Option Investor

Daily Newsletter, Wednesday, 10/29/2008

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Table of Contents

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

Market Wrap

Witches Brew

[Image 1]

Bull horn, bear snout, some butterflies too.
Stirred in a pot for a wild witches brew.
Be careful my pretty, don't eat it so quick.
Too much of this cooking, could make you sick.

Stocks found a mixed-to-higher trade for the bulk of Wednesday's session, but a Halloween-like "trick" in the final 15-minutes of trade left the major averages twisted, with the broader S&P 500 (SPX.X) falling 10 points, or -1.10% to close at 930.09.

S&P 500 Index (SPX.X) - 15-minute intervals
[Image 2]

Just as yesterday morning's "dip" looked like another new low was certain for the S&P500, today's move above 956 after the FOMC lowered its target for fed fund by 50-basis points to 1.00% had the look that last week's highs were going to be traded into the close.

Then, as if a witch's spell had been cast over buyers, the S&P500 shed roughly 40-points faster than General Electric's (NYSE:GE) $19.20 -1.48% CEO Jeffrey Immelt could say the company was aiming for the same 2009 profit (flat profits), even if revenues fall 10%-15%.

At least, that seemed to be a headline released by Dow Jones at 03:52 PM EDT, which coincided with today's late-session decline.

GE had already warned that profits will fall in 2008 as a result of troubles at its hefty finance arm and analysts, on average, look for profit of $1.95/share.

GE's shares were trading $20.00, then fell to as low as $18.70 during the final 15-minutes of trade.

Here this evening, I'm seeing further news that a GE spokesperson said the Dow Jones report quoting Mr. Immelt "was completely out of context and inaccurate."

I (Jeff Bailey) do think the headline created some uncertainty among market participants. However, shares of GE tick rather quietly in this evening's extended session at $19.38.

I did click through many of the indexes/sectors and many stocks, even commodities, and there wasn't much of anything that didn't see a notable decline in the final 15-minutes of trade.

Wednesday's Global Economic Calendar -
[Image 3]

Today's global economic calendar had the Bank of England (BOE) saying total net lending to individuals in September rose to 2.4 billion pounds from the anemic 400 million pounds in August. The BOE said the 12-month growth rate slowed further, to +5.4% from August's +6.1%, and the 3-month annualized growth rate fell by 0.4 percentage points to +1.9%.

More and more, we're hearing the "velocity of money" measure being mentioned by some economists as an important metric of how capital flows are doing, or not doing as has been the case since the credit crunch tightened.

One modest positive was that within the total increase, net lending secured on dwellings was 2.2 billion pounds compared to the 0.1 billion pound increase in August.

The BOE added that the number of loans approved for house purchases edged up to 33,000.

Not shown in the above economic calendar, we also got our weekly report from the Mortgage Banker's Association (MBA). The MBA said its seasonally adjusted purchases index rose 8.5% to 303.10 last week, which was a smidge above the 4-week average of 302.6.

After a 23.5 decline for the week ended 10/17, the MBA's refinance index rose 28.5% to 1,489.4.

The MBA added that the average contract interest rate for a 30-year fixed-rate mortgage fell to 6.26% from the prior week's 6.28%. Meanwhile, the average contract interest rate for a one-year ARM decreased to 6.90% from 6.97%.

MBA's Weekly Data (Table)
[Image 4]

I track and tabulate several of the data sets the MBA reports each weak, and there may be an opportunity for a bounce in the homebuilders as depicted by the DJUSHB.

What I'm looking at here is the seasonally adjusted purchases index, the "Friday after report DJUSHB" and then a 4-week and 12-week average of the purchases index itself.

The 4-week averages purchase is still below its 12-week average, but looks to be stabilizing, and with the DJUSHB and many of the builders well off some of their DJUSHB benchmarks of 290.31 and 277.01, I think the builders may still have some room for further gains.

Today, the DJUSHB 212.83 +7.40% was among the sector winners as you'll see later in the US Market Watch.

Pulte Home (PHM) - Daily Intervals
[Image 5]

You could probably take any of the homebuilding stocks and place some date benchmarks on them using the MBA's weekly data like I'm showing with Pulte Homes (NYSE:PHM) $9.88 +6.92%.

Now, as you've probably seen of late, a stock, is a stock, is a stock, and in some cases, stocks have really been getting squashed of late.

But some stocks have "held up" relatively better than others this year.

Today, PHM almost traded its 12/31/07 close of $10.54, and several homebuilders I looked at were trading near their 21-day SMA's.

Using the MBA's weekly data at least gives us an additional observation of PURCHASES, where I can derive some moving averages like the 4-week and 12-week.

A stock like PHM might just want to elevate itself back higher and the 150-day, 200-day and 50-day SMA's look like achievable targets.

Take the "witches advice," and don't stuff the account overly full.

I would also have to think that there are some "bears" that are short PHM. They're looking at the same chart, they see/hear what the Fed is trying to do (save the banks and housing market) and they've seen PHM at these levels twice, make it thrice, this year.

Additional economic data released today had the Commerce Department saying new orders for long-lasting manufactured goods rose unexpectedly in September by 0.8%, led by demand for defense goods (+19.1%) and transportation equipment.

Excluding transportation, September durable goods were down 1.1%. Slightly better than forecast, but relatively inline.

EIA Weekly Inventory / Refinery Data
[Image 6]

At 10:35 AM EDT we got our weekly inventory and refinery data from the EIA. The 493,000 bbl build was lighter less than the forecast for a build of 1.4M barrels.

Commodities in general had a strong day today and you can see from the above data that while gasoline inventories saw draws, refiners were producing distillates (diesel, heating oil).

Crude oil inputs rose by 289,000 bbls/day to 14.85 million bbl/day, which was slightly less than last year's 14.93 million bbl/day input.

Percent utilization of operable capacity begins to level off at 85.34% on a post Hurricane Ike basis and the number of days supply of crude oil falling to 21.7 days may have helped bring the bid to oil.

US Market Watch - 10/29/08 Close
[Image 7]

Today also "felt" a bit like an option expiration. Some market observers say there is a big REBALANCING taking place into the end of the month.

Perhaps some of last Wednesday's market wrap commentary would suggest that is a possibility.

The HUI.X +15.65% since Friday's close (5DayNet%) while GLD and SLV up a lesser 2.47% and 5.91%.

Same type of observation for OIX.X and USO.

Some have also said the Yen's strength as depicted by the FXY has been a "flight to safety" move in recent weeks. A -2.86% decline does have the major averages here in the U.S seeing some gains.

While the Bank of Japan has their rates at 0.50%, there was some speculation today that they could lower to 0.25%. This may be a reason why the yen eases from recent 52-week and multi-year highs against the dollar.

Breadth at the NYSE today was positive by the close at 1,875 to 1,135. NASDAQ breadth also finished positive at 1,707 to 1,186.

Major Global Indexes, Currencies, USO, GLD, HUI.X, OIX.X and XLF
[Image 8]

Asian markets continue to trade weak since our last visit, and that's a "global concern." Here at home, the small caps of the Russell 2000 ($RUT.X), which would perhaps reflect the state of the US economy and be sensitive to banks "not eager to lend" is notable.

S&P Depository Receipts (SPY) - $1 and $2 box
[Image 9]

At last Wednesday's close the SPY was trading at the $88.00 level (pink box), then tested the $84.00 "support" and whipped back higher.

GE's comments or not, today's late session decline sure could be technical in nature, where "those that bought the low, don't want to eat crow."

The red "?" would be about where the SPY closed after seeing $95, $96 and $97 today.

This remains a TOUGH market to trade due to the volatility.

New Option Plays

Is this a reversal?

New Option Plays
Call Options Plays
Put Options Plays
Strangle Options Plays
None IWM None


Play Editor's Note: The late-day sell-off in stocks only confirms that we're still stuck in a downtrend. I'd love for the market to find a bottom but it looks like stocks may have to retest their lows again. At the very least I would expect a 50% retracement of the bounce.


iShares Russell 2000 - IWM - close: 48.70 chg: +0.25 stop: 50.75

Why We Like It:
I know that most investors are hoping we've hit bottom and maybe the market has. However, today's failed rally pattern confirms that the trend is still down. This play is a bet that we retest the recent lows. We're suggesting a stop loss above today's high. Our target is $45.05. Aggressive traders might want to contemplate a secondary target under $45.00.

Suggested Options:
We're suggesting the November puts.

BUY PUT NOV 50.00 IWM-WX open interest=35217 current ask $4.15
BUY PUT NOV 47.00 IWM-WU open interest=19940 current ask $2.84
BUY PUT NOV 45.00 IWM-WS open interest=23187 current ask $2.14

Annotated Chart:

Picked on October 29 at $ 48.70
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 6.1 million


Lockheed Martin - LMT - close: 78.61 change: -1.67 stop: 82.55

Why We Like It:
It's a similar story in LMT. The stock was crushed during the market sell-off but the oversold bounce is failing at resistance. We're suggesting short-term put plays with a tight stop over today's high. Our target is the $74.00-73.00 zone.

Suggested Options:
We are suggesting the November puts.

BUY PUT NOV 80.00 LMT-WP open interest= 753 current ask $5.80
BUY PUT NOV 75.00 LMT-WO open interest= 146 current ask $3.60

Annotated Chart:

Picked on October 29 at $ 78.61
Change since picked: + 0.00
Earnings Date 10/21/08 (confirmed)
Average Daily Volume = 3.8 million


PetroChina - PTR - close: 67.85 change: +2.93 stop: 71.25

Why We Like It:
Chinese oil giant PTR is showing a similar bearish pattern. The oversold bounce struggled with resistance and rolled over this afternoon. We're suggesting put positions with a stop above today's high. However, if crude oil is trading above $67.00 tomorrow morning before the market open I would not open this play. Our target is the $60.50 mark. More aggressive traders could aim for the $57.50 region.

Suggested Options:
We are suggesting the November puts.

BUY PUT NOV 70.00 PWK-WN open interest= 283 current ask $8.60
BUY PUT NOV 65.00 PWK-WM open interest= 207 current ask $6.20
BUY PUT NOV 60.00 PWK-WL open interest= 481 current ask $4.50

Annotated Chart:

Picked on October 29 at $ 67.85
Change since picked: + 0.00
Earnings Date 03/06/09 (unconfirmed)
Average Daily Volume = 1.0 million


In Play Updates and Reviews

Late-day sell-off reaffirms downtrend

Play Editor's Note: The late-day sell-off in stocks only confirms that we're still stuck in a downtrend. I'd love for the market to find a bottom but it looks like stocks may have to retest their lows again. At the very least I would expect a 50% retracement of the bounce.

---------------------- CALL Play Updates ----------------------

Burlington Northern - BNI - cls: 85.05 chg: +1.60 stop: 73.85

The short covering continued into Wednesday and the afternoon push lifted BNI to $89.78, just shy of the $90.00 round-number resistance. Then suddenly the market turned south in the last 15 minutes and BNI collapsed back to $85. I suspect that shares might retrace lower tomorrow. Previously we had been suggesting readers buy calls on a dip into the $75.50-74.00 zone. I'm considering a higher entry point but we're not going to change it yet. Right now I'm watching for a potential bounce in the $80.00-82.50 zone. If we do see a bounce there it might be an entry point to buy calls with a stop under $80.00.

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/23/08 (confirmed)
Average Daily Volume = 5.1 million


CSX Corp. - CSX - close: 43.34 chg: +0.21 stop: 39.49

Railroad stock CSX was also looking strong intraday. The stock got to $47.25 late this afternoon before giving almost all of its gains back. This does not illustrate strength when investors rush to sell in the last 15 minutes. If we see another dip in the $40.50-40.00 zone then I might be tempted to open new bullish positions. Otherwise I would avoid new bullish positions. if CSX hits our stop loss at $39.49 it might be a signal to buy puts instead! Currently our target to exit is $49.90.

Picked on October 23 at $ 40.41 /gap down entry
Change since picked: + 2.93 /originally listed at $43.74
Earnings Date 10/14/08 (confirmed)
Average Daily Volume = 6.5 million


Freeport McMoran - FCX - close: 28.24 change: +1.50 stop: 18.45

FCX rallied right to resistance near $30.00 and stalled. It did hit $30.23 intraday but couldn't hold it. Nor could it hold above its simple 10-dma. At this point the trend remains bearish. More nimble traders may want to consider bearish positions to scalp a few points on the way down. We're going to stick to our plan to buy calls in the $21.00-20.00 zone. However, if we see another bounce from $23.00 we might re-evaluate. An alternative entry point, should FCX continue to rally, would be to buy calls on a breakout over $30.50 where I'd probably use a stop under $28.00. All right, I know I'm throwing a lot of numbers out. Here's a summary. Officially we want to buy calls at $21.00. Unofficially I'd be tempted to buy a bounce from $23.00 or a new relative high over $30.50 with a stop 6.5% to 10% under my entry point. I would try to catch a 15% to 20% gain in the stock.

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/21/08 (confirmed)
Average Daily Volume = 20 million


Hansen Natural - HANS - close: 23.91 change: -0.13 stop: 19.95

HANS did not see the same sell-off the rest of the market did late in the day. It still traded lower and ended in the red but the velocity of the drop wasn't as bad as the DJIA or the S&P 500. It's possible that HANS is struggling with round-number resistance at $25.00. Thus the next move might be down. More conservative traders will want to consider taking some money off the table or raising their stop loss significantly. We're not suggesting new bullish positions.

We have two targets. Our first target is $26.85. Our secondary target is $30.00.

Picked on October 23 at $ 21.47 /gap down entry
Change since picked: + 2.44 /originally listed at 22.88
Earnings Date 11/06/08 (unconfirmed)
Average Daily Volume = 10.6 million


MasterCard - MA - close: 135.73 chg: - 0.28 stop: 118.99

It was another volatile day for MA with $10 swings in the stock price. The stock traded near $144 twice before ending lower. The overall pattern for MA is still bearish, which should put us on the defensive. We're not suggesting new positions at this time. More conservative traders may want to raise their stops toward Tuesday's low (123.50). We have two targets. Our first target is $158.00. Our second target is $169.50.

Picked on October 23 at $131.00 *triggered 10/23
Change since picked: + 4.73
Earnings Date 11/03/08 (confirmed)
Average Daily Volume = 3.8 million


Energy SPDR - XLE - close: 48.13 chg: +1.04 stop: 37.45

I'm not willing to give up yet on buying a dip near support around $40.00. On the other hand I wouldn't want to open bearish plays with a target near $40.00. This volatility is hard to read. A breakout over the Oct. 20th high around $51.30 might be a bullish signal. We're going to wait and see how the market reacts tomorrow before making any decisions on XLE.

Currently the plan is to buy calls in the $40.50-39.00 zone. If triggered we're setting two targets. Our first target is $45.00. Our second target is $49.75.

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 47.7 million

---------------------- PUT Play Updates ----------------------

Volatility Index - VIX - cls: 69.96 chg: + 3.00 stop: n/a

The VIX was poised to close at a new five-day low under 65.00 until a last hour sell-off in stocks sent the volatility higher again. The bigger picture continues to look like the VIX has probably topped but that doesn't mean the market won't continue to be volatile.

We're not suggesting readers buy puts at this time. With the VIX this high if you want to bet on its going lower the better bet would be to sell calls instead.

Trading Idea: If you think this is one last gasp higher for the VIX (either tonight or tomorrow) consider selling some calls. The November 65 calls are trading around $4.50 at the bid. The Nov. 70s are $3.40 bid and the 75s are $2.55 bid.

If the VIX is under your call's strike price at expiration (11/19/08) they'll expire at zero ($0.00) and you keep all the premium you sold it for.

Note: The VIX options, which are European style options, have a unique expiration date. November VIX options expire on November 19th, 2008. The last day of trading for these options is the Tuesday before expiration. For more information check this link:

Our September 16th put position (suggested entry at 30.30) has a 25.50 target. In all honesty this position may be dead. We still have plenty of time with these next two. The September 29th position (suggested entry at 46.72) has two targets at 36.00 and 31.00. Our October 8th position (entry 57.53) has two targets at 40.00 and 35.00.

Picked on September 16 at = 30.30 first position
Change since picked: +39.66
Picked again Sept. 29 at = 46.72 second position
Changed since picked: +23.24
Picked again Octo. 08 at = 57.53 third position
Changed since picked: +12.43
Earnings Date 00/00/00
Average Daily Volume = --- million


---------------------- Strangle & Spread Play Updates ----------------------

CBOE Volatility Index - VIX - cls: 69.96 chg: + 3.00 stop: n/a

We don't see any changes from our prior comments on the VIX spread plays.


Please see the CBOE website or our Sunday, October 12th play description for details on margin requirements for selling VIX options. Link:

Note: VIX options are European style options that settle for cash at expiration. Furthermore VIX options have unique expiration dates. November options expire on Wednesday, November 19, 2008 and will stop trading on Tuesday, November 18th.

VIX spread #1 has been completed.

VIX spread #2 with November options (date Oct. 12th):

We wanted to SELL the November 30 calls (opening price 10/13/08 was $ 8.60) and BUY the November 50 (opening price was $1.61) as a hedge against the VIX remaining elevated.

In a different format the play is:

Monday 10/13/08 open 8.60, high 9.80, closed 8.40
Update 10/15/08 open 10.00, high 13.00, closed 13.00
Update 10/16/08 open 13.70, high 16.20, closed 13.25
Update 10/17/08 open 15.55, high 17.70, closed 17.50bid
Update 10/20/08 open 16.30, high 17.20, closed 15.00bid
Update 10/21/08 open -----, high 15.50, closed 14.40bid
Update 10/22/08 open 16.40, high 19.20, closed 18.10bid
Update 10/23/08 open 17.50, high 21.40, closed 20.30bid
Update 10/24/08 open 25.00, high 26.50, closed 25.80bid
Update 10/27/08 open 26.32, high 26.45, closed 29.30bid
Update 10/28/08 open 29.00, high 29.00, closed 23.70bid
Update 10/29/08 open 25.60, high 25.60, closed 26.20bid

-and- BUY CALL NOV 50.00 VIX-KJ.
Monday 10/13/08 open 1.61, high 2.10, closed 1.50
Update 10/15/08 open 2.00, high 3.60, closed 3.60
Update 10/16/08 open 3.70, high 5.50, closed 3.65
Update 10/17/08 open 4.50, high 5.30, closed 5.50ask
Update 10/20/08 open 3.90, high 5.30, closed 4.40ask
Update 10/21/08 open ----, high 4.70, closed 3.80ask
Update 10/22/08 open 4.30, high 6.60, closed 6.40ask
Update 10/23/08 open 5.70, high 7.70, closed 7.30ask
Update 10/24/08 open 10.10, high 11.00, closed 11.00ask
Update 10/27/08 open 11.43, high 13.80, closed 14.20ask
Update 10/28/08 open 11.00, high 13.30, closed 9.40ask
Update 10/28/08 open 9.23, high 10.70, closed 11.00ask

Picked on October 12 at $ 69.95
Change since picked: + 0.01


VIX spread #3 with November options (published 10/22/08):

We wanted to SELL the November 35 calls (10/23/08 opening price was $ 14.00) and BUY the November 60 (10/23/08 opening price was $3.00) as a hedge against the VIX remaining elevated. We'll fill in the prices Thursday morning. Our account will be credited with the amount for selling the November 35 calls, while it the price paid for the 60 calls will be deducted.

In a different format the play is:

Wednesday 10/22/08 closed at 14.00 bid
Update 10/23/08 open 14.00, high 17.00, closed 15.30bid
Update 10/24/08 open 19.40, high 21.50, closed 20.60bid
Update 10/27/08 open 23.00, high 23.00, closed 23.90bid
Update 10/28/08 open 22.93, high 24.70, closed 18.60bid
Update 10/29/08 open 19.59, high 21.13, closed 20.90bid

-and- BUY CALL NOV 60.00 VIX-KN
Wednesday 10/22/08 closed at 3.70 ask
Update 10/23/08 open 3.00, high 4.50, closed 4.10ask
Update 10/24/08 open 7.00, high 7.00, closed 6.90ask
Update 10/27/08 open 6.91, high 8.80, closed 9.00ask
Update 10/28/08 open 7.60, high 8.60, closed 5.50ask
Update 10/29/08 open 5.40, high 6.30, closed 6.50ask

Picked on October 12 at $ 69.65
Change since picked: + 0.31


---------------------- CLOSED PLAYS ----------------------

PriceLine.com - PCLN - close: 55.67 change: +2.83 stop: 54.15

Tuesday's afternoon rebound continued into Wednesday and shares soared to $57.88. PCLN has had a 28% range in the last two days making it almost impossible to trade. Shares hit our stop loss at $54.15 early this morning ending the play after the stock hit our early target yesterday at $45.25.


Picked on October 27 at $ 50.40 /gap open entry/target hit 45.25
Change since picked: + 5.27 /originally listed at 49.25
Earnings Date 11/06/08 (unconfirmed)
Average Daily Volume = 2.0 million



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