Option Investor

Daily Newsletter, Monday, 11/17/2008

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Table of Contents

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

Market Wrap

Japan In Recession

[Image 1]

Economic data released Sunday evening confirmed Japan was the latest major economy to fall into recession after the country's Cabinet Office said gross domestic product (GDP) contracted for a second-straight quarter, falling 0.1% (July-September) in the third quarter after a -0.9% decline in Q2 (April-June).

With the world's second-largest economy contracting for a second-straight quarter and the euro zone already in a formal recession, many traders and investors continued to trade cautiously with the United States and Britain on the brink of a recession and China's economy slowing sharply.

Nymex crude oil continued to ease into Thursday's December contract termination. December Crude (cl08z) settled down $2.09, or -3.66% at $54.95, with the U.S. Oil Fund (USO) finishing lower by just more than a bone ($1.00), or -2.21% at $45.16.

Reports of Somali pirates having hijacked a Saudi-owned supertanker off the Horn of Africa had oil prices modestly higher in the early part of this morning's trade, but the roll into Thursday's termination and easing global demand kept things in check.

After today's close, the EIA said the national average retail gasoline price plunged an additional 0.152/gallon, to $2.072/gallon for the week ended Monday.

The average price/gallon is the lowest since March 14, 2005!

Prices are now $1.027, or 33.1%, below a year earlier.

Nymex December Unleaded (rb08z) settled down $0.0645, or -5.21% at $1.1746. That's off $0.1933, or -14.13% from last Monday's settlement.

Global Economic Calendar-

[Image 2]

Old new travels fast; and with the Nikkei-225 having fallen 16.5% in Q3, Japan's benchmark Nikkei-225 ($NIKK) edged higher by 60-points, or +0.71% to finish Monday's trade at 8,522.58.

The yen was strong versus the greenback with the Yen CurrencyShares (FXY) $103.47 +0.83%.

Hong Kong's Hang Seng ($HSI) shed 13 points, or -0.10%, while mainland China's Shanghai Composite ($SSEC) gained 44 points, or 2.22% to reclaim the 2,000 level.

European bourses were weak with bankers and miners pacing the declines.

Housing data (Rightmove House Price Index) out of the UK helped set a negative tone for the FTSE-100 ($FTSE), which fell 100-points, or 2.38% to 4,132.16 on Monday.

Sellers in England and Wales lowered their asking prices by 2.9% on average in November, pushing prices lower by 7.1% versus a year ago.

The property Web site showed the number of new sellers dwindling to just 20,000 a week, almost half the number this time last year.

Economists noted that the bulk of the Rightmove survey was conducted before the Bank of England's (BOE) 1.5 percentage point interest rate cut on 11/06/08, which took the official rate down to 3.0%.

The Pound CurrencyShares (FXB) $150.54 +1.64% got a bounce, but the Euro CurrencyShares (FXE) $126.63 -0.33% remained bound between the $125-$130 (1.25-1.30 eur/$) going on 4-weeks.

US Intra-day Internals -

[Image 3]

Economic data as well as news of further job cuts at Citigroup (NYSE:C) $8.89 -6.61% found the major averages opening mixed-to-lower as the opening bell rang.

The nation's number 2 bank said it would cut 52,000 jobs by early next year in a move to offset mounting debt losses and sagging economies worldwide.

U.S. industrial output rebounded in October after hurricane disruptions (Gustav and Ike) aided a sharp decline in September.

Industrial production rose 1.3% in October after a downwardly revised 3.7% decline in September.

Just as I've noted the rise in U.S. refinery capacity utilization in recent weeks after hurricane disruptions in September, here too we see some manufacturing capacity showing a slight rebound with 76.4% of the nation's manufacturing capacity being utilized in October.

Still, the Federal Reserve noted that while the hurricane disruptions and a strike in the commercial aircraft industry impacted production negatively in September and October, excluding these two items, total production is estimated to have fallen around 0.66% in both September and October.

One note I'd have traders and investors make is a survey from the Philadelphia Fed regarding some fourth quarter figures which estimates the U.S. Q4 GDP falling by 2.4%, with a further decline of 1.1% in Q1 of 2009. The survey suggested the U.S. unemployment rate could rise 7.6% by Q3 2009.

Volumes at both exchanges were what I would consider to be anemic with the big board turning just 4.93 billion compared to its 21-day average volume of 5.85 billion.

NASDAQ volume also below its 21-day average volume of 2.33 billion shares.

I'd expect volume to pick up into this week's option expiration.

Here are some of this month's November option "Max Pain" theory tabulations. These are simply the averages of all call/put option open interest among the various strikes for November expiration at Friday's close.

"Max Pain" Theory (DIA, SPY, QQQQ, IWM, SMH, XLF, USO, GLD)

[Image 4]

At Friday's close, and today's, all those securities listed in the above table would currently be residing below their respective November option "Max Pain" theory tabulations.

The StreetTracks Gold (GLD) $72.65 -0.88% (~726.60 spot) today, is nearest its 11/14/08 tabulation (these can/will change daily), -4.41% below its current $76.00 tabulation and may at least be a security to monitor for any signal to where some "pain" might be delivered.

The idea behind "Max Pain" is that a short-term gravitation, or elevation of a security's PRICE in order to deliver as much "pain" to the option holder.

An OPTION trader currently holding PUT options that are PROFITABLE would be on the alert here, as an "unexplained" jump in PRICES (that's what an option expiration can deliver... unexplained price action) could be painful.

My basic thought process for TRADERS and investors is to be aware of the upcoming option expiration. Should the GLD reclaim the $76.00 level and begin moving notable higher, start assessing UPSIDE risk in other securities.

At tonight's close, the Dow Diamonds (DIA) $82.95 -1.50% would be -7.94% from its $90.00 "Max Pain" theory tabulation.

I would note here that based on last week's high/low/close for the DIA, this week's WEEKLY R1 (resistance 1) is $90.70. This week's Pivot of $85.27 (mathematical midpoint of last week's h/l/c) kept things in check, "give-or-take" $0.71 with the DIA trading a session best $85.98.

Many are under the impression that volatility measures have risen significantly since last expiration. That isn't necessarily the case, or at least my observation.

Here's a chart of the CBOE Market Volatility Index (VIX.X), which would more fully encompass the S&P 500 (SPX.X).

CBOE Market Volatility Index (VIX.X) - Daily Intervals

[Image 5]

Since last expiration Friday (10/17/08), the VIX.X is relatively unchanged. Actually a bit below the 70.33 level found at the 10/17/08 close.

On Thursday of last week, the VIX.X fell to 58.66, just above this month's MONTHLY Pivot of 58.20. That's a MEASURE to monitor, or assess some volatility to if we're to see a jump in SPX-SPY related PRICE action.

Today's broader market "light volumes" has me on my toes and a bit jittery. ALL INDICATORS are very BEARISH and VERY OVERSOLD.

It is like the "quiet before the storm."

S&P Depository Receipts (SPY) - Daily Intervals

[Image 6]

Trying to call a market into an expiration is always tough. I've noted this $97.00 "Max Pain" theory level on the SPY, and really narrowed down a "range" from the 10/10/08 intra-day low to the 10/14/08 intra-day high.

As I look at it, the SPY can't get to $97.00 without first getting above $87.77, then $91.96 and $94.55.

New Option Plays

Bearhug on Oil.


ConocoPhillips - COP - close: 46.76 chg: -0.63 stop: 50.05

Why We Like It:
There seems to be no stopping the slide in oil. Now shares of COP look poised to resume their fall after last Thursday's bounce has failed under the $50.00 level. We are trying to play the trend and the trend is down. The Point & Figure chart is bearish with a $41.00 target.

We're suggesting readers buy puts with a stop loss at $50.05. Our target is the $41.00-40.00 zone. More aggressive traders may want to aim lower.

Suggested Options:
We are suggesting the December puts.

BUY PUT DEC 45.00 COP-XI open interest=2572 current ask $3.90
BUY PUT DEC 40.00 COP-XH open interest=3349 current ask $2.23

Annotated Chart:

Picked on November 17 at $ 46.76
Change since picked:      + 0.00
Earnings Date           01/22/09 (unconfirmed)
Average Daily Volume =      18.1 million  

In Play Updates and Reviews

Stocks continue to slide lower. Put options rise in value.

PUT Play Updates

Bard CR - BCR - close: 81.76 change: -1.15 stop: 86.01

The stock market continued to move lower. The midday bounce attempt in BCR failed under the $84.00 level. Meanwhile the MACD has produced a new sell signal. We don't see any changes from our weekend comments and we would still consider new positions here.

The Point & Figure chart is bearish with a $69.00 target. Our target is $75.50.

Picked on November 15 at $ 82.91
Change since picked:      - 1.15
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =       1.0 million  

Capital One Financial - COF - close: 29.87 change: -1.32 stop: 35.01

A Reuters article out today reported that COF recently disclosed in an SEC filing that its U.S. consumer charge-off rate rose to 6.54 percent in October from 6.34 percent in September. The number of loans at least 30 days delinquent rose 0.28% to 4.48%. Shares of COF fell 4.2% and closed under the $30.00 mark for the first time in about five years.

We do not see any changes from our weekend comments. 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.

Picked on November 15 at $ 31.19
Change since picked:      - 1.32
Earnings Date           01/22/09 (unconfirmed)
Average Daily Volume =      12.5 million  

iShares Brazil - EWZ - close: 33.80 change: -0.75 stop: 36.55

The Brazil ETF, the EWZ, continued to drift lower. It lost another 2.1% while maintaining its bearish trend of lower highs. We would still consider new positions right here.

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. Our target is $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.

Picked on November 15 at $ 34.55
Change since picked:      - 0.75
Earnings Date           00/00/00
Average Daily Volume =      25.7 million  

Intl. Business Machines - IBM - cls: 77.48 change: -2.85 stop: 85.55

As expected shares of IBM continued to move lower. The stock lost more than 3.5% and closed under the $80.00 mark. We really don't see any changes from our weekend comments although more conservative traders may want to start adjusting their stop loss lower.

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.

Picked on November 15 at $ 80.33
Change since picked:      - 2.85
Earnings Date           01/15/09 (unconfirmed)
Average Daily Volume =      11.9 million  

iShares Russell 2000 - IWM - close: 45.25 change: -0.39 stop: 49.01

The action in the small caps caused me to raise an eyebrow. Normally this group has been under performing the markets. Today the small caps out performed the market. The RUT only lost 1.1% and the IWM only fell 0.8% versus a 2.58% drop in the S&P 500 index. The trend is still bearish but we don't want to see relative strength in the small caps, which might signal a broader strength building in the market. I know that sounds redundant but hopefully you get my point.

Until the trend changes we remain bearish and would continue to buy puts here. Our target is the $41.00 mark. FYI: The P&F chart points to an $18 target.

Picked on November 15 at $ 45.64
Change since picked:      - 0.39
Earnings Date           00/00/00
Average Daily Volume =       121 million  

Joy Global - JOYG - close: 22.69 change: -2.49 stop: 27.51

News that one analyst firm had reiterated their "strong buy" on JOYG had no affect on the stock price. Shares proceeded lower and closed with a 9.89% loss. We don't see any changes from our weekend comments.

Our target is $20.50. We're suggesting a stop loss at $27.51. After a 10% drop it's probably time to start thinking about a lower stop loss. FYI: The P&F chart is bearish with a $17.00 target.

Picked on November 15 at $ 25.18
Change since picked:      - 2.49
Earnings Date           12/17/08 (unconfirmed)
Average Daily Volume =       4.0 million  

Kohl's Corp. - KSS - close: 27.45 change: -1.64 stop: 32.05

Retail stocks continued to sink and KSS (-5.6%) under performed its peers in the RLX retail index, which fell 2.6%. We don't see any changes from our previous comments. Tomorrow could see some volatility as investors react to an earnings report from Saks Inc. (SKS), a purveyor of luxury apparel.

We have two targets on KSS. 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.

Picked on November 15 at $ 29.09
Change since picked:      - 1.64
Earnings Date           02/26/09 (unconfirmed)
Average Daily Volume =       8.4 million  

L-3 Communications - LLL- close: 68.50 change: -0.83 stop: 73.25

The DFI defense index out performed the S&P 500 today by posting a 1.1% decline. Shares of LLL kept pace with the DFI but the intraday action looks more bearish. LLL tried to rebound midday but failed several times at the $70.00 level. We don't see any changes from our weekend comments.

We're listing two targets. Our first target is $65.25, which would be a new relative low. Our second target is $61.00.

Picked on November 15 at $ 69.33
Change since picked:      - 0.83
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =       1.2 million  

Northern Trust - NTRS - close: 42.16 change: -2.76 stop: 50.05

Banking stocks continued to under perform and NTRS was no exception. The stock lost 6.1% and closed at new multi-year lows. More conservative traders may want to tighten their stop losses a bit.

In the news today it was announced that NTRS had received $1.58 billion from the government's $700 billion TARP program. Quoting an AP article, in return for the money the "government received the preferred stock and warrants to purchase up to about 3.8 million shares of Northern Trust's common stock. The warrants, which expire in 10 years, allow the government to purchase the shares at a price of $61.81 per share." Seems like a bullish bet on the bank by the U.S. considering that $62 a share is about 50% above today's levels.

Our first target is the $40.00-38.50 zone. The Point & Figure chart is bearish with a $34.00 target.

Picked on November 15 at $ 44.92
Change since picked:      - 2.76
Earnings Date           01/15/09 (unconfirmed)
Average Daily Volume =       3.7 million  

Potash Corp. - POT - close: 69.15 change: -0.66 stop: 74.51

Shares of POT held up reasonably well only losing 0.9% on Monday. We couldn't find any news to account for the relative strength but made a note in the MarketMonitor this morning about some relative strength in Monsanto (MON), another fertilizer company. The rally in MON eventually failed this afternoon and the group looks poised to move lower. We don't see any changes from our weekend comments and would still buy puts on POT here.

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.

Picked on November 15 at $ 69.81
Change since picked:      - 0.66
Earnings Date           01/22/09 (unconfirmed)
Average Daily Volume =      20.3 million  

Volatility Index - VIX - cls: 69.15 chg: + 2.84 stop: n/a

Tomorrow is the last day of trading for November VIX options. They will settle on Wednesday. At this point the VIX has rallied back toward the 70.00 level and looks ready to breakout to new three-week highs. It may be time to buy some short-term December call options instead except for the fact that an extremely elevated level in the VIX like today means that option premiums are very expensive.

It looks like all of our suggested put positions in the VIX are going to close as losers.

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.

Picked on September 16 at = 30.30 first position
Change since picked:       +38.85
Picked again Sept. 29 at =  46.72 second position
Changed since picked:      +22.43
Picked again Octo. 08 at =  57.53 third position
Changed since picked:      +11.62
Earnings Date            00/00/00
Average Daily Volume =        --- million  

Strangle & Spread Play Updates

SPDR GOLD Trust - GLD - close: 72.65 change: -0.65 stop: n/a

The intraday rally in gold prices failed and the GLD rolled over under the $74.00 level. It looks like the GLD may resume its slide lower.

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.

NOTE: lack of any real directional movement is bad news for our November play. Readers may want to exit early right now!

We listed two strangles back on Nov. 9th 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 this 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.

Picked on November 09 at $ 72.50
Change since picked:      + 0.15
Earnings Date           00/00/00
Average Daily Volume =      19.3 million  

Ultra S&P500 ProShares - SSO - close: 24.45 change: -0.98 stop: n/a

The S&P 500 is still sliding lower and there is a growing camp of investors and pundits that think the market will break its lows.

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.

Picked on November 12 at $ 24.84
Change since picked:      - 0.39
Earnings Date           00/00/00
Average Daily Volume =           million  


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