Option Investor
Newsletter

Daily Newsletter, Wednesday, 8/17/2011

Table of Contents

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

Market Wrap

Dell, Tech Drag Most Stocks Lower

by Todd Shriber

Click here to email Todd Shriber
At least Wednesday was a pretty benign day in terms of domestic and international headline risk. Dell's (DELL) gloomy after-hours report on Tuesday carried over to today, making the Nasdaq the worst performer of the three major indexes. The S&P 500 and the Dow Jones Industrial Average were able to scrape together modest gains.

Stats Table

Gold continued its bullish ways as COMEX-traded gold for December delivery closed at a record $1793.80 an ounce. That is a record closing price in nominal terms and below the intraday record of $1817.60 set on August 11. The yellow metal got a boost from an unusual source. Then again, for those of us that actively follow the oil industry and the geopolitical issues that affect that business, gold's Wednesday run may not be that surprising at all.

Venezuelan President Hugo Chavez has decided to nationalize the South American country's gold industry, something he did several years ago with the OPEC member's oil business. This really does not mean much in terms of lost or gained supply, but Venezuelan gold will be withdrawn from the European banks where it is currently stored to come home to vaults run by Venezuela's central bank.

Venezuela's official gold reserves, of 365.8 metric tons as of June, make it the 15th largest gold holder in the world according to the World Gold Council, the Wall Street Journal reported. I admit I might be jumping ahead here, but it might be worth keeping an eye out for a similar move by Peru, which is major gold and silver producer. Peru's new president is something of a Chavez disciple and a known leftist, so nationalization of any business there can never be ruled out. Nevertheless, it still looks like gold is headed higher.

Gold Chart

In stock-specific news, I will not rehash all of the carnage surrounding Dell because Jim went over those numbers last night, but it is worth having a look at Dow component Hewlett-Packard (HPQ) because the world's largest personal computer maker reports earnings tomorrow. With the disappointing outlook provided by Dell, investors chose not to wait around for HP's numbers and opted to bail on the stock today, sending the stock lower by nearly 4% on strong than average volume.

Dell was only partially to blame for HP's day in the red. BMO Capital Markets analyst Keith Bachman cut his rating on HP to ''market perform'' from ''outperform'' and slashed his price target on the stock to $36 from $43, citing ''deteriorating financial performance.'' The new price target still implies significant upside from where HP currently trades, but the reality is this stock has been almost untouchable from the long side since the 2010 departure of former CEO Mark Hurd.

Shares of HP have tumbled 25% since Leo Apotheker replaced Hurd. Bachman also said it might be worthwhile for HP to consider selling its PC business, but acknowledged there would be a limited field of buyers and that HP might struggle to monetize the asset appropriately, MarketWatch reported.

Hewlett-Packard Chart

In earnings news, Deere (DE), the largest maker of agriculture equipment, said its fiscal third-quarter profit rose 15% to $712.3 million, or $1.69 per share, from $617 million, or $1.44 per share, a year earlier. Revenue jumped 22% to $8.4 billion. Analysts were expecting a profit of $1.67 a share on revenue of $7.52 billion.

Beating expectations was not enough to appease investors as Deere shares fell 1.2% on volume that was roughly double the daily average. Deere's report amounts to a mixed bag when considering the strength in the international agriculture business. On the bright side, the company said earlier this year that natural disasters that struck Japan could weigh on sales to the tune of $300 million. That number is looking more like $70 million. On the other hand, Deere is spending more on raw materials and research and development for new products.

The company remains bullish on the global ag market, though it did lower its estimate for Brazilian farm income to $20.2 billion from $26.1 billion, but that is still above the 2010 level of $15.4 billion, the AP reported. Overall, Deere forecast a 2011 profit of $6.40 a share on revenue of $29.47 billion. Analysts were expecting revenue of $29.05 billion.

Deere Chart

Keeping with the commodities theme, shares of apparel retailer Abercrombie & Fitch (ANF) plunged almost 9% on volume that was more than triple the daily average after the company said higher commodities costs will be an issue in the back half of this year. Obviously, that means cotton prices, which I find to be an interesting situation.

Take a look at the chart of the iPath Cotton ETN (BAL). It is trading around its lowest levels of 2011 and has been in tailspin for months. So while cotton prices are high by historical levels, it can be argued that a company like Abercrombie should be catching a break on cotton prices compared to earlier this year and late 2010, not complaining about cotton prices.

Any hint of a double-dip recession would bring the bears out in droves for Abercrombie for the simple reason that this particular company has a deeply flawed business model. The flaw is that the company wins sales from parents of teens and college kids because these parents often choose to indulge their kids with the Abercrombie and ignore the fact that shirts, khakis, etc. of comparable quality can be had at any number of retailers for lower prices.

Put another way, if you are a parent looking to save money on clothing for your kids, Abercrombie is probably one of the last places you want to shop. And to add my anti-Abercrombie musings, the company is essentially bribing the cast of ''Jersey Shore'' to stop wearing Abercrombie apparel. That is odd when considering the target age group for Abercrombie is basically the same as the target age group for the MTV show.

Abercrombie & Fitch Chart

Looking at the charts, make that three days in a row that the S&P 500 has stalled at 1200. Today, the index traded as high as 1208, but could not keep those gains and closed below 1200 once again. A close above 1205 would be inviting for buyers, but that is also the neighborhood where the sellers appear most viscous. On the downside, support appears firm at 1175, but if 1205 is cleared, a run back to 1250 appears likely.

S&P 500 Chart

With a gain of just four points on Wednesday, the Dow remains laboring in its 11,200-11,500 range, though on an intraday basis, the index was able to trade slightly above the 11,500 mark. The sad story that is Hewlett-Packard is known at this point and I would not expect that earnings report to have a material impact on the Dow one way or the other unless it is far more negative than expected.

Dow Chart

The Nasdaq honored support at 2500 today, no small feat given Dell's woes. Google continues to look weak, but Apple offsets that situation with strength of its own. Same song as yesterday: Short below 2500, long above 2565.

Nasdaq Chart

Perhaps the best thing that can be said about the Russell 2000 is that it remains above 700 and that old resistance could be turning into new support. On the other hand, the 715-720 range has become a hurdle that is hard to overcome for the small-cap index recently. If the Russell gets through there, it could run back to 775. If support at 700 fails, 650 is the next stopping point.

Russell 2000 Chart

There is a distinct lack of direction in this market and to go along with that, there is not much in the way of scheduled catalysts. As I mentioned on Monday, another week of jobless claims below 400,000 would provide an excuse for buyers to get going on Thursday and that would result in some short covering as well. Here's to hoping no negative surprises emerge from Europe.


New Option Plays

Rumors Are Circling

by James Brown

Click here to email James Brown


NEW MARKET NEUTRAL OPTION PLAYS

Hewlett-Packard Co - HPQ - close: 31.39 change: -1.22

Stop Loss: n/a
Target(s): TBD
Current Option Gain/Loss: + 0.0%
Time Frame: 1 to 2 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Friday could be full of fireworks for HPQ. The company is due to report earnings on Thursday, Aug. 18th after the closing bell. Analysts are expecting a profit of $1.09 a share but there are rumors that the new HP TouchPad computer is not selling. HPQ's first attempt to compete with Apple's (AAPL) iPad product has not been accepted by the consumer and sales are so low that major retailers are asking HPQ to take them back - at least that's what the rumors are suggesting. The problem with the earnings results tomorrow is that these missing sales may not show up. HPQ could report X amount of "channel" sales that they billed to the retailers so any returns may not be factored in yet. The key may be HPQ's guidance.

We are suggesting a straddle or a strangle play to take advantage of any post-earnings volatility. HPQ reports Thursday night so we want to launch these positions tomorrow and tomorrow only. You could open them Thursday morning. The newsletter will use Thursday's closing prices.

Early Target: I'm not setting a target tonight but if we should happen to see a gain of +40% or more on Friday morning then readers may want to choose an early exit.

I am suggesting September options since August options expire after Friday.

NOTE: The newsletter is using Thursday's closing prices for these options. If HPQ closes up or down by more than a $1.00 then we'll roll our option strikes up or down to match the stock's move on Thursday.

Option Straddle (buy a call and put at the same strike)

Buy the Sep. $31 call (HPQ1117I31) current ask $1.71
- and -
Buy the Sep. $31 put (HPQ1117U31) current ask $1.42

- or -

Option Strangle (buy an OTM call and OTM put)

Buy the Sep. $34 call (HPQ1117I34) current ask $0.50
- and -
Buy the Sep. $28 put (HPQ1117U28) current ask $0.56

Annotated Chart:

Entry on August 18 at $ xx.xx
Earnings Date 08/18/11 (confirmed)
Average Daily Volume = 21.4 million
Listed on August 17, 2011



In Play Updates and Reviews

Stocks Stall at Fib Retracement

by James Brown

Click here to email James Brown

Editor's Note:

The market's indices are stalling at the 38.2% Fibonacci retracement of the July-August sell-off. One TV pundit suggested it was a matter of trader exhaustion. The morning strength was enough to trigger both our MJN and TDC trades.

-James

Current Portfolio:


CALL Play Updates

Deckers Outdoor - DECK - close: 83.37 change: -6.13

Stop Loss: n/a
Target(s): 93.50, 97.00
Current Option Gain/Loss: - 93.4% & -43.6%
Time Frame: 1 to 3 weeks
New Positions: see below

Comments:
08/17 update: What is going on with DECK? The stock has underperformed two days in a row on no news. After yesterday's nearly -5 point drop the stock dropped another -6 points today. Volume was above average on today's decline with a plunge to technical support near its 200-dma. I warned readers that yesterday looked like the third candle on a three-day bearish reversal. Coincidentally the oversold bounce from the August lows stalled almost perfectly at the 61.8% Fib retracement of the August sell-off.

This $11 plunge in two days has pushed the Aug. $90 call to almost zero and the Sep. $90 call has been cut in half. We only have two days left before August options expire. With the bid at 10 cents on our Aug. $90 calls it seems too late to exit now. However, unless DECK suddenly sees a surge back above $90.00, these Aug. $90 calls will probably see the bid drop to 5 cents or 0 (zero) cents tomorrow. We have four weeks left on our Sept. $90 calls but cautious traders may want to exit now anyway.

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: 98.73 change: - 2.01

Stop Loss: n/a
Target(s): 99.50, 107.50
Current Option Gain/Loss: ---.-- & + 54.7%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
08/17 update: Today marks the fourth decline in a row for GMCR. Shares have seen a 50% pull back from the bounce off its August lows. It could be normal profit taking but today's drop of -1.99% could also be influenced by news last night. J.M. Smuckers Co. (SJM) announced they were lowering coffee prices. SJM owns the Folgers, Millstone, and Dunkin' Donuts brand of coffees. This move reflects a drop in coffee bean prices but it follows four price hikes in the last two years. Traders could be speculating that GMCR might feel pressure to lower prices.

I am not suggesting new bullish positions at this time. More conservative traders may want to take their profits and run or consider adding a stop loss.

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 -

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


Mead Johnson Nutrition Co. - MJN - close: 71.03 change: +0.46

Stop Loss: 66.99
Target(s): 74.50
Current Option Gain/Loss: + 1.5% & -13.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/17 update: Our new trade on MJN is open. Both the stock and the S&P500 opened positive this morning. MJN gapped open at $71.11 and spent most of the day drifting sideways. The weakness in the broader market is a concern and readers may want to hesitate on launching new positions here. You could choose to wait for a dip or a bounce near the $70 or $69 levels as an alternative entry point.

- Suggested Positions -

Long SEP $70 call (MJN1117I70) Entry $2.63

- or -

Long SEP $75 call (MJN1117I75) Entry $0.75

Entry on August 17 at $71.11
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on August 16, 2011


O'Reilly Automotive - ORLY - close: 61.06 change: +0.40

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:
08/17 update: ORLY displayed some relative strength on Wednesday with a +0.6% gain. The morning rally faded but traders bought the dip twice near $60.25 this afternoon. ORLY is nearing potential resistance at the 50-dma. I would still consider new bullish positions here if both ORLY and the S&P500 index open positive tomorrow. 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.

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: 119.67 change: +0.08

Stop Loss: n/a
Target(s): 119.75, 122.50
Current Option Gain/Loss: -.-% & +28.6%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
08/17 update: The S&P500 index managed to eke out a gain even though the morning rally failed. The index and the SPY are struggling at the 38.2% Fibonacci retracement of the July-August sell-off. I am neutral here and we're not suggesting new bullish positions at this time.

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

- Suggested (SMALL) Positions -

Long SEP $120 call (SPY1117I120) Entry $2.55

08/16 exit Aug. $118 call now. bid $2.26 (+5.1%)
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


Teradata Corp. - TDC - close: 52.40 change: -2.18

Stop Loss: n/a
Target(s): 62.00
Current Option Gain/Loss: - 76.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
08/17 update: Unfortunately our bullish trade on TDC is now open. Both the S&P500 and the stock opened higher this morning, meeting our condition to launch positions. TDC opened at $54.76 but quickly reversed course and closed down with a -3.99% decline. Part of the problem was some negative commentary by analysts on the sector.

TDC was trying to find some support near $52 this afternoon but the above average volume on the sell-off is not a good sign. I am not suggesting new positions at this moment. We might get a better entry point on a dip or a bounce in the $51-50 zone so let's wait and see.

Use your position size to manage risk.

- Suggested Positions -

Long SEP $60 call (TDC1117I60) Entry $0.65

chart:

Entry on August 17 at $54.76
Earnings Date 11/03/11 (unconfirmed)
Average Daily Volume = 2.8 million
Listed on August 15, 2011


U.S. Oil Fund - USO - close: 34.01 change: +0.18

Stop Loss: n/a
Target(s): $37.50, 40.00
Current Option Gain/Loss: +26.8%
Time Frame: 2 to 3 months
New Positions: see below

Comments:
08/17 update: Crude oil prices rallied this morning even though the inventory report showed an unexpected build up in crude supplies. Gains faded but the USO closed up +0.5%. 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: 72.05 change: -0.50

Stop Loss: n/a
Target(s): 76.40, 79.75
Current Option Gain/Loss: (Sep. - 34.9% & Aug. -89.6%)
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
08/17 update: UTX saw another day of profit taking with the market undecided on a direction. I do not see any changes from my prior comments. At this time I would wait for a dip into the $71.50-70.00 zone before considering new bullish positions. The newsletter will think about doubling down at those levels. I would not buy August options at this time. August options expire at the end of this week.

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: 62.04 change: +2.07

Stop Loss: n/a
Target(s): 63.50
Current Option Gain/Loss: + 53.0%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
08/17 update: WFM continues to outperform. Shares rallied past potential resistance at the 50-dma and the $62 level today. The stock closed up with a +3.4% gain. I would not chase it at these levels. Our target to exit is at $63.50. More aggressive traders may want to target a move toward the $67-68 level instead.

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: 31.89 change: - 1.27

Stop Loss: n/a
Target(s): 26.00, 22.50
Current Option Gain/Loss: -100.0% & -62.5%
Second Position Gain/Loss: -100.0% & - 40.0%
Third Position Gain/Loss: -15.7%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
08/17 update: The VIX is slowly contracting and the index lost another -3.8% today. Unfortunately we have run out of time with our August VIX options. I fear that the decline in the VIX is not happening fast enough. Readers will want to consider an early exit now from our remaining September put options.

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 -

AUG $25.00 PUT (VIX1117T25) Entry $2.50, exit $0.00 (-100%)

- 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, exit $0.00 (-100%)

- 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

08/17 August VIX options expire
1st position Aug. $25 put @ $0.00 (-100%)
2nd position Aug. $25 put @ $0.00 (-100%)
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