Option Investor
Newsletter

Daily Newsletter, Monday, 6/20/2011

Table of Contents

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

Market Wrap

Finally A Greek Solution?

by Todd Shriber

Click here to email Todd Shriber
Comments from Luxembourg's Jean-Claude Juncker, the leader of the group of Eurozone finance ministers, that a solution to Greece's sovereign debt woes will in fact be found lit a fire under U.S. stocks today, sending the S&P 500 and Dow Jones Industrial Average higher for a third consecutive day, the best winning streak for the two indexes since last month. The Nasdaq even got in on the party, gaining half a percent and the Russell 2000 was higher by nearly 1%.

Stats Table

The Greece news, while welcome, does not put the issue to be entirely. Not by a long shot. The International Monetary Fund (IMF) still is not negotiating a second rescue package for Greece while it weighs whether to approve the next payment of the country’s initial program, Bloomberg News reported. Still, Juncker added that he does not believe Italy is in danger of a Greece-esque crisis.

Good news again, but not enough to save the iShares MSCI Italy Index Fund (EWI) from a down day. Given that EWI was only down fractionally today, it would appear that the bulls and bears targeting this ETF wrestled with Juncker's remarks and headlines that broke late in Friday's trading session that Moody's Investors Service is mulling a downgrade of Italy's credit rating. Remember, unfortunately for short sellers and put buyers, there is no Greece-specific ETF, but EWI might be the next best thing.

Italy ETF

One stock that was on the move today was a controversial and familiar name: Molycorp (MCP), the largest U.S.-based rare earths miner. As the chart below indicates, recent weeks have not been kind to the Colorado-based company and that is due to a variety factors. Combining the market slamming the door shut on the high-beta trade and a pair of announcements regarding some substantial insider selling by early Molycorp investors and company executives was a toxic brew for the shares.

In reality, not much has changed regarding the rare earths story. Multiple press outlets noted late last week rare earths again doubled in recent weeks, that is a fact. I will interject my opinion that rare earths projects that are expected to come online over the next five years will be enough to curb the current supply/demand imbalance will not be enough to do so. Or at the very least, this is a risky proposition to bank on.

Enough my thoughts, because what JPMorgan had to say about Molycorp means more to your brokerage account anyway. The bank raised its price target on the stock today to $105 from $87, more than double where the shares closed today and have a look at the bank's new EPS estimates for Molycorp: 2012 to $5.93 from $5.25, 2013 to $14.48 from $12.51, and 2014 to $27.01 from $22.45.

Piper Jaffray chimed in as well, upgrading Molycorp to ''overweight'' from ''neutral,'' saying that the stock's recent pullback overly discounts an imminent plunge in rare earths prices. For more news and commentary on the energy and commodities sector, register for the Oil Slick daily newsletter (HERE).

Molycorp Chart

Speaking of high-beta materials stocks, there was more good news. In what has seemed like a constant barrage of earnings warnings, companies that actually raise guidance stand-out these days. One shining example is Canadian fertilizer producer Agrium (AGU). Citing rising global crop prices, particularly corn, Agrium, the largest North American farm products retailer, raised its second-quarter profit forecast to $4.10-$4.40 a share from previous guidance of $3.38-$3.88 and boosted its first half earnings estimate to $5.12-$5.42 a share up from prior guidance of $4.40-$4.90.

Agrium Chart

Dow component Wal-Mart (WMT), the world's largest retailer, was in the news today as well, winning a big legal battle after the U.S. Supreme Court overturned a decision by the Ninth Circuit Court, halting a major sexual discrimination suit against Wall-Mart. While the court did not rule on the merits of the case itself, it did rule that Wal-Mart is entitled to individual determinations of its employees' eligibility for back-pay, Forbes reported.

Obviously, Wal-Mart is pleased with the ruling and the company said as much, but as far as the plaintiffs go, their lawyers said the case is not over. The case would have been the largest employment class-action suit in U.S. history, involving 1.5 million female employees of Wal-Mart, according to Forbes. Shares of Wal-Mart rose less than half a percent.

Wal-Mart Chart

I do not want to be the first to go out on a limb and say banking sector mergers and acquisitions are back, but it is starting to feel that way. On the heels of last week's news that Capital One (COF) will pay $9 billion to acquire ING Groep's (ING) U.S. online banking business, the biggest retail bank deal in several years, PNC Financial Services (PNC) announced today it will pay $3.62 billion in cash and stock for Royal Bank of Canada's (RY) U.S. retail banking and credit card operations.

The retail banking business had been a money a loser for RY, not surprising given that the business is focused on the Southeastern part of the country, but with an already dominant presence in the Mid-Atlantic region and a Florida footprint, the deal makes sense for Pennsylvania-based PNC, which is looking to expand in the Southeast.

PNC is paying $3.45 billion for the bank and $165 million for the credit card operation, which represents a $112 million discount to the tangible book value of the unit, Reuters reported. PNC expects the acquisition to add to earnings by the end of 2013, or perhaps sooner depending on how much stock it uses to fund the deal. As of March 31, PNC had 2,446 branches and $259.38 billion of assets, according to Reuters.

PNC Chart

Looking at the charts, even with three days of gains, the S&P 500 has barely made a dent in six-plus consecutive weeks of losses. As was the case on Friday, the index bumped into resistance at 1280 and was not able to muster a close above the level. Maybe the best thing that can be said at this juncture is that the 200-day moving average at 1259 appears to be providing firm support.

I still think we need to see a test of 1250 and see that area hold before fresh capital is deployed. If 1250 does not hold as support, 1175 could be the first downside target.

S&P 500 Chart

The Dow was able to hold 12,000 on Friday and built on that today, but with today's close around 12,080, the blue-chip index still needs to notch a couple of solid days so it can takeout resistance at 12,200. The Dow's chart turned ugly early this month and I am afraid three days of gains is lot like putting lipstick on a pig in that a retreat to 11,750 is still a very real possibility.

Dow Chart

As I mentioned earlier, the Nasdaq got in on the positive action again today, but that does not mean it is time to feel positive about the index. The Nasdaq really has its work cut out for itself as it needs to deal with some resistance at 2640 and then again just below 2700. A break below the critical 2600 level would probably induce fresh selling and fortify the theory that there is no reason to be involved tech at the moment.

Nasdaq Chart

The Russell 2000 made only a faint effort to challenge resistance at 790 closing below that area once again and while a gain of nearly 1% is good for single day, the Russell's outlook is similar to the other indexes: One decent day is simply not enough to inspire tons of confidence. If the Russell moves below support at 775, 730 becomes a legitimate possibility.

Russell 2000 Chart

A couple of weeks ago, I predicted we might see a ''law of averages'' bounce and after six weeks of intense selling, we have probably seen that bounce over the past three sessions. Even if the Greece situation is miraculously solved in the next couple of days, that will only amount to a temporary catalyst because it will not do anything to change U.S. economic data or keep companies from issuing negative earnings guidance.

This might be a good time to start making a list of prospective long trades, but I would hold off on the shopping, at least until the end of the month.


New Option Plays

Watch List of Candidates

by James Brown

Click here to email James Brown

Editor's Note:

I would be wary of the market's bounce today. The market has been oversold and due for a rebound but the intermediate trend is still down. Now the bounce could last a few days but I'm concerned the market might roll over again on Wednesday following the FOMC meeting and Bernanke's press conference.

On a very short-term basis stocks look poised to move higher but I'm not willing to add call plays to the newsletter at this time. Since I think stocks might bounce for a couple more days I'm not adding puts tonight either.

If you are nimble enough you might be able to find a bullish trade with some of these candidates below:

ISRG - appears to be breaking out from a multi-week sideways consolidation. Caution - options are expensive.

WYNN - appears to have found support near $128.50. A rally past $134.00 could be a new bullish entry point but I am concerned about over head resistance near $140.00.

DLTR - is showing lots of relative strength and a new closing high and a consistent trend of higher lows.

ORLY - I would not chase it here since the stock closed near resistance at its December highs but the trend is definitely up and shares are worth watching the next few days for a possible entry point.

CAT - has found some support near $95 and its 200-dma. Nimble traders might be able to scalp a few points on a bounce.

MCD - this defensive stock has rallied back toward its recent highs near $83.00. A breakout here would be a new all-time high.

- James


In Play Updates and Reviews

Apple Inc. (AAPL) Breaks Down!

by James Brown

Click here to email James Brown

Editor's Note:

High-flying, technology giant AAPL was a significant underperformer on Monday and broke support. Our aggressive call play on AAPL was stopped out but our new put play has been triggered.

Our NKE put play has been stopped out.

-James

Current Portfolio:


CALL Play Updates

Fossil Inc. - FOSL - close: 110.71 change: +4.03

Stop Loss: 104.40
Target(s): 109.75, 114.00
Current Option Gain/Loss: +23.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/20 update: FOSL displayed significant relative strength today with a +3.7% rally and a close over round-number resistance at $110. If there was anything to complain about it would be the low volume on the move. Please note that I am raising our stop loss to $104.40. Our final target is $114.00.

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

06/20 new stop loss @ 104.40
06/18 Cautious traders may want to exit early now.
06/14 1st target hit @ 109.75, July option @ 3.20 (+6.6%)
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: 39.49 change: +0.81

Stop Loss: 35.75
Target(s): 39.00, 42.50
Current Option Gain/Loss: +121.4%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/20 update: FRX was also showing relative strength with a +2.0% gain. Shares closed over short-term resistance at $39.00. I am raising our stop loss up to $35.75. I am not suggesting new positions at this time.

- Suggested Positions -

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

06/20 new stop loss @ 35.75
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

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


PUT Play Updates

Apple Inc. - AAPL - close: 315.32 change: -4.94

Stop Loss: 325.50
Target(s): 301.00
Current Option Gain/Loss: - 2.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/20 update: The sell-off in AAPL continues. While the rest of the market was bouncing AAPL was breaking down. The stock gapped open lower at $317.36 and then plunged to new 2011 lows near $310 before paring its losses. Our trigger to buy puts was at $318.25 but AAPL gapped open below this level. The July $300 put opened at $4.50.

Readers may want to wait for AAPL to retest $320 as resistance and then launch new positions if you missed the entry point this morning.

AAPL is due to report earnings in late July and we do not want to hold over this announcement. OPEN... $4.50 bid 4.40/4.55

- Suggested Positions -

Long July $300 PUT (AAPL1116S300) Entry @ $4.40

Chart:

Entry on June 20th at $317.36
Earnings Date 07/19/11 (unconfirmed)
Average Daily Volume = 13.7 million
Listed on June 18th, 2011


Amazon.com Inc. - AMZN - close: 187.72 change: +1.35

Stop Loss: 192.55
Target(s): 180.25, 175.00
Current Option Gain/Loss: -31.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/20 update: AMZN is trying to bounce but it didn't make it very far and volume was very low today. Wait for a new failed rally near $190 or its 50-dma before considering new bearish positions.

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 July $180 PUT (AMZN1116S180) Entry @ $4.40

06/16 planned exit, June $185 put @ -27.3%
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: 85.96 change: +0.83

Stop Loss: 87.15
Target(s): 80.50
Current Option Gain/Loss: -60.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/20 update: BDX is bouncing from the $85.00 level but shares have not yet broken the bearish trend of lower highs. It does mean that our bearish play is in jeopardy, especially if the market rallies again on Tuesday. I am not suggesting new positions at this time.

Our target is $80.50. We'll try and keep our target just above the 200-dma.

- 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


Deere & Co - DE - close: 80.06 change: +1.53

Stop Loss: 82.75
Target(s): 75.25, 71.00
Current Option Gain/Loss: -42.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/20 update: Investors were bargain hunting in the industrial names today and DE rallied off its morning lows to close on the $80 level. Wait for a new failed rally move before launching positions. DE's next level of resistance to look for an entry point is in the $81.50-82.00 area. Our first target is $75.25. Our second, more aggressive target would be $71. FYI: The Point & Figure chart for DE is bearish with a $71 target.

- Suggested Positions -

Long July $75 PUT (DE1116S75) Entry @ $1.52

Entry on June 16th at $79.25
Earnings Date 08/17/11 (unconfirmed)
Average Daily Volume = 5.7 million
Listed on June 15th, 2011


Diamond Offshore Drilling, Inc. - DO - close: 66.73 change: -0.61

Stop Loss: 70.55
Target(s): 64.50, 62.50
Current Option Gain/Loss: +11.4%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/20 update: Energy stocks were underperformers today in spite of a bounce in crude oil prices. DO spent most of the day drifting sideways but still closed down -0.9%. I would wait for a bounce near resistance at $70 and its 200-dma before considering new bearish positions.

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

06/15 new stop loss @ 70.55
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


Transocean Ltd. - RIG - close: 59.87 change: -1.40

Stop Loss: 66.15
Target(s): 58.00, 55.25
Current Option Gain/Loss: +68.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/20 update: The sell-off in RIG continues and shares broke down under what should have been round-number support at $60.00. The stock is growing more and more oversold and could see a sharp bounce soon. I am not suggesting new positions at this time. Our first target to take profits is at $58.00.

In previous updates I suggested that more conservative traders take profits early near $60.00.

We wanted to keep our position size small to limit our risk.

- Suggested (SMALL) Positions -

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

06/20 RIG has hit $60. Cautious traders may want to take profits now (option @ +68%). The newsletter's target is $58.00

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: 41.79 change: +0.85

Stop Loss: 45.05
Target(s): 40.50, 36.00
Current Option Gain/Loss: + 57.2% & + 36.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/20 update: SNDK produced a sharp bounce (+2.0%) but the rally quickly stalled at short-term resistance near $42.00. More conservative traders may want to take profits early or lower their stops (or both). I am not suggesting new positions at this time.

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

06/18 new stop loss @ 45.05
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: 86.85 change: +0.44

Stop Loss: 88.05
Target(s): 84.00, 81.00
Current Option Gain/Loss: -30.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/20 update: SRCL is still trying to bounce and rebounded off the $86.00 level this morning. Yet the rally stalled at its 100-dma. If there is any follow through higher tomorrow there is a chance we'll get stopped out at $88.05. I am not suggesting new positions at this time.

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

06/15 adjusted 2nd target to $81.00.
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


T.Rowe Price Associates - TROW - close: 57.67 change: +0.44

Stop Loss: 61.75
Target(s): 55.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see Trigger

Comments:
06/20 update: TROW looks like it's building up steam for a bounce. We're expecting the stock to find resistance at $60.00 or the $61.00 level. We want to buy puts at $59.50. If triggered we'll use a stop loss at $61.75 (new stop). 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)

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


Whole Foods Market - WFM - close: 56.90 change: +1.21

Stop Loss: 58.15
Target(s): 55.10, 52.00
Current Option Gain/Loss: - 3.8%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/20 update: The oversold bounce in WFM continues and shares are up three days in a row. The stock got a boost today thanks to an analyst upgrade this morning. The rebound stalled at short-term resistance near $58.00 but if the market continues higher tomorrow there is a good chance we'll get stopped out. I am not suggesting new positions at this time.

- Suggested Positions -

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


Walter Energy, Inc. - WLT - close: 105.59 change: -2.48

Stop Loss: 115.50
Target(s): 100.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see TRIGGER

Comments:
06/20 update: WLT underperformed on Monday thanks to a downgrade by Goldman Sachs. Shares gapped open lower and closed down -2.2%. We do not want to chase it. Right now we're waiting for a bounce back toward resistance. We want to be ready to use that bounce as an entry point to launch bearish positions. The 200-dma should now be resistance. I am suggesting a trigger to open bearish positions at $112.00. We'll use a stop loss at $115.50. WLT can be a volatile stock so we want to keep our position size small to limit our risk. If triggered at $112.00 our target is $100.50. We do not want to hold over the late July earnings report.

Trigger @ $112.00

- Suggested Positions -

Buy the July $105 PUT (WLT1116S105)

- or -

BUy the Sept. $100 PUT (WLT1117U100)

Entry on June xxth at $ xx.xx
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on June 18th, 2011


CLOSED BULLISH PLAYS

Apple Inc. - AAPL - close: 320.26 change: -4.90

Stop Loss: 318.25
Target(s): 337.50, 347.50
Current Option Gain/Loss: - 36.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/20 update: Ouch! AAPL was a huge underperformer on Monday. The stock gapped open lower at $317.36. This was below support at $320 and below its long-term trendline of support. This was also below our stop loss at $318.25 so our call play was closed immediately.

FYI: Today's move also launches our new put play on AAPL.

This has always been a very aggressive, higher-risk trade.

(SMALL POSITIONS)- Suggested Positions -

July $340 call (AAPL1116G340) entry @ $3.05, exit $1.95 (-36.0%)

06/20 gap down exit @ 317.36, option @ $1.95 (-36.0%)
06/16 new stop loss @ 318.25

chart:

Entry on June 15th at $325.00
Earnings Date 07/19/11 (unconfirmed)
Average Daily Volume = 12.9 million
Listed on June 8th, 2011


CLOSED BEARISH PLAYS

Nike Inc. - NKE - close: 83.23 change: +2.12

Stop Loss: 83.05
Target(s): 75.50
Current Option Gain/Loss: -25.0%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
06/20 update: After two weeks of failing at resistance near the $82 area and the 200-dma shares of NKE suddenly found new strength. The stock rallied +2.6% and closed above resistance. Shares hit our stop loss at $83.05 along the way. NKE's larger trend still has a bearish pattern of lower highs but short-term today's breakout is definitely bullish.

- Suggested Positions -

July $80 PUT (NKE1116G80) Entry @ $2.00, exit $1.50 (-25%)

06/20 stopped out @ 83.05, option @ $1.50 (-25%)
06/11 New stop loss @ 83.05

chart:

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