Option Investor
Newsletter

Daily Newsletter, Monday, 10/31/2011

Table of Contents

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

Market Wrap

Europe Rears Its Ugly Head Again

by Todd Shriber

Click here to email Todd Shriber
It was a dreadful day for U.S. equities as concern's regarding the European Union's ability to contain the continent's sovereign debt crisis played like Lazarus and rose from the grave. The MF Global (MF) situation did not help matters. With the rapid decline of the commodities and derivatives broker being viewed by some as miniature version of Bear Stearns or Lehman Brothers, investors were skittish on October's final trading day as the S&P 500 lost 2.5% and the Dow Jones Industrial Average dealt with a 276-point decline. The Nasdaq shed 1.93%.

Market Stats

I will not be so bold as to say all the good work the market did last week has gone for naught, but Monday's session serves as a stark reminder to what so many folks have been saying over the past week. That being Europe is making progress, but the sovereign debt issue is nowhere near solved. Most investors probably knew that in the back of their minds, but the behavior of U.S. and European equities today is proof positive that as fast as Europe can boost riskier assets, it can drag them down as well.

Making matters worse is the fact that China is not likely to play savior as so many European policymakers were secretly hoping. In fact, China's Xinhua News Agency said the world's biggest country by population will not play savior to Europe. Even as a former journalist, I say do not believe everything you read, but when it comes from the state-run news agency, I think it is a pretty safe bet that China will not be the ultimate backstop for Europe.

It was a bad day for bonds issued by the PIGS. The five-year Italian yield rose to the highest since the euro was introduced in 1999 and yields on Spanish 10-years rose to a 12-week high, Bloomberg reported. The spread on Italian 10-years over comparable German bunds is now 400 basis points. No treats on Halloween for investors in PIGS debt, that is for sure.

Italian Bond Yields

In economic news, the Chicago Purchasing Managers Index (PMI) fell to 58.4% in October from 60.4% in September. Economists expected a reading of 58.4%. The employment index jumped to a six-month high, but new orders fell to 61.3% from 65.3%. The national Institute of Supply Management's manufacturing index is released tomorrow.

As noted earlier, a large part of the reason for Monday's declines was the onslaught of negative headlines regarding MF Global. In what amounts to a potential embarrassment for MF Global CEO Jon Corzine, formerly head of Goldman Sachs (GS) and U.S. Senator from and governor of New Jersey, the brokerage firm filed for Chapter 11 bankruptcy protection in New York on Monday, listing $41 billion in assets and $39.7 billion in debt.

Throughout last week, there was a flurry of speculation that MF was looking to sell some of its assets o the entire company and Corzine reportedly made calls to basically every bank on the Street. There was a rumor that Jefferies (JEF) was interested. DealBook reported Sunday night that Interactive Brokers (IBKR) was talking with MF.

Cozine took the reigns at MF in March 2010 and by most accounts, looked to transform the brokerage house into more an investment bank. That shift included risky trading practices and those risky trades include big bets on European sovereign debt. MF held $6.3 billion of Italian, Spanish, Belgian, Portuguese and Irish debt as of Oct. 25, Bloomberg reported. That is not the kind of stuff you want sitting on the books when you are looking for a buyer.

Last week, Moody's and Fitch both downgraded MF debt to junk status and it appears bankruptcy for the firm arrived faster than a Kardashian divorce. I kid, I kid. In all seriousness, MF Global's bankruptcy is the eighth-largest in the U.S. by assets, according to bankruptcydata.com.

MF Global Chart

Finding stocks that were in the green, let alone making new 52-week highs today was easier said than done. One standout, however, was health insurance provider Humana (HUM). On a grizzly day for stocks, Humana jumped 5.7% on volume that was nearly triple the daily average. Humana said its third-quarter profit increased 13% to $444.7 million, or $2.67 per share, from $393.2 million, or $2.32 per share, a year earlier. Revenue rose 11% to $9.3 billion. Analysts expected a profit of $2.03 per share on $9.26 billion in revenue. Humana also forecast a 2012 profit of $7.40-$7.60 a share, which is well above the $7 analysts were expecting.

Humana Chart

There was another episode of as Yahoo (YHOO) turns airing on Monday. This time, the embattled Internet search company slid 5.6% on above average volume after the company said it may sell its Asian assets and distribute those proceeds to investors in the form of a dividend rather than sell itself. Proceeds from the sale of Yahoo's Asian assets could be used for a special dividend or a share buyback plan, Bloomberg reported citing sources with knowledge of the matter.

There has been no shortage of rumors about who is supposedly interested in Yahoo, but the company still seems intent on battling Google (GOOG) alone. Yahoo shareholders have been put through the ringer so much at this point at this point that it is going to take more than a one-time dividend to appease them and today's drop might tell us as much.

Yahoo Chart

After the bell, Anadarko Petroleum (APC), the second-largest U.S. independent oil and natural gas producer, reported a third-quarter loss of $3.05 billion, or $6.12 per share, compared to a year-earlier loss of $26 million, or 5 cents per share. The loss was attributable to Anadarko agreeing to settle Gulf of Mexico spill liabilities with BP (BP).

On an adjusted basis, Anadarko earned 66 cents a share on revenue of $3.20 billion, but those numbers missed Wall Street estimates of 67 cents on revenue of $3.31 billion. The company did say its total production rose 10% and onshore production surged 30%. The after-hours crowd may be focusing more On Anadarko's production numbers as the stock is higher by almost 1% as of this writing.

Anadarko Chart

Looking at the charts, the bad news about Monday's decline beyond the obvious carnage is that the S&P 500's stay above its 200-day moving average was short-lived. The index came to a dead stop at resistance at 1285 on Friday and if it spends too many days below what was support at 1255, a return to 1225 could become a reality.

S&P 500 Chart

Things are not much different for the Dow. The blue-chip index was overbought after last week's rally and Monday's decline has brought it slightly under the 200-day line. The Dow did not touch support at 11,900 today, but if it does this week, it will be important to see what happens there. If 11,900 holds, that is probably a buying opportunity before another run at 12,250.

Dow Chart

Tech was no place to hideout today as the Nasdaq slid below round number support at 2700 and legitimate support at 2691. If the Nasdaq can retake 2700, then 2740 is next resistance and then it is on to 2825. There are not of marquee earnings reports this week, but the number of earnings reports is decent enough and the Nasdaq does have two names that could make an impact: QCOM Wednesday and SBUX Thursday.

Nasdaq Chart

As Jim noted in the weekend wrap, JPMorgan has a 1400-1475 S&P 500 year-end price target. Assuming that proves accurate, the index needs to gain 147-222 points from here, but that does not really jibe with this statistic: Price targets for companies in the index from more than 10,000 estimates suggest the S&P 500 will advance 13 percent to 1,447.93 in a year, according to Bloomberg.

I have become convinced that anything is possible, particularly after the big pop stocks delivered in October. That said, I continue to beat the dead horse and warn that Europe can hasten or hamper gains for the rest of this year.


New Option Plays

Financials & Industrials

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Goldman Sachs - GS - close: 109.55 change: -6.31

Stop Loss: 102.25
Target(s): 113.75
Current Option Gain/Loss: Unopened
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of GS experienced some profit taking today. Financials had been some of the market's best performers last week. Today they were some of the worst as traders took money off the table to lock in gains. Technically GS has entered the gap from $106 to 110. The bottom of the gap should be support. Plus, the stock used to have resistance at $105. This level should now be new support.

I am suggesting we launch small bullish positions on a dip at $105.25 with a stop loss at $102.25. If triggered our upside target is $113.75. More aggressive traders could aim for the 100-dma instead. We do want to keep our position small because GS can be a volatile stock.

buy-the-dip Trigger @ $105.25

- Suggested Positions -

buy the NOV $105 call (GS1119K105)

Annotated Chart:

Entry on October xx at $ xx.xx
Earnings Date 01/19/12 (unconfirmed)
Average Daily Volume = 8.5 million
Listed on October 31, 2011


United Technologies - UTX - close: 77.98 change: -1.53

Stop Loss: 74.45
Target(s): 79.85
Current Option Gain/Loss: Unopened
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Dow-component UTX appears to have stalled at resistance near $80.00. The stock will likely fill the gap and there is a good chance it will dip toward the 10-dma and even the $75.00 level. Yet this is probably just a normal correction within the new up trend. We want to be ready to buy the dip. I am suggesting we buy calls on a dip at $76.25 with a stop loss at $74.45. Our target is $79.85. More aggressive traders could aim for the simple 200-dma instead.

buy-the-dip Trigger @ $76.25

- Suggested Positions -

buy the NOV $77.50 call (UTX1119K77.5)

Annotated Chart:

Entry on October xx at $ xx.xx
Earnings Date 01/26/11 (unconfirmed)
Average Daily Volume = 5.2 million
Listed on October 31, 2011



In Play Updates and Reviews

Markets Get Spooked

by James Brown

Click here to email James Brown

Editor's Note:

The stock markets suffered a little scare today thanks to some troubling headlines out of Europe. Yet after four big weekly gains in a row the market was poised for profit taking. Investors could have used any headline as an excuse to sell.

Our new trades on DE and IYF are open. I've adjusted the trigger on our Visa trade. Meanwhile our FXI trade has been stopped out.

-James

Current Portfolio:


CALL Play Updates

Bed Bath & Beyond Inc. - BBBY - close: 61.84 change: +0.69

Stop Loss: 59.75
Target(s): 64.75
Current Option Gain/Loss: - 9.3%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
10/31 update: BBBY displayed relative strength today with a +1.1% gain thanks to takeover speculation. The bullish trend remains intact but I'm reluctant to launch new positions at current levels. Thankfully the options saw a nice rebound today.

*Small Positions*- Suggested Positions -

Long NOV $62.50 call (BBBY1119K62.5) Entry $1.50

10/27 new stop loss @ 59.75

Entry on October 14 at $61.00
Earnings Date 12/21/11 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on October 12, 2011


Costco Wholesale - COST - close: 83.25 change: -1.68

Stop Loss: 81.80
Target(s): 97.50
Current Option Gain/Loss: Nov$85 call: -51.9% & Jan $90 call: + 3.9%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
10/31 update: Hmm... what happened to COST today? In the last hour of trading the stock fell off a cliff. I couldn't find any specific news to account for the late day drop. The stock looks headed for the $82.50-82.00 zone. I am not suggesting new positions at this time.

Earlier Comments:
Our multi-week exit target is $97.50. Cautious traders will want to consider an exit near $90 or $94 instead. Keep positions small.

(small positions)- Suggested Positions -

Long NOV $85 call (COST1119K85) Entry $1.52

- or -

Long 2012 Jan $90 call (COST1221A90) Entry $1.01

10/27 trade opened on gap higher at $85.00
10/26 Adjusted entry point strategy. Buy calls tomorrow if COST and S&P 500 index open positive. New stop loss at $81.80.

Entry on October xx at $ xx.xx
Earnings Date 12/07/11 (unconfirmed)
Average Daily Volume = 2.9 million
Listed on October 22, 2011


Deere & Co. - DE - close: 75.90 change: -2.77

Stop Loss: 73.75
Target(s): 82.00
Current Option Gain/Loss: Nov$77.50c: - 6.1% & Dec$80c: - 4.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
10/31 update: It looked like DE was going to hold support at the $76.00 level today. Traders bought the dip just above $76.00 early this morning and then again very late this afternoon. It wasn't until the very last few minutes of trading that DE actually hit $76.00 and traded lower. Our plan was to buy calls on a dip at $76.00. Readers may want to wait for a dip near $75.00 instead as their entry point.

Please note that upon further view I think our stop loss at $74.40 is too tight. We'll move it to $73.75.

- Suggested Positions -

Long NOV $77.50 calls (DE1119K77.5) Entry $1.80

- or -

Long DEC $80 calls (DE1117L80) Entry $2.15

10/31 adjusting stop loss to $73.75.
10/31 trade opened at $76.00

Entry on October 31 at $76.00
Earnings Date 11/23/11 (unconfirmed)
Average Daily Volume = 5.6 million
Listed on October 29, 2011


iShares U.S.Financials ETF - IYF - close: 50.16 change: -1.73

Stop Loss: 48.40
Target(s): 54.00
Current Option Gain/Loss: Nov$50c: -25.0% & Dec $53c: -35.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
10/31 update: Thankfully we didn't have to wait very long for the IYF to hit our entry point. Shares gapped open lower at $50.90 and fell toward the 100-dma before closing with a -3.3% decline. Our trigger to buy the dip was hit at $50.50. Investors were unnerved this morning over headlines out of Europe and renewed worries over Greece and Italy.

Please note that I am adjusting our stop loss from $48.75 to $48.40. Our multi-week target is $54.00. FYI: The Point & Figure chart for IYF is bullish with a $75 target.

- Suggested Positions -

Long NOV $50 call (IYF1119K50) Entry $2.00

- or -

Long DEC $53 call (IYF1117L53) Entry $1.35

10/31 adjusted stop loss to $48.40
10/31 Trade opened at $50.50

Entry on October 31 at $50.50
Earnings Date --/--/--
Average Daily Volume = 697 thousand
Listed on October 29, 2011


Roper Industries - ROP - close: 81.10 change: -1.79

Stop Loss: 79.45
Target(s): 84.90
Current Option Gain/Loss: -18.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/31 update: There are no surprises here. I warned readers to expect a pull back toward $80. Shares of ROP gapped open lower and ended the session down -2.1%. Wait for a dip or a bounce near $80.00 before considering new positions.

- Suggested Positions -

Long NOV $80 call (ROP1119K80) Entry $3.30

10/29 wait for a dip near $80 before considering new positions.
10/27 new stop loss @ 79.45
10/27 gap higher at $82.03 is our entry point. Plan was to buy calls at $80.25.

Entry on October 27 at $82.03
Earnings Date 01/31/12 (unconfirmed)
Average Daily Volume = 740 thousand
Listed on October 26, 2011


Tractor Supply Co - TSCO - close: 70.94 change: -0.25

Stop Loss: 69.90
Target(s): 79.00
Current Option Gain/Loss: Nov$75c: -65.7% & Jan$80c: -43.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/31 update: TSCO held up reasonably well. Traders bought the dip near support at $70.00 this morning. The bounce did roll over but shares only fell -0.3% on Monday. I would still consider buying dips or a bounce near $70.00 tomorrow.

(small positions)- Suggested Positions -

Long NOV $75 call (TSCO1119K75) Entry $1.75

- or -

Long Jan $80 call (TSCO1221A80) Entry $2.30

10/27 TSCO gapped open higher at $74.36 (up from $72.41)

Entry on October 27 at $74.36
Earnings Date 10/19/11
Average Daily Volume = 904 thousand
Listed on October 26, 2011


Visa, Inc. - V - close: 93.26 change: -1.84

Stop Loss: 89.49
Target(s): 99.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
10/31 update: Right on cue shares of Visa pulled back. I still think there is a little bit more profit taking to go. We are adjusting our buy-the-dip trigger from $93.00 to $92.25. We'll move the stop loss a tiny bit to $89.40. More conservative traders may want to wait for a pull back closer to the $90.50-90.00 zone as their entry point instead.

buy-the-dip Trigger @ $92.25

- Suggested Positions -

buy the Nov. $95 call (V1119K95)

- or -

buy the Dec. $95 call (V1117L95)

10/31 adjusted trigger to $92.25

Entry on October xx at $ xx.xx
Earnings Date 10/26/11
Average Daily Volume = 5.0 million
Listed on October 29, 2011


PUT Play Updates

Dollar Tree - DLTR - close: 79.96 change: +1.09

Stop Loss: 82.65
Target(s): 75.10
Current Option Gain/Loss: -11.5%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
10/31 update: The relative strength in DLTR today is surprising. The stock was strong right at the open but struggled to hold its gains over $80.00. Readers may want to wait for a new drop under $79.50 before considering new bearish positions. More conservative traders might want to tighten their stop loss.

Earlier Comments:
More conservative traders may want to use a trigger under $78.45 to buy puts. Our target is $75.10. More aggressive traders could aim for the 100-dma instead.

- Suggested Positions -

Long NOV $80 put (DLTR1119W80) Entry $2.60

Entry on October 28 at $79.46
Earnings Date 11/17/11 (unconfirmed)
Average Daily Volume = 1.4 million
Listed on October 27, 2011


Shutterfly, Inc. - SFLY - close: 41.67 change: -1.23

Stop Loss: 48.05
Target(s): 35.25
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/31 update: SFLY continues to look weak. The stock gapped open lower at $42.32 and ended the session down -2.8%. I am not suggesting new positions at this time.

FYI: The spread on our put is a bit wide, which makes an impact on our gain/loss for this trade. Today the bid has bounced back and we're at breakeven.

Earlier Comments:
The $40 level could offer potential support but we're aiming for $35.25 as our exit target.

- Suggested Positions -

Long NOV $40 PUT (SFLY1119W40) Entry $0.95

Entry on October 28 at $42.88
Earnings Date 10/26/11 (confirmed)
Average Daily Volume = 1.1 million
Listed on October 27, 2011


CLOSED BULLISH PLAYS

iShares China 25 index ETF - FXI - close: 36.06 change: -1.73

Stop Loss: 36.90
Target(s): 39.50
Current Option Gain/Loss: -37.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
10/31 update: Our FXI trade didn't last very long and the huge gap up entry on Thursday last week probably doomed our trade. Shares opened at $36.91 this morning and quickly hit our stop loss at $36.90 before falling to $35.96 this afternoon.

- Suggested Positions -

NOV $37 call (FXI1119K37) Entry $1.82, exit $1.14 (-37.3%)

10/31 stopped out at $36.90
10/27 new stop loss @ 36.90
10/27 FXI gaps higher at $37.72, our new entry
10/26 adjusted our entry point strategy. New stop loss @ 33.90

chart:

Entry on October 27 at $37.72
Earnings Date --/--/--
Average Daily Volume = 30 million
Listed on October 24, 2011