Option Investor
Newsletter

Daily Newsletter, Tuesday, 12/14/2010

Table of Contents

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

Market Wrap

No Change In Fed Policy

by Jim Brown

Click here to email Jim Brown
The Fed is unshaken by the rise in interest rates since QE2 began. Today they said inflation was too low and unemployment too high so the QE2 program would continue.

Market Statistics

The Fed left rates unchanged and repeated the "exceptionally low levels for the federal funds rate for an extended period" comment suggesting rates would remain unchanged for at least the next six months. They can't raise rates until they finish the QE2 program and begin removing liquidity from the market. Most analysts believe it will be 2012 before the Fed changes rates.

The Fed said it would continue buying up to $600 billion in longer-term treasuries by the second quarter of 2011. Not so heavily reported the Fed will also roll over maturing securities into new purchases of another $300 billion. In quantitative easing the Fed creates money and uses its new money to buy treasuries and remove those investment vehicles from the market and forcing investors to look for other places to put their money, preferably the stock market.

In theory this increases bidding for the available treasuries and drives up prices producing a lower implied interest rate. Unfortunately for the Fed the economy began improving about the time the QE2 program began and the European debt crisis flared up again. The European crisis pushed the dollar higher and the improving economy is convincing investors to pull out of bonds and chase stocks. That pushes interest rates higher. Both factors are opposed to the Fed's goals.

Since the interest rate has been rising instead of following there was some thought the Fed might warn of a potential increase in the QE2 purchases in order to force its will on the bond market and force rates lower. This did not happen but it does not mean the Fed can't change the program in the future. They left themselves and out with the sentence: "The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability." Also, "The Fed will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary." Those statements mean they can change policy at will if they deem necessary.

The Fed repeated the list of problems in the economy but noted again that a gradual uptick in activity had begun. However, "progress toward its objectives has been disappointingly slow." The Fed's objectives are low unemployment and price stability, which is normally expected to be a +2% inflation rate.

The Fed noted that consumer spending is "increasing at a moderate pace" compared with "increasing gradually" in the prior statement. However, they also noted the overall pace of business growth has slowed.

The tax compromise, which includes a cut in the social security tax and extension in unemployment benefits for millions of workers, should mean the Fed would not have to implement more aggressive policy actions to stimulate growth. Most analysts have raised their GDP estimates for 2011 by 1.0% to as much as 1.5% with the higher GDP predictions now in the +4.2% to +4.5% range. That would be nearly double the 2009 levels.

It would also put the Fed in a bind with nearly $3 trillion in treasuries on their books and rising interest rates pushing down their value as each day passes. A suddenly accelerating economy would also mean a greater fear of inflation and a need for the Fed to reverse its position very quickly. This is going to be a major challenge for the Fed when it occurs and they could actually end up killing the new recovery by too aggressive a revision in policy change.

The bottom line to the current Fed environment is a very accommodative interest rate policy at a time when the economy is poised to accelerate in 2011. As Ken Heebner said after the FOMC announcement, "we are expecting the economy to grow significantly over the next several years and this is a very attractive time to buy stocks. Conditions could not be better!"

The Senate test vote on the tax compromise was 83-15 in favor and when the real vote occurs it is expected to pass and move on to the house. This will be beneficial to the economy and with the Fed greasing the wheels we could actually see 4.5% growth by the end of 2011.

Elsewhere on the economic front the Producer Price Index (PPI) showed prices for finished goods rose +0.8% in November. The core rate without food and energy components rose +0.3%. The core rate was up +1.9% over the same period in 2009 but 1.7% of that was due to a rise in the sticker price of new cars. Wednesday's Consumer Price Index (CPI) will be the more important report with the level of inflation at the consumer level. I expect it to be tame or the Fed would have been more aggressive in their statement.

Retail Sales rose +0.8% in November compared to an upwardly revised +1.7% gain in October. Excluding autos sales rose +1.2%. I was surprised to see electronics and appliance stores post a decline in sales in November. You may remember the Black Friday sales actually started the day after Halloween and ran all month. I was expecting a good November for the electronics stores.

Of course everything is relative since November sales were still up +7.7% above November 2009. This was the third consecutive month of growth near 8% year-over-year. Sales are up at an annualized rate of +13.7% over the last four months.

There is a lot of pent up demand and most analysts have been projecting that demand increase in this holiday shopping cycle. I personally tried to visit a local mall twice in the last week and literally could not even get in the parking lot. Cars were lined up around the block just waiting to pull into the parking lot. Fortunately I was in no rush to spend money and went elsewhere. The real point is that December sales could be very strong.

Noteworthy reports left for this week include the CPI and Industrial Production on Wednesday and Philly Fed Survey on Thursday.

Economic Calendar

Another sign of a weak consumer was the implosion in Best Buy (BBY) today after they slashed their guidance and posted worse than expected earnings. Best Buy reported earnings of 54-cents for Q3 compared to analyst estimates for 60-cents. The company lowered its guidance for the full year to $3.20 to $3.40 per share compared to prior guidance of $3.55 to $3.70.

Evidently Best Buy did not discount prices enough to offset stronger competition from Wal-Mart, Target, Costco, Sears and Amazon. Those companies have said business was good and momentum was growing in electronics. Wal-Mart reported a "solid increase" in sales of LCD, plasma TVs and laptops.

The various smartphone apps that scan barcodes and tell you who has the same item for a cheaper price are getting a lot of play and creating some point of sale traffic. If you are standing in front of a $700 TV at Best Buy and your smartphone says Wal-Mart has the same model for $599 you are probably going to go immediately to Wal-Mart. Same for Amazon. If Amazon is showing it for $100 cheaper and it takes 2 clicks on your phone and no waiting in line then Amazon wins even with shipping.

Best Buy also said consumers were buying the cheaper priced models of flat panel TVs with screens 36 inches or smaller for $229 to $299 and that hurt both sales revenue and margins. Tablet computers are also credited with impacting sales of PCs and laptops.

Best Buy shares were hammered for a -15% loss.

Best Buy Chart

FedEx said Monday was probably the busiest shipping day of the holiday season with nearly 16 million packages moving through its system. That is a 13% increase over the 14.2 million packages handled on the same day in 2009 and it is double a normal days activity. About half of that increase comes from a deal with the Postal Service. FedEx ships lighter packages for the Post Office and delivers them to a local post office in the delivery area where the USPS takes over again for their final delivery to the address on the label.

Online merchants across the country are promoting this coming Friday as "free shipping" day and FedEx expects another spike in volume. Without the shipping promotions the online retailers would see their business drop off significantly in the week before the holidays. Their shopping season is almost over. Online spending is expected to increase up to 4% this year.

UPS expects its busiest day to be Dec-22nd when it expects to move about 24 million packages. That is 60% more than a normal day. UPS hired 50,000 part time workers to handle the load. For the entire season FedEx expects to ship 223.3 million packages and UPS more than 430 million. FedEx said the majority of its holiday shipments come from Amazon and other online retailers and mostly consist of books, cameras and electronics.

FedEx reports earnings on Thursday before the open. Estimates are for $1.31 per share.

FedEx Chart

In the recovery story of the century AIG gained another $3 today after the Chairman Steve Miller said he was encouraged about the company's prospects and they were more interested in BUYING insurance companies today than selling them. AIG has sold off dozens of assets to raise cash to repay the $49 billion bailout by the government. Their plan to pay off the loans and return the stock to private hands appears to be on track. The government owns 90% of the outstanding shares in AIG and they have to be very happy about the gains over the last couple of weeks.

AIG Chart

Bank of America raised their estimates for the S&P for 2011. They now believe global GDP growth will slow to 4.2% in 2010 from 4.9% in 2009 with emerging markets accounting for 80% of that growth. The bank still has one of the lowest estimates of U.S. GDP at +2.8%. However, the bank believes strong corporate profits in the U.S. will power the S&P-500 over 1,400 by year end. The 1400-1450 range seems to be garnering most of the estimate upgrades from the major analysts but there have been estimates as high as 1500.

David Bianco, chief U.S. equity strategist for BAC said 2010 was a good year for the markets but 2011 will me even better. Stocks are going to be an asset class that comes back into favor. Bianco said S&P 1500 is where he would expect the market to be by year end but the 1400 forecast is the banks cautious way of hedging their bet. He said oil should hit $100, gold $1500 but agricultural prices will decline as new crops replace those burned in the Russian fires or washed away in the floods.

In the energy markets there could be some volatility in crude prices this week. MasterCard's Spending Pulse report showed there was a 3% drop in gasoline demand last week and that was a heavy shopping week when consumers should have been bouncing from mall to mall. Gasoline over $3 per gallon in 21 states is weighing on consumers and they are electing not to drive any more than necessary. John, a reader in Maui told me he paid $4.10 today and reflexively stopped short of filling tank. (John, I think readers in the Midwest and Northeast suffering in the cold would gladly fill your tank if you would trade places with them this week.)

Oil prices over $85 per gallon are an economic drag because that is the level where those fill-ups start being painful to the discretionary budget. With so many people out of work and depending on unemployment for gas and food it is an even bigger problem.

With the current month crude contract expiring at the close next Monday I am expecting to see some profit taking from the nearly $10 spike we saw since Thanksgiving. We shorted the e-mini crude futures in OilSlick this afternoon.

Register for my OilSlick.com newsletter and receive free daily updates and commentary on the energy sector. Register here

The markets appeared to express indifference to the FOMC announcement but bled a few points into the close when a sell program hit about 3:PM. I would not be surprised to see some real profit taking occur now that the FOMC is behind us. There was no change in policy and almost no change in the statement so a sell the news session would not surprise me.

The S&P touched a high of 1246 both yesterday and today and both times there was an almost immediate decline. Today's intraday low was a lower low at 1238 but the range was still minor. An eight-point range on the S&P with a positive close in the middle is nothing to worry about but I think the Best Buy cloud could be with us for a couple days. The FedEx earnings on Thursday morning could be a bright spot.

Support on the S&P is well back at 1225-1228 so there is some risk if real profit taking appears. Fund managers should use any dips to window dress into year-end so I don't expect any material decline.

S&P-500 Chart

The Dow finally moved to a new high at 11,514 after lagging the other indexes for the last couple of weeks. The move came on upgrades to Verizon, Kraft and Caterpillar. The Dow has decent support at 11,335 with today's close nearly 150 points higher. That gives the Dow plenty of room to wander without any material danger of breaking support.

Dow Chart

On the ninth day the Nasdaq rested. Yes, after a streak of eight consecutive gains the Nasdaq rested on Monday but the decline was minimal. After being up about 15 points intraday today the index came back to initial support at 2625 at the close. This was the result of a 3:PM sell program that hit all indexes. Several of the Nasdaq big caps were in negative territory like NFLX, FFIV and AAPL. After the strong December to date a little weakness was to be expected. I still believe funds will use this opportunity to window dress into year-end so today's action was not troubling.

Nasdaq Chart

The Russell completed its second day in negative territory but only fractionally. The Russell can decline to 765 without causing any alarm and I believe that level would be bought. After the performance so far in December it would be somewhat unbelievable to expect the run to continue without a rest.

Russell Chart

After the bell today TrimTabs.com reported U.S. stock mutual funds have taken in a net $2.7 billion so far in December. If the trend continues through year-end it will be the first month since April that stock funds have seen net inflows. Year to date stock funds have seen outflows of $69.8 billion in redemptions. Bond mutual funds have seen outflows in December of $2.3 billion. The tide is turning. Once the tax deal is in place and investors can look two more years into the future before worrying about an increase in capital gains taxes I believe the bond funds will hemorrhage money and stocks will benefit.

I don't have any particular market bias for the rest of the week but I do expect to see some higher highs before year-end. We could easily see some sell the news profit taking this week now that the FOMC is behind us. I would continue to buy the dips until proven wrong.

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Jim Brown


New Option Plays

Big Cap Tech

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

International Business Machines - IBM - close: 145.82 change: +1.54

Stop Loss: 142.99
Target(s): 149.90, 157.50
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
The stock market just refuses to correct lower. Eventually stocks will see some profit taking and it could begin this week. However, we should also consider the alternative. What if stocks continue to melt up higher to close out the year on a strong note? If that happens then IBM could lead the charge. Shares of this technology giant are have been consolidating sideways for weeks and look poised to breakout higher. I am suggesting that we wait for IBM to hit $146.75 and use that move as our entry point to buy calls. If triggered we'll use a stop loss at $142.99. Our first target to take profits will be $149.90. Our secondary, longer-term target is $157.50 (which could take weeks to achieve). More conservative traders may want to wait for IBM to close over $147.50 (a new closing high) before initiating new positions. I do want to point out that my biggest concern would be an intraday rally that fails. If IBM surges through resistance only to reverse it could be a caution signal, especially with the stock market overbought. FYI: The Point & Figure chart on IBM is forecasting a long-term target of $196.

Breakout Trigger @ $146.75

- Suggested Positions -

Buy the 2011 January $150 calls (IBM1122A150)

- or -

Buy the 2011 April $155 calls (IBM1116D155)

Annotated Chart:

Entry on December xxth at $ xx.xx
Earnings Date 01/18/11 (unconfirmed)
Average Daily Volume = 4.7 million
Listed on December 14th, 2010


In Play Updates and Reviews

Intraday Gains Fade

by James Brown

Click here to email James Brown

Editor's Note:

The market's rally continues to look tired. The intraday gains faded into the closing bell. I'm still crossing my fingers that we'll see a decent pull back so we can launch new bullish positions on the decline.

-James

Current Portfolio:


CALL Play Updates

CH Robinson Worldwide Inc. - CHRW - close: 78.46 change: +0.39

Stop Loss: 74.45
Target(s): 74.90, 79.00
Current Option Gain/Loss: +230.4%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
12/14 update: CHRW is getting closer to our final target. Shares hit $78.71 this afternoon. Our final target is $79.00. More aggressive traders could aim for $80. Bear in mind that CHRW remains short-term overbought and due for some profit taking. The stock did show some relative strength today with a +0.49% gain compared to a decline in the transportation index. We will raise our stop loss to $74.45. I am not suggesting new positions at this time. I urge more conservative traders to strongly consider an early exit now.

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

12/14: New stop loss @ 74.45
12/11: New stop loss @ 72.90
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


Cummins Inc. - CMI - close: 108.29 change: +1.60

Stop Loss: 98.40
Target(s): 108.25 114.00
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
12/14 update: Positive analyst comments on CMI pushed the stock to a +1.5% gain and a new all-time high. I urge readers to not chase this move. CMI is overbought here. We will raise our buy-the-dip trigger to $102.50 and raise our stop loss to $98.40.

We want to start with small positions! Consider only buying half your normal position size. Just in case the correction pulls CMI toward the 50-dma we want to have some cash on the sidelines to double down near the 50-dma.

Trigger @ $102.50 <-- New Trigger

- Suggested Position -
Buy the 2011 January $105 calls (CMI1122A105)

- or -

Buy the 2011 March $110 calls (CMI1119C110)

Entry on December xxth at $ xx.xx
Earnings Date 02/02/11 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on December 11th, 2010


CSX Corp. - CSX - close: 63.62 change: -0.16

Stop Loss: 59.75
Target(s): 67.00, 69.50
Current Option Gain/Loss: -12.0% and - 8.4%
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
12/14 update: The Dow Jones Railroad index consolidated sideways most of the session but broke down under short-term support late this afternoon. CSX delivered a similar move just on a smaller scale. Meanwhile Bloomberg had an article discussing the rising put volume on CSX. The author is suggesting that investors are buying lots of puts on CSX with the expectation that CSX will decline sharply following its earnings report (due out in January). For now the overall trend in CSX is bullish but I wouldn't be surprised to see a dip at $62.00. As a matter of fact I would use a dip into the $62.00-61.00 area as another entry point to buy calls.

- Current Positions - (We only have a small position open)

Buy the 2011 January $65 calls (CSX1122A65) Entry @ $1.75

- or -

Buy the 2011 February $65 calls (CSX1119B65) Entry @ $2.49

12/13: CSX opened at $64.39
12/11: New Entry Point Strategy. Buy half now.
12/11: New targets: 67.00, 69.50
12/02: New trigger @ 62.50.
12/01: New trigger @ 62.25, New stop @ 59.90, New targets.

Entry on December 13th at $64.39
Earnings Date 01/18/11 (unconfirmed)
Average Daily Volume = 5.9 million
Listed on November 23rd, 2010


CenturyLink, Inc. - CTL - close: 45.92 change: +0.70

Stop Loss: 43.75
Target(s): 44.90, 47.25
Current Option Gain/Loss: +550.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
12/14 update: Once again CTL is showing relative strength. The rally seems to be accelerating. Shares added +1.5% to close at new two-year highs (again). I am raising our stop loss to $43.75 since broken resistance near $44.00 should offer some support. I'm not suggesting new positions at this time. CTL is short-term overbought and due for some profit taking. Our final target to exit is $47.25.
NOTE: I would strongly consider an early exit on any move near $47.00! More conservative traders will want to consider an early exit now.

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

12/14: New stop loss @ 43.75
12/13: First Target Hit @ $44.90, option @ $0.85 (+325%)
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: 54.86 change: +0.54

Stop Loss: 49.65
Target(s): 53.95, 57.25
Current Option Gain/Loss: +50.0%
Time Frame: 5 to 6 weeks
New Positions: Yes, see below

Comments:
12/14 update: ESRX outperformed the major market averages but shares remain inside the $55-54 trading range. I still don't see any changes from my weekend comments. I'm still warning readers to be ready for a correction back towards $52.00. If you're looking for a new entry point I would prefer to initiate positions on a dip or a bounce near $53-52.

We currently only have half a position open.

Current Position:
Long the 2011 January $52.50 calls (ESRX1122A52.5) Entry @ $2.10

12/07: Exit the December calls. option @ $2.01 (+64.7%)
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


Fastenal Co. - FAST - close: 58.99 change: +0.11

Stop Loss: 53.75
Target(s): 59.75, 62.50
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
12/14 update: UBS initiated coverage on FAST with a "neutral" rating. This news didn't do much for the stock. Shares spent the day drifting sideways. We are still waiting for a little correction to buy the dip. The plan is to buy calls at $56.00. Conservative traders could wait for a dip closer to $55 or $54 before launching positions. If triggered our first target is $59.75.

FYI: FAST announced a special, one-time cash dividend of 42-cents on November 18th and all of the option strikes have been adjusted for this 42-cent dividend.

Trigger @ 56.00

Suggested Positions:
Buy the 2011 January $54.58 calls (FAST1122A54.58)

- or -

Buy the 2011 February $59.58 calls (FAST1119B59.58)

Entry on December xxth at $ xx.xx
Earnings Date 01/19/11 (unconfirmed)
Average Daily Volume = 880 thousand
Listed on December 8th, 2010


FedEx Corp. - FDX - close: 93.33 change: -0.98

Stop Loss: 87.75
Target(s): 94.75, 99.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/14 update: FDX lost about 1% on Tuesday. Shares have been trading in the $96-92 range for a couple of weeks now. Odds are FDX will remain in this range tomorrow as investors wait for the company's earnings report on Thursday morning. I am expecting FDX To see some volatility following the report. Just in case the stock spikes lower toward $90.00 I am moving our trigger to buy calls down to $90.25. We'll re-evaluate our entry point again once we see how the market reacts to FDX's earnings. Wall Street is expecting a profit of $1.31 a share.

Suggested Position: TRIGGER @ $90.25 <-- new trigger

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: 167.33 change: -2.15

Stop Loss: 157.45
Target(s): 169.75, 177.00
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
12/14 update: We should not be surprised to see some profit taking in GS. I've been warning readers that GS was short-term overbought and the $170-171 area was resistance. Let's just hope the pull back continues. We're still waiting for the correction with a trigger to buy calls at $163.00.

Trigger @ 163.00

Suggested Positions:
Buy the 2011 January $170 calls (GS1122A170)

- or -

Buy the 2011 April $175 calls (GS1116D175)

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: 134.83 change: +1.06

Stop Loss: 124.75
Target(s): 129.90, 138.50
Current Option Gain/Loss: +152.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
12/14 update: UBS initiated coverage on GWW with a "neutral". This news failed to halt the stock from hitting new highs as shares gained another +0.79%. I am raising our stop loss to $127.25 since the $128.00 level should be support. I am not suggesting new bullish positions at current levels. Our final target remains $138.50.

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

12/14: New stop loss @ 127.25
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


Juniper Networks - JNPR - close: 35.75 change: -0.41

Stop Loss: 33.75
Target(s): 37.40, 39.85
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
12/14 update: Networking stocks are starting to see some profit taking. Yesterday's action and today's decline definitely looks like a short-term failed rally/bearish reversal. I'm expecting a pull back toward short-term support near $35.00. We have a trigger to buy calls at $35.20. More conservative traders could wait to buy calls on a dip near $34.00.

Trigger to buy the dip @ $35.20

- Suggested Position -
Buy the 2011 January $35.00 calls (JNPR1122A35)

- or -

Buy the 2011 April $37.00 calls (JNPR1116D37)

Entry on December xxth at $ xx.xx
Earnings Date 01/25/11 (unconfirmed)
Average Daily Volume = 5.5 million
Listed on December 11th, 2010


Nike Inc. - NKE - close: 89.28 change: +0.05

Stop Loss: 83.90
Target(s): 89.50, 94.50
Current Option Gain/Loss: +92.4%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
12/14 update: Traders bought the early morning dip in NKE and shares managed to squeeze our another gain. There is no change from my prior comments. More conservative traders may want to consider an early exit now. Or you may want to consider a higher stop loss. I'm considering raising our stop closer to $85 or $86. Officially the newsletter's final exit is the $94.50 mark. I am not suggesting new bullish positions at this time.

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

12/13/10 Target Hit @ $89.64 (gap higher), option @ $5.51 (+98.2%)
12/13/10 New stop loss $83.90
12/11/10 New stop loss $83.49
12/07/10 Exit the December calls, option @ $2.25 (+95.6%)
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: 73.82 change: +1.02

Stop Loss: 67.75
Target(s): 74.80, 79.75
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
12/14 update: The OSX oil service index underperformed the OIX oil index on Tuesday. Yet OII displayed some relative strength this morning. The stock spiked over $75.00 only to see its gains fade this afternoon. It looks like another short-term failed rally pattern. The recent volatility could be signs of a more significant top. Readers may want to scale back on their position size to limit their risk. Currently our plan is unchanged. We want to buy calls on a dip at $70.25.

Trigger to buy @ $70.25

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

- or -

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

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: 72.80 change: +0.33

Stop Loss: 66.25
Target(s): 72.50, 78.25
Current Option Gain/Loss: +52.5%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
12/14 update: It was a quiet session for RIG. Shares saw another failed rally near $74.00 this morning. There is no change from my prior comments. More conservative traders may want to consider raising their stop loss. I am not suggesting new positions at current levels. Our final target is $78.25.

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

12/11/10 New target 78.25, new stop loss $66.25
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


Sherwin-Williams Co. - SHW - close: 79.38 change: +1.20

Stop Loss: 73.75
Target(s): 79.90
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
12/14 update: The relative strength in SHW is great but it's frustrating when we're not in the stock yet. Shares are overbought with their December rally lifting shares more than five points without much of a dip. The $80.00 level has been resistance in the past. I would now expect SHW to rally into the $80.00-80.40 zone and then correct lower.

We want to buy calls on a correction at $76.10.

Trigger @ $76.10

Suggested Positions:

Buy the 2011 January $75.00 calls (SHW1122A75)

- or -

Buy the 2011 March $80.00 calls (SHW1119C80)

Entry on December xxth at $ xx.xx
Earnings Date 01/26/11 (unconfirmed)
Average Daily Volume = 675 thousand
Listed on December 9th, 2010


Union Pacific - UNP - close: 91.57 change: -0.61

Stop Loss: 87.90
Target(s): 96.25, 99.75
Current Option Gain/Loss: - 11.8%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
12/14 update: UNP saw a small sell-off in the last two hours of trading. Shares hit $90.93 at its low. I would expect a dip toward $90.00 or its rising 50-dma near $89.00. Wait for the dip close to $90.00 or wait for the bounce before considering new bullish call positions. If you do initiate positions I would buy the February calls. More conservative traders might want to consider a tighter stop loss.

- 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 Parcel Service - UPS - close: 72.60 change: -0.17

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

Comments:
12/14 update: UPS dipped toward $72.00 late this afternoon but managed to pare its losses. Shares of UPS might churn sideways tomorrow as investors wait to hear the earnings news from rival FedEx (FDX) on Thursday morning. We can probably expect some volatility in UPS following FDX's report.

UPS should have support near broken resistance at $70.00. Currently our plan is to buy calls on a dip at $70.25 but I might reconsider if UPS bounces near $71.00 again.

Trigger @ 70.25

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

- or -

Buy the 2011 April $75.00 call (UPS1116D75)

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


United Technology Corp. - UTX - close: 78.85 change: +0.70

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:
12/14 update: UTX was showing some strength today. Traders bought the morning gap lower but the rally stalled at $79.00. There is no change from my prior comments. Currently our plan is to buy calls on a dip at $77.10. Cautious traders could wait for a pull back closer to $76.00 or even $75.00.
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)

- or -

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

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


Vulcan Materials Co. - VMC - close: 47.37 change: +2.59

Stop Loss: 39.95
Target(s): 47.75
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
12/14 update: Yuck! This melt up higher without any corrections is frustrating. Obviously the +5.7% rally in VMC is bullish. Shares were one of the best performers today and volume was very big on the move, which is another positive signal. Yet we don't want to buy options here. The $47.50 level should offer some short-term resistance. I'm suggesting readers wait for a correction.

We will raise our trigger to buy calls on the dip to $43.75.

Trigger @ $43.75 <-- New trigger

Suggested Position: Buy the 2011 January $45 calls (VMC1122A45)

- or -

Buy the 2011 February $45 calls (VMC1119B45)

Entry on December xxth at $ xx.xx
Earnings Date 02/07/11 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on December 13th, 2010


Cimarex Energy Co. - XEC - close: 86.34 change: +0.34

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:
12/14 update: XEC continues to drift sideways in the $85-87 range. We are waiting for a correction lower. Our plan is to buy calls on a dip at $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)

- or - Buy the 2011

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


PUT Play Updates

Expedia Inc. - EXPE - close: 25.57 change: -0.57

Stop Loss: 27.75
Target(s): 25.10, 24.25
Current Option Gain/Loss: +41.6%
Time Frame: 2 to 3 weeks
New Positions: No

Comments:
12/14 update: The sell-off continues in EXPE. The stock dipped toward the $25.50 level and bounced. Yet the bounce rolled over under the $26.00 level. Our first target to take profits is at $25.10.

Current Position: Buy the 2011 January $25 Put (EXPE1122M25) Entry @ $0.60

Entry on December 8th at $26.88
Earnings Date 02/10/11 (unconfirmed)
Average Daily Volume = 2.5 million
Listed on December 7th, 2010


CLOSED BULLISH PLAYS

Humana Inc. - HUM - close: 56.03 change: -0.51

Stop Loss: 54.40
Target(s): 59.75, 64.00
Current Option Gain/Loss: -34.2%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
12/14 update: The HMO healthcare index managed to eke out a gain but HUM underperformed its peers. I remain very concerned about this stock and today's close under the simple 50-dma is bearish. I am suggesting we go ahead and cut our losses in HUM now. We can re-evaluate positions if we see shares close over $58.00 or retest support in the $52.50-50.00 zone.

Closed Position:
Long the 2011 January $55 calls (HUM1122A55) Entry @ $3.80, exit @ $2.50 (-34.2%)

12/14/10 Exit Early, Option @ $2.50 (-34.2%)
12/08/10 New stop @ 54.40
11/22/10 New stop @ 53.75
11/22/10 New (2nd) target at $64.00

Chart:

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