Option Investor

Daily Newsletter, Saturday, 11/15/2008

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Table of Contents

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

Market Wrap

Never A Dull Moment

Thursday was the second 900-point swing for the Dow in the last month. Unfortunately neither rally held its gains and only gave sellers a perfect entry point.

Market Statistics
[Image 1]

The most important economic report on Friday was the Retail Sales for October. Retail sales fell -2.8% and that was the biggest one-month drop since 1947. The majority of the decline was auto sales and falling gasoline prices but overall sales were still very weak and accelerating to the downside as shown in the chart below. Typically the monthly retail sales numbers are volatile but you can see a definite trend has developed. Declines of more than 1% were seen in furniture stores, electronics and appliance stores, nonstore retailers, sporting goods and hobby stores, apparel stores and department stores. Only drug stores and restaurants posted minimal gains. The sectors hardest hit were auto dealers, which saw declines of -20% and furniture stores with a -10% drop. The month over month headline decline was -2.8% but the year over year decline was even worse with a -4.1% decline and the biggest drop since the 1960s. Retailers are expecting the worst holiday shopping season in over 20 years.

Retail Sales Chart
[Image 2]

The first Consumer Sentiment report for November came in slightly better than expected at 57.9 compared to consensus estimates of 56.0. This minor improvement is nothing more than a decimal rounding factor in the larger picture. The minor gain came from a +3 point uptick in the present conditions component likely caused by rapidly falling gasoline prices. Sentiment remains near 28-year lows and as we saw in the retail sales the consumer is AWOL. They have entered hoard mode and saving any cash for the future crisis. We are seeing almost daily comments comparing the current crisis with the great depression of the 1930s and consumers are buying groceries and guns. Literally, gun sales since the election have gone up more than 50% to as much as 300% in some areas. Buyers claim they are concerned about protecting themselves if the crisis continued to spiral downward and because they are afraid of attempts by the new administration to ban guns.

Consumer Sentiment
[Image 3]

Part of the weak sentiment problem is the rising jobless claims. They hit a new cycle high of 516,000 last week. This is clear evidence of rapidly increasing recession pressures. Hardly a week goes by without a dozen additional companies announcing thousands of layoffs. You can see how rapidly the jobless claims have accelerated over the last several months and this is a post 9/11 high and very close to a 20-year high. If claims remain over 500,000 we are likely to see a substantial deterioration in the nonfarm payrolls for November. Continuing claims are also setting multi-year highs at 3.897 million workers still on unemployment. That is the highest level since 1983 and it only counts those who still have unemployment benefits left. Those who have exhausted their benefits are kicked off the rolls even though they still don't have jobs. Analysts believe that more than five million people are out of work. This is a major problem for sentiment, retail sales and home foreclosures.

Unemployment Claims Chart
[Image 4]

The Import and Export Prices report for October showed import prices fell -4.7% for the biggest drop on record and much lower than analysts expected. This follows a -3.3% decline in the prior month. The drop in prices is led by the fall in crude prices, which fell -16.7% in October. The drop in import prices shows how quickly the rest of the world has seized up as economies fell into recession. The chart below shows how much prices had risen over the last five years and the sharp decline has quickly deflated inflation fears but there is still plenty of fat in the system.

Import Prices Five Year Chart
[Image 5]

Next week has a busy economic calendar and PPI, CPI, FOMC minutes, Philly Fed and Industrial Production will be the highlights. The PPI/CPI should be lower impact than normal since prices have collapsed with the recession and lower oil prices. The Philly Fed and Industrial production will tell us if the manufacturing conditions are still deteriorating. The FOMC minutes will tell us what the Fed was thinking when they cut rates at the October meeting. This will give analysts an indication of what to expect at the Dec-16th Fed meeting. The rest of the reports are filler or repeats of what we have seen over the last 60-days. The markets are not really paying attention to the weekly reports with volatility and liquidation the current controlling factor.

Economic Calendar
[Image 6]

Retailers have been making news for weeks and Friday was no different. A survey by the American Research Group showed shoppers are planning on spending 50% less in the coming holidays than they did in 2007. This is an annual survey started in 1985. The previous record for a decline in spending plans was a -6% decline in both 2003 and 2005. This is being called the worst holiday shopping season in a lifetime. On Friday Abercrombie & Fitch and JC Penny both reported earnings that fell by about half. They both gave forecasts for the rest of 2008 that were substantially below analyst expectations. Profits for JC Penny fell -52% due to low mall traffic and lower consumer spending. JCP same store sales were expected to drop as much as -9% in Q4. ANF saw profits fall -46% and said same store sales could be down as much as 26% in Q4. Earlier last week Kohl's saw profits fall -17% and Nordstrom saw a -57% drop. Best Buy's comments earlier in the week they were seeing a "seismic change in consumer spending" were echoed by those retailers reporting on Friday. Even Wal-Mart warned that Q4 earnings would suffer even though they were becoming the outlet of last resort by cash strapped shoppers. You may remember I wrote several times in these pages back in August recommending a short in ANF ($54) because of falling store traffic. ANF closed at $17.79 on Friday.

ANF Chart
[Image 11]

Nokia (NOK) started the markets off on the wrong foot on Friday when it lowered its estimates for mobile phones to 330 million in Q4 and 1.24 billion for the year, down from 1.26 billion units. Nokia also said mobile device volumes in 2009 would be less than 2008. Nokia said it still expected to maintain its market share but that percentage share would be of a smaller market. Shares in Nokia fell (-11%) as well as phone makers AAPL and RIMM and mobile chipmakers QCOM and TXN. It was another nail in the tech coffin as another sector bit the dust.

Sun Microsystems (JAVA) helped add to the tech weakness when is said they could cut 5,000 to 6,000 jobs as a result of the global slowdown. Sun said it would take a charge of $600 million related to the layoffs. Sun announced another 2,500 job cuts in May of this year. Sun reported earnings two weeks ago that were actually a loss of -2.24 per share or $1.68 billion. Sun said it would be more vulnerable to any global slowdown because it deals with large corporate customers. Sun said it was going to breakup its software division into three groups, Applications, Systems and Cloud Computing. Sun (JAVA) closed flat for the day but it did manage to hold its +15% spike from Thursday.

Citigroup (Nyse:C) reportedly began its big layoff program on Friday with 10,000 to 15,000 jobs expected to be cut. Citi closed under $10 on Thursday for the first time since the early 1990s and was unable to break over that level on Friday. Citi has lost more than $20 billion in 2008 and the year isn't over yet. Citi has 352,000 employees and they are openly targeting a reduction to 290,000 by early 2009. That suggests a lot more than 15,000 are going to be getting pink slips over the next four months. Citi managers were also instructed to cut their budgets for employee compensation by 25% for 2009. Citi is going to hold a "town hall" meeting on Monday to discuss with employees the strategy for moving forward. Citi also said it was raising the interest rates on 20% of its 54 million credit card accounts by +3%. Citi has been unable to securitize its credit card receivables since the banking crisis began and needs to raise the interest rates to offset the loss of the securitization fees and to make the accounts more profitable if they have to keep them on their books permanently. Citi hit a low of $8.27 on Thursday.

Activision's World of Warcraft or WOW as players call it released its newest version on Friday. It is expected to generate $100 million in revenue in the first 24 hours and $1 billion over the next 12 months. I have three adult sons addicted to this game along with more than eleven million others around the world faithfully paying their monthly subscription fee. The news of the release did not prevent Merrill Lynch from downgrading Activision (ATVI), Electronic Arts (ERTS) and reiterating an under perform on THQ Inc (THQI). Merrill said recent data points showed negative shopping trends for video games in November although it was still expected to be once of the strongest sectors. Given Activision's WOW plus the Guitar Hero series I question whether Activision should be in this group.

The world's largest mutual fund company, Fidelity, said it was going to cut another 1,700 jobs on top of the 1,300 already announced. That would equate to 7% of Fidelity's staff. Fidelity said they were seeing record withdrawals from their funds. Fidelity is not the only fund in trouble. Charles Biderman of TrimTabs.com was on CNBC on Friday and said 350 hedge funds had closed in the first six months of 2008 and that was before the bear market correction began in July. He did not agree with estimates earlier in the week that a third of hedge funds would close but he said there would be quite a few. Investors withdrew $100 billion from hedge funds in September. As of last week numbers over $40 billion had been withdrawn in October. He felt the number would rise significantly when all the numbers finally came in. He said funds of funds, funds that invest only in other funds, saw withdrawals of $38 billion so far in November. He said hedge funds were stockpiling cash with expectations of $250 billion in further withdrawals over the next 3-6 months. Biderman downplayed the Nov-15th notice date for hedge fund withdrawals. He said funds were in close contact with their investors and have known for sometime what kind of withdrawals to expect through year end.

Late after the close on Friday (8:PM) Freddie Mac (FRE) said it lost $25.3 billion or $19.44 per share in Q3 and asked for an immediate injection of $13.8 billion in government aid. You may remember the initial Fannie/Freddie bailout package was $200 billion "if they ever need it but I doubt it" quote from Hank Paulson. Surprise! Freddie needs $14 billion ASAP. Fannie Mae (FNM) reported a $29 billion loss on Monday and said it "may" have to tap the government's bailout money in coming months. The Freddie request for an immediate injection of funds could sour financial markets again next week.

Friday was another ugly day in the markets. The Dow opened down and quickly sank to -393 at 8,472. The afternoon rebound took it back up +451 points from the low to 8,923 and +58 for the day. Contrary to Thursday's closing ramp sellers hit the bounce and quickly knocked off -400 points to close down -337 for the day. On a day when reporters were talking about traders not wanting to go home short ahead of the G20 meeting this weekend the closing sell off was very unexpected. The Dow tried several times to break through 8900 and was rebuffed every time. That level has appeared as strong resistance and I fear we are in trouble for next week. Support on the Dow is 8000 and Thursday's retest of that level was seen by some as a textbook triple bottom formation. I would love for it to be bottom in any form but the selling remains too strong and there is no confirmation from the other indexes. The S&P-500 looks worse than the Dow with a lower low and lower highs.

Dow Chart
[Image 7]
S&P-500 Chart
[Image 8]

The Nasdaq is more bearish than the Dow with a series of lower lows and lower highs. The Nasdaq closed under 1500 on Wednesday, traded as low as 1428 on Thursday and was very lackluster during Friday's attempted rebound. The news from Nokia, downgrades on chip stocks and warnings from Intel, Cisco and Dell appear to have sealed the fate of the tech index. The next material support is well below at 1250.

Nasdaq Chart
[Image 9]

I knew the afternoon bounce on Friday was going to fail when the Dow went positive and the Russell was still down -15 points. I mentioned it in the Market Monitor at the time that the big cap rally could not last if the small caps were still being sold. The Russell lost -34 points for the day or -7.1% and was the biggest loser of the major indexes. The Nasdaq lost -5%, SPX -4.2% and Dow -3.8%. At twice the percentage loss of the Dow the picture is pretty clear. Fund managers were not only avoiding small caps on Friday but selling them hard. This suggests the broader markets are going lower. I doubt it was just a case of some fund bailing to raise cash for redemptions but that is always possible. For next week we definitely need to watch the Russell for market direction. If the weakness continues we should remain flat or short until the Russell finds some buyers. Russell 350 is the next material support level and the Russell closed at 456 on Friday.

Russell 2000 Chart
[Image 10]

I think traders have been holding their breath for a month now in expectations of a retest of the October lows. We got that retest and the rebound was crushed. That is not what traders were hoping for and I think real fear is starting to permeate the market. Fear that the October 10th lows are not going to hold and fear that the trillions in bailouts and stimulus is not going to rescue the U.S. and global economies from a severe recession and maybe even a depression. I get a lot of email from readers and I received several articles last week comparing the current economic setup with that before the great depression. Some are calling this the greater depression. While I don't subscribe to those beliefs the continued selling in the banks, the lack of financing for cars, homes, inventory, buildings, deals, debt, etc is becoming very worrisome. Something needs to change for the better soon and I don't see it on the horizon. I think the market is seeing the same void and beginning to make plans for some lower lows ahead. I would be careful about new longs here even though many people are making a living out of beating the "stocks are cheap" drum. They are cheap and if you don't mind holding for a couple years there are some real bargains. One-sixth of the S&P-500 is now under $10. Historically it is normally less than 2%. Cheap can get cheaper and while I want to buy the dips I am starting to become more cautious than I was just a couple days ago. At this level a real oversold bounce could last days and we are not seeing it. When something really does happen that signals a bottom the rebound is going to be explosive. Today I just don't know what that event will be. We have seen plenty of events that could have triggered a lasting rally and to date they have all fizzled. With every failed rally the bulls become less aggressive and the bears more aggressive. That is not a sign of a potential market rally in our future. You never know when a $14 billion Freddie Mac bombshell will turn up at 8:PM on a Friday or any other day for that matter. Be careful.

Jim Brown

Index Wrap



As I anticipated last week, we got a re-test of the prior lows and the S&P and the Dow held those prior lows either approximately or exactly, setting up possible double bottoms. While sellers may not try to push the major indexes to new lows, it takes real buying to then mount a sustained rally.

All the indexes are still at oversold extremes on a long-term weekly chart basis but there is yet to be successful tests of the 2002 bear market lows, although the S&P 100 (OEX) has come close to its '02 lows at 385. Whether these various lows will be reached is an open question. I've started making a note of these areas (or the top of these price zones) on my daily charts.

In terms of trading, it's possible that basis the lead S&P 500 (SPX) index, we're in a 800/820 to 1000 trading range for awhile. The recession is getting bad no doubt, but there's also hope for change ahead too.

This past week as I wrote in my Thursday Trader's Corner article, I was willing to step up the plate and buy some OEX calls when the index hit the 400 area again and also got into DJX calls when the index again reached 80. The next day (Friday) saw renewed sell pressure and I exited, becoming a short-term trader inadvertently not by intention. Hey, you take what the market gives you, especially in this hyper volatility period!

I mostly am on the sidelines as it's getting tougher to find a compelling trade. I don't assign a high probability yet to a new down leg, nor does it look like we'll see enough volume coming in to push a sustained rally. Selling premium can work but those strategies are not my usual game.

There are two slight bullish chart interpretations. One is that the S&P and Dow are experiencing longer term sideways basing action. The other is that the Nasdaq decline is starting to look overdone and the Composite (COMP) and Nas 100 (NDX) are tracing out bullish falling wedge patterns.

Ever thought about what books you would take to a dessert island if it could only be 1-2 items? I am 'marooned' near my old coastal haunts in California on a consulting project. Since I didn't really know if my stay would be weeks or months, I only took 2 market analysis books: my own (it's a good general technical reference) and Thomas Bulkowski's "Encyclopedia of Chart Patterns". This later allows a good read on the historical tendency for the outcome of wedge type patterns and most every other predictive type chart formation. I'll get into this with the Nasdaq charts.

I anticipate some further attempts to rally given the bearish sentiment extremes seen recently and figure lows may be in place on a short-term basis; but, as noted, I'm not betting on anything much. Too tough to call the trend ahead. Tough market, tough economy!

And, having grown up in Michigan, it's hard to believe how far the mighty auto companies have fallen. They were as short sighted as the banks, but spent longer lacking foresight.



The S&P 500 (SPX) chart continues bearish and this last retreat wasn't even from the down trendline intersecting around 950 and didn't either quite reach near resistance at the 21-day moving average. Near resistance implied by the average is at 925. The most significant area of potential selling interest remains the 1000 area.

Support is in the 850 to 835 zone, then at 820, with longer-term support from the '02 bottom beginning in the 800 area.

No suggestions. Selling rallies is obviously still working but I question still how much downside potential there is. How times have changed, when buying puts for a possible 100 point decline is not something I would be jumping into.

[Image 1]


The chart pattern for the S&P 100 (OEX) remains similar to that of the 500 in its bearish aspects. I wrote last week that key resistance should be found around 450. That's still the case, with next resistance in the 480-485 area.

I've pegged initial support at 400 area, extending down to 385. OK, I'd probably bite on another call buy if 385 was seen. Ever the contrarian! It's maybe too easy to just short rallies?

[Image 2]

SENTIMENT: sentiment extremes suggested by dips below the 1.1 level of my equities call/put indicator noted per the line above as suggesting an oversold-extreme bearishness market outlook have me at least not shorting this market currently.

It may be just that it's been awhile since I've been trading in a full-blown bear market, but there is this tendency for some quite sharp rebounds once traders get so predominately bearish as suggested by a low CPRATIO reading.


The Dow 30 Average (INDU) found good technical support once INDU got back to the 8000 area a second time, if only on short covering and the lifting of put hedges. However, the sharp rally from intraday lows around 8000 all the way back up to the 8900 area in INDU fell apart on the following day (Friday) this past week. The 21-day average was a key stopper.

Resistance is at 8875, then at 9200. A close above 9200, not reversed (back to the downside) the next day is needed to suggest a chart breakout.

I've noted a 'first' support on the chart below for the 8000 area, but initial support is in the 8200 area. Major support begins at 7500. If 75 was reached in the Dow Index (DJX) it would be a place to take profits on DJX puts; calls bought in that area could have reward potential back up to 80, risking to 73 as an exiting stop.

[Image 3]


The Nasdaq Composite Index (COMP) rally begin from the area of the lower down trendline at 1429 and was short-lived; good day-trade in calls no doubt. Near resistance is in the 1640 area, then up around the prior 1876 high.

I noted the falling wedge pattern which has often proven to be a bullish chart pattern, suggesting potential for an eventual upside breakout. The 'appearance' of a falling wedge is a downward price trend bounded by two intersecting, down-sloping, trendlines. The history of such patterns in stocks has been for a rise of between 20 and 30 percent once there is a decisive upside penetration of the upper trendline. There should be several alternating 'touches' to each trendline which we have in COMP.

Best COMP support should be found back in the low-1400, although I'd also note potential near support around 1500. Major support begins in the 1250 area.

[Image 4]


The rising wedge pattern with it's potential for a good-sized rally ahead is duplicated in the Nas 100 (NDX) as noted on the chart below. Chart patterns can 'fail' to lead to the expected outcome of course and the timing of when a rally might develop if it does, can't be closely predicted.

Technical resistance is noted at 1269 at the current (Monday) level of the 21-day average, with next resistance assumed to lie at the prior 1383 high.

Very near support (not noted on the chart) is at 1150, then is noted on the chart at the lower trendline, currently intersecting in the 1100 area. I've gone back to the top end of the 2002-2003 support zone (not shown) to note the start of major long-term support as beginning around 950.

[Image 5]


Near resistance in QQQQ has moved down to the 31.2 area. Pivotal resistance implied by the prior upswing high is at 34.

Close by technical support begins in the 28.0 area and is assumed to extend to the prior recent low at 27.3 or to 27 even. Major long-term support is some distance lower and begins around 23.5. If a new down leg developed, this would be an initial objective.

[Image 6]


The Russell 2000 (RUT) remains bearish in its pattern. I've suggested a possible outline of a current/future downtrend channel with support in the 400 area. Near support is assumed to lie at the recent 433 low, maybe a bit above such as 442.

Near resistance is at 500, in the 530 area and next around 550.

I haven't been wild to trade this index as it bounces back and forth on its overall downward slide, but if I owned them would cover puts (and probably buy some calls) if RUT got down to the 400 area, as from this area if reached, there's potential for a rebound of 125-150 points.

[Image 7]




1. Technical support/areas of likely buying interest are highlighted with green up arrows. 2. Resistance/areas of likely selling interest: red down arrows. [Gray up/down arrows: support/resistance levels that got pierced]


3. Index price areas where I have a bullish bias or interest in buying index calls, selling puts or other bullish strategies.

4. Price levels where I suggest buying index puts or adopting other bearish option strategies.

5. Bullish or Bearish trader sentiment and display the graph of a CBOE daily call to put volume ratio for equities only (CPRATIO) with the S&P 100 (OEX) chart. However, this indicator pertains to the market as a whole, not just OEX. I divide calls BY puts rather than the reverse (the put/call ratio). In my indicator a LOW reading is bearish and a HIGH reading bearish, consistent with other overbought/oversold indicators.

Trading suggestions are based on Index levels, not a specific option (month and strike price) and entry price for that option. My outlook often focuses on the intermediate-term trend (next few weeks) rather than the next several days of the short-term trend.

Having at least 3-4 weeks to expiration tends to be my guideline for trade entry choice. I attempt to pick only what I consider to be 'high-potential' trades; e.g., a defined risk point would equal in points only 1/3 or less of the index price target.

I favor At The Money (ATM), In The Money (ITM) or only slightly Out of The Money (OTM) strike prices so that premium levels are not as cheap as would otherwise be the case, which helps in not overtrading an account. Exit or stop points, as well as projected profitable index price targets, are based on my technical analysis of the underlying indexes.

New Option Plays

Puts aPlenty

Play Editor's Note: This remains one of the most volatile markets in U.S. history. The Dow Jones Industrial Average delivered not one but three different 300-point moves on Friday. The last half of the day saw two 400-point moves. The lack of follow through on Thursday's bounce is bearish and as a trading newsletter we need to adapt to market conditions quickly. We're dropping our new call plays from Thursday night and adding new put plays.

New plays note: We are adding several new put plays. However, traders may want to consider some sort of alternative to just buying puts. The VIX is extremely elevated again and that makes option premiums higher than normal. You may want to consider some sort of strategy that takes advantage of these elevated premiums. If you're bearish then one idea might be a call credit spread where you sell an at the money or out of the money call and hedge it by buying another higher-strike call.

New Option Plays
Call Options Plays
Put Options Plays
Strangle Options Plays
None BCR, COF None
  EWZ, IBM  
  KSS, LLL  


Bard CR - BCR - close: 82.91 change: -1.40 stop: 86.01

Why We Like It:
BCR, a medical devices company, produced a bearish double-top pattern on Friday (intraday) following Thursday's big rebound. It was a common pattern on Friday but it corresponds with the growing bearish technicals on the stock. The Point & Figure chart is already bearish with a $69.00 target.

We are suggesting readers buy December calls here with a stop loss above Friday's high at $86.01. Our target is $75.50.

Suggested Options:
We are suggesting the December puts.

BUY PUT DEC 80.00 BCR-XP open interest= 119 current ask $3.40
BUY PUT DEC 75.00 BCR-XO open interest=  77 current ask $2.00

Annotated Chart:

Picked on November 15 at $ 82.91
Change since picked:      + 0.00
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =       1.0 million  

Capital One Financial - COF - close: 31.19 change: -2.37 stop: 35.01

Why We Like It:
The consumer is in a tailspin. The economic slowdown is going global. The credit markets remain illiquid. We can't imagine a worse place to be than consumer credit. COF looks like a prime candidate for further declines. That's why there are so many shorts. The most recent data listed short interest at 11.7% of the 386 million-share float. Unfortunately, this high short position caused a little short squeeze on Thursday. The "rally" quickly reversed on Friday under the $35.00 level. We're suggesting readers buy puts with a stop loss at $35.01. This is a wide, aggressive stop loss but it needs to be wide due to the stock's volatility.

COF appears to have some support near $25.00 dating back a few years ago. We're targeting a drop to $25.50. The Point & Figure chart is very bearish with a $15.00 target.

Suggested Options:
We are suggesting the December puts.

BUY PUT DEC 30.00 COF-XF open interest=11316 current ask $4.10
BUY PUT DEC 25.00 COF-XE open interest=16373 current ask $2.35

Annotated Chart:

Picked on November 15 at $ 31.19
Change since picked:      + 0.00
Earnings Date           01/22/09 (unconfirmed)
Average Daily Volume =      12.5 million  

iShares Brazil - EWZ - close: 34.55 change: -2.69 stop: 36.55

Why We Like It:
Emerging markets are a mixed bag but many think Brazil is a land of opportunity. Yet you wouldn't think that after looking at the EWZ iShares for Brazil. It's been in steady freefall for months. As the global recession heats up Brazil should see less exports and that should hurt its economy and thus its stock market.

At a minimum I would expect the EWZ to retest its lows near $28.50. The Point & Figure chart is bearish with a $23.00 target. We're suggesting puts now with a stop loss at $36.55 and a $29.00 target.

Readers should consider this an aggressive play. The EWZ can be very volatile. On Thursday it's range was almost $31.00 to $37.50.

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

BUY PUT DEC 35.00 ESZ-XI open interest=29304 current ask $4.90
BUY PUT DEC 31.00 ESZ-XE open interest= 1143 current ask $3.30
BUY PUT DEC 30.00 ESZ-XD open interest=44713 current ask $2.95

Annotated Chart:

Picked on November 15 at $ 34.55
Change since picked:      + 0.00
Earnings Date           00/00/00
Average Daily Volume =      25.7 million  

Intl. Business Machines - IBM - cls: 80.33 change: -3.88 stop: 85.55

Why We Like It:
Negative earnings guidance from across the tech sector has not inspired the bulls. While IBM did see a significant bounce on Thursday investors quickly sold the rally. The technical picture is getting worse and IBM's Point & Figure chart is forecasting a $57 target.

We are suggesting puts with a stop loss at $85.55. We're setting two targets. Our first target is $75.50. Our second target is $71.00.

Suggested Options:
We are suggesting the December puts.

BUY PUT DEC 80.00 IBM-WP open interest=16062 current ask $3.00
BUY PUT DEC 75.00 IBM-WO open interest=11947 current ask $1.30
BUY PUT DEC 70.00 IBM-WN open interest= 5838 current ask $0.55

Annotated Chart:

Picked on November 15 at $ 80.33
Change since picked:      + 0.00
Earnings Date           01/15/09 (unconfirmed)
Average Daily Volume =      11.9 million  

iShares Russell 2000 - IWM - close: 45.64 change: -3.67 stop: 49.01

Why We Like It:
The Russell 2000 small cap index hit new five-year lows this week. While this index saw a huge rebound on Thursday it was the weakest on Friday. If fund managers are not buying small caps then this market will continue lower.

There is a chance that the RUT could see another bounce from its recent lows but the rebound will probably not be as violent as Thursday's. Overall the trend remains negative and we're expecting new relative lows.

We're suggesting a stop loss at 49.05 on the IWM. Our target is the $41.00 mark. FYI: The P&F chart points to an $18 target.

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

BUY PUT DEC 45.00 IWM-XS open interest=32736 current ask $3.80
BUY PUT DEC 42.00 IWM-XP open interest=31611 current ask $2.59
BUY PUT DEC 40.00 IWM-XN open interest=13072 current ask $1.98

Annotated Chart:

Picked on November 15 at $ 45.64
Change since picked:      + 0.00
Earnings Date           00/00/00
Average Daily Volume =       121 million  

Joy Global - JOYG - close: 25.18 change: -1.36 stop: 27.51

Why We Like It:
We're going to take another swing at JOYG. We listed it as a bearish play last week but exited early on the reversal higher. There was no follow through on Friday so we're re-listing it as a put play.

Our target is $20.50. We're suggesting a stop loss at $27.51. FYI: The P&F chart is bearish with a $17.00 target.

Suggested Options:
We are suggesting the December puts.

BUY PUT DEC 25.00 JQY-XZ open interest= 721 current ask $3.80
BUY PUT DEC 22.50 JQY-XX open interest= 725 current ask $2.65
BUY PUT DEC 20.00 JQY-XY open interest=1176 current ask $1.75

Annotated Chart:

Picked on November 15 at $ 25.18
Change since picked:      + 0.00
Earnings Date           12/17/08 (unconfirmed)
Average Daily Volume =       4.0 million  

Kohl's Corp. - KSS - close: 29.09 change: -1.48 stop: 32.05

Why We Like It:
Everyone expected the October retail sales figures to be bad and yet the retail sector sold off on the news anyway. Currently the market is expecting this Christmas to be the worst holiday shopping season in about 20 years. You might be able to argue that it's already been priced in but the trend for retailers is still lower.

We're suggesting puts with a stop loss at $32.05 and two targets. Our first target is $25.50 since KSS appears to have some long-term support around $25.00. Our second target is $22.00. Believe it or not the P&F chart is still bullish from the late October rally but a new move under $26.00 would change that. FYI: More conservative traders may want to use a tighter stop near the late Friday rebound around $31.15.

Suggested Options:
We are suggesting the December puts.

BUY PUT DEC 30.00 KSS-XF open interest= 6898 current ask $3.60
BUY PUT DEC 25.00 KSS-XE open interest=14870 current ask $1.65

Annotated Chart:

Picked on November 15 at $ 29.09
Change since picked:      + 0.00
Earnings Date           02/26/09 (unconfirmed)
Average Daily Volume =       8.4 million  

L-3 Communications - LLL- close: 69.33 change: -1.75 stop: 73.25

Why We Like It:
The defense sector has mirrored the declines in the S&P 500. Unfortunately for LLL shareholders the stock has under performed both the market and the DFI index. Even Thursday's rebound in LLL failed to push the stock back into the green.

We're suggesting puts with a stop loss above Friday's high a $73.25. We're listing two targets. Our first target is $65.25, which would be a new relative low. Our second target is $61.00.

Suggested Options:
We are suggesting the December puts.

BUY PUT DEC 70.00 LLL-XN open interest= 334 current ask $5.20
BUY PUT DEC 65.00 LLL-XM open interest= 373 current ask $3.10
BUY PUT DEC 60.00 LLL-XL open interest= 341 current ask $1.80

Annotated Chart:

Picked on November 15 at $ 69.33
Change since picked:      + 0.00
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =       1.2 million  

Northern Trust - NTRS - close: 44.92 change: -4.88 stop: 50.05

Why We Like It:
The banking indices look poised to hit new relative lows soon. In front of the pack is NTRS, a regional bank, that is already hitting multi-year lows. Now the financials have become one of the most volatile sectors in the market. NTRS' range on Thursday was almost $43 to $50. We're going to play with a relatively wide stop loss, which raises our risk.

We're suggesting readers buy puts with a stop loss at $50.05. More conservative traders may want to try $47.55 instead. Our first target is the $40.00-38.50 zone. The Point & Figure chart is bearish with a $34.00 target.

Suggested Options:
We are suggesting the December puts.

BUY PUT DEC 45.00 NRQ-XI open interest= 765 current ask $5.10
BUY PUT DEC 40.00 NRQ-XH open interest=  14 current ask $3.10

Annotated Chart:

Picked on November 15 at $ 44.92
Change since picked:      + 0.00
Earnings Date           01/15/09 (unconfirmed)
Average Daily Volume =       3.7 million  

Potash Corp. - POT - close: 69.81 change: -4.38 stop: 74.51

Why We Like It:
The post-bubble burst in POT and the rest of the fertilizer stocks has been horrendous. POT was trading around $240 in June. The group continues to slide lower whether the move is warranted or not. I would argue that the demand for fertilizer remains strong and these companies have said before they're in multi-year bullish business trends. We can't trade what we think should happen but only what the markets gives us. At the moment, POT is headed lower.

We are suggesting a stop loss at $74.51, just above Friday's high. Our target is the $61.50 mark. More aggressive traders may want to aim lower. The P&F chart is bearish with a $48 target.

Suggested Options:
We are suggesting the December puts.

BUY PUT DEC 70.00 PVZ-XN open interest=5870 current ask $8.70
BUY PUT DEC 65.00 PVZ-XM open interest=1703 current ask $6.40
BUY PUT DEC 60.00 PVZ-XL open interest=1570 current ask $4.60

Annotated Chart:

Picked on November 15 at $ 69.81
Change since picked:      + 0.00
Earnings Date           01/22/09 (unconfirmed)
Average Daily Volume =      20.3 million  

In Play Updates and Reviews

Need to be Nimble

Play Editor's Note: This remains one of the most volatile markets in U.S. history. The Dow Jones Industrial Average delivered not one but three different 300-point moves on Friday. The last half of the day saw two 400-point moves. The lack of follow through on Thursday's bounce is bearish and as a trading newsletter we need to adapt to market conditions quickly. We're dropping our new call plays from Thursday night and adding new put plays.

PUT Play Updates

Volatility Index - VIX - cls: 66.31 chg: + 6.48 stop: n/a

The VIX put together back to back 10% moves on Thursday and Friday. Unfortunately, Friday's was a 10% gain and that's bad news for our bearish play. We only have two days left before November VIX options expire and it would appear that these speculative positions will end as a loss.

If you bought puts then your loss is limited to the amount paid. If you sold calls then your loss potential is technically unlimited. Once again I am suggesting that traders cover any short call positions since it looks like the VIX is poised to move higher.

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:

The highest spike in the VIX in history has ruined our chances for success with these put positions. Now after a sharp correction the VIX is climbing again. Our September 16th put position (suggested entry at 30.30) has a 25.50 target. In all honesty this position is dead. The September 29th position (suggested entry at 46.72) is also dead and had two targets at 36.00 and 31.00. Our October 8th position (entry 57.53) has two targets at 40.00 and 35.00. Right now we'd be happy with breakeven on the Oct. 8th position.

Annotated Chart:

Picked on September 16 at = 30.30 first position
Change since picked:       +36.01
Picked again Sept. 29 at =  46.72 second position
Changed since picked:      +19.59
Picked again Octo. 08 at =  57.53 third position
Changed since picked:      + 8.78
Earnings Date            00/00/00
Average Daily Volume =        --- million  

Strangle & Spread Play Updates

SPDR GOLD Trust - GLD - close: 73.30 change: +1.15 stop: n/a

Rumors that China might be or planning to buy gold to diversify their reserves sent gold prices rising on Friday. I'm not convinced that the GLD has turned bullish since Friday's rally couldn't get past its trendline of lower highs.

Remember that we don't care what direction the GLD moves as long as it picks a direction and goes. We're not suggesting new positions at this time.

We listed two strangles to take advantage of what appeared to be an imminent breakout, up or down, in gold prices.

The first strangle uses November options, which expire in one week. Thus it's much more risky. The second strangle uses December options.

What is a strangle?
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 the stock moves far enough one side of our trade will rise in value and pay for the entire trade and make a profit.

-November Strangle-

We suggested readers buy the November $75 call (GVD-KW) and the November $70 puts (GVD-WR). Our estimated cost was $3.10. We want to sell if either option hits $5.25. There are only two weeks left before November options expire.

-December Strangle-

We suggested readers buy the December $75 call (GVD-LW) and the December $70 puts (GVD-XR). Our estimated cost was $6.30. We want to sell if either option hits $12.00.

Annotated Chart:

Picked on November 09 at $ 72.50
Change since picked:      + 0.80
Earnings Date           00/00/00
Average Daily Volume =      19.3 million  

Ultra S&P500 ProShares - SSO - close: 25.43 change: -2.67 stop: n/a

It looks like Thursday's bullish reversal in the S&P 500 is failing. The market is poised to retest its October lows yet again and this time they may not hold.

If you want to open new positions anywhere in the $25.50-24.50 zone is a good entry point.

Note: The SSO is an ultra-long ETF that typically moves twice the daily performance of the S&P 500 index.

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.

-December Strangle Details-
We suggested readers buy the December $30.00 call (SOJ-LD) and the December $20.00 put (SOJ-XT). Our estimated cost is $3.75. We want to sell if either option hits $6.00.

Annotated Chart:

Picked on November 12 at $ 24.84
Change since picked:      + 0.59
Earnings Date           00/00/00
Average Daily Volume =           million  


Apple Inc. - AAPL - close: 90.24 change: -6.20 stop: 89.90

There was absolutely no follow through on AAPL's rally from Thursday. Friday was so bearish that AAPL actually gapped open lower at $93.76 (our first opportunity to buy calls) and eventually closed with a 6.4% loss, which almost completely erased Thursday's gains.

We have to be nimble in this market and Friday is telling us that stocks may have farther to fall and that Thursday was a one-day fluke. We're suggesting readers exit any bullish positions immediately. If AAPL breaks down under $85 it will be time to open bearish positions.


Picked on November 13 at $ 93.76 /gap down entry/originally 96.44
Change since picked:      - 2.44
Earnings Date           01/22/09 (unconfirmed)
Average Daily Volume =        53 million  

Freeport McMoran - FCX - close: 24.34 change: -1.67 stop: 22.90

FCX also gave us a gap down entry. Shares opened at $25.37 and eventually settled with a 6.4% loss. The stock rallied twice intraday over the $26.00 level and failed both times. We are suggesting an early exit to cut our losses since the market is clearly telling us that FCX has further downside here.


Picked on November 13 at $ 25.37 /early exit/gap down entry
Change since picked:      - 1.03 /originally listed at $26.01
Earnings Date           01/22/09 (unconfirmed)
Average Daily Volume =      23.7 million  


SPDR Gold ETF - GLD - close: 73.30 change: +1.15 stop: 73.25

We tightened our stop loss to $73.25 on Thursday night to reduce our risk in GLD in case the ETF kept rising. Without fail the GLD did post a gain. It actually gapped open higher at $73.39 and hit $74.26 before paring its gains. Our stop loss was at $73.25 so the play was over at the open. Unfortunately, Friday's spike might be a head fake. There were some rumors on Friday morning that China might be buying (or planning to buy) gold in an effort to diversify its currency reserves.

If GLD trades back under $72.00 or $71.50 it might be an entry point to buy puts again. Keep an eye on the U.S. dollar (watch the UUP) since GLD will do the opposite most of the time.


Picked on November 11 at $ 72.05 /stopped out 73.39 gap open exit
Change since picked:      + 1.25
Earnings Date           00/00/00
Average Daily Volume =      19.3 million  


CBOE Volatility Index - VIX - cls: 66.31 chg: + 6.48 stop: n/a

We have two days left before November VIX options expire. The Volatility index has reversed higher again after Thursday's failed rally and looks poised to climb even higher. At this point, if you have not exited already, traders need to exit.

Why exit now? Honestly, the VIX could be 10 points higher or 10 points lower (or more) by the end of business on Tuesday. That would make a HUGE difference on our Profit or Loss for these positions. It would be tempting to call it a coin toss on what direction it will go but the trend has reversed higher again so momentum is against us. If you're still short the November 30 or 35 calls would you want to exit now or ten points higher?

Please see the CBOE website 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.

Position Summary:

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.

Hypothetically we have sold the November 30 calls at $8.60 (credit). We bought the Nov. 50 calls for $1.61 (debit). Based on these numbers we would need the VIX to close under 37.00 for us to be profitable. If it closes higher than 37.00 then the intrinsic value of the Nov. 30 calls will be higher than what we paid for it and we'll have to come up with the difference. Example: if the VIX is at 40.00 another $1.40 will be taken out of our accounts when the VIX options are settled because the Nov. 30 call will be worth $10.00.

Now, if you sold the higher-strike call (Nov.50) when we discussed it a couple of weeks ago you could have gotten $9.00-11.00 for it. Let's say you got $10.00 for it. Now our "credit" to our account is $8.60 for the Nov. 30 calls and $8.39 ($10.00 for selling Nov. 50 call minus the $1.61 we paid for it) for a total income of $16.99. This gives us a much wider margin for error. With this scenario, the VIX would have to close over 47.00 before we lost any money.

Alternatively if you sold the Nov. 50 call around $5.00 then our breakeven point is a VIX settling at 42.00.

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<-high
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
Update 10/30/08 open 24.06, high 27.32, closed 25.20bid
Update 10/31/08 open 25.20, high 25.20, closed 24.30bid
Update 11/03/08 open 24.50, high 24.50, closed 21.50bid
Update 11/04/08 open 19.00, high 19.00, closed 16.80bid
Update 11/05/08 open 17.56, high 20.60, closed 20.20bid
Update 11/06/08 open 26.90, high 28.00, closed 27.50bid
Update 11/07/08 open 26.30, high 27.00, closed 24.70bid
Update 11/10/08 open 23.30, high 27.00, closed 25.70bid
Update 11/11/08 open 29.27, high 29.27, closed 28.20bid
Update 11/12/08 open 31.00, high 33.60, closed 33.30bid <- new high
Update 11/13/08 open 33.10, high 37.10, closed 26.60bid
Update 11/14/08 open 28.43, high 32.70, closed 32.40bid


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<-high/suggested sell
Update 10/28/08 open 11.00, high 13.30, closed  9.40ask
Update 10/29/08 open  9.23, high 10.70, closed 11.00ask
Update 10/30/08 open  8.69, high 10.90, closed 10.00ask
Update 10/31/08 open 10.30, high 10.30, closed  9.00ask
Update 11/03/08 open  8.34, high 8.34, closed 7.00ask
Update 11/04/08 open  3.50, high 3.70, closed 4.00ask
Update 11/05/08 open  4.20, high 5.90, closed 5.60ask
Update 11/06/08 open  6.00, high 12.00, closed 11.20ask
Update 11/07/08 open  9.80, high 9.80, closed 8.00ask
Update 11/10/08 open 6.00, high 9.25, closed 8.50ask
Update 11/11/08 open 10.60, high 12.10, closed 9.90ask
Update 11/12/08 open 10.95, high 14.50, closed 14.70 <-new high
Update 11/13/08 open 13.40, high 17.20, closed 8.30ask
Update 11/14/08 open 8.77, high 11.60, closed 13.60ask

Picked on October 12 at $ 69.95
Change since picked:     - 3.64  


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.

Hypothetically we have sold the November 35 calls at $14.00 (credit). We bought the Nov. 60 calls for $3.00 (debit). Based on these numbers we would need the VIX to close under 46.00 for us to be profitable. If it closes higher than 46.00 then the intrinsic value of the Nov. 35 calls will be higher than what we paid for it and we'll have to come up with the difference. Example: if the VIX is at 50.00 at settlement another $6.00 because the Nov. 35 call will be worth $20.00.

Now, if you sold the higher-strike call (Nov.60) when we discussed it a couple of weeks ago you could have gotten $5.50-6.50 for it. Let's say you got $6.00 for it. Now our "credit" to our account is $14.00 for the Nov. 35 calls and $3.00 ($6.00 for selling the Nov. 60 call minus the $3.00 we paid for it) for a total income of $17.00. This gives us a much wider margin for error. With this scenario, the VIX would have to close over 52.00 before we lost any money.

Alternatively if you sold the Nov. 50 call around $3.00 then our breakeven point is a VIX settling at 49.00.

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 <-high
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
Update 10/30/08 open 18.50, high 22.00, closed 20.30bid
Update 10/31/08 open 21.10, high 21.10, closed 19.20bid
Update 11/03/08 open 19.31, high 19.31, closed 19.10bid
Update 11/04/08 open 14.80, high 14.80, closed 11.80bid
Update 11/05/08 open 13.05, high 14.40, closed 15.30bid
Update 11/06/08 open 17.60, high 23.90, closed 22.00bid
Update 11/07/08 open 21.40, high 21.40, closed 19.30bid
Update 11/10/08 open 17.30, high 21.74, closed 20.30bid
Update 11/11/08 open 23.90, high 25.00, closed 22.60bid
Update 11/12/08 open 25.25, high 27.48, closed 28.20bid <-new high
Update 11/13/08 open 28.05, high 28.05, closed 21.30bid
Update 11/14/08 open 26.10, high 27.00, closed 27.10bid

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 <-high/suggested sell
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
Update 10/30/08 open 4.90, high 6.20, closed 5.80ask
Update 10/31/08 open 5.90, high 6.10, closed 4.90ask
Update 11/03/08 open 4.60, high 4.81, closed 3.50ask
Update 11/04/08 open 1.15, high 1.60, closed 1.75ask
Update 11/05/08 open 1.66, high 2.70, closed 2.45ask
Update 11/06/08 open 2.80, high 6.90, closed 6.30ask
Update 11/07/08 open 5.70, high 5.70, closed 3.30ask
Update 11/10/08 open 2.80, high 4.20, closed 3.70ask
Update 11/11/08 open 4.40, high 5.50, closed 4.00ask
Update 11/12/08 open 5.20, high 6.60, closed 6.90ask
Update 11/13/08 open 5.00, high 8.40, closed 2.70ask
Update 11/14/08 open 3.30, high 5.00, closed 5.30ask

Annotated Chart:

Picked on October 12 at $ 69.65
Change since picked:     - 4.37 
VIX spread #4 with November options (published 11/08/08):

This play (VIX Strangle #4) was closed on Thursday 11/13/08.


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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