Option Investor
Newsletter

Daily Newsletter, Tuesday, 5/10/2011

Table of Contents

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

Market Wrap

Stealth Rally In Progress

by Jim Brown

Click here to email Jim Brown
Volume was very low but the results were outstanding. All the indexes finished higher but the strength of the gains was surprising.

Market Statistics

The markets gapped open but then went dormant until 2:30 and that gave all the bears time to load up on shorts in anticipation of a decline into the close. For the second day in a row the trend into the close was positive and those shorts were forced to cover. The move up was surprising with the Nasdaq now only 16 points from a new multi year high.

There were no major economic reports to roil the market so everyone was focused on the Microsoft/Skype deal and the continued rise in commodities.

Import and Export Prices rose +2.2% in April compared to +2.7% in March. Since imported petroleum prices rose +7.2% for the month, still less than 9.8% gain in March, that makes the +2.2% overall gain actually pretty tame. That suggests the inflation worries may actually be easing.

The U.S. Wholesale Inventories for March rose by +1.1% compared to +1.0% in February. This was basically inline with estimates the internals were positive. Sales rebounded strongly by +2.9% after a -0.3% decline in February. Durable goods sales rose +2.3%. Computer inventories declined -3.9%. The increase in sales pushed the inventory to sales ratio down to 1.13. That matched its all time low set in June 2008. The inventory to sales ratio measures the number of months it would take to deplete inventories at the current pace of sales. A low ratio like we have today means manufacturers will need to step up production to rebuild inventory levels.

The negative report for the day was not a surprise. The National Association of Realtors (NAR) said home prices declined in Q1 by -4.6% over Q1-2010 levels even though sales remained relatively the same. The decline was broad based with the Midwest falling -5.3% while the south slipped only -0.6%. 118 out of the 153 metro areas saw prices decline. Miami and Chicago are still the most depressed with Chicago prices -11.7% below Q1-2010 and Miami prices down -19.7%.

However, in Q1-2010 there were homebuyer tax credits to boost sales and prices. Without any stimulus in 2011 it is up to the seller to provide the stimulus by discounting the sales price. The number of single-family homes on the market is more than twice the normal average although the supply is declining. The number of foreclosures is expected to decline by year-end and prospects are increasing for a housing rally in 2012.

The economic calendar for the rest of the week is mostly noise with the exception of the two price indexes and their readings on inflation. The Jobless Claims will also be of interest given the sharp spike last week to 474,000.

Economic Calendar

The big item making the news today was the Microsoft purchase of Skype for $8.5 billion. It was widely seen as significantly more than it was worth with some analysts suggesting something more in the $4.5 billion range would have been reasonable. Microsoft claims Skype will be accretive in 2012. The offer was unsolicited and it was the largest acquisition in the company's history.

Ebay bought Skype in 2005 for $2.6 billion. They sold 70% of the company in 2009 to Silverlake Investors for $2.0 billion. The $8.5 billion of the entire company today will give Ebay about $2.975 billion in cash for their remaining share. The company that made out like a bandit was Silverlake. They saw their $2 billion investment turn into $5.75 billion in two years. There will be champagne flowing there this week.

In theory Microsoft is going to integrate Skype with xBox, Windows and the mobile phone and tablet operating systems. The challenge is going to be how to monetize the purchase. Since 99% of Skype users pay no money it will either require a change in that business model or the implementation of an advertising component. Microsoft has not been very successful in that area in the past.

While Microsoft has been very successful as a company and generates tons of cash they have never been successful in acquisitions and nearly every venture outside their normal Windows business has failed to produce any material revenue with the exception of the xBox and that division produced losses for years. Microsoft stock has been dead money for the last ten years.

Microsoft Chart

Ebay Chart

There were some earnings making news today. Fossil (FOSL) reported earnings that rose +55% on a +37% rise in revenue. Earnings of 86-cents beat analyst estimates of 66-cents. Sales in Asia rose +57%. The company warned that Q2 earnings would only be in the range of 70-73 cents and analysts were expecting 76-cents. They are expecting a hit from a higher tax rate of 26-cents. However, traders ignored the warning and sent Fossil shares up +12.7% to $106.

Fossil Chart

Boston Scientific (BSX) shares declined -9% after the company announced their new CEO of two years will retire in December. CEO Ray Elliott, age 61, said he would stay on as a director and help hunt for his successor. He had previously been lauded for his work at Simmer Holdings (ZMR). Now analysts and investors are wondering why the hand picked CEO to lead BSX out of its many problems is suddenly taking retirement at an early age after only two years on the job. Investors worry is there is something wrong with the company and the CEO is bailing to avoid being painted with the blame when the news breaks or maybe the company is forcing him out. In an interview with the WSJ Elliott stressed the departure is entirely his decision and he claimed the restructuring plan should be mostly completed by year-end.

Boston Scientific Chart

After the close Disney (DIS) reported earnings that disappointed the street. Disney reported earnings of 49-cents compared to estimates of 57-cents. Disney blamed the miss on the box office bomb "Mars Needs Moms" that drove a $70 million drop in studio profits. They also blamed the earthquake in Japan and the temporary closure of theme parks in Japan. Disney also saw higher cost to launch their newest cruise ship even though it is already 75% to 90% booked throughout the rest of the year. They also warned Q3 would face some difficult comparisons since Disney had the World Cup soccer tournament and the Celtic-Lakers NBA final that went seven gains. The CEO also said the late date for Easter and some severe weather also impacted attendance at theme parks. Bottom line, it was a kitchen sink quarter. Once they knew they were going to miss the bar they threw everything they could into the quarter to make sure they got the most mileage out of the problems.

Disney Chart

Stec Inc (STEC) a manufacturer of flash memory warned for Q2 due to the earthquake in Japan and a drop in orders while Japan recovers. They said customers have been impacted by a shortage of material from Japan that would delay products made from that material all the way through the food chain. The company said earnings could decline as low as 21-cents and analysts were expecting 31-cents. Shares declined sharply.

Stec Chart

Molycorp (MCP) posted earnings after the close of a penny when analysts were expecting 7-cents. Revenue was also much lower than estimates at $26.3 million from street views of $41.6 million. If you just looked at it from year ago levels it was a decent improvement from the 16-cent loss in Q1-2010. Sales surged to $26.3 million from $3 million.

Shares were crushed on the news. However, I believe this "will be" a buying opportunity. The rare earth story continues to get better and prices continue to rise. Molycorp is restarting a mine that was closed years ago and the fact they have any sales is amazing. Basically they are collecting the scraps that were left over when the mine was closed many years ago and selling those scraps. Once they get the mine open and actually begin to sell new production they will be very profitable. Molycorp was formed and went public in August 2010 in order to reopen this mine. How many companies faced with the complexities of mining are highly profitable in the first couple years? Molycorp has also been acquiring key producers around the world in an effort to have different rare earth minerals available on their menu of products. I believe MCP is going to be a killer play but not today.

In the Oil Slick newsletter I recommended MCP at $35 a share and then we closed the position at $70 on April 25th in anticipation of a coming event. We will be buying it back once that event passes. I am referring to the giant lockup expiration of 39 million shares on May 11th. This will double the number of shares available to trade. The last expiration saw shares decline -$20. In the Oil Slick newsletter we went long MCP puts last week. I plan on riding MCP down on the lockup expiration and then going long again once support appears. We got a good start on the decline today with shares falling to $62 after the earnings report.

Molycorp Chart

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The CME tried to create a flush in the oil market yesterday when they raised the margin for trading crude futures by +25%. This was the second hike this year. They claimed it was due to the excess volatility. I wrote several times how they killed the silver market last week by raising margin rates five times in a two-week period. When oil was holding at $114 last week there was considerable worry the CME would also target crude futures. I am sure that was some of the worry that helped push crude -$10 lower last Thursday.

The CME raised the initial margin for crude futures from $6,750 per contract to $8,438. Back in March they raised them significantly less from $6,075 to $6,750. So basically it costs a trader $2500 more per contract today to buy futures than it did on March 1st.

Crude prices declined from $103.40 to $100.12 on the news but trades shook it off and pushed prices higher. In this case it appears the damage was done last week and once the second shoe had dropped they came back into the market. There may be a hit on Wednesday when traders who are not paying attention get a margin call in their broker age account but I suspect it will not last.

There are too many factors pushing oil prices higher. Gasoline prices have nearly rebounded to their highs from last week on worries the Mississippi flood will hit the 11 refineries in the Louisiana area. They produce roughly 900,000 bpd and 10% of the nations gasoline supply. Gasoline futures declined from $3.44 last week to $3.09 on the commodity dip and they were back at $3.35 today.

The MasterCard Spending Pulse report showed gasoline demand for last week declined by -0.5% to -2.4% lower than the same week in 2010 BUT it was the slowest rate of decline in the last six weeks. The EIA is now predicting the average price for gasoline this summer will be $3.81. That is down from the actual average price of $3.985 last week.

The energy sector is expected to post earnings growth of 36% for all of 2011. That is the highest growth sector.

WTI Chart

Brent Chart

GM is doing its part to populate the highways with more cars. GM said it was going to invest $2 billion in 17 plants and "create or save" 4,000 jobs. Personally I thought we were past that "create or save jobs" claim that was used a lot a couple years ago. Every time it turns up the speaker gets ridiculed but apparently it is still alive. GM said the new investment would be in addition to the $3.4 billion invested and the 9,000 jobs created or saved over the past two years.

In Toledo, GM will invest $204 million and "retain" 250 jobs to work on a new 8-speed automatic transmission to increase fuel economy on future vehicles. The Center for Automotive Research predicted the ripple effect of the upgrades and investments would add $2.9 billion to GDP and create or retain more than 28,000 jobs. You have to wonder who is writing these press releases.

GM Chart

The Dow Transports closed at a new historic high at 5527 thanks to strong gains in the railroads. Airlines were mostly positive but the gains were minimal. This is obviously a knee jerk reaction to the drop in oil prices last week but somebody needs to tell investors that one-week does not make a trend. Businesses that use fuel made from oil are only going to see costs continue to rise. That is airlines, trucking companies, shippers, etc.

Dow Transports

For instance the Postal Service said today they lost $2.2 billion in the first quarter. That compares to a $1.6 billion loss in Q1-2010. Even worse they said they would likely default on their debts before year-end. They will exceed their $15 billion funding by September 30th. Unless Congress intervenes the Postal Service will not be able to make certain payments to the government or be able to continue billions in payments to a trust fund for health care benefits for future retirees. The reason they gave for the continued losses was the rising price of fuel and a 3% decline in mail volume. Mail volume for the quarter fell from 42.3 billion pieces to 41.0 billion. The Postal Service has cut over 130,000 jobs over the last three years and it is continuing to cut with 7,500 administrators in regional offices getting their paychecks cancelled. However, the Postal Service claims all their efforts to trim costs are being offset by rising fuel prices. The Postal Service is asking Congress to allow them to stop Saturday mail delivery.

The S&P continued its rebound with a +11 point gain to 1357. That puts it just 13 points away from a new multiyear high at 1370. This is confusing a lot of traders and the slow and stealthy way it is moving higher does not produce a lot of conviction. Volume yesterday was 5.6 billion shares and the second lowest day of the year. However, we were missing the 450 million shares of Citigroup pre-split volume that had been so common. Citi reverse split 1:10 on Monday so the volume was also cut by 90%. Citi volume today was 42 million shares.

If we take today's market volume of 6.5 billion and add in the lost volume from Citi we are still weak at just under 7.0 billion and the slowest day other than Monday in more than two weeks. Remember, we are only 13 points away from a new high and this is May. Conventional wisdom would be for a weaker market as we head into the summer doldrums.

For traders we need to trade the trend and not trade what we think the trend may be. We had a great opportunity for a serious sell off last week and it never appeared. Support at 1330-1340 held and new 52-week highs on individual stocks are soaring again. There were 445 on Tuesday. If we don't believe in the trend then we should trade smaller positions but go with the trend, don't fight it. If the S&P does successfully break over 1370 and into new high territory I suspect that volume will pick up significantly and we want to be long when/if it happens.

S&P Chart

The Dow is 116 points from a new two-year high. All but four Dow stocks were positive with only MMM, MSFT, AXP and AA fractionally negative with MMM the biggest loser at -0.28 cents. CAT and IBM were the biggest gainers.

The new high on the Transports suggests we will see a new high on the Dow Industrials. Of course that new transport high could be brief if oil prices continue to rise.

Resistance on the Dow is 12,800 and it should be pretty decent resistance. The Dow stalled there for three days on the last attempt. There was some positive news out of China tonight suggesting their economy had slowed only slightly and that could lift the U.S. markets on Wednesday.

Dow Chart

The Nasdaq Composite is within ONE point of a new closing high at 2872.02. The Nasdaq 100 is two points away. Tech stocks seem to be accelerating out of last week's bout of profit taking after finding solid support at 2825. The big gains came without Apple. Those shares have been trading sideways since April 21st although they did manage a +1.85 today. If the Nasdaq breaks out to a new closing high it would be very positive for market sentiment. It would help a lot if it were a strong breakout and not just a point or two.

Nasdaq Chart

The Russell was the biggest percentage gainer of the major indexes by a wide margin. However, it was unable to move over historic resistance at 855. I am hoping this is just a temporary stall and the Russell does breakout to a new high. Otherwise this could turn into a head and shoulders pattern and that would be bearish. I like the strong gains but we are not home yet.

Russell Chart

After the bell today China's trade surplus rebounded to $11.4 billion for April after posting an unexpected decline in the prior report. This should be positive for the U.S. markets and the price of oil is rising again, now over $104.50 on expectations demand in China will increase. The dollar is falling again.

While there is plenty of darkness before morning this could be a positive influence on Wednesday's open. Like I said earlier we need to trade the trend and prepare for a breakout to new highs. If that breakout does not happen then we will deal with it then. There are no earth shaking economics on the calendar for Wednesday but Cisco reports earnings after the close. That could be a drag but they have already guided lower so it should not be unexpected.

Enter passively and exit aggressively.

Jim Brown

Send Jim an email

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New Option Plays

Information, Biotech, & Retail

by James Brown

Click here to email James Brown

Editor's Note:

FYI: I wanted to share some of the stocks on my watch list tonight.

ISRG, WYNN, SIAL, APOL, SLG, SLH, AGCO, HON, ENR, CHRW, HSIC, CHKP, RYN, ESS, and CTXS.

- James


NEW DIRECTIONAL CALL PLAYS

FactSet Research Systems - FDS - close: 111.44 change: +2.33

Stop Loss: 106.40
Target(s): 114.75, 119.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
FDS is delivering a strong performance this week. The stock has broken out to new all-time highs with today's rally past $110. Volume was above average on the rally, which is a good sign. Aggressive traders could buy calls now. I am suggesting a buy-the-dip entry point at $110.25. If triggered our targets are $114.75 and $119.50.

Please note that this is a higher-risk, more aggressive trade because FDS doesn't have a lot of option volume and the option spreads are a little too wide. Keep your position small to limit our risk.

Trigger @ $110.25 (small positions only!)

- Suggested Positions -

Buy the June $115 call (FDS1118F115) current ask $2.05

Annotated Chart:

Entry on May xxth at $ xx.xx
Earnings Date 06/15/11 (unconfirmed)
Average Daily Volume = 211 thousand
Listed on May 10th, 2011


Illumina Inc. - ILMN - close: 75.66 change: +2.39

Stop Loss: 69.90
Target(s): 79.50, 84.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
ILMN is in the biotech industry and shares just rally past resistance near $74.00 to hit new all-time highs. Aggressive traders may want to buy calls now. I am suggesting we use a buy-the-dip entry point at $74.50. If triggered we'll use a stop loss at $69.90. Our upside targets are $79.50 and $84.00. There is a pretty good chance that ILMN could see a short squeeze, which is why I would be tempted to buy calls now. However, the newsletter will wait for a dip at $74.50. The Point & Figure chart for ILMN is bullish with a $90 target.

FYI: The most recent data listed short interest in ILMN at 22% of the 121 million-share float.

Trigger @ $74.50

- Suggested Positions -

Buy the June $75 call (ILMN1118F75) current ask $3.30

Annotated Chart:

Entry on May xxth at $ xx.xx
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on May 10th, 2011


Tractor Supply Co. - TSCO - close: 61.62 change: +1.08

Stop Loss: 56.99
Target(s): 69.00
Current Option Gain/Loss: + 0.0%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Specialty retailer TSCO tagged new all-time highs near $65 back in April. The stock has spent about three weeks digesting its gains. Over the last several months investors have been consistently buying dips at TSCO's rising 50-dma. Shares just recently bounced off this technical support. You could argue that the three-week consolidation looks like a bull-flag pattern.

I am suggesting bullish positions right now. As an alternative you could wait for another dip near $60.00. We'll use a stop loss at $56.99, which is just under last week's low. There is resistance at $65.00 but I'm setting our profit target at $69.00. More conservative traders may want to take profits at $64.80 and then sell the rest at $69.00.

Open Bullish Positions Now!

- Suggested Positions -

Buy the June $65 call (TSCO1118F65) current ask $1.00

- or -

Buy the July $65 call (TSCO1116G65) current ask $1.65

Annotated Chart:

Entry on May 11th at $ xx.xx
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 958 thousand
Listed on May 10th, 2011


In Play Updates and Reviews

ROST Rallies Through our Target

by James Brown

Click here to email James Brown

Editor's Note:

Our bullish trade on ROST has been closed with shares hitting our final target. Meanwhile the rest of our bullish candidates are definitely seeing some improvement. The put play on PNRA is in jeopardy.

-James

Current Portfolio:


CALL Play Updates

Apple Inc. - AAPL - close: 347.60 change: +0.94

Stop Loss: 339.40
Target(s): 374.00, 395.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see trigger

Comments:
05/10 update: AAPL spent most of the day drifting sideways again but the stock started to rally late in the session. Now AAPL looks poised to breakout past the $350 level. Currently our plan is to launch bullish positions when AAPL rises to $352.50.

Buy-the-breakout Trigger @ $352.50

- Suggested Positions -

Buy the June $370 calls (AAPL1118F370)

- or -

Buy the July $380 calls (AAPL1116G380)

Entry on May xxth at $ xx.xx
Earnings Date 07/20/11 (unconfirmed)
Average Daily Volume = 16.6 million
Listed on May 2nd, 2011


Express Scripts - ESRX - close: 59.75 change: +0.76

Stop Loss: 56.75
Target(s): 64.00, 68.50
Current Option Gain/Loss: + 7.8% & - 3.1%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/10 update: The rally continues and ESRX is now testing possible resistance at the $60.00 mark. Traders did buy the dip midday near $59.00. I would still consider new positions now or you can wait for a dip near $58.50 instead. Our targets are $64 and $68.50. FYI: The Point & Figure chart for ESRX is bullish with a $72 target.

- Suggested Positions -

Long the June $60 call (ESRX1118F60) Entry @ $1.53

- or -

Long the August $60 call (ESRX1120H60) Entry @ 3.15

Entry on May 10th at $59.21
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume = 4.6 million
Listed on May 9th, 2011


Fastenal Co. - FAST - close: 67.33 change: +0.55

Stop Loss: 63.75
Target(s): 69.50, 74.00
Current Option Gain/Loss: +11.3% & - 0.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/10 update: FAST is inching closer and closer to a breakout from its current sideways consolidation. Cautious traders might want to use a higher stop loss near $65.00 instead of our stop at $63.75.

Don't forget that May options expire after May 20th.

Our targets are $69.50 and $74.00. We should expect the $70.00 area to offer some resistance and FAST will likely pull back on the first test of $70.

FYI: FAST is due to split 2-for-1 on May 23rd. Plus, the Point & Figure chart for FAST is bullish with a $72 target.

- Suggested Positions -

Long the May $65.00 calls (FAST1121E65) Entry @ $2.20

- or -

Long the June $70.00 calls (FAST1118F70) Entry @ $0.75

Entry on April 26th at $66.25
Earnings Date 04/12/11 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on April 23rd, 2011


Google Inc. - GOOG - close: 542.66 change: +4.98

Stop Loss: 529.00
Target(s): 549.00, 558.00
Current Option Gain/Loss: - 8.3%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
05/10 update: GOOG was showing a little strength today. Shares closed over the $540 mark and the stock is nearing resistance at its May 2nd high and resistance at the bottom of its gap down in the $545-546 area. Aggressive traders might want to consider buying calls on a breakout past $546 but keep in mind that GOOG appears to have resistance at $550 and could have technical resistance at its 30, 50, and 200-dma all directly overhead. Today's bearish cross over of the 50-dma under the 200-dma is normally a very bearish development (but doesn't mean GOOG won't try and fill the gap first).

I am not suggesting new positions at this time. May options expire after the 20th. Currently our targets are at $549.00 and $558.00.

Prior Comments:
This is a very aggressive, higher-risk trade. Keep positions small.

(Very Small Positions) Suggested Positions:

Long the May $550 call (GOOG1121E550) Entry @ $3.00

05/09 New stop loss @ 529.00
04/30 Adjusted exit strategy. First target at $549.00. Final target at $558.00.

Entry on April 25th at $525.25
Earnings Date 04/14/11 (confirmed)
Average Daily Volume = 3.3 million
Listed on April 23rd, 2011


International Business Machines - IBM - close: 170.38 change: +1.28

Stop Loss: 165.90
Target(s): 174.00, 179.50
Current Option Gain/Loss: + 44.2%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
05/10 update: Tech stocks continue to bounce and IBM's close over $170 is bullish. If you were looking for a new entry point this could work. I am raising our stop loss to $165.90. Our targets are $174.00 and $179.50. FYI: The Point & Figure chart for IBM is bullish with a $208 target.

- Suggested Positions -

Long the June $170 calls (IBM1118F170) Entry @ $2.60

05/10 New stop loss @ 165.90

Entry on May 5th at $167.50
Earnings Date 04/19/11
Average Daily Volume = 4.8 million
Listed on April 27th, 2011


Intuit - INTU - close: 54.89 change: +0.75

Stop Loss: 53.45
Target(s): near 56.00
Current Option Gain/Loss: -45.8%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/10 update: The rally in INTU is a nice improvement. The move breaks through the short-term bearish trend of lower highs. Yet volume was very, very light and INTU still has resistance near $56.00. More aggressive traders may want to aim higher. I'm suggesting we exit on a bounce near $56.00.

I would keep our position size small to limit our risk (1/2 or less than your normal trade size).

- Suggested Positions -

Long the May $55.00 call (INTU1121E55) Entry @ $2.40

05/09 consider an early exit
05/07 consider an early exit
04/30 Adjusted target to $58.75

Entry on April 20th at $55.25
Earnings Date 05/19/11 (confirmed)
Average Daily Volume = 2.4 million
Listed on April 14th, 2011


Jos. A Bank Clothiers - JOSB - close: 54.63 change: +1.79

Stop Loss: 49.95
Target(s): 59.50
Current Option Gain/Loss: + 14.2% and +22.8%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/10 update: JOSB has finally broken out past its recent highs. Today's +3.3% gain leaves JOSB at a new all-time high. The stock has above average short interest so the rally could accelerate. If you're looking for a new entry point I'd wait for a dip near the $53.50 area. Don't forget that May options expire after the 20th.

FYI: The most recent data listed short interest in JOSB at more than 21% of the small 27.3 million-share float. Together the increase the risk of a short squeeze.

- Suggested Positions -

Long the May $55 calls (JOSB1121E55) entry @ $0.70

- or -

Long the June $55 calls (JOSB1118F55) entry @ $1.75

Entry on April 26th at $52.75
Earnings Date 06/02/11 (unconfirmed)
Average Daily Volume = 510 thousand
Listed on April 25th, 2011


NetApp, Inc. - NTAP - close: 54.21 change: +1.04

Stop Loss: 50.75
Target(s): 58.00
Current Option Gain/Loss: + 8.9%
Time Frame: about 3 weeks
New Positions: see below

Comments:
05/10 update: NTAP extended its gains with a +1.9% advance and a new two-month high. The next spot for potential resistance is the $55.00 level. If you're looking for an entry point consider waiting for a dip near $53.00. Our target to exit is the $58.00 mark.

NOTE: We do not want to hold over the late May earnings report. The date is still unconfirmed. This gives is about two or three weeks as our time frame.

- Suggested Positions -

Long the June $55 calls (NTAP1118F55) Entry @ $1.90

Entry on May 9th at $ xx.xx
Earnings Date 05/25/11 (unconfirmed)
Average Daily Volume = 5.8 million
Listed on May 7th, 2011


O'Reilly Automotive - ORLY - close: 60.26 change: +0.60

Stop Loss: 57.75
Target(s): 62.75, 67.25
Current Option Gain/Loss: -28.5% & + 0.0%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/10 update: It looks like traders are still buying the dips near ORLY's rising 10-dma. The close over $60.00 is a bullish development. Unfortunately volume has been pretty light this week. I remain cautious here. The plan was to keep our position size small to limit our risk.

- Suggested (Small) Positions -

Long the May $60 calls (ORLY1121E60) Entry @ $1.05

- or -

Long the June $60 calls (ORLY1118F60) Entry @ $1.65

Entry on May 4th at $60.15
Earnings Date 04/27/11
Average Daily Volume = 1.1 million
Listed on April 30th, 2011


Powershares QQQ ETF - QQQ - close: 59.19 change: +0.50

Stop Loss: 56.45
Target(s): 64.00
Current Option Gain/Loss: +20.3% & +13.0%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
05/10 update: The NASDAQ-100 index is inching closer toward its recent highs. A breakout would produce new multi-year highs for the $NDX and the QQQ. There is no change from my prior comments. I would still consider new positions now or you can wait for a dip (which may or may not show up). Our upside target is $64.00. The Qs don't move very fast so we'll have to be patient.

- Suggested Positions -

Long the June $60 calls (QQQ1118F60) Entry @ 0.59

- or -

Long the July $60 calls (QQQ1116G60) Entry @ 1.00

Entry on May 4th at $58.15
Earnings Date --/--/--
Average Daily Volume = 50 million
Listed on April 30th, 2011


ProShares Ultra(long) S&P 500 - SSO - close: 55.85 change: +0.95

Stop Loss: 52.75
Target(s): 59.00
Current Option Gain/Loss: +15.6% and + 1.0%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
05/10 update: The market's rebound continues and the SSO added +1.7%. My only concern right now is the lack of volume behind this rise compared to the elevated volume on last week's decline. The SSO is twice as volatile as the market so we want to keep our position size small. Our multi-week target is the $59.00 level.

Small Positions Only - Suggested Positions -

Long the June $56 call (SSO1118F56) Entry @ $1.60

- or -

Long the September $60 call (SSO1117I60) Entry @ $2.00

Entry on May 5th at $54.39
Earnings Date --/--/--
Average Daily Volume = 11.3 million
Listed on May 4th, 2011


Union Pacific - UNP - close: 104.49 change: +2.02

Stop Loss: 98.95
Target(s): 109.00, 114.00
Current Option Gain/Loss: +49.3%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/10 update: Railroad stocks continue to shine and UNP added +1.9%. The stock closed above recent resistance at $104.00 and set a new all-time high. I'd wait for a dip near the $102 area before considering new positions. Our targets are $109.00 and $114.00. FYI: The Point & Figure chart for UNP is bullish with a $116 target.

- Suggested Positions -

Long the June $105 call (UNP1118F105) Entry @ $1.62

Entry on May 9th at $102.19
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on May 7th, 2011


United Technologies Corp. - UTX - close: 89.81 change: +0.29

Stop Loss: 83.49
Target(s): 89.50, 94.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see trigger

Comments:
05/10 update: Hmm... what are we going to do with UTX. Shares are hovering near resistance at $90.00. Why didn't the stock breakout higher given the bullish tape today? I didn't see any significant news for UTX today. I'm going to adjust our entry point strategy. We'll keep our buy-the-dip entry point at $86.50 but we'll move the stop loss up to $84.75. Plus, we're adding a breakout trigger to buy calls just in case UTX does not pull back. Our alternative entry point will be $90.75 and we'll use a stop loss at $87.75. However, if UTX hits $90.75 we want to keep our position size very small given this aggressive entry point. If triggered at $90.75 our targets are $94.75 and $98.50.

Buy-the-dip Trigger @ $86.50
-OR-
breakout @ $90.75 and use small positions to limit our risk!

- Suggested Positions -

Buy the June $90 calls (UTX1118F90)

Entry on April xxth at $ xx.xx
Earnings Date 04/20/11
Average Daily Volume = 3.7 million
Listed on April 27th, 2011


SPDR Oil & Gas ETF - XOP - close: 60.48 change: +0.68

Stop Loss: 55.99
Target(s): 61.00, 65.00
Current Option Gain/Loss: +60.0% & +24.3%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/10 update: The XOP's close over the $60.00 mark is bullish but shares are nearing potential resistance with a virtual cloud of moving averages overhead in the $61-62 area. I would not launch new positions at these levels. Wait for another dip or bounce near $58.00.

Our first target is $61.00. Our second, more aggressive target is $65.00 but the XOP will have to climb through a cloud over overhead resistance to get there.

I would keep our position size small to limit our risk.

- Suggested Positions - (Small positions)

Long the May $58.00 call (XOP1121E58) Entry @ $1.70

- or -

Long the June $60.00 call (XOP1118F60) Entry @ $1.85

Entry on May 9th at $58.32
Earnings Date --/--/--
Average Daily Volume = 4.8 million
Listed on May 7th, 2011


PUT Play Updates

Panera Bread Co. - PNRA - close: 121.33 change: +2.49

Stop Loss: 123.25
Target(s): 110.50, 102.50
Current Option Gain/Loss: -43.7%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/10 update: Caution! The action today is what I have been worried about. The market's widespread rally is fueling buying interest in PNRA. Shares rallied +2.0% today and the stock is testing resistance in the $122 area. I am not suggesting new bearish positions at this time. More conservative traders may want to abandon ship.

Prior Comments:
We knew this was an aggressive, higher-risk trade and wanted to keep our position size small to limit our risk. Our targets are the 100-dma (currently near $112.00, we'll take profits at $112.50) and the $102.50 level.

Suggested Positions

Long the June $110 PUTS (PNRA1118R110) Entry @ $1.60

Entry on May 4th at $119.00
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume = 647 thousand
Listed on May 3rd, 2011


CLOSED BULLISH PLAYS

Ross Stores Inc. - ROST - close: 79.76 change: +1.18

Stop Loss: 74.75
Target(s): 77.25, 79.90
Current Option Gain/Loss: +266.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/10 update: Target achieved. We've been waiting for ROST to hit our final target at $79.90. ROST hit our target after 11:00 a.m. and we got another chance to exit later in the day with a rally past $80. The bid on the May $72.50 call was trading near $7.35.

- Suggested Positions -

May $72.50 calls (ROST1121E72.5) Entry @ $2.25, Exit @ 7.35 (+226.6%)

05/10 Final target hit @ 79.90. Option @ $7.35 (+226.6%)
05/05 New stop loss @ 74.75. Adjusted 2nd target to $79.90 from $79.50.
05/05 1st Target Hit @ 77.25. Option @ $5.00 (+122.2%)

chart:

Entry on April 28th at $73.55
Earnings Date 05/19/11 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on April 23rd, 2011