from doji, not all potential reversal signals result in a reversal.

Sustained values above today's high would suggest that the Nasdaq was undoing that indecision, but I've been burned before by many an inside-day setup, so I don't believe in them too strongly. Be sure you stay on your toes if you're buying an upside breakout tomorrow in case it soon reverses.

Annotated Daily Chart of the SOX:

Annotated Daily Chart of the RUT:

If other charts showed potential reversal signals in those small-bodied candles, the TRAN's did more. The TRAN's daily candle sliced down through more than half yesterday's range before it bounced in the afternoon, barely missing a confirmation of a reversal signal by closing below the midpoint of yesterday's range. It left behind no small-bodied candle, however, but a large-bodied one. It looked smaller only in proportion to the previous day, but the range between the open and the close was almost 87 points and the TRAN had punched far lower than that during the day.

I like to watch the longer-term picture on the TRAN, however, as displayed on its weekly chart. I believe we ought to watch at least one longer-range chart each time we look at charts, and the TRAN is my choice.

Annotated Weekly Chart of the TRAN

I know some have been watching the daily chart's confirmed inverse or reverse head-and-shoulders formation, too, on the TRAN. I've noted it in many previous Wraps, too. We have competing or battling formations, a potentially bearish one on the longer-term chart, not yet invalidated, and an already confirmed bullish one on the daily chart. I do not like the expansion of volatility after the TRAN moved across the neckline of that inverse or reverse version on the daily chart, however. I was taught that it's troubling when you see an expansion of volatility immediately after some benchmark has been surpassed. Such an expansion of volatility can mean that the move across that benchmark is being question or greeted with emotion-based trading.

I don't have room to include all charts I'd like to include, but I wanted to point out in this section that the USDJPY's daily chart shows the currency pair having charged straight up again to the 23.6 percent retracement of its steep decline off last June's high into March's low. The climb has been choppy off that March low and more indicative, so far, of a bear flag climb than of a V-shaped recovery. I do note, however, that a possible cup-and-handle formation that can be discerned. These are bullish formations but I don't recall them typically being bottoming formations, so I'll remain aware of both possibilities.

These currency pairs do tend to conform a bit better to the Fib levels than some equity charts do, so if this is a bear flag climb, we would expect it to find resistance and roll down again from one of these levels. The April high was been 102.92. Sustained values above that April high might mean that the USDJPY will attempt to climb toward the next Fib level near 106.58. That would be beneficial for U.S. equities, but be wary of the possibility of a downturn from the currently being tested level instead. Equity bulls don't want to wake up tomorrow with the USDJPY diving.

Today's Developments

Today's release schedule featured a full slate but not as full as yesterday's. Weekly initial jobless claims led the day. This release is no longer the throw-away, little-attention-paid release that it once was.

Economists predicted that initial claims would rise to 375,000 from the previous week's 357,000. They rose to 372,000, mostly in line with expectations. The four-week moving average fell by 750, but remained well above the benchmark 350,000, at 376,000. As mentioned previously, when these numbers remain consistently above that benchmark, a slowdown in the labor market is signaled.

Continuing claims rose 26,000 to 2.98 million, their highest levels in almost four years. The four-week moving average rose 29,750 to 2.94 million. The uninsured unemployment rate has been gradually creeping up from the 1.9 percent that we were seeing a year ago, but remained steady this week at 2.2 percent.

The Conference Board released its March leading indicators at 10:00 am ET, but this release was upstaged by another at the same time. Despite the "leading" in its name, most economists feel that this number tends to be fairly predictable. Barring some surprise that would impact the GDP, little attention is usually paid to this release.

Leading indicators rose 0.1 percent, the Conference Board reported, less than the expected 0.2 percent rise. Although this was still the first rise after five months of declines in a row, the Conference Board did not paint a pretty picture. CB's labor economist said the environment had produced no job growth for three months. Overall profits had dropped, he said. The environment was tough and could get tougher, the labor economist avowed.

The April Philly Fed Manufacturing Survey was released at the same time. This district's manufacturing survey tends to be predictive of the Institute of Supply Management's (ISM) nationwide manufacturing survey, so it's always important to watch. The survey's diffusion index had been expected to improve to -15.0 from the previous -17.4. Instead, it dropped to -24.9, its lowest reading in more than 7 years. This was the fifth consecutive month of negative values for the main diffusion index.

Component indices revealed that new orders dropped to -18.8 from the previous -9.3, shipments fell to -8 from the previous -6.3, and the current employment index fell to -11.1 from -4.7. The average workweek fell, too.

That news was bad enough, but when coupled with inflation measures, it was worse. The prices paid index dropped to 51.6 from the previous 54.4, but the district reported that "55 percent of manufacturers reported higher input prices this month," and noted that manufacturers were also reporting higher prices for their own goods. The prices received index rose to 30.9, the highest reading in more than two years.

The Federal district asked "Special Questions" when surveying firms. Those questions included questions about changes in demand for their products since January and changes in their plans for capital spending since then. More firms reported a lowering of demand and decreases in capital spending and plans for capital spending than did increases in those areas.

The news was not good, but one spot of good news was found in the six-month outlook component. That rose to 13.7 from its previous -0.5. Those who would like to read the entire report can find it on the Philadelphia Federal Reserve's page at http://www.philadelphiafed.org/econ/bos/index.cfm

Around the time of those releases, the Federal Reserve provided its weekly figures for outstanding commercial paper. For the third week in a row, outstanding commercial paper fell. The decline was a seasonally adjusted $10.3 billion. If this is used as a measure of whether the credit crunch is easing, it's certainly not showing much improvement. Only one week out of the last six has shown an increase in outstanding commercial paper.

Expanding the credit discussion to a global arena, the Libor Interbank offering rate, the rate that large banks loan to each other, continues to be too high for comfort. An article today in THE LONDON TIMES mentioned that the British Bankers' Association (BBA) is reviewing its rate-setting policies under increasing speculation that the Libor rate may be losing its trustworthiness. Other sources are speculating that some banks may be hiding the true rates at which they're borrowing from each other out of fear that the Libor rate may spiral even higher. Moves are afoot in the U.K. that are meant to ease the mortgage crisis and the financial crisis caused by difficulty in placing any mortgage-backed paper. This problem has not been solved, and we're not the only ones dealing with it.

The EIA released natural gas inventories at 10:30. Inventories rose 27 billion cubic feet, in the range of the expected 25-32 bcf's that was expected. With crude options expiring today and crude hitting an early high of 115.54 per barrel, much focus was on crude. The high open interest strikes at 110 and 115 were expected to provide some support into the close. Crude finished the regular session at $114.78 a barrel.

The March Semi Book-to-Bill number will also be released today. However, its release will come at 6:00 pm ET, after this report has been submitted and too late for inclusion here.

Federal Reserve Vice Chairman Donald Kohn, Dallas Fed President Richard Fisher and Richmond Fed President Jeffrey Lacker all spoke today. Vice Chairman Kohn spoke of a U.S. financial system that was in need of urgent attention from regulators and the private sector, too. He mentioned the Fed's efforts to improve liquidity. He recommends that regulations be put in place to ensure that banks don't rely too heavily on the Fed to provide that liquidity. He believes small banks may be too heavily exposed to loans in commercial real estate.

Dallas Fed President Fisher is more hawkish than some, as we know, and he continued that tone today. He said that more rate cuts could promote inflation, compounding the problems in our economy.

Earnings reports captured attention, too, with markets reacting both to today's reports and yesterday's after-hours reports such as IBM's and EBAY's. Before the open this morning, Merrill Lynch (MER) reported a $1.96 billion or $2.19 per share loss. The loss from continuing operations was $2.20 per share. The company swung to that loss from a $2.16 gain in the year-ago period. Analysts had anticipated a loss, but only of $1.96-1.98 a share from continuing operations.

Revenue was $2.93 billion, which was also below the expectation of $3.35 billion according to one source. This revenue reflected $4.5 billion in a decline in hedge values, valuation adjustments on CDO's, collateralized debt obligations, and write downs. Merrill Lynch has already written down $24 billion in previous quarters. Even without those declines, revenue would have dropped 26 percent.

The value of hedges went down because they're provided by bond insurers, and those insurers have seen their credit ratings under review by the ratings agencies. We all know the story behind the CDO's by now. Companies holding those CDO's have been forced to write down their valuations from their previous higher book values to more realistic marked-to-market values. The company wrote down $2.3 billion due to its exposure to residential mortgages and leveraged finance deals, but those were offset by a $2.1 billion benefit.

Along with its earnings report, the company announced that by the end of the year, it will trim its workforce by 4,000 employees. If financial advisers and investment associates are excluded, that amounts to about 10 percent of the company's workforce. The company expects to save about $800 million on an annualized basis, with $600 million expected to be saved this year. It will likely take a $350 million restructuring charge in the second quarter as a result.

The good news is that the report wasn't worse, although some headlines, such as that on Reuters, termed the loss a big one. Many had feared a bigger miss. Also, chairman and chief executive officer John A. Thain took the opportunity to assure markets that MER's capitalization included an $82 billion excess liquidity pool. Calling the company "well capitalized," Thain said he didn't anticipate a need to raise more capital in the near future.

The company also produced record revenue in the rates and currencies division and global wealth management. Losses were offset to some degree by that $2.1 billion benefit mentioned earlier. That apparently resulted from widening credit spreads that changed values on long-term liabilities. The company's stock was to end the day at $46.71, up $1.82 from the previous day's close on volume well above the 30-day average volume.


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Although MER produced a bigger-than-expected loss, futures reacted with relief this morning, climbing a bit off their pre-release levels. However, market participants were also reacting to disappointments from Nokia (NOK) and Pfizer (PFE). NOK's profit rose 25 percent but the company said mobile device sales would drop in value below previous forecasts this year. PFE's problem was the opposite: the company's profit dropped 19 percent but it held steady its previous profit guidance for the year.

Analysts had expected NOK's first quarter report to include earnings of 1.38 billion euros or 0.38 a share. Instead the company reported earnings of 1.22 billion euros. Excluding one-time costs, the EPS was the expected 0.38 a share. The company blamed its lowered guidance on weakness in the dollar against the euro, economic weakness in the U.S. and possible future weakening in Europe. Economic weakness was hitting value rather than volume on sales of mobile phone devices, a spokesperson said. Other commentators outside the company also point to increased competition and a move toward lower-margin products as impacting the company.

Market share slipped to 39 percent from the previous 40 percent, but still stayed well above the year-ago level of 36 percent. Those gains from the previous year were not seen in North America, however, where NOK continues to lose market share. With some industry analysts questioning NOK's line of new products--or, rather, the dearth of new products--coming on line in the next quarter, some believe the company will have a tough time improving its market share in the U.S. in the near future. A company spokesperson was quoted in a Marketwatch.com article as calling the iPhone a "niche product," an attitude some analysts think will hurt the company.

PFE was hit by increased competition from generic drugs for some of its best selling products. Over recent years, PFE has lost patent protection for many of its best-selling drugs and has recently lost that protection for another: Zyrtec.

Net income was $2.8 billion or $0.41 per share. Excluding items, the company would have reported earnings of $0.61 a share. Analysts had expected $0.66 a share with adjusted earnings of $0.67 a share. Revenue of $11.85 billion also disappointed. Analysts had expected $12.04 billion. The chief executive claimed that it wasn't right to compare this quarter's results with year-ago results because of the timing of its loss of patent protection on Norvasc and Zyrtec. The same timing issues won't impact the company's earnings reports next year. The company does expect revenue to remain flat until newer product sales begin to make up for the losses on those other drugs, which should occur in 2009.

Google (GOOG) reported after hours. Excluding special items, the company reported earnings of $4.84 net revenue of $3.7 billion. Analysts expected the earnings excluding special items to be $4.55 a share on net revenue of $3.61 billion. That didn't tell the entire story, however, as analysts were quick to delve into information on the revenue from paid clicks. They've been concerned that the slowdown in the U.S. would result in fewer paid clicks and lower revenue from the core search advertising business.

GOOG said that overall paid clicks climbed 20 percent from the year-ago level. Although lower than the previous quarter's 30 percent growth, a company spokesperson said it was due in part to changes that the company has made in the graphics of site, shrinking the formats of search ads while also shrinking the number of accidental clicks. The company has introduced other changes meant to increase revenue from advertisers, including hiking costs of keywords. As this report was prepared, shares had soared above 526 in after hours trading. As we always caution on these pages, however, after hours trading patterns do not always carry over into the next day.

AMD also reported. The company's net loss of $358 million or $0.59 a share with revenue of $1.5 billion compared to expectations of a loss of $0.48 a share on revenue of $1.52 billion. A year ago, the company lost $1.11 a share, and after-hours traders must have been celebrating that, rather than the apparent miss, when they were sending the stock higher in after hours. As this report is prepared, AMD was trading at $6.35.

E-Trade Financial Corp (ETFC) also reported after hours. The company's exposure to mortgage securities continues to impact it, with the company reporting a net loss of $91.2 million or $0.20 a share. Analysts had predicted the company would lose $0.10 a share. As this report was prepared, the stock had jumped up to $3.78, however, so someone found something to like in it, at least for the afternoon.

Tomorrow's Economic and Earnings Releases

Tomorrow's releases include only the March Regional-State Unemployment number and the ECRI Weekly Leading Index. Important earnings tomorrow include those from C, CAT, HON, and SLB.

What about Tomorrow?

Annotated 15-Minute Chart of the SPX:

As long as the SPX is maintaining 15-minute closes above the thin red 9-ema, the strongest upward momentum is preserved. Bears want to see sustained 15-minute closes below that 9-ema and then a tumble through the other levels listed here. The daily chart setups suggest that more consolidation is a possibility tomorrow along with a potential reversal. The short-term charts suggest that, barring a strong down move, the earliest reaction might be some chopping around until clearer chart setups are found.

Annotated 15-Minute Chart of the Dow:

Annotated 15-Minute Chart of the Nasdaq:

Annotated 15-Minute Chart of the Russell 2000:

Going into today, my best guess was that we'd see a doji-type day on most indices, so I'm not alarmed by that fact itself on behalf of the bulls. However, since I often use the TRAN as a sort of leading indicator for the SPX, OEX and Dow, I closely watched its steep decline today. That's more than a little worrisome for equity bulls. I wasn't impressed by volume patterns today. The advance/decline line, as reported by my provider, reached a high of +236.00 today, hardly any kind of endorsement of strength. Yet the VIX and VXN declined, although that could perhaps be written off to some degree to option expiration effects.

Most daily candles on most indices would suggest the same thing: consolidation or an actual pullback next, but some chart signs on the RUT and Nasdaq, even before GOOG's after hours gains, made me question whether it wasn't consolidation or gains for those indices.

Unfortunately, this uncertainty is typical of consolidation periods. The chart characteristics are mixed up because bulls and bears are, and bulls are buying what bears are dumping, and neither has gained strength over the other. Those doji and inside-day candles on daily charts are the visual representations of uncertainty. We have to wait until it gets sorted out. I'm just not sure that will happen tomorrow.

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

Ashland Inc. - ASH - close: 52.87 change: -0.01 stop: 49.85

It was a quiet day for the market in spite of all the earnings news and shares of ASH illustrated the day closing almost unchanged. Looking intraday traders bought the dip near $52, which is bullish but the stock is testing resistance at the 200-dma. Our target is the $57.00-58.00 range. We do not want to hold over the late April earnings report.

Picked on April 06 at $ 51.25
Change since picked: + 1.62
Earnings Date 04/23/08 (unconfirmed)
Average Daily Volume = 774 thousand


Baker Hughes - BHI - close: 77.38 chg: +0.49 stop: 71.45

BHI continues to march higher. The stock out performed the S&P 500 today with a 0.6% gain. Shares are getting close to our target in the $78.50-80.00 range. We do not want to hold over the April 22nd earnings report.

Picked on April 10 at $ 72.76
Change since picked: + 4.62
Earnings Date 04/22/08 (confirmed)
Average Daily Volume = 4.7 million


CH Robinson Worldwide- CHRW - cls: 58.56 chg: -1.27 stop: 56.89

Transports hit some profit taking after yesterday's big rally. CHRW gave back most of its gains but traders did buy the dip near $58.00 just as the transportation average started bouncing late this afternoon. We would use this pull back as a new entry point to buy calls. Our target is the $62.00-62.50 zone. We do not want to hold over the April 22nd earnings so this is a short-term play.

Picked on April 15 at $ 58.25
Change since picked: + 0.31
Earnings Date 04/22/08 (confirmed)
Average Daily Volume = 1.9 million


CONSOL Energy - CNX - cls: 83.06 chg: -1.22 stop: 76.85

Coal producer CNX also hit some profit taking after yesterday's big move. If we see a dip to $80.00 or its 10-dma readers can use it as a new entry point to buy calls. Our target is the $88.00-90.00 zone. Remember, we do not want to hold over the late April earnings report, which does not give us much time left.

Picked on April 15 at $ 80.55
Change since picked: + 2.51
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 3.7 million


DryShips Inc. - DRYS - close: 73.69 chg: -0.95 stop: 67.45

It's the same story here. After Wednesday's big rally shares of DRYS pulled back some today. The stock did tag overhead resistance at its 200-dma near $75.75 today. If we see a dip toward $70.00 readers can use it (or a bounce from $70) as a new entry point for calls. Our target is the $79.00-80.00 zone.

Picked on April 15 at $ 70.32
Change since picked: + 3.37
Earnings Date 05/29/08 (unconfirmed)
Average Daily Volume = 4.2 million


Fluor - FLR - close: 156.40 chg: -2.60 stop: 146.49

After a $9 gain yesterday FLR dips just 1.6% and traders were buying the dip near $154 this afternoon. We're not suggesting new positions at this time. More conservative traders may want to use a higher stop. The stock has already hit our target at the $159.00 level. Our second target is the $168.00-170.00 zone. We do not want to hold over earnings in early May. FYI: The P&F chart is bullish with a $184 target.

Picked on April 01 at $146.50 *triggered /1st target hit $159
Change since picked: + 9.90
Earnings Date 05/07/08 (unconfirmed)
Average Daily Volume = 2.3 million


CurrencyShares Euro - FXE - cls: 159.11 chg: -0.75 stop: 156.45

The U.S. dollar bounced after yesterday's losses and the Euro slipped in reaction. The FXE dropped just 0.3% and on low volume. The trend is still bullish. We would consider new positions here. Our target is the $164.00-165.00 range. Our time frame is three to five weeks.

Picked on April 13 at $158.57
Change since picked: + 0.54
Earnings Date 00/00/00
Average Daily Volume = 307 thousand


Essex Prop. - ESS - close: 118.42 chg: +1.07 stop: 109.45

ESS continues to rally and the lack of profit taking after Wednesday's big move is definitely bullish. Shares could hit our target in the $119.50-120.00 zone tomorrow. More aggressive traders could aim much higher, maybe $125 or $130. The P&F chart points to $154. We do not want to hold over the April 30th earnings report.

Editor's note: We received an email today regarding the option spreads on ESS. When we listed this play the May $120 call had an ask of $2.50. Today the ask is $5.10. That's a potential 100% gain. However, the bid on this option (May $120 call ESS-ED) is only at $2.85 (which would only be a 14% gain). That is a HUGE spread. What should a trader do? Unfortunately, there isn't a lot that we can do. We are at the mercy of the market makers who are trying to protect themselves from losing money. The volatility in the market this year has been huge and probably very painful for some of the market makers. Part of the challenge that exacerbates this problem of huge spreads is that we're playing options that don't have a lot of volume or open interest. On a thinly traded equity like this the market makers might feel that can game the system a little bit more and widen the spreads. Something that we as traders can do is put a limit order in to sell. Normally we prefer to use market orders since orders of 10 or less options are routed electronically. However, in a situation like this you could try putting in a limit order to sell at $5.00 (or whatever you want to try for). I have heard some traders report success when they place their limit order inside the spread. If your limit order is sitting there on a thinly traded option you could get taken out when the next trader places a market order. Fortunately, it looks like the market will have an upward bias on Friday, which should make selling easier for us.

Picked on April 15 at $112.07
Change since picked: + 6.35
Earnings Date 04/30/08 (confirmed)
Average Daily Volume = 411 thousand


Hovnanian - HOV - close: 11.85 chg: -0.01 stop: 10.45

After Wednesday's big gain in HOV it was bullish to see shares only lose a penny today. The stock maintained a positive trend of higher lows on an intraday basis. We don't see any changes from our previous comments. Our target is the $13.50-14.00 zone. Our second, more aggressive target is the $14.75-15.00 zone.

Picked on April 16 at $ 11.86
Change since picked: - 0.01
Earnings Date 05/29/08 (unconfirmed)
Average Daily Volume = 4.1 million


Joy Global - JOYG - close: 73.00 chg: -0.65 stop: 68.45

We remain bullish on JOYG. Yesterday the stock broke out over resistance to new all-time highs. Today traders bought the dip near $71.65. We see this as a new entry point to buy calls. Our target is the $79.50-80.00 range. The P&F chart is already bullish with an $88 target.

Picked on April 16 at $ 72.55 *triggered
Change since picked: + 0.45
Earnings Date 05/29/08 (unconfirmed)
Average Daily Volume = 2.3 million


Lincoln Elec. - LECO - cls: 71.93 chg: -0.47 stop: 68.74

It was a quiet day for LECO. However, we do want to note that there was a virtual floor under the stock at $71.50 almost all day long. Someone was sitting there buying every dip for the better part of Thursday's session. Our first target is the $74.85-75.00 range. Our second target is the $78.00-80.00 zone. The Point & Figure chart is bullish with a $91 target. We do not want to hold over the late April earnings report.

Picked on April 07 at $ 73.73 *triggered/gap higher
Change since picked: - 1.80
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 233 thousand


Ultra Petrol. - UPL - close: 83.98 chg: -1.46 stop: 79.45

UPL hit a little bit of profit taking with a 1.7% decline. Dips to the 10-dma near $82.00 can probably be used as new entry points for calls. Our target is the $89.50-90.00 zone. The P&F chart has broken through resistance and points to a $95 target.

Picked on April 10 at $ 81.50
Change since picked: + 2.48
Earnings Date 05/01/08 (unconfirmed)
Average Daily Volume = 1.4 million


United States Oil - USO - close: 92.37 chg: +0.22 stop: 86.49

Target achieved. The USO traded to an intraday high of $92.61 before paring its gains. Our initial target was the $92.50 mark. The USO is looking overbought and due for a correction after a non-stop rally from the $80 level. We are not suggesting new bullish positions. We strongly suggest that readers take money off the table here and only keep a small position open to ride oil's momentum. Our second, more aggressive target is the $97.50-100.00 range.

Picked on April 07 at $ 86.49 *gap higher /1st target hit
Change since picked: + 5.88
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 5.4 million


ExxonMobil - XOM - cls: 93.38 chg: +0.49 stop: 89.45 *new*

XOM rallied again posting its fourth gain in a row. If you are looking for a new entry point we would wait for a dip near $90.00. Our target is the $94.85-95.00 range. We do not want to hold over the May 1st earnings report. Please note that we're raising the stop loss to $89.45.

Picked on April 15 at $ 90.80
Change since picked: + 2.58
Earnings Date 05/01/08 (confirmed)
Average Daily Volume = 26.2 million

Put Updates

Ambac Fincl. - ABK - cls: 5.76 change: +0.46 stop: n/a

This week's stock market reaction to earnings out of the financial sector is not playing out as we expected. In spite of losses and more analyst calls for greater write downs, investors are buying these stocks. ABK bounced with an 8.6% gain today. Today's reaction in ABK was probably influenced by earnings from bond insurer MTG. This morning MTG announced an earnings loss of 41 cents a share but Wall Street was expecting a loss of $1.69 per share. This earnings "beat" sent shares of MTG up almost 19%. We are still planning to hold over ABK's earnings report on April 23rd but to be honest we would seriously consider a stop loss around $6.50 (or even $6.00 if you're really concerned). We are not suggesting new bearish positions in ABK. This remains a very speculative play. Previously we had been suggesting the May out-of-the money puts ($5.00 and $2.50 strikes).

Picked on January 27 at $ 11.54
Change since picked: - 5.78
Earnings Date 04/23/08 (confirmed)
Average Daily Volume = 10.9 million


Capital One - COF - close: 48.74 chg: +2.49 stop: 51.05 *new*

Strength in the financial stocks today launched a 5.3% gain in COF ahead of earnings. We had elected to hold over the announcement this time. Consensus estimates were for a profit of $1.45 a share. COF reported after the closing bell and actually beat estimates by 2 cents. There seems to be mixed reaction to the company's comments about their business environment, one-time charges, and write downs. The stock was trading around $48.35 in after hours trading. We are going to inch down our stop loss to $51.05. More conservative traders might want to move their stop closer to $50.00. Our target is the $41.50-40.00 zone. The Point & Figure chart is bearish with a $38 target.

Picked on April 13 at $ 48.30
Change since picked: + 0.44
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 9.0 million


Fannie Mae - FNM - close: 28.25 chg: +0.47 stop: 30.26

FNM continued to bounce thanks to strength in the financials. The stock managed to close over its 50-dma today. Wait for the rebound to fail before considering new put positions. FNM has already exceeded our target at the $25.25 mark. Our second target is the $21.00-20.00 zone.

Picked on April 08 at $ 29.00 /1st target exceeded 25.25
Change since picked: - 0.75
Earnings Date 05/27/08 (unconfirmed)
Average Daily Volume = 26.5 million


Humana Inc - HUM - cls: 42.27 chg: +0.01 stop: 45.20

HUM continues to under perform. The stock has found some short-term support near $42.00 but the trend of lower highs is suggesting another breakdown lower. We are adjusting our stop loss to $45.20. Our target is the $40.50-40.00 zone. More aggressive traders may want to aim lower. Currently the P&F chart is so bearish it points to a target of zero ($0.00).

Picked on March 30 at $ 45.20
Change since picked: - 2.93
Earnings Date 04/28/08 (confirmed)
Average Daily Volume = 4.4 million


iShares Financial - IYF - close: 85.01 chg: +1.13 stop: 85.55

We are on the verge of being stopped out in the IYF. Financial stocks rebounded as investors ignore earnings losses in the group on hopes the worst is behind us. The intraday high was $85.48 and our stop loss is at $85.55. We're not suggesting new positions at this time and more conservative traders may want to cut their losses and exit. Our target is the $76.00-75.00. We're adding a second target in the $71.50-70.00 zone.

Picked on April 13 at $ 82.51
Change since picked: + 2.50
Earnings Date 00/00/00
Average Daily Volume = 3.6 million


iShares Fincl.Servcs. - IYG - cls: 89.90 chg: +1.49 stop: 92.26

The IYG also rebounded with the financials but shares are still trading under potential resistance at $90.00 and its 50-dma. Wait for signs of a failed rally before considering new puts. More conservative traders may want to tighten their stops toward $90.00. We have two targets. Our first target is the $82.00-80.00 zone. Our second, more aggressive target is the $76.00-75.00 zone.

Picked on April 13 at $ 87.26
Change since picked: + 2.64
Earnings Date 00/00/00
Average Daily Volume = 344 thousand


Juniper Networks - JNPR - cls: 23.36 chg: -0.25 stop: 24.55

Today's relative weakness in JNPR is a good sign but we are more concerned about strength in the tech sector in general. GOOG's earnings after hours tonight are likely to fuel another rally in the NASDAQ. If you study the intraday chart for JNPR it looks like shares were bouncing from the $23.00 level and that JNPR may have set a short-term bottom. We are not suggesting new put plays at this time. We would seriously consider lowering the stop loss toward the $24.00 mark. We do not want to hold over the late April earnings report. Our target is the $20.15-20.00 zone.

Picked on April 09 at $ 22.95 triggered
Change since picked: + 0.41
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 11.5 million


MBIA Inc. - MBI - close: 12.71 change: +1.06 stop: n/a

Ouch! MBI bounced with the financials today and added 9% to its share price. The reaction to financial earnings this week has not played out as expected. This morning bond insurer MTG reported earnings that were a loss but they were not as bad as Wall Street expected. Shares of MTG soared 19%, which probably influenced some short covering in MBI. Per our previous comments, we will probably drop MBI this weekend if we don't see some sort of significant reversal tomorrow. The general trend in MBI is still one of a narrowing, neutral pennant pattern of higher lows and lower highs but we don't want to stick around as May option premiums will begin to evaporate in earnest starting next week. We are not suggesting new bearish positions at this time. We had been suggesting the out-of-the-money May puts (7.50, 5.00 and 2.50 strikes).

Picked on January 27 at $ 14.20
Change since picked: - 1.49
Earnings Date 05/13/08 (confirmed)
Average Daily Volume = 15.2 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.)


Google Inc. - GOOG - cls: 449.54 chg: -5.49 stop: n/a

Perfection. GOOG's dip to $450 provided a perfect entry point for us to open strangle positions ahead of earnings. CNBC was billing tonight's earnings report as the most significant quarterly report since the company's IPO. While we know they are inclined to sensationalism it did give some idea to the pent up expectations for GOOG's report. If you haven't heard yet GOOG announced earnings after the closing bell today and blew away the estimates. Wall Street was looking for $4.52 a share. GOOG delivered $4.84 a share. This better than expected earnings news has launched GOOG back into the stratosphere. The stock is up about $80 in after hours. The after hours high thus far is $533.50 and at the time of this update GOOG is near $526.00. We are suggesting that readers exit at the open tomorrow. More aggressive traders, who can watch the stock all day, might want to try and time an exit and see how far GOOG might run. We had suggested the May $500 call (GOP-EO) and the May $400 put (GOP-QT) with an estimated cost of $14.10. Our suggested exit was to sell if either option hit $25.00. However, now that it looks like GOOG will gap open at $525.00 we are changing our exit price. Instead of selling at $25.00 we want to sell if either option hits $34.50 or more. We wouldn't be surprised to see the May $500 call trade higher but we can't estimate what the intraday high might be. The call option is going to gap open tomorrow the question is how high.

Picked on April 16 at $455.03
Change since picked: - 5.49
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 2.9 million


Goldman Sachs - GS - cls: 172.10 chg: +3.05 stop: n/a

GS also enjoyed a decent bounce thanks to strength in the financials and a positive reaction to the Merrill Lynch earnings news. We are not suggesting new strangles at this time. The options we suggested for this strangle were the May $190 calls (GPY-ER) and the May $160 puts (GPY-QL). Our estimated cost was $8.70. We want to sell if either option trades at $14.50 or higher. FYI: The May $160 puts hit a high of $7.70 today.

Picked on April 06 at $175.40
Change since picked: - 3.30
Earnings Date 06/12/08 (unconfirmed)
Average Daily Volume = 14.5 million


Merrill Lynch - MER - cls: 46.71 chg: +1.82 stop: n/a

MER reported earnings this morning. Wall Street expected a loss of $1.99 a share. MER delivered a loss of $2.19. Investors saw this as a relief that the numbers were not worse and the stock bounced 4%. We were expecting a bigger post-earnings reaction. More conservative traders will want to seriously consider just cutting your losses right now and bailing out. We're going to stick with MER for another day, maybe two, just to see if it can develop a trend. We're not suggesting new positions. The lack of a bigger move in MER has pretty much doomed the April options. We have a very aggressive, high-risk April strangle and a May strangle. The options we suggested in the April strangle were April 47.50 calls (MER-DW) and the April 37.50 puts (MER-PB). Our estimated cost was $0.90. We want to sell if either option hits $1.80 or more. However, we have to exit before Friday's close because of April option expiration. The options we listed in the May strangle were the May $50 calls (MER-EJ) and the May $32.50 puts (MER-QA). Our estimated cost was $1.76 and we want to sell if either option hits $3.00 or more.

Picked on April 15 at $ 43.34
Change since picked: + 3.37
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 30.6 million

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


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