Option Investor
Newsletter

Daily Newsletter, Monday, 10/10/2011

Table of Contents

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

Market Wrap

Merkozy Saves The Day

by Todd Shriber

Click here to email Todd Shriber
Stocks got another Europe-induced boost on Monday after Merkozy, the cute verbal combination of Geman Chancellor Angela Merkel and French President Nicholas Sarkozy, circled Nov. 3 on their calendars as the day their plan to recapitalize European banks and perhaps do something about Greece will be delivered. That was good enough to send the S&P 500 to its best one-day performance since August and light a fire under almost anything that can be considered a ''riskier asset.''

Stats Table

The Dow Jones Industrial Average gained 330 points and all 30 of the index's constituents were high on the day. In a true testament to the ''risk on trade'' coming back into vogue for one day at least, the Dow's four worst performers today were Procter & Gamble (PG), McDonald's (NYSE: MCD), Coca-Cola (NYSE: KO) and Kraft (NYSE: KFT). All staples stocks and that is hardly the place to be on a day when risk was being embraced.

Yes, today was a day to give risk a hug. Take coal miner Alpha Natural Resources (NYSE: ANR) for example. This stock has been taken to the woodshed recently, plunging almost 57.5% in the past three months leading up to today. I have been trading ANR off and on for several years and recently I have considered getting involved with it as a multi-month investment so I had it on my board today.

I did not pull the trigger to buy ANR for the long haul, but I traded it in the morning and while I admit this is anecdotal, this one stock that sort of gave a way this was going to be a strong day for stocks. On no specific news, ANR tacked on 9% and closed at its day high. Volume was below average and I think that is what kept me from keeping the stock beyond today, but remember this: Anyone that takes a look at ANR at $20 is going to be getting a far better price than hedge fund legend John Paulson did. We will have to wait to see if Paulson still owns ANR when the third-quarter 13F filings are released, but he did hold ANR in Q2.

ANR Chart

Staying with the commodities theme, there was some mergers and acquisitions afoot in the oil services sector. Complete Production Services (CPX) soared more than 39% on volume that was roughly 12 times the daily average after Superior Energy (SPN) agreed to buy Texas-based Complete Production for $2.6 billion in cash and stock. Complete Production investors will receive the equivalent of $32.90 for each of their shares, a 61% premium to Friday's closing price. The deal could close by the end of this year.

That followed news that broke Sunday evening that China's Sinopec (SNP), that country's second-largest oil producer, would acquire Canada's Daylight Energy for $2.1 billion. Macroeconomic concerns and weak economic data points in the U.S. and China have been hampering oil prices lately, but Goldman Sachs Group Inc. and Sanford C. Bernstein Co. have predicted a surge of oil and natural-gas takeovers following oil's recent woes, Bloomberg reported.

CPX Chart

Even on a day like today there was some bad news for select offenders and I dare I call them the usual suspects. Shares of Sprint (S) slid almost 8% on volume of over 306 million shares. That compares with average daily trade of 68.5 million. Sprint, the third-largest U.S. provider of mobile phone services, said last week it may have to tap the capital markets to raise additional cash.

Monday's slide comes on top of 20% plunge last Friday and no shortage of analysts took the ax to their ratings on Sprint today. UBS estimated that Sprint would incur a free cash flow loss of $2.5 billion over the next two years and worried how it would pay for upcoming debts, according to Reuters. JPMorgan cut its rating on the stock to ''neutral'' from ''overweight.''

Sprint Chart

One stock with significant telecom exposure that had a fine day was Apple (AAPL), who else? Apple popped 5.14% after the company said the iPhone 4S sold more than 1 million units in seven countries in its first day of availability. That beat the previous record for an iPhone debut, which was 600,000 units when the iPhone debuted in five countries last year.

The 1 million number is for pre-orders as the new generation iPhone is scheduled to be in stores later this week and it is higher because the wildly popular smartphone was only available on AT&T's (T) network when the iPhone debuted last year. This time around, it the phone is available through T, VZ and Sprint.

I saw a couple of articles today that speculated the surge in pre-orders for the new iPhone may have had something to do with the passing of Steve Jobs. I do not know about the validity of that theory, but pat of me says there might be something to it. More importantly, some analysts are saying the company will need to sell 20 million iPhones in the current quarter to really wow investors. That would be an almost 25% increase from the year earlier quarter. If any company can post that kind of gain, it would be Apple.

iPhone Sales

Back to companies that just cannot seem to get out of their own way there is Netflix (NFLX). If you happened to be tracking the stock in the pre-market and in the first few minutes of trading today, it would have been logical to assume this was going to be the first really good day for Netflix in a while. After all, the shares were up 8% on news the plan to split the DVD-by-mail business and the streaming operation has been scuttled.

Highlighting how weak of a stock Netflix now is, all of those pre-market gains evaporated and the stock even touched a new 52-week low today. When the dust settled, Netflix had lost almost 5% on volume that was more than triple the daily average. I also happened across a piece on the Web that was critical of Netflix CEO Reed Hastings, saying he was no Steve Jobs and Netflix is no Apple. That comparison probably is not fair to either gentleman or either company for the simple reason that Apple rarely, if ever, draws the ire of its customers. That is Netflix seems to know how to do lately.

NFLX Chart

Looking at the charts, with the S&P 500 closing just under 1195, the index easily dealt with resistance at 1177 and now only has minor work to do to conquer resistance at 1200. From there, 1220 will be the next hurdle. On the downside, support areas are 1150, 1120 and 1080. It would be really nice if that last one can be avoided.

S&P 500 Chat

A 330-point for the jump for the Dow on the cusp of earnings season is not a bad way to start the week and it helped the blue-chip index deal with resistance at 11,200 and 11,400. If the Dow can take 11,500, there is plenty of room unencumbered space back to 12,000. Support is 11,000 and then 10,600. Alcoa (AA) reports after the bell Tuesday and JPM reports before the bell Wednesday.

Dow Chart

The Nasdaq took out resistance at 2500 with authority and is now just 34 points away from conquering the all-important 2600 area. Support is 2510. Google (GOOG) gets the Nasdaq's earnings season rolling on Thursday.

Nasdaq Chart

As I see it, the problem that is the Euro zone remains the same. Yes, today's news was obviously uplifting for riskier assets, but the mess that Greece, Italy, Spain and others are has been a dominant theme for almost two years now. It is going to take much more than a couple of week's of less bad news to render it moot point. What I find disconcerting is how much stocks jumped on good news out of Europe today. That makes me feel like riskier assets could fall harder and faster should more bad news emerge.

Todd Shriber


New Option Plays

Significant Gains

by James Brown

Click here to email James Brown

Editor's Note:

Today's rally across the stock market is significant. Many of the major indices like the S&P 500, Dow Industrials, the Transportation index, and more have now broken through resistance at the top of their bearish channel.

We do not want to chase this huge move off last week's lows but we do want to maintain a bullish posture. This seems like a good time for traders to try a buy-the-dip approach to new bullish positions.

Here are some of the stocks that caught my eye as possible buy-the-dip candidates:

ROST, DLTR, ORLY, WFM, PSMT, INFY, IBM, VFC, LO, TJX

Plus, you may want to watch:

XOM, DECK, INTU, SNDK, ECL

XOM has broken through the top of its trading range. INTU has broken through resistance near $50 and its 200-dma. SNDK has rallied past its 200-dma. ECL has broken through the top of its bearish channel and above its 200-dma.

No new trades tonight. Wait for a pull back.

- James


In Play Updates and Reviews

Targets Tagged, Stops Hit

by James Brown

Click here to email James Brown

Editor's Note:

It was a great day for the bulls. The S&P 500 delivered its best one-day gain in almost two months. If you look at the major indices today's rally is a bullish breakout above the multi-week trendline of lower highs.

We saw ALXN and CHKP both hit our profit targets.

I am suggesting we take some profits on HPQ.

Put plays on BCR and PXD were quickly stopped out with the market in rally mode.

-James

Current Portfolio:


CALL Play Updates

Green Mountain Coffee Roasters - GMCR - cls: 93.04 chg: +0.98

Stop Loss: 89.90
Target(s): 99.75
Current Option Gain/Loss: -18.2%
Time Frame: less than 2 weeks
New Positions: see below

Comments:
10/10 update: Warning! The action in GMCR today is troubling. The U.S. stock market just produced its best one-day gain in almost two months. The S&P 500 closed up +3.4% and the NASDAQ rallied +3.5%. Yet GMCR only gained +1.0%. That is very concerning. GMCR is a momentum stock. Shares should have outperformed today. Our trade was opened this morning but I am not suggesting new positions at this time. More conservative traders may want to raise their stop or scale back positions.

Currently we have a stop loss at $89.90 and an exit target at $99.75.

(Small positions) - Suggested Positions -

Long OCT $95 call (GMCR1122J95) Entry $4.65

10/10 trade opened. GMCR gapped higher at $93.71.

Entry on October 10 at $93.71
Earnings Date 12/07/11 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on October 08, 2011


Hewlett Packard - HPQ - close: 25.74 change: +0.86

Stop Loss: 21.45
Target(s): 29.50
Current Option Gain/Loss: +72.8%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/10 update: It was another strong session for HPQ. Shares hit $25.99 before paring its gains and closing up +3.4%. I am somewhat concerned that the late August, early September highs near $26.00-26.50 and its simple 50-dma near $26.20 could be overhead resistance. Therefore I am suggesting we take some money off the table immediately. Sell half of our position now (we'll adjust for the open tomorrow morning). The bid on the 2012 January $24 call is currently at $3.70 (+72.8%). Our final target remains $29.50.

Earlier Comments:
I am not suggesting new positions at this time. The next level of resistance for HPQ is the $26.25-26.50 zone.

- Suggested Positions -

Long 2012 Jan. $24 call (HPQ1221A24) Entry $2.14

10/10 Take some $$ off the table. Sell 1/2 at the open tomorrow
09/27 new stop loss @ 21.45

Entry on September 23 at $22.52
Earnings Date 11/21/11 (unconfirmed)
Average Daily Volume = 26.6 million
Listed on September 22, 2011


Sears Holding - SHLD - close: 64.90 change: +2.78

Stop Loss: 59.45
Target(s): 69.75
Current Option Gain/Loss: Oct$65 - 2.4% & Nov $67.50: - 4.4%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
10/10 update: SHLD outperformed the market today with a +4.4% gain. The stock managed to briefly trade above resistance at its 100-dma with an early morning rally to $65.80. I am not suggesting new positions tonight.

Earlier Comments:
It's worth noting that the Point & Figure chart on SHLD has reversed higher and is now pointing to an $83 target. FYI: The most recent data listed short interest at 47% of the float.

- Suggested Positions -

Long OCT $65 call (SHLD1122J65) Entry $2.41

- or -

Long NOV $67.50 call (SHLD1119K67.5) Entry $3.35

10/08 new stop loss @ 59.45, new target 69.75

Entry on October 7 at $64.13
Earnings Date 11/17/11 (unconfirmed)
Average Daily Volume = 644 thousand
Listed on October 06, 2011


United Technologies - UTX - close: 73.75 change: +2.29

Stop Loss: 69.75
Target(s): 74.50
Current Option Gain/Loss: +94.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/10 update: UTX is seeing a bullish breakout above technical resistance at its 50-dma today. The stock gapped open higher and surged to a +3.2% gain. Our final target is $74.50. More aggressive traders could aim a little higher. Please note we are raising our stop loss to $69.75.

More conservative traders may want to take profits now with the Oct. $70 call up +94%.

NOTE: We do not want to hold over UTX's earnings report on Oct. 19th.

- Suggested Positions -

Long OCT $70 call (UTX1122J70) Entry $2.24

10/10 new stop loss at $69.75

Entry on October 05 at $69.61
Earnings Date 10/19/11 (confirmed)
Average Daily Volume = 6.3 million
Listed on October 04, 2011


PUT Play Updates

None. Currently there are no active put plays.


CLOSED BULLISH PLAYS

Alexion Pharmaceuticals - ALXN - close: 67.88 change: +2.70

Stop Loss: 61.75
Target(s): 67.90
Current Option Gain/Loss: +100.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/10 update: Target achieved. The stock market's huge rally on Monday helped fuel a +4.1% gain in ALXN. Shares hit an intraday high of $68.16. Our target to exit was hit at $67.90.

- Suggested Positions -

OCT $65 call (ALXN1122J65) Entry $2.00, exit $4.00 (+100%)

10/10 target hit at $67.90
10/08 new stop loss @ 61.75

chart:

Entry on October 05 at $63.16
Earnings Date 10/20/11 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on October 04, 2011


Check Point Software - CHKP - close: 57.81 change: +1.80

Stop Loss: 53.45
Target(s): 55.75 , 57.75
Current Option Gain/Loss: +86.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/10 update: Target achieved. Shares of CHKP continued to surge and the stock rallied to resistance near $58.00. CHKP actually hit $58.31 intraday. Our final target was hit at $57.75. The stock is now at the top of its trading range and closed just under resistance.

- Suggested Positions -

OCT $55 call (CHKP1122J55) Entry $1.80, exit $3.35 (+86.1%)

10/10 final target hit at $57.75
10/06 new stop loss @ 53.45
10/06 1st target hit at $55.75
bid on Oct. $55 call @ 2.30 (+27.7%)
10/03 testing support near $51.00, consider an early exit
10/01 readers may want to consider an early exit now.
09/26 trade opened.

chart:

Entry on September 26 at $53.00
Earnings Date 10/18/11 (confirmed)
Average Daily Volume = 1.6 million
Listed on September 20, 2011


CLOSED BEARISH PLAYS

CR Bard Inc. - BCR - close: 86.43 change: +2.50

Stop Loss: 86.15
Target(s): 80.15
Current Option Gain/Loss: -22.0%
Time Frame: less than 2 weeks
New Positions: see below

Comments:
10/10 update: Monday was the best one-day rally in the stock market in about two months. I'm not surprised that our new BCR put play has been stopped out. Shares gapped open higher at $85.13 (our entry point) and quickly hit our stop loss at $86.15.

The larger trend for BCR is still down. I'd keep it on your watch list.

- Suggested Positions -

OCT $85 PUT (BCR1122V85) Entry $2.50, exit $1.95 (-22%)

10/10 stopped out at $86.15
10/10 trade opened on gap higher at $85.13

chart:

Entry on October 10 at $85.13
Earnings Date 10/17/11 (unconfirmed)
Average Daily Volume = 976 thousand
Listed on October 08, 2011


Pioneer Natural Resources - PXD - cls: 71.42 chg: +2.97

Stop Loss: 71.35
Target(s): 63.50
Current Option Gain/Loss: -48.3%
Time Frame: less than 2 weeks
New Positions: see below

Comments:
10/10 update: Our new put play on PXD didn't last very long. Energy-related stocks were big outperformers today with the stock market's technical breakout on Monday. Shares of PXD opened at $69.28 and hit our stop loss at $71.35 before the closing bell.

- Suggested Positions -

OCT $65 PUT (PXD1122V65) Entry $1.55, exit $0.80 (-48.3%)

10/10 stopped out at $71.35
10/10 PXD gapped open higher at $69.28

chart:

Entry on October 10 at $69.28
Earnings Date 11/01/11 (confirmed)
Average Daily Volume = 2.0 million
Listed on October 08, 2011