Option Investor
Newsletter

Daily Newsletter, Monday, 4/5/2010

Table of Contents

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

Market Wrap

Markets Cheer Friday's Jobs Report

by Todd Shriber

Click here to email Todd Shriber
Equity markets were closed on Friday due to the Good Friday holiday, so Monday was the first chance equity investors had to officially react to Friday's jobs report that showed 162,000 new jobs were added in March. Apparently, investors liked the news as the Dow Jones continued to rally, gaining nearly 46.5 points to settle at 10,973.55. The S&P 500 inched closer to 1200 by adding 9.34 points to close at 1187.44 while the Nasdaq enjoyed another solid day, gaining almost 27 points to move well above 2400 with a close of 2429.53.

Stats Table

With the positive employment data, risk appetite was healthy on Monday as stocks got a lift from soaring commodities prices. Both copper and crude oil futures closed at new multi-month highs and when I say multi-month highs, I am not talking about two or three months. NYMEX-traded copper for May delivery gained 3.15 cents per pound to close at $3.6155. That is good for a 20-month high.

As for crude oil, last week, all eyes were on the $85 a barrel level and that number is a thing of the past. At least for now. The jobs report sent crude above $86 in electronic trading over the weekend and when U.S. markets opened today, traders were inclined to keep the rally going. That they did as NYMEX crude for May delivery gained $1.96, or 2.31%, to close at $86.83 a barrel, a level last seen on the way down in October 2008. The intraday high was $86.90.

Oil Chart

That was good news for energy stocks as 39 of the 40 energy names in the S&P 500 posted gains on the day. Among the usual suspects, Dow components Exxon Mobil (XOM) and Chevron (CVX), the two largest U.S. oil companies, were among the Dow's 22 gainers on Monday. It would appear that the new floor for oil prices is $75 a barrel and with OPEC seeing no reason to increase production, prices may head even higher despite tepid demand in the U.S. and Europe.

The energy sector looked poised for a good start to the week after some mergers and acquisitions news broke on Sunday evening. Independent oil and natural gas producer SandRidge Energy (SD) said it will acquire rival Arena Resources (ARD) for $1.55 billion in cash and stock. That values Arena at $40 a share, a roughly 17% premium to where the stock closed last Thursday. The price tag is impressive considering that Oklahoma-based SandRidge had a market cap of $1.59 billion as of Monday's close.

By its own admission, SandRidge is buying Arena to increase its exposure to oil, not a bad idea given where oil prices currently reside. The company said the acquisition will make it one of the biggest producers of West Texas conventional oil and natural gas. SandRidge has been trying to bolsters its oil portfolio for two years and this acquisition jibes with that effort.

SandRidge Energy Chart

Venezuela's oil minister said on Friday that there is no need for OPEC, which produces 40% of the world's oil, to boost production and that his country is comfortable with oil prices between $80 and $100 a barrel. Obviously, we are still a way's away from $100 a barrel, but the prospect of triple-digit oil prices is not an enticing one for the U.S. OPEC would not complain (keep in mind that Venezuela was the third-largest supplier of crude to the U.S. in 2009), but $100 oil would almost certainly hamper an economic recovery that is still in its nascent stages.

If consumers are faced with higher oil prices, they likely will not be inclined to make big purchases for cars, clothes and gadgets. Then again, Apple's (AAPL) denizens of loyal followers may represent a different breed. The company's much heralded iPad was made available to shoppers over the weekend and Piper Jaffray estimates that 300,000 iPads sold in the first day and perhaps as many as 700,000 were sold over the weekend. That compares with the 200,000 iPhones that were sold when that device made its debut.

Research firm BroadPoint AmTech estimated the sales number was in the neighborhood of 500,000-525,000 and Apple itself estimated 450,000 iPads would be sold over the weekend. Obviously Sunday was Easter Sunday and that means some Best Buys (BBY) and other places where an iPad could be acquired were closed, so if not for the holiday, the sales could have been even better.

Indulge me for a minute and assume that 500,000 iPads were sold over the weekend. Of course, sales will level off over time, but it is hard to argue this is another strong debut for an Apple product. It could also mean that about half of the analyst estimates for 2010 iPad sales in the chart I have included below are too conservative.

iPad Sales Estimates

Perhaps the most impressive aspect of the iPad's boffo debut is a combination of the following: A holiday weekend launch, a launch in an economy that still cannot be characterized as vibrant and a lofty $499 price tag. So if you in a high sales tax state like California and Texas, an iPad is going to cost you more than $550 when the tax is factored in. Need or want more than 16 gigs? Apple has you covered with plans for 32GB and 64GB iPads that cost $599 and $699 before tax, respectively.

The bottom line is the reason why Apple is such an admired company and why the stock seems to do nothing but go up is because the company can keep introducing expensive products that consumers do not really need, but intensely desire. Apple shares gained ''just'' $2.52 today to close at $238.49. Oddly enough, the stock did not even touch the 52-week high of $238.73 today. Do not fret. That was taken care of after-hours where Apple is trading at $239 as of this writing.

Apple Chart

A broader market theme that the bulls will like hearing about is the pace of share buyback announcements thus far in 2010. After unprecedented cost-cutting in 2009, companies are flush with cash and shareholders are rightfully clamoring for companies to reward stock owners via either dividends, share repurchases or both.

2009 Cash Chart

Of course, 2009 was a down year for buybacks, with S&P 500 constituents repurchasing just $137.6 billion of their own stock, or 28% of operating profits, according to Bloomberg News. Repurchase plans started to increasing in number during the second half of 2009 and that trend has continued this year with more than 200 companies announcing buyback plans, Bloomberg reported.

There have been plenty of marquee names to announce buyback plans this year including Tiffany (TIF), Warren Buffet favorite Washington Post (WPO), ConocoPhillips (COP), the third-largest U.S. oil company, and Dow component United Technologies (UTX). All of those headlines represented good news for shareholders of those companies, but all of those buyback plans pale in comparison to PepsiCo's (PEP) $15 billion plan, which is far and away the largest repurchase effort announced this year.

I am not sure if there is a correlation between the size of a company's buyback and the future performance of the shares, but on a historical basis, repurchase plans are bullish for equities. The best year on record for these plans was 2007, the year the S&P 500 made a record high.

Taking a look at the charts, the Dow flirted came with 12 points of 11,000 intraday and that number remains the first resistance point to be taken out. From there, the 11,120 area will be the next hurdle, followed by the 11,250 neighborhood. On the downside, 10,850 should function as a support level with perhaps a firmer floor at 10,730.

Dow Chart

As with the Dow, the S&P needs to contend with some round-number resistance at 1200. From there, 1225 is the next significant hurdle to be cleared, but there might be some issues in the 1210-1215 area. As it is, the index is firmly in bullish territory close to the 1190 level and any moves to the downside may not be a cause for concern unless 1150 is violated. Based on where the index currently trades, 1170 could be the stopping point of any bearish move in the near-term.

S&P 500 Chart

It was not that long ago that the Nasdaq was looking a little challenged, but a truly troublesome sign would be a move below 2350 and that does not appear probable, at least not this week. The Nasdaq has been battling with 2400 for several days, but Monday's close near 2430 might be far enough removed from 2400 that the bulls have something to build on and challenge resistance at 2460. A move beyond 2450 would be a bullish sign.

Nasdaq Chart

Being a bear is hard these days, but the volume on the upside is pretty benign, if not downright weak. I took a look at a smattering of higher-beta materials names after the market closed and while the dozen or so stocks and ETFs I looked at were all up on the day, they all traded at least 20% less shares than their daily average and Monday is not the first time this has happened. My feeling is that first-quarter earnings expectations are already priced into many stocks, meaning that strong upside surprises will be needed to continue driving stocks higher.


New Option Plays

Networking Stocks Outperform

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

F5 Networks - FFIV - close: 65.29 change: +3.15 stop: 61.40

Company Description:
F5 Networks is the global leader in Application Delivery Networking (ADN), focused on ensuring the secure, reliable, and fast delivery of applications. F5’s flexible architectural framework enables community-driven innovation that helps organizations enhance IT agility and dynamically deliver services that generate true business value. F5’s vision of unified application and data delivery offers customers an unprecedented level of choice in how they deploy ADN solutions. It redefines the management of application, server, storage, and network resources, streamlining application delivery and reducing costs. Global enterprise organizations, service and cloud providers, and Web 2.0 content providers trust F5 to keep their business moving forward (source: company press release or website)

Why We Like It:
Technology stocks were strong performers on Monday. The NWX networking index produced a bullish engulfing candlestick pattern and rallied toward the top of its trading range. The bullish reversal pattern still needs to see confirmation but if the sector breaks out from here it could begin a new leg higher. Shares of FFIV have a pattern similar to that of the sector index. The stock has been consolidating sideways the last few weeks. However, today's rally in FFIV did more than rally toward the top of its trading range. The stock broke out to new 52-week highs. I normally want to avoid chasing a big move like today's 5% rally in FFIV but if the market rally continues from here FFIV may not see a pull back any time soon. This is, without a doubt, a much more aggressive entry point. I would keep your positions very small. We'll use a stop loss under last week's low at $61.40. Our first target is $69.75.

Suggested Position: BUY CALL MAY $65.00 (FFIV 10E65.00) current ask $3.80

Annotated Chart:

Entry on April 6th at $ 65.29(?)
Earnings Date 04/21/10 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on April 5th, 2010



In Play Updates and Reviews

Stocks Surge to New 52-week Highs

by James Brown

Click here to email James Brown

Editor's Note:

As planned we're closing the AAPL play following the iPad launch. More aggressive traders may want to let it ride. We're dropping the small cap put play early.

Current Portfolio:


CALL Play Updates

Express Scripts - ESRX - close: 102.40 change: +0.01 stop: 99.90

The initial rally in ESRX this morning faded and the stock closed virtually unchanged on the session. Considering the widespread rally in the rest of the market we have to view today's performance in ESRX as a sign of relative weakness. The stock appears to be struggling with short-term resistance in the $103.00-103.25 zone. Our first target is $104.90. Our second target is $107.45. Our time frame is just a couple of weeks.

Current Position: CALL APRIL $105 (ESRX 10D105.00) at $1.10

Entry on March 24th at $101.99
Earnings Date 04/29/10
Average Daily Volume = 2.51 million
Listed on March 23rd, 2010


Coca-Cola - KO - close: 54.86 change: -0.44 stop: 52.95

Uh-oh! The action in KO today was definitely bearish. Shares gapped open to a new relative high above the $55.50 level and then promptly collapsed. I did not see any news to explain the relative weakness in KO today. Traders should definitely turn defensive given today's bearish reversal while the rest of the market was in rally mode. More cautious traders may want to consider a stop loss closer to $54.00 or even $54.50. The stock doesn't move super fast but I envision a rally toward the December highs over the next few weeks. Our target to exit is $59.00.

Current Position: CALL May $55.00 (KO 10E55.00) at $1.62

Entry on March 24th at $ 55.22
Earnings Date 04/21/10
Average Daily Volume = 14.6 million
Listed on March 23rd, 2010


L-3 Communications - LLL - close: 92.83 change: +0.30 stop: 88.90

Monday proved to be a relatively quiet low-volume session for LLL. The stock is struggling with the 10-dma and 20-dma directly overhead. I remain cautious on LLL and would not launch new positions at this time. Our first target is $97.00. Our final target is $99.75.

We chose the $100 calls to keep our capital investment very small. Keep your position size limited.

Current Position: CALL APRIL 100.00 (LLL 10D100.00) @ $0.30

Entry on March 18th at $ 93.88
Earnings Date 04/22/10
Average Daily Volume = 908 thousand
Listed on March 17th, 2010


NII Holdings Inc. - NIHD - close: 43.42 change: +0.99 stop: 39.90

Shares of NIHD surged to a new 52-week high and hit $43.95 this morning. Our target to exit is $44.00. More conservative traders may want to take profits now while more aggressive traders may want to aim for the $45 or $46 levels. We will plan to exit at $44.00.

Current Position: CALL APRIL $40 (NIHD 10D40.00) @ $1.85

Entry on March 11th at $ 40.10
Earnings Date 04/22/10
Average Daily Volume = 2.68 million
Listed on March 10th, 2010


Priceline.com - PCLN - close: 257.65 change: + 0.65 stop: 239.85

The trading in PCLN today was disappointing. The major market indices were breaking out to new highs and yet PCLN could not breakout past resistance near the $260 level. I am not suggesting new bullish positions at this time. I still think more conservative traders, if you haven't taken some money off the table, may want to do so. This remains a very aggressive, higher-risk trade given PCLN's volatility and overbought stature. We need to keep our positions small. Our target is $275.00. Our time frame is about four weeks.

Current Position: CALL APRIL $260 (PCLN 10D260.00) @ 2.15

Entry on March 25th at $246.60
Earnings Date 05/11/10
Average Daily Volume = 793 thousand
Listed on March 23rd, 2010


Panera Bread Co. - PNRA - close: 80.28 change: +3.90 stop: 74.75

Call option activity on PNRA surged after the stock garnered a "buy" rating and a $100 18-month price target this morning. Shares of PNRA surged higher with a 5.1% gain to close over resistance near $80.00. Volume on the stock was twice the norm. This is definitely a bullish signal. Please note our new exit strategy. We will plan to sell half our position at $82.00. We'll sell the second half at $84.75. Keep in mind that April options expire in about two weeks. FYI: It is worth noting that PNRA could announce a stock split one of these days. The last time shares split was in the $75-80 zone back in June 2002.

Current Position: CALL APR 80.00 (PNRA 10D80.00) @ $1.35

Entry on March 11th at $ 77.18
Earnings Date 04/28/10
Average Daily Volume = 519 thousand
Listed on March 9th, 2010


PartnerRe Ltd. - PRE - close: 80.52 change: +0.76 stop: 77.75

PRE is looking lively again with a 0.9% rally and a close over resistance at the $80.50 level. Yet the high today was only $80.52 and our trigger to buy calls is at $80.55. Odds are very high that PRE will hit our trigger at $80.55 tomorrow.

If triggered we'll use a stop loss at $77.75 (under the March 19th low). Our first target is $84.75. Our second, longer-term target is $89.00. There is potential resistance near the October 2009 highs ($81.70) so don't be surprised to see some congestion there.

Trigger to buy calls at $80.55

Suggested Position: BUY CALL MAY $80.00 (PRE 10E80.00) current ask $2.65

Entry on April xxth at $ xx.xx
Earnings Date 04/27/10
Average Daily Volume = 989 thousand
Listed on March 20th, 2010


Tractor Supply Co. - TSCO - close: 60.98 change: +1.58 stop: 57.75

Bingo! Our new play on TSCO is now open. Shares displayed relative strength with a 2.6% rally and a breakout past resistance to hit new 52-week highs. Shares hit our trigger to buy calls at $60.75 so we'll use a stop loss at $57.75. Our first target is $64.75.

TSCO hit our trigger at $60.75

Current Position: CALL MAY $60.00 (TSCO 10E60.00) @ $2.95

Chart:

Entry on April 5th at $ 60.75
Earnings Date 04/21/10
Average Daily Volume = 310 thousand
Listed on April 3rd, 2010


Wynn Resorts - WYNN - close: 82.28 change: +4.88 stop: 69.20

Wow! Casino and gambling stocks were huge winners today. The DJUSCA casino index surged 6.3% on news that companies with exposure to Macau were doing well with record gambling revenues for the region. Shares of WYNN soared 6.3% and broke out past resistance at $78.00 and the $80.00 level. We had been waiting for a correction to launch bullish positions. We need to re-evaluate our plan. Naturally today's breakout is very bullish but the stock is still overbought. Broken resistance near $78.00 should be new support so we will raise our buy-the-dip entry point to $78.50. We'll raise our stop loss to $74.45. If triggered at $78.50 our target is $84.50.

Trigger to buy calls at $78.50

Suggested Position: BUY CALL MAY $80 (WYNN 10E80.00) current ask $6.35

Entry on March xxth at $ xx.xx
Earnings Date 05/05/10
Average Daily Volume = 2.7 million
Listed on March 24th, 2010


PUT Play Updates

Amedisys Inc. - AMED - close: 58.12 change: +1.13 stop: 59.05

The market's bullish breakout on Monday does not bode well for any of our bearish positions. AMED has rallied toward short-term resistance near its 50-dma. Wait for the stock to rollover before considering new bearish positions. Our target to exit is $50.25. Our time frame is about two weeks.

Current Position: PUT APRIL $50.00 (AMED 10P50.00) $ 0.85

Entry on April 1st at $ 55.88
Earnings Date 04/28/10
Average Daily Volume = 749 thousand
Listed on March 31st, 2010


AvalonBay Comm. - AVB - close: 88.98 change: +3.24 stop: 90.15

The big rally in shares of AVB this morning looks like a short squeeze. I couldn't find any company or sector specific news behind the big rally in REITs today. The close over $88.00 is short-term bullish but shares still have resistance near $90.00. I'm not suggesting new positions at this time. Let's wait and see if the $90 level holds or not. We knew this was an aggressive trade to begin with but the strength of today's rally is surprising.

Current Position: PUT APRIL $85.00 (AVB 10P85.00) @ $1.70

Entry on April 1st at $ 85.75
Earnings Date 04/28/10
Average Daily Volume = 5.67 million
Listed on March 30th, 2010


Cerner Corp. - CERN - close: 86.33 change: +0.60 stop: 88.25

The rally in shares of CERN was relatively mild and volume came in pretty light. I don't see any changes from my weekend comments.

Last week's low was $83.84. I am suggesting a trigger to open bearish positions at $83.75. If triggered we'll use a stop loss at $88.25. Our target is the $76.50 level since the $75 level and the rising 200-dma look like potential support. If we do not see CERN breakdown under $84.00 soon I will be watching for another failed rally in the $89-90 zone as an alternative entry point for bearish positions. Please note that I consider this play somewhat aggressive due to CERN's higher than normal short interest. The most recent data listed short interest at nearly 14% of the 68.4 million share float. That raises the risk for a short squeeze. You may want to keep your positions limited.

Trigger to open bearish positions at $83.75

Suggested Position: BUY PUT MAY $80.00 (CERN 10Q80.00) current ask $1.95

Entry on April xxth at $ xx.xx
Earnings Date 04/28/10
Average Daily Volume = 526 thousand
Listed on April 3rd, 2010


CLOSED BULLISH PLAYS

Apple Inc - AAPL close: 238.49 change: +2.52 stop: 232.45

AAPL added another 1% following the launch of its iPad tablet PC. The company reported that they sold more than 300,000 units in the first day. Consumers have already downloaded more than one million applications for the product and purchased more than 250,000 ebooks. It's a strong launch and many in the industry feel it could be a game-changer. It was our plan to exit this trade on AAPL today at the closing bell to avoid any post-launch, sell-the-news sort of move lower. Our play is closed but I would keep AAPL on your watch list to buy a correction.

Closed at planned on Monday, April 5th at the closing bell.

Closed Position: CALL APRIL $230 (AAPL 10D230.00) @ $9.95 (+89.5%)
Entry price was at $5.25

03/30/10 - 1st Target Exceeded on gap open
AAPL opened at $236.60. The April $230 call opened at $9.20 (+75%)

Chart:

Entry on March 23rd at $228.00
Earnings Date 04/21/10
Average Daily Volume = 18.6 million
Listed on March 22nd, 2010


CLOSED BEARISH PLAYS

iShares Russell 2000 - IWM - close: 69.71 change: +1.28 stop: 70.15

Uh-oh! The market-wide rally today was a bit surprising given the less than expected job growth in Friday's jobs numbers. The small caps have broken out to new 52-week highs. I am suggesting an early exit before shares hit our stop loss.

Closing Early

Closed Position: PUT APRIL $65.00 (IWM 10P65.00) @ 0.09
Entry was at @ $0.47

Chart:

Entry on March 29th at $ 68.11
Earnings Date --/--/--
Average Daily Volume = 60.4 million
Listed on March 27th, 2010