Option Investor

Daily Newsletter, Monday, 06/09/2008

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Table of Contents

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

Market Wrap

Financials Weak; McDonalds Sales Food For Thought

The major averages started the week mixed-to-lower as continued weakness among the financials, soaring energy prices and strong same-store sales from fast food giant McDonald's Corp. (NYSE:MCD) $59.31 +4.14% gave investors some food for thought.

Of today's top 10 most active securities, the Financial Select SPDRs (AMEX:XLF) $23.01 -1.37%, Lehman Brothers (NYSE:LEH) $29.48 -8.70%, Washington Mutual (NYSE:WM) $6.25 -16.99%, Citigroup (NYSE:C) $19.60 -2.29%, Wachovia Bank (NYSE:WB) $18.89 -6.15%, JP Morgan (NYSE:JPM) $37.51 -6.43% and Bank of American (NYSE:BAC) $37.51 -6.43% held respective #3, #4, #5, #6, #8, #9 and #10 spots, as earnings, or lack of earnings from Lehman Brothers brought another tidal wave of selling into the financials.

Lehman Brother (LEH) $29.48 -8.70% said this morning that it lost $2.8 billion in the second quarter and plans to sell $6 billion in stock to beef up its capital base. The company's CFO Erin Callan said the company has completed its deleveraging program of selling assets and raising equity, and is using its new capital to expand its business. The company said it plans to raise $4 billion by offering 143 million shares of common stock at $28 apiece.

While Lehman was delivering the much anticipated bad news of the negative impact from mortgage-related losses, shares of Washington Mutual (NYSE:WM) $6.25 -16.99% plunged to an all-time low after UBS said it had completed an extensive credit analysis of the bank's balance sheet. In a note to clients, UBS said it thinks Washington Mutual will take total losses through 2011 of $27 billion, with $21.7 billion of the total coming from mortgage losses. While UBS sees the bank's capital requirements sufficient so it will not have to raise more capital, the firm cautioned that further economic weakening could put its analysis at risk.

Economic news regarding the housing market at 10:00 AM EDT had the National Association of Realtors saying pending sales of previously owned homes jumped 6.3% in April to 88.2 from an unrevised reading of 83.0 in March. The 6.3% increase was well above economists' forecast for a 1.0% decline. Still, April's 88.2 reading was 13.1% lower than a year ago.

The NAR's chief economists Lawrence Yun said, "Bargain hunters have entered the market en masse, especially in areas that have seen double-digit price declines."

FTN Financial's chief economist said "We are seeing an acceleration in foreclosures. As foreclosures have taken off, they put pressure on prices. Banks have become more aggressive with sales on homes they have foreclosed." Mr. Low added that he thinks sales will stabilize in the next few months and that will set the stage for an inventory turn sometime next year. "For now, prices will continue to fall. There is still an inventory overhang that will take 18 month to work through. The end game of the housing bust is near."

A quick glance of today's action for some of the very thinly traded CME Group's regional housing futures show little action.

I do see the May'09 Composite (Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, NY Metro, San Diego, San Francisco, Washington DC) having edged up from my 05/30/08 benchmarking of 153.20 to 155.40. We've got a wide spread between the bid/ask here at 153.00/165.00. I should note that a more recent check for this contract's composite was taken on 6/03/08 where last trade was 154.20.

I'd have to say, based on observation, that I don't see much here at this point and more likely some type of composite squaring by an individual player as none of the region housing futures contracts have budged from their 05/30/08 benchmarks.

CME Regional Housing Futures (Aug'08 to May'09) Benchmarks

Having once tracked the various CME Regional Housing futures on a week-to-week basis, the lack of trading activity in this relatively new derivative has had me backing off to every two weeks (end of month and 15th). I've benchmarked the last couple of weeks only as we recently had a futures roll from the May'08 contracts and I wanted to see if there was another excessive negative roll to some of the forward-dated contracts.

It has been my observation that Las Vegas, Los Angeles, Miami and San Diego have been the WEAKEST of the various regional housing futures.

The May'09 contract discussed tonight, simply shows "no change" in the various regions, but a couple of "up-ticks" for the Composite.


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Since we're on the subject of housing, Moody's Investor Service did cut its rating on the nation's largest home builder DR Horton's (NYSE:DHI) $11.73 +0.77% debt one notch further into "junk" territory amid concern about quarterly losses that could continue into next year.

Last month, DR Horton reported a Q2 net loss of $1.31 billion, which included $834.1 million in pretax charges from inventory impairments and land options the builder walked away from.

In Dec'07, Moody's cut the company's debt rating to "junk" status saying that "even though Horton will continue to outperform many of its peers that have already been downgraded, our expectations about its fiscal 2008 and 2009 performance do not conform to that of an investment grade company."

Closing U.S. Market Watch

Having paced declines for the better part of the last several weeks, the Dow Industrials (INDU) 12,280 +0.57% offered some sign of bullishness to an otherwise bearish news flow today.

Breadth among the Dow 30 components finished positive at 18:12.

Alcoa (NYSE:AA) $42.17 +7.52% was a percentage gainer after positive mention in this weekend's Barron's, while shares of McDonald's (NYSE:MCD) $59.31 +4.14% jumped after the world's largest hamburger chain said global sales at locations open at least a year rose 7.7% in May, including a 4.3% rise in the U.S. on new menu items and upbeat breakfast trends.

Financial components JP Morgan (JPM) $37.51 -6.43%, recently added Bank of America (BAC) $29.61 -2.91%, Home Depot (NYSE:HD) $26.54 -2.35% and Citigroup (NYSE:C) $19.60 -2.29% kept gains in check.

Dow 30 Components (Price Weighted Index)

Percentage gainers for 20DyNet% (05/20/08 close) and outperforming stocks are hard to find in the narrow Dow 30. Discount retailer Wal-Mart (NYSE:WMT) $59.57 +2.05% today holds the greatest amount of favor during that time period, while General Motors (NYSE:GM) $16.48 +1.60% today has sputtered notably with a 17.01% decline.

"Red arrows" continue to align themselves with the banks and with high fuel prices pressuring the commercial airline industry, Boeing (NYSE:BA) $73.95 +1.07% today, loses favor among buyers.

It is notable that Chevron (NYSE:CVX) $101.20 +1.70% today, and Exxon/Mobil (NYSE:XOM) $89.07 +2.62% are down over the past 20-dayNet%, despite the surge in oil prices.

July Crude Oil (cl08n) did take a rest today, settling down $4.19, or -3.02% at $134.35. Saudi Arabia said today that it wanted to convene an energy summit of producers and consumers to focus on "how to objectively deal" with high prices. The Saudi government said, "The increase in prices isn't justified in terms of market fundamentals."

Last Wednesday evening, crude oil as well as the euro were both resting on what I observed as "important" near-term support levels. However, early Thursday morning, the ECB's President Jean-Claude Trichet said the ECB "is in a state of heightened alert" regarding inflation, after the ECB left its key interest rate unchanged at 4.00% for the 12th consecutive month.

Those comments sent the euro surging back higher against the dollar and helped further fuel buying in crude oil, which is denominated in U.S. dollars.

Euro CurrencyShares (NYSE:FXE) - Daily Intervals

Crude oil's surge last week wasn't due entirely to geopolitical concerns regarding tensions between Israel and Iran, but hawkish comments out of Trichet. The euro as depicted above with the FXE gave back some gains today. The euro is the most heavily weighted currency in the U.S. Dollar Index (DXY).

Yen CurrencyShares (NYSE:FXY) - Daily Intervals

While the euro holds strong versus the U.S. dollar, some "currency positives" for the U.S. dollar and perhaps Japan's economy is the Yen's recent weakness. One of the major risks to the U.S. economy is that its major trading partner's (Japan) economy would crumble should the yen get "too strong" versus the dollar, thus their exports to the U.S. crumble.

U.S. equity bulls like what they're seeing in the yen, but it is the euro and oil prices that remain the headwind. The SLOW METHODICAL decline in the Yen is what remains bullish. From here, I don't think market participants want to see further SHARP decline in the Yen. A SHARP decline in the euro may bring some weakness to oil too, but as you can see from the weighting of the Dow components, a DIA bull, and even an SPY/OEX bull need to be careful what they wish for as long as the FINANCIALS remain weak.

Dow Diamonds / S&P Dep. Receipts Montage - Daily Intervals

I like the Dow Diamonds (DIA) $136.62 +0.24% as a BUY for 1/2 positions at tomorrow's open (barring a mushroom cloud in the Middle East). The DIA "should not" close below $120.75 having closed ABOVE $128.92 in May. If the DIA does look to close below $120.75 at a 03:50 PM EDT tick, I'd suggest moving back to the sidelines.

IWM and QQQQ Montage - Daily Intervals

Early Friday I had profiled a BEARISH trade for the IWM with OPTIONS in the ProShares Ultra Short Russell 2000 (TWM) $70.28%, but thought better of it today and closed out the trade for a decent profit.

Tonight's advance/decline reading for the very broad Russell 2000 looks very "oversold" at 26 advancers and 82 decliners as the IWM now approaches support at $72.00.

NASDAQ-100 heavyweight Apple Computer (AAPL) $181.61 -2.17% unveiled its 3rd generation iPhone today at its developer's conference. The company said the new iPhone will offer faster downloads (2.8-times faster than original iPhone) and will be priced at $199.00. New features will include a Global Positioning System (GPS) and will be available in 22 countries starting July 11th. As rollout builds, Apple looks for the new iPhone to be selling in 70 countries over the next several months.

New Plays

New Option Plays

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

Play Editor's Note: Keep an eye on SRS, which is the REIT ultra-short ETF, and the IYR, which is a normal REIT ETF. It looks like the sector is heading lower but watch for a pull back before initiating positions. More aggressive traders may want to jump in now. Brave traders might also want to consider bullish positions on the IYE, which is the iShares for the oil and gas index. If you do, use a tight stop loss.

New Calls

Lehman Brothers - LEH - close: 29.48 change: -2.81 stop: 27.75

Company Description:
Lehman Brothers (ticker symbol: LEH), an innovator in global finance, serves the financial needs of corporations, governments and municipalities, institutional clients, and high net worth individuals worldwide. Founded in 1850, Lehman Brothers maintains leadership positions in equity and fixed income sales, trading and research, investment banking, private investment management, asset management and private equity. (source: company press release or website)

Why We Like It:
Once again Lehman Brothers was the big story today. As was expected the company pre-released its earnings report to help stem fears on Wall Street. Management said that LEH's earnings will be a loss of $5.14 a share. That's huge. Last year this time they earned $2.21/share. Analysts were expecting LEH to post a loss of just $0.22/share. The positive news was that LEH has reduced a lot of its exposure and is raising capital. The company said they will raise another $6 billion in capital between common stock and new debt offerings. They have already priced a $4 billion secondary of common stock at $28 a share. Today's volume in LEH was massive. The average daily volume is about 26.5 million. Today the stock traded more than 168.3 million shares. I suspect that this is a short-term bottom of LEH. Now that the news is out it should alleviate Wall Street's uncertainty about the company. The market hates not knowing. We are suggesting readers buy calls. We have two targets. Sell the majority of your position at the first target. Our first target is the $34.00 mark. Our second target is $36.25. Please note that we do NOT want to open positions if LEH gaps open above $30.50 tomorrow. This should be considered a higher-risk and much more aggressive play.

Suggested Options:
We are suggesting the July calls. Options are available at $1.00 increments. If you don't like our suggested strike, pick another one!

BUY CALL JUL 34.00 LEH-GY open interest= 8351 current ask $1.25
BUY CALL JUL 35.00 LEH-GG open interest=13840 current ask $1.00

Picked on June 09 at $ 29.48
Change since picked: + 0.00
Earnings Date 07/27/08 (unconfirmed)
Average Daily Volume = 26.5 million

New Puts

None today.

New Strangles

None today.

Play Updates

In Play Updates and Reviews

Call Updates

Peabody Energy - BTU - close: 81.40 change: +3.66 stop: 73.92

Monday was a pretty good day for BTU. The stock soared to a new high of $82.62 intraday. Shares did pare their gains this afternoon but bulls were buying the dip again by the closing bell and BTU set a new closing high too. The MACD has produced a new buy signal. We remain optimistic here and wouldn't be surprised to see BTU hit our secondary target in the $84.00-85.00 zone in the next day or two.

Picked on June 01 at $ 73.92 /1st target exceeded 79.75
Change since picked: + 7.48
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume = 5.8 million


Molson-Coors Brewing - TAP - cls: 58.63 chg: +0.56 stop: 56.45

TAP bubbled up from its intraday lows to post a 0.9% gain. The trend is still bullish but the momentum in this stock is pretty slow. If you want to consider new positions make sure you buy enough time. Our target is the $64.00-65.00 range. FYI: The P&F chart is bullish with a $69 target.

Picked on May 23 at $ 58.51 *triggered
Change since picked: + 0.12
Earnings Date 08/07/08 (unconfirmed)
Average Daily Volume = 1.1 million

Put Updates

Emerging Markets 50 ADR - ADRE - cls: 53.82 chg: -0.25 stop: 56.85

ADRE is still sinking and the ETF for emerging markets closed under its 50-dma today. We don't see any changes from our weekend comments. Don't be surprised to see a short-term bounce near its 200-dma in the $52.75-52.50 zone. We are aiming for the $51.00-50.00 zone. FYI: The P&F chart is still bullish.

Picked on June 03 at $ 54.69
Change since picked: - 0.87
Earnings Date 00/00/00
Average Daily Volume = 448 thousand


Caterpillar - CAT - close: 80.81 change: +0.82 stop: 84.05

CAT sank to $79.66 this morning before rebounding. The intraday high was $81.06 so we're still on the sidelines. We want to buy puts on a bounce but we are listing two entry points. Our preferred entry point is to buy puts on a bounce in the $81.50-82.00 zone. However, if CAT does not bounce then we're setting a secondary entry point at $79.45. If triggered our target is the $75.25 mark. CAT will probably find some support near $75.00 and its 200-dma. The P&F chart is bearish with a $74 target.

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/18/08 (unconfirmed)
Average Daily Volume = 6.2 million


DaVita Inc. - DVA - close: 49.78 chg: -0.64 stop: 53.01

DVA's breakdown under $50.00 and its lack of a bounce is very bearish. We are very tempted to suggest new put positions right here. However, we're going to wait and stick to our plan, which is to buy puts on a bounce. However, instead of using a $51.50-52.00 entry zone we're adjusting it to $51.00-52.00. If triggered we have two targets. Our first target is 47.75-47.50. Our second target is the $45.15-45.00 zone. The P&F chart is bearish with a $45 target. FYI: Last month DVA announced a $250 million stock buy back program. At $50 a share that's about 5 million shares. DVA has about 104 million shares outstanding.

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume = 606 thousand


Electronic Arts - ERTS - close: 46.93 chg: -0.62 stop: 49.75

ERTS is cooperating. The stock posted another decline following Friday's breakdown. If you don't want to open put positions here then wait for a bounce or failed rally near $48.00, which should be new overhead resistance. Our target is the February lows near $44.50-44.00.

Picked on June 06 at $ 47.75 *triggered
Change since picked: - 0.82
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume = 3.7 million


3M Co. - MMM - close: 75.82 chg: +0.96 stop: 77.65

We were expecting a bounce in MMM but today's gain was a little bit stronger than we expected. Look for a failed rally pattern or a new relative low (under $74.85) before initiating new put positions. We have two targets. Our first target is the $70.25-70.00 zone. Our secondary target is the $67.00-65.00 range. The P&F chart is bearish with a $69 target. FYI: If you are aiming for the $67 target then you might want to consider the October puts.

Picked on June 06 at $ 74.95 *triggered
Change since picked: + 0.87
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume = 4.0 million


Terex Corp. - TEX - close: 66.52 change: -0.85 stop: 72.05

Hmmm.. we were expecting an oversold rebound in TEX today and it failed to show up. Instead the stock sank toward technical support at its 100-dma before bouncing. We are sticking to our plan. We are suggesting readers buy puts on a bounce back into the $69.00-70.00 zone. Our suggested stop loss is $72.05. If triggered we have two targets. Our first target is $65.25. Our second target is $61.50. The P&F chart is bearish with a $61 target.

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/23/08 (unconfirmed)
Average Daily Volume = 1.7 million

Strangle Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)


Amgen Inc. - AMGN - close: 44.30 chg: +0.06 stop: n/a

We do not see any changes from our weekend comments on AMGN. If you have the June options you may want to consider an early exit to just cut your losses. We have less than two weeks left for June strikes before they expire and the erosion is going to pick up speed. We are not suggesting new positions at this time. We have suggested a July strangle and a more aggressive June strangle. The options in the July strangle are the July $45 calls (AMQ-GI) and the July $40 puts (AMQ-SH). Our estimated cost for the July strangle was $1.65. We want to sell if either option hits $3.50. The options in the June strangle are the June $45.00 calls (AMQ-FI) and the June $40.00 puts (AMQ-RH). Our estimated cost on the June strangle was $0.56. We want to sell if either option hits $1.10 or more.

Picked on May 22 at $ 42.77
Change since picked: + 1.53
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume = 6.7 million


McDonald's - MCD - close: 59.31 chg: +2.36 stop: n/a

MCD was a big reason the Dow Jones Industrial Average finished higher today. The fast-food stock heated up the board with a 4.1% gain. The spike higher was fueled by better than expected May same-store sales growth. If MCD sees any follow through it could be bad news. We were close to hitting our target on the downside and now MCD is back in no man's land and we've got less than two weeks left. We are not suggesting new positions. The options we suggested were the June $62.50 calls (MCD-FZ) and the June $57.50 puts (MCD-RY). Our estimated cost was $1.10. We want to sell if either option hits $1.65 or higher. Keep in mind that June options expire in less than two weeks and will see their premium erode more quickly.

Picked on May 18 at $ 60.53
Change since picked: - 1.22
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume = 7.5 million


Tyco Intl. - TYC - close: 43.37 change: -0.64 stop: n/a

TYC sinks again. This time the stock has closed under its exponential 200-dma. We are not suggesting new strangle positions in TYC at this time. The options we suggested were the July $47.50 calls (TYC-GW) and the July $42.50 puts (TYC-SV). Our estimated cost was $1.30. We want to sell if either option hits $1.95 (50% gain).

Picked on June 03 at $ 44.89
Change since picked: - 1.52
Earnings Date 08/05/08 (unconfirmed)
Average Daily Volume = 2.9 million

Dropped Calls

iShares Russ.2000 - IWM - cls: 73.68 chg: -0.24 stop: 72.95

The IWM ishares for the small cap index temporarily broke down under the $73.00 level and hit our stop loss at $72.95. The IWM did bounce from its lows, which also looks like a rebound from the bottom of its bullish channel. If the S&P 500 and DJIA didn't look so vulnerable we'd say this looks like a new entry point for bullish positions in IWM. The IWM hit a high of $76.23 on Thursday and we were aiming for the $77.00 level.

Picked on April 28 at $ 72.55 */stopped out 72.95
Change since picked: + 1.37
Earnings Date 00/00/00
Average Daily Volume = 84.6 million


Priceline.com - PCLN - close: 126.55 chg: -5.93 stop: 129.90

By lunchtime it looked like PCLN was going to survive the day. Shares had dipped a bit but the $130 level was holding. Even a terrible performance by rival Oribtz (OWW), which was downgraded today, didn't push PCLN below support. The stock was actually starting to bounce. Then suddenly around 1:00 p.m. Eastern the stock just fell off a climb and lost more than $7.00 in the next 90 minutes. This swoosh lower occurred the same time the NASDAQ tripped lower around 1:00 p.m. Our stop loss was hit at $129.90. PCLN still has a bullish trend of higher lows but the next level of support looks like the 100-dma near $120. We had been aiming for the $139.50-140.00 zone. Last Thursday PCLN hit $139.16.

Picked on May 27 at $132.75 */stopped out 129.90
Change since picked: - 6.20
Earnings Date 05/08/08 (confirmed)
Average Daily Volume = 1.5 million

Dropped Puts


Dropped Strangles


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


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

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