Option Investor
Newsletter

Daily Newsletter, Monday, 11/8/2010

Table of Contents

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

Market Wrap

A Monday Breather

by Todd Shriber

Click here to email Todd Shriber
Stocks took a break from last week's stellar rally on Monday as the news flow was basically slow and there was little in the way of major economic news to report. Beyond that, this was no ''Merger Monday'' as you will see in momentarily when I highlight the day's marquee deal. Overall, it was not the most exciting of days, Monday or otherwise, as the Dow Jones Industrial Average and the S&P 500 endured small losses while the Nasdaq and Russell 2000 posted meager gains.

Stats Table

One interesting tidbit was released today, courtesy of Amherst Securities Group, and it features more bad news about the residential real estate market. It seems the pace of first-time mortgage defaults in the U.S. is quickening for the first time in a year. September first-time defaults rose to 1.1% of mortgages that were previously deemed ''always performing'' from the August rate of 1%.

The good news, if you choose to view it as such, is that the rate was as high as 2.5% early in 2009, but Amherst said declining home values may provide an impetus for some homeowners to simply stop paying their mortgages. As Federal Reserve Chairman Ben Bernanke said last month, more than 20% of homeowners owe more than what their home is worth and another 33% are only in the green by 10% or less.

Case-Shiller data shows home prices lost almost half a percent in July and August after the home-buyer tax credit expire and values are down almost 30% from their 2006 peak, according to Bloomberg News.

The disconnect between profits at the dinner table and the table in board room is growing as U.S. CEOs are apparently quite chipper about their companies' profitability. In fact, Bloomberg reported today that more CEOs than ever are boosting earnings forecasts. During the month of October, 196 companies raised profit estimates compared to 130 that lowered, the biggest gap since Bloomberg started keeping such data in 1999.

That works out to be about 1.5 companies raising estimates for every one that lowers, or the equivalent of three times the historical average. The bulls should like this news because the last time executives were this optimistic, stocks climbed 39 percent over the next 3.5 years, data compiled by Bloomberg show. Remember that today's news regarding corporate profitability comes on the heels of a 200-point rally for the S&P 500 since July and five consecutive weekly gains.

Corporate Profits Chart

In M&A news, highlighting the fact that this was not the typical Monday when it comes to M&A activity, Amazon.com's (AMZN) $500 purchase of privately held Quidsi was the deal of the day. The all-cash deal allows Amazon to get its hands on the Diapers.com and Soap.com Web properties. While those aren't the sexiest businesses to be in, the deal does help Amazon eliminate a competitor.

Amazon started selling diapers online in 2006, shortly after Diapers.com made its debut. Analysts said, Quidsi is expected to post revenue of $300 million this year, a 67% jump from 2009. In addition, the company recently launched the BeautyBar.com Web site, which will give Amazon exposure to consumers seeking high-end skin care products.

One analyst said the deal positions Washington-based Amazon to be a dominant player in the baby products category. Not to mention, Amazon probably irked Wal-Mart (WMT) with this deal because the world's largest retailer had also set its sights on New Jersey-based Quidsi. Amazon will assume $45 million in debt as part of the deal.

Amazon Chart

If you are disappointed that $500 million represents the big deal of the day, those glum feelings probably will not last too long as other tech titans such as Dell (DELL) and Google (GOOG) plan to go shopping in a big way. There has already been $60 billion worth of mergers and acquisitions activity in the tech sector this year, but the sector will remain an investment banker's dream as Google looks for more deals that are the same size as ValueClick and YouTube, the search giant's two biggest purchases to date.

Dell, which has been fighting a losing battle against rivals Hewlett-Packard (HPQ) and International Business Machines (IBM), is hunting for more deals to bolster its data center business. Last week, Dell said it would purchase software developer Boomi and Google spent $1.6 billion on 20 different deals through the first nine months of this year.

Sticking with the theme of acquisition rumors, a surprise loser on the day was Anadarko Petroleum (APC). The independent oil and gas producer slumped $2.90, or 4.3%, to close at $64.71 on the heels of news that BHP Billiton (BHP) may target Anadarko after missing out on Potash Corp. (POT). This rumor started a few weeks after BHP initially made its bid for Potash with an Australian newspaper deeming Anadarko as a potential ''backup plan'' for BHP if the mining giant was not able to win Potash.

That rumor died pretty quickly, but it resurfaced last week when a UBS analyst published a note naming Anadarko and Australia's Woodside Petroluem as possible targets for BHP now that the Potash deal is all but dead. We will be covering this issue more extensively at OilSlick.com, but to get to the crux of the matter, Anadarko would make for a logical takeover target for BHP, at least on the surface.

BHP has said it is looking for ways to bolster its oil and gas production and the company is active in the Gulf of Mexico, where Anadarko has a major footprint as well. That said, Anadarko still has to contend with the possibility of liabilities related to its 25% non-operating interest in the Macondo well project and there was an interesting piece in the Wall Street Journal recently that showed Anadarko would have done little to add to BHP's EBITDA over the past several years.

In related news, Royal Dutch Shell (RDS-A), Europe's largest oil company, said today it will sell 10% of its stake of in Woodside, fueling speculation the latter is going to be taken out in the near-term.

Anadarko Chart

Looking at the charts, the S&P 500 retreated just a couple of points today after coming to a stop right near significant resistance at 1228 on Friday. I doubt that Monday's declines represent a buy the dip opportunity because the dip was so minor, but it is interesting to note that tech remains solid and could be supported by further M&A activity in the sector.

In addition, financials, while most of the major ones were down today, started to show some signs of life last week. Considering that the group has basically been absent from the recent rally, it would be extremely bullish for the S&P 500 if its second-largest sector component actually started pulling its weight. The 1175 area is support.

S&P 500 Chart

After the Dow found its way to back to pre-Lehman collapse levels last week, a loss of less than 40 points probably does not warrant cause for concern. From top to bottom, the Dow's range was a scant 70 points today and it looks like 11,400 is working as firm support. On the upside, the index will need to contend with resistance at 11,750, which is a fair bit away.

Dow Chart

After putting on an impressive show last week, gaining over 70 points, the Nasdaq would have been an ideal candidate for some profit-taking today and maybe that happened, but the index still found a way to close higher on the day. With today's close at 2580, the Nasdaq has plenty of real estate in front of it before running into next resistance at 2720. From there, 2850 becomes the big hurdle to clear.

Neither of those numbers will be challenged this week, but if the Nasdaq just keeps doing what it has been doing recently, 2720 becomes a realistic target within a few weeks and 2850 could be seen early next year. Support is 2570.

Nasdaq Chart

The Russell 2000 barely moved from Friday's close, but at least it did not move lower. After last week's 5% jump, it would not have been surprising to see the Russell sell-off a bit today, but that did not happen and that may be a positive sign. The index has clear sailing for another 25 points or so before it bumps into resistance at 760. Making a run above 800 before the end of the year probably is not too much to expect as performance-chasing money managers will need to pour some money into small-caps to jolt returns.

Russell 2000 Chart

This is a slow week on both the economic news and earnings fronts with Cisco (CSCO) the headliner in terms of profit reports. My personal feelings about the dollar-decimating QE2 fiasco aside, it is obvious that the market likes the Fed's stimulative efforts, at least for now. If the market continues its torrid pace, Ben Bernanke may stumble his way into some ''man of the year'' awards. Per typical U.S. policy, worry about the impact of QE2 at a later date.


New Option Plays

A Cynical Outlook

by James Brown

Click here to email James Brown

Editor's Note:
I listed ESS as a trading idea in the weekend letter.

- James


NEW DIRECTIONAL CALL PLAYS

Essex Property Trust - ESS - close: 115.24 change: -1.70

Stop Loss: 111.80
Target(s): 119.50, 124.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes

Company Description:
Essex Property Trust, Inc., located in Palo Alto, California and traded on the New York Stock Exchange (ESS), is a fully integrated real estate investment trust (REIT) that acquires, develops, redevelops, and manages multifamily residential properties in selected West Coast markets. Essex currently has ownership interests in 142 apartment communities with an additional 3 properties in various stages of development (source: company press release or website)

Why We Like It:
It might be a cynical outlook but given all the foreclosures on the west coast those families have to live somewhere. Shares of this apartment REIT have been performing well. The stock has a very consistent trend of higher lows and I'm suggesting we buy the next dip near that trendline. At current levels that means buying calls on a dip at $114.00. If triggered we'll use a tight stop loss at $111.80 (you might be able to get away with $112.40 as an alternative stop). Our first target is $119.50 and our second target is $124.50. Keep your position size small!

Suggested Position:

Ouch! The option spreads are wide on this stock. I am suggesting very small positions given this handicap.

Trigger @ $114.00

BUY the 2011 January $120 calls (symbol: ESS1122A120)

Annotated Chart:

Entry on November xxth at $ xx.xx
Earnings Date 02/02/11
Average Daily Volume = 209 thousand
Listed on November 8th, 2010


In Play Updates and Reviews

Monday Malaise

by James Brown

Click here to email James Brown

Editor's Note:

It was a slow news day and the market was somewhat directionless. Stocks slipped lower on Monday but losses were mild. We still want to see a deeper dip to trigger some entry points. Although today's decline did see both our COST and VIP call positions get triggered. Put play MICC hit our first target.

-James

Current Portfolio:


CALL Play Updates

Caterpillar - CAT - close: 83.12 change: -0.42

Stop Loss: 79.40
Target(s): 84.85, 89.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see trigger

Comments:
11/8: Stocks faltered on Monday after last week's impressive gains. More than a little profit taking at this point would be normal for the market. I don't see any changes from my prior comments on CAT. We're still waiting for a pull back toward prior resistance and what should be new support.

Earlier Comments
Use a trigger to buy calls at $81.75. We'll use a stop loss at $79.40. Our first target is $84.85. We want to exit the majority of our position here. We'll set a secondary target at $89.50 but again I warn you the $85 level should be tough resistance. FYI: The P&F chart is bullish with a $118 target.

Trigger @ 81.75

Suggested Position:
Buy the December $85.00 calls (symbol: CAT1018L85), current ask $2.18

Entry on November xxth at $ xx.xx
Earnings Date 01/27/11
Average Daily Volume = 7.7 million
Listed on November 6th, 2010


Cliffs Natural Resources - CLF - close: 70.89 change: -0.21

Stop Loss: 61.85
Target(s): 68.75, 70.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes

Comments:
11/8: The U.S. dollar's bounce on Monday should have put more pressure on the commodity space but commodities held up pretty well. CLF also held on to its gains. If the dollar continues to climb it should nurture a pull back in CLF. There is no change from my prior comments.

Earlier Comments
We want to buy calls on a dip to $68.00. We'll use a stop loss at $64.75. Our upside targets are $72.00 and $74.75.

Trigger to buy calls @ $68.00

Suggested Position: Buy the 2010 December $70.00 CALL

Entry on November XX
Earnings Date 02/17/11
Average Daily Volume = 4.3 million
Listed on November 1, 2010


Costco Wholesale - COST - close: 65.81 change: -0.59

Stop Loss: 62.90
Target(s): 69.00
Current Option Gain/Loss: + 6.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see trigger

Comments:
11/8: Bingo! Our new play in COST is now open. A little profit taking in COST pushed the stock to an intraday low of $64.24. Our trigger to buy calls was hit at $64.50. The stock bounced just as expected and looks poised to rally higher from here. If you missed the entry point I would still consider positions now but keep your position size small to limit your risk.

Current Position: December $65.00 calls (symbol: COST1018L65)
Option Entry @ $1.50

Entry on November 8th at $64.50
Earnings Date 12/09/10
Average Daily Volume = 3.4 million
Listed on November 6th, 2010


Humana Inc. - HUM - close: 59.62 change: +0.06

Stop Loss: 51.75
Target(s): 59.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes

Comments:
11/8: HUM managed another gain on Monday but the action still looks short-term bearish. I am still expecting a correction. There is no change from my previous comments.

Earlier Comments
We want to wait for a dip and use a trigger at $55.25 to buy calls. Aggressive traders may want to consider puts while we wait since we're expecting such a big correction. If HUM hits our bullish trigger at $55.25 we'll use a stop loss at $51.75.

Suggested Position:

Trigger to buy calls at $55.25

BUY the 2011 January $55 calls.

Entry on November xxth at $ xx.xx
Earnings Date 11/01/10 (confirmed)
Average Daily Volume = 2.1 million
Listed on October 16th, 2010


iShares DJ Financial ETF - IYF - close 55.97 change -0.39

Stop Loss: 53.40
Target(s): 57.50, 59.75
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes

Comments:
11/8: It looks like the pull back in financials is starting after last week's impressive breakout. The IYF dipped to $55.53 intraday. There is no change from my prior comments. However, if you're really nimble you could try using a trigger near $54.50 instead of $55.00.

Earlier Comments
We want to use a dip at $55.00 as our entry point to buy calls. If triggered we'll use a stop loss at $53.40. Our first target is $57.50. Our second, longer-term target is $59.75.

Trigger to buy calls @ 55.00

Suggested Position: Buy the December $55.00 CALLS

Entry on November XX
Earnings Date N/A (unconfirmed)
Average Daily Volume: 1.0 million
Listed on November 4, 2010


Nike Inc. - NKE - close: 83.61 change: -0.50

Stop Loss: 79.90
Target(s): 87.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see trigger

Comments:
11/8: NKE slipped toward $83.00 before traders bought the dip. That's not close enough for us. I'm really expecting a pull back to $82 but I don't want to miss the entry point so our trigger is at $82.50. There is no change from my prior comments.

Earlier Comments
Trigger to buy calls at $82.50. Stop loss at $79.90. Our first target is $87.25. FYI: The Point & Figure chart is very bullish with a long-term target of $115.

Trigger to buy calls @ 82.50

Suggested Position: Buy the December $85.00 CALLS (symbol:NKE1018L85)

Entry on November xxth at $ xx.xx
Earnings Date 12/21/10
Average Daily Volume = 2.3 million
Listed on November 6th, 2010


VimpelCom Ltd - VIP - close 15.72 change -0.27

Stop Loss: 14.80
Target(s): 16.75, 17.75
Current Option Gain/Loss: + 9.0%
Time Frame: 6 to 8 weeks
New Positions: Yes

Comments:
11/8: Shares of VIP showed some volatility this morning. Traders were reacting to comments over the weekend as doubts emerged over the pending merger between VIP and Orascom Telecom Holdings, owned by Egyptian billionaire Naguib Sawiri. The concerns seemed to be temporary and VIP quickly recovered. It was a good move for us since VIP dipped to $15.20 intraday. Our trigger to buy calls was hit at $15.60. If you missed the entry point I wouldn't worry. Odds are still very good that VIP will retest the $15.50-15.25 area again so you'll see another entry. FYI: VIP is due to report earnings around Nov. 24th.

Current Position: December $15.00 CALLS, Entry @ $1.05

Entry on November 8, 2010 @ 15.60
Earnings Date 11/24/2010 (unconfirmed)
Average Daily Volume: 3.5 million
Listed on November 3, 2010


PUT Play Updates

Millicom Intl. - MICC - close: 93.06 change: -2.93

Stop Loss: 98.25
Target(s): 92.50, 90.25
Current Option Gain/Loss: + 8.1%
Time Frame: 3 to 4 weeks
New Positions: No

Comments:
11/8: Target achieved! Investors were a little unhappy that Goldman Sachs initiated coverage on MICC with a "neutral". The stock gapped open lower at $94.23 and slipped toward short-term support near $92.00. Our target was hit at $92.50. I am not suggesting new positions at this time. MICC is likely to fill the gap and that means a bounce back toward $95.00-95.50 before rolling over again. We still have our final target at $90.25.

Current Position: Long December 2010 $90 puts (MICC1018X90)
Entry @ $2.45

11/08 Target hit @ 92.50, option @ 2.85 (+16.3%)

Entry on November 1, 2010
Earnings Date 02/01/11
Average Daily Volume = 490 thousand
Listed on October 30th, 2010