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Daily Newsletter, Saturday, 06/21/2008

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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

Summer Witching

The summer doldrums are in full swing and Friday was a quadruple witching. Need I say more? That alone is a recipe for a decline but there were plenty of other negatives adding to the momentum. The Dow fell to within 80 points of the March lows as the selling in the banking sector intensifies. Add in ratings downgrades by S&P and Moody's and it was not a fun day for the bulls.

Wilshire 5000 Broad Market Index Chart - Weekly

There were no material economic reports on Friday. The only one of note was the Mass Layoffs for May, which rose to 1,626 events involving 50 workers or more. The May layoffs hit 171,387 compared to 133,914 workers in April. This suggests the labor picture is declining but you need to realize this is a lagging report for May and the announced layoffs will take place over several months, not all in May. The announcements are usually forward looking like "we are cutting 1100 employees by year-end." Construction and manufacturing have fallen the most with a sharp deterioration over the last two months. Manufacturing is being hurt by the sharp drop in automobile sales with production falling to 1998 levels.

Next week the calendar is busy but with few material reports. The Richmond Fed Survey on Tuesday and Kansas Fed Survey on Thursday along with the GDP will be the only items of real interest. The big event on the calendar is the Fed meeting on Tue/Wed. The rate announcement will be 2:15 on Wednesday and that is going to heavily influence the markets.

Economic Calendar

The Fed is caught between a rock and a hard place or in this case recession and inflation. The ammunition to fight either feeds the other. Cutting rates feeds inflation and raising rates feeds the recession. Their best alternative is to do nothing and that is what the market is expecting as of Friday. Chances of a rate hike have decreased sharply this week. However, the "whip inflation now" or WIN crowd is lobbying for a rate hike regardless of the impact on the recession. Richmond Fed President Jeffrey Lacker is adamant that "reversing rate cuts now makes eminent sense." And, "Just as easing policy aggressively in response to emerging downside risks makes sense, withdrawing some of that stimulus as those risks diminish makes eminent sense as well." Lacker is no stranger to the markets because he is a constant inflation hawk. He voted against several of the rate cuts saying inflation risks were already too high. Other Fed officials have also been making comments on inflation that were seen as hawkish and that pushed the chances of a rate hike higher.

The various news items on Friday diminished the chances of a hike significantly. S&P warned that it was putting GM, Ford and Chrysler on negative credit watch because of the falling auto sales. Moody's also lowered its ratings on Ford and Chrysler. Both said the sudden and significant drop in auto sales, specifically trucks and SUVs, was a bad omen for the automakers. Sales have fallen to 1998 levels. Liquidity for the big three for the rest of 2008 does not appear to be a problem. However, S&P said if sales don't pickup sharply in the first half of 2009 their liquidity levels could reach "undesirable levels." Not only have sales dropped off a cliff but it is especially painful that their highest profit lines of trucks and SUVs have been the hardest hit. I seriously doubt this is going to change soon. Ford said it was putting off the release of the redesigned F-150 pickup, the largest selling vehicle in the world, until they clean out the inventory of the older models. The downgrade on the automakers and the negative comments about sales would definitely weigh on any rate hike chances next week.

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Another factor weighing on the Fed is the bearish comments out of the banking sector this week. Citigroup fell under $20 on comments that loan losses could produce significant additional write-downs. Goldman Sachs said on Friday that the credit crunch was ongoing and would not peak until 2009. Credit losses would increase, loan loss reserves would need to be increased and capital raises would become much harder. Every capital deal done over the last three months is now underwater. Merrill said on Friday that loan losses in the banking sector would materially weaken earnings and they saw no improvement until 2010. All the major banks have said the consumer is under serious pressure and future defaults, foreclosures and bankruptcies were expected to increase. The Fed will find it very tough to justify raising rates under these conditions.

Lastly the bond insurers are in trouble again. Moody's downgraded bond insurer MBIA (MBI) by two notches to A2 from Aaa. This was much harsher than expected and literally shuts the door on new business for MBIA. The stock dropped 13% from $6.45 to $5.60 but that is not the problem. This puts MBIA $2.6 billion short of the capital needed to regain an investment grade rating. MBIA said it only has $1.1 billion in capital and would probably have to post an additional $4.5 billion in eligible collateral to satisfy potential collateral posting requirements under existing contracts. Moody's said their exposure to mortgage backed securities had risen to $5.9 billion as of last week. The ratings cut on MBIA will cause the ratings to be cut on hundreds of billions of bonds MBIA insured. This means holders of those securities will in some cases be forced to sell them because of rules regulating the quality of investments they are allowed to hold. For instance money market funds cannot hold securities that are not in the top two categories. This would knock those securities out of that range and force their sale. Moody's also cut the rating on the other major insurer, Ambac, to Aa3 from Aaa. Just when the Fed thought the worst was over these ratings cuts are putting about $1 trillion in bonds in jeopardy. Can the Fed afford to raise rates in this environment?

MBIA Chart - Weekly

I am betting against the Fed changing rates. That does not make the 2-day meeting any less of a market event. Traders are likely to remain on the sidelines until the smoke clears on Wednesday. The Fed will likely claim inflation is now more of a threat than recession and talk tough about mounting an aggressive fight but in the end do nothing. I am not sure it will help the market or not because those same points I made above are still negative for stocks.

August Crude Oil Chart - 120 Min

Crude prices firmed to gain +2.69 at $135 ahead of this weekend's meeting in Saudi Arabia. Friday was also the last day of trading for the July contract. Oil was expected to be weak ahead of the weekend meeting but news from around the world erased those expectations. It was reported in the New York Times on Friday that Israel had staged a maneuver over the Mediterranean and Greece that had all the appearances of preparations for an attack on Iran's nuclear facilities. The mock raid involved more than 100 Israeli F-15 and F-16 warplanes along with aerial refueling tankers, helicopters for pilot rescue, radar planes, etc. The warplanes flew more than 1400 kilometers, about the distance from Israel to Iran's nuclear enrichment facility in Natanz. This major exercise was obviously designed to demonstrate their capability of striking Iran as they have promised if Iran continues uranium enrichment. The U.S. confirmed the maneuvers and the potential of an attack on Iran. This was clearly designed to send a message to Iran and to the world that Israel was not making idle threats to end Iran's nuclear project. Israel destroyed Iraq's reactor facility in 1981 and a nuclear site in Syria several months ago.

The potential for an attack on Iran sent oil prices spiking early Friday to $136.80 but the Israel/Iran scenario was not the only market-moving event. Shell declared force majeure on 225,000 bpd of June and July production from Nigeria after the rebel attack on Thursday. That is a huge amount of light crude off the market for the next six weeks. A Chevron pumping station in Nigeria was attacked on Thursday night but there was no word on production declines. Chevron was also in the news as talks with workers in Nigeria fell apart and a strike is expected. A strike would impact Chevron's daily output of 350,000 bpd in Nigeria.

Those news events offset the negative price impact of the impending meeting in Saudi Arabia. The rumors are flying and I don't have the space to get into all of them here. Saudi already leaked that they will announce a production increase of 200,000 bpd at the conference. That leak has been making the rounds for a week. The newest rumor is that the announcement will actually be an increase of 500,000 bpd. That would take Saudi output to an even 10 million barrels per day and a level that many analysts doubt they can achieve. "IF" they actually bumped the announcement to 500,000 bpd "AND" actually managed to pull it off then it would be very bearish for oil prices. Saudi appears dead set on lowering prices and to emphasize their commitment they announced on Friday they were spending $90 billion to increase production to 12.5 mbpd by the end of 2009. This is not new news but their reiteration only days before the meeting suggests they are serious about talking down prices. That has been an impossible task recently. For the last two weeks oil prices have stabilized just under $137 and that suggests the oil bulls are running scared that the Saudi meeting could pressure prices next week.

In stock news Yahoo announced the departure of several executives. The brain drain included senior executives focused on search, email and services such as photo sharing, are departing. Current president Sue Decker is reportedly considering a reorganization that would centralize Yahoo mail, search and home page divisions into a global product organization. The brain drain and the rumors of a major reorganization knocked YHOO back to $21.99 on Friday.

In a major last minute market shocker SunTrust Banks (STI) said late Friday that it did not see any need for a dividend cut or to issue new stock or raise capital. They reaffirmed their charge-off and capital ratio guidance for Q2. They took this unusual step of announcing this late Friday to counter the sell off in the financial sector and in their stock price. Merrill Lynch comments earlier in the day suggested STI would be forced to cut their dividends. The move worked and the announcement lifted them +$3.50 off their lows. Huntington Bancshares (HBAN) had already shocked investors when they affirmed their prior guidance earlier in the morning and said charge-offs would not exceed prior estimates. HBAN spiked +30% on the news.

SanDisk (SNDK) was hammered after Citi downgraded them to hold from buy citing slowing demand in Asia and slowing handset orders from European companies. "Contract pricing weakness ahead of a seasonably strong build period along with demand erosion point to a loosening of fundamentals for NAND-based flash memory cards in the second half of the year" according to the Citi analyst. SNDK fell -10% on the downgrade.

Determining market direction for next week is no easy task. There are many conflicting factors which taken together could cancel each other out. The bear market in financials is becoming worse. The PHLX Banking Index (BKX) closed at 62.72 and a new 10-year low on a weekly basis. The Merrill, Goldman and Citigroup comments over the past week suggest there is more pain to come and in Merrill's view we may not see a rebound until 2010. If that is true there is almost no way for the broader markets to rise. The financials are the biggest component of the S&P. No financial rally, no market rally, period. The downgrades on the bond insurers will cause an entirely new ripple down effect for that trillion dollars of bonds insured by Ambac and MBIA. This will cause more write-downs and capital raises all down the food chain. This suggests there really is more pain ahead. The earnings warning cycle will be in full bloom next week.

The consumer is struggling as we saw with the bankruptcy and foreclosure numbers. The rise in the mass layoff numbers indicates the weak job market should continue. The Saudi oil meeting could send oil prices lower and oil stocks would follow. At 18% of the S&P that, along with the banks, would be a win for the market bears.

On the flipside no move by the Fed is already priced into the market. A positive statement of some kind could actually give the market a lift. There are six trading days left in the quarter. With a large amount of cash on the sidelines and NYSE short interest at a record high as of last week at 4.6% of all outstanding shares there is plenty of kindling for a bear-b-que. That is 17.65 billion shares short compared to the previous record of 16.43 billion on May 30th. The last three days of a quarter and first four days are generally bullish as retirement funds are deposited and put to work. Lastly the Dow is only 102 points away from the March closing low. This would be an excellent place for the bulls to produce a rebound. At one point on Friday decliners on the NYSE were outpacing advancers by 10:1. By the close that had improved to only 5:1. Still bad but indicated buyers had stepped in. It was probably just short covering ahead of the weekend but you can never tell.

The markets on Friday were heavily influenced by the downgrades on the automakers, financials, bond insurers, chip stocks and by the quadruple witching option expiration. If that was not a quintuplet of shocks to the market's foundation I don't know what is. Volume was very high at more than 9 billion shares. Was it a short-term capitulation? Who knows for sure but the market and especially the Dow is very oversold. Even the oil stocks have been losing ground despite rising oil prices. Granted it is summer and there is no compelling reason to own stocks right now but there is always a reason to own the right stocks as one reader pointed out as a rebuttal to that statement I made last Tuesday. Unfortunately even the right stocks go down in a bear market but that becomes a buying opportunity for those with risk tolerance.

That brings me to my final point. Funds have been sitting on a pile of cash while waiting for the market to pick a direction. Three weeks ago the Russell 2000 was breaking out as eager fund managers were starting to nibble on the "worst is over comments" coming out of the Fed. That idea cratered with the current round of problems and everybody is back in cash. Extremely oversold, a 10:1 A/D line, end of quarter window dressing, new retirement money, record short interest and the Dow within 102 points of its March closing low. That all adds up to a potential bear-b-que and we could see it next week. The SunTrust (STI) and Huntington Bank (HBAN) positive guidance could have been the leading edge of some good banking news for next week. There is absolutely no way to predict which of these scenarios will play out next week but I believe the fuse has been lit for a sharp rebound even if it is only a couple days in length.

The Dow closed at 11842 and gave up -220 points for the day and -464 points for the week. FYI the markets have been negative for 7 of the last 11 Fridays. The March closing low was 11740 and that is the level to watch. The Dow dropped below that level twice in January but rebounded to close higher both times. If the Dow closes below 11740 then all bets are off and we start looking for the next support level, which could be well below at 10700. That would be another thousand-point drop but there is nothing of any significance in terms of support between those ranges. Under 11740 is where the bears put everything in cruise control and take a thousand point nap.

Dow Chart - Weekly

Nasdaq Chart - Weekly

The Nasdaq continues to be far less bearish with a stop on Friday at support at 2400. Granted it was a -56 point loss for the day but the loss for the week was only 48 points. For the Nasdaq the 2400 level is the line in the sand that must be defended. Once that level breaks we could see a cascade lower to 2275. If the Dow and the financials continue to be weak the Nasdaq probably will not be able to hold that 2400 level. We have a clear double top at 2550 and this is the second test in the last two weeks of support at 2400. This is a critical test!

The S&P-500 has split the charts between the very bearish Dow and slightly bullish Nasdaq. The index stopped its descent on Friday at 1315 and although under the 1320-1327 some analysts were watching it is still over weak support at 1310 and much stronger support at 1275. The S&P is being pushed lower by the financials with 73 of its 500 components being financial in nature. There is little hope for the S&P as long as the financials continue to weaken. The odds are very good that we will eventually test that 1275 level even if it is not next week.

S&P-500 Chart - Weekly

Like the Nasdaq the Russell continues to find support at higher levels and is struggling to hold on to its gains. 720 is current support and it closed at 725 on Friday.

The Dow Transports were the most bullish index for the week and despite a -98 point loss on Friday the transports actually ended the week higher by +45 points. This is astounding with oil at $135 and is most likely helped by the positive earnings guidance from YRWC earlier in the month. It was definitely not due to the FedEx disaster on Wednesday where they dropped -$5 on earnings news. It had to be the rebound in the airlines pushing it higher. You may recall that the airlines closed at their multi-week lows last Friday and then rebounded on announcements about cuts in capacity, fare increases and a couple dollar drop in oil prices. This is a false rebound and any day the market is open is a good day to sell airline stocks. Earnings estimates for the top 10 U.S. airlines for 2008 are for a loss of $10 billion and growing.

Dow Transports Chart - Weekly

Airline Index - XAL - Chart - Weekly

For next week look for an oversold bounce and undue consternation around the Fed announcement. Volume is going to continue to slow as we approach July 4th and after Wednesday's Fed announcement the volatility should shrink dramatically. Plan your trades carefully and trade your plan. Emotional trading is an expensive hobby.

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
CEPH AAPL KLAC
DIA   USO
SPY    

Play Editor's Note: It is really looking ugly out there. Fortunately, we know that stocks don't normally move in a straight line for very long so we should see an oversold bounce soon. Even bear markets have their rallies. The idea here is to try and buy the dip on any follow though from Friday's sell-off. Friday's session was ugly and as the mom-and-pop investor crowd read their newspapers this weekend there could be another spike lower on Monday morning as they hit the "sell" button. We're expecting the Dow Jones Industrials to bounce from the March lows and that could carry the rest of the market higher even if it's temporary. The really sad news this evening is that we didn't find many candidates that looked good enough that we wanted to buy the dip.


New Calls

Cephalon - CEPH - close: 71.14 change: +0.44 stop: 67.95

Company Description:
Founded in 1987, Cephalon, Inc. is an international biopharmaceutical company dedicated to the discovery, development and commercialization of innovative products in four core therapeutic areas: central nervous system, pain, oncology and addiction. (source: company press release or website)

Why We Like It:
CEPH displayed relative strength last week with a breakout over resistance at the $70.00 level. Even the market's sell-off to new relative lows did not slow the buying pressure in CEPH. We don't want to chase last week's highs. Instead we're suggesting readers buy a dip into the $69.50-69.00 zone. If triggered our target is the $74.00-75.00 range. We do not want to hold over the late July earnings report. FYI: The P&F chart is bullish with an $83 target. The most recent data listed short interest at 18.6% of the 66.2 million-share float. That is a relatively high amount of short interest and raises the risk of a short squeeze, which would obviously be good for the bulls.

Suggested Options:
We are suggesting the July or August 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 CQE-GN open interest=2511 current ask $2.80
BUY CALL JUL 75.00 CQE-GO open interest=1263 current ask $0.70

BUY CALL AUG 70.00 CQE-HN open interest=13347 current ask $4.10
BUY CALL AUG 75.00 CQE-HO open interest= 2786 current ask $1.80

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/29/08 (unconfirmed)
Average Daily Volume = 1.4 million

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DIAMONDS - DIA - close: 118.24 chg: -2.12 stop: 116.99

Company Description:
The DIAMONDS Trust Series 1 is an exchange traded fund that mimics the performance in the Dow Jones Industrial Average.

Why We Like It:
We suspect that the Dow Jones Industrial Average (DJIA) will bounce near its March lows. It will probably be a temporary bear-market rally but we want to try and capture a chunk of any rebound. We're suggesting readers buy calls on the DIA in the $117.75-117.45 zone with a stop loss at $116.99. If triggered our target is the $121.50-122.00 zone.

Suggested Options:
We are suggesting the July calls. Strikes are available at $1.00 increments. Our suggested entry point is $117.75.

BUY CALL JUL 117.00 DIA-GM open interest= 536 current ask $3.70
BUY CALL JUL 119.00 DAW-GO open interest= 647 current ask $2.46
BUY CALL JUL 121.00 DAW-GQ open interest=3282 current ask $1.50

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume: 13.1 million

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SPDRs - SPY - close: 131.58 chg: -2.17 stop: 129.19

Company Description:
The SPDR Trust Series 1 is an exchange traded fund that mimics the performance of the S&P 500 index.

Why We Like It:
This trade in the SPY is the same strategy as the DIA it's just focused on the S&P 500. We're looking for a dip toward the $130 level early this week at which point the S&P should see an oversold bounce. Our suggested entry point is the $130.50-130.00 zone. We'll use a stop loss at $129.19. More conservative traders may want to use a tighter stop closer to $130.00. If triggered our target is the $134.00-134.50 zone.

Suggested Options:
We are suggesting the July calls. Strikes are available at $1.00 increments. Our suggested entry point is $130.50.

BUY CALL JUL 130.00 SFB-GZ open interest=9317 current ask $4.30
BUY CALL JUL 132.00 SFB-GB open interest=5672 current ask $3.10
BUY CALL JUL 134.00 SFB-GD open interest=16554 current ask $2.06

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume: 200 million
 

New Puts

Apple Inc. - AAPL - close: 175.27 chg: -5.63 stop: 182.55

Company Description:
Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. Today, Apple continues to lead the industry in innovation with its award-winning computers, OS X operating system and iLife and professional applications. Apple is also spearheading the digital media revolution with its iPod portable music and video players and iTunes online store, and has entered the mobile phone market with its revolutionary iPhone. (source: company press release or website)

Why We Like It:
Unless you have nerves of steel and quick fingers don't even look at this one. We're expecting the market to produce an oversold bounce when the DJIA tests the March lows. This is a play betting that AAPL is going to under perform the market this week. Just about everything about this stock is screaming "look out below". Technicals are bearish. The stock has a pattern of lower highs now. There was a bearish double top last week. The P&F chart is bearish with a $150 target. We have to label this a very aggressive play. The stock price can be volatile and the options aren't cheap and we are using a fairly wide stop compared to our target. We're suggesting a stop loss above last week's highs. We're aiming for $166.00. More aggressive traders could aim for the 200-dma near $162.00. If AAPL were to test $160 we'd expect a bounce and consider buying calls for a short-term rebound.

Suggested Options:
Remember, this is a very aggressive play. We're suggesting the July puts.

BUY PUT JUL 175.00 APV-SO open interest=13686 current ask $8.30
BUY PUT JUL 170.00 APV_SN open interest=26483 current ask $6.50
BUY PUT JUL 165.00 APV_SM open interest=13427 current ask $4.30

Picked on June 22 at $175.27
Change since picked: + 0.00
Earnings Date 07/27/08 (unconfirmed)
Average Daily Volume = 34.2 million
 

New Strangles

KLA-Tencor - KLAC - close: 40.07 chg: -1.19 stop:

Company Description:
KLA-Tencor is the world leader in yield management and process control solutions for semiconductor manufacturing and related industries. (source: company press release or website)

Why We Like It:
KLAC has pulled back to support near $40.00 and is now poised to rebound back toward $45.00 or plunge toward $35.00. We don't know what direction it's going to move so we're suggesting a strangle. We would open positions in the $40.50-39.50 zone. The closer to $40.00 the better.

Suggested Options:
A strangle involves buying both an out of the money call and an out of the money put. We don't care what direction the stock goes as long as it moves one direction. If it moves far enough one side of our trade will rise enough to pay for the entire trade and make a profit.

We are suggesting two different strangles. The strangle with the wider strikes costs less but has higher risk.

KLAC Strangle #1
$42.50-37.50 strangle: Our estimated cost is $1.65 We want to sell if either option hits $3.00.

BUY CALL JUL 42.50 KCQ-GV open interest=1682 current ask $0.85
-and-
BUY PUT JUL 37.50 KCQ-SU open interest= 598 current ask $0.80

KLAC Strangle #2
$45.00-35.00 strangle: Our estimated cost is $0.70. We want to sell if either option hits $1.50.

BUY CALL JUL 45.00 KCQ-GI open interest=2091 current ask $0.35
-and-
BUY PUT JUL 35.00 KCQ-SG open interest= 326 current ask $0.35

Picked on June 22 at $ 40.07
Change since picked: + 0.00
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume = 3.7 million

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United States Oil - USO - cls: 109.14 chg: +2.23 stop: n/a

Company Description:
The United States Oil Fund (USO) is an exchange traded fund that mimics the spot price performance of West Texas Intermediate (WTI) light, sweet crude oil.

Why We Like It:
The USO oil etf has been trading sideways for more than two weeks. It conveniently closed near the $110 strike price allowing us a chance to launch some strangles in what will probably be another very volatile month of trading. Hopefully the USO doesn't gap open to much on Monday morning following this Sunday's meeting with the Saudis regarding oil availability. We are suggesting readers open positions in the $109.00-111.00 zone and the closer to $110.00 the better!

Suggested Options:
A strangle involves buying both an out of the money call and an out of the money put. We don't care what direction the stock goes as long as it moves one direction. If it moves far enough one side of our trade will rise enough to pay for the entire trade and make a profit.

We are suggesting two different strangles. The strangle with the wider strikes costs less but has higher risk.

USO Strangle #1
$115-105 strangle: Our estimated cost is $7.10 We want to sell if either option hits $9.75.

BUY CALL JUL 115 IYS_GK open interest=3066 current ask $3.30
-and-
BUY PUT JUL 105 IYS-SA open interest=6337 current ask $3.80

USO Strangle #2
$120-100 strangle: Our estimated cost is $4.10. We want to sell if either option hits $6.50.

BUY CALL JUL 120 QSO-GP open interest=9590 current ask $1.95
-and-
BUY PUT JUL 100 IYS-SV open interest=16561 current ask $2.15

Picked on June 22 at $109.14
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 12.5 million
 


Play Updates

In Play Updates and Reviews

Call Updates

Bucyrus - BUCY - close: 73.83 change: -2.22 stop: 71.65

The widespread market weakness was enough to push BUCY to $72.70 intraday. The late afternoon bounce might be an entry point but we would wait to see if there is any follow through on Monday. Since the market might continue lower on Monday as retail traders read their weekend papers and react to the weekly sell-off we would not be surprised to see BUCY dip to $72.00-71.75 before bouncing. We're going to leave our stop loss at $71.65 but more aggressive traders may want to consider adjusting their stop loss to just under $71.50. Remember, wait for the bounce before considering new bullish positions. 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:
If BUCY provides a new entry point we would suggest the July or October calls.

Picked on June 15 at $ 75.41
Change since picked: - 1.58
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume = 2.4 million

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Research In Motion - RIMM - cls: 144.56 chg: -2.99 stop: 137.40

It was a very strong week for RIMM. The stock rallied from the $133 level to over $148 on Thursday. Our first target was the $144.00 mark. Friday's minor 2% pull back wasn't that bad considering the stock's rally. We remain bullish on RIMM but we're not suggesting new positions at this time. Our second target is $154.50. Remember, we do not want to hold over RIMM's earnings next Wednesday. With only three days left until earnings we strongly suggest readers take some profits here.

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

Picked on June 16 at $136.05 *1st target exceeded $144
Change since picked: + 8.51
Earnings Date 06/25/08 (confirmed)
Average Daily Volume = 16.7 million
 

Put Updates

Caterpillar - CAT - close: 79.08 change: -0.40 stop: 82.75

We have to issue a warning here. The markets sold off sharply on Friday and yet shares of CAT did not. The stock held on to its mid June lows. This is short-term bullish even though the larger bullish pattern has been broken. We would expect a bounce back to the $81.00-82.00 zone. Keep an eye on the 50-dma near $81.50. Wait for a clear failed rally under its trendline of lower highs before considering new puts. Our target is the $75.25 mark. The stock "should" see some technical support at its 200-dma near $75.00.

Suggested Options:
If CAT provides a new entry point we would use the July or August puts.

Picked on June 11 at $ 79.45 *triggered
Change since picked: - 0.37
Earnings Date 07/18/08 (unconfirmed)
Average Daily Volume = 6.2 million

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Capital One - COF - close: 40.90 change: -0.98 stop: 46.05

Readers may want to do some profit taking in COF. We have been aiming for the $40.25 mark as our first target. Yet for two days in a row COF has bounced near $40.50. While the trend is very bearish COF could be setting up for an oversold bounce. Readers may also want to tighten their stops. The $45.00 level or $44.25 region could be alternative stops. We're leaving our stop at $46.05 for now. If COF does bounce look for a rebound toward $44.00 at which point it will have "filled the gap" from the 18th of June. We do have a secondary, more aggressive target at $37.75. The Point & Figure chart has a $36 target.

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

Picked on June 17 at $ 43.87
Change since picked: - 2.97
Earnings Date 07/17/08 (unconfirmed)
Average Daily Volume = 8.3 million

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Deere & Co. - DE - close: 76.37 change: -1.31 stop: 82.55

The trend is definitely getting worse for DE. The stock closed under its March double-bottom lows near $76.50. However, while DE looks bearish if the market bounces next week we do expect DE to participate. Wait for another failed rally near $80.00 before considering new put positions. More conservative traders may want to tighten their stops. Our target is the $70.50 mark. The Point & Figure chart is forecasting a $72 target.

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

Picked on June 12 at $ 78.49 *triggered
Change since picked: - 2.12
Earnings Date 08/13/08 (unconfirmed)
Average Daily Volume = 5.4 million

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Electronic Arts - ERTS - close: 46.94 chg: -1.50 stop: 48.55*new*

ERTS' rally from Thursday was completely erased on Friday. The stock lost more than 3% producing a very clear bearish reversal. Thursday's move now looks like a bull trap with the break above short-term resistance at $48.00. We are going to lower our stop loss to $48.55. Our target is the February lows near $44.50-44.00. FYI: Don't forget that trading in ERTS is at risk for headlines regarding its attempted acquisition of TTWO. Depending on the news the stock could go either way.

Suggested Options:
We would use the July puts.

Picked on June 06 at $ 47.75 *triggered
Change since picked: - 0.81
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume = 3.7 million

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E*Trade - ETFC - close: 3.59 change: -0.10 stop: 3.91

The trend in ETFC still looks bearish following last week's failed rally under its 50-dma and its trendline of broken support. We remain negative here and would still consider new put positions but bear in mind this is an aggressive trade. Readers should also consider that the financials remain very oversold and due for a bounce. Plus, the bulls could argue that while the market is testing or breaking its June lows shares of ETRC are not and that could be considered relative strength. The options we suggested were the July $4.00 and $3.00 puts. We have two targets. Our first target is $3.25. Our second target is $3.05.

Suggested Options:
We are suggesting the July puts.

Picked on June 17 at $ 3.68
Change since picked: - 0.09
Earnings Date 07/23/08 (unconfirmed)
Average Daily Volume = 20.8 million

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3M Co. - MMM - close: 73.02 chg: -1.10 stop: 76.26 *new*

Good news! Not only is MMM breaking down to new relative lows but it has also broken through the bottom of what appeared to be a bullish wedge pattern. Volume was pretty strong on Friday's sell-off. Shares do look a little oversold. Wait for a failed rally near $75.00 before considering new positions. We are adjusting the stop loss to $76.26. 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.

Suggested Options:
We're not suggesting new positions at this time. Wait for another entry point.

Picked on June 06 at $ 74.95 *triggered
Change since picked: - 1.93
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume = 4.0 million

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PowerShares QQQ - QQQQ - close: 47.42 change: -1.32 stop: 49.26

Tech stocks completely reversed their gains from Thursday. The NDX just collapsed on Friday morning and the QQQQ closed the session with a 2.7% loss right on its exponential 200-dma. The overall pattern is one of a broken bullish trend but the market could still see a short-term oversold bounce. Our target is $46.10. The $46.00 level and its 100-dma might be support.

Suggested Options:
We were suggesting the July puts. Strikes are available at $1.00 increments.

Picked on June 17 at $ 48.54
Change since picked: - 1.12
Earnings Date 00/00/00
Average Daily Volume = 133 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: 45.17 chg: +0.31 stop: n/a

AMGN displayed some relative strength on Friday but as expected it didn't stray far from the $45.00 level. Our June strangle has expired but traders should have been able to recoup part of our initial investment. The best bid for the day on the June $45 calls was about 29 cents. We are now down to four weeks left with the July options. We are not suggesting new positions at this time. 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.

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

Picked on May 22 at $ 42.77
Change since picked: + 2.40
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume = 6.7 million

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Alpha Nat. Res. - ANR - close: 94.80 chg: +0.48 stop: n/a

ANR has rallied from $22 on January 22nd, 2008 to over $104.00 this past Thursday. There is definitely room for some profit taking. Thursday's session produced a huge bearish engulfing (reversal) pattern and the MACD has produced a new sell signal on the daily chart. While the trend is still up this volatile stock will eventually correct. If you want to speculate with us we would try and open positions in the $94.50-95.50 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.

Suggested Options:
To open the same July strangle mentioned above it would only cost about $7.70 versus our initial estimated cost of $9.40.

Picked on June 15 at $ 94.25
Change since picked: + 0.55
Earnings Date 08/05/08 (unconfirmed)
Average Daily Volume = 3.7 million

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Fording Cand. Coal - FDG - close: 88.50 chg: -0.14 stop: n/a

FDG initially produced a bounce following Thursday's reversal but by Friday afternoon the stock had rolled over again. This definitely looks like a short-term top but FDG has left a massive trail of dead bears along the six-month rally. Instead of shorting it or buying puts we suggested a strangle a few days ago. We're not suggesting new strangle positions at this time. The options we suggested were 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.

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

Picked on June 15 at $ 82.91
Change since picked: + 5.59
Earnings Date 07/21/08 (unconfirmed)
Average Daily Volume = 1.7 million

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Garmin Ltd. - GRMN - close: 43.49 chg: -0.98 stop: n/a

GRMN continues to drift lower. We're not suggesting new positions at this time. 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.

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

Picked on June 15 at $ 44.91
Change since picked: - 1.42
Earnings Date 07/30/08 (unconfirmed)
Average Daily Volume = 4.1 million

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Holly Corp. - HOC - close: 39.73 chg: -0.37 stop: n/a

Oil prices spent last week bouncing sideways, albeit in a volatile range. HOC wasn't that volatile and continued it's own sideways consolidation. Shares will break one way or the other eventually. We would consider new strangle positions in the $39.50-40.50 zone. 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.

Suggested Options:
If you bought the same strangle above today it would only cost about $1.45. July options expire in four weeks.

Picked on June 15 at $ 41.25
Change since picked: - 1.52
Earnings Date 08/07/08 (unconfirmed)
Average Daily Volume = 1.1 million

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Tyco Intl. - TYC - close: 43.18 change: -0.59 stop: n/a

It already looks like TYC's bounce from Thursday is failing. We're not suggesting new strangle positions 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 positions at this time.

Picked on June 03 at $ 44.89
Change since picked: - 1.71
Earnings Date 08/05/08 (unconfirmed)
Average Daily Volume = 2.9 million

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Valero - VLO - close: 42.51 change: -1.66 stop: n/a

VLO is breaking down from its sideways consolidation. The stock lost more than 3.7% on Friday and closed at new multi-year lows. However, if crude oil reverses sharply lower then VLO could just as easily reverse higher since lower oil prices should improve this refiner's margins. At this time we're not suggesting new positions. 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.

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

Picked on June 15 at $ 44.84
Change since picked: - 2.33
Earnings Date 07/29/08 (unconfirmed)
Average Daily Volume = 10.8 million
 

Dropped Calls

None
 

Dropped Puts

Emerging Markets 50 ADR - ADRE - cls: 50.43 chg: -1.65 stop: 55.01

Target achieved. The ADRE just plunged on Friday morning breaking down through its exponential 200-dma. It eventually closed with a 3.1% loss. Our target was the $51.00-50.00 zone. While the play is closed we could keep an eye on it. Nimble traders might be able to capture a bounce. The $50.00 level could be round-number support, which happens to coincide with its trendline of higher lows dating back to the January 2008 low.

Picked on June 03 at $ 54.69 *target achieved 51.00
Change since picked: - 4.26
Earnings Date 00/00/00
Average Daily Volume = 448 thousand

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DaVita Inc. - DVA - close: 51.75 chg: +0.71 stop: 52.01

We are suggesting an early exit in DVA. It's been two days and we still can't find what is driving the rebound in this stock. Shares just took off on Thursday and the rally continued into Friday in spite of the widespread market weakness. We do not want to hold onto puts with DVA showing this kind of relative strength.

Picked on June 17 at $ 50.26 *exiting early
Change since picked: + 1.49
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume = 606 thousand

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S&P 500 SPDR - SPY - close: 131.58 change: -2.17 stop: 137.26

Target exceeded. The S&P 500 sold off sharply on Friday and the SPY slipped to an intraday low of $131.22. Our target was the $132.40 mark. We strongly suggest readers take profits if you have not done so already. The SPY is near its trendline of lower lows and is due for another oversold bounce.

Picked on June 17 at $135.57 *target exceeded (131.22 low)
Change since picked: - 3.99
Earnings Date 00/00/00
Average Daily Volume = 197 million
 

Dropped Strangles

McDonald's - MCD - close: 57.40 chg: -1.19 stop: n/a

Two weeks ago we were in pretty good shape with MCD's drop on June 6th. The very next trading day the stock exploded on better than expected May same-store sales growth. The bounce eventually failed but our strangle was doomed. The June strangle has expired. Our estimated cost was $1.10.

Picked on May 18 at $ 60.53
Change since picked: - 3.13
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume = 7.5 million
 


Trader's Corner

Amateur Hour in the Markets

I must have been trading options close to a year before I heard the term "amateur hour," referencing the first hour of trading. Oops. I'd been trading amateur hour all that time. And you know what? Sometimes I still do.

The first hour of trading has well earned that term. Two difficulties related to that time period sometimes trap traders into bad trades, bad executions or both. Here's why the first happens: early moves sometimes reverse. A lot of terms have been invented to describe this tendency, including pop-and-drop and gap-and . . . well, you can fill in the rest.

Annotated 15-Minute Chart of the Russell 2000:

Although the quick reversal on the price chart provides its own warning, channeling systems such as Keltner channels or Bollinger bands can help traders identify when an early move might be extreme and subject to a quick reversal. My current charting program does not support Donchian channels, but with my last charting service, I used them to identify extreme moves, too. Breakouts above or below Donchian channels in the first few or last few minutes of trading should always be considered a bit suspect. I set them for 20 periods and used an offset to identify moves more quickly.

When trading the OEX and SPX especially, I also chart the advance/decline line on Keltner charts and watch for similar setups when the early move might be too extreme. This can provide corroboration of what you're seeing on price charts. Sometimes the A/D line warns of a potential reversal before price changes dramatically, providing a warning to would-be traders to hold off entering that new trade that looks so enticing. Volatility measures can do the same thing.

Annotated 15-Minute Chart of the VIX:

As this evidence suggests, by whatever measure you use to determine when a move might be extreme, be a bit skeptical of any early morning move that violates those extreme levels. I prefer to use some sort of channel or band system. Maybe you'll use some calculation of standard deviations or something else that's your preference.

The first problem with amateur hour, then, is that early extreme moves are suspect. Another problem exists. During a February 7, 2008 "Options Safari" webinar on CBOE.com, Dan Sheridan discussed getting good executions on trades. He spoke about executions from the perspective of someone who traded in the pits for decades. Those in the pits will be studying their inventories first thing in the morning, he said. Don't bother them then.

Well, Sheridan didn't actually speak that last sentence, but he did list three possible time periods for getting the best executions, with the 8:30-9:30 am CT period definitely not being his favorite for good executions.

If you must trade during the first hour that the cash markets are open, Sheridan said, make it as late in that hour as possible. He advised that the first half hour of trading, market makers are dealing with their inventories and somewhat uncertain about the direction of the market. If you need to take action in the morning, maybe let the markets settle for a half hour first. If you're considering a spread order, the end-of-the-day period might be best. Market makers don't want to carry too much risk overnight, so although they might not have accepted a trade earlier, they might be willing to do it then. For example, perhaps they don't want to be long so many deltas, so they might sell a call that they wouldn't have sold earlier for that price, especially for mid-price.

That's Sheridan's take built on his experience in the thick of things in the markets. To us out in the retail trader world, what's happening with the people on the floor sometimes results in executions that don't occur or executions with inflated prices. How many times have you bought a call in the first few minutes of trading, only to have the underlying climb but your call decrease in value? Two things are going on: those who are handling the trades have to manage their own risk and they're going to do that by widening the spreads a bit in some cases, especially if they're uncertain about market direction. Also, if traders are flooding the markets with first-thing-in-the-morning orders, the whole supply/demand thing comes into play and prices get pumped up, too. No one is against us or trying to make suckers out of us. It's the way it works.

However, I'm a spread trader and I have a little different idea than Sheridan. For example, imagine that markets have been climbing for days and I've been being patient, waiting for the best time to swing the bear call portion of a condor above the markets, the time when I think the underlying might have hit the tippy top of that particular swing higher and ready to tip right over. Then imagine that I see an early move hit extreme measures. I'm likely to go ahead and throw out my order in case markets are about to reverse.

In addition, in that amateur hour period, prices are sometimes hopping around everywhere, and I sometimes find my orders get filled for a credit I'd asked for but not truly expected to get.

But buying an unhedged long call or put position during amateur hour? That shouldn't be done unless you expect a move big enough to overcome the perhaps inflated price you're paying. Great trade- and account-management practices should be instituted, too, in case an early move is reversed.

So, trade at your own risk during amateur hour, but do take advantage of its peculiarities if you understand them and know what you're risking.
 

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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