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Daily Newsletter, Monday, 06/16/2008

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Table of Contents

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

Market Wrap

Stocks Post Modest Gains As Rocco and Tiger Go Extra Round

Stocks posted modest gains to start the week as traders were either more occupied with this year's sudden death round of the U.S. Open golf championship between sentimental favorite Rocco Mediate and the world's #1 ranked golfer Tiger Woods, or traders expended all their energy last week ahead of this Friday's Triple Witch expiration as volumes were notably less than last week's 4.49 billion share average daily volume at the big board and 2.14 billion share average churn the NASDAQ.

For those of you that taped today's sudden death round of the U.S. Open, don't worry, I will not reveal today's winner in tonight's Market Wrap.

Oil prices jolted higher ahead of this morning's cash open and helped set a broader negative tone for stocks in early session trade as July crude oil futures (cl08n) jumped to a session high $139.89 just prior to 09:00 AM EDT, but then retreated as traders and investors mulled the effects of an overnight fire at a StatoilHydro (NYSE:STO) $38.46 +3.08% drilling rig in the North Sea, which could affect as much as 150,000 barrels of daily oil production, and this weekend's announcement out of Saudi Arabia that it would boost oil output by 200,000 barrels a day from June to July.

By session's end, July crude oil futures at the Nymex settled down $0.25, or -0.19% at $134.61, with this contract expiring on Friday.

After breaking below what I have been viewing as a key level of support (1.5392) on Friday, the euro did strengthen back some today, settling at 1.5476 +0.64% versus the dollar.

It has been my thoughts that the weakness in the dollar versus the euro has been partially responsible for the remarkable gains in oil prices. With some "softening" in the euro, I don't see how market participants can continue to blame any further strength in oil on monetary policy, should weakness in the euro versus the dollar continue.

U.S. Market Watch -

Financials were once again in focus with Lehman Brothers (NYSE:LEH) $27.20 +5.38% reporting a previously forecasted loss. The broker reported its first-ever quarterly loss of $2.8 billion, or $-5.14 per share. Revenue (total revenue less interest expense) for the recently completed Q2 was negative at $-700 million. Some analysts took solace in the firm's 20% reduced exposure to residential mortgages, commercial mortgages and real estate investments during the quarter.

The Financial SPDRs (XLF) $23.60 +0.94% edged higher by $0.22 and were the third-most heavily traded security, turning just more than 124 million shares.

U.S. homebuilder's confidence was about as robust as Lehman's in June.

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The National Association of Home Builders said its index for sales of new, single-family homes fell to just 18 in June, matching a record low set in December 2007. The index, which was 19 in May, gauges builder's perceptions of current home sales as well as sales expectations for the next six months. Readings above 50.00 indicate that more builders view sales conditions as good, while measures below 50 suggest builders see poor sales conditions persisting.

While the NAHB's survey of home builders was very negative, last week's rebound in the seasonally adjusted purchases index from the Mortgage Banker's Association (MBA) will be in the spotlight Wednesday morning.

MBA's Weekly Survey of Purchases - Week Ended 06/06/08

While sentiment among new homebuilders is negative, I would at least want to note that last Wednesday's release of the Mortgage Bankers Association (MBA) purchases index rebounded, with the MBA saying there were some signs that depressed prices may have started to find some speculators re-entering the market.

Having plunged to 333.6 for the week ended 05/30/08, the seasonally adjusted purchase index edged up 8.4% last week.

In the above table, and over to the far right, I've been calculating the 4-week SMA (simple moving average) and 12-week SMA (roughly 1 quarter).

Economic data released today showed manufacturing activity in New York State remained weak. The Empire State Manufacturing Survey fell 5 points to a negative 8.7 in June, which was weaker than economists' forecast of -2.0 and May's -3.2 measure. Readings above 0.00 suggest growth, while measurements below 0.00 suggest slowing.

Of the 200 manufacturing executives polled, roughly 30% of responding businesses reported conditions had deteriorated since May, while 21% said conditions had improved.

This weekend I had been asked by subscribers to post some of the major index/tracker "Max Pain Theory" levels. At tonight's close, the current tabulations when all June call and put open interest is combined would equate to the following.

June "Max Pain Theory" Tabulations - at 06/16/08 Close

The Dow Diamonds (DIA) $122.66 -0.35% and the Financial SPDRs (XLF) $23.60 +0.94% currently reside BELOW their June'08 Max Pain theory levels. The SPY $136.23 +0.05%, IWM $73.78 +0.62% and USO $108.99 -0.19% currently reside ABOVE their June'08 Max Pain theory levels. Give or take several cents, the QQQQ $48.80 +0.88% and SMH $32.00 +0.72% currently trade near, or at their June Max Pain theory levels.

While traders should NOT rely on securities "gravitating," or "elevating" towards the Max Pain theory levels, this is a QUARTERLY expiration and levels can me more influential and create greater gyrations as institutional traders, especially options market makers attempt to push things around and keep as much of the premiums they've sold as possible.

While today's U.S. Open sudden death round was exciting, last week's heavy volume certainly suggests institutions were active in their pre option expiration activity and if you thought Tiger's birdie on the 18th hole Sunday was unbelievable, which forced today's playoff, traders should always be aware that similar excitement and turning of events can take place into Friday's expiration.

U.S. Oil Fund (USO) - $0.50 box chart

Oil prices as depicted by the U.S. Oil Fund (USO) could be a major driver into Friday's expiration. Not only do USO options expire this week, but July crude oil futures (cl08n) also expire at Friday's close.

A break ABOVE $113.00 in the USO could bring another HUGE wave of buying into oil and weigh on the major indices, while a break below $116.00 in the USO, which happens to be this month's "Max Pain" theory could trigger a substantial decline.

Open interest in the July crude oil futures (cl08n) is heavy at 172,409 contracts and today's volume was brisk at 273,792 contracts!

If there's going to be a pivotal technical event to drive markets this week, I have to think its oil's price.

Like a 4-foot put to win the U.S. Open, great pressure continues to build around oil's price.

Euro CurrencyShares (FXE) - Daily Intervals

On Friday (06/13/08) the euro looked set to break down against the dollar, but the euro rebounded today.

I have NO clue as to "why" oil shorts didn't get their heads handed to them today, other than the euro looking a bit suspect to softening.

It is a tough call here as support looks horizontal at $154.00, but the lower highs despite oil's strength has a near-term bearish look to it.

If sellers come in strong below Friday's low (FXE= $153.40), then some hedge funds that have been long oil and long the euro could relinquish their hold.

The reason I feel pressure here is that I had profiled NAKED calls against the FXE, but on June 5th, I feared the FXE could surge above trend (as it did on June 6th), and should it break much above $158, traders could get caught in another short squeeze similar to that in late February (see 02/26/08 move).

Despite some very hawkish comments out of ECB officials, the euro's strength has been "kept in check."

In my opinion, the yen has weakened enough against the dollar at this point to alleviate fears among Japanese investors that their economy would crater under dollar weakness.

I think greater focus will be placed on the eur/$ and its impact, if any, on oil for the next couple of weeks.

DIA and SPY Montage - Daily Intervals

Little change in the DIA, or SPY from last Monday's market wrap at tonight's close, but buyers defended where they had to in the DIA on Wednesday (06/11/08).

On Tuesday morning as the DIA was trading $123.36, I did think conservative bulls should be looking to trade long the DIA Aug $123 Calls (DAW-HS) at $4.50/contract. As stated in last Monday's market wrap, I'm looking to hold this call option as long as the DIA can hold a CLOSE above $120.75.

IWM and QQQQ Montage - Daily Intervals

Both the very broad small caps of the iShares Russell 2000 (IWM) $73.78 +0.62% and the narrower, but larger cap names at the NASDAQ as depicted by the NASDAQ-100 Tracker (QQQQ) $48.80 +0.88% remain steady.

Shares of QQQQ/NDX component Adobe Systems (ADBE) $42.85 +0.32% slipped to $41.85 in this evening extended session after the software-maker said net income rose to $214.9 million, or $0.40 a share, amid strong sales overseas. Excluding stock-based compensation and acquisition charges, the company said EPS were $0.50. Revenue rose 19% year-over-year to $886.9 million. Analysts were looking for the company to earn $0.46/share on revenue of $880.01 million.
 


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

Alliant Tech - ATK - close: 105.53 change: -1.58 stop: 102.95

News that ATK had won a $97 million ammo contract from the army did not boost the stock price. Shares under performed the market with a 1.4% loss. We see this dip back toward $105 as a new bullish entry point but since ATK closed near its lows for the session you may want to look for a bounce first tomorrow morning before initiating positions. 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.

Picked on June 12 at $105.28
Change since picked: + 0.25
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume = 244 thousand

---

Peabody Energy - BTU - close: 77.30 change: -0.29 stop: 74.90

It was another mixed session for coal stocks. Some where hitting new highs while others trended sideways. BTU was in the latter group and volume today was below average. We're still suggesting that readers tread cautiously here. The group as a whole continues to grow more overbought. 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.

Picked on June 01 at $ 73.92 /1st target exceeded 79.75
Change since picked: + 3.38
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume = 5.8 million

---

Bucyrus - BUCY - close: 77.55 change: +2.14 stop: 71.65

BUCY continues to show relative strength. The stock added 2.8% and is challenging its highs near $78.00. If you don't want to chase it then wait for a pull back toward $75 again. 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.

Picked on June 15 at $ 75.41
Change since picked: + 2.14
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume = 2.4 million

---

Diamonds - DIA - close: 122.66 change: -0.44 stop: 120.85

The rebound in the DJIA is already faltering. That's not a good sign. We are not suggesting new positions at this time. Our target is the $124.50 mark. However, keep a close eye on the $124.00 level. If DIA fails close to $124 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.

Picked on June 12 at $121.63
Change since picked: + 1.03
Earnings Date 00/00/00
Average Daily Volume = 12.9 million

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Research In Motion - RIMM - cls: 140.98 chg: +8.02 stop: 132.49*new*

Positive analyst comments over the weekend and again this morning helped boost shares of RIMM today. The note this morning raised RIMM's price target to $205. The stock reacted with a 6% rally. Our suggested entry point to buy calls was $136.05 so the play is now open. We have two targets. Our first target is $144.00. Our second target is $154.50. Please note that our stop loss is now $132.49.

Picked on June 16 at $136.05 *triggered
Change since picked: + 4.93
Earnings Date 06/25/08 (confirmed)
Average Daily Volume = 16.7 million

---

United States Oil - USO - close: 108.99 chg: -0.21 stop: 105.95

Crude oil spiked to a new high at $139.89 this morning and then promptly reversed. Crude oil had a $7.00 swing. The USO witnessed close to a $5.00 swing. The intraday low on the USO was $108.07. A bounce from here could be used as a new entry point. However, keep in mind that this is a very short-term play. Essentially this week only and we'll plan to exit on Friday if we don't hit our target. 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.

Picked on June 12 at $111.27
Change since picked: - 2.28
Earnings Date 00/00/00
Average Daily Volume = 11.4 million
 

Put Updates

Emerging Markets 50 ADR - ADRE - cls: 52.61 chg: +0.24 stop: 55.01

the ADRE continues to bounce but has not yet broken above its 200-dma or 10-dam. 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.

Picked on June 03 at $ 54.69
Change since picked: - 2.08
Earnings Date 00/00/00
Average Daily Volume = 448 thousand

---

Caterpillar - CAT - close: 80.91 change: -0.59 stop: 83.55

We remain bearish on CAT and readers could open new put positions here under $82.00. However, the bounce in the DJIA and the S&P 500 may not be over yet. Traders should remain cautious with the stock above $80.00. Our target is the $75.25 mark. The stock "should" see some technical support at its 200-dma near $75.00.

Picked on June 11 at $ 79.45 *triggered
Change since picked: + 1.46
Earnings Date 07/18/08 (unconfirmed)
Average Daily Volume = 6.2 million

---

Deere & Co. - DE - close: 80.60 change: +2.68 stop: 82.55

Positive analyst comments this morning, about long-term demand for farm equipment, fueled a sharp bounce in DE. The stock hit $81.22 intraday. We remain bearish here. A move back under $80.00 or under $79.50 would be a new entry point to buy puts. Our target is the $70.50 mark. The Point & Figure chart is forecasting a $72 target.

Picked on June 12 at $ 78.49 *triggered
Change since picked: + 2.11
Earnings Date 08/13/08 (unconfirmed)
Average Daily Volume = 5.4 million

---

DaVita Inc. - DVA - close: 50.26 chg: -0.21 stop: 53.01

There wasn't much follow through on DVA's big bounce on Friday. The best the bulls could do today was $50.54. We don't see any changes from our weekend comments. 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.

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: 47.06 chg: +0.07 stop: 49.05

The oversold bounce in ERTS continued into Monday. 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.

Picked on June 06 at $ 47.75 *triggered
Change since picked: - 0.69
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume = 3.7 million

---

3M Co. - MMM - close: 75.20 chg: -0.92 stop: 77.05

MMM is showing relative weakness and looks like it's ready to breakdown under $75.00 again. Traders might be tempted to jump in right now with some new put positions. If you prefer to see more momentum then wait for a new relative low under $74.75. 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: + 0.25
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume = 4.0 million

---

Monsanto - MON - close: 135.92 change: -1.34 stop: 140.55

A lot of the fertilizer stocks like POT, MOS, CF, IPI, and AGU all hit new highs today. MON was the laggard with a failed rally near $140.00. This looks like a new bearish entry point to buy puts. I want to reiterate that this is an aggressive, higher-risk play. With the sector moving higher it's a tough call to go against the current. 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.

Picked on June 11 at $133.40
Change since picked: + 2.52
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.)

---

Amgen Inc. - AMGN - close: 43.99 chg: +0.02 stop: n/a

We have four days left to go for June options. It's not looking good. 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.

Picked on May 22 at $ 42.77
Change since picked: + 1.22
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume = 6.7 million

---

Alpha Nat. Res. - ANR - close: 94.42 chg: +0.17 stop: n/a

ANR struggled to keep the momentum going today. We would suggest strangle positions in the $94-96 zone. This is a higher-risk strangle play with the options so expensive. The options we suggested were the July $105 calls (ANR-GA) and the July $85 puts (ANR-SQ). Our estimated cost was $9.40. We want to sell if either option hits $14.50.

Picked on June 15 at $ 94.25
Change since picked: + 0.17
Earnings Date 08/05/08 (unconfirmed)
Average Daily Volume = 3.7 million

---

Fording Cand. Coal - FDG - close: 85.74 chg: +2.83 stop: n/a

FDG hit another new high with a 3.4% gain. If you want to play with the options we listed then wait for a dip near $82.50. Otherwise you may want to adjust the strikes you trade with. We were suggesting the July $90 calls (FDG-GR) and the July $75 puts (FDG-SO). Our estimated cost was $5.45. We want to sell if either option hits $ 8.00 or higher.

Picked on June 15 at $ 82.91
Change since picked: + 2.83
Earnings Date 07/21/08 (unconfirmed)
Average Daily Volume = 1.7 million

---

Garmin Ltd. - GRMN - close: 45.85 chg: +0.94 stop: n/a

GRMN continued to trade sideways on either side of $45.00, which allowed us a great opportunity to open up strangle plays. We would suggest entries in the $45.50-44.50 zone. The options we listed were the July $50 calls (GQR-GJ) and the July $40 puts (GQR-SH). Our estimated cost was $2.55 We want to sell if either option hits $ 4.75 or higher.

Picked on June 15 at $ 44.91
Change since picked: + 0.94
Earnings Date 07/30/08 (unconfirmed)
Average Daily Volume = 4.1 million

---

Holly Corp. - HOC - close: 39.85 chg: -1.40 stop: n/a

HOC's drop back toward the $40.00 level is a great entry point to open strangles. We would try and use the $41.00-39.00 zone as your entry range. The options we listed were the July $45 calls (HOC-GI) and the July $35 puts (HOC-SG). Our estimated cost was $2.00 We want to sell if either option hits $ 3.00 or higher.

Picked on June 15 at $ 41.25
Change since picked: - 1.40
Earnings Date 08/07/08 (unconfirmed)
Average Daily Volume = 1.1 million

---

McDonald's - MCD - close: 59.94 chg: -0.01 stop: n/a

Dow-component MCD did not see much movement today. That's very bad news for our options, which only have four days left. Don't be surprised to see the "market" peg MCD at the $60 strike price by Friday. 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.

Picked on May 18 at $ 60.53
Change since picked: - 0.59
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume = 7.5 million

---

Tyco Intl. - TYC - close: 43.28 change: -0.05 stop: n/a

TYC is still trading sideways in its new $43-44 trading range. 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: - 1.62
Earnings Date 08/05/08 (unconfirmed)
Average Daily Volume = 2.9 million

---

Valero - VLO - close: 44.12 change: -0.72 stop: n/a

There is no change from our weekend comments on VLO. We would still open new strangles in the $44-45 zone. The options we suggested were the July $50 calls (VLO-GJ) and the July $40 puts (VLO-SH). Our estimated cost is $1.89. We want to sell if either option hits $2.75 or higher.

Picked on June 15 at $ 44.84
Change since picked: - 0.72
Earnings Date 07/29/08 (unconfirmed)
Average Daily Volume = 10.8 million
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 

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

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