Option Investor
Newsletter

Daily Newsletter, Monday, 7/18/2011

Table of Contents

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

Market Wrap

Debt's Broken Record Plays On

by Todd Shriber

Click here to email Todd Shriber
Debt. Debt. Debt. It is all about debt these days, whether it is of the European sovereign varietal or the now seemingly endless debate on Capitol Hill regarding raising the U.S. debt ceiling, an event that if it does not take place before the Aug. 2 deadline could throw global equity markets into turmoil. Some of that turmoil was seen today as all three of the major U.S. indexes flirted with loss of almost 1% and decliners outpaced advancers on the NYSE by a margin of nearly five-to-one.

Stats Table

All of these debt concerns are great for gold bugs. The yellow metal advanced to a new record high in nominal terms above $1600 an ounce today. When adjusting for inflation, gold traded around $2400 an ounce in early 1980. Whether or not that lofty level appears again remains to be seen, but one analyst quoted by the Associated Press says gold is headed to $1800 by the end of next year, a price target that almost seems too conservative at this point.

Gold has been a reliable buy on the dip candidate for more than a year now as every pullback to the 50-day moving average would have represented a decent entry point. With the dollar and euro looking shaky at best and investor demand for gold soaring, the path of least resistance here is easily higher. And hey, miners are finally getting in on the act as well. In the past month, the Market Vectors Junior Gold Miners ETF (GDXJ) and Market Vectors Gold Miners ETF (GDX) are up 16% and 14%, respectively, while the SPDR Gold Shares (GLD) is up about 4%.

(gold #2) Speaking of things that can be mined, shares of coal miner Walter Energy (WLT) surged $7.61, or 6.9% to $118.55 today on volume that was well above double the daily average. Citigroup initiating coverage of Walter with a ''buy'' rating and a $140 price target certainly helped, but that was not the real catalyst behind Walter's pop.

No, that honor belongs to Audley Capital Advisors, one of Walter's largest shareholders, said it has contacted the Alabama-based company's board, urging it to retain an investment bank and evaluate a sale of the company. Using the $5.1 billion offered for Australia's Macarthur Coal by Peabody Energy (BTU) and ArcelorMittal (MT), Audley Capital thinks Walter is worth a whopping $240 a share, more than doubled where the shares closed today.

Walter Energy Chart

In earnings news, shares of Halliburton (HAL), the world's second-largest oilfield services provider, closed fractionally higher on strong volume, as the Texas-based company kicked off what is a busy week of earnings reports for the oil services sector by saying its second-quarter profit jumped 54% to $739 million, or 80 cents per share, from $480 million, or 53 cents per share, a year earlier as revenue soared 35% to $5.9 billion. Excluding one-time items, Halliburton earned 81 cents a share. Analysts were expecting a profit of 74 cents on revenue of $5.71 billion.

Once again, the North American market (Read: Shale) buoyed Halliburton's quarterly results as sales there soared 63% to $3.45 billion. The company is forecasting a small slowdown in North American revenue in the back half of this year, but expects international sales to pickup incrementally. Either way, Halliburton is in a sweet spot right now. Dahlman Rose is forecasting oil and natural gas producers will spend $122 billion on exploration and production this year in the U.S. alone, 22% above last year's level, Bloomberg reported. We will have plenty of commentary and earnings updates on the energy sector at OilSlick.com. Signup for a free trial (HERE).

Halliburton Chart

The after-hours session was chock full of headlines today. Starting with Dow component IBM, Big Blue does what it usually does and that is deliver a set of quarterly results that beat Wall Street estimates. For the second quarter, New York-based IBM said it earned $3.66 billion, or $3 a share, compared with $3.39 billion, or $2.61 a s share, a year earlier. Excluding one-time items, IBM earned $3.09 a share. Analysts were expecting a profit of $3.02. Revenue came in at $26.7 billion, topping the $25.4 billion analysts were forecasting.

IBM slightly raised its 2011 profit outlook, saying it expects to earn at least $13.25 a share, up from previous guidance of $13.15. That is good news, but how much of an impact it will have on the stock is debatable because IBM has set the ambitious goal of producing operating earnings of $20 per share by 2015. In other words, investors expect increased guidance and that is what it is going to take to get to $20 per share in profits.

Still, IBM is something of a tech bellwether and as the highest priced stock in the Dow, any positive sentiment regarding IBM's results and outlook could jolt the Dow higher tomorrow. The shares were up almost 2% in the after-hours session.

IBM Chart

Staying with tech, a fallen and long ago at that, tech star was making news after the market closed. Cisco Systems (CSCO), the largest maker of networking gear, said it is planning to trim 6500 , or 9% of its full-time staff, to save $1 billion in annual costs. Earlier this month, press reports said Cisco was planning job cuts of up to 10,000.

The cuts announced this evening will sting those highest up in Cisco the hardest. According to one estimate, 15% of those with vice president designation or higher will be shown the door at the California-based company.

In connection with this plan, Cisco estimates that it will recognize total pre-tax restructuring charges to its GAAP financial results in an amount not expected to exceed $1.3 billion over several quarters, consisting of severance and other one-time termination benefits, the company said in a statement. The company said $750 million in charges will be recognized in its fiscal fourth quarter.

I am not a Cisco expert, but I doubt this news will do much to galvanize the stock. Pick a time frame, six months, one year, two years or five years, and Cisco shares are down by double digits in each. Dead money is an appropriate descriptor here.

Cisco Chart

Wynn Resorts (WYNN) was also on the move in the after-hours session, jumping more than 2.3% after saying its second-quarter profit more than doubled to $122 million, or 97 cents per share, from $52.4 million, or 42 cents per share, a year earlier. On an adjusted basis, Las Vegas-based Wynn said it earned $1.60 a share compared with 52 cents a year earlier as revenue climbed to $1.37 billion from $1.03 billion. Analysts were expecting a profit of $1.02 on revenue of $1.26 billion.

Vegas revenue rose 23%, but the real story with Wynn, as it probably will be with rival Las Vegas Sands (LVS), is Macau. Wynn's revenue on the Chinese island, the world's largest gambling mecca, surged 37%. Wynn already has two casinos in Macau, the only Chinese territory where gambling is legal, and is planning to open a third there in 2015.

Wynn Chart

Looking at the charts, the S&P 500 closed just below some support at 1307, but did find support in the 1295 area. There is some resistance looming in the 1318-1320 area. The earnings calendar is jam-packed this week, so the catalysts are there, both good and bad. Plenty of financials are reporting this week and I would not expect much out of that group. On the other hand, Apple (AAPL) reports Tuesday after the close and expectations are in place for Apple to do what Apple always does: Crush estimates.

S&P 500 Chart

The Dow violated support around 12,415 and from here, next support is 12,310. There is still some stiff resistance in the 12,750 area. IBM's earnings should help a little bit and there are 13 more Dow constituents left to report earnings this week. The INTC report after the bell Wednesday and CAT before the market opens Friday are the marquee reports from that group.

Dow Chart

The Nasdaq looked vulnerable today, falling through support at 2772. Next support is 2740 with resistance around 2825. We saw the impact GOOG had on the Nasdaq last week, now it is Apple's turn to do the same. The Nasdaq could be in for an up day tomorrow as traders buy Apple ahead of earnings and do not forget that WYNN is a Nasdaq-100 stock.

Nasdaq Chart

On a percentage basis, the Russell 2000 was by far the worst performer of the major indexes today and the close around 816 has the small-cap index within earshot of support at 810. From there, next support is further back around 790. Resistance is 825-830 and then 840.

Russell 2000 Chart

Aside from earnings, the headlines this week will be dominated by the debt ceiling talks in Washington and whatever toxic dish Europe decides to send the world's way. Good news on either front should be taken with a grain of salt because all it will be is trading near-term gain for more pain down the road. Moody's actually suggested eliminating the debt ceiling altogether and that is not a terrible idea when you think about it.

Polls show Americans favor raising the debt ceiling by a slim majority and my guess is they favor this because they see what all the rancor on this issue is doing to their investment portfolios. Raising the debt ceiling in the U.S. is like giving a gold AmEx card to a 21-year-old and telling that kid he or she does not have to pay the bill. The bad behavior that will ensue will not be surprising, but it will still stink.

As for Europe, it is painfully clear the EU and Euro we're ill-fated concepts and that Greece is now bossing Germany around when the scenario should be reversed. The lessons on both sides of the Atlantic are easy to see, but hard to implement: Governments are terrible fiscal stewards, but that is the world today. Here's to hoping that at least the debt ceiling stalemate is broken this week. I would put my money on that happening before any more good news emerges from Europe.


New Option Plays

Pull Back to Support

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Teradata Corp. - TDC - close: 56.70 change: -1.07

Stop Loss: 54.90
Target(s): 62.00
Current Option Gain/Loss: Unopened
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
TDC has had a consistent trend of higher lows and higher highs for months. Traders have bought dips at the 50-dma since last November. Today's pull back toward support near $56.00 and its 50-dma is a chance to hop on board. The stock has seen a -9% correction. The combination of the correction and the pull back to support at its long-term up trend looks like an entry point.

I am suggesting we launch bullish positions tomorrow if both TDC and the S&P 500 are positive at the open. Nimble traders could choose to try and buy a dip near $56.00 instead. We'll use a stop loss at $54.90. Our target is $62.00. FYI: The Point & Figure chart for TDC is bullish with a $79 target.

- Suggested Positions -

Buy the AUG $60 call (TDC1120H60) current ask $1.10

Annotated Chart:

Entry on July xx at $ xx.xx
Earnings Date 08/04/11 (confirmed)
Average Daily Volume = 1.5 million
Listed on July 18, 2011



In Play Updates and Reviews

S&P 500 Breaks 1300 Intraday

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500's intraday dip under support at 1300 may have spooked some traders. We had CAT, CERN, and PNRA all get stopped out. Our two new trades, NUS and POT, were not opened.

-James

Current Portfolio:


CALL Play Updates

Agrium Inc. - AGU - close: 88.08 change: -1.30

Stop Loss: 85.90
Target(s): 94.00, 98.00
Current Option Gain/Loss: -18.5% & -20.2%
Time Frame: 4 to 5 weeks
New Positions: see below

Comments:
07/18 update: AGU dipped toward its 100 and 200-dma before finding support. Volume was pretty light on today's pull back. I am still suggesting readers wait for a breakout higher and move past $90.50 before initiating new positions.

- Suggested Positions -

Long AUG $90 call (AGU1120H90) Entry @ $2.70

- or -

Long AUG $95 call (AGU1120H95) Entry @ $0.94

Entry on July 11 at $88.54
Earnings Date 08/03/11 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on July 9, 2011


BJ's Restaurants, Inc. - BJRI - close: 54.39 change: +0.40

Stop Loss: 53.15
Target(s): 59.50
Current Option Gain/Loss: -31.6%
Time Frame: about one week
New Positions: see below

Comments:
07/18 update: I am honestly shocked at the relative strength in BJRI today. Given the market's weakness I would have expected a new relative low for BJRI. We are almost out of time for this trade. Cautious traders may want to exit early anyway. I am not suggesting new positions at this time. Earlier Comments:
The most recent data listed short interest at 21% of the 24 million-share float. This as an aggressive, higher-risk trade. I am suggesting we limit our risk with small positions. We do not want to hold over the Thursday, July 21st earnings report.

- Suggested (small) Positions -

Long AUG $55 call (BJRI1120H55) Entry @ $3.00

Entry on July 14 at $55.77
Earnings Date 07/21/11 (confirmed)
Average Daily Volume = 245 thousand
Listed on July 13, 2011


Diamond Foods Inc. - DMND - close: 74.50 change: -0.85

Stop Loss: 72.75
Target(s): 79.50
Current Option Gain/Loss: -22.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
07/18 update: DMND tried to rally this morning but reversed under short-term resistance. The stock did manage to tag a new two-week low but shares are holding at technical support at the 30-dma. This level has not been broken in months. Cautious traders may want to raise their stop loss toward the $73.50 area. Given the market's rebound off its intraday lows today I would still be tempted to buy calls on DMND at current levels. Just remember to keep positions small. FYI: The Point & Figure chart for DMND is bullish with a $90 target.

- Suggested (small) Positions -

Long AUG $75 call (DMND1120H75) Entry @ $2.25

07/15 triggered at $74.25
07/14 Adjusted entry point to $74.25 and stop to $72.75

Entry on July 15 at $74.25
Earnings Date 10/05/11 (unconfirmed)
Average Daily Volume = 237 thousand
Listed on July 11, 2011


Joy Global - JOYG - close: 97.31 change: +1.90

Stop Loss: 89.00
Target(s): 102.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see trigger

Comments:
07/18 update: JOYG was relative resilient today. Traders bought the dip near short-term support in the $94 region. JOYG had almost recovered by the closing bell. I'm still thinking that aggressive traders may want to buy calls now and use a stop loss in the $93.50 area. I am actually lowering the newsletter's entry point from $92.00 down to $91.00 and adjusting our stop to $89.00. I would keep positions small.

Trigger @ $91.00 (Small Positions)

- Suggested Positions - Buy the Aug $95 call (JOYG1120H95)

07/18 New trigger @ 91.00. Stop @ 89.00. Still thinking Aggressive traders may want to buy calls now with a stop in the $93.50 area
07/16 Aggressive traders may want to buy calls now instead
07/14 Adjusted strategy. New trigger @ 92.00, stop @ 89.75
07/11 relist this play with a trigger at $93.00 and stop @ 91.40

07/11 JOYG hit our trigger at $96.00 (actually $95.97) and then hit our stop at $94.75. The option opened at $2.32 (ask) and we were stopped out at $2.20 (bid) for a loss of -5.1% We were fortune this loss was not larger!

07/09 Adjusted trigger to $96.00, stop to $94.75, target to $102.00, and option strike to Aug. $100 call.

Entry on June xx at $ xx.xx
Earnings Date 08/31/11 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on June 30, 2011


Nu Skin Enterprises - NUS - close: 39.76 change: -0.24

Stop Loss: 38.25
Target(s): 44.00
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
07/18 update: NUS did not meet our requirements to launch positions today. We wanted both the stock and the S&P 500 to open higher. NUS did open higher but the market did not. Shares of NUS were actually upgraded this morning but the rally didn't last and shares closed back under resistance at $40.00. So now that our trade did not get filled what do we do?

I am suggest we wait one day and then re-evaluate. It looks like NUS might dip toward its rising 10-dma. I want to wait and see how shares trade tomorrow and then we'll determine what our new entry point strategy will be. Nimble traders could try buying calls on a dip at the 10-dma. Or you could wait for a new high past $40.40.

Earlier Comments:
Our target is the $44.00 mark but we will plan to exit ahead of the early August earnings report. FYI: The Point & Figure chart for NUS is bullish with a $62 target. Investors should note that the most recent data did list short interest at 14.4% of the 53.4 million-share float. That does provide some fuel for a short squeeze.

- Suggested Positions -

We are going to wait until after Tuesday's close and then reconsider an entry point.
07/18 Our play has not been opened yet. We're going to wait 24 hours and reconsider.

Entry on July 18 at $ xx.xx
Earnings Date 08/02/11 (confirmed)
Average Daily Volume = 700 thousand
Listed on July 16, 2011


Potash Corp. - POT - close: 58.77 change: -0.43

Stop Loss: 56.70
Target(s): 63.75, 68.00
Current Option Gain/Loss: + 0.0%
Time Frame: exit prior to July 28th
New Positions: Yes, see below

Comments:
07/18 update: Our requirements to launch positions was not met. We wanted both shares of POT and the S&P 500 to open higher. POT did find intraday support near $58.00 and its 10-dma. The short-term trend of higher lows is still intact. Aggressive traders may want to buy calls now.

I am suggesting we try again with the same rules. Buy calls on POT if the stock and the S&P 500 opens higher tomorrow. Please note that I am inching up our stop loss to $56.70. More conservative traders may want to use a stop closer to $57.50 instead.

Earlier Comments:
Our first target is $63.75. Our second, more aggressive target is $68.00. Keep in mind that we have less than two weeks. POT is due to report earnings on July 28th. We do not want to hold over the announcement. Thus the $68 target will probably not get hit. FYI: The Point & Figure chart for POT is bullish with a $76 target.

- Suggested Positions -

buy the AUG $60 call (POT1120H60)
07/18 We are still unopened. Try again. Both POT and S&P 500 need to open higher on July 19th to buy calls.
07/18 New stop @ 56.70

Entry on July 19 at $ xx.xx
Earnings Date 07/28/11 (confirmed)
Average Daily Volume = 7.4 million
Listed on July 16, 2011


Starbucks Corp. - SBUX - close: 39.40 change: -0.40

Stop Loss: 37.75
Target(s): 44.00
Current Option Gain/Loss: unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
07/18 update: SBUX lost -1% on the day. I do not see any changes from my prior comments. If we see shares close over $40.00 I might be tempted to buy it with a stop just under $39.00. Otherwise we will keep our buy-the-dip trigger at $38.50. We do not want to hold positions over the late July earnings report.

Trigger @ $38.50

- Suggested (Small) Positions -

buy the AUG $40.00 call (SBUX1120H40)

07/12 adjust trigger to $38.50
07/11 Our first attempt at a call play on SBUX did not pan out. Shares opened lower at $39.98 and then hit our relatively tight stop loss at $39.45. The option opened at $1.49 (ask) and we were stopped out at $1.22 (bid)for an -18% loss.
We are reloading this trade with a buy-the-dip trigger at $38.75.

Entry on July xx at $ xx.xx
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume = 6.8 million
Listed on July 9, 2011


PUT Play Updates

FactSet Research - FDS - close: 93.94 change: -1.05

Stop Loss: 100.25
Target(s): 90.50, 86.00
Current Option Gain/Loss: -11.4% & -10.4%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
07/18 update: Our aggressive, higher-risk trade on FDS is off to a good start. Shares opened at $94.48 and closed at new multi-month lows. I do want to remind readers that we wanted to keep positions small. FDS remains oversold and due for a bounce. We want to keep cash available as we might get a better entry point on a bounce or failed rally near $98.00.

Earlier Comments:
Our targets are $90.50 and $86.00 but the $90.00 level is support and FDS will probably see a bounce from this level. The Point & Figure chart for FDS is bearish with a $64 target.

- Suggested (SMALL) Positions -

Long AUG $95 PUT (FDS1120T95) Entry @ $3.50

- or -

Long SEP $90 PUT (FDS1117U90) Entry @ $2.40

Entry on July 18 at $94.48
Earnings Date 09/21/11 (unconfirmed)
Average Daily Volume = 363 thousand
Listed on July 16, 2011


CLOSED BULLISH PLAYS

Caterpillar - CAT - close: 107.80 change: -1.10

Stop Loss: 106.40
Target(s): 114.00
Current Option Gain/Loss: -14.2%
Time Frame: Until the earnings report
New Positions: see below

Comments:
07/18 update: CAT was down nearly -3% intraday before paring its gains in the last two hours of trading. Traders bought the dip three times, at $106.35, at $106.16, and finally at $106.23. Unfortunately our stop loss was at $106.40 so the trade has been closed. If you're still long options I would not hold over the earnings report.

- Suggested Positions -

Aug. $110 call (CAT11H110) entry @ 3.15, exit 2.70 (-14.2%)

07/18 stopped out @ 106.40, option @ -14.2%
07/16 new stop loss @ 106.40
07/16 Plan on exiting on Thursday at the close if CAT does not hit our target
07/11 Triggered @ 107.50.
07/09 adjusted trigger to $107.50, stop to $105.95, target to $114.00

chart:

Entry on July 11 at $107.50
Earnings Date 07/22/11 (confirmed)
Average Daily Volume = 8.4 million
Listed on July 2, 2011


Cerner Corp. - CERN - close: 61.54 change: -0.36

Stop Loss: 61.45
Target(s): 64.75
Current Option Gain/Loss: + 3.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
07/18 update: CERN succumbed to market weakness and declined to $60.69 intraday. Our stop loss was hit at $61.45 closing the play early this morning. The intraday rebound almost looks like a short-term bottom. Nimble traders may want to consider buying calls again on a close above the simple 10-dma.

- Suggested (small) Positions -

Aug. $62.50 call (CERN1120H62.5) Entry @ $1.60, exit $1.65 (+3.1%)

07/18 stopped out @ 61.45, option @ +3.1%
07/09 new stop loss @ 61.45
07/08 Planned exit. July calls @ +125.0%
07/07 new stop loss @ 60.90
07/07 plan on exiting July calls on Friday at the close.
07/02 New stop loss @ 58.75
07/02 Cautious traders may want to exit the July calls now for a gain

chart:

Entry on June 29 at $60.76
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume = 624 thousand
Listed on June 28, 2011


Panera Bread Co. - PNRA - close: 128.33 change: -1.91

Stop Loss: 128.35
Target(s): 138.50, 144.00
Current Option Gain/Loss: -42.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
07/18 update: After two weeks of consolidating sideways near all-time highs PNRA finally caved into profit taking. The stock hit our stop loss at $128.35 by noon. The play is closed. However, I'm still longer-term bullish on PNRA. I would keep this stock on your watch list. A dip or a bounce in the $126-124 area could be a new entry point.

Don't forget that PNRA has significant short interest and could see a short squeeze higher. FYI: The most recent data listed short interest at 8.6% of the small 28.2 million-share float.

- Suggested Positions -

AUG $135 call (PNRA1120H135) Entry @ $3.40, exit $1.95 (-42.6%)

07/18 stopped out @ 128.35, option @ -42.6%
07/13 option back to breakeven (+0.0%)
07/12 new stop loss @ 128.35

chart:

Entry on July 11 at $130.61
Earnings Date 07/26/11 (unconfirmed)
Average Daily Volume = 337 thousand
Listed on July 9, 2011