Option Investor
Newsletter

Daily Newsletter, Monday, 9/19/2011

Table of Contents

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

Market Wrap

Greece...Again

by Todd Shriber

Click here to email Todd Shriber
It was another day at the Greek office for Mr. Market as speculation swirled that everyone's favorite Mediterranean problem will not be able to procure additional financing needed avoid a sovereign debt default. I have been saying for months that Greece should be allowed to default and the sooner the better, but European policymakers apparently do not agree and the result was another triple-digit move, this time down, for the Dow, and a slide of almost 1% for the S&P 500. Once again, the Nasdaq held up pretty well.

Stats Table

No shock here: Financials were punished following the Greece news. Bank of America published a note on Friday that said the following: ''Due to financial trading relationships and off-balance sheet exposure to European banks, the U.S. banking system will not go unscathed.'' BofA is not outright predicting that the Greece fiasco will push the U.S. into another recession, but the bank is not wiping that scenario off the table either.

The Bank for International Settlements said that U.S. banks had $41 billion in Greece exposure at the end of last year. Most of that is believed to be in the form of credit default swaps and that could be fueling speculation about counter-party risk. Forty-one billion is far less than the market caps of some major U.S. banks, but it is still more in Greece exposure than Germany had at the end of last year.

Greece Exposure Chart

Things are so gloomy out there that another bank has pared its year-end price target for the S&P 500. You may remember that I mentioned similar news from a couple of banks in last Monday's wrap. Today, it was Citigroup stepping into the booth of lower broader market expectations. The bank pared its 2011 year-end forecast for the S&P 500 to 1325 from 1400. Unfortunately, the bank does not see much in store for the more patient among us and projected a 2012 year-end target of just 1375.

The chart below shows the median expectation for the S&P 500 at the end of this year at 1,400, but that number is lower now as several banks have ratcheting their forecasts back recently. I do not know if it is good news or bad news, but typically when a decent amount of analysts and banks go in the same direction on these types of forecasts, something else happens. With that something else is better or worse than what is being predicted today remains to be seen.

S&P 500 Forecasts

Despite the nasty tumble for the Dow, a couple of non-Dow industrial stocks enjoyed very nice days. Aircraft components maker Goodrich (GR) surged another 16% on volume that was roughly 10 times the daily average following up on a monster Friday gain that was prompted by speculation Dow component United Technologies (UTX) was looking to procure financing for a big acquisition.

Goodrich was one of several companies believed to be in United Technologies' sights. Now it looks like Goodrich is the lone object of the Dow component's affections. Goodrich closed just below $108, still a 30-year high and the price could go even higher as analysts have speculated that United Technologies could offer in the $122-$128 a share range for Goodrich.

A deal for Goodrich may be valued at more than $17 billion, including $1.9 billion of net debt, based on previous deals in the U.S. aerospace and defense industry and that works out to $122 a share, according to Bloomberg News. Two unidentified sources quoted by Reuters today said United Technologies is trying lineup $10 billion to $20 billion to make an offer.

United Technologies has been making add-on acquisitions for years, limiting its deals to the $1 billion to $3 billion range. The company has not really ''gone big'' in M&A since losing out on Honeywell (HON) in 2000.

Goodrich Chart

Tyco International (TYC), once one of the largest industrial conglomerates in the U.S., jumped 2.4% on volume that was roughly five times the daily average on some news that a lot of companies seem to be taking part in these days: A corporate breakup.

Tyco has been down the breakup road before. Last time, the breakup followed former CEO Dennis Kozlowski's resignation. The last breakup involved Tyco separating its Covidien medical products and Tyco Electronics businesses. This time around, Tyco will split into three companies focused on home security, fire protection and pipes and valves, according to the Wall Street Journal.

FBR Capital Markets said the combined value of the three Tyco companies could be $52-$56 a share while JPMorgan put the price tag as high as $65 a share. Not matter how you slice it, $52-$65 is a lot better than the $44.75 Tyco closed at today. As I said, spin-offs have become popular this year. Marathon Oil (MRO) and Sara Lee (SLE) are among the companies that have already done them. ConocoPhillips (COP), the third-largest U.S. oil company, Kraft (KFT), the largest U.S. food company, and McGraw-Hill (MHP) are among the companies eying spin-offs in the near future.

Tyco Chart

As you can see, breakup news is often embraced, but there is always an exception to the rule. Netflix (NFLX) was that exception today. The movie rental company said it will separate its DVD-by-mail business from the streaming movies and TV shows operation. Investors were less than enthused as Netflix tumbled another 7.4% on volume that was more than quadruple the daily average. Factor in today's loss and Netflix is now down 30% in the last five trading days. That is while the S&P 500 and the Nasdaq are up nearly 5% each over the same five days.

If you want to keep receiving DVDs by mail, Netflix will enroll you in its new Qwikster service. The streaming business will keep the Netflix name. In other words, after ticking off customers on the matter of price, Netflix will now ask subscribers to deal with not one, but two companies. Have a problem with Qwikster? You have to call Qwikster. Same thing goes for Netflix.

Even though CEO Reed Hastings apologized for how last week's price hikes were communicated, he did not actually say he was sorry for the increases themselves. He even said that no more price increases are imminent and that Netflix is working diligently to boost its streaming content. All of that may be too little too late for Netflix. It was nice of Hastings to apologize and admit his arrogance, though all of that is of little compensation to anyone that was long Netflix from $300. Haircuts of 50% are not repaired with words.

Netflix Chart

Looking at the charts, the S&P 500 was able to pare its earlier losses and close right at support at 1204-1205. Next support should be 1190 followed by 1150. Resistance remains at 1225. Either support at 1190 or the aforementioned resistance could come into play this week, though which we way go depends on Greece and friends.

The market is clearly pricing in a Greek default, but there is little clarity on exactly when or if that will happen. For now, the reality is correlations are elevated and Europe is not only the story of the day, it is the story of EVERY day.

S&P 500 Chart

Just four Dow components were higher today. Congrats to IBM, MCD, MSFT and UTX for the feat. Days like today are not going to help the blue-chip index conquer resistance at 11,650-11,700, that much is obvious. The Dow did honor support at 11,250. In fact, the intraday low was 11,255. There are no marquee Dow earnings this week, so it will probably be Greece and the Fed moving the Dow this week. What else is new?

Dow Chart

Take Netflix and a couple of other laggards out of the equation and the Nasdaq is looking pretty solid. Apple touched a new all-time high today over $413 before closing above $411. Amazon (AMZN) is also part of the all-time high club and the Nasdaq 100 was able to muster a positive close today. Encouraging was the Composite's close above 2600. That could turn to new support, but should that not hold as support, the Nasdaq could fall back to 2550 and then 2500. Resistance can be found at 2650.

Nasdaq Chart

The Russell 2000 closed above support at 700 and that is the best thing that can be said after the index slid 1.7%. There really is no reason to be enthused about small caps as they continue to lag large caps. Failure to hold 700 could take the Russell 2000 back to 650. It will take a break of resistance at 725 to get fund managers off the small-cap sidelines.

Russell 2000 Chart

I wish I could find a legitimate reason to be long right now equities right now, but the combination of high correlations, Europe and weak economic data here in the U.S. has me thinking otherwise. There are some pretty lofty expectations being placed on the Federal Reserve this week and that certainly opens the door to disappointment. That is just one more factor to consider and it also means the ingredients in this week's pot are anything but delicious.

Todd Shriber


New Option Plays

Technology and High-End Retail

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

F5 Networks - FFIV - close: 82.89 change: -0.83

Stop Loss: 79.95
Target(s): 89.50, 94.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Technology stocks have been outperforming the rest of the market on this current rebound. Traders were quick to buy the dip this morning. FFIV saw a rebound at $80.50 before paring its losses to just -1%. I am suggesting we take advantage of this dip and intraday bounce.

We want to buy calls on FFIV now but only if the stock and the S&P 500 index both open higher tomorrow morning. We do want to keep our position size small. The simple 50-dma might be technical resistance and FFIV will probably see some resistance in the $90-92 zone.

Our first target is $89.50. Our secondary, more aggressive target is $94.50. We will list our stop loss at $79.95.

*See Entry Details Above* (Small Positions)

- Suggested Positions -

buy the OCT $85 call (FFIV1122J85) current ask $4.35

- or -

buy the OCT $90 call (FFIV1122J90) current ask $2.45

Annotated Chart:

Entry on September xx at $ xx.xx
Earnings Date 10/25/11 (unconfirmed)
Average Daily Volume = 2.6 million
Listed on September 19, 2011


Tiffany & Co - TIF - close: 76.07 change: +1.07

Stop Loss: 72.75
Target(s): 79.90, 83.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of TIF continue to show relative strength. Traders bought the dip near $73.00 this morning. That's above the 50 and 100-dma. Bulls pushed the stock back into positive territory making TIF one of the market's best performers today. I am suggesting we take advantage of this strength and buy calls now. However, we only want to buy calls if both TIF and the S&P 500 index both open positive tomorrow morning. We will list our stop loss at $72.75. Our targets are $79.90 and $83.50.

*See Entry Details Above* (Small Positions)

- Suggested Positions -

buy the OCT $80 call (TIF1122J80) current ask $2.21

Annotated Chart:

Entry on September xx at $ xx.xx
Earnings Date 11/29/11 (unconfirmed)
Average Daily Volume = 2.7 million
Listed on September 19, 2011



In Play Updates and Reviews

RRC Hits Our Target

by James Brown

Click here to email James Brown

Editor's Note:

Shares of RRC surged more than +15% intraday on takeover rumors. The stock hit our first target near $70.00.

I have updated several stop losses tonight.

FYI: In the weekend newsletter we dropped our CS put play with plans to exit immediately. Concerns over Greece hit the European banking sector really hard on Monday. Shares of CS gapped open lower at $24.60 and closed with a -7.3% decline today.

-James

Current Portfolio:


CALL Play Updates

Dollar Tree, Inc. - DLTR - close: 76.29 change: +0.75

Stop Loss: 72.25
Target(s): 76.00, 79.00
Current Option Gain/Loss: Oct$75: +53.1%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
09/19 update: DLTR held up pretty well today. When the market was down big this morning shares of DLTR only dipped to $74.44. Shares managed to rebound back into positive territory. More conservative traders might want to raise their stop loss toward the $74.00 level. We are raising our stop to $72.25. I am not suggesting new positions at current levels.

- Suggested Positions -

Long OCT $75 call (DLTR1122J75) Entry $2.35

09/19 new stop loss @ 72.25
09/17 new stop loss @ 71.75
09/15 new stop loss @ 71.45
09/15 1st Target hit at $76.00. Oct $75 call bid @ 3.20 (+36.1%)
09/15 planned exit for Sep. $75 call. bid $0.65 (+30%)
09/14 exit the September $75 calls ASAP (tomorrow morning)
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


Ingersoll-Rand Plc. - IR - close: 33.64 change: -2.06

Stop Loss: 32.90
Target(s): 34.75, 37.25
Current Option Gain/Loss: Oct$35: -27.0%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
09/19 update: Ouch! Our IR play has been damaged with some steep relative weakness today. I did not see any news behind today's -5.7% plunge. Our call option lost a whole dollar.

The morning weakness was probably just a reaction to the market's big drop but IR did not recover while the rest of the market did. The three-day candlestick pattern looks like a bearish reversal. Conservative trades will want to exit immediately! I am not suggesting new positions. We will raise our stop loss to $32.90. The low today was $33.13.

- Suggested Positions -

Long OCT $35 call (IR1122J35) Entry $1.85

09/19 readers may want to exit immediately! new stop @ 32.90
09/17 new stop loss @ 32.40
09/15 1st target hit @ 34.75. Oct. $35 call @ 1.90 (+2.7%)
09/15 planned exit on Sep$33 call. bid $0.85 (-37%)
09/14 exit Sep. $33 calls tomorrow morning at the open
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


Mead Johnson Nutrition - MJN - close: 75.80 change: -0.29

Stop Loss: 71.75
Target(s): 77.00, 79.50
Current Option Gain/Loss: Oct$70: +16.3% & Oct$75: + 6.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/19 update: MJN also held up reasonably well. Traders bought the dip near $75.00 this morning and the stock almost made it back into positive territory. I would still prefer to wait and buy a bounce from the $74 or $72 levels. Please note our new stop loss at $71.75.

Earlier Comments:
NOTE: The spreads on the Oct. $75 calls are a lot wider than the spreads on the $70s. Buying the $75s would be a riskier bet.

- Suggested Positions -

Long OCT $70 call (MJN1122J70) Entry $5.20*

- or -

Long OCT $75 call (MJN1122J75) Entry $3.15

09/19 new stop loss @ 71.75
09/17 new stop loss @ 71.45
09/14 new stop loss @ 69.90
*09/14 entry price is an estimate

Entry on September 14 at $73.22
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 1.6 million
Listed on September 13, 2011


PriceSmart Inc. - PSMT - close: 74.16 change: +0.88

Stop Loss: 69.90
Target(s): 74.75
Current Option Gain/Loss: +76.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/19 update: PSMT displayed some relative strength. The stock dipped to $71.40 this morning but rallied back to a new high. Shares hit $74.59 and our exit target is $74.75. Cautious traders may want to exit now. Aggressive traders may want to aim higher. I am raising our stop loss to $69.90.

No new positions at this time.

- Suggested Positions -

Long OCT $70 call (PSMT1122J70) Entry $3.40

09/19 new stop loss @ 69.90
09/17 Readers may want to take profits now. Option bid at $5.50 (+61.7%).
09/17 new stop loss @ 67.75, adjust target to $74.75
09/15 new stop loss @ 67.25
09/14 new stop loss @ 66.60

Entry on September 13 at $68.25
Earnings Date 11/10/11 (unconfirmed)
Average Daily Volume = 307 thousand
Listed on September 12, 2011


Praxair Inc. - PX - close: 100.09 change: -0.72

Stop Loss: 97.75
Target(s): 104.80, 109.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
09/19 update: PX is one of our new trades from the weekend. The market's gap open lower this morning negated our entry point. PX dipped to $97.84 and bounced back above its 200-dma and the $100 mark. I am suggesting we try again. The plan is to buy calls now with a stop loss at $97.75 but only if both PX and the S&P 500 index both open positive tomorrow.

NOTE: Aggressive traders might want to consider buying a breakout past the 100-dma even if the market is lower tomorrow.

Our first target is $104.80. Our second target is $109.00. The Point & Figure chart for PX is bullish with a $115 target.

*See Entry Point Details Above*

- Suggested Positions -

buy the OCT $105 call (PX1122J105) current ask $1.20

09/19 new stop loss @ 97.75

Entry on September xx at $ xx.xx
Earnings Date 10/26/11 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on September 17, 2011


Range Resources Corp. - RRC - close: 63.44 change: +0.17

Stop Loss: 59.90
Target(s): 69.75, 72.50
Current Option Gain/Loss: Oct$65: +28.5% & Oct$70: +72.4%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
09/19 update: Target achieved. RRC gapped open lower and dipped toward support near $60 this morning. Shares were starting to bounce and then BOOM, the stock surged from $61 to over $70 in minutes (+15.4%). The intraday surge was fueled by rumors that RRC was a takeover target. The rally faded and RRC eventually settled under resistance near $66.00 but still posted a +3.7% gain.

Our first target was hit at $69.75. The bid on the October $65 call was trading near $6.30 (+80.0%) and the bid on the October $70 call was near $4.45 (+206%).

I am not suggesting new positions at this time but readers may want to consider buying calls if we see RRC close over the $67.00 level. Our final target is $72.50.

- Suggested Positions -

Long OCT $65 call (RRC1122J65) Entry $3.50

- or -

Long OCT $70 call (RRC1122J70) Entry $1.45

09/19 1st target hit @ 69.75
bid on Oct. $65 call @ $6.30 (+80%)
bid on Oct. $70 call @ $4.45 (+206%)
09/13 trade opened. RRC @ 63.12

chart:

Entry on September 13 at $63.12
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on September 8, 2011


Sina Corp. - SINA - close: 109.35 change: -0.98

Target(s): 124.00
Entry #1) Current Option Gain/Loss: -41.7%
Stop Loss: 104.75
Entry #2) Current Option Gain/Loss: -26.6%
Stop Loss: 101.70
Time Frame: 4 to 6 weeks
New Positions: see trigger

Comments:
09/19 update: SINA dipped toward $105 on the market's morning weakness. Shares managed to recoup most of its losses. I am suggesting readers use the afternoon bounce as a new entry point to buy calls.

Earlier Comments:
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 recently broken through resistance and is bullish with a $146 target.

Entry #1) Triggered @ 112.55, stop: 104.75 (SMALL positions!)

Long OCT $125 call (SINA1122J125) Entry $ 5.15

Entry #2) Entry @ 107.29, stop: 101.70 (SMALL positions!)

Long OCT $120 call (SINA1122J120) Entry $ 6.00

09/13 trade opened. both entry points hit.

Entry #1) Entry on September 13 at $112.55
Entry #2) Entry on September 13 at $107.29
Earnings Date 11/15/11 (unconfirmed)
Average Daily Volume = 6.0 million
Listed on September 8, 2011


Whole Foods Market - WFM - close: 72.10 change: +3.05

Stop Loss: 65.25
Target(s): 74.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/19 update: The market's gap down at the open as well as WFM's drop at the open negated our entry point. WFM managed to rebound pretty quickly from its morning lows near $68.00. The stock ended up as one of the S&P 500's best performers today with a +4.4% rally and a new high.

I do not want to chase it here. The breakout over $70.00 is bullish but I'd rather wait. The newsletter will temporarily remove our entry point to buy calls. Let's wait and watch WFM to see how shares perform tomorrow. Then we'll either choose a new entry point strategy or we'll remove WFM as a trade.

No Trade Tonight - Just Wait and Watch

Entry on September xx at $ xx.xx
Earnings Date 11/02/11 (unconfirmed)
Average Daily Volume = 2.1 million
Listed on September 17, 2011


PUT Play Updates

Stanley Black & Decker - SWK - close: 55.32 change: -1.41

Stop Loss: 58.05
Target(s): 50.25, 46.00
Current Option Gain/Loss: Oct$50: -44.7%, & Oct$55: -33.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/19 update: SWK underperformed the market on Monday. Shares have dropped back under support near $56.00. Today's move could be used as a new entry point to buy puts.

- Suggested Positions -

Long OCT $50 put (SWK1122V50) Entry $1.90

- or -

Long OCT $55 put (SWK1122V55) Entry $3.90

Entry on September 12 at $54.78
Earnings Date 10/18/11 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on September 10, 2011


CBOE Volatility Index - VIX - close: 32.93 change: + 1.75

Stop Loss: n/a
Target(s): 26.00, 22.50
Current Option Gain/Loss: -100.0%
Second Position Gain/Loss: -100.0%
Third Position Gain/Loss: -98.2%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
09/19 update: The VIX gapped open higher on the market's morning drop. Yet volatility was fading as stocks recovered. We are almost out of time for this trade. The newsletter will close any remaining positions tomorrow (Tuesday) at the closing bell.

September VIX options expire on Wednesday, Sep. 21. 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.

- 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

09/19 prepare to close any positions tomorrow (Tuesday).
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