Option Investor
Newsletter

Daily Newsletter, Monday, 8/15/2011

Table of Contents

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

Market Wrap

Return Of Merger Monday Buoys Stocks

by Todd Shriber

Click here to email Todd Shriber
Merger Monday returned in epic fashion as nearly $22 billion in deals provided just the tonic the market needed to erase last week's losses as the Dow Jones Industrial Average booked a third consecutive day of triple-digit gains. The S&P 500 gained over 2% and the Nasdaq closed with a gain of just under that mark. The Russell 2000 was the real standout with a pop of over 3%.

Market Stats

While the mergers and acquisitions news was the highlight of the day, that does not mean all the news was good. Concerns remain on the economic front as the Empire State Manufacturing Survey of General Business Conditions slumped to -7.7 in August from -3.8 in July. That is good for the third consecutive monthly decline and the August reading was well below the -0.4 economists were forecasting. Make of that report what you will, but it would indicate there is still a chance of a double-dip recession.

Empire State Manufacturing Index

The other side of the coin is that if the economy does not ebb back into recession, the market could be on the cusp of bottoming for the year. That is the sentiment of some analysts and pundits quoted by several mainstream financial news sources today. A less bad economic outlook and equity valuations that still remain well off their 2011 highs could prompt more M&A activity as companies look to part with some the cash reserves they built up during the financial crisis.

Whether heightened M&A activity leads to rich takeover premiums is another story, but there was at least one example of rich premium being paid today and it came courtesy of Google (GOOG), the largest U.S. provider of Internet search services. News that Google will acquire Motorola Mobility Holdings (MMI) for $12.5 billion sent the maker of phones that run on Google's Android operating system soaring by almost 56%.

To be sure, Google's $40-a-share offer for MMI is a rich premium. It values the spin-off of the old Motorola at 63% above Friday's closing price and 73% above the stock's 20-day closing average, according to Bloomberg data. The 63% is also nearly double to what buyers paid in 360 wireless sector deals over the past five years, Bloomberg reported.

Google also offered up a hefty $2.5 billion breakup fee if the deal does not go through. No worries for Google though. The company had over $39 billion in cash on its balance sheet at the end of the second quarter.

Well, there are some worries for Google, actually. An unidentified industry insider interviewed by Business Insider today says Google just got its hands on the ''worst'' of the Android manufacturers. Samsung and HTC are the studs of the Android universe. They are expected to ship 83 million and 50 million Android phones this year compared to 20 million for MMI, according to the interview.

Skeptics of the deal see it as a patent grab and speculated that massive lay-offs could be seen in the future. Not to mention, Google has now turned into a competitor of Samsung and HTC, something those two companies probably are not thrilled about.

Motorola Mobility Chart

The recent slide in oil services stocks may have had some believing the sector was down for the count, but in less than 24 hours, news flow proved otherwise. On Sunday evening, National Oilwell Varco (NOV), the world's largest provider of oilfield equipment, announced $1.5 billion in Brazilian contract signings.

Transocean (RIG), the world's largest provider of offshore exploration services, followed that up on Monday with news of its largest deal in four years. Switzerland-based Transocean said it will acquire Norwegian rival Aker Drilling ASA for $1.46 billion in a deal that values the Norwegian company at an almost 100% premium to where the stock closed on Friday.

Aker said it had been actively shopping itself to suitors for several months, but Transocean, owner of the Deepwater Horizon rig, was the most interested, the Norwegian company said. The deal is Transocean's largest since the 2007 buy of GlobalSantaFe. For more news and commentary on the energy sector, sign-up for a free trial of the OilSlick daily newsletter (HERE).

Transocean Chart

Believe it or not, one of the driving forces behind the 213-point gain for the Dow was downtrodden Bank of America (BAC). The largest U.S. bank by assets jumped by nearly 8% after the company announced the sale of its $8.6 billion Canadian credit card portfolio to Canada's TD Bank (TD). BofA also said it is looking to dump its U.K. and Irish credit card portfolios. The value of the Canadian deal was not disclosed.

BofA has been on a BP-esque asset sales binge, parting with $30 billion in assets over the past six quarters. Earlier this summer, Bank of America sold a $1 billion portfolio, or 500,000 accounts, of its credit card portfolio to Regions Financial (RF), according to Reuters. The portfolio being sold to TD Bank has 1.8 million active accounts.

As is often par for the course with BofA, the good news only lasts so long. We are in the midst of second-quarter 13F filing season and after the market closed today, it was revealed that legendary hedge fund manager John Paulson slashed his stake in BofA during the second quarter to 60 million shares by quarter end. That is down from 124 million shares at the end of the first quarter.

Paulson, who made a mint betting against subprime mortgages during the financial crisis, has struggled mightily this year, due in no small part to holdings in financial services like BofA. He also pared his Citigroup (C) stake to 33.5 million shares from 41.3 million.

On the other hand, Fairholme Capital's Bruce Berkowitz boosted his fund's BofA exposure by 7 million shares during the second quarter. That works out to 99.65 million shares. That stake was worth almost $1.1 billion at the end of June, but just $762.3 million at the close today, according to the Wall Street Journal.

Bank of America Chart

Looking at the charts, it looks like support for the S&P 500 held firm at 1120 and Monday's big gain took the index past resistance at 1200. Above 1205, there is plenty of room to run back to 1250. On the downside, if support at 1120 were to fail, that would mean a retest of 1100 and from there 1045 could be an issue.

S&P 500 Chart

The Dow tore through resistance at 11,400 today and did not come all that close to flirting with support at 11,200. The blue-chip has about 120 points of real estate in front of it before it bumps into next resistance at 11,600. Earnings season is all but over, Dow components Home Depot (HD) and Wal-Mart (WMT) report on Tuesday, followed by Hewlett-Packard on Thursday. The key with the Dow in the event of a pullback could be its ability to hold 11,000. If that does not happen, the index could dip even further below 10,800 than it did last week.

Dow Chart

During the recent slide, the Nasdaq found buyers around and just under 2400 and with Monday's move above 2500, that should turn to support. Token resistance looms at 2600 with firmer ceilings at 2700 and 2750. If 2400 were to fail on the downside, 2100 could be the next stopping point.

Nasdaq Chart

The Russell 2000 may have failed at resistance at 700 on Friday, but it cruised through that barricade today, closing at its intraday higher just below 719. That is good for a bounce of almost 70 points in just a few trading days, but if the buying spree continues, that trend will matriculate over to small-caps. Whether or not that is enough to carry the Russell back to and above resistance at 775 remains to be seen. If 650 fails on the downside, 590 could be the next destination.

Russell 2000 Chart

With earnings season winding to a close, this week should be all about headline risk and economic data points. Just as this market has been sensitive to bad news on the way down, any good, or less bad, news could be the impetus for fund managers to start getting back into the game. I am not expecting throngs of good economic data, but another week of declining jobless claims could serve to calm investors' nerves and before that number on Thursday, French Prime Minister Sarkozy and German Chancellor Merkel meet on Tuesday. I would expect anything even slightly resembling positive news out of that get-together to move the market. Color me cautiously optimistic that the S&P 500 can tack on another 20-25 points this week.


New Option Plays

Data Warehousing

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Teradata Corp. - TDC - close: 56.00 change: +0.85

Stop Loss: n/a
Target(s): 62.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
This is a simple momentum trade. TDC is rebounding sharply from support near $50 and its rising 200-dma. Shares have cleared potential resistance near $54 and its 100-dma. Now shares are at $56.00 and look poised to rally past the 50-dma. The high in July was $62.71 and if TDC can rally past resistance at $56 and $58 it could make another run at its high.

I would consider this somewhat aggressive. You could argue the 50-dma is now overhead resistance. Plus, TDC is up over +10% from its recent lows. Of course a lot of stocks are up big off their lows from last week. I am suggesting we open call positions tomorrow if both TDC and the S&P 500 both open positive in the morning. However, we want to keep our position size pretty small. More conservative traders will want to wait for a pull back toward the $54.00 level instead. The Sept. $60s are only $0.95 at the moment so I'm not suggesting a stop loss on this trade. Use your position size to manage risk.

- Suggested Positions -

buy the SEP $60 call (TDC1117I60) current ask $0.95

Annotated Chart:

Entry on August xx at $ xx.xx
Earnings Date 11/03/11 (unconfirmed)
Average Daily Volume = 2.8 million
Listed on August 15, 2011



In Play Updates and Reviews

Two More Targets Hit

by James Brown

Click here to email James Brown

Editor's Note:

Stocks extend their gains to three days in a row. CLB hit our final target and the SPY hit our first target. Meanwhile ORLY, UTX and WFM were all opened.

Please note we want to exit our Aug. calls on the GMCR trade.

-James

Current Portfolio:


CALL Play Updates

Abercrombie & Fitch Co - ANF - close: 71.71 change: +1.61

Stop Loss: 69.50
Target(s): 69.75, 73.50
Current Option Gain/Loss: +53.8% & + 37.5%
Time Frame: 1 to 3 weeks
New Positions: see below

Comments:
08/15 update: ANF spent the first half of Monday drifting sideways before finally rallying late in the day. The stock has cleared resistance at $70 and its 50-dma with today's +2.2% gain. Now the stock is up four out of the last five sessions and starting to look a little bit short-term overbought.

More conservative traders may want to exit immediately. We are planning to exit tomorrow (Tuesday) at the closing bell to avoid holding over earnings. I am adding a stop loss at $69.50 just in case stocks tank tomorrow.

Earlier Comments:
This is an aggressive, higher-risk trade. ANF is due to report earnings on August 17th. We do not want to hold over the report.

- Suggested (SMALL) Positions -

Long AUG $70 call (ANF1120H70) Entry $2.08

- or -

Long SEP $70 call (ANF1117I70) Entry $4.00

08/15 new stop loss @ 69.50. Prepare to exit tomorrow at the close
08/13 prepare to exit in two days at the close
08/12 1st target hit at $69.75.
bid on the Aug. $70 call $2.66 (+27.8%)
bid on the Sep. $70 call $5.00 (+25.0%)
08/11 conditions to buy calls were met. ANF opened at $66.46.

Entry on August 11 at $66.46
Earnings Date 08/17/11 (confirmed)
Average Daily Volume = 2.8 million
Listed on August 9, 2011


Deckers Outdoor - DECK - close: 94.32 change: +0.72

Stop Loss: n/a
Target(s): 93.50, 97.00
Current Option Gain/Loss: +248.6% & +82.9%
Time Frame: 1 to 3 weeks
New Positions: see below

Comments:
08/15 update: After Friday's huge gain in DECK the rally stalled a little bit today. Shares only added +0.7%. Shares are looking a little overbought here with last week's low under $80. Conservative traders may want to add a stop loss or take profits now. Our final target is $97.00. I am not suggesting new positions at this time.

Earlier Comments:
I do consider this an aggressive trade. DECK can be a volatile normally and in this market the moves get a little crazy. We definitely want to keep our position size small. I am not listing a stop loss on this trade.

- Suggested (SMALL) Positions -

Long AUG $90 call (DECK1120H90) Entry $1.52

- or -

Long SEP $90 call (DECK1117I90) Entry $4.70

08/12 1st target hit @ 93.50
bid on Aug. $90 call @ $5.05 (+232.2%)
bid on Sep. $90 call @ $8.45 (+79.7%)

Entry on August 11 at $83.53
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on August 9, 2011


Green Mountain Coffee Roasters - GMCR - close: 102.38 change: - 1.20

Stop Loss: n/a
Target(s): 99.50, 107.50
Current Option Gain/Loss: +190.1% & +119.1%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
08/15 update: Warning! The S&P500 index rallied +2.1% and the NASDAQ gained +1.8% and yet GMCR lost -1.1%. It's unusual to see relative weakness in this stock. GMCR failed at the $105 level this morning.

I am suggesting we exit our August calls immediately! If you're holding September calls you may want to add a stop loss. I am not suggesting new positions at this time.

Earlier Comments:
As a high-risk, speculative play we wanted to keep our position size very small. We are not using a stop loss on this play.

- Suggested (SMALL) Positions -

AUG $95 call (GMCR1120H95) Entry @ $2.74, exit $7.95 (+190.1%)

- or -

Long SEP $100 call (GMCR1117I100) Entry $3.65
08/15 exit August $95 calls immediately. Bid @ $7.95 (+190.1%)
08/10 Consider exiting all August options now
08/09 adjusting 2nd target to $107.50
08/09 1st target hit at $99.50.
Aug. $95 call bid $6.30 (+129.9%), Sep. $100 call bid $6.95 (+90.4%)
08/08 we are not using a stop loss on this trade

Entry on August 8 at $91.26
Earnings Date 12/08/11 (unconfirmed)
Average Daily Volume = 2.9 million
Listed on August 6, 2011


O'Reilly Automotive - ORLY - close: 60.74 change: +0.51

Stop Loss: n/a
Target(s): 63.75, 66.00
Current Option Gain/Loss: + 10.5%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
08/15 update: Our ORLY trade is finally open. Both the stock and the S&P500 opened higher, which was our condition to launch positions. ORLY hovered near the $60 level this morning but finally rallied off this round-number support. Unfortunately today's +0.8% gain paled in comparison to the +2.1% jump in the S&P500 today.

I remain bullish here but readers will want to keep their position size small.

Earlier Comments:
Use a small position size to limit your risk.

- Suggested (small) Positions -

Long SEP $60 call (ORLY1117I60) entry $1.90

08/15 trade opened
08/13 adjusted entry point. removed Aug. strike
08/10 new trigger at $55.00
08/09 adjusted targets to $63.75 and $66.00.

chart:

Entry on August 15 at $60.37
Earnings Date 10/26/11 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on August 6, 2011


SPDR S&P500 ETF - SPY - close: 120.62 change: +2.50

Stop Loss: n/a
Target(s): 119.75, 122.50
Current Option Gain/Loss: +15.3% & +43.1%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
08/15 update: Target achieved. Stocks extended their gains to three days in a row. The S&P 500 index delivered a strong +2.1% rally and managed to close above round-number resistance at the 1200 mark. For the SPY this meant a close over $120. Our first target was hit at $119.75 pretty early this morning.

Unfortunately, the spreads seem to be getting wider. Combine that with a fast approaching August expiration and the bid on the August $118 call was at breakeven for us. Currently the bid for the Aug. $118 call is at $2.48.

If you're holding August calls you will want to consider a complete exit now. I am not suggesting new positions at this time.

Earlier Comments:
We are not using a stop loss on this trade.

- Suggested (SMALL) Positions -

Long AUG $118 call (SPY1120H118) Entry $2.15

- or -

Long SEP $120 call (SPY1117I120) Entry $2.55

08/15 1st target hit @ 119.75
bid on the Aug. $118 call @ $2.15 (+0.0%)
bid on the Sep. $120 call @ $3.32 (+30.1%)
08/08 trade opened at $115.00. We are not using a stop loss.

chart:

Entry on August 8 at $115.00
Earnings Date --/--/--
Average Daily Volume = 235 million
Listed on August 6, 2011


U.S. Oil Fund - USO - close: 34.22 change: +0.99

Stop Loss: n/a
Target(s): $37.50, 40.00
Current Option Gain/Loss: +34.6%
Time Frame: 2 to 3 months
New Positions: see below

Comments:
08/15 update: Monday proved to be a bullish day for oil prices and the USO added +2.9%. The close over $34.00 is another win for the bulls. I don't see any changes from my prior comments. Readers may want to look for another dip into the $32-30 zone before initiating new positions. Our time frame for this trade is several weeks, which is why we are using November calls. We're not using a stop loss on this trade so keep your position size small!

Earlier Comments:
This is another lottery-ticket style of play.

- Suggested Positions -

Long NOV $34 call (USO1119K34) Entry $2.05

Entry on August 9 at $31.97
Earnings Date --/--/--
Average Daily Volume = 10.7 million
Listed on August 8, 2011


United Technologies Corp. - UTX - close: 73.54 change: +1.09

Stop Loss: n/a
Target(s): 76.40, 79.75
Current Option Gain/Loss: + 0.0% & +20.6%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
08/15 update: Our new trade on UTX is now open. Shares have continued to rally and extended their gains to three days in a row. If you don't feel like chasing it here you could wait for a dip into the $72-70 zone as an alternative entry point.

Earlier Comments:
We want to keep our position size small since I'm not listing a stop loss.

- Suggested Positions -

Long SEP $75 call (UTX1117I75) Entry $1.83

- or high-risk trade with August calls -

Long AUG $75 call (UTX1120H75) Entry $0.29

Entry on August 15 at $73.21
Earnings Date 10/20/11 (unconfirmed)
Average Daily Volume = 6.6 million
Listed on August 13, 2011


Whole Foods Market, Inc. - WFM - close: 60.27 change: +1.98

Stop Loss: n/a
Target(s): 63.50
Current Option Gain/Loss: + 16.7%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
08/15 update: WFM is off to a strong start. Our trade was opened this morning. WFM gapped open higher at $58.68 and then rallied to a +3.3% gain to close over potential round-number resistance at $60.00. If you don't feel like chasing WFM here (up $6 in three days) then wait for a dip near $58 or the 200-dma.

Earlier Comments:
We want to keep our position size small since we're not listing a stop loss.

- Suggested Positions -

Long SEP $60 call (WFM1117I60) Entry $2.45

Entry on August 15 at $58.68
Earnings Date 11/03/11 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on August 13, 2011


PUT Play Updates

CBOE Volatility Index - VIX - close: 31.87 change: - 4.49

Stop Loss: n/a
Target(s): 26.00, 22.50
Current Option Gain/Loss: -100.0% & -43.7%
Second Position Gain/Loss: -100.0% & - 10.0%
Third Position Gain/Loss: + 0.0%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
08/15 update: Another widespread rally for the U.S. markets sent the volatility index plunging lower. The VIX lost -12.3% for its third daily loss in a row. Unfortunately our August puts are running out of time. The Aug. $25 put still has a bid of $0.00.

I am not suggesting new positions here.

Earlier Comments:
I am not listing a stop loss on this trade. We should consider this a higher-risk, speculative trade. I'm setting our targets at 26.00 and 22.50. NOTE: August VIX options expire after the 17th of the month. You may want to buy Septembers instead.

- Suggested Positions -

Long AUG $25.00 PUT (VIX1117T25) Entry $2.50

- or -

Long SEP $25.00 PUT (VIX1121U25) Entry $4.00

- Second Position, entered at the open on Monday, Aug. 8th -
(very small positions)

Long AUG $25.00 PUT (VIX1117T25) Entry $0.90

- or -

Long SEP $25.00 PUT (VIX1121U25) Entry $2.50

- 3rd Position, listed Aug. 8th, Open Aug. 9th @ open. -

Long SEP $30.00 PUT (VXI1121U30) Entry $5.70

08/08 3rd position listed to buy at the open on Aug. 9th
08/08 2nd position was filled the open.

Entry on August 5 at $28.48
Earnings Date --/--/--
Average Daily Volume = xxx
Listed on August 4, 2011


CLOSED BULLISH PLAYS

Core Labs - CLB - close: 110.99 change: +4.07

Stop Loss: n/a
Target(s): 104.90, 109.75
Current Option Gain/Loss: +220.0% & +242.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/15 update: Energy stocks were big winners on Monday. Oil rallied almost +3%. The oil and oil service sector indices were both up more than +3.2%. CLB was an outperformer with a +3.8% gain and a rally past resistance at its 50-dma, 30-dma, and the $110 level.

Our target was hit at $109.75 pretty early this morning.

Earlier Comments:
It's an aggressive trade so keep your position size small.

- Suggested (SMALL) Positions -

AUG $105 call (CLB1120H105) Entry $1.25*, exit $4.00* (+220%)

- or -

SEP $105 call (CLB1117I105) Entry $2.00, exit $6.85 (+242.5%)
08/15 2nd target hit @ 109.75.
08/15 *the $4.00 exit price is an estimate. The option did not trade today
08/11 1st target hit @ $104.90.
Aug. $105 call bid @ $1.80 (+44%)
Sep. $105 call bid @ $3.90 (+95%)
08/10 no new positions at this time.
08/08 we are REMOVING the stop loss for this trade
08/05 stop loss @ 95.45, under the 200-dma
08/05 play opened.
08/05 *entry price is an estimate. option did not trade today
08/04 Adjusted our strategy for the decline. New stop loss @ 95.80. New targets are $104.90 and $109.75. Buy calls if both CLB and S&P 500 are positive at the open tomorrow.

chart:

Entry on August 5 at $100.23
Earnings Date 10/20/11 (unconfirmed)
Average Daily Volume = 526 thousand
Listed on August 2, 2011