Option Investor
Newsletter

Daily Newsletter, Thursday, 9/8/2011

Table of Contents

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

Market Wrap

Uncle Ben Disappoints, Again

by Jim Brown

Click here to email Jim Brown
Ben Bernanke spoke again today on the state of the economy but his speech was a carbon copy of the Jackson Hole speech two weeks ago and still no promise any specific stimulus program.

Market Statistics

Traders had been expecting Bernanke to further elaborate on what types of stimulus the Fed might be considering. Instead of discussing individual options Bernanke simply reiterated his closing comments from Jackson Hole.

The Fed will consider additional stimulus.

The Fed will employ tools as appropriate.

The Fed will do "all it can" to restore growth and jobs.

The key word in all those statements is "will" as opposed to could or might. The "all it can" is also a clue that suggests there is more the Fed will do since there are still stimulus options available.

The markets were hoping for more specificity. Unfortunately Bernanke was speaking only several hours before president Obama's speech on jobs to the joint session of Congress. I am sure he did not want to say anything ahead of that speech that could be in contradiction to something the president may propose. It is not politically correct to upstage your boss. After the president's proposals are announced the Fed will have two weeks before the September 20th meeting to determine what impact, if any, those proposals will have on the economy and how best to act in light of those plans.

The market was hoping for more although that hope was irrational. Anybody thinking the situation through would understand the potential for any actionable clues was minimal.

He did spend a lot of time downplaying expectations on inflation. That is another clue to the Fed's plans. If he can convince the committee that inflation is less of a problem then they will be more likely to agree to further stimulus.

The market did not get a lot of help from today's economics. The weekly jobless claims rose unexpectedly to 414,000 compared to the consensus for a decline to 405,000. Claims in the prior week were revised higher by +3,000 to 412,000.

This was a throw away week because of the holiday. Many newly unemployed workers would have waited until after the holiday to apply for unemployment. It is a little disconcerting that claims rose in that environment. It suggests we could see another rise next week as those laggards rush into file claims this week. However, there could have been a rise in claims due to damages to businesses by Irene.

Jobless Claims Chart

The international trade deficit fell sharply to $44.8 billion from $53.1 billion. This is a lagging number from July so it was mostly ignored. Exports spiked +4.9% while imports declined -0.2%. This is much better than expectations and could add another half point to Q2 GDP when it is revised.

Consumer Credit rose unexpectedly to $12 billion in July while the prior month was revised to $11.3 billion. Revolving credit declined by -$3.4 billion while non-revolving credit rose significantly from $8.7 billion to $15.4 billion. This was the largest increase since early 2008. The spike in non-revolving was related to a jump in auto sales as the dealer inventory recovered from the break in the supply chain. Credit growth rose to an annualized pace of +6.8% over the last three months and the highest rate this year. The -$3.4 billion decline in revolving credit was the largest decline since January. Total outstanding credit rose to $2.45 trillion. This is $61 billion higher than last September but still $27 billion below the peak reached in 2008.

Oil inventories declined -4.0 million barrels as a result of the outage from the tropical storm Lee that shutdown over 60% of Gulf oil production last week. A new storm, Nate has spawned in the southern gulf and was initially expected to make landfall in northern Mexico and southern Texas. Over the last couple days it has started to increase in strength and the track is starting to point a little farther north. There is a possibility it could turn into the oil patch and with winds over 70 mph today it would be even more damaging than Lee. Oil prices are not likely to fall until the impact from Nate is known.

Also, tropical storm Maria continues to slid farther west and is now expected to cross Puerto Rico and brush Cuba on its way to Florida. This storm also has the potential to enter the Gulf although today that possibility is remote.

Tropical Storm Map

Nate Storm Track

Maria Storm Track

Wholesale Trade for July is the only report on the calendar for Friday. As a lagging report it will be mostly ignored.

Other factors weighing on the market today included the decision by the ECB to keep rates on hold at 1.5%. The problem was the lack of mention of any new monetary policy implementation. This was like the Bernanke speech. Lots of expectations and no big reveal of a new program. Jean-Claude Trichet also weighed on the market when he announced a cut in the GDP forecast for Europe. He said threats to growth in the euro region had worsened and inflation risks had eased. He left the options open for banking officials but failed to suggest there would be any change in policy. He said the economy faces "particularly high uncertainty and intensified downside risks." He said the ECB remained ready to pump more cash into the market "if needed" and that lack of action depressed sentiment.

Gold prices recovered from their Wednesday dip to post a $50 gain today to $1852 and it is trading at $1863 overnight.

All eyes were on the president's speech coming up after the close. The president announced a $447 billion package of tax cuts and spending measures. The highlights of the package were as follows.

He proposed a $175 billion one-year extension and expansion of the employee payroll tax holiday that would have the tax rate to 3.1% in 2012.

He also proposed a $65 billion package to encourage small businesses to hire more workers. This would include cutting employer payroll taxes to 3.1% for the first $5 million of a company's wage bill in 2012. He also suggested a complete payroll tax holiday for increasing the size of payrolls by up to $50 million above the prior year either by hiring new workers or raising the salaries of existing workers.

The president said he was going to announce a plan to provide low cost refinancing to existing households. The holdup was discussions with Fannie and Freddie on how they could lower the barriers to refinancing. The number one barrier is credit quality. The new credit requirements are preventing the majority of existing homeowners from refinancing.

The president wants to continue the 100% expensing of corporate purchasers for 2012. That would cost another $5 billion.

He proposed $85 billion in aid for state and local governments. $35 billion for keeping teachers, police and firefighters in their jobs. $30 billion to modernize schools and community colleges. $15 billion to rehabilitate and refurbish vacant and foreclosed homes. Another $5 billion to help low income youths an adult workers and supporting year-round jobs for young people and subsidize work for unemployed low-income workers.

The president proposed $50 billion to invest in highways, transit, rail and aviation including upgrading airports and Air Traffic modernization.

He proposed $49 billion for a one year extension of long-term unemployment benefits currently about to expire for six million jobless Americans. Another $8 billion would be for tax credits for long-term unemployed.

The S&P futures declined sharply immediately after the speech but recovered quickly to slightly positive.

In stock news Google announced it was buying dining authority Zagat. They did this to compete with Open Table and Yelp. By adding Zagat to maps and reservations Google will attempt to differentiate themselves from the competition. This is part of Google's continuing plan to make more things available on mobile devices for an increasingly connected public. Zagat will be integrated into Google Places. There was no price mentioned but in 2008 Zagat had engaged Goldman Sachs to look for buyers in the $200 million range. Google had previously made a $500 million offer for Yelp but the deal talks collapsed. Open Table (OPEN) shares declined -10% after the Zagat deal was announced leaving them with a market cap of $1 billion.

Shares of Verisign (VRSN) declined nearly 12% in after hours after the CFO Brian Robbins unexpectedly resigned to pursue new opportunities. He will remain on through year-end to assist with a transition. The company also reaffirmed its 2011 financial outlook saying the resignation was not the result of any matters which would have an impact on the company.

After the bell Texas Instruments (TXN) warned earnings and revenue would be lower than expected for Q3. The company said it was seeing weaker demand "across a wide range of products, markets and customers." Revenue was cut to a mid range of $3.0 billion from prior forecasts averaging $3.55 billion. TXN said earnings would decline to 56-60 cents from prior estimates of 55-65 cents. The company statement said "the reductions are due to broadly lower demand across a wide range of products, markets and customers." They said demand began to decline in June with demand below seasonal norms. Shares only declined slightly in after hours.

Sunday is the ten-year anniversary of 9/11 and there is terrorist trouble again. The White House said there was a credible but unconfirmed threat ahead of the anniversary. Al-Qaeda has a history of repeating attacks on anniversaries. New York city and Washington were named as the potential sites for trouble next weekend. Officials said there was a high profile manhunt underway for 2-3 suspects. The government raised the threat level last week saying there was an increase in terrorist chatter but no specific threat. They raised awareness again today but continued to stress there was no confirmed threat. An initial report earlier in the week mentioned some rental trucks that had disappeared but officials said late Thursday those trucks had been recovered and were not a danger.

The S&P opened higher but came to a dead stop at our recurring nemesis of resistance at 1205. That was a challenge last time we moved higher in late August and apparently it is still a challenge. However, after yesterday's big gain I would have expect any further move higher ahead of Bernanke and Obama to be very difficult to achieve.

The dip today was lackluster and on low volume. Given the lack of any surprises in the president's speech I would suspect there will not be any enthusiasm for trading on Friday. Traders really have no reason to buy but there is no real reason to sell either. The potential for the Fed to act on Sept 20th is still real and that should keep the markets from falling off a cliff.

The odds are good we will trade in a range over the next couple weeks as we move into the earnings warning cycle. Events like the Texas Instruments warning will become more prevalent but overall corporate profits are still in good shape. There will be some unexpected warnings but we already knew semiconductor sales were weak.

The S&P could continue to trade between 1120-1220 until the Fed meeting. There is no compelling reason to trade other than a dip to the 1120 level or a breakout over 1220.

S&P Chart

The Dow did not quite make it to strong resistance at 11,500 with the high of the day at 11,477. The most positive point in the chart below is the pattern of higher lows. This suggests the range will continue to narrow as we get closer to the FOMC meeting. Support is now 11,000 with resistance at 11,500.

Dow Chart

The only real trend in the Nasdaq is extreme volatility as evidenced by the series of gap opens. We already knew semiconductor sales were weak so the TXN news was no surprise but there was always hope they would buck the trend. With September already showing extreme volatility for tech stocks the warning from TXN may make it less likely there will be enough buyers to produce a breakout over 2600 before the FOMC meeting. Like the other indexes I believe the Nasdaq will continue to trade in its recent range with a possible upward bias.

Nasdaq Chart

Russell Chart

I am neutral on the market for Friday. Even though summer is over there may still be some lingering vacations by traders. Volume should be light and direction dictated by Europe. The president's speech did not produce a direction in the overnight futures with them trading flat late tonight.

I would be in the camp of "why buy" for Friday. The weekend event risk is high and there is no trend other than range bound. I would look to buy the dips or buy a breakout over current resistance and avoid being cut to pieces in the range bound chop.

Jim Brown

Send Jim an email


New Option Plays

Oil & Chinese Internet

by James Brown

Click here to email James Brown

Editor's Note:

In addition to our new trades tonight we were going to add a bullish call play on ULTA with a trigger to buy calls above $61.00 but the company reported earnings tonight. ULTA beat estimates by 6 cents and guided higher but we're not seeing any action in after hours trading. Aggressive traders could still try but there could be some unnecessary volatility as traders exit now that the news is out.

- James


NEW DIRECTIONAL CALL PLAYS

Range Resources Corp. - RRC - close: 65.39 change: -0.61

Stop Loss: 60.55
Target(s): 72.25, 74.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see Trigger

Company Description

Why We Like It:
RRC continues to edge higher and seems to be coiling for a bullish breakout past resistance near $67.00. Nimble traders could try and buy a dip near its rising 30, 40, or 50-dma(s). Instead of trying to catch a dip I am suggesting readers buy a breakout. Last week the stock failed twice near $66.70. Today the stock failed at $66.92. I am suggesting we buy calls at $67.10. More conservative traders may want to wait for a move past $67.50 instead since the early August high was $67.33.

We will start this trade with a wide (aggressive) stop loss at $60.55, which is under Tuesday's low. Once we're triggered and the play is open we plan to adjust our stop loss higher.

FYI: The Point & Figure chart for RRC is bullish with an $85 target.

Trigger @ $67.10

- Suggested Positions -

buy the OCT $70 call (RRC1122J70) current ask $2.65

Annotated Chart:

Entry on September xx at $ xx.xx
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on September 8, 2011


Sina Corp. - SINA - close: 108.74 change: -0.46

Stop Loss: 103.90
Target(s): 124.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
SINA is essentially a Chinese Internet stock and tends to move with that industry. The stock has been showing some relative strength this week with a big bounce off its Tuesday low near technical support at the 200-dma. SINA saw a temporary breakout past resistance at the 100-dma and the $110 level today but it failed near the trendline of lower highs. The high today was $111.97.

I suspect that if SINA can breakthrough this trendline it will see a significant surge toward the July highs or higher. You could argue that SINA has been building a big inverse (bullish version) head-and-shoulders pattern (see chart).

Nimble traders could try buying a dip near $100 if we see another market pull back. I am suggesting we use a trigger to buy calls at $112.55. If triggered we'll use a stop loss at $103.90. We do want to keep our position size small because SINA can be a volatile stock and we have a wide stop loss.

I am setting our target at $124.00. More aggressive traders could aim higher. The inverse H&S pattern would suggest a target in the $150 area.

FYI: The Point & Figure chart for SINA has just broken through resistance and is bullish with a $146 target.

Trigger @ 112.55 (SMALL positions!)

- Suggested Positions -

buy the OCT $125 call (SINA1122J125) current ask $4.90

Annotated Chart:

Entry on September xx at $ xx.xx
Earnings Date 11/15/11 (unconfirmed)
Average Daily Volume = 6.0 million
Listed on September 8, 2011



In Play Updates and Reviews

Waiting for Obama

by James Brown

Click here to email James Brown

Editor's Note:

After Wednesday's big gains the stock market was in a wait and see mode while investors looked toward the President's speech tonight.

-James

Current Portfolio:


CALL Play Updates

Cabot Oil & Gas - COG - close: 74.30 change: -2.82

Stop Loss: 69.90
Target(s): 82.00, 84.75
Current Option Gain/Loss: Oct.$80: -31.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/08 update: Another rise in the U.S. dollar weighed on oil prices, which could have influenced the weakness in energy stocks. COG definitely saw some profit taking with a -3.6% drop after yesterday's failure to breakout past resistance. COG should see support in the $72-70 zone. Traders will want to wait for the next bounce before considering new positions.

- Suggested Positions -

Long OCT $80 call (COG1122J80) Entry $4.50

09/07 trade opened. COG gapped open higher at $76.72
09/06 original trade stopped out. Try again tomorrow with new stop and targets

Entry on September 7 at $76.72
Earnings Date 10/25/11 (unconfirmed)
Average Daily Volume = 2.1 million
Listed on September 6, 2011


Dollar Tree, Inc. - DLTR - close: 71.20 change: -0.79

Stop Loss: 68.95
Target(s): 76.00, 79.00
Current Option Gain/Loss: Sep$75: -50.0% & Oct$75: -34.0%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
09/08 update: DLTR tried to rally this morning but ran out of steam at $72.50. Shares gave up -1.0%, which was in line with the S&P500's decline. The $69-70 zone should be short-term support so we can use a dip or a bounce near this area as a new bullish entry point to buy calls.

- Suggested Positions -

Long SEP $75 call (DLTR1117I75) Entry $0.50

- or -

Long OCT $75 call (DLTR1122J75) Entry $2.35

09/07 trade is open. DLTR gapped open at $72.97
09/06 trade not open. Adjusted entry point strategy, stop loss, and targets.

Entry on September 7 at $72.97
Earnings Date 11/17/11 (unconfirmed)
Average Daily Volume = 2.2 million
Listed on September 3, 2011


Energy XXI Ltd. - EXXI - close: 25.32 change: -0.46

Stop Loss: 23.49
Target(s): 27.90, 29.75
Current Option Gain/Loss: Oct$27: -18.9% & Dec$30: -13.5%
Time Frame: 6 to 12 weeks
New Positions: see below

Comments:
09/08 update: EXXI tried to rally a couple of times today but it couldn't get past the 30-dma. If you look at an intraday chart you can see where EXXI was failing near the $26.40 level. The failure to breakout also reinforces the pennant formation pattern. The next move could be a dip toward this week's lows near $24.00. I'd wait for that dip or a bounce from $24.00 before launching new positions.

Earlier Comments:
Readers may want to keep their position size small because EXXI can be a volatile stock! Plus, I want to point out that technically EXXI is in a neutral trading pattern of higher lows and lower highs (pennant formation).

- Suggested Positions -

Long OCT $27 call (EXXI1122J27) Entry $1.85*

- or -

Long DEC $30 call (EXXI1117L30) Entry $1.85*

09/07 trade open. EXXI opened at $25.67
*prices are estimates. options did not trade today
09/06 original trade stopped out. Try again tomorrow with new stop and targets

Entry on September 7 at $25.67
Earnings Date 10/25/11 (unconfirmed)
Average Daily Volume = 1.4 million
Listed on September 6, 2011


Ingersoll-Rand Plc. - IR - close: 33.35 change: -1.11

Stop Loss: 31.25
Target(s): 34.75, 36.75
Current Option Gain/Loss: Sep$33: -18.5% & Oct$35: -27.0%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
09/08 update: IR managed to tag a new four-week high this morning before reversing directions. The stock closed down -3.2%, which erased a good chunk of yesterday's big gains. I would wait for a dip near the simple 10-dma (about 32.50) or a dip near $32.00 before considering new bullish positions on IR.

- Suggested Positions -

Long SEP $33 call (IR1117I33) Entry $1.35*

- or -

Long OCT $35 call (IR1122J35) Entry $1.85

09/07 trade opened. IR gapped higher at $33.39
*price is an estimate. option did not trade today
09/06 play not open. try again. new stop loss $31.25

Entry on September 7 at $33.39
Earnings Date 10/20/11 (unconfirmed)
Average Daily Volume = 8.0 million
Listed on September 3, 2011


U.S. Oil Fund - USO - close: 34.46 change: -0.23

Stop Loss: 31.90
Target(s): $37.50, 40.00
Current Option Gain/Loss: +33.6%
Time Frame: 2 to 3 months
New Positions: see below

Comments:
09/08 update: The USO oil ETF stalled at resistance near $35.00. Another rise in the U.S. dollar put pressure on oil prices. There is a good chance that the USO will pull back toward the $33 area if stocks retreat.

No new positions at this time.

Earlier Comments:
Keep your position size small! This is a lottery-ticket style of play.

- Suggested Positions -

Long NOV $34 call (USO1119K34) Entry $2.05

08/27 new stop loss @ $31.90
08/27 removing 2nd trigger to add another position.
08/20 Adding a new buy-the-dip entry at $30.50, stop @ 29.00

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


PUT Play Updates

Moody's Corp. - MCO - close: 30.08 change: -0.19

Stop Loss: 31.60
Target(s): 26.50 , 25.25
Current Option Gain/Loss: Sep$30: -61.5% & Oct$27: -50.5%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
09/08 update: MCO rallied to $30.70 this morning before eventually reversing and closing negative (-0.6%). This almost looks like a failed rally/lower high sort of pattern. Readers could use this move as a new entry point. Cautious traders will want to consider a lower stop loss (maybe near $31.00 or closer to today's high). Alternative you could wait for a new drop under $29.50 as an entry point to buy puts.

Earlier Comments:
FYI: There are plenty of investors who are bearish on MCO. The most recent data listed short interest at almost 15% of the 183 million-share float. That does raise the risk of a short squeeze. We want to keep our position size small.

The Point & Figure chart for MCO is bearish with a $19 target.

We will list both September and October calls but bear in mind that Septembers will expire in less than two weeks. I prefer the Octobers!

* Small Positions * - Suggested Positions -

Long SEP $30 PUT (MCO1117U30) Entry $2.00*

- or -

Long OCT $27 PUT (MCO1122V27) Entry $1.80*

09/06 *Entry price on these options are estimates. Options did not trade today.

Entry on September 06 at $28.06
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 4.5 million
Listed on September 3, 2011


CBOE Volatility Index - VIX - close: 34.32 change: + 0.94

Stop Loss: n/a
Target(s): 26.00, 22.50
Current Option Gain/Loss: -98.7%
Second Position Gain/Loss: - 98.0%
Third Position Gain/Loss: -91.2%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
09/08 update: It was almost a quiet day for the VIX given the big moves recently. The VIX did see an intraday reversal higher and closed up +2.8%.

We are not suggesting new positions at this time.

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: These VIX options expire on Wednesday, September 21st.

- Suggested Positions -

Long SEP $25.00 PUT (VIX1121U25) Entry $4.00

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

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 = ---
Listed on August 4, 2011