Option Investor

Daily Newsletter, Monday, 05/12/2008

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Table of Contents

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

Market Wrap

Oil Prices Ease; Record Receipts Has Budget Deficit Shrinking

Stocks rebounded strongly to start the week and built gains toward the close as a combination of easing oil prices and record tax receipts for the month of April bolstered investor sentiment.

The major averages opened modestly higher, then sunk into negative territory just after the 10:00 AM mark when June Crude Oil futures (cl08m) lurched to another record high of $126.40.

CNBC reported later in the afternoon that there were reports out of China that its oil imports declined 4.00% for the month. While I could find no news to confirm those reports, June Crude Oil did settle down $1.73, or -1.37% at $124.23. It was the first decline for June crude since May 2nd.

Other energy complexes tracked lower with June Heating Oil (ho08m) retreating $0.0762, or -2.10% to settle at $3.5598 after last week's 12.96% surge, spurred largely by Wednesday's EIA weekly inventory report.

June Unleaded (rb08m) settled down $0.037, or -1.16% at $3.1642.

Just after todays close, the EIA reported that the national average for gasoline prices rose nearly 11-cents per gallon last week to a record $3.722/gallon.

Natural gas prices also retreated with June Nat. Gas futures (ng08m) settling back $0.2360, or -2.05% at $11.301.

Today's "top story" in my opinion looks to have caught several traders off guard. Including me!

I had tried to get an early start on tonight's Market Wrap, but just as I try to plan anything, today's 02:00 PM EDT release of the Congressional Budget status for April sent stocks notably higher to the close, and had the dollar reversing some of its earlier-session losses.

Monthly Tax Receipts, Outlays & Deficit/Surplus

Perhaps one of the more shocking economic reports we've received so far this year had the Treasury reporting record revenue receipts of $403.75 billion for April'08, which for the first seven months of this budget year (begins October), revenues have totaled $1.55 trillion, up 3% from the same period a year ago.

While the April 15 tax deadline usually finds a notable increase in revenues, the year-over-year comparisons raised some eye browse from economists that had forecasted a severe recession for the U.S.

While revenues from tax receipts showed a gain, outlays were also high on a year-over-year basis.

Through the first seven months of this budget year, the federal deficit totals $152.2 billion, nearly double the $80.8 billion deficit during the same period in 2007.

With the dollar having shown some sign of stability in the recent month, traders, investors and economists continue to monitor the U.S. deficit closely as economic growth/slowing will significantly impact tax revenues.

While the deficit in 2007 dropped to a five-year low of $162.8 billion (see table above), many economists expected the deficit to rise significantly this year because of economic weakening and extra spending in such areas as the recently announced $168 billion economic stimulus package and the funding of the war in Iraq.

U.S. Market Watch - (05:00 PM EDT)

Financials were atop today's list of sector winners, recouping some of last week's gains. Several of the mortgage insurers reported earnings today, and while weak, may not have been "as weak" as some feared.

MBIA Inc. (NYSE:MBI) $9.85 +4.45% held gains to the after posting a $2.41 billion first quarter loss.

Shares of Research-in-Motion (NASDAQ:RIMM) $141.97 +6.92% closed at a record high as the handheld electronic maker introduces its first major new BlackBerry model in more than a year.

But today's most noteworthy gainer came late in the session when shares of Electronic Data Systems (NYSE:EDS) $24.00 +27.25 jumped more than $5.00 before being halted for trade.


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Just when I noticed that shares of Hewlett Packard (NYSE:HPQ) $46.83 -4.68% had reversed earlier session gains, it too was halted for trade.

Not long after both stocks were halted, Hewlett Packard said it is in talks with EDS about a possible acquisition.

Option-Expiration Gyrations

As we head into this week's option expiration for May, the major averages look choppy, but today's volatility action (see VIX.X, and VXN.X) lower and price action looks like buyers could be pressed into Friday's expiration.

SPY and DIA Montage - Daily Intervals

Last week's action may have brought some jitters to bulls as the major averages "gravitated" back lower to this month "Max Pain" theory values for the various tracker like the SPY and DIA.

"Max Pain" Theory values are simply a culmination of all put and call open interest for an index, or a stock that has option traded on them and price action into an expiration can be choppy and volatile.

The ability for both the SPY and DIA to hold steady at their respective "Max Pain" Theory values suggests that institutional traders aren't necessarily to relinquish their hold on these two indices.

The S&P Depository Receipts (SPY) remain the only major equity average to still trade below its downward trend.

IWM and QQQQ Montage - Daily Intervals

Just as the SPY and DIA hold above their May "Max Pain" Theory values, so does the small caps of the IWM and the large caps at the NASDAQ with the QQQQ.

Apple Computer (AAPL) $188.16 +2.56%, the most HEAVILY weighted stock in the QQQQ remains a big driver. Today, AAPL said its online inventory of the iPod is now "sold out" in both the U.S. and the U.K., which continues to draw speculation that the company is set to announce it next generation of the popular device.


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

AGCO Corp. - AG - close: 58.36 change: -0.79 stop: 57.75

Shares of AG are still consolidating sideways under the $60.00 mark. More aggressive traders might want to consider buying a bounce from its 200-dma near $57.35 (obviously adjust your stop). We are waiting for a breakout higher. Our suggested entry point to buy calls is at $60.40. If triggered at $60.40 our short-term target is the $64.90-65.00 range. FYI: The P&F chart is bullish with a $71 target.

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/28/08 (confirmed)
Average Daily Volume = 1.8 million


Aracruz Celulose - ARA - cls: 86.62 chg: +5.11 stop: 79.45

ARA soared more than 6.2% to new highs on Monday. Investors jumped on board following news that the Brazilian government was launching a $13 billion stimulus plan. ARA has exceeded our target in the $84.50 zone and is nearing our second target at $88.50-90.00. The intraday high today was $87.16. Volume came in above average on the rally, which is bullish. We would seriously consider an early exit just to lock in gains on this big pop.

Picked on April 28 at $ 80.25 *1st target hit $84.50
Change since picked: + 6.37
Earnings Date 04/07/08 (confirmed)
Average Daily Volume = 481 thousand


CNOOC - CEO - close: 180.36 change: -0.62 stop: 174.75

A much needed pull back in crude oil weighed on the energy stocks. Shares of CEO essentially traded sideways but investors bought the dip near $177. We remain bullish and would still consider new positions now but the stock has developed short-term resistance near $181.50. Readers may want to wait for a rally past $181.75 or $182.00 before initiating new positions. Our target is the $199.00-200.00 range. FYI: We have to label this a more aggressive play because the option spreads are so wide!

Picked on May 06 at $183.47
Change since picked: - 3.11
Earnings Date 04/28/08 (confirmed)
Average Daily Volume = 548 thousand


CF Ind. - CF - close: 139.45 chg: +2.62 stop: 129.90

It was a quiet rally for the fertilizer stocks today. The group didn't see much attention but stocks continued to march higher. CF rose 1.9% and is poised to breakout over $140.00. More conservative traders might want to raise their stop toward $132 since last week's low was $132.35. Our target is the $155.00-160.00 range. FYI: CF announced that its annual shareholder meeting will be held on Tuesday, May 13th.

Picked on May 05 at $137.50 *triggered
Change since picked: + 1.95
Earnings Date 04/27/08 (unconfirmed)
Average Daily Volume = 3.1 million


Carbo Ceramics - CRR - close: 48.00 change: +0.55 stop: 44.89

There is no change from our weekend comments on CRR. The stock continues to bounce and posted another gain. Traders bought the dip this morning near its 10-dma, which is bullish. There is some resistance near $50.00 but we're aiming for the $52.00-52.50 zone.

Picked on May 11 at $ 47.45
Change since picked: + 0.55
Earnings Date 04/24/08 (confirmed)
Average Daily Volume = 303 thousand


Cytec Ind. - CYT - close: 61.66 change: +1.22 stop: 58.45

CYT turned in a strong session. The stock rallied 2% and broke through resistance at its 200-dma. This looks like another entry point to buy calls. More conservative traders could inch up their stops even further. We're listing two targets. Our first target is the $64.75-65.00 range. Our second target is the $68.00-70.00 zone. We have to label this a more aggressive play because the spreads on the options are pretty wide. There isn't much we as traders can do about that except try to minimize its impact with good entry and exit strategy.

Picked on April 27 at $ 60.64
Change since picked: + 1.02
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 556 thousand


Deere & Co. - DE - close: 89.37 change: +3.06 stop: 86.45 *new*

Almost! DE traded to an intraday high of $89.89 and closed with a 3.5% gain. Our short-term target is $89.95. Tomorrow is our last day. We plan to exit at Tuesday's closing bell to avoid earnings on Wednesday. It's up to you if you want to exit tomorrow morning in an effort to avoid any pull back from today's rally or hold on and exit at the close. We are raising our stop loss to $86.45.

Picked on May 06 at $ 86.08
Change since picked: + 3.29
Earnings Date 05/14/08 (confirmed)
Average Daily Volume = 5.3 million


Express Scipts - ESRX - close: 71.46 chg: +0.67 stop: 68.19

Today's performance in ESRX looks like another bullish entry point to buy calls. Overall we don't see any changes from our prior comments. We do expect some resistance at $74.25 but our target is the $77.00-80.00 range. More conservative traders will want to consider taking some profits off the table near $75.00. The Point & Figure chart is bullish with a $81 target.

Picked on May 08 at $ 70.96
Change since picked: + 0.50
Earnings Date 04/29/08 (confirmed)
Average Daily Volume = 2.8 million


Fortune Brands - FO - close: 69.84 change: +1.30 stop: 67.95

FO is still consolidating sideways but today's performance was bullish. The stock added 1.8% and is once again set to breakout over $70.00. We are tempted to buy calls again right here but we'll stick to our previous comments and suggest readers wait for a rise past $70.00 or $70.15. Our target is the $74.00-75.00 range. The 200-dma is technical resistance near $75.00. The P&F chart is bullish with a $95 target.

Picked on May 07 at $ 70.05 *triggered
Change since picked: - 0.21
Earnings Date 04/24/08 (confirmed)
Average Daily Volume = 971 thousand


Foster Wheeler - FWLT - close: 68.90 change: -0.07 stop: 65.99

FWLT under performed the market on Monday. It looks like the stock was asleep all day. Shares just meandered sideways in a tight range. We are suggesting a trigger to buy calls at $70.51, which is above last week's high. If triggered we have two targets. Our short-term target is $74.90-75.00. Our secondary target is the $79.50-80.00 range. We're starting the play with a relatively wide (aggressive) stop loss. You may want to use a tighter stop! The P&F chart is bullish with an $84 target.

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/07/08 (confirmed)
Average Daily Volume = 3.4 million


Gilead Sciences - GILD - close: 54.48 chg: +0.84 stop: 49.99

GILD out performed its peers in the biotech sector. The BTK index rose 0.89% and GILD added 1.5% as traders bought the dip at its rising 10-dma. Our target is the $57.50-60.00 range. Don't forget that any time we play a biotech company it should be considered an aggressive, higher-risk trade. There is always risk of some FDA decision or clinical trial result surprising the market and sending the stock gapping one direction or the other. FYI: GILD is due to present at a conference on May 13th.

Picked on May 04 at $ 53.63
Change since picked: + 0.85
Earnings Date 04/16/08 (confirmed)
Average Daily Volume = 8.9 million


Harsco - HSC - close: 62.00 change: +1.08 stop: 59.85 *new*

It looks like the trend of higher lows is overpowering the potential double-top pattern. Traders bought the dip near round-number support at $60.00 today. HSC added 1.7% by the closing bell. We see today's move as a new entry point to buy calls. We're raising the stop loss to $59.85. Our four-week target is the $64.50-65.00 range.

Picked on May 01 at $ 60.38
Change since picked: + 1.62
Earnings Date 04/22/08 (confirmed)
Average Daily Volume = 613 thousand


Intl.Bus.Mach. - IBM - cls: 125.24 chg: +1.18 stop: 119.75

Tech stocks were the market leaders today and IBM was doing its part. Shares rallied past resistance at the $125.00 level after traders bought the dip near its 10-dma. IBM did pare its gains from $126 but still closed up 0.9%. This looks like another entry point to buy calls. IBM has already hit our early target at $124.90. We are altering our secondary target from $128.00-130.00 to $129.50-130.00.

Picked on April 30 at $120.75 */1st target achieved 124.90
Change since picked: + 4.49
Earnings Date 04/16/08 (confirmed)
Average Daily Volume = 8.8 million


iShares Russ.2000 - IWM - cls: 73.07 chg: +1.57 stop: 69.85

It was a strong day for the small caps. The IWM added almost 2.2% and is challenging its recent highs and its exponential 200-dma. More conservative traders might want to raise their stop loss closer to $71.00. Our multi-week target is the $77.50-80.00 zone. The P&F chart is bullish with an $87 target.

Picked on April 28 at $ 72.55 *triggered
Change since picked: + 0.52
Earnings Date 00/00/00
Average Daily Volume = 84.6 million


Joy Global - JOYG - close: 79.96 chg: +0.97 stop: 74.99

Target exceeded! JOYG displayed relative strength and surged to a new high at $80.35. Our first target was the $79.50-80.00 range. We strongly suggest that readers take some money off the table right here. Our secondary, more aggressive target is the $84.00-85.00 range. We will plan to exit ahead of the late May earnings report. The P&F chart is already bullish with an $88 target.

Picked on April 16 at $ 72.55 */ fist target exceeded
Change since picked: + 7.41
Earnings Date 05/29/08 (confirmed)
Average Daily Volume = 2.3 million


Mosaic - MOS - close: 126.99 change: +0.57 stop: 119.75

MOS under performed some of its peers and the S&P 500 but shares continue to look staged for a rally higher. We don't see any changes from our weekend comments. More aggressive traders will want to keep their stop loss under the 50-dma (115.71). More conservative traders could tighten their stop toward last week's low (121.15). Our first target is the $138.00-140.00 range. We are still suggesting bullish positions here but if you prefer to buy on momentum wait for a rise past $130.00.

Picked on May 05 at $126.75 *triggered/gap higher entry
Change since picked: + 0.24
Earnings Date 07/30/08 (unconfirmed)
Average Daily Volume = 7.4 million


Arcelor Mittal - MT - close: 95.89 chg: +1.32 stop: 92.45*new*

This is it. Tuesday is our last day. We plan to exit at the closing bell to avoid Wednesday's earnings report. Our target is $96.50. However, we strongly suggest that readers consider an early exit first thing tomorrow to lock in a gain. We're raising our stop loss to $92.45.

Picked on May 05 at $ 90.25 *triggered
Change since picked: + 5.64
Earnings Date 05/14/08 (confirmed)
Average Daily Volume = 3.7 million


Nucor - NUE - close: 81.34 change: +2.93 stop: 75.95

NUE was a strong out performer on Monday. The stock rallied 3.7% and almost erased Friday's decline. The stock has already surpassed our target in the $79.50-80.00 range. If you haven't done any profit taking yet we suggest you do so now. Our second target remains the $84.00-85.00 range.

Picked on April 22 at $ 74.63 /1st target exceeded 79.50
Change since picked: + 6.71
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 5.6 million


POSCO - PKX - close: 129.82 change: +2.23 stop: 119.75

PKX is still inching higher. The stock is nearing potential resistance at its 100-dma near $130.80. If PKX sees any profit taking we'd buy a dip in the $127-125 zone. Our target is the $139.00-140.00 range. More conservative traders may want to raise their stop loss toward $122.25 under last week's low. NOTE: We would consider this a slightly more aggressive play for two reasons. First, PKX is prone to gap openings as the U.S. traded shares adjust to trading overseas the night before. Second, the spreads on the options are pretty wide and that immediately puts us, as option traders, at a disadvantage.

Picked on May 05 at $125.55 *triggered
Change since picked: + 4.27
Earnings Date 07/16/08 (unconfirmed)
Average Daily Volume = 907 thousand

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


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