Option Investor
Newsletter

Daily Newsletter, Wednesday, 5/11/2011

Table of Contents

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

Market Wrap

Sea Of Red

by Todd Shriber

Click here to email Todd Shriber
The market has days when nothing seems to work from the long side and today was one of them as stocks were slammed with the S&P 500 shedding 1.1%, the Index's worst one-day performance since March. Concerns over rising interest rates also hit the Dow Jones Industrial Average and the Nasdaq, both of which were down about 1%. The Russell 2000 slid nearly 2%.

Stats Table

Oil was certainly one of the culprits to roil the market today after a 5.5% drop on the back of the U.S. Energy Department report that showed weekly inventory rose to 370.3 million barrels last week, an increase of almost 3.8 million barrels from the prior week. Gasoline inventories surged by 1.28 million barrels to 205.8 million barrels for the first weekly gain in three months. Making matters worse was a halt in gasoline futures trading on the New York Mercantile Exchange after gasoline fell 25 cents, limit down on the NYMEX. Rising inflation and lower-than-expected industrial output data for April also weighed on oil prices today.

For more news and commentary on the energy sector, register for a free trial of the OilSlick newsletter (HERE).

Oil Chart

Chinese inflation data was another issue to plague stocks today, particularly materials names. Inflation in the world's fastest growing major economy checked in at 5.3% for April, topping the government's target of 4% for the fourth consecutive month. That data point is concerning enough on its own, but another tidbit may have had more to do with today's sell-off. Chinese industrial output slowed to 13.4% last month, the weakest level since November. A 17.1% expansion in retail sales was below economists' median 17.6% estimate, according to Bloomberg News.

The simple way of looking at the situation is Chinese growth is showing some signs of slowing, but inflation is not and that is a toxic brew for global equity markets.

Weak Chinese economic data sends investors and traders in any number of sectors running for cover, but as I just noted, you can always count on materials names to take it on the chin when China spooks the market. If the Chinese economy is not humming along at the pace investors have become accustomed to, copper usually gets whacked and that was the case day as shares of Freeport McMoRan plunged on volume that was roughly 50% above the daily average. The stock closed below its 200-day moving average.

Freeport McMoRan

Good news was obviously hard to come by today, but give Intel (INTC) some credit for finishing with a modest gain on the day. The world's largest semiconductor maker said it is raising its dividend 16%. That is the second dividend hike from Intel in the past six months and the new quarterly dividend will be 21 cents up from 18.1 cents. California-based Intel will spend $4 billion on dividends this year compared with $3.5 billion last year. Dividend hikes sure are more pleasant than margin hikes, aren't they?

Intel Chart

In more good news from tech land, shares of Rovi (ROVI), the TV listings data provider, soared almost 18% on volume that was more than six times the daily average after the company boosted its full-year guidance to $2.25-$2.55 a share. Analysts were expecting a profit of $2.38.

Rovi Chart

I have my doubts that what follows will be a major catalyst for the Dow or the Nasdaq on Thursday, but it certainly was a pleasant surprise compared to what investors have seen out of the company following its few earnings reports. After the bell today, Cisco Systems (CSCO) posted a fiscal third-quarter profit of 42 cents a share on revenue of $10.9 billion. Analysts were expecting a profit of 37 cents on revenue of $10.9 billion, so the top-line number was inline with what Wall Street was looking fir, but meeting estimates is better than disappointing, especially in Cisco's case.

The results also topped guidance Cisco gave in February that forecast a profit of 35-38 cents on revenue of $10.89 billion. CEO John Chambers said on the company's conference call that it plans to save $1 billion through restructuring and a workforce reduction is expected this summer.

''We have acknowledged our challenges. We know what we have to do. We have a clear game plan, and we are a company with a track record of market-shaping innovation. We thank our shareholders, employees, customers and partners as we transition to the next phase of Cisco,'' Chambers said in a statement.

It does not appear that shareholders appreciate the requisite Chambers candor. Cisco's fourth-quarter outlook is tepid at best and the job cuts are not going to do much to generate enthusiasm. As such, shares of Cisco are down 1% in after-hours trading as of this writing.

Cisco Chart

Another sector where it is hard to find good news these days is the junkyard known as the financials services group. That makes a 3.5% jump for American International Group (AIG) today all the more impressive. Along with its best friend forever, the federal government, AIG will sell 300 million shares to the public, according to a regulatory filling. The company did not specify a price for the offering, but the stock closed over $30 today, so it the share sale would raise over $9 billion.

Taxpayers forked over $182 billion to save AIG from the brink of collapse during the financial crisis and while the stock has plummeted this year, the government still has a profitable trade going. The break-even stock price at which taxpayers would fully recover their investment is considered to be around $27 to $28, the Associated Press reported.

AIG Chart

Taking a look at the charts, factor in today's decline and the ''sell in May'' crowd is having their way this month just when it appeared that old market notion would not prove valid this May. The S&P 500 is now down 1.4% for the month, but the 1340 held as support today. The index did violate that level intraday, but was able to muster a close at 1342. On the upside, resistance is 1370 and if 1340 does not hold, second support is further back at 1300.

S&P 500 Chart

Everything was looking like roses for the Dow heading into today as the index was just 116 points off a new two-year high. Make that almost 250 points after today's carnage. Resistance is firm at 12,800 and those that are trading from the long side are hoping the same can be said of support at 12,600. This much is clear: The Dow probably will not move higher if CVX and XOM keep turning in performances similar to today's.

Dow Chart

As Jim noted last night, the Nasdaq was a mere point away from a new closing high, but that dream was dashed today. Resistance is still just above 2900 and support can be found in the 2800-2825 area. There were some interesting pockets of strength today in the Nasdaq, including online travel stocks, media technology firms and computer peripherals makers and recent strength from tech names could be suggesting the group is ready to be a market leader should the broader market run higher into year-end.

Nasdaq Chart

The Russell 2000 was the leader among the major indexes on the upside yesterday and it was easily the worst performer on the downside today. After failing at the 855-860 resistance area, the Russell came to an almost dead stop today at support at 840. From here, next support is 830.

Russell 2000 Chart

Hmmm, concerns about inflation are rising and risk appetite sure looks like it is declining. Sounds like a good time to take a look at consumer staples names in my opinion. Along those lines, Only four Dow stocks were higher today. Exclude Intel and the other three were staples names, KFT, JNJ and PG. Several big staples stocks were ''less bad'' than the broader market today. There is nothing wrong with playing a little defense from time-to-time.


New Option Plays

Near Three Year Highs

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Wynn Resorts Ltd. - WYNN - close: 148.63 change: -1.11

Stop Loss: 146.40
Target(s): 159.75, 169.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see Trigger

Company Description

Why We Like It:
Shares of WYNN have been consolidating under resistance at the $150.00 level for about three weeks. The stock has reversed twice near the $151.75 level. Yet shares are still building on a bullish pattern of higher lows. If WYNN can breakout to a new multiyear high it could spark some short covering and a run at its all-time highs.

This stock can be somewhat volatile so I am suggesting we keep our position sizes small to limit our risk. We'll use a trigger to buy calls at $152.00. If triggered at $152.00 our targets are $159.75 and $169.00. The $160 and $170 levels look like potential resistance.

Trigger @ $152.00

- Suggested Positions -

Buy the June $160 calls (WYNN1118F160) current ask $2.15

Annotated Chart:

Entry on May xxth at $ xx.xx
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume = 2.1 million
Listed on May 11th, 2011


In Play Updates and Reviews

Oil Weakness Sparks Sell-off

by James Brown

Click here to email James Brown

Editor's Note:

Worries over oil inventories and an economic slowdown spark a market-wide decline. I am suggesting an early exit for our XOP trade. Meanwhile PNRA has been stopped out. Our ILMN trade has been triggered.

-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:
05/11 update: Shares of AAPL failed at the $350 level this morning and spent the day drifting towards $345. The $345 area has been support for about three weeks now. More aggressive traders may want to buy calls on this dip and just raise their stops. The newsletter will stick to our current plan with a trigger to buy calls at $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: 59.12 change: -0.63

Stop Loss: 56.75
Target(s): 64.00, 68.50
Current Option Gain/Loss: -13.7% & -12.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/11 update: ESRX fell from potential resistance at $60 toward short-term support near $58.50, which is where I suggested we launch new positions. I would still consider new positions now! 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: 66.38 change: -0.95

Stop Loss: 63.75
Target(s): 69.50, 74.00
Current Option Gain/Loss: -25.0% & -26.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/11 update: Today's -1.4% decline just erased about three days worth of gains. The stock is testing technical support near its 30-dma. I would consider this dip a new entry point but more conservative traders may want to wait for a breakout past resistance near the $67.50 level instead. Readers may also want to consider a stop loss closer to the $65 level 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


FactSet Research Systems - FDS - close: 111.76 change: +0.32

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

Comments:
05/11 update: In a show of strength FDS posted another gain in spite of the market's widespread declines. Traders will also note that volume has been rising for FDS. The low today was $110.82 so we're still on the sidelines. I'm suggesting a trigger to buy calls 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

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


Google Inc. - GOOG - close: 535.45 change: -7.21

Stop Loss: 529.00
Target(s): 549.00, 558.00
Current Option Gain/Loss: -58.3%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
05/11 update: Ouch! GOOG just gave up seven points. We are quickly running out of time for our out of the money May calls and moves like today can really hurt. GOOG issued their 10-Q SEC filing today and the markets were unhappy to hear that GOOG set aside $500 million for a U.S. Department of Justice inquiry into the company's advertising practices.

This has always been an aggressive, higher-risk trade but now it's really starting to wilt. 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:
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: 169.50 change: -0.88

Stop Loss: 165.90
Target(s): 174.00, 179.50
Current Option Gain/Loss: + 25.0%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
05/11 update: IBM provided another bullish entry point today. Shares dipped to short-term support near $168 and bounced. I would still consider new positions now or you can wait for a rally past $171. 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


Illumina Inc. - ILMN - close: 74.74 change: -0.92

Stop Loss: 69.90
Target(s): 79.50, 84.00
Current Option Gain/Loss: - 5.4%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/11 update: Our new play on ILMN has already been triggered. Shares opened at $75.01 and dipped to $74.22 intraday. Our trigger to buy calls was hit at $74.50. I would still open new positions now at current levels. 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.

- Suggested Positions -

Long the June $75 call (ILMN1118F75) Entry @ $2.75

Entry on May 11th at $74.50
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on May 10th, 2011


Intuit - INTU - close: 54.44 change: -0.45

Stop Loss: 53.45
Target(s): near 56.00
Current Option Gain/Loss: -52.8%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/11 update: INTU fell back toward its recent support. If the market continues to sink tomorrow there is a good chance this stock will hit our stop loss at $53.45. I am not suggesting new positions at this time. 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: 54.62 change: -0.01

Stop Loss: 49.95
Target(s): 59.50
Current Option Gain/Loss: + 0.0% and +22.8%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/11 update: Big gains by Macy's (M) thanks to its earnings report helped the retail sector stave off some of the market's bearishness today. JOSB held up well. Traders bought the dip at $53.75 and the stock closed virtually unchanged on the session. 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. The risk of a short squeeze is pretty high.

- 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: 53.97 change: -0.24

Stop Loss: 50.75
Target(s): 58.00
Current Option Gain/Loss: + 2.1%
Time Frame: about 3 weeks
New Positions: see below

Comments:
05/11 update: Shares of NTAP were upgraded this morning. This caused the stock to gap open higher but shares couldn't hold these gains with the market sinking. I don't see any changes from my prior comments. 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: 60.77 change: +0.51

Stop Loss: 57.75
Target(s): 62.75, 67.25
Current Option Gain/Loss: -14.2% & + 3.0%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/11 update: ORLY displayed relative strength and closed at new three-month highs. Volume remains light but I am cautiously bullish. 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: 58.76 change: -0.44

Stop Loss: 56.45
Target(s): 64.00
Current Option Gain/Loss: - 3.3% & + 5.0%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
05/11 update: The QQQ came close to erasing yesterday's gain but this ETF managed a late day bounce. Readers looking for a new entry point may want to wait for a dip closer to the $58.00 area. Shares are still facing short-term resistance around the $59.25 area. 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: 54.70 change: -1.15

Stop Loss: 52.75
Target(s): 59.00
Current Option Gain/Loss: -16.8% and -12.0%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
05/11 update: The SSO fell back toward short-term technical support near its rising 20 and 30-dma. I remain bullish here and would use the dip as a new entry point to buy calls. 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


Tractor Supply Co. - TSCO - close: 61.23 change: -0.39

Stop Loss: 56.99
Target(s): 69.00
Current Option Gain/Loss: -20.0% & + 8.3%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/11 update: TSCO held up pretty well considering the market's widespread losses. Retailers got a boost from big gains in Macy's (M) today. TSCO was churning around the $62-60.50 area. There is no change from my prior comments. I would still launch new positions here.

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.

- Suggested Positions -

Long the June $65 call (TSCO1118F65) Entry @ $1.00

- or -

Long the July $65 call (TSCO1116G65) Entry @ $1.20

Entry on May 11th at $61.62
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 958 thousand
Listed on May 10th, 2011


Union Pacific - UNP - close: 102.46 change: -2.03

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:
05/11 update: Profit taking in UNP erased yesterday's gains. The dip to $102 can be used as a new entry point but readers might want to wait and see if we get a better entry point on a dip in the $101-100 zone. 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: 89.52 change: -0.29

Stop Loss: 83.49
Target(s): 89.50, 94.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see trigger

Comments:
05/11 update: UTX is still churning sideways. There is no change from my prior comments. We have two different triggers to open positions here. One is a buy-the-dip entry point at $86.50 with a stop loss at $84.75. Another one is a breakout entry point at $90.75 but with very small positions and a stop loss at $87.75.

If UTX hits $86.50 first then our targets are $89.50 and $94.75. If UTX hits $90.75 first then 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


CLOSED BULLISH PLAYS

SPDR Oil & Gas ETF - XOP - close: 57.84 change: -2.64

Stop Loss: 55.99
Target(s): 61.00, 65.00
Current Option Gain/Loss: -35.8% & -34.0%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/11 update: I am suggesting everyone hit the eject button on this trade. The action today was very bearish. Another high-volume sell-off as investors reacted to rising oil and gasoline levels. The markets are worried about a global slowdown. The XOP lost -4.3%. We knew this was an aggressive, higher-risk trade. I'd rather cut our losses early.

- Suggested Positions - (Small positions)

May $58.00 call (XOP1121E58) Entry @ $1.70, Exit @ 1.09 (-35.8%)

- or -

June $60.00 call (XOP1118F60) Entry @ $1.85, Exit @ 1.22 (-34.0%)

05/11 Exit early. XOP @ 57.84. Options @ -35.8% & -34.0%

chart:

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


CLOSED BEARISH PLAYS

Panera Bread Co. - PNRA - close: 122.58 change: +1.25

Stop Loss: 123.25
Target(s): 110.50, 102.50
Current Option Gain/Loss: -62.5%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/11 update: PNRA shrugged off the market's weakness and rallied to a new short-term relative high. It was just enough to hit our stop loss at $123.25 and close this trade.

Prior Comments:
We knew this was an aggressive, higher-risk trade and wanted to keep our position size small to limit our risk.

Suggested Positions

June $110 PUTS (PNRA1118R110) Entry @ $1.60, Exit @ 0.60 (-62.5%)

05/11 Stopped out @ 123.25, Option @ -62.5%

chart:

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