Option Investor
Newsletter

Daily Newsletter, Monday, 12/6/2010

Table of Contents

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

Market Wrap

Monday Snoozer Despite QE3 Talk

by Todd Shriber

Click here to email Todd Shriber
In movie studio fashion, no sooner is the sequel released and executives are already talking about a sequel to the sequel. Such is the case with quantitative easing. The market reacted in negative fashion today to comments made by Federal Reserve Chairman Ben Bernanke during his interview with ''60 Minutes'' on Sunday.

Bernanke basically said the Fed could expand its $600 bond purchase program known as QE2. So I am not sure if an expansion counts as the third part of this trilogy, but even the faint chance that the Fed would need to buy more bonds was enough to roil stocks today, snapping three-day winning streaks for the Dow Jones Industrial Average and the S&P 500, both of which endured small losses on the day. The Nasdaq moved to a three-year high and the Russell 2000 also found its way to a higher close.

Stats Table

Of course all that QE talk leads to talk about a debased currency (the old greenback) and that is music to the ears of gold bugs. Indeed, the price for gold you see in the stats table above is a fresh all-time high. Gold has been in a bull market of unprecedented proportions for an extended period of time and with each bullish day for the yellow metal today, I am reminded of an anecdote about this gold bull market that I have seen rehashed by several media outlets this year: Gold is in the midst of its best 10-year run since the 1920s.

There's good reason for this and I say that as someone who is only long gold through the ETFS Precious Metals Basket (GLTR), an ETF that holds four different precious metals, so I am not overweight gold. Perhaps I should be. After all, with the debasement of the dollar and persistent concerns about the viability of the euro, gold for all intents and purposes a de facto currency now.

Speaking of ETFs, I get a chuckle out when I see pundits blaming gold-backed ETFs for artificially pumping up the price of gold and creating a potential bubble for the yellow metal. As I just noted, there are sound fundamental reasons for owning gold and if an investor wants gold exposure without being involved in the futures market or collecting gold, the logical alternative is ETFs. Most folks that have followed financial markets for extended period of time know that gold is prone to bubbles and wicked falls after lengthy rallies. These events occurred long before the advent of gold ETFs and when this gold run expires, it will not be simply because of ETFs.

Gold Chart

Staying with the precious metals theme, silver closed at another 30-year high today. The cheaper, more industrially useful metal than gold has been on a tear of its own this year. Year-to-date, the iShares Silver Trust (SLV) is up about 70% compared to a 30% gain for the SPDR Gold Shares (GLD).

The run in silver, while equally as valid as the run in gold, comes with an element of a humor. By that I mean JPMorgan (JPM) is short a massive amount of paper silver. London's Guardian newspaper reports that the bank's short position in silver is 3.3 billion ounces. Other press reports and blogs say the bank's short position in the metal, which is believed to be naked, is larger than all of the physically available silver in the world.

With this comes the accusation that JPMorgan is trying suppress the price of silver on behalf of the Fed to make the dollar look more attractive. Forgive me for finding this kind of funny because as the chart below illustrates, JPMorgan has done quite a miserable job of taming silver prices. With no end in sight to silver's rally, the bank will be forced to cover its shorts and with so many positions to covered, it will be almost possible to do that without disrupting the market in favor of the bulls.

Silver Chart

And staying with materials that can be mined, Massey Energy (MEE), the largest coal miner in Central Appalachia, was one of the more noteworthy winners in the S&P 500 today on news that embattled CEO Don Blankenship will leave the company. Blankenship's departure, while abrupt, seemed to be a positive catalyst for the shares today as the stock gained $1.21, or 2.4%, to close at $51.63. Volume was almost double the daily average.

Analysts are speculating that Blankenship's departure frees Massey up to be acquired, a tidbit that was once a rumor, but the company did recently confirm it was open to shopping itself. On the hand, the Wall Street Journal reported early this morning that Massey could be looking to make an acquisition of its own.

No matter what the future holds for Massey, the stock has been on an impressive run over the past few months, reclaiming almost all of the lost shareholder value that was endured as a result of the Upper Big Branch mine explosion in April, the worst U.S. coal mine disaster in four decades.

Massey Chart

It was another rough day for Bank of America (BAC), the largest U.S. bank by assets. The shares slid almost 2% to close at $11.64, just a penny above the intraday low, after Nomura Holdings said the bank is at risk for a credit downgrade next year. On top of that, Bloomberg News reported that is losing financial adviser Michael Brown to a rival firm. Normally, this would not be big news, but when the adviser manages $5.9 billion in client assets, as Brown does, it becomes just one more bit of bad news for a stock already ravaged by negative news flow.

As Bloomberg reports, Brown's departure leads to concerns that BofA has had and will continue to have difficulties retaining top talent it acquired through its shot-gun purchase of Merrill Lynch. The only bright side to all the bad news BofA has had to contend with recently is that it could mean the looming WikiLeaks release of a data about a major U.S. bank, assuming it is about this bank, may not damage the stock price all that much.

Bank of America Chart

A 2% seems tame compared to an 8.2% loss, the thrashing endured by biotech firm Celgene (CELG). Biotech is almost always a hot sector, especially when it comes to mergers and acquisitions, a fact highlighted by over $3 billion in deals out of the sector in two days alone last week, but it appears that big pharma will probably be taking a pass on Celgene, at least for the time being.

The company said today that its best-selling blood cancer treatment Revlimid was found to cause cases of secondary cancer in multiple myeloma patients. It should be noted that the data sample was small and viewed to be inconclusive, but investors concluded otherwise, punishing Celgene shares on more than seven times the average daily volume.

Revlimid is not going by the wayside because it is expected to see 2010 sales of almost $2.5 billion, but it is not a good thing when a drug that is adept after suppressing myeloma is found to cause other forms of cancer. The hard times for Celgene shares are continuing in the after-hours session with the stock down 3% to $54 as of this writing on news that American Society of Hematology data from a study of Revlimid long-term maintenance therapy in multiple myeloma reported 15 cases of secondary malignancies in Revlimid patients compared to six cases of secondary cancer in placebo patients, according to TheStreet.com.

Celgene Chart

Looking at the charts, the S&P 500 did not even touch the important 1228 resistance level today, the same area that sent the index tumbling back twice last month. Rather, the S&P 500 was locked in a boring five-point range for the day and closed hovering near 1225. Round number support is 1200, but the more critical support zone is 1175.

S&P 500 Chart

The Dow offered little more in the way of excitement today, trading in a 42-point range from top-to-bottom. After last week's Wednesday/Thursday rally, a 20-point loss today does not mean much other than to say the index is probably still a tad overbought. Support below 11,000 is obviously a long way off, but it remains to be seen if the bulls can catapult the Dow above the November peak in the 11,440 area.

Dow Chart

The Nasdaq was the shining star among the major U.S. indexes today, closing at a three-year high, but failing to even trade above 2600 intraday. Monday's close at 2594 means resistance at 2592 has been cleared and there is plenty of room in front of the Nasdaq before encountering decade-old resistance at 2850.

Nasdaq Chart

As I said last week, give the Russell 2000 some credit. The small-cap index just keeps on chugging along and closed right at resistance at 760 today. Clearing this level on strong volume would be a bullish sign and probably take the index to 775. From there, the Russell 2000 could run to 850 without much interference.

Russell 2000 Chart

The bears missed a golden opportunity on Friday to reassert themselves. That disappointing jobs number should have been like mana from heaven for the shorts. Alas, it was not and the moment has passed. If Europe can keep its nose clean for the next few weeks, stocks should rally into year-end. If not, there is always gold and silver.

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New Option Plays

Trigger at New Support

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

United Parcel Service - UPS - close: 71.69 change: -0.11

Stop Loss: 66.85
Target(s): 74.75, 78.50
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The transportation sector broke out to new multi-year highs last week. UPS followed them higher with a move past resistance near $70.00. Now it looks like stocks are poised for a little profit taking. We want to buy calls on UPS when it dips back toward prior resistance and what should be support near $70. I'm suggesting a trigger to launch positions at $70.25. If triggered our first target is $74.75.

Trigger @ 70.25

Suggested Position:
Buy the 2011 January $70.00 call (UPS1122A70) current ask $2.90

- or -

Buy the 2011 April $75.00 call (UPS1116D75) current ask $1.68

Annotated Chart:

Entry on December xxth at $ xx.xx
Earnings Date 02/01/10 (unconfirmed)
Average Daily Volume = 3.9 million
Listed on December 6th, 2010


In Play Updates and Reviews

Stocks Drift Sideways

by James Brown

Click here to email James Brown

Editor's Note:

After big gains last week the market took a break on Monday. Overall the trend today saw stocks drifting sideways in quiet trading.

-James

Current Portfolio:


CALL Play Updates

CH Robinson Worldwide Inc. - CHRW - close: 75.94 change: -0.41

Stop Loss: 71.90
Target(s): 74.90, 79.00
Current Option Gain/Loss: +100.0%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/06 update: Transports saw their rally stall on Monday. CHRW followed suit. The stock spent most of the day in a very narrow range near $76.00. I don't see any changes from my weekend comments. I would expect a pull back toward the $75-74 zone. If you're looking for a new entry point I would prefer to buy calls on a dip near $74-73. Our final target is $79.00.

Current Position:
Long the January $75.00 calls (CHRW1122A75) Entry @ $1.15

12/01: New Stop loss @ 71.90
12/01: First target hit @ $74.90 Exit all December calls: $0.95 (+111.1%)
12/01: First target hit, take profits on January calls: $ $2.00 (+73.9%)
11/27: New stop @ 70.75, new first target at $74.90

Entry on November 22nd at $72.44
Earnings Date 02/03/11
Average Daily Volume = 1.1 million
Listed on November 18th, 2010


Cliffs Natural Resources - CLF - close: 73.63 change: +0.05

Stop Loss: 67.75
Target(s): 71.50, 74.75
Current Option Gain/Loss: +77.6%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/06 update: After three strong gains in a row CLF managed to eke out a fourth gain but momentum is stalling. CLF struggled at $74.00 all day. Once again I'm suggesting that more conservative traders exit now! We have less than two weeks left for December options. Officially our final target is $74.75. Look for a dip back toward $70.00 as our next entry point to buy January calls (or later). I am moving our stop loss to $67.75.

Current Position:
Long the 2010 December $70.00 CALL, Entry @ $2.42

12/04 New stop loss $67.75
12/02 Target hit @ 71.50, option @ $3.25 (+34.2%)
12/02 New Stop loss @ 65.75

Entry on November 12th @ 67.00
Earnings Date 02/17/11
Average Daily Volume = 4.3 million
Listed on November 1, 2010


CSX Corp. - CSX - close: 64.00 change: -0.41

Stop Loss: 59.75
Target(s): 64.25, 67.25
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Comments:
12/06 update: The rally in CSX is stalling near its November highs. Odds are growing quickly that this railroad stock will see a little pull back soon. I am suggesting we buy calls on a dip at $62.50.

Trigger to buy-the-dip @ $62.50

Suggested Position: Buy the 2011 January $60 calls (CSX1122A60)

- or -

Suggested Position: Buy the 2011 February $65 calls (CSX1119B65)

12/02: New trigger @ 62.50.
12/01: New trigger @ 62.25, New stop @ 59.90, New targets.

Entry on December xxth at $ xx.xx
Earnings Date 01/18/11 (unconfirmed)
Average Daily Volume = 5.9 million
Listed on November 23rd, 2010


CenturyLink, Inc. - CTL - close: 43.81 change: +0.38

Stop Loss: 41.45
Target(s): 44.90, 47.25
Current Option Gain/Loss: +100.0%
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
12/06 update: CTL continues to show strength but the rally did fail at last week's highs near $44.00. It is worth noting that our option has doubled from 20 cents to a bid of 40 cents. Currently I would consider new positions on dips near $43.00.

FYI: Investors should know that CTL is currently involved with a $10.6 billion stock-swap merger with Qwest Communications (Q). The merger isn't supposed to be completed until the first half of 2011. The trend for both stocks is up and naturally looks very similar following the M&A announcement.

Current Position:
Long the 2011 January $45.00 calls (CTL1122A45) Entry @ 0.20

12/01: Adjusted secondary target to $49.00

Entry on November 29th at $42x55
Earnings Date 02/22/11
Average Daily Volume = 3.0 million
Listed on November 27th, 2010


Express Scripts - ESRX - close: 53.99 change: -0.21

Stop Loss: 49.65
Target(s): 53.95, 57.25
Current Option Gain/Loss: +54.9%, and +35.7%
Time Frame: 5 to 6 weeks
New Positions: Yes, see below

Comments:
12/06 update: Monday was a quiet session for ESRX with the stock drifting sideways near $54.00. I don't see any changes from my weekend comments. I would still focus on decline in the $53-52 zone as possible entry points to buy calls (Januarys or later). Readers may want to consider an early exit on the December options, especially on any more toward $55.

We currently only have half a position open.

Don't forget - December options expire in less than two weeks.

Current Position:
Long the 2010 December $52.50 calls (ESRX1018L52.5) Entry @ $1.22
- or -
Current Position:
Long the 2011 January $52.50 calls (ESRX1122A52.5) Entry @ $2.10

12/01: First Target Hit @ $53.95. Dec's @ $2.20 (+80.3%). Jan's @ $3.10 (+47.6%)

Entry on November 18th at $51.81
Earnings Date 02/24/11
Average Daily Volume = 4.3 million
Listed on November 17th, 2010


FedEx Corp. - FDX - close: 93.29 change: -1.71

Stop Loss: 88.45
Target(s): 94.75, 99.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/06 update: We have been expecting a pull back in FDX and it looks like that correction has started today with a -1.8% decline. Our plan is to buy calls on a dip at $91.00.

FYI: FDX is due to report earnings on Dec. 16th. Holding over earnings is risky. More conservative traders will want to exit ahead of the announcement.

Suggested Position: TRIGGER @ $91.00

Buy the 2011 January $90.00 call (FDX1122A90) current ask $4.85

- or

Buy the 2011 April $95 call (FDX1116D95) current ask $5.00

Entry on December xxth at $ xx.xx
Earnings Date 12/16/10 (confirmed)
Average Daily Volume = 2.1 million
Listed on November 29th, 2010


Goldman Sachs - GS - close: 162.65 change: +0.34

Stop Loss: 152.75
Target(s): 169.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Comments:
12/06 update: There is no change from my weekend comments on GS. We're still waiting for a dip back to $160.25. More conservative traders could wait for a dip closer to $158.00.

Trigger @ 160.25

Suggested Position: Buy the 2011 January $165 calls (GS1122A165) current ask $5.25

Entry on December xxth at $ xx.xx
Earnings Date 01/18/11 (unconfirmed)
Average Daily Volume = 7.2 million
Listed on December 2nd, 2010


W.W. Grainger Inc. - GWW - close: 131.95 change: +0.36

Stop Loss: 124.75
Target(s): 129.90, 138.50
Current Option Gain/Loss: +84.0%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/06 update: GWW managed to rally again and traded over $132.00 for another new record high. There is no change from my weekend comments. Shares look a little bit overbought here. I would expect a dip soon. If you're looking for a new entry point I would consider buying calls on a dip near $128.00.

FYI: The stock could see a little short squeeze since the most recent data listed short interest at more than 5% of the 58.5 million share float (which isn't very big as far as floats go). FYI: The Point & Figure chart is bullish with a $140 target.

Current Position:
Long the 2011 January $130 calls (GWW1122A130) Entry @ $2.50

12/02: First target hit @ 129.90, option @ $4.10 (+64%)
12/02: New stop loss @ 124.75, New final target at $138.50

Entry on November 24th at $126.75
Earnings Date 01/25/11 (unconfirmed)
Average Daily Volume = 567 thousand
Listed on November 22nd, 2010


Humana Inc. - HUM - close: 56.41 change: -0.63

Stop Loss: 53.75
Target(s): 59.75, 64.00
Current Option Gain/Loss: -21.0%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/06 update: Hmm... HUM has been unable to break the bearish trend of lower highs. Odds are really good this stock is going to retest the 50-dma and possibly the $55 level. I would wait for the dip or a bounce from these levels before considering new bullish positions. I am suggesting we sell half of our position at $59.75 and then plan on selling the rest with a target at $64.00.

Current Position:
Long the 2011 January $55 calls (HUM1122A55) Entry @ $3.80

11/22/10 New stop @ 53.75
11/22/10 New (2nd) target at $64.00

Entry on November 18th at $55.05
Earnings Date 11/01/10 (confirmed)
Average Daily Volume = 2.1 million
Listed on October 16th, 2010


Nike Inc. - NKE - close: 87.73 change: +0.20

Stop Loss: 82.45
Target(s): 86.75, 89.50
Current Option Gain/Loss: +165.2%, and +60.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
12/06 update: NKE is still holding up and edged toward the top of its short-term trading range near $88.00. I'm still expecting a little pull back toward $85-84. If NKE does dip toward $85 the December calls are going to get hammered lower. Cautious traders will want to seriously consider an early exit for the December position right here. If you don't sell now I am lowering our exit target on the December calls to $88.75. We still want to take profits (sell half) of our January calls at $89.50. Just remember that December options expire in about two weeks.

Current Position:
Long the December $85.00 CALLS (symbol:NKE1018L85) Entry @ $1.15

- or -

(Second position)
Current Position:
Long the January $85.00 CALLS (symbol:NKE1122A85) Entry @ $2.78

12/01/10 New stop loss @ 82.45
11/30/10 Readers may want to exit December options early for a gain
11/30/10 Entry on January calls @ $2.78
11/29/10 Buy the bounce from $84.00
11/24/10 Target hit @ 86.75, Dec. option @ $2.60 (+126%)

Entry on November 11th at $83.00
Earnings Date 12/21/10
Average Daily Volume = 2.3 million
Listed on November 6th, 2010


Oceaneering International - OII - close: 72.86 change: -0.01

Stop Loss: 66.90
Target(s): 74.80, 79.75
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
12/06 update: OII spent the day in a very tight range and closed virtually unchanged on the session. There is no change from my weekend comments. I am suggesting we use a trigger at $70.55. We'll start the play with a stop loss at $66.90. Our first target is $74.80. Our final target is $79.75. More aggressive traders could aim for the all-time highs near $85.

Trigger to buy @ $70.25

Suggested Position: Buy the 2011 January $75 calls (OII1122A75) current ask $2.90

- or -

Suggested Position: Buy the 2011 April $75 calls (OII1116D75) current ask $6.00

Entry on December xxth at $ xx.xx
Earnings Date 02/17/11 (unconfirmed)
Average Daily Volume = 584 thousand
Listed on December 4th, 2010


Transocean Ltd. - RIG - close: 70.93 change: +0.42

Stop Loss: 64.75
Target(s): 72.50, 74.90
Current Option Gain/Loss: +30.5%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/06 update: RIG erased Friday's loss and the relative strength is encouraging. Yet I'm still expecting a pull back toward the $69-68 zone. We can use a decline into this area as a new entry point to buy calls.

- Current Position -
Long the 2011 January $70.00 calls (RIG1122A70) Entry @ $2.95

12/03/10 Target hit @ $72.50, option @ $4.95 (+67.7%)

Entry on November 30th at $68.18
Earnings Date 02/24/11 (unconfirmed)
Average Daily Volume = 6.3 million
Listed on November 29th, 2010


Union Pacific - UNP - close: 94.42 change: -0.13

Stop Loss: 87.90
Target(s): 96.25, 99.75
Current Option Gain/Loss: + 92.1%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/06 update: Railroad stocks, like most of the transport sector, saw their rally stall on Monday. UNP hovered just above the $94 level all day. There is no change from my weekend comments. I would expect a pull back toward $92.00. We can use a dip in the $92.50-92.00 zone as another bullish entry point.

- Current position -
Suggested Position:
Buy the 2011 January $95 calls (UNP1122A95) Entry @ $1.52

Entry on November 30th at $89.83
Earnings Date 01/20/11
Average Daily Volume = 2.9 million
Listed on November 20th, 2010


United Technology Corp. - UTX - close: 78.41 change: -0.33

Stop Loss: 73.90
Target(s): 81.50, 84.75
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
12/06 update: We're seeing a theme today. Stocks were quiet and traded sideways. UTX was in a 60-cent range all day long. There is no change from my weekend comment. I am suggesting a trigger to buy calls at $77.10. Cautious traders could wait for a pullback closer to $76 or even $75. We will begin the play with a stop loss at $73.90, just under the rising 50-dma. Our first target is $81.50. UTX's all-time high is $82.50.
FYI: The Point & Figure chart is bullish with a $91 target for UTX.

Trigger to buy calls @ $77.10

Suggested Position: Buy the 2011 January $80 calls (UTX1122A80) current ask $1.63

- or -

Suggested Position: Buy the 2011 February $80 calls (UTX1119B80) current ask $2.45

Entry on December xxth at $ xx.xx
Earnings Date 01/26/11 (unconfirmed)
Average Daily Volume = 3.2 million
Listed on December 4th, 2010


Cimarex Energy Co. - XEC - close: 87.28 change: +0.45

Stop Loss: 79.85
Target(s): 87.40, 89.90
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/06 update: XEC continues to show relative strength. The stock rallied to another new high. There is no change from my weekend comment. I would not chase it. I'm suggesting readers wait for a dip to $84.00. Cautious traders could wait for a dip closer to $82 instead.

Trigger @ 84.00

Suggested Position:
Buy the 2011 January $85 calls (XEC1122A85)

Entry on December xxth at $ xx.xx
Earnings Date 02/17/11 (unconfirmed)
Average Daily Volume = 907 thousand
Listed on December 1st, 2010


CLOSED BULLISH PLAYS

VimpelCom Ltd - VIP - close 14.55 change -0.51

Stop Loss: 14.90
Target(s): 16.75
Current Option Gain/Loss: -57.1%
Time Frame: 6 to 8 weeks
New Positions: No

Comments:
12/06 update: Ouch! It was an ugly session for VIP. Shares opened at $14.85 (under support at $15.00) and quickly plunged to new four-week lows. With our stop at $14.90 the play was closed immediately. The option opened at $0.45.

Closed Position:
December $15.00 CALLS, Entry @ $1.05, exit @ 0.45 (-57.1%)

12/06/10 Stopped out @ $14.85 (gap down)
11/27/10 new stop @ 14.90

Chart:

Entry on November 8, 2010 @ 15.60
Earnings Date 12/02/2010 (unconfirmed)
Average Daily Volume: 3.5 million
Listed on November 3, 2010