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Daily Newsletter, Saturday, 06/14/2008

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. Trader's Corner

Market Wrap

Dow Finds Traction

The Dow powered for a +165 gain on Friday and became the only major index to finish the week higher than it started. Not bad for a Friday the 13th. It was an ugly week with major declines and trails of broken support. Is this rebound the start of something good or just the result of short covering before the weekend?

Wilshire 5000 Chart - Daily

The economic reports on Friday told us that we have no inflation in the U.S. and I am sure that is reassuring to everyone who is finding it harder to stretch those paychecks. Of course that low inflation rate is known as the core rate and excluded food and energy. If you don't use those items your cost of goods rose only 0.2% for the month of May. That core inflation rate is up only 2.3% over the last 12 months. Unfortunately for those of us who do eat and drive the inflation rate rose by +0.6%. The Consumer Price Index showed us that top line inflation rose by 4.2% for the last twelve months.

The largest single increase was energy prices which rose +4.4% for the month and a 28.2% annualized rate, and a 17.4% increase over the last 12 months. Food prices rose +0.3% for the month and +5.1% over May 2007. In reality all of these prices would be much higher were it not for the implosion in the automobile sector. Falling prices there knocked -1.1% off the number. Economists trying to explain the Friday numbers said that the +20.8% rise in gasoline prices was not really an issue since gasoline bills were such a small part of the consumer budget. Try telling that to Wal-Mart shoppers. They also pointed to the price deflation in many products as a sign that inflation was tame. Over the last 12 months television prices have fallen -16.8%, computers -13%, toys -5.2%, furniture -2.4%, women's apparel -5%, automobiles -1.2% and appliances -1.1%. Televisions and computers always go down because of improvements in technology continually reduce prices. Furniture and appliances are down because of the collapse of the housing sector.

The first reading of Consumer Sentiment for June fell to another 28 year low at 56.7. That was a sharp drop of -3.1 points over May. The current conditions component fell from 73.3 to 68.7 and the expectations component fell from 51.1 to 49.0. The impact of the tax rebate checks was unseen. Inflation expectations fell 0.1 to 5.1%. May's 5.2% reading was the highest level since 1982. The headline reading on sentiment is not only indicating a recession but a severe recession when compared to similar occurrences in the past. It is already -4 points below the recession in 1990. Unlike the CPI the Michigan Sentiment index is directly impacted by food and energy prices. The reduced availability of consumer credit is also putting stress on sentiment.

Consumer Sentiment Chart

For next week we have the Producer Price Index (PPI) on Tuesday and the Philly Fed Survey on Thursday as the key reports for the week. The PPI will give us an advance look on what to expect in the next CPI. Inflation has to filter through the producer level before it can get to the consumer level. Expectations are for a headline gain of +1%. The Philly Fed Survey on Thursday is expected to show an improvement to a -10 from -15.6 in May. Any negative number is still in contraction territory but at least the trend appears to be up from the -24.9 low in April.

I added the crude options expiration on Tuesday and the crude futures expiration on Friday to the calendar because crude prices are likely extremely volatile next week. With the Morgan Stanley target of $150 by July 4th there could be some early fireworks. The Saudi Arabia global oil meeting on June 22nd could also be a factor since most traders expect the meeting result to be additional oil on the market even if it is just a token amount for a short time. All OPEC has to do is "say" we are going to increase production by one-million barrels per day and the upward price spiral would begin to crumble. The fundamental basis behind the gains in crude is partly based on fiction and hype. Adding another million barrels to the mix could drown some of that speculation.

Crude Oil Chart - 60 min

The earnings for three major financial stocks will be announced and some believe that was partly the reason for Friday's rally. With all the bad news and expectations for bad news already priced into the stocks it was time to exit before some actual good news surfaced. Lehman reports on Monday, Goldman on Tuesday and Morgan Stanley on Wednesday.

Weekly Economic Calendar

The two quarreling kids are at it again. On Thursday it was big news that Microsoft was finally done with Yahoo and was no longer interested in doing a deal. Yahoo's stock fell -10% and Microsoft shareholders were cheering while Yahoo shareholders were getting the ropes and torches together to storm Jerry Yang's castle. Yahoo did a deal with Google to outsource its search advertising and immediately ignited another firestorm. Google has 75% of the search traffic and Yahoo 9%. How any regulator could approve that deal is astounding. Secondly, Yahoo spent $2 billion revamping its search-advertising portal over the last three years. Outsourcing to Google now admits that $2 billion was wasted. Deutsche Bank analyst Jeetil Patel described Yahoo's deal with Google as "one of the worst strategic maneuvers seen in the Internet industry." Since Google will be serving ads on Yahoo it is only a matter of time before advertisers switch to Google for the greater market share and knowing their ads will still run on Yahoo as well. ThinkPanmure analyst William Morrison said by letting Google inside Yahoo they would be able to gather even more information on the Yahoo search process and be able to translate it into the Google model. The research note was titled "Giving away the store."

Yahoo Chart - Daily

On Thursday Yahoo said it was "unequivocally" rebuffed by Microsoft during an attempt to renew negotiations. Yahoo shareholders had been clinging to the hope that Yahoo could rekindle the prior bid of $33. Yahoo stock was $19 just before Microsoft made the offer and at Friday's close of $23 it appears headed back to $19. But wait, late Friday Microsoft said it was still interested in a deal with Yahoo. This love hate relationship has more chapters than the bible. Microsoft said it offered to pay $1 billion for Yahoo search and buy $8 billion in Yahoo stock for $35 a share. Microsoft was also willing to guarantee Yahoo $1 billion a year in additional income from a revenue sharing arrangement as an incentive for Yahoo to do a deal. The deal with Google is only expected to bring Yahoo between $250-$450 million per year. According to Microsoft they offered the search deal after concerns rose about combining Hotmail, Yahoo mail and their instant messaging systems and possibly not getting regulator approval. Given Yahoo's declining market share that is not a consideration by most analysts.

If Microsoft ever decides to spend the money and go head to head with Google, Yahoo's scraps will be meaningless to the sector. Microsoft has already said they would protest the Yahoo/Google deal to regulators. They may never have to go that far with the Yahoo shareholder meeting coming up in August. Jerry Yang better get his bags packed in advance because the villagers are about to riot. Carl Icahn is almost certain to get control of the board even if the Microsoft deal is really dead. Shareholders are going to be so angry they will vote to throw all the bums out. Icahn will have to crawl on his knees to Microsoft after August to get a deal done but a deal of some kind will get done. Yahoo shareholders are pushing ahead with a suit against Yahoo in an attempt to get the poison pill severance plan removed even before the August shareholder meeting. They claim the hastily approved poison pill was a major reason Microsoft walked on the initial offer. Icahn has already said he will kill the pill as a first step to making Yahoo attractive if he gets control of the board. The second step according to Icahn will be firing Jerry Yang.

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Shares of Qualcomm (QCOM) hit a new 52-week high at $50 on Friday after raising its guidance for the current quarter and the year. QCOM predicted earnings of 54-55 cents compared to its prior forecast of 50-52 cents. Hand set sales were expected to be inline with prior estimates but the mix improved significantly with a greater percentage of high-end data-centric devices and wireless infrastructure upgrades. This led to higher prices and higher profits on that existing handset forecast.

Apple Inc (AAPL) stock continued to fall with a close at $172 on Friday. Thursday was really ugly with a drop of $8. The problem continues to focus on Steve Jobs health. You have heard the story about how he looked gaunt and pale when he announced the 3G iPhone at the WWDC last Monday. Rumors started flying almost instantly that his pancreatic cancer had returned. Initially the company said is was "just a common bug and he was taking antibiotics." That covers a wide range of possibilities but it did not end the rumors. Henry Blodgett said again on Friday that Apple is only making it worse by NOT saying specifically "his cancer has not returned." Until they do the rumors will continue to grow and the stock price sag. By not saying the cancer has not returned they are actually giving credence to the rumors. I think Apple is doing their shareholders a disservice by not killing this rumor quickly, if they can do it truthfully. I found one link that gave a very good explanation of why Jobs is weakened and skinny after his bout with cancer. It describes his surgery with diagrams from the Mayo Clinic. It is a miracle he is still alive. See this link for more information. Still Apple needs to come clean for the benefit of their shareholders.

Apple Chart - Daily

Hopefully the earnings from LEH, GS and MS will end the bloodbath in the banking sector. They are the single biggest drag on the major indexes. The regional banks are getting hammered on fears the asset base is shrinking through homeowner foreclosures and bankruptcies and dividends will be eliminated to reduce the cash burn. Foreclosures were up +48% in May. There have been several bank failures on the regional level and below and this is not producing confidence for the sector.

Remember Thornburg Mortgage? TMA was a mortgage company that had no subprime exposure. They only wrote jumbo loans to Alt-A credits and above. Unfortunately the subprime crisis reached up and snatched them off their lofty perch and down into the slime. The drop in value for mortgage backed securities forced them to buy back billions in AAA+ MB securities with no place to sell them. They avoided bankruptcy by raising enormous amounts of capital and finally agreeing to sell 48% of the company at a penny a share in exchange for another capital infusion with an interest rate of 18%. I could go on but the point of this story is that TMA had no problems of their own. The credit crunch reached out and strangled them from afar by devaluing perfectly good mortgage loan paper. Investors are afraid this is what will happen to the regional banks. They are afraid many are carrying loans on their books at face value when they are really worth substantially less in the market. I could have a $500,000 home loan on a million dollar home and be paying exactly on time each month as agreed. If my loan was packaged and sold with hundreds of others in a mortgage backed security then it could be valued today at 60 cents on the dollar simply because the market value for MBS loans had fallen due to market conditions. Once the regional banks have to acknowledge these values as well as the hit from rising foreclosures then investors believe quite a few could be in danger. This is depressing the stocks of otherwise healthy banks.

Thornburg Mortgage Chart - Weekly

Wachovia Chart - Weekly

Downey Financial Corp (DSL) said on Friday that one-seventh of its total assets were now non-performing. Bad loans had risen 900% over the same period in 2007. Non-performing loans were 1.3% in May 2007 and 14.3% today. On June 1st 2007 DSL shares were $74. Today they are $4.97. Similar problems exist in the larger banks. Wachovia (WB) has fallen from $55 to $18 and a 16-year low on Friday. WB is expected to cut their dividend amid further deterioration in their assets. Wachovia's asset base is similar to Downey's because they acquired Golden West Financial at the height of the housing boom. Fifth Third Bancorp (FITB) was cut Friday morning on growing concerns over loans, charge offs and a potential dividend cut. The downgrade sent it to a 13-year low. Bank America (BAC) is under fire for its acquisition of Countrywide because they have the biggest portfolio of loans in the business. The pain being felt at DSL and WB is going to be magnified at Countrywide. The problems at these majors suggest the smaller local banks could be in hot water since they don't have the access to capital the bigger banks have.

Downey Financial Chart - Weekly

The Dow rebounded +165 points after finding surprise support at 12100. The rebound was surprising after the CPI news but it appeared traders are following the Fed's party line of low core inflation. The +0.2% core rate was actually benign if you believe the Fed. After two days of bumping along at 12100 as support they suddenly took a benign CPI report as good news? I find that hard to believe and instead believe it was option expiration moves and short covering. Funds tend to roll out of their option positions the week before option expiration. The Friday before expiration tends to be volatile and we saw a perfect example this week. We also know that as of the end of May short interest was at record levels. Record short interest on stocks also translates into short interest on options. After two days of support at 12100 I believe the funds and anyone else short just decided to take profits and cover ahead of next week's financial news and expiration. As short squeezes go it was still rather pathetic. How do you know it was a short squeeze? Because those most heavily shorted sectors like airlines, homebuilders and financials spiked abnormally.

DDow Chart - Daily

Overhead resistance on the Dow is now 12350 and a level that was support the prior week. If the G8 ends positive this weekend with some comment on a stronger dollar then the market could remain positive. However, what Lehman, Goldman and Morgan Stanley say along with oil prices will have more impact than the G8. The current range on the Dow is now clearly defined between 12100 and 12600. Odds are good it will spend more time at the bottom than the top.

We are approaching the warning cycle for Q2 and it remains to be seen if we are going to have a flurry of warnings or more good news like Qualcomm. With the evidence for a recession still rather absent there is a potential for earnings to be better than expected. Everyone guided lower in Q1 and maybe that downturn failed to appear. We know from retailers that customers are still buying and sales have been better than expected in many sectors. Earnings guidance over the next two weeks will be key in market direction. The Fed meeting is only seven days away and it appears traders are actually wishing for a rate hike. I know that sounds crazy but it would be beneficial for the dollar and send a message that they are serious about fighting inflation.

Nasdaq Chart - Daily

The Nasdaq has been at the mercy of the declines in AAPL, RIMM and GOOG. On Friday it benefited from gains in two of those stocks. GOOG was up +18 and RIMM +3.37. FSLR also helped with a +12.50 move, BIDU +11, ISRG +11 and AMZN +3. The Nasdaq spiked at the open both Thursday and Friday but Thursday's +38 point spike failed to hold. However Friday's +50 point spike did hold and it closed at the high for the day. Support both days was just below 2400 and exactly where it should be. AMG Data said that fund flows out of techs could end in June. Over the past five months the amount of money flowing out of tech funds has dwindled to a slow drip. Jan -$788 million, Feb -$339, Mar -$437, April -$168, May -$27 and so far for June they have seen inflows of +$3 million. This suggests that the worst is over and we are about to see a reversal of fortunes for tech stocks. For all funds inflows have averages $1.67 billion over the last four weeks and that is up from $800 million the week of April 23rd. Last week's reading was the largest inflow since March 2007. Support at 2400 should be decent but it may be a little early to expect any big money to flow back into tech funds. The Nasdaq is setting up for a nice run once that money does start to appear.

The S&P is less positive with support appearing at 1340 on Wednesday. The rebound was lackluster due mostly to the weak financials. I would still not be a buyer of the S&P chart today. The summer range, assuming no improvement in the financial sector, could be 1275-1400.

S&P-500 Chart - Daily

Russell-2000 Chart - Daily

The Russell spent three days under 730 and my level to be short. The Russell spiked +8 points in the closing minutes on Friday to edge back over that level to 733. I would not be a buyer here. I believe it was option related short covering and next week could be rocky in terms of earnings and economics. There is no compelling reason to be long the market today. Of course that means we will probably blast off to new highs on Monday on some obscure news item. Remember, short interest was at record levels at the end of May and I doubt everyone has covered. The general market sentiment expects financials to crash and burn in this earnings cycle and take the market with them. If LEH, GS, MS accidentally said something positive next week to suggest the worst is over all those shorts would have nowhere to hide.

We should be somewhat encouraged by the 28 year low in consumer sentiment. Since 1970 when sentiment has been in a trough as it is today the next 12 months have been outstanding. There have been six recessionary sentiment bottoms in 1970, 1975, 1980, 1982, 1991 and 2001. The market rebounded strongly in five of those six cases. The average gain over the next twelve months was 14% with the low 9% and the high 31%. The only exception was the 2001 recession where the markets declined 18% in the following 12 months. Obviously the reason for the 2001 decline was not the recession but the aftermath of the 9/11 attacks. The world was changing as we knew it and the market reflected that change. If you eliminate that sentiment trough then the future is bright. The key here is finding a bottom. Until that bottom appears we don't know where to start the clock for the 12-month rebound. Stopping all the recession talk would be the first step. Something needs to happen to turn the conversations away from the impending recession to the impending rebound. Maybe this earnings cycle will be the catalyst if companies are not proclaiming dire times ahead. If not then the next pivot point could be the Q3 earnings and that is a long way off from where I sit.

Don't forget the Association for the Study of Peak Oil (ASPO) is holding their annual conference in Sacramento on Sept 21-23rd. This is a full 2.5 days of intensive, as in 8:AM to 9:PM information overload from dozens of experts from around the world on the status of Peak Oil. The cost is minimal at $325 because they are a non-profit and make no money on the event. Follow the link below to register and join me there. We can discuss each presentation and plan trades for the coming year. Put my name in the "how did you hear" box so they can group us together for the meetings. Go here to register:
http://www.aspo-usa.org/aspousa4/

Jim Brown
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
BUCY None ANR
RIMM   FDG
    GRMN
    HOC
    VLO

New Calls

Bucyrus - BUCY - close: 75.41 change: +2.51 stop: 71.65

Company Description:
Bucyrus International, Inc. is a world leader in the design and manufacture of high productivity mining equipment for the surface and underground mining industries. Bucyrus' surface equipment is used for mining coal, copper, iron ore, oil sands and other minerals and Bucyrus' underground equipment is used primarily for mining coal. (source: company press release or website)

Why We Like It:
The mining equipment stocks look ready to run again. Traders continue to buy the dips. Technical traders could argue that BUCY has a bearish divergence between price and its MACD on the daily chart but I suspect BUCY can tag $80 before seeing any trouble. We're suggesting readers buy calls now or on a dip in the $75.00-74.50 zone. We have two targets. Our first target is $79.85. Our second target is $83.50. The Point & Figure chart is bullish with a $92 target.

Suggested Options:
We are suggesting the July calls. It is up to the individual trader to decide which month and which strike price best suits your trading style and risk.

BUY CALL JUL 70.00 HIK-GN open interest=5023 current ask $8.00
BUY CALL JUL 72.50 HIK-GV open interest= 833 current ask $6.30
BUY CALL JUL 75.00 HIK-GO open interest=4176 current ask $4.90
BUY CALL JUL 77.50 HIK-GW open interest=1605 current ask $3.70
BUY CALL JUL 80.00 HIK-GP open interest=1151 current ask $2.65

Picked on June 15 at $ 75.41
Change since picked: + 0.00
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume = 2.4 million

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Research In Motion - RIMM - cls: 132.96 chg: +3.37 stop: 129.99

Company Description:
Research In Motion is a leading designer, manufacturer and marketer of innovative wireless solutions for the worldwide mobile communications market. (source: company press release or website)

Why We Like It:
This looks like a pivotal spot for RIMM. Traders could argue for a move either way. The longer-term trend is still up but the stock has been flirting with a breakdown from its bullish channel all week and RIMM has a four-week trend of lower highs. I suspect the next move will be higher but we're going to be ready if RIMM drops. Here's the plan. If RIMM trades at $136.05 buy calls. We will have two targets. Our first target is $144.00. Our second target is $154.50. If, on the other hand, RIMM breaks down then we want to buy puts if RIMM trades at $127.40. Our two targets to the downside are $120.25 and $113.50. We do not want to hold over the June 25th earnings report.

Suggested Options:
If RIMM hits our trigger to buy calls at $136.05 then we're suggesting these July calls.

BUY CALL JUL 135.00 RUL-GW open interest=3874 current ask $8.50
BUY CALL JUL 140.00 RUL-GH open interest=5032 current ask $6.40
BUY CALL JUL 145.00 RUL-GI open interest=2933 current ask $4.60

If RIMM breaks down and hits our trigger to buy puts at $127.40 then choose one of these puts.

BUY PUT JUL 130.00 RUL-SV open interest=4779 current ask $7.90
BUY PUT JUL 125.00 RUL-SE open interest=3334 current ask $5.90
BUY PUT JUL 120.00 RUL-SD open interest=3544 current ask $4.25

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 06/25/08 (confirmed)
Average Daily Volume = 16.7 million
 

New Puts

None today.
 

New Strangles

Alpha Nat. Res. - ANR - close: 94.25 chg: +5.61 stop: n/a

Company Description:
Alpha Natural Resources is a leading supplier of high-quality Appalachian coal to electric utilities, steel producers and heavy industry. Approximately 89 percent of the company's reserve base is high Btu coal and 82 percent is low sulfur, qualities that are in high demand among electric utilities which use steam coal. Alpha is also the nation's largest supplier and exporter of metallurgical coal, a key ingredient in steel manufacturing. (source: company press release or website)

Why We Like It:
Soaring coal prices, especially the metallurgical coal, is sending shares of ANR to the moon. While the fundamental story sounds great nothing skyrockets higher forever. Instead of calling a top and just buying puts we're suggesting a strangle. We don't care what direction ANR goes as long as it continues to really move. Options are kind of pricey due to the stock's volatility so we're being aggressive and using some wide strike price points to try and make this play more affordable. This should be considered a very speculative play but not as speculative as just buying puts or calls.

Suggested Options:
A strangle involves buying both an out of the money call and an out of the money put. The plan is for the stock to move in either direction so that one side of the trade appreciates enough to make the entire speculation profitable. Traders will want to try and keep their capital evenly invested on both side of the trade to keep the strategy neutral.

We are suggesting these July options. Our estimated cost is $9.40 We want to sell if either option hits $14.50.

BUY CALL JUL 105.00 ANR-GA open interest=1162 current ask $4.80
-and-
BUY PUT JUL 85.00 ANR-SQ open interest= 310 current ask $4.60

Picked on June 15 at $ 94.25
Change since picked: + 0.00
Earnings Date 08/05/08 (unconfirmed)
Average Daily Volume = 3.7 million

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Fording Cand. Coal - FDG - close: 82.91 chg: -0.09 stop: n/a

Company Description:
Fording Canadian Coal Trust is an open-ended mutual fund trust and one of the largest royalty trusts in Canada. (source: company press release or website)

Why We Like It:
This strangle is the same strategy as the one we outlined with ANR. The coal stocks have gone stratospheric but nothing goes up this strong forever. However, we can't call a top so we're suggesting a strangle. This should be considered a risky bet but not as risky as just buying calls or just buying puts.

Suggested Options:
A strangle involves buying both an out of the money call and an out of the money put. The plan is for the stock to move in either direction so that one side of the trade appreciates enough to make the entire speculation profitable. Traders will want to try and keep their capital evenly invested on both side of the trade to keep the strategy neutral.

We are suggesting these July options. Our estimated cost is $5.45 We want to sell if either option hits $ 8.00.

BUY CALL JUL 90.00 FDG-GR open interest= 767 current ask $2.25
-and-
BUY PUT JUL 75.00 FDG-SO open interest= 805 current ask $3.20

Picked on June 15 at $ 82.91
Change since picked: + 0.00
Earnings Date 07/21/08 (unconfirmed)
Average Daily Volume = 1.7 million

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Garmin Ltd. - GRMN - close: 44.91 chg: -0.29 stop: n/a

Company Description:
The global leader in satellite navigation, Garmin Ltd. and its subsidiaries have designed, manufactured, marketed and sold navigation, communication and information devices and applications since 1989 -- most of which are enabled by GPS technology. (source: company press release or website)

Why We Like It:
There are a lot of different opinions on GRMN and how they are going to weather the growing competition from the smart phone market. The long-term trend in the stock price is negative but short-term GRMN has pulled back from its recent highs. The stock is poised to move. The problem is which way? We're suggesting a strangle.

Suggested Options:
A strangle involves buying both an out of the money call and an out of the money put. The plan is for the stock to move in either direction so that one side of the trade appreciates enough to make the entire speculation profitable. Traders will want to try and keep their capital evenly invested on both side of the trade to keep the strategy neutral.

We are suggesting these July options. Our estimated cost is $2.55 We want to sell if either option hits $ 4.75.

BUY CALL JUL 50.00 GQR-GJ open interest=19286 current ask $1.25
-and-
BUY PUT JUL 40.00 GQR-SH open interest= 6305 current ask $1.30

Picked on June 15 at $ 44.91
Change since picked: + 0.00
Earnings Date 07/30/08 (unconfirmed)
Average Daily Volume = 4.1 million

---

Holly Corp. - HOC - close: 41.25 chg: +0.96 stop: n/a

Company Description:
Holly Corporation, headquartered in Dallas, Texas, is an independent petroleum refiner and marketer that produces high value light products such as gasoline, diesel fuel and jet fuel. (source: company press release or website)

Why We Like It:
The refiners have been killed due to rising oil prices squeezing their margins. The next few weeks could be rocky for oil and that should translate into volatility for HOC. Currently the stock is bouncing form support near $40.00. We are suggesting new strangle positions now but a dip back to $40.00 would be better. There is a significant difference between prices in the calls and puts so try and balance your capital on both sides of the trade.

Suggested Options:
A strangle involves buying both an out of the money call and an out of the money put. The plan is for the stock to move in either direction so that one side of the trade appreciates enough to make the entire speculation profitable. Traders will want to try and keep their capital evenly invested on both side of the trade to keep the strategy neutral.

We are suggesting these July options. Our estimated cost is $2.00 We want to sell if either option hits $ 3.00.

BUY CALL JUL 45.00 HOC-GI open interest= 767 current ask $1.35
-and-
BUY PUT JUL 35.00 HOC-SG open interest= 314 current ask $0.65

Picked on June 15 at $ 41.25
Change since picked: + 0.00
Earnings Date 08/07/08 (unconfirmed)
Average Daily Volume = 1.1 million

---

Valero - VLO - close: 44.84 change: +0.42 stop: n/a

Company Description:
Valero is one of the largest oil refiners in the world.

Why We Like It:
The story is similar with VLO. Rising oil puts pressure on the margins. Shares of VLO have pulled back to support near $45.00 and oscillated back and forth around this level for days now. It looks like VLO is setting up for a move but it's tough to pick a direction. We're suggesting a strangle.

Suggested Options:
A strangle involves buying both an out of the money call and an out of the money put. The plan is for the stock to move in either direction so that one side of the trade appreciates enough to make the entire speculation profitable. Traders will want to try and keep their capital evenly invested on both side of the trade to keep the strategy neutral.

We are suggesting these July options. Our estimated cost is $1.89 We want to sell if either option hits $2.75.

BUY CALL JUL 50.00 VLO-GJ open interest=10322 current ask $1.01
-and-
BUY PUT JUL 40.00 VLO-SH open interest=1171 current ask $0.88

Picked on June 15 at $ 44.84
Change since picked: + 0.00
Earnings Date 07/29/08 (unconfirmed)
Average Daily Volume = 10.8 million
 


Play Updates

In Play Updates and Reviews

Call Updates

Alliant Tech - ATK - close: 107.11 change: +1.83 stop: 102.95

The widespread market rebound really helped fuel the bounce in shares of ATK. The stock added 1.7% and broke through potential resistance at its 10-dma and exponential 200-dma. Readers looking for new positions may want to look for a dip back to $106 or $105. We're using a stop loss under the recent low. We have two targets. The 200-dma is near $109.00. We're setting the first target at $108.75. Our second target is the $111.00 mark.

Suggested Options:
If ATK provides another entry point we would use the July calls.

Picked on June 12 at $105.28
Change since picked: + 1.83
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume = 244 thousand

---

Peabody Energy - BTU - close: 77.59 change: +1.64 stop: 74.90

The fundamental story for coal seems to be very bullish. However a lot of stocks in this group are growing more and more overbought on a daily basis. Eventually there will be a correction and it will probably be a sharp and painful pull back. BTU is unlikely to avoid this sell-off when it finally occurs. I'm suggesting that readers trade cautiously. Right now the trend is still up for BTU and Friday's bounce could be a new entry point but I am on guard for a reversal. Some of the technical indicators for BTU don't look that strong. This stock has exceeded our target near $80 several times. Our secondary target is the $84.00-85.00 zone.

Suggested Options:
We're not suggesting new positions in BTU at this time.

Picked on June 01 at $ 73.92 /1st target exceeded 79.75
Change since picked: + 3.67
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume = 5.8 million

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Diamonds - DIA - close: 123.10 change: +1.47 stop: 120.85 *new*

Right on cue the DIA provided a bounce. I'm only expecting a short-term rebound before it rolls over again. Our target is the $124.50 mark. However, keep a close eye on the $124.00 level. If DIA fails there we'll want to jump out. More aggressive traders could aim for the $125.00 level as their target. We're inching up our stop loss to $120.85.

Suggested Options:
Friday was our entry point so we're not suggesting new positions but nimble traders might want to consider July calls.

Picked on June 12 at $121.63
Change since picked: + 1.47
Earnings Date 00/00/00
Average Daily Volume = 12.9 million

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United States Oil - USO - close: 109.20 chg: -2.07 stop: 105.95

Excellent! The USO provided a dip so we could open bullish positions at a more attractive level. The oil ETF gapped open lower at $108.92 and then traded sideways. As Jim mentioned in the market wrap today next week could be very volatile for crude oil. If OPEC, or more specifically the Saudis, decide to up their production levels then this headline, whether it occurs or not, could push oil prices lower. However, the real influence behind oil this week should be short covering. Oil options expire on Wednesday and oil futures expire on Friday. There will be pressure to cover those shorts ahead of expiration. Our first target is the $114.90 mark. Our second target is $118.00. We strongly suggest you take some profits at the first target.

Suggested Options:
We are suggesting the June or July calls. This should be a very short-term move otherwise we would not play June calls this close to expiration (this coming Friday). Strikes are available at $1.00 increments. I want to reiterate that June options are going to be very fragile. Any move lower is going to crush them with just five days left.

BUY CALL JUN 110.00 IYS-FF open interest= 7648 current ask $2.60
BUY CALL JUN 114.00 IYS-FJ open interest= 2235 current ask $1.25

BUY CALL JUL 110.00 IYS-GF open interest=23781 current ask $6.30
BUY CALL JUL 113.00 IYS-GI open interest= 4998current ask $5.00
BUY CALL JUL 115.00 IYS-GK open interest= 2892 current ask $4.30

Picked on June 12 at $111.27
Change since picked: - 2.07
Earnings Date 00/00/00
Average Daily Volume = 11.4 million
 

Put Updates

Emerging Markets 50 ADR - ADRE - cls: 52.37 chg: +0.47 stop: 55.01*new*

The ADRE is still trying to bounce. We suspect that this ETF will bounce back to the $53.50-54.00 zone before rolling over again. If you are looking for a new entry point then wait for a failed rally under $54.00. We are adjusting the stop loss to $55.01. Our target is the $51.00-50.00 zone.

Suggested Options:
We are not suggesting new put positions at this time.

Picked on June 03 at $ 54.69
Change since picked: - 2.32
Earnings Date 00/00/00
Average Daily Volume = 448 thousand

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Caterpillar - CAT - close: 81.50 change: +1.00 stop: 83.55 *new*

We were expecting a bounce in CAT back to the $81.50-82.50 zone and that's what the stock delivered. Friday's move looks like a new entry point to buy puts but readers may want to wait for the rebound in the DJIA and S&P to run out of steam first, which shouldn't take too long. More aggressive traders may want to widen their stop toward $84.00. We're going to adjust our stop loss to $83.55 to give CAT just a little more room. Our target is the $75.25 mark. The stock "should" see some technical support at its 200-dma near $75.00.

Suggested Options:
We would suggest the July $85, 80 or $75 puts.

Picked on June 11 at $ 79.45 *triggered
Change since picked: + 2.05
Earnings Date 07/18/08 (unconfirmed)
Average Daily Volume = 6.2 million

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Deere & Co. - DE - close: 77.92 change: -0.04 stop: 82.55

The first thing you might notice looking at DE's chart is that the stock did not participate in Friday's market rally. DE broke down from its trading range on Thursday and continues to show relative weakness. We would still consider new put positions here at current levels. Or, if DE does bounce, then look for a failed rally in the $80 region. Our target is the $70.50 mark. The Point & Figure chart is forecasting a $72 target.

Suggested Options:
We are suggesting the July puts. The $80 and $75 strikes should work well.

Picked on June 12 at $ 78.49 *triggered
Change since picked: - 0.57
Earnings Date 08/13/08 (unconfirmed)
Average Daily Volume = 5.4 million

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DaVita Inc. - DVA - close: 50.47 chg: +1.13 stop: 53.01

DVA is starting to cooperate with a bounce. Shares rallied 2.2% on Friday and regained the $50 level and closed above its 100-dma. We expect the bounce to fail in the $51.50-52.50 zone. Thus we're suggesting readers buy puts in the $51.00-52.00 range. 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.

Suggested Options:
We are suggesting the July puts. The $50 and $45 strikes should work well.

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

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Electronic Arts - ERTS - close: 46.99 chg: +1.00 stop: 49.05

We have been expecting a bounce back toward resistance at $48.00. Wait for a failed rally near $48.00 before considering new put positions. More conservative traders might want to tighten their stops closer to the $48 level. Our target is the February lows near $44.50-44.00.

Suggested Options:
If ERTS provides another entry point we would use the July puts. The $50 and $45 strikes would probably work best.

Picked on June 06 at $ 47.75 *triggered
Change since picked: - 0.76
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume = 3.7 million

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3M Co. - MMM - close: 76.12 chg: +0.57 stop: 77.05

We do not see any changes from our Thursday night comments. If MMM bounces again look for short-term resistance near $76.75. The last several weeks has seen the stock sort of stair-step down so we should see it step down soon. We do want to point out that MMM appears to have produced a bullish wedge pattern over the last eight weeks. A breakout above its trendline of lower highs would be very bullish. 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.

Suggested Options:
We have been suggesting the July puts. However, readers may want to use October strikes. Consider waiting for a new decline under $75.00 before opening positions.

Picked on June 06 at $ 74.95 *triggered
Change since picked: + 1.17
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume = 4.0 million

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Monsanto - MON - close: 137.26 change: +2.33 stop: 140.55

Our aggressive put play in MON might backfire on us. The general trend still looks like MON is poised to move lower after its failed rallies near resistance (see chart). Yet MON may tag the trendline one more time and that would mean hitting our stop loss in the process. Keep a sharp eye on the $140 level. A failed rally near $140 would be a great entry point to open new (and still aggressive) put positions. Remember, we're long-term bullish on MON and this industry and we're just trying to capture a short-term correction. A dip toward $125 would look like a possible entry point to buy calls. Our target is the $126.50 mark. We do not want to hold over the June 25th earnings report.

Suggested Options:
We have been suggesting the July puts but wait for a new failed rally before considering new positions.

Picked on June 11 at $133.40
Change since picked: + 3.86
Earnings Date 06/25/08 (confirmed)
Average Daily Volume = 6.5 million
 

Strangle Updates

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

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Amgen Inc. - AMGN - close: 43.97 chg: +0.75 stop: n/a

AMGN is bouncing again but we don't have much time left for the June options that expire after Friday. We are adjusting our exit on the June strangle to breakeven at $0.56. You may want to adjust your exit lower. 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.

Suggested Options:
We are not suggesting new strangles in AMGN.

Picked on May 22 at $ 42.77
Change since picked: + 1.20
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume = 6.7 million

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McDonald's - MCD - close: 59.95 chg: +0.61 stop: n/a

It's not looking good for this MCD strangle. The June options only have five days left. We are adjusting our exit to breakeven at $1.10. 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.

Suggested Options:
We are not suggesting new positions at this time.

Picked on May 18 at $ 60.53
Change since picked: - 0.58
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume = 7.5 million

---

Tyco Intl. - TYC - close: 43.33 change: +0.02 stop: n/a

TYC has been consolidating sideways the last few days near its 100-dma. At this point I would expect a bounce back up into the $44.50-45.00 zone. 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).

Suggested Options:
We are not suggesting new strangles in TYC at this time.

Picked on June 03 at $ 44.89
Change since picked: - 1.57
Earnings Date 08/05/08 (unconfirmed)
Average Daily Volume = 2.9 million
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

Got the Time?

It happened again. I had just exited a position, barely holding onto some profit before prices reversed and ran away without me. Not only that, but once again, I'd had to hunt down the broker doing lunch duty while my broker and others had gone out to lunch. These were the days when even some of us options traders still had traditional brokers we must call to place a trade. I'd been practically drumming my fingers on the desk while the broker had slowly and deliberately repeated my order and I confirmed that, yes, I wanted to sell to close my 20 contracts of whatever it was.

And it dawned on me. The last three times I'd been in a similar position had been during lunchtime here in Texas, too. In fact, they'd been very nearly at 12:45 pm Texas time, so 1:45 pm in New York. Because these trades had all occurred during my broker's lunch hour when I'd had to hunt down someone to place my trade, only three trades were needed before I noticed that pattern.

If it had been any time other than lunchtime, the pattern might not have been so quickly apparent. Now I often warn subscribers to watch out for a stop-running time of day that often begins as New York traders return from their own lunch period. In fact, as I type on June 3 at 1:34 pm ET, one has been playing out.

Annotated 15-Minute Chart of the OEX:

The OEX was on its way to an intraday low of 624.46 within a few minutes after this chart was snapped, so this was no stop-running move that was quickly reversed. Instead it was part of a downturn that was going to bring the OEX sharply lower.

So, although early on I dubbed this period a stop-running time of day and that title stuck with me and subscribers, I wish I'd never named it that. You see, I'm not one of those who believe that market makers, specialists, big money and all such people sit around figuring out how they're going to bilk mom and pop retail trader out of their money. I don't picture floor traders standing around, spitting tobacco out of the corners of their mouths, studying some screen. I don't imagine them discovering a stop on a 10-contract position somewhere, elbowing fellow floor traders and picking off that 10-contract position before reversing the markets again, barking out a laugh while they're doing it. No, instead, I picture floor traders, specialists, big money and others who might have something to do with the markets studying their inventories or their clients', figuring out how much risk they have on the table and deciding what they need to do in order to manage their risk.

What if big money wants to acquire stock but is afraid that the floor under the markets remains too unstable? Or conversely, if big money wants to acquire and is worried that any attempts to do so will send prices up sharply above the level at which they want to acquire?

I know what I'd do if I had enough money to move the markets. I'd be doing some testing. I'd stick my toe in the water with trades just big enough to move markets a bit in the thinner trading environment just as people are returning from lunch. Then I'd see what happens.

We retail traders better know what they're doing and realize that the test going on may not be the final move. We have to be aware that big money or someone else with the capacity to move markets a bit is doing some testing and it's the RESULT of the test that will better determine where markets go next.

So that I can include volume, I've used the SPY to show one such test underway right during that stop-running (or market-testing) time of day.

Annotated Five-Minute Chart of the SPY:

Annotated Five-Minute Chart of the SPY:

Although the 1:35-1:55 pm ET period isn't exact, it's easy to pick up on the test when you're trading and aware of what might happen. It's not always as easy to predict either the direction of the test or the outcome of the test. If it were easy to predict, big money wouldn't need the test at all.

Perhaps that's why on some days, no testing appears. We're moving into a summertime trading period, and the light-volume days of summer tend to produce either no test at all or else exaggerated responses to any test that does occur.

Being aware of such a test helps traders to fine-tune their trading plans. No one approach works for all trades. For example, some scalpers or day traders plan to be out of their first trades by mid-morning, waiting out the chop during lunchtime and that test that occurs as big money returns from lunch for a next entry. Some traders who are in position trades, have a big cushion of accumulated profits and don't want to get whipsawed out of positions will widen their stops as this period of day approaches. Traders who have just entered a swing trade they hope to hold onto a day or two but haven't yet accumulated any profits may elect a tight stop in case that a test results in a move against their positions.

Although there's not a single approach that works for all trades, all traders should be aware of the propensity for some type of testing to occur during that period of time and plan accordingly.
 

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

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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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