Option Investor
Newsletter

Daily Newsletter, Monday, 1/31/2011

Table of Contents

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

Market Wrap

Stocks Give Egypt The Stiff Arm

by Todd Shriber

Click here to email Todd Shriber
Not even mounting political tension in Egypt could derail stocks on Monday as the Dow got a lift from oil earnings and oil prices while some mergers and acquisitions news helped the S&P 500 managed to reclaim some of Friday's severe losses.

Stats Table

On the economic front, the Commerce Department said consumer spending increased more than expected last month, rising 0.7% after a 0.3% increase in November. Economists were expecting an increase of 0.5%. In the fourth-quarter, consumer spending surged 4.4%, the most robust pace in four years.

Apparently the U.S. consumer is starting to feel a tad better about his economic situation as there is evidence consumers are using some of their savings to fund purchases. Incomes rose 0.4% last month, but savings dwindled to their lowest point since March. Savings fell to $614.1 billion from $634.4 billion in November, Reuters reported.

Private wages rose 0.3% in December compared with an increase of just 0.1% and while 4% annual increase in private wages lags what was seen prior to the financial crisis, it is an improvement.

Private Wage Chart

In another bit of good economic news, the Institute for Supply Management said its survey of business activity in the Chicago area rose for the sixteenth consecutive month, jumping to 68.8 in January from 66.8 in December on a seasonally adjusted basis. Readings over 50 are considered bullish. The Chicago PMI index has remained the leader among the regionals, now nearly 10 points above the average of 56.1 for the four other surveys, according to Bondsquawk.

Fueled by potential supply concerns that could arrive due to escalating political protests in Egypt, oil continued its bullish ways on Monday, adding to Friday's gain of better than 4%. NYMEX-traded crude for March delivery tacked on another 3% today to break above $92 a barrel. There might be a tinge of overreaction in the oil markets to the Egypt situation because the country is a small player in terms of daily output and any output that could be lost due to a potential military conflict in Egypt would easily be made up for by OPEC members that are more than happy to violate their own production quotas.

Oil Chart

The real story is not the West Texas Intermediate contract moving above $92, but Brent crude topping $100 for the first time since 2008. One could argue it is the Brent contract where the market is pricing in a possible supply disruption on the Suez Canal where two million barrels of oil are transported each day. Hey, it is a long, expensive journey for tankers to have to go all the way around Africa if they cannot use the canal.

Staying with the oil theme, Exxon Mobil (XOM), the largest U.S. oil company, reported another boffo set of quarterly results, saying it earned $9.25 billion, or $1.85 a share in the fourth-quarter, compared with $6.05 billion, or $1.27 per share, a year earlier. No surprise here. Increased demand and higher oil prices were the catalysts driving Exxon's fourth-quarter results. We have heard that from basically every other oil major that has reported thus far.

Revenue jumped 17% to $105 billion. Analysts were expecting a profit of $1.62 a share on sales of $99.1 billion. Taking advantage of favorable oil prices, Texas-based Exxon ratcheted up fourth-quarter production by 19%. The company's exploration and production operations posted a domestic profit of $1.3 billion and $6.2 billion on a global basis.

Exxon's refining business showed a profit of $1.2 billion after posting a loss in the fourth-quarter of 2009. The chemical's business had a profit of $1.1 billion for the quarter. Perhaps the lone dark cloud dark in the Exxon numbers is the natural gas business. The company became the largest U.S. natural gas producer through its purchase of XTO Energy last year, but natural gas prices continue to languish.

Even in the face of those falling prices, Exxon and its rivals continue to target shale acquisitions and are bringing ample supply to market.

Exxon Chart

Speaking of natural gas, Chesapeake Energy (CHK), the second-largest U.S. natural gas producer behind Exxon, put in a stellar run today, surging $2.27, or 8.3%, to $29.60, after announcing another shale deal with Cnooc (CEO), China's largest offshore oil exploration firm. While Chesapeake is a dominant natural gas player, the company has been looking for ways to boost its oil exposure and this deal with Cnooc is certainly more about oil.

The Chinese company will pay Oklahoma-based Chesapeake $570 million for a one-third stake in Chesapeake's Niobrara shale project and pick up $697 million, or two-thirds, of Chesapeake's drilling cots. Cnooc will pay about $2,140 an acre for its stake in Niobrara and has the right to a one-third share in future acquisitions in the shale formation, according to Bloomberg News.

Like other Chinese oil majors, Cnooc has a voracious appetite for international energy acquisitions and despite being turned away for Unocal five years ago, the company has remained diligent in its pursuit of North American assets. In November, Cnooc paid Chesapeake almost $1.1 billion for a one-third stake in 600,000 acres in the Eagle Ford Shale in south Texas. All of this is very good news for Chesapeake shares as the chart below illustrates.

Chesapeake Energy Chart

In energy news that will not come as much of a surprise to anyone that has been watching the coal sector over the past few months, Alpha Natural Resources (ANR), the third-largest coal producer, finally got around to making its well-known flirtation with Massey Energy (MEE) a legitimate relationship by announcing it will acquire its smaller rival for $7.1 billion in cash in and stock. The deal values Massey at $69.33 a share, a 21% premium to where Massey, the largest coal producer in Central Appalachia, closed on Friday.

This deal has been pretty well advertised for a while now as multiple press outlets reported multiple times that Alpha Natural was holding advanced talks with Massey. The signs were all there on Friday when these two high-beta stocks found their way to closes in the green while the broader market was being punished. Just look at an intraday chart from Friday for either Alpha Natural or Massey and you will see that the bulls ran into both names around 2PM New York time.

I love to dig through the options volume after a big deal is announced to find something the conspiracy theorist would like and Alpha Natural and Massey did not disappoint. The was some, to put it delicately, curious options activity in both stocks on Friday, though the bulk of the action was concentrated in Massey. There was rampant buying across the 55-65 February calls, which was a good idea, for the 55-60 buyers as of today. (Massey closed below $63). There was also no noteworthy activity in Alpha Natural puts, rather the unusual options activity in that name was also on the call side.

I will just file that under ''things that make you go hmmm'' and leave it at that. Fun fact of the day: $69 seems like a great deal for Massey, which was trading for around $26 in July, just a few months after the tragedy at its Upper Big Branch mine in West Virginia. Or does it? Well, the answer lies in your perspective. I will just say that once upon a time, June 2008 to be precise, Massey was a $91 stock and no, there was not a split.

Massey Chart

Certainly helped by what was a pretty good day for stocks, Intel (INTC) was able to avoid a real drubbing and close the day unchanged after announcing it had found a flaw in one of its chips. The timing leaves something to be desired for the world's largest semiconductor maker because the company is in the middle of rolling out the Sandy Bridge processor, which was introduced earlier this month. The chip is designed to enhance computer graphics.

On a postive note, since the Sandy Bridge is so new, it has not found its way into a large amount of PCs as of yet. The bad news is Intel has to pay to fix the problem and that led the company to say it will lose $300 million in first-quarter sales due to the Sandy Bridge issues. Intel also lowered its gross profit margin estimate for the quarter by 2%. Over the course of this year, Intel expects to miss out on another $700 million in sales to fix the chip.

First-quarter revenue will be about $11.7 billion, up from a previous forecast of $11.5 billion. Gross margin will be about 61 percent, down from a previous forecast of about 64 percent, according to Bloomberg News.

Intel Chart

Looking at the charts, the S&P 500 moved off support at 1275 today, but at 1286 and some change is basically right in the middle of 1275 and 1300. I watched an hour or two worth of Egypt coverage on Sunday night and got the impression the situation there was worsening, so naturally I thought stocks would extend Friday's declines. Obviously, I was wrong, but if things get worse in Egypt and Yemen and others really join fray, 1275 will be seen again and 1265 could come into play as well.

S&P 500 Chart

I will pin most of the Dow's cheery performance for the day on Exxon earnings and rising oil prices giving a lift to Chevron (CVX). Financials performed admirably as well. Resistance remains 12,000 here, but Egypt could be a drag this week and enhance the likelihood of a retest of 11,800. A break there probably takes us to 11,600.

Dow Chart

Well, at least the Nasdaq did not extend last Friday's thrashing and found its way to a close of 2700. I am not sure what the four horsemen of the Nasdaq are anymore because the quartet changes quite often, but I do know that of Apple (AAPL), Amazon (AMZN), Google (GOOG) and Netflix (NFLX), only Apple closed higher today. If that trend continues, the Nasdaq could back into support at 2675, if not lower as risk appetite wanes.

Nasdaq Chart

One way or another, oil and Egypt are going to factor into Mr. Market's plans for this week. There are still some marquee oil earnings left to come. Anadarko Petroleum (APC) reported after the close today and is trading down 1% in the after-hours session. BP (BP) reports early Tuesday morning. Here is what is clear: The Egypt situation smacks of contagion. In fact, this started in Tunisia, spread to Egypt and has now moved to Yemen. That is by definition contagion. If the bears want to force the S&P 500 to 1260 and the Dow to 11,600, the excuses are there.


New Option Plays

Luxury Goods, Auto Parts & More

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Coach Inc. - COH - close: 54.09 change: +1.27

Stop Loss: 52.49
Target(s): 58.50, 62.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
I remain very cautious on the market following Friday's apparent reversal lower. However, there was no follow through lower in the major averages on Monday. So what if the market doesn't correct lower? The overall trend is still up. I'm suggesting we look at COH as a bullish candidate. The stock has been consolidating sideways under resistance near $55.00 the last few weeks. A breakout past $55 could be an entry point to buy calls. The Jan. 18th high was $55.27.

I am suggesting a trigger to buy calls at $55.35. If triggered we'll target a move to $58.50 and $62.00 but keep in mind that the $60.00 level could end up being round-number, psychological resistance.

Trigger @ $55.35

- Suggested Positions -

Buy the 2011 March $55.00 calls (COH1119C55)

- or -

Buy the 2011 March $57.50 calls (COH1119C57.5)

Annotated Chart:

Entry on February xxth at $ xx.xx
Earnings Date 04/20/11 (unconfirmed)
Average Daily Volume = 4.1 million
Listed on January 31st, 2011


NEW DIRECTIONAL PUT PLAYS

Advance Auto Parts Inc. - AAP - close: 63.94 change: -0.15

Stop Loss: 66.15
Target(s): 60.25, 58.00
Current Option Gain/Loss: + 0.0%
Time Frame: 6 trading days
New Positions: Yes, see below

Company Description

Why We Like It:
The oversold bounce in AAP just failed at resistance near $65 and its 50-dma. This looks like an entry point to buy puts and wait for gravity to take effect. My biggest concern is that AAP might just churn sideways as investors wait for the company's earnings report due around Feb. 9th (an unconfirmed date). I am suggesting small bearish positions now with a stop loss at $66.15. More conservative traders could use a stop loss closer to today's high (65.16). We want to exit ahead of the earnings announcement. That gives us about six trading days. The Point & Figure chart for AAP is bearish with a $52 target.

- Suggested Small Positions -

Buy the 2011 Feb. $60.00 puts (AAP11N60) current ask $0.65

Annotated Chart:

Entry on February 1st at $ xx.xx
Earnings Date 02/09/11 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on January 31st, 2011


Donaldson Company, Inc. - DCI - close: 58.60 change: +0.56

Stop Loss: 60.35
Target(s): 52.75, 50.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
The rally in DCI is quickly losing steam. Shares have been stuck under resistance near $60.00 for a few weeks now. The stock looks poised to breakdown from its trading range and correct lower. The early January lows were near $57.50. I am suggesting a trigger to buy puts at $57.50. If triggered we'll aim for a drop to $52.75 and $50.50. I would keep your position size small to limit our risk.

Trigger @ 57.45 (Small Positions)

- Suggested Positions -

Buy the 2011 March $55 puts (DCI1119O55)

Annotated Chart:

Entry on February xxth at $ xx.xx
Earnings Date 02/23/11 (unconfirmed)
Average Daily Volume = 208 thousand
Listed on January 31st, 2011


In Play Updates and Reviews

Energy Strength Fuels Bounce

by James Brown

Click here to email James Brown

Editor's Note:

Stocks produced a rebound on Monday following Friday's sharp decline with energy stocks leading the way. I remain cautious on bullish plays even though we haven't seen any follow through on Friday's bearish reversal.

-James

Current Portfolio:


CALL Play Updates

Compass Minerals - CMP - close: 91.87 change: +0.95

Stop Loss: 87.75
Target(s): 94.75, 99.00
Current Option Gain/Loss: + 8.0%, and + 5.0%
Time Frame: 3 to 4 weeks
New Positions: See below

Comments:
01/31 update: I remain cautious on the market and thus reluctant to open new positions on CMP right now. Shares bounced from the $91 level, which is a positive development but shares failed to clear last week's high.

We have a stop loss at $87.75. More conservative traders might want to consider a stop closer to $90.00 instead. Our targets are $94.75 and $99.00.

- Suggested Positions -

Long the 2011 February $95.00 calls (CMP1119B95) Entry @ $1.25

- or -

Long the 2011 March $95 calls (CMP1119C95) Entry @ $2.00

Entry on January 28th at $91.00
Earnings Date 02/08/11 (confirmed)
Average Daily Volume = 210 thousand
Listed on January 27th, 2010


FactSet Research Systems - FDS - close: 100.80 change: +1.14

Stop Loss: 95.75
Target(s): 99.90, 103.50
Current Option Gain/Loss: +44.8%, and + 78.5%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
01/31 update: FDS continues to show relative strength and rallied to new highs on Monday. More aggressive traders might be tempted to raise their final exit target. Right now we plan to exit at $103.50.

We can look for FDS to find short-term support at $98 and $96. Our final target is $103.50.

Small Positions

Long the 2011 February $95 call (FDS1119B95) Entry @ $2.90

- or -

Long the 2011 February $100 call (FDS1119B100) Entry @ $0.70

01/29 Consider an Early Exit now!
01/27 New stop loss @ 95.75
01/27 1st Target Hit @ 99.90. Feb. $95 call @ $4.25 (+46.5%)
01/27 1st Target Hit @ 99.90. Feb. $100 call @ $1.45 (+107%)

Entry on January 25th at $96.64
Earnings Date 03/16/11 (unconfirmed)
Average Daily Volume = 181 thousand
Listed on January 24th, 2010


CBOE Market Volatility Index - VIX - close: 19.53 change: -0.51

Stop Loss: N/A
Target(s): 24.00, 28.00
Current Option Gain/Loss: - 6.2%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
01/31 update: Something happened midday that sent the VIX plunging around 1:00 p.m. but half an hour later it was back above the 19 level. I'm still bullish on the VIX but if you're launching positions now you may want to use a stop (maybe close to the 16.00 level).

We have two targets to take profits at 24.00 and at 28.00.

- Suggested Positions -

Long the 2011 March $22.50 calls (VIX1116C22.5) Entry @ $1.60

Entry on January 26th at $17.00
Earnings Date --/--/--
Average Daily Volume =
Listed on January 25th, 2010


PUT Play Updates

BorgWarner Inc. - BWA - close: 67.40 change: -0.23

Stop Loss: 71.25
Target(s): 63.50, 60.25
Current Option Gain/Loss: - 4.9%, and -11.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/31 update: BWA failed to rebound with the rest of the market and shares settled near their lows for the session. This is a good sign for the bears. I would still consider new put positions now. More conservative traders could wait for a drop under $67 instead. Thursday's high was near $71.00 so we'll set our stop at $71.25. Our targets are $63.50 and $60.25. I'd probably start looking at potential bullish positions in the $60-55 zone. FYI: The Point & Figure chart for BWA has turned bearish.

Use small positions to limit our risk.

- (small positions) -

Long the Feb. $65 PUTs (BWA1119N65) Entry @ $1.42

- or -

Long the Mar. $65 PUTs (BWA1119O65) Entry @ $2.25

Entry on January 31st at $67.77
Earnings Date 02/10/11 (confirmed)
Average Daily Volume = 2.0 million
Listed on January 29th, 2010


Cognizant Technology Solutions - CTSH - close: 72.95 change: +1.32

Stop Loss: 75.25
Target(s): 70.25, 68.00
Current Option Gain/Loss: -11.5%
Time Frame: exit ahead of earnings
New Positions: see below

Comments:
01/31 update: CTSH was showing some relative strength today with a +1.8% bounce as it rebounded from its 50-dma. Yet the rally stalled at short-term overhead resistance. Look for this bounce to roll over in the $74-75 zone. Our first target is $70.25. Our secondary target is $68.00. We still want to avoid holding over earnings. That only gives us a few trading days (earnings are Feb. 7th).

- Suggested Positions (very small positions only!) -

Long the 2011 February $70.00 PUT (CTSH1119N70) Entry @ $1.30

01/24 CTSH opened at $73.13. Put option opened at $1.30 01/22 Moved from call candidate to put play.

Entry on January 24th at $73.13
Earnings Date 02/07/11 (confirmed)
Average Daily Volume = 1.8 million
Listed as a PUT on January 22nd, 2010


Citrix Systems - CTXS - close: 63.18 change: -0.58

Stop Loss: 67.65
Target(s): 60.10, 58.00
Current Option Gain/Loss: -26.3%, and - 7.5%
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Comments:
01/31 update: Monday proved to be a quiet session for CTXS. Shares gapped open lowre at $63.43 and spent the day consolidating sideways. I don't see any changes from my weekend comments. We can open put positions now or wait for a bounce near the $65-66 area to buy puts. We'll start the play with a wide (aggressive, higher-risk) stop loss at $67.75. Readers might want to buy half their position now and if we see another failed rally near $66 then we can buy our second half. Our targets are $60.10 and $58.00.

- (small positions) -

Long the Feb. $60 PUTs (CTXS1119N60) Entry @ $0.95

- or -

Long the Mar. $60 PUTs (CTXS1119O60) Entry @ $2.00

Entry on January 31st at $63.43
Earnings Date 01/26/11
Average Daily Volume = 3.2 million
Listed on January 29th, 2010


Decker's Outdoor Corp. - DECK - close: 73.39 change: -1.02

Stop Loss: 80.25
Target(s): 70.50, 65.50
Current Option Gain/Loss: +20.7%, and +12.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/31 update: DECK rebounded off its morning lows but the rally never gained any momentum. Shares of DECK look poised to move lower. More conservative traders may want to lower their stop loss.

Our targets are $70.50 and $65.50. The Point & Figure chart for DECK is bearish with a $65 target.

- Suggested Positions -

Long the 2011 February $75.00 PUTS (DECK1119N75) Entry @ $2.65

- or -

Long the 2011 March $75.00 PUTS (DECK1119O75) Entry @ $4.80

01/27 DECK hit our trigger to buy puts at $77.00

Entry on January 27th at $77.00
Earnings Date 02/24/11 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on January 20th, 2010


Google Inc. - GOOG - close: 600.36 change: - 0.63

Stop Loss: n/a
Target(s): n/a
Current Option Gain/Loss: see below
Time Frame: 1 month
New Positions: No

THIS IS A STRANGLE TRADE (not a simple put play)

Comments:
01/31 update: GOOG spent the day hovering near $60.00 and its 50-dma. I don't see any changes from my weekend comments:

A breakdown from here could accelerate the profit taking. If you look at the weekly chart GOOG has definitely formed a failed rally/bearish reversal pattern. The good news is that stocks normally fall faster than they climb. I am not suggesting new strangle trades at this time but aggressive traders might consider buying puts.

STRANGLE TRADE: Buy an out of the money CALL and PUT

STRANGLE #2 (February) initial cost $15.10, currently: $5.05 (-66.5%)

2011 February $680 call (GOOG1119B680) Entry @ $6.20

- AND -

2011 February $580 put (GOOG1119N580) Entry @ $8.90

01/22: Exit the January strangle at the open.

Entry on January 20th at $626.77
Earnings Date 01/20/11 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on January 19th, 2010


iShares Russell 2000 Index - IWM - close: 77.95 change: +0.54

Stop Loss: 80.25
Target(s): 75.00
Current Option Gain/Loss: -25.4%
Time Frame: 1 to 2 weeks
New Positions: see below

Comments:
01/31 update: The IWM managed a bounce from its rising 50-dma on Monday but the rebound didn't see a lot of follow through this afternoon. I would still consider new put positions at current levels. Right now our target is $75.00 but I'm tempted to move the target down to $74.00.

Small Position only

Long the 2011 February $77 puts (IWM1119N77) Entry @ $1.65

01/29 New stop loss @ 80.25

Entry on January 20th at $78.14
Earnings Date --/--/--
Average Daily Volume = 38 million
Listed on January 19th, 2010


Monsanto Co. - MON - close: 73.38 change: +1.84

Stop Loss: 75.51
Target(s): 69.00, 66.00
Current Option Gain/Loss: -17.0%, and - 0.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/31 update: Agriculture names were showing some relative strength on Monday. MON rallied +2.5% to almost erase Friday's decline. I find this troublesome for our put positions. MON should encounter resistance in the $74.00-75.00 zone so wait for the next failed rally before launching new put positions. Our targets are $69.00 and $66.00.

- Suggested Positions -

Long the 2011 February $70 PUT (FDS1119N70) Entry @ $1.00

- or -

Long the 2011 March $70 PUT (FDS1119O70) Entry @ $1.85

01/29 MON is offering a new entry point to buy puts.

Entry on January 26th at $73.00
Earnings Date 03/31/11 (unconfirmed)
Average Daily Volume = 6.2 million
Listed on January 24th, 2010


Panera Bread Co. - PNRA - close: 95.56 change: +0.70

Stop Loss: 100.05
Target(s): 95.15, 91.00
Current Option Gain/Loss: + 0.0%
Time Frame: 3 weeks
New Positions: see below

Comments:
01/31 update: PNRA is trying to bounce from the $95 level but the rebound did not gain much traction and failed near the $96.70 level more than once today. PNRA is starting to look a little oversold so I would not open new positions at this time.

- Suggested Positions - (small positions)

Long the 2011 February $95 PUTS (PNRA1119N95) Entry @ $2.85

01/29 New stop loss @ 100.05
01/28 1st Target Hit @ 95.15, option @ $3.20 (+12.2%)
01/26 New stop loss @ 100.55, target adjusted from 95.50 to 95.15

Entry on January 24th at $97.96
Earnings Date 02/10/11 (unconfirmed)
Average Daily Volume = 364 thousand
Listed on January 22nd, 2010