Option Investor
Newsletter

Daily Newsletter, Monday, 6/13/2011

Table of Contents

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

Market Wrap

You Call These Gains?

by Todd Shriber

Click here to email Todd Shriber
Coming off a sixth consecutive weekly loss that saw the S&P 500 slide 2.24% last week and the Dow Jones Industrial Average give up 1.64%, the only thing that can be said for Monday's action is that at least those two indexes found their way to gains, as meager as they were. The Nasdaq Composite and the Russell 2000 continued their losing ways.

Stats Table

Speaking of extending losing streaks, that is just what oil did, tumbling 2% and that slide was helped by at least two negative headlines. China's lending rate slid to $85 billion in May, well below the $100 billion analysts were forecasting, providing further evidence that the world's second-largest oil consumer behind the U.S. is home to a slowing economy.

Making matters worse for oil, Bloomberg reports that a drought in Texas is threatening oil output in the Eagle Ford Shale, home to booming oil production recently, and that hot weather is forcing producers to go out of their way to acquire water from farmers and municipalities. As anyone that has spent time in Texas between May and September will tell you, it gets pretty darn hot in the Lone Star state and this a problem that will not be easy to solve for oil companies without some help from Mother Nature. For more news and commentary on the energy sector, register for the OilSlick free daily newsletter (HERE).

Oil Chart

We have not seen a real ''Merger Monday'' in several weeks, if not longer, and while the price tags being thrown about today were on the low end, the pickup in mergers and acquisitions activity could still be viewed as a positive and perhaps more of the same going forward will provide some comfort to those that are long the market.

Transatlantic Holdings (TRH), a former unit of American International Group (AIG), got the ball rolling on Sunday evening when it agreed to sell itself to Allied World Assurance for $3.2 billion, a deal that values Transatlantic at less than 80% of book value. Allied World's offer values Transatlantic at $51.10 a share, or a 16% premium to where the shares closed on Friday.

That is not a huge premium and given the percentage of book value that Allied World is offering, Transatlantic may see some rival bids come in. Barclays said as much. That price ''could result in other property-casualty insurers and reinsurers competing for Transatlantic,'' Barclays said, according to Bloomberg News. The bank did not identify other potential suitors for Transatlantic.

Shareholders love a bidding war for their company and that much was evident in Transatlantic's action today as the stock soared nearly 10% on volume that was better than five times the daily average.

Transatlantic Chart

Footwear maker Timberland (TBL) was another stock on the move thanks to M&A news as VF Corp. (VFC) offered $2 billion for the maker of work boots and casual footwear. The deal values Timberland at $43 a share, a 43% premium to where the shares closed on Friday. North Carolina-based VF, the maker of the Nautica and North Face brands, said the Timberland acquisition will add $2 to annual earnings per share by 2015, and add about $700 million to VF's 2011 revenue, according to Reuters.

VF plans to finance the acquisition, which is expected to close in the third quarter, through a combination of cash on hand and commercial paper. The company is looking to grow its outdoor segment to fuel revenue and profit growth, making the Timberland deal an ideal fit, at least on the surface, for VF. As for Timberland shareholders, this was welcome news to say the least because the stock had lost more than a third of its value since early May. Today, Timberland shares were up 44% on volume that was better than 30 times the daily average.

Timberland Chart

I do not know what it is about the packaging sector, but it sure does appear to be fertile ground for M&A activity these days. Last Monday, I wrote about the unsolicited $3.3 billion takeover offer Temple-Inland (TIN) had received from rival International Paper (IP). This week, there is news of yet another unsolicited offer for another packaging firm, that being Graham Packaging (GRM).

Pennsylvania-based Graham makes custom-molded plastic containers for consumer products companies and a quick look at the company's Web site shows that it has a roster of well-known customers including Coca-Cola (KO), PepsiCo (PEP) and Heinz (HNZ), just to name a few.

Apparently, that is an attractive feature to Rank Group, the New Zealand-based private equity firm that is offering $1.64 billion for Graham. Again, there's a potential battle brewing here because Silgan Holdings (SLGN) previously offered $22.10 a share for Graham. Rank's offer values Graham at $25 a share.

No word yet on whether Silgan is mulling a new bid, but investors do not like the idea of the company missing out on Graham. Silgan plunged almost 6% on volume that was more than five times the daily average.

Silgan Chart

Perhaps the biggest news of the day involves a company that is not yet even public. Of course, I am referring to social networking king Facebook, the most visited site on the Internet. For all the talk of about LinkedIn's (LNKD) IPO and the imminent offering from daily deal Web site Groupon, the reality is Facebook is the one IPO everyone and his sister is talking about.

CNBC reported today that the word on Wall Street is that Facebook could be targeting an IPO in the first quarter of 2012 that values the company at a staggering $100 billion. Staggering is truly the appropriate term because in recent months the rumored valuation for Facebook has risen from $50 billion to $70 billion to now $100 billion.

Just for fun, I ran a quick screen of only NYSE-listed stocks that have market values in the $100 billion area and the roster of companies that Facebook would be in the same ballpark with, assuming the $100 billion number proves accurate, is nothing short of impressive. In the oil patch, $100 billion puts Facebook on par with ConocPhillips (COP) and makes the company a lot more valuable (try 20%+) than Occidental Petroleum (OXY), the third- and fourth-largest U.S. oil companies respectively.

At $100 billion, Facebook would sport a larger market value than a pretty hefty percentage of the Dow Jones Industrial Average. I stopped counting when I realized $100 billion is more than the market caps of the following Dow stocks: AA, AXP, CAT, DIS, HD, HPQ, KFT, MCD, and MMM.

I realize the chart that I have included below is a bit dated, but it does paint the picture of Facebook's epic valuation surge. Plus, the chronology of it is fun to study. Take a peak at where Microsoft (MSFT) got involved. There are plenty of reasons to criticize Mr. Softy these days. Investing $240 million in Facebook in 2007 is NOT one of them.

Facebook Valuation Chart

Looking at the charts, given the small gains and losses seen across the major indexes today, I am afraid I do not have a lot of material to work with that is noticeably different from what Jim had to say in the weekend commentary. A gain of less than one point for the S&P 500 is not going to do much to inspire confidence and with the index almost 56 points below its 50-day moving average, next support looks like 1250. The 200-day line is just four points above there.

If 1250 does not hold as support, there is further downside risk to 1225 and then to 1275.

S&P 500 Chart

The margin of advancers to decliners on the Dow was 19-11, but even that is not worth writing home about because CAT, CVX, IBM and XOM were all lower on the day. On the bright side, financials perked up...sort of. Still, the blue chip languishes under 12,000 and the longer it does that, the more realistic a fall to 11,600 becomes. Go there and the Dow could be on its way to 11,000.

Dow Chart

With the summer doldrums officially setting in, this is not the season to be embracing tech and the Nasdaq's chart confirms that sentiment. The Nasdaq's cascade from its May peak is now close to 200 points and I would not be betting on the 200-day moving average at 2630 holding as support. Support is more firm at 2600 and if that does not work, then 2540-2550 area could be the next stop. With the charts for AAPL, GOOG, PCLN, FFIV and several other big-name Nasdaq stocks looking very ugly right now, more pain probably awaits the Nasdaq.

Nasdaq Chart

At this point, it is hard to envision the Russell 2000 not following another eight points or so to its 200-day moving average at 769. If that is not support, well, I will just say you probably will not want to be long small-caps or Russell 2000 Index ETFs because the carnage from there will be palpable. I am talking a downturn to the 700-710 area.

Russell 2000 Chart

These waters are still too dangerous to jump into, at least not without patience and an insurance policy in the form of puts or an inverse ETF. A ''law of averages'' bounce is possible this week. After all, the market has slid for six straight weeks, but even if such a bounce occurs, it will not be enough to erase six weeks' worth of damage. I still think restraint is the order of the day. What one may be thinking about buying today can be probably be had next week at an even better price.


New Option Plays

Asset Management

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

T.Rowe Price Associates - TROW - close: 56.68 change: -0.03

Stop Loss: 62.25
Target(s): 55.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see Trigger

Company Description

Why We Like It:
The stock market is oversold and could bounce soon. If and when it does bounce we want to be ready to launch new bearish positions as stocks near resistance. TROW has broken down under key support near $60 and its 200-dma in the last couple of weeks. Volume has been very strong on the sell-off. I'm expecting $60.00 to be new resistance. We want to buy puts on a bounce at $59.50. If triggered we'll use a stop loss at $62.25. Our target is $55.25. FYI: The Point & Figure chart for TROW is bullish with a $51 target.

Trigger @ 59.50

- Suggested Positions -

buy the July $60 PUT (TROW1116S60) current ask $4.10 (they'll be cheaper when TROW bounces to our trigger at $59.50)

Annotated Chart:

Entry on June xxth at $ xx.xx
Earnings Date 07/26/11 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on June 13th, 2011



In Play Updates and Reviews

FRX Tags Our Target

by James Brown

Click here to email James Brown

Editor's Note:

Shares of Forest Labs Inc. (FRX) continue to rally and shares hit our upside target this morning. I am suggesting we take profits in our June puts on WFM immediately.

-James

Current Portfolio:


CALL Play Updates

Apple Inc. - AAPL - close: 326.60 change: +0.70

Stop Loss: 317.45
Target(s): 337.50, 347.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Comments:
06/13 update: We are trying to buy calls on a dip near AAPL's 200-dma. That's why we moved the trigger to $324.00. Yet AAPL bounced at $325.07 and the 200-dma has now risen to $324.27. I am moving our trigger back to $325.00 and we'll adjust our stop loss to $318.45.

In summary, this is a very aggressive, higher-risk trade. If the 200-dma fails then AAPL is headed for the next level of support at $320.00. Let's keep our position size small to limit our risk. We have two targets at $337.50 and $347.50.

Trigger @ $325.00 (SMALL POSITIONS)

- Suggested Positions -

buy the July $340 call (AAPL1116G340)

Entry on June xxth at $ xx.xx
Earnings Date 07/19/11 (unconfirmed)
Average Daily Volume = 12.9 million
Listed on June 8th, 2011


Fossil Inc. - FOSL - close: 106.90 change: +1.42

Stop Loss: 99.39
Target(s): 109.75, 114.00
Current Option Gain/Loss: - 8.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/13 update: Traders bought the dip near short-term support at $105.00 again. This is encouraging to see but I would not open new bullish positions at this time.

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

- Suggested (SMALL) Positions -

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

06/11 Exit June calls ASAP. Option @ 0.35 (-74.6%)

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: 38.57 change: +0.62

Stop Loss: 34.90
Target(s): 39.00, 42.50
Current Option Gain/Loss: +92.8%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/13 update: Target achieved. I was a little surprised to see FRX rally on news that billionaire activist investor Carl Icahn told FRX that he plans to nominate four candidates to FRX's nine-member board (source: WSJ). The stock gapped open higher at $38.47 and spiked to $39.14 intraday. Our first target to take profits was hit at $39.00. The August $37 call was trading with a bid near $2.85 (+103.5%).

More conservative traders may want to raise their stop higher. FRX is looking very overbought and the $40.00 level could be round-number, psychological resistance. Our secondary target is $42.50. I am not suggesting new positions at this time.

- Suggested Positions -

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

06/13 1st target hit @ $39.00. August $37 call @ $2.85 (+103.5%)
06/11 New stop loss @ 34.90
06/10 Planned exit of June $37 call. exit $1.10 (+69.2%)
06/09 Prepare to exit the June calls on June 10th at the close
06/04 new stop loss @ 34.45
05/28 New stop loss @ 33.75

chart:

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: 137.53 change: +1.61

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:
06/13 update: Hmm... given the three-day bounce in GS I'm starting to wonder if we've missed our entry point. Financials rallied again on Monday and GS managed to close above its 20-dma. The overall trend is still down but if you're the optimistic type you could argue that GS formed a little double bottom near $131.55 last week.

I am not suggesting positions at this time. We'll stick to our plan, which is to buy calls (small positions) at $130.25. However, if GS continues to bounce and closes above $140 we'll re-evaluate.

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 July $135 call (GS1116G135)

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: 100.64 change: +1.04

Stop Loss: n/a
Target(s): 109.00, 114.00
Current Option Gain/Loss: -93.2%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
06/13 update: UNP is still churning sideways on either side of the $100 level. I remain very wary here and would not start new positions at this time. Odds are that our June $105 call option is going to expire worthless.

- Suggested Positions -

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

06/11 option has deteriorated. Removing the stop loss.

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: 186.29 change: -0.24

Stop Loss: 192.55
Target(s): 180.25, 175.00
Current Option Gain/Loss: -35.6% & -11.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/13 update: It is encouraging to note that AMZN did not produce a bounce today. Shares tried to rebound but failed at their 10-dma this morning. The stock is currently resting on support near the $185.00 level. I am not suggesting new positions at this time. FYI: We have four days left for our June puts. More conservative traders may want to cut their losses now and exit early.

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

06/11 New stop loss @ 192.55
06/07 New stop loss @ 195.15.

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


Becton, Dickinson and Company - BDX - close: 85.06 change: +0.14

Stop Loss: 87.15
Target(s): 80.50
Current Option Gain/Loss: -30.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/13 update: BDX didn't really move much today. Shares just bounced around the $85.50-84.90 zone. I don't see any changes from my weekend comments. I would still launch new bearish positions here. Our target is $80.50. We'll try and keep our target just above the 200-dma.

NOTE: Just because the July $80 puts are inexpensive don't go overboard. Keep your position size small.

- Suggested (SMALL) Positions -

Long July $80 put (BDX1116S80) Entry @ $0.50

Entry on June 13th at $84.95
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on June 11th, 2011


Diamond Offshore Drilling, Inc. - DO - close: 67.33 change: -0.89

Stop Loss: 71.55
Target(s): 64.50, 62.50
Current Option Gain/Loss: +13.8%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/13 update: Energy stocks were struggling today and oil services were some of the market's worst performers. Shares of DO spiked down to $66.38 before trimming its losses. I am moving our stop loss down to $71.55. I would prefer to launch new positions on a bounce or failed rally near resistance at $70 and the 200-dma.

Earlier Comments:
Our targets are $64.50 and $62.50. FYI: Traders should note that the most recent data listed short interest at more than 14% of the float. That does raise the risk of a short squeeze should the stock suddenly find strength.

- Suggested Positions -

Long July $67.50 PUT (DO1116S67.5) entry @ $2.09

06/13 new stop loss @ 71.55

Entry on June 8th at $68.91
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on June 7th, 2011


General Dynamics Corp - GD - close: 69.64 change: +0.27

Stop Loss: 72.25
Target(s): 65.50
Current Option Gain/Loss: - 8.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/13 update: Monday was a quiet session for GD. The stock churned sideways under resistance at $70 and its 200-dma. I would still consider new positions now at current levels.

-Suggested Positions-

Long July $67.50 PUT (GD1116S67.5) Entry @ $1.25

Entry on June 10th at $69.75
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on June 9th, 2011


Nike Inc. - NKE - close: 80.51 change: +0.85

Stop Loss: 83.05
Target(s): 75.50
Current Option Gain/Loss: +24.5%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
06/13 update: NKE saw a morning spike toward $82.00 before paring its gains. There is no change from my prior comments. I would still consider new positions now.

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.

- Suggested Positions -

Long July $80 PUT (NKE1116G80) Entry @ $2.00

06/11 New stop loss @ 83.05

Entry on June 7th at $81.75
Earnings Date 06/27/11 (confirmed)
Average Daily Volume = 2.3 million
Listed on June 6th, 2011


Transocean Ltd. - RIG - close: 62.23 change: -0.62

Stop Loss: 66.15
Target(s): 58.00, 55.25
Current Option Gain/Loss: +21.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/13 update: RIG was kind enough to gap open higher for us this morning, which set our entry point at $63.32. The rebound quickly faded as oil service stocks were some of the market's worst performers today. RIG dropped to new multi-month lows. You could argue that RIG is a little bit oversold here so we want to keep our position size small to limit our risk.

More conservative traders may want to take profits early near $60.00 since the $60 level might be support but I'm setting our targets at $58.00 and $55.25.

- Suggested (SMALL) Positions -

Long July $60 puts (RIG1116S60) Entry @ $1.32

Entry on June 13th at $63.32
Earnings Date 08/04/11 (unconfirmed)
Average Daily Volume = 4.3 million
Listed on June 11th, 2011


SanDisk Corp. - SNDK - close: 42.45 change: -0.08

Stop Loss: 46.25
Target(s): 40.50, 36.00
Current Option Gain/Loss: +39.0% & +18.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/13 update: SNDK has been moving sideways the last four days. I am expecting an oversold bounce soon. SNDK should have resistance near $45.00 and its 200-dma. Wait for a bounce or failed rally near this level before launching new positions.

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

06/08 New stop loss @ 46.25

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: 85.05 change: +0.15

Stop Loss: 90.05
Target(s): 84.00, 80.50
Current Option Gain/Loss: +36.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/13 update: SRCL tried to rally this morning. The stock was upgraded and shares gapped open at $85.72 but the rally quickly faded. Shares spent the day hovering near support at $85.00. There is no change from my weekend comments. More conservative traders may want their stop lower or consider taking profits early right now. Our first target is $84.00. Our second target is $80.50.

- Suggested Positions - Long July $85 PUT (SRCL1116S85) Entry @ $1.50

06/11 new stop loss @ 88.05
06/08 Exit June $85 puts. Bid @ $1.00 (+100%)
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: 54.71 change: +0.48

Stop Loss: 58.15
Target(s): 55.10, 52.00
Current Option Gain/Loss: +136.3% & +106.6%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/13 update: WFM bounced at the $54.00 level midday. I am suggesting we exit our June puts immediately. The June $60 put has a bid of $5.20 (+136.3%). I'm worried that WFM might see an oversold bounce back toward the $57-58 area or worse. We'll keep our July puts but more conservative traders may want to take profits there too. Our final target for the July puts is $52.00. I am not suggesting new positions at this time.

- Suggested Positions -

June $60 PUT (WFM1118R60) Entry @ $2.20, exit $5.20 (+136.3%)

- or -

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

06/13 Exit June $60 puts. Bid @ $5.20 (+136.3%)
06/11 New stop loss @ 58.15.
06/11 Consider exiting our June puts early.
06/08 1st target hit @ 55.10. June $60 put @ 4.30 (+95.4%), July $55 put @ 1.92 (+82.8%)
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