Option Investor
Newsletter

Daily Newsletter, Monday, 6/6/2011

Table of Contents

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

Market Wrap

Not Off To A Good Start

by Todd Shriber

Click here to email Todd Shriber
After five consecutive weeks of losses, U.S. stocks are not showing any signs of snapping that losing steak this week following a lackluster start to the week that saw three of the four major indexes loss more than 1%. The Dow was good by comparison, shedding ''just'' half a percent as losers outpaced gainers on both the NYSE and the Nasdaq by just under four-to-one.

Stats Table

One stock that experienced a nasty tumble today was biotech firm Exelixis (EXEL, which saw its shares plunge 20%. The company reported Phase II trial data for its cancer drug, cabozantinib, over the weekend at the American Society of Clinical Oncology conclave and the results showed six patient deaths. If you actively follow biotech stocks, you probably know that cancer treatment is one of the hottest sub-sectors of this universe and while unfortunate, one or two patient deaths are not uncommon during these types of trials.

Six deaths, or 1% of the trial group for cabozantinib, is too much for the market to deal with the and that much was evident in shares of Exelixis today. Making matters worse for the company is that mortality rate experienced with cabozantinib is too high for the drug to be used as part of combination therapy in late-stage cancer patients.

The company expects to have initial results around midyear from a pivotal trial of the drug as a treatment for thyroid cancer, according to Reuters, and while that may prove to be a catalyst for the stock, it might be best to let Exelixis sort itself out over the next few days before running into a new position here.

Exelixis Chart

Keeping with theme of healthcare-related names that were taken to the woodshed today, shares of medical diagnostics maker Gen-Probe (GPRO) were slammed by almost 13% on volume that was roughly 10 times the daily average after the Wall Street Journal reported that basically no one besides Swiss pharma giant Novartis (NVS) is interested in acquiring Gen-Probe anymore and even that deal may not see the light of day.

Sources cited by the Journal say Thermo Fisher Scientific (TMO) and Life Technologies “are now on the sidelines.” The problem for Gen-Probe is that analysts and traders were speculating that much of Novartis's interest in Gen-Probe centered around keeping the company out of the hands of rivals. Now that those concerns do not exist, Novartis may also take a pass on the California-based company.

Gen-Probe Chart

Departing from U.S. stocks for a moment, as many readers know, I have been known to opine on politics from time to time and that can get me in some hot water, but I am going to give it a go again. Do NOT worry, I am not going to discuss U.S. politics because I do not want the offend the senses of half our readers.

Nope, Peru is the political hot spot du jour following Sunday's presidential election that saw the country elect Ollanta Humala as its next president. As some who does a lot research, analysis and trading of ETFs and has been doing so for several years now, I can safely say that I cannot remember a short that was as easy or obvious as the iShares MSCI All Peru Capped Index Fund (EPU) going into Sunday's election.

While it can be argued that most presidential elections in the developed world do not have a candidate that is clearly the wrong choice, Peru had that situation and economically speaking, Humala was clearly the wrong choice. He claims to be a reformed leftist, but in reality, he probably still is a leftist and that is not surprising given he counts Venezuelan President Hugo Chavez among his friends.

Under the previous administration, Peru had been trying to go the way of Brazil, Colombia and Chile and adopt pro-growth policies to foster foreign investment, particularly in its energy and materials industries.

All of those efforts may go for naught now that Humala has won. He previously threatened to revoke oil and minerals licenses in Peru (Translation: Watch out for nationalization) and while Peru isn't Brazil when it comes to oil production, it is a major producer of copper, gold and silver. How enthusiastic are investors about Humala's victory? EPU's chart tells the story as the ETF traded more than triple its average daily volume. The chart is a far cry from 2010 when the ETF was one of the leaders of the emerging markets asset class.

Peru ETF Chart

Speaking of ugly charts, name a big money center bank stock or an ETF that holds a collection of these market red-headed stepchildren and chances are you will find a nasty looking chart. A fine example is the SPDR KBW Bank ETF (KBE). Illustrious names (sense the sarcasm) JPM, C, WFC and BAC combine for about 29% of KBE's weight, so its no wonder this fund has been blasted recently.

Options traders may be sending the rest of us a message regarding KBE and that message is stay away or join us in buying puts. The June 24 KBE puts have open interest of over 12,600 contracts and the June 25's have open interest of nearly 5900 contracts.

KBE Chart

The after-hours session brought some good cheer, at least for shareholders of corrugated packaging maker Temple-Inland (TIN). The stock was down over 3% in the regular session, but something was afoot as volume was more than seven times the daily average. That ''something'' is an unsolicited $3.3 billion takeover offer from rival International Paper (IP) and the news has Temple-Inland shares up almost 43% in after-hours trading as of this writing.

IP is offering $30.60 for each Temple-Inland share, which is well above the $21 the stock closed at today, but even with that substantial premium, the former is not finding a willing seller in the latter. Temple-Inland's board unanimously rejected the overture with the typical ''grossly undervalues'' the company line.

''Your letter of May 27 insistently says 'timing and speed are important,' and you have threatened us with a hostile bid if we do not respond by your deadline. The speed that is 'important' to you underscores an opportunistic attempt to deprive our stockholders of the value in their company that we believe will become increasingly evident, Temple-Inland CEO Doyle Simons said in a letter to IP CEO John Faraci over the weekend, the New York Times reported.

Those are harsh words, but they appear to be good for Temple-Inland shares. Forgive me, but I cannot resist saying that I do not think anyone has been this excited about mergers and acquisitions in the paper sector since Gordon Gekko was making a run at Teldar Paper.

Temple-Inland Chart

Looking at the charts, support at 1300, be it psychological or otherwise, for the S&P 500 did not hold today and with the index laboring below 1295, there is a solid chance the 1250-1260 area is the next destination. The combination of June typically being a challenging month for stocks and economic news that simply gives buyers no reason to get in the game could prove toxic for the S&P 500 in the coming weeks. Remember,the low for the S&P 500 this year is 1256, which was last seen in mid-March.

S&P 500 Chart

The Dow may be in even worse health than the S&P 500. Support at 12,200 failed last week and now the blue chip index is clinging to 12,100. Further declines put 11,600 in play. On Monday, seven Dow stocks managed to close higher, but the same culprits continue to weigh on the index. Financials are a mess and CAT and CVX are both under $100. The last time both stocks were under $100 at the same was March. CAT's shareholders meeting is Wednesday and this is usually the time the company raises its dividend, but they may not be enough on its own to spark the rest of the Dow higher.

Dow Chart

How weak is the Nasdaq? Well AAPL's developer's conference kicked off today and Steve Jobs made an appearance, but the stock still fell 1.6%. If there was support at 2725, it did not hold today and that means 2675 is next support. From there, the Nasdaq could slide all the way back to 2615.

Nasdaq Chart

The Russell 2000 was blasted last week for a 3.3% loss and dipped another 1.6% today and below 800, a move to 775 is not that far flung. things are not looking any better to start this week. The small-cap index If that level does not hold, look for 760-765 to come into play.

Russell 2000 Chart

I happened to take a look at a chart of the S&P 500 running from the March 2009 lows through today and I only spotted one correction, assuming a correction within a bull market is 10%-15%, and it occurred between April and July 2010. The Dow is off about 4.5% from its 2011 high and the S&P 500 is off about 5% from its 2011 peak.

With all this bad economic data we are seeing and the subsequent weakness in stocks, maybe it is time for another correction. A little more bloodletting to clear out the weak hands may be just what the market needs to rally into year-end, but only time will tell if that is what we see.

Fun fact of the day: If you want to donate a boatload of money to charity and have lunch with Warren Buffett, bidding for that privilege on eBay is now up to $2.34 million. As of 11 AM New York time, the last bid was $1.51 million. Bidding closes at 7:30 PM Pacific time on June 10.


New Option Plays

Stumbling Lower

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Nike Inc. - NKE - close: 79.77 change: -0.59

Stop Loss: 84.05
Target(s): 75.50
Current Option Gain/Loss: Unopened
Time Frame: 2 to 3 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
The most recent same-store sales data for the industry was disappointing and suggested the consumer might be slowing down. That doesn't bode well for NKE. The stock has already broken its trend of higher lows and broken down through its major moving averages. Aggressive traders may want to buy puts now. I suspect that NKE is a little bit oversold here so I would rather use a trigger to launch put positions at $81.75. If triggered we'll use a stop at $84.05. Our target is $75.50 but we'll adjust the target as the trade progresses. NKE is due to report earnings on June 27th and we do not want to hold over the announcement.

Trigger @ $81.75

- Suggested Positions -

buy the July $80 PUT (NKE1116G80) current ask $2.82

Annotated Chart:

Entry on June xxth at $ xx.xx
Earnings Date 06/27/11 (confirmed)
Average Daily Volume = 2.3 million
Listed on June 6th, 2011



In Play Updates and Reviews

The Correction Continues

by James Brown

Click here to email James Brown

Editor's Note:

Stocks pushed their stream of losses to four days in a row. The S&P 500 has broken down under the 1300 level. The NASDAQ has fallen to potential support at the 2700 mark. Meanwhile our ADS call play has been stopped out.

-James

Current Portfolio:


CALL Play Updates

Baker Hughes Inc. - BHI - close: 72.23 change: -2.35

Stop Loss: 69.90
Target(s): 79.00
Current Option Gain/Loss: -52.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/06 update: Oil stocks were some of the worst performers on Monday. Oil services were hit especially hard. Shares of BHI reversed Friday's bounce and fell -3.1%. The stock closed near short-term support at $72.00. If this level breaks it will be a quick drop toward the next level of support near $70.00. More aggressive traders may want to move their stop loss so it's under the 100-dma (currently $69.63) or under the $68.00 level. I am not suggesting new positions at this time. A breakdown under $68.00 would look like BHI had produced a bearish H&S pattern.

Earlier Comments:
We wanted to keep our position size small to limit our risk.

-Small Positions - Suggested Positions -

Long June $75 call (BHI1118F75) Entry @ $1.61

06/04 new stop loss @ 69.90

Entry on May 26th at $73.34
Earnings Date 08/03/11 (unconfirmed)
Average Daily Volume = 2.2 million
Listed on May 25th, 2011


Fossil Inc. - FOSL - close: 100.07 change: -0.43

Stop Loss: 99.39
Target(s): 109.75, 114.00
Current Option Gain/Loss: -92.7% & -66.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/06 update: I'll be honest here. I'm surprised that FOSL resisted the market's sell-off today. Shares were down (-0.4%) but they did not break down to new relative lows. Even though FOSL held support the future doesn't look very bright here, not with the market accelerating lower. More conservative traders may want to exit early. I am not suggesting new positions at this time.

Earlier Comments:
We wanted to keep our position size small to limit our risk.

- Suggested (SMALL) Positions -

Long June $110 call (FOSL1118F110) Entry @ $1.38

- or -

Long July $110 call (FOSL1116G110) Entry @ $3.00

Entry on May 27th at $104.96
Earnings Date 08/09/11 (unconfirmed)
Average Daily Volume = 842 thousand
Listed on May 26th, 2011


Forest Labs Inc. - FRX - close: 36.31 change: -0.59

Stop Loss: 34.45
Target(s): 39.00, 42.50
Current Option Gain/Loss: -46.1% & + 0.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/06 update: After hitting new multi-year highs on Friday shares of FRX experienced some profit taking today. The trend is up but readers will want to wait for a dip near support before launching new positions.

Our target is the $39.00 level and the $42.50 mark but I'm starting to worry that FRX just doesn't move fast enough.

- Suggested Positions -

Long the June $37 call (FRX1118F37) Entry @ $0.65

- or -

Long the August $37 call (FRX1120H37) Entry @ $1.40

06/04 new stop loss @ 34.45
05/28 New stop loss @ 33.75

Entry on May 20th at $35.29
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 3.2 million
Listed on May 19th, 2011


Goldman Sachs - GS - close: 133.90 change: -1.43

Stop Loss: 128.45
Target(s): 134.00, 137.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see trigger

Comments:
06/06 update: I am surprised by the relative strength in GS today. The banking stocks were getting hammered but GS only fell -1%. Overall there has been no change for us. We're still trying to grab the falling knife when GS nears the $130 level. Readers may want to consider trading July calls instead.

Earlier Comments:
The 2010 lows are near $130. I am suggesting we launch very small bullish positions on a dip at $130.25. This is a very aggressive, higher-risk trade.

Trigger @ 130.25 (very small positions)

- Suggested Positions -

buy the June $135 call (GS1118F135)

Entry on May xxth at $ xx.xx
Earnings Date 07/19/11 (unconfirmed)
Average Daily Volume = 6.5 million
Listed on May 21st, 2011


Union Pacific - UNP - close: 100.13 change: -1.01

Stop Loss: 98.95
Target(s): 109.00, 114.00
Current Option Gain/Loss: -80.8%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
06/06 update: Hmm... UNP did not see any follow through on Friday's bounce from $100. Instead the stock rolled over under short-term resistance near $102 and is testing support near $100 and its 50-dma again. If there is any follow through lower tomorrow we will probably get stopped out at $98.95. I am not suggesting new positions at this time.

- 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


PUT Play Updates

Amazon.com Inc. - AMZN - close: 185.69 change: -2.63

Stop Loss: 196.25
Target(s): 180.25, 175.00
Current Option Gain/Loss: +26.2% & +10.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/06 update: Our new trade on AMZN is off to a good start. Shares opened at $188.01 and closed down -1.39%. If you were nimble enough shares provided an entry point close to the $190 level where the bounce failed this morning. I am adjusting our stop loss down to $195.25.

Earlier Comments:
The plan was to keep our position size small. Our first target is $180.25. Our second target is $175.00 (or the simple 200-dma, whichever one AMZN hits first).

- small bearish positions -

Long June $185 PUT (AMZN1118R185) Entry @ $2.89

- or -

Long July $180 PUT (AMZN1116S180) Entry @ $4.40

Entry on June 6th at $188.01
Earnings Date 07/26/11 (unconfirmed)
Average Daily Volume = 4.5 million
Listed on June 4th, 2011


SanDisk Corp. - SNDK - close: 43.24 change: -1.02

Stop Loss: 47.70
Target(s): 40.50, 36.00
Current Option Gain/Loss: +35.4% & +24.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/06 update: SNDK extended its declines with a -2.3% drop today. Shares opened at $44.31. If you missed the entry point consider waiting for a bounce or failed rally near the $45 level and its 200-dma.

Our targets are $40.50 and $36.00, given enough time. FYI: The P&F chart for SNDK is bearish with a $30 target.

- Suggested Positions -

Long July $42.00 PUT (SNDK1116S42) Entry @ $1.10

- or -

Long July $40.00 PUT (SNDK1116S40) Entry @ $0.69

Entry on June 6th at $44.31
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 5.8 million
Listed on June 4th, 2011


Stericycle Inc. - SRCL - close: 85.55 change: -0.14

Stop Loss: 90.05
Target(s): 84.00, 80.50
Current Option Gain/Loss: +120.0% & +50.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/06 update: SRCL found support at $85.00 this morning and bounced but that bounce was rolling over into the closing bell. The trend is down but I'm not suggesting new positions at this time. I'd rather see a failed rally type of move closer to resistance.

- Suggested Positions -

Long June $85 PUT (SRCL1118R85) Entry @ $0.50

- or -

Long July $85 PUT (SRCL1116S85) Entry @ $1.50

06/04 new stop loss @ 90.05

Entry on May 31st at $88.78
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume = 502 thousand
Listed on May 28th, 2011


Whole Foods Market - WFM - close: 55.95 change: -1.20

Stop Loss: 60.15
Target(s): 55.10, 52.00
Current Option Gain/Loss: +88.6% & +80.9%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/06 update: WFM extended its losses to four days in a row. The stock is now trading under what was possible support near the late February lows at $56.28. While WFM does look short-term oversold here the next level of support should be the $54.00 level. We have a target at $55.10 and our secondary, more aggressive target is $52.00. Please note our new stop loss at $60.15.

- Suggested Positions -

Long June $60 PUT (WFM1118R60) Entry @ $2.20

- or -

Long July $55 PUT (WFM1116S55) Entry @ $1.05

06/06 new stop loss @ 60.15
06/04 new stop loss @ 60.65

Entry on June 2 at $58.70
Earnings Date 08/11/11 (unconfirmed)
Average Daily Volume = 1.6 million
Listed on June 1st, 2011


CLOSED BULLISH PLAYS

Alliance Data Systems - ADS - close: 87.73 change: -2.13

Stop Loss: 88.65
Target(s): 96.50, 99.75
Current Option Gain/Loss: -95.8% & -77.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/06 update: The stock market extended its sell-off to four days in a row. ADS followed suit. Today's decline breaks support at the 50-dma and near $88 with the stock's late May lows. Our stop loss was hit at $88.65.

Earlier Comments:
This is an aggressive trade. We want to keep our position size small to limit our risk.

- Suggested (SMALL) Positions -

June $95 call (ADS1118F95) Entry @ $1.20, exit $0.05 (-95.8%)

- or -

July $95 call (ADS1116G95) Entry @ $2.45, exit $0.55 (-77.5%)

06/06 stopped out @ 88.65, Options @ -95.8% & -77.5%
06/02 New stop loss @ 88.65

chart:

Entry on May 27th at $92.23
Earnings Date 07/18/11 (unconfirmed)
Average Daily Volume = 999 thousand
Listed on May 26th, 2011