Option Investor
Newsletter

Daily Newsletter, Wednesday, 8/25/2010

Table of Contents

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

Market Wrap

New Home Sales Worst On Record

by James Brown

Click here to email James Brown

Market Stats

The market sell-off continued early this morning with new signs the U.S. economic recovery is stumbling. The Dow Jones Industrial Average briefly traded under psychological support at the 10,000 level and the S&P 500 index traded under support near 1040 on very disappointing economic data. The durable goods report and the new home sales data both missed expectations by a wide margin. However, stocks managed to rebound from support with an oversold bounce and ended a four-day losing streak.

Commodities like gold and oil managed to rally in spite of the dollar's strength. The bounce in crude oil futures is a surprise given the weekly inventory data. This morning the EIA said stockpiles rose 4.11 million barrels, the third weekly rise in a row. Economists were only expecting a rise of 200,000 barrels. Oil prices initially fell to a new 11-week low but like stocks, the price of oil delivered an intraday reversal and the commodity closed higher with a +1.2% gain to $72.52 a barrel. Gold was strong from the start and the precious metal rose nearly $8 to $1,241 an ounce, closing at new eight-week highs. Traders' first reaction was to sell the economic news this morning and money poured into the bond market again hitting a new high. Yields, which move opposite bond prices, spiked to new lows. The yield on the 10-year U.S. treasury hit 2.419% but bonds reversed as well and the yield settled at 2.538%.

Stock market weakness has been widespread with declines across the major global indices. The Hong Kong Hang Seng index lost 0.11% but the Chinese Shanghai index lost -2.0%. The Japanese market continues to struggle with a rising currency. The yen hit a nine-year high versus the euro and tagged another new 15-year high against the dollar. A rising yen makes Japanese exports more expensive and the NIKKEI index lost -1.7% on the session. There has been some speculation that Japan might try and intervene in the currency markets soon.

East of the Atlantic there seems to be a tale of two Europes. Yesterday Standard & Poor's lowered their credit rating on Ireland over banking concerns. This news helped push borrowing costs for countries like Ireland and Greece higher today as investors worry over a potential default. Yields on Irish and Greek bonds soared as traders demand more reward for the risk they're taking. The price of credit default swaps in Greece hit new 18-month highs. Yet in Germany it's a different story.

Germany is Europe's largest economy and the country saw a record-setting +2.2% GDP growth last quarter. Last week Bundesbank raised their GDP forecast for Germany to +3%. Today the Ifo Institute announced that their business climate index, a measure of business confidence, marked its fourth monthly gain n a row and hit a new three-year high in August. Economists were expecting a drop to 105.7 but Ifo said their confidence index rose from 106.2 in July to 106.7 in August. Another eurozone surprise was the strength in Portugal's debt sale. The country of Portugal is on the list of troubled economies that investors are worried about and yet the country managed to sell 1.3 billion euros worth of bonds on Wednesday in five and ten year notes. This was up from the original plan to sell 750 million to 1.25 billion euros in debt. At the end of the day the English FTSE index lost -0.75%. The German DAX lost -0.61%.

The major headlines this morning were focused on the New Home sales numbers and the Durable Goods report. Economic data continues to point to a slowing economy, which is fanning the flames for double-dip recession fears. Yesterday investors were disappointed with the existing home sales, where the National Association of Realtors announced that the pace of existing home sales crashed -27% to a new 15-year low in July. This morning the Commerce Department said New Home sales plunged to the lowest level on record. Economists were expecting a pace of 330,000 sales a year. Unfortunately July's sales came in at 276,000. That is a -12.4% drop and the lowest level since records began back in 1963.

Consumers are nervous about their jobs and they're not buying homes in spite of the record-low mortgage rates. Plus new homes are facing stiff competition from the sale of foreclosures and short-sales although you can see from yesterday's existing home sales data that even these distressed properties are not moving very fast. The median price of a home has fallen to $204,000, which is a -4.8% drop from a year ago. All four regions of the country saw sales decline with the biggest drop in the West at -25%. Another worrisome figure is the supply of new homes on the market, which increased from 8 months in June to 9.1 months in July. Not surprisingly the homebuilder confidence index fell to its lowest level since March 2009.

Oddly enough homebuilders rallied on the news presumably on hopes the worst is behind them. They did get a boost from DHR, which garnered an analyst upgrade this morning. Plus, Toll Brothers (TOL) reported earnings that were better than expected prior to the bell. TOL is the largest luxury homebuilder in the U.S. The company delivered earnings of 16 cents a share, which was 30 cents better than expected (analysts were looking for a loss of 14 cents). Revenues of $454.2 million were also significantly better than expected. TOL said the number of homes sold dropped -16% and the number of contracts signed fell -11%. Believe it or not analysts were expecting these figures to be worse. The stock gapped open higher and closed with a +5.8% gain just over $17 and its 50-dma. Rival builders BZH, PHM, RYL, and DHI were all up sharply with gains in the +3.0% to +4.6% range.

Of course we have been warning readers to expect terrible numbers from the real estate market. I am more concerned with the manufacturing data out today. The Commerce Department said orders for durable goods rose just +0.3%. This was the first gain for the durable goods orders in three months but economists were expecting a gain of +3.0%. The gain was fueled by the one industry and that was transportation, which rose +13.1%. If you back out the transportation number then orders for durable goods actually fell -3.8% in July. That's the biggest drop since January 2009. If you drill down even farther you would see that the transportation gains were fueled by the volatile aircraft component, which saw a +75.9% jump in orders. Naturally investors are concerned. If you're worried about another recession we don't want to see orders for durable goods in negative territory.

In other news today the Department of Agriculture said food price inflation was extremely low and poised to rise at its slowest pace since 1992. The government revised their estimates on food inflation from +1.5-2.5% down to +0.5-1.5% for 2010. This was somewhat surprising given the recent rally (new highs) in wheat and pork prices.

Industry insiders are expecting computer maker DELL to raise their bid for 3PAR (NYSE:PAR). The company is in the data storage business with what 3PAR calls its "utility computing". A couple of weeks ago shares of PAR gapped from the $10 level to $18 on news it was being acquired by DELL for $1.15 billion. On Monday shares of PAR gapped from $18 to $26 on news that HPQ had offered a higher bid of $1.6 billion. Now speculation is growing that DELL will make a higher bid and analysts are estimating a final price near $29 a share.

After hours tonight there were a handful of earnings reports. Guess?, JDSU, and JoAnn Stores made headlines. Apparel designer and retailers Guess? (GES) delivered a profit of 72 cents a share. That was 4 cents better than expected. Revenues managed to beat Wall Street's estimates at $577.1 million. GES issued Q3 guidance that was in-line with estimates but the company's 2011 guidance was under expectations. The stock was trading down about -6.4% after hours.

Shares of JDS Uniphase (JDSU) were trading down under support at $10.00 in after hours following its earnings beat. The company reported a profit of 15 cents a share, better than the street's 14 cent estimate. Revenues rose almost 20% to $398.1 million, which was just enough to beat estimates. Traders were selling the news with a spike toward $9.50 but JDSU appears to be paring its losses with a bounce back to $9.90. Shares closed the regular session at $10.22.

JoAnn Stores (JAS) is up about $2 after hours following a better than expected earnings report. JAS reported a profit of 20 cents, which was 18 cents better than expected. Revenues bested estimates at $439.3 million for the quarter. Management gave relatively optimistic guidance and shares look poised to gap open higher tomorrow near resistance at its 200-dma.

Technically the market had reached oversold levels and traders are buying the dip to support (while bears take profits by covering their shorts). The S&P 500 had lost -4% in the last four days and a decline toward support near 1040 was widely anticipated. On a very short-term basis the S&P 500 could easily see an oversold bounce back toward the 1070-1080 zone. There is some short-term resistance at the simple 10-dma near 1075 to give you a clear target. We may want to wait for the next lower high before considering new bearish positions.

Hourly Chart of the S&P 500 index:

Chart of the S&P 500 index:

The NASDAQ Composite dipped toward the 2100 level this morning and rebounded back toward short-term resistance near 2150. The high today was 2148. Technically this index has produced a bullish engulfing (reversal) candlestick pattern but it needs to see confirmation. We can look for a bounce back toward resistance under the 2200 level.

Chart of the NASDAQ index:

Yesterday and today the small cap Russell 2000 index managed to bounce from its July lows. This was the perfect spot to look for support and now that this support level is holding the $RUT could see a rebound back to 620 or its 50-dma closer to 630.

Chart of the Russell 2000 index:

Tomorrow stocks could react to the weekly initial jobless claims. Last week investors were shocked to see weekly claims jump to 500,000. This week economists are looking for initial claims to come in at 485,000. The bigger event will be Friday's Q2 GDP revision. Many expect the government to lower their Q2 GDP growth estimates down from +2.4% to +1.4% there is speculation it could drop to +1.0%.

Speaking of GDP estimates, Nouriel Roubini, the infamous economics professor at NYU, made headlines this afternoon on his Twitter account. Nouriel suspects that Q3 GDP growth will be in the +0.0-to-1.0% range and closer to 0% than +1%. He is concerned about capex spending, which was very healthy in Q2, but appears to have stalled in Q3. Mr. Roubini estimates that our risk of a double-dip recession is greater than 40%.

Roubini wasn't the only analyst sharing their opinion today. Arnaud Mares, with Morgan Stanley, issued a report today highlighting the risks of sovereign debt default. To paraphrase, this Morgan Stanley director believes it's not a matter of if governments will default on their debt but a question of how they will default. The aging populations of the Western world are too great and governments will try and pay back their creditors in devalued currencies or at a lower rate of return. Another analyst, this time at Goldman Sachs, said the parade of disappointing economic data in the U.S. will force the Federal Reserve into a new round of quantitative easing. Jim O'Neill, the Chief Global Economist at Goldman Sachs believes we will see the Fed come out with a new program by October this year.

In summary, the trend is down but stocks were oversold and we're bouncing from support. This bounce could last a couple of days or all of next week but everything could change on Friday if the U.S. Q2 GDP estimates are worse than expected.

-James


New Option Plays

Cloud Computing Play

by Scott Hawes

Click here to email Scott Hawes


NEW DIRECTIONAL CALL PLAYS

Rackspace Hosting, Inc - RAX - close 19.55 change +0.95 stop 17.95

Company Description:
Rackspace Hosting, Inc. (Rackspace Hosting) operates in the hosting and cloud computing industry. The Company offers its products under the Fanatical Support brand. The Company’s services are sold to businesses in more than 120 countries. During the year ended December 31, 2009, the Company served more than 90,000 business customers and managed more than 56,000 servers, 1,600,000 e-mail accounts, and 259,000 cloud hosting domains.

Target(s): 20.75, 21.30, 23.00
Key Support/Resistance Areas: 23.50, 21.40, 20.00, 19.00, 18.00
Time Frame: 3 to 5 weeks

Why We Like It:
M&A activity is heating up in the tech sector. Dell and Hewlett-Packard are in a bidding war over a 3Par at a huge premium 160% premium over its closing price just a couple of weeks ago. Whoever loses the bid will most likely be looking for a similar firm to acquire and there seems to be none better than RAX. Regardless of whether RAX fits the bill for an acquisition they are in the red hot cloud computing industry which is outperforming the broader market. I suggest we take advantage of the momentum and initiate long positions now. More nimble traders could wait for a breakout or time an entry on weakness. Technically, RAX is above all of its moving averages and is forming an ascending triangle. Our stop will be $17.95 and I have three targets with the most aggressive being the YTD highs near $23.00. I envision this trade lasting several weeks or more but if the stock surges we won't hesitate to book profits.

Suggested Position: Buy December $21.00 CALL, current ask $1.30

Annotated daily chart:

Entry on August xx
Earnings 11/9/2010 (unconfirmed)
Average Daily Volume: 1.75 million
Listed on August 25, 2010


In Play Updates and Reviews

Three Positions Closed

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:


CALL Play Updates

Cameron International - CAM - close 36.33 change -0.31 stop 35.45

Target(s): 37.85, 38.40, 39.10, 39.50
Key Support/Resistance Areas: 45.00, 42.50, 41.00, 38.75, 36.00
Current Gain/Loss: -63%
Time Frame: Several weeks
New Positions: Yes

Comments:
8/25: CAM came close to hitting our stop this morning but reversed. My comments haven't changed much. I suggest readers use strength in the stock and consider exiting positions as time decay will start to affect the option premium. Our targets were adjusted yesterday and remain the same except I have lowered the first target by 10 cents.

8/24: CAM hung tough today but closed below its upward trend line and the 50-day SMA. It did close above the key resistance level of $36.00 so it is do or die time for bounce. I'm looking for a bounce back up to its 20 and 100-SMA's. But I'm concerned about time decay negatively affecting our option premium so I suggest readers begin to exit positions on any strength or by using our adjusted targets above.

8/23: CAM is maintaining its upward trend line from the 7/1 lows and closed above its 50-day SMA. The stock has support at this level and should bounce if the broader market cooperates. However, I'm concerned about time decay negatively affecting our option premium. I've adjusted our targets and I suggest readers begin to exit positions on any strength in CAM, or tighten stops to protect capital.

Current Position: Long September $40.00 CALL, entry was $0.95

Entry on August 16, 2010
Earnings Date 11/3/2010 (unconfirmed)
Average Daily Volume: 4.6 million
Listed on August 14, 2010


FMC Technologies, Inc - FTI - close 61.79 change -0.21 stop 58.25

Target(s): 65.25 (hit), 67.00, 68.75
Key Support/Resistance Areas: 69.00, 65.50, 62.40, 59.00
Current Gain/Loss: -18%
Time Frame: Several weeks
New Positions: Yes, with a tight stop

Comments:
8/25: FTI made a double bottom with Tuesday's lows and closed near its highs of the day. Broader market strength will do wonders for our position and the fact that crude oil gained today on bearish inventory data should be good for FTI. But now we need follow through. This is not a bad spot to open new positions with tight stops.

8/24: After gapping lower FTI was bought the entire day and managed to post a gain while the broader market was very weak. The bullish trend in the stock remains in tact as described below. Traders may want to consider exiting FTI on a move up towards its 20-day SMA near $63.00 as it will be tough for the stock to buck the broader market trend too long.

8/23: FTI is maintaining its upward trend line from its 6/8 lows and is above its 100-day, 200-day and 50-day SMA's. The stock's trend is up but we still need the broader market behind us if FTI is going to reach our targets. Our $65.25 target was hit on 8/17 and still remains valid.

Current Position: Long October $70.00 CALL, entry was at $1.10

Entry on August 16, 2010
Earnings 10/27/2010 (unconfirmed)
Average Daily Volume: 1.5 million
Listed on August 14, 2010


Panera Bread Co. - PNRA - close: 78.93 change: +0.84 stop: 72.40

Target(s): 77.00, 78.50
Key Support/Resistance Areas: 73.00, 76.00, 80.00, 85.00, 88.50
Current Gain/Loss: N/A
Time Frame: 2 to 3 weeks
New Positions: Yes, see trigger

Comments:
8/25: I suggest we change the strategy on this play and initiate long positions in PNRA on weakness rather than strength. There is no doubt PNRA is a relative strong performer but trading it against the broader market trend on a break out is higher risk. I suggest we keep this active into next week and use a trigger of $74.75 to initiate long positions. This is near the 200-day SMA and we could easily get there if the market sells off in the coming days. I've also updated the suggested option to October. More nimble traders could consider a position on a breakout but I like the risk/reward set-up better on weakness for a swing trade.

8/21: This is a relative strength play. PNRA has been out performing the market the past few days. Now the stock is testing resistance near $80.00. The high on Aug. 18th was $80.56. I am suggesting we buy calls at $80.75 and target a move toward resistance at $85.00 (exit target $84.90). This should be a relatively short-term play if we are triggered.

Suggested Position: Buy October $80.00 CALL, estimated ask at entry $1.75

Entry on August XX
Earnings Date 10/27/10
Average Daily Volume 562,000
Listed on August 21, 2010


UnitedHealth Group Inc - UNH - close 31.96 change +0.92 stop 31.33 *NEW*

Target(s): 31.50 (hit), 31.90 (hit), 32.45, 33.15
Key Support/Resistance Areas: 35.00, 34.40, 33.50, 31.50
Current Gain/Loss: -20%
Time Frame: 1 to 2 weeks
New Positions: No

Comments:
8/25: UNH made a comeback today gaining nearly +3%. I'm still looking for an exit and have tightened the stop to $31.33. I've also narrowed our next target to $32.45 and would be inclined to exit if it is hit. This should get us to breakeven or better on the trade.

8/24: UNH closed below critical support at $31.50 and readers should consider exiting positions to preserve capital. The stock closed above its 100 and 50-day SMA but below its 200 and 20-day SMA. I suggest using $31.50 or $31.95 as possible targets. We have September options and need to begin to protect the time value remaining in them. I've adjusted the targets above.

8/23: UNH closed at the critical support level of $31.50 so it is do or die time for a bounce. Readers should consider exiting positions, especially if UNH begins to bounce.

Current Position: Long September $32.00 CALL, entry was at $1.25

Entry on August 17, 2010
Earnings Date 10/19/2010 (unconfirmed)
Average Daily Volume: 8.5 million
Listed on August 16, 2010


PUT Play Updates

Abercrombie & Fitch - ANF - close 35.60 change +0.63 stop 38.40

Target(s): 33.00, 31.50
Key Support/Resistance Areas: 38.20, 37.25, 32.75, 34.00, 30.50
Current Gain/Loss: -9%
Time Frame: Several weeks
New Positions: Yes

Comments:
8/25: We are short ANF and I am expecting a move down to $33.00 and eventually $31.50. The broader market needs to cooperate and I think any bounces will be will be short lived. ANF has a lot of overhead resistance to keep bounces in check. My comments below remain valid.

8/24: We are back with a consumer name in the retail space. Retailers are weak and ANF looks ready for a drop if the broader market cooperates. This company is one of the more bloated retail names out there and trades at high PE ratio of 26. Technically the stock has broken out of a bear flag that formed in July and August off of the decline from its April highs. ANF is also consolidating below its broken trend line from the 11/08 lows (see dashed line) and volume is picking up which indicates sellers are overwhelming buyers. I suggest we initiate short positions now or on any strength in the stock. We'll use stop of $38.40. Our targets are $33.00 and $31.50.

Current Position: Long October $34.00 PUT, entry was at $2.10

Entry on August 25, 2010
Earnings: 11/11/10 (unconfirmed)
Average Daily Volume: 3.5 million
Listed on August 24, 2010


Apple, Inc - AAPL - close 242.89 change +2.96 stop 256.50 *NEW*

Target(s): 240.00 (hit), 233.00, 226.00
Key Support/Resistance Areas: 266, 258, 256, 246, 240, 231, 235
Current Gain/Loss: +5%
Time Frame: Several weeks
New Positions: Yes

Comments:
8/25: If the broader market bounces here AAPL will most likely rally up to fill the gap down from yesterday. But I think bounces will be short lived so I suggest we be patient and be ready to take profits when AAPL approaches our targets.

8/24: We are short AAPL as our trigger to initiate positions was hit at the open. This is the lowest closing price in AAPL since 5/20. Anyone who has initiated long positions in AAPL since April is hoping and praying AAPL comes back and if the weakness continues I'm expecting stops to get hit. This should send AAPL down to test its 200-day SMA which is just below our primary target of $233. This is where I suggest taking profits or tightening stops to protect them.

8/23: AAPL lost -1.54% (or $3.84). Our comments from the weekend remain the same except I believe more aggressive traders can short AAPL on any strength. We have two official entry points to buy puts - at a bounce near $254.00 (lowered $3) or at a breakdown at $244.00. If AAPL hits $244.00 we'll adjust the stop loss down to $256.00.

Current Position: Long October $230.00 PUT, entry was at $6.90

Entry on August xx
Earnings: 10/21/10 (unconfirmed)
Average Daily Volume: 23 million
Listed on August 14, 2010


FASTENAL Co. - FAST - close: 45.90 change: -0.37 stop: 50.40

Target(s): 44.80, 43.50, 41.00
Key Support/Resistance Areas: 50.00, 48-47, 200-dma, 40.00
Current Gain/Loss: +8%
Time Frame: 3 to 4 weeks
New Positions: Yes

Comments:
8/25: FAST closed down despite a rally off of the lows in the broader market. This is relative weakness and when things turn back down FAST should approach our targets quickly.

8/24: Our short positions were triggered at $46.50 in FAST this morning. The stock is well below its 200-day SMA and may bounce to retest it from below. This may provide another entry point. I've added $44.80 as a near term target and is an area to consider taking profits or tightening stops to protect them.

8/23: We are waiting to be triggered but more aggressive traders should still consider new bearish positions now or on any strength in the stock. Our trigger remains the same at $46.50 but I suggest the November options to limit time decay on this position.

Current Position: Long November $45.00 PUT, entry was at $2.50

Entry on August 24, 2010
Earnings Date 10/12/10
Average Daily Volume = 839,000
Listed on August 19, 2010


NUCOR Corp. - NUE - close 36.68 change +0.00 stop 40.55

Target(s): 36.05 (hit), 35.25, 31.90
Key Support/Resistance Areas: 43.00, 40.30, 37.00, 35.00
Option Current Gain/Loss: +33%
Time Frame: 4 to 6 weeks
New Positions: Yes

Comments:
8/25: NUE opened lower and quickly traded to our $36.05 target. Positions could have been closed at $1.55 which would have been a +60% gain. NUE printed another 52-week low and continues to look vulnerable so I stick with the plan and give this some time to work, but we may have to be patient.

8/24: NUE closed at a new 52-week low today and looks vulnerable. We now have a +33% gain so protecting profits is suggested. Ultimately NUE looks headed towards our $35.25 target but taking profits on the way is a good idea. I'm going to add $36.05 as an immediate target.

8/23: We are looking for continued weakness in NUE and need to break below $36.95 which should get the stock moving towards our targets.

Current Position: Long October $35.00 PUT, entry was at $0.96

Entry on August 20, 2010
Earnings Date 10/21/10
Average Daily Volume = 2.9 million
Listed on August 19, 2010


Occidental Petrol. - OXY - close: 74.02 change: -1.55 stop: 78.51

Target(s): 71.60, 67.50
Key Support/Resistance Areas: 75-74.00, 70.00, 65.00
Current Gain/Loss: +1%
Time Frame: Several Weeks
New Positions: Yes, on strength

Comments:
8/25: Finally, OXY triggered our entry. I suggest we keep our target relatively tight on this trade and exit positions or tighten stops to protect profits if OXY hits our first target of $71.60. This is just above the 52-week low and the stock could bounce. I have also heard many of the talking heads on TV mention OXY as a buy, however, the sellers are in control right now. But the lower the stock goes it may interest buyers and I don't want to caught shorting a potential bottom.

8/23 & 8/24: We are waiting for the adjusted strategy from the weekend to trigger our entry. All of the comments below remain the same. 8/21: There is no change from Thursday's update. Oil and the oil sector continue to look weak. Odds are growing that OXY will breakdown. We have two entry points. One possible entry is at $77.50. Another is at $73.50. If triggered at $73.50 we'll change the stop loss to $78.51. Plus we'll change the targets to $70.25 and $66.00 if triggered on the breakdown.

8/19: I am adjusting the strategy on this play. Instead of waiting for a bounce toward $77.50 (which still works as an entry point) I am adding a breakdown trigger to buy puts at $73.50. The recent low was $73.90 and so far traders have continued to buy OXY near support at $74.00. If we are triggered at $73.50 we'll move the stop loss down to $78.51. I'm adjusting our targets to $70.25 and $66.00 if triggered at $73.50. We can keep the bounce trigger to buy puts at $77.50, if hit we'll use a stop loss at $81.05.

Current Position: Long OXY November $70.00 PUT, entry was at $3.45

Entry on August 25, 2010
Earnings Date 10/21/10 (unconfirmed)
Average Daily Volume 4.4 million
Listed on August 7th, 2010


Procter & Gamble - PG - close: 59.67 change: +0.01 stop: 63.26

Target(s): 59.50 (hit), 59.20, 58.05, 55.25
Key Support/Resistance Areas: 59.00, 61.00
Current Gain/Loss: -11%
Time Frame: 2 to 3 weeks
New Positions: Yes, with November options

Comments:
8/24 & 8/25: My comments from below remain the same. I suggest readers begin exit PG to prevent time decay from accelerating. Another strategy would be to roll current positions into the November strikes and give this time to work.

8/23: PG has a lot of support at $59.00 and our options will begin to suffer from time decay. PG looks like it has further room to the downside but time is not on our side. As such, I suggest readers begin to look for an exit using the targets listed above. Another strategy would be to roll current positions into the November strikes and give this time to work.

8/19: Shares of PG have been forming a top for over eight months now. If the stock breaks down under support near $59.00 it would forecast a drop toward $54.00. Readers can choose to open positions near $61-62 but I would prefer to see a breakdown under $59.00. Please note I have adjusted our exit targets to $58.05 and $55.25. FYI: If you launch new positions I would buy the Novembers.

Current Position: Long September $57.50 PUT, entry was at $0.36

Entry on August 10, 2010
Earnings Date 10/28/10 (unconfirmed)
Average Daily Volume 2.5 million
Listed on August 7th, 2010


CLOSED BULLISH PLAYS

SPDR Gold Trust - GLD - close 121.36 change +1.00 stop 115.95

Target(s): 121.25, 123.00, 125.00
Key Support/Resistance Areas: 123.00, 119.10, 116.50, 113.50
Current Gain/Loss: +55.6%
Time Frame: Several weeks
New Positions: No

Comments:
8/25: We've been looking for an exit in GLD and it hit our target of $121.25 so we are flat the position for +55% gain. I still think gold has more room to run but I would rather play it with later dated options, expiring in Nov or Dec perhaps, to prevent imminent accelerating time decay in our September options. I suspect there will be a pullback prior to gold printing new all time highs so we may revisit this play again. Although GLD only gained $1.47 from our entry, our calls gained $1.00 so it was good time to exit for a gain.

8/24: GLD gapped lower and was bought the entire day. My comments from last have not changed.

8/23: I suggest readers begin to look for an exit in GLD to prevent time decay from eating away at our option premium. I've adjusted the targets above and suggest readers use these levels to take profits or tighten stops to protect them.

Closed Position: Long GLD September $120.00 CALL at $2.80, entry was at $1.80

Annotated Chart:

Entry on August 12, 2010
Earnings Date N/A (unconfirmed)
Average Daily Volume: 12.4 million
Listed on August 10, 2010


Monsanto Co. - MON - close 55.86 change -0.07 stop 55.75

Target(s): 61.25, 63.75, 65.90,
Key Support/Resistance Areas: 66.00, 62.30, 58.50, 56.00
Final Gain/Loss: -55%
Time Frame: 1 to 3 weeks
New Positions: No

Comments:
8/25: Our stop was hit on MON during the early morning weakness. The opening range was even taken out as described below so it we have stepped aside with a loss. Unfortunately, MON finally did reverse and retraced just about all of the early losses. Long positions in MON could be considered now with a stop under the 50-day SMA. I like the risk reward set-up as I think MON has a lot of potential.

8/24: MON is nearing our stop and it appears headed for the 50-day SMA. We will most likely be stopped out of this position tomorrow if the broader market is weak. If the stock opens near or below our stop tomorrow I suggest waiting for the opening 15 or 30 minute range to settle in before doing anything. Then place a new stop underneath that opening range to see if MON reverses from there. This is designed to keep us in the position longer and looking for a better exit.

8/23: MON is consolidating between its 50-day and 100-day SMA's. I remain bullish on the agriculture sector but broader market strength would do wonders for our position. I've added $61.25 as an immediate target which is a good area to take profits or tighten stops to protect them.

Closed Position: Long October $62.50 CALL at $0.75, entry was at $1.65

Annotated Chart:

Entry on August 19, 2010
Earnings Date 10/6/2010 (unconfirmed)
Average Daily Volume: 7.2 million
Listed on August 18, 2010


CLOSED BEARISH PLAYS

Intl. Bus. Machine - IBM - close 125.27 change +0.37 stop 130.51

Target(s): 123.50, 122.00
Key Support/Resistance Areas: 130.00, 127.00, 123.00, 121.00
Current Gain/Loss: +86.7%
Time Frame: 2 weeks
New Positions: Yes

Comments:
8/25: Per last night's updates IBM was closed at the open this morning for a +86.7% gain. The stock gapped down and that was just about the lowest price of the day so we booked a nice winner. I think IBM can be shorted again if it bounces from here, perhaps into the $128 area where it will test all of its SMA's from below. IBM lost over $4 from our entry and with time decay imminent in September options it is time to book the gain.

8/24: IBM lost -1.57% and is headed to our $123.50 target. We currently have a gain of +74% and I think it is prudent to either tighten stops or take profits now as opposed to try to squeeze out more gains and risk a reversal, especially since our options will start to suffer from time decay if we sit and do nothing through a bounce. IBM also closed right on its upward trend line from the flash crash lows so there could be a bounce here. I suggest we take profits at the open tomorrow and book the gain.

8/23: We are long IBM puts and are expecting a move down to the $123 level. The stock drifted lower the entire day and our position has gained +24%. I've adjusted our $123 target up 50 cents and added $122 as a more aggressive target. I suggest we take profits and/or tighten stops as IBM trades down to these levels.

Closed Position: Long IBM September $125 PUT at $2.85, entry was at $1.53

Annotated Chart:

Entry on August 23, 2010
Earnings Date 10/18/10
Average Daily Volume = 5.4 million
Listed on August 21, 2010