Option Investor

Daily Newsletter, Wednesday, 09/03/2008

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Table of Contents

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

Market Wrap

The Gist of It

Market Wrap

The day started out on a sour note with Corning (GLW) issuing downside guidance for the third quarter. GLW has had lower than expected shipments of LCD glass. LG, the manufacturer of LCD computer and HD TVs said that they are only at 90% capacity due to reduced demand. The technology sector declined about 1.7%. Semiconductor stocks fell 4.2% on GLWs news.

Financials advanced 1.4% today on Ambac Financial (ABK) confirming that it has received regulatory approval from Wisconsins Commissioner of Insurance to capitalize and restart Connie Lee Insurance, which will provide insurance for the Municipal bond market. Hope was the note at Lehman Brothers (LEH) with further speculation that the company will be taken over or receive a capital infusion soon.

Perhaps the slightly strengthening dollar is turning the table on foreign companies ability to purchase U.S. stocks. For instance, Coca-Cola (KO) is buying a Chinese juice company worth roughly $2.4 billion. ConAgra (CAG) fell 8.6% after reporting that earnings due would under perform in its consumer business.

On todays Fed Watch, the Beige book was released at 2:00 PM EST. The economic reports on a collection of economic reports from the 12 Federal Reserve districts. Todays report showed a slowdown in most districts. Most districts continued to report price pressures from elevated costs of food, energy and other commodities. Wage pricing pressures have remained subdues, though, as the slowing economic conditions have allowed businesses to curtail their salary increases. On the positive side, factory orders increased for the fifth straight month. July orders rose 1.3% versus the 1% consensus. June orders were revised to upward 2.1% from 1.7%. July orders declined from June.


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The Internals

At the NYSE, there were 1610 advancing issues versus 1483 declining issues. 36 new highs were overshadowed by the 121 new 52 week lows. The NYSE declined 27.72 points today on 1,208 million shares. With the $TRIN at 1.11, there is no trade.

The NASDAQ Composite had 1486 advancers versus 1312 decliners. There were 71 new 52 week highs versus 117 new 52 week lows. The COMP declined 15.51 on 2,115 million shares today.

What to Watch Tomorrow

Tomorrow morning we get the August ADP report. This report has garnered more attention since its data is provided by a private company versus the government. The market is expecting for a decline in employment. Usually a decline in employment equates to lower employment costs. However, people without jobs dont spend as much. It is a double edged sword. Following the ADP report, the government gets to take a stab at the employment number. I dont think that the 2nd quarter productivity revision will be market moving since we are almost in the fourth quarter. ISM Services will be closely watched at 10:00 AM. Finally, the Crude Inventories for last week may give some insight into the Gustav affects on the LOOP and Gulf oil patch. Crude oil doesnt seem to want to move above $110 per barrel until there is some fundamental reason to push it higher. Obviously, $4 per gallon caused the demand structure to collapse and people finally made efforts to reduce expenditures. A stronger dollar is also supporting the decline in commodities. The Eurodollar has moved from $1.59 per euro to $1.44 per euro in two months.

The media is waiting for some fireworks from the Homebuilders to see if the bottom is near. Toll Brothers (TOL) reports tomorrow before the open. TOL builds higher end homes primarily in the south east. Quicksilver (ZQK) and Jos A Bank (JOSB) are some clothing companies reporting tomorrow. Take Two Interactive and the Cooper Companies, Inc. might provide some volatility to trade. Actually, the volatility usually ramps up ahead of earnings. Option traders can sell the increased volatility and buy to close after the event. Sell high and buy low. The main risk is when the price moves farther than your break even points. That equates to a loss.

For instance, Take Two (TTWO) reports after the bell tomorrow. The percentages at the right of each months row identify the Implied Volatility for those options. Notice that the Implied Volatility for September is 111.32% versus Januarys 55.13%. Normally we would look at the historical volatility and stack it up to the implied volatility to determine the direction of the volatility bias, but this is for a quick trade. I can usually look at an option string and determine the probabilities. Now I have fancy tools like the one above to help speed up the analysis. Basically, if Implied Volatility declines to Januarys levels, the trade has the potential of profiting $578 from the decline in volatility and another $13.22 for one day of time decay (Look under THETA). The initial margin requirement for this trade is about $1,249.06 ($662.77 + $578.43). According to the price slices, TTWO can move up or down 10% and remain profitable. If you do this trade, it is best to close the position our within the first 15 minutes of the trading session. If it loses at the open, dont try to be smarter than the strategy. Some of these lose. The goal is to profit on 70% or more of them and lose no more than the average gain on the other 30%.

The S&P 500 (SPX)

The SPX has been quite boring lately. Yesterday, however, was a lot more interesting. I like to gap up and then the nice decline intraday. Strangely, the CBOE Volatility Index ($VIX) barely moved. At one point today, the SPX was down about 11.50 points but managed to close down only 2.60. I have drawn the Fibonacci retracement on the chart above to show that the SPX has maintained relatively close to the 38.2% level. In addition, the spikes lower have done so without piercing to lower lows. However, the advances keep getting slammed down at resistance that was first at 1315 and then at 1305. Declining highs and increasing lows form a triangle pattern. We are waiting for the breakout in either direction. An early indication could come from a break of the 14 day Average True Range. One would then take the direction at the time of the break to determine whether to go long or short. Neither the RSI nor Slow Stochastics are giving us an accurate gauge to determine the SPXs future directional tendency. The upper and lower Bollinger bands are squeezing together thus indicating that the volatility of the SPX is decreasing. In reality, the SPX is fairly volatile within this relative range. Support is at 1250 from the lower Bollinger band and the 50% retracement level. A break of the 50% level would greatly alter the shape of the chart and give room for the price to retest Julys lows. Yesterday the price tested the upper Bollinger band. The SPX is like a caged tiger testing the integrity of its new home. So far the ceiling is secure. While it is hard to determine the 8 day Exponential Moving Average (EMA) is slightly above the 21 day EMA.

The SPX has been hanging on for dear life above the 50 day SMA (green line). As the chart above shows, the SPX dropped below intraday but found some late day buying to help get back above. The Dow Jones closed positively today on the fact that it isnt as exposed to the energy and materials sectors as the SPX. While the SPX has remained in consolidation the Money Flow index hasnt moved up or down. If you are bullish, this is a good sign because the money flow hasnt peaked therefore providing ample room for buying to come in before reaching overbought territory. The peak in the ADX histogram correlates exactly with the low in the SPX. Once the ADX begins to advance upward above 15 20 the direction of the SPX is confirmed. Choppy trade occurs when the ADX is less than 20. Resistance is at 1320 from the 89 day SMA. The moving averages point the overall picture of the SPX; down trend. A close below the 50 day SMA will be a short opportunity since it is now the new dynamic support level. My guess is that the SPX would run down to 1240 on the weakness. However, the SPX might make a run upward to the 89 day SMA. September is usually very volatile since the go away in May traders arent supposed to back until October and it is the last month of the third quarter.

The Russell 2000 (RUT)

RUT is my new favorite technology sector. The NDXs chart isnt as pretty so RUT is my new best friend. The RUT is very volatile and keeps me on my toes. While the SPX set a lower low in July, the RUT squeezed out a slightly higher high in July versus March (see chart below).

ADX is moving up along with the RUTs price which confirms the uptrend. Interestingly the RUT has moving up while the Money Flow index has declined from above 70 on 7/29/08. Last Thursday, the 89 day SMA crossed above the 200 day SMA. If we just used the 200 day SMA, we would think that the RUT is on a downtrend. But looking at the 50 and 89 day SMAs the RUT appears to be on a newly established uptrend rather than just a bounce. Up trends are usually traded differently than bounce opportunities. For instance, professional traders buy the oversold conditions during an uptrend and scale out of part of the position at resistance levels and overbought levels. Oversold conditions in downtrends are riskier since there arent many other indicators providing confirmed long signals. Support is at the 89 and 200 day SMAs currently at 720. Dont forget that moving averages provide dynamic support and resistance.

Referring to the chart above of the RUT, the upper Bollinger band is fairly flat while the lower band is moving up fast in order to catch up and provide support if needed. The 8 day EMA remains above the 21 day EMA. The 21 day EMA provided support for the RUT yesterday. There is a little bit of convergence between the RSI and the Slow Stochastics. The RSI is showing upside momentum while the Slow Stochastics has crossed below the confirmation line. Generally, the Slow Stochastics crossing the moving average (green line) is a confirmation in the direction of the Stochastics line. We will have to see which one is right. The negative part of technical analysis is that there is always a line that can be drawn to make your opinion seem correct.

Sector Inspector

The Healthcare Sector (shown above) has remained relatively strong compared to the other 8 S&P sectors. However, the XLV has begun to weaken as traders are obviously swapping shares of this with other sectors just beginning to gain strength. For instance, the Financial Sector (XLF) has received some attention from investors and institutions. The XLF options were traded aggressively last week as the sector began to gain ground. The 8 day EMA broke above the 21 day EMA which confirms the long bias in the battered sector. However, RSI is overbought and Slow Stochastics is fast approaching overbought territory. Traders should be patient for the price to test the 21 day EMA before buying the XLF. There is existing momentum that could allow for a partial position to be placed. The benefit of partial positions is that you have powder dry for adding to a profitable position or reducing the cost basis.

The Consumer Discretionary sector (XLY) is shown below. The chart remains on a positive trend while the Consumer Staples sector is beginning to falter. There is still room for upside momentum as indicated by the RSI. The Slow Stochastics crossed just below its moving average at the close today. One way to trade the uptrend is buying one third at these levels and then wait for a test of the 8 day EMA for another third and the 21 day EMA for the remaining position.

Money seems to be exiting the Materials, Energy and the Technology sectors and moving into the Healthcare, Consumer and Financial sectors. The Industrial Sector is maintaining its stability. If the XLV declines below its 21 day EMA which would probably cause the 8 day EMA to fall below the 21 day EMA, the position should rotate to the XLI. Good trading to all!

New Plays

Most Recent Plays

Click here to email James
New Option Plays
Call Options Plays
Put Options Plays
Strangle Options Plays
None JEC None

New Calls

None today.

New Puts

Jacobs Engineering - JEC - cls: 69.35 chg: -1.12 stop: see below

Company Description:
Jacobs, with over 55,000 employees and revenues exceeding $10.0 billion, provides technical, professional, and construction services globally. (source: company press release or website)

Why We Like It:
The bearish trend of lower highs in JEC has finally produced a breakdown under round-number support at $70.00. The recent weakness in this stock has also produced some new technical sell signals. The Point & Figure chart is already bearish with a $59 target. While it might be tempting to buy puts on JEC under $70.00 the stock does have another level of support in the $67.00-67.50 zone. We are going to list two different entry points to try and trade the bearish trend in JEC. Entry point number one will be $66.90. Entry point number two will be a failed rally under its 50-dma. However, since the 50-dma is a moving target we're going to use the $74.00-76.00 zone as our second entry point. If triggered at $66.90 our stop loss will be $70.51. If triggered at $74.00 our stop loss will be $77.01. Our target is the $60.50 mark.

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

BUY PUT OCT 70.00 JEC-VN open interest=653 current ask $4.70
BUY PUT OCT 65.00 JEC-VM open interest=252 current ask $2.55

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/05/08 (unconfirmed)
Average Daily Volume = 1.6 million


Roper Industries - ROP - cls: 58.19 chg: -1.02 stop: 60.55

Company Description:
Roper Industries is a market-driven, diversified growth company with trailing twelve month revenues of $2.2 billion, and is a component of the Fortune 1000, S&P MidCap 400 and the Russell 1000 Indexes. Roper provides engineered products and solutions for global niche markets, including water, energy, radio frequency and research/medical applications. (source: company press release or website)

Why We Like It:
ROP is also suffering from a bearish trend of lower highs. The recent consolidation near $60.00 almost looks like a bear flag pattern. The bounce failed yesterday and the stock sank to a new relative low today. We're suggesting new put positions now or on another failed rally/bounce near $60.00. Normally we would target potential psychological support near $55.00 but it looks like ROP has support near $54.00 instead. Our target is the $54.25 mark. The Point & Figure chart is bearish with a $45 target but the P&F chart also shows some support near $53.00.

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

Note: the spreads on these options are a little wide and option volume is light. Readers should consider this a slightly more aggressive trade.

BUY PUT OCT 60.00 ROP-VL open interest= 7 current ask $3.50
BUY PUT OCT 55.00 ROP-VK open interest=15 current ask $1.45

Picked on September 03 at $ 58.19
Change since picked: + 0.00
Earnings Date 10/23/08 (unconfirmed)
Average Daily Volume = 664 thousand

New Strangles

None today.

Play Updates

Updates On Latest Picks

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Call Updates

CBOE Volatility Index - VIX - close: 21.43 chg: -0.56 stop: n/a

The VIX pulled back a bit after a sharp two-day rally. As stocks weaken it looks like the VIX may have produced a change in trend. We don't see any changes from our prior comments. Our readers might want to consider new call positions here. We're going to maintain our previous suggestion to wait for a move over 22.50. Don't forget that this is a very speculative play (as in no stop loss) as we bet on a strong enough market sell-off to send the VIX toward 30.00. In our favor is the time of year with September and the first several days of October historically the worst time of year for stocks. Plus, we have the ongoing credit crisis, financial sector woes, and escalating tensions with Russia (not to mention Iran), oh and let's throw in a couple of hurricanes. Our target is 29.75 but readers might want to consider scaling out of positions in the 28-29 region.

Picked on August 03 at $ 22.57
Change since picked: - 1.14
Earnings Date 00/00/00
Average Daily Volume = x million

Put Updates

Air Products - APD - cls: 88.98 change: -2.11 stop: 93.05 *new*

APD continues to move lower. Shares closed under what could have been round-number support at $90.00. The intraday low was $88.16 before APD trimmed its losses as the broader market tried to bounce. We are adjusting our stop loss to $93.05. We are listing two targets. Our first target is $87.00. Our second target is $84.00. The Point & Figure chart is bearish with a $73 target.

Picked on August 31 at $ 91.85
Change since picked: - 2.87
Earnings Date 10/22/08 (unconfirmed)
Average Daily Volume = 1.8 million


L-3 Comm. - LLL - close: 103.49 chg: -0.38 stop: 105.05

It looks like LLL may have produced a bearish double-top but today's decline failed to close under support near its 20-dma and support in the $103-102.50 zone. Yesterday we added a trigger to buy puts at $102.00. If triggered our target is $97.50 or the 50-dma.

Picked on September x at $ xx.xx <-- trigger 102.00
Change since picked: + 0.00
Earnings Date 10/23/08 (unconfirmed)
Average Daily Volume = 1.0 million


Lindsay Corp. - LNN - cls: 73.08 chg: -4.66 stop: 79.05 *new*

First target exceeded! Weakness in the agriculture-related stocks continued into Wednesday. Shares of LNN gave up about 6% and dipped to $71.38 intraday. Our first target to take profits was $75.25. Our second target is $71.00. We are adjusting the stop loss to $79.05. More conservative traders may want to exit completely right here. We're not suggesting new bearish positions at this time.

Picked on September 2 at $ 79.85 *1st target hit 75.25 9/03
Change since picked: - 6.77
Earnings Date 10/08/08 (unconfirmed)
Average Daily Volume = 480 thousand


Millicom Intl. - MICC - cls: 75.49 chg: -3.09 stop: 81.65

As expected MICC is moving lower. The stock gave up almost 4% today. The MACD on the daily chart is nearing a new sell signal. The Point & Figure chart has produced a new sell signal with a $67 target. We have two targets. Our first target is $75.05. Our second target is $72.50. (Note: Our first play on MICC was stopped out at $81.55 on 09/02/08. Entry was 78.49.)

Picked on August 28 at $ 78.58 *re-listed
Change since picked: - 3.09
Earnings Date 10/23/08 (unconfirmed)
Average Daily Volume = 1.0 million


Monsanto - MON - close: 107.90 chg: -1.44 stop: 116.75*new*

MON is still moving lower. The intraday high failed at its exponential 200-dma. We suggested a bounce back towards $112 as a potential entry point and MON hit $112 today. We are adjusting our stop loss down towards resistance at the 50-dma. Our new stop will be $116.75. Our target is the $101.00. The $100.00 level should be round-number support.

Picked on August 31 at $114.25
Change since picked: - 6.35
Earnings Date 10/08/08 (unconfirmed)
Average Daily Volume = 6.7 million

Strangle Updates

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


Lehman Brothers - LEH - close: 16.94 chg: +0.81 stop: n/a

LEH continues to rebound on hopes someone will buy them or buy a significant stake in the company. We do not see any changes from our weekend comments. We're not suggesting new strangle positions in LEH at this time. We have less than three weeks left and LEH still has to make some large moves. We need to see LEH significantly above $24.00 or under $10.00. The options we suggested were the September $24.00 calls (LYH-IR) and the September $10.00 puts (LYH-UB). Our estimated cost is $2.15. We want to sell if either option hits $3.50 or higher.

Picked on July 27 at $ 17.05
Change since picked: - 0.11
Earnings Date 09/18/08 (unconfirmed)
Average Daily Volume = 63 million

Dropped Calls


Dropped Puts


Dropped Strangles


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


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

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