Option Investor
Newsletter

Daily Newsletter, Monday, 11/7/2011

Table of Contents

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

Market Wrap

The Italian Job

by Todd Shriber

Click here to email Todd Shriber
U.S. stocks dodged an Italian bullet on Monday as all three major indexes posted decent gains on a day that started with ample speculation that Italy would be the Euro Zone's sequel to Greece. Comments from European policymakers helped assuage skittish investors even as Italian bond yields continued to blow out and Silvio Berlusconi fights for his political life.

Market Stats

While stocks were able to stave off more European crisis concerns today, it was gold that really impressed. The yellow metal is back within striking distance of $1,800 an ounce after closing at $1790/oz on Monday. Helping the cause were statements out of Germany that the EU's largest economy will not touch their gold reserves in order to fund bailout plans. Wise idea and just one more example that gold is in fact money.

Adding fuel to gold's fire is the lingering notion that the Federal Reserve will engage in another round of quantitative easing and that the European Central Bank (ECB) will follow suit. I do not know if the Fed and ECB are going travel down QE Street again, but I think it's apparent that gold's safe have status has been restored and with Greece, Italy and friends under substantial duress, investors want a safe have.

Gold Chart

One would have thought Monday would have been a grizzly day for Italian equities, what with calls for Prime Minister Silvio Berlusconi's head, I mean resignation, and growing speculation that Italy will be the next European domino to fall after Greece. As I have said before, Italy is much more significant than Greece because Italy is the third-largest Euro Zone economy behind Germany and France.

Even with yields on Italian bonds soaring to highs not seen since the debut of the Euro, German Finance Minister Wolfgang Schaeuble told the media today that investors are overreacting to Italy's situation. Schaeuble even went so far as to say that Italy is not comparable to Greece. Let's hope not.

Maybe those comments had a calming effect on stocks, I do not know for certain. I do know that when I got up this morning, I thought the iShares MSCI Italy Index Fund (NYSE: EWI) was headed for a nasty day. Instead, the lone Italy-specific ETF listed in the U.S. gained almost 2% on volume that was less than half the daily average.

Italy ETF Chart

Keeping with theme of surprises from across the Atlantic, BP (NYSE: BP) did not have a bad day all things considered. In fact, the U.S.-listed shares of Europe's second-largest oil company closed fractionally higher despite news that broke on Sunday that BP's plan to sell its 60% stake in Argentina's Pan American Energy to China's Cnooc (NYSE: CEO) for $7.1 billion collapsed.

BP was looking to sell the Argentine asset as part of its plan to raise $30 billion through asset sales to pay for Gulf spill-related liabilities, but the deal with Cnooc, China's largest offshore oil explorer, collapsed under the weight of Argentina's less than favorable regulatory environment. The South American country actually has some decent energy assets, it is the government that stands in the way of the country being a bigger energy player.

The transaction had a Nov. 1 deadline. In a filing with the Hong Kong stock exchange, Cnooc said Bridas Energy, in which the Chinese firm owns half, sent BP a letter on November 5 to terminate the deal, Reuters reported. BP said it's “happy to return to long-term ownership of these valuable assets, given the considerable improvement in its own financial strength and circumstances, as well as the improved external trading environment,” according to the Wall Street Journal.

What is even more surprising about the performance of BP ADRs today is that news of the deal with Cnooc falling apart prompted speculation that BP may not be able to raise its dividend next year as the company said it might when it reported third-quarter earnings a few weeks ago. Just as a note, BP CEO Bob Dudley has raised the company's asset sales target to $45 billion.

BP Chart

Another stock that notched a surprise gain despite all the worry surrounding Europe was Jefferies (JEF), the boutique investment bank. The embattled bank has been having to answer questions about its exposure to European sovereign since the MF Global (MF) imbroglio last week. In the case of Jefferies, it was really a case of ''Who is next?'' as traders pondered if another U.S. financial institution could be sunk by exposure to European bonds.

To be sure, the 1.4% Jefferies gained today barely puts a dent in last week's 18% plunge and it is worth noting that the December 6 puts in Jefferies have tumbled about 40% in the past two trading days. The company has slashed its holdings of PIIGS sovereign debt by 50% in a matter of days and investors seem to be buying into the theory that Jefferies is not as dangerously levered to Europe as was MF Global.

The four most-traded puts -- all of which expire in December and have strike prices at $5, $6, $10 and $11, Bloomberg News reported. Some options traders are betting Jefferies could disappear, but the company is at least making an effort to ward off that notion with being transparent (I think) about its Europe exposure.

Jefferies Chart

In earnings news, shares of satellite television providerDish Network (DISH) jumped more than 5% after the company declared a $2 per share special dividend and said its third-quarter profit rose to $319.1 million, or 71 cents per share, from $244.9 million, or 55 cents per share, a year earlier. Revenue increased 12% to $3.6 billion. Analysts expected a profit of 74 cents on revenue of $3.64 billion. The company had 13.9 million subscribers at the end of the quarter. Volume in shares of Colorado-based Dish was more than triple the daily average.

Dish Network Chart

Canada-based Cameco (CCJ) the largest North American uranium miner, plunged 6.25% on turnover that was more than double the daily average after the company lowered its 2011 uranium production forecast to 21.7 million pounds from an earlier estimate of 21.9 million pounds. Cameco's third-quarter profit rose to $102 million, or 26 cents a share, from $78.5 million, or 20 cents a share, a year earlier. Revenue rose 26% to $517.1 million. Analysts expected a profit of 30 cents.

Cameco Chart

Looking at the charts, the S&P 500's small Monday gain kept the index above 1250 and that's a bullish sign. Next resistance is 1300 and that's a legitimate possibility as long as the news flow out of Europe and U.S. economic data points remain kind of good/less bad. A move below the 1225 would be bad news. The S&P 500 needs to add just 13 points to surpass its 200-day line.

S&P 500 Chart

The Dow closed Monday above its 200-day moving average and the psychologically important 12,000 level. Now the blue-chip index needs to work its way back to resistance at 12,230, just below last week's closing high. I would remain bullish as long as support at 11,650 holds. A close below that level is a bearish sign.

Dow Chart

By comparison, the Nasdaq was not all that impressive today and remains below the important 2700 level. The silver lining is Monday's action was enough to get the Nasdaq above its 200-day moving average. Once the Nasdaq takes out 2700, it is on to next resistance at 2750. Closes above 2700 are bullish here and I would be cautious below 2650.

Nasdaq Chart

In my humble opinion, Monday was one of those days where I could have been telling you about a major loss on the S&P 500 and a triple-digit loss on the Dow. Obviously, that was not the case and the market deserves some credit for grinding higher in the face of some, shall we say, tricky headlines. Markets always find an excuse to sell-off and if the situation in Italy was not a valid excuse to move lower, I do not know what is. This weeks looks like it is shaping up to be a cautiously bullish affair.

Todd Shriber


New Option Plays

Apparel Stores

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Ross Stores Inc. - ROST - close: 89.62 change: +0.21

Stop Loss: 87.75
Target(s): 94.75
Current Option Gain/Loss: Unopened
Time Frame: up to earnings on Nov. 17th
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of ROST have been pretty resistant to the market's volatile swings lately. The stock's recent consolidation has narrowed and ROST looks poised to breakout past resistance at $90.00. If that occurs shares could see a strong pre-earnings run up.

I am suggesting a trigger to open bullish positions at $90.10. If triggered we will use a stop loss at $87.75 and aim for the $94.75 level. More aggressive traders could aim higher. There is a trading maxim that says stocks that rally past $90 usually hit $100. Please note that we do not want to hold over the November 17th earnings report.

I am listing November calls and December calls. November calls will expire after November 18th but we're planning to exit prior to Nov. 17th. We can use them but they will be more volatile.

FYI: The Point & Figure chart for ROST is bullish with a $118 target.

Trigger @ $90.10

- Suggested Positions -

buy the NOV $90 call (ROST1119K90) current ask $2.10

- or -

buy the DEC $92.50 call (ROST1117L92.5) current ask $2.20

Annotated Chart:

Entry on November xx at $ xx.xx
Earnings Date 11/17/11 (confirmed)
Average Daily Volume = 1.0 million
Listed on November 7, 2011



In Play Updates and Reviews

Commodities Rally on Monday

by James Brown

Click here to email James Brown

Editor's Note:

Gold, silver, and oil all rallied on Monday. Meanwhile stocks faltered early on but managed to bounce back this afternoon.

Our MCD trade is now open. COG, UA, and VMW are not open yet. Please note that we've adjusted our entry point strategy for the VMW play.

-James

Current Portfolio:


CALL Play Updates

Cabot Oil & Gas - COG - close: 83.64 change: +1.55

Stop Loss: 79.65
Target(s): 89.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
11/07 update: Technically our trade is not open yet. COG opened higher but the S&P 500 did not. COG essentially traded sideways the rest of the session. We will try again. The plan is to buy calls (small positions) if both COG and the S&P 500 index open positive tomorrow morning. Remember, this is an aggressive, higher-risk trade so let's keep our position size small.

I am listing both November and December calls but bear in mind that Novembers will expire in about two weeks. FYI: The Point & Figure chart for COG is bullish with a $116 target.

*See Entry Details Above* (small positions)

- Suggested Positions -

buy the NOV $85 call (COG1119K85)

- or -

buy the DEC $90 call (COG1117L90)

11/07 not open yet. try again

Entry on November xx at $ xx.xx
Earnings Date 02/22/12 (unconfirmed)
Average Daily Volume = 2.6 million
Listed on November 5, 2011


Costco Wholesale - COST - close: 84.16 change: +0.35

Stop Loss: 81.80
Target(s): 97.50
Current Option Gain/Loss: Nov$85 call: -49.3% & Jan $90 call: + 0.0%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
11/07 update: Traders bought the dip twice near $83.25 today. If COST can just break through its short-term trend of lower highs the stock could see a strong move higher. More conservative traders might want to move their stop loss closer to the 50-dma near $82.29.

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

11/01 COST bounced at short-term support near $82 but readers may want to exit positions early right now
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 27 at $85.00
Earnings Date 12/07/11 (unconfirmed)
Average Daily Volume = 2.9 million
Listed on October 22, 2011


SPDR Gold Shares - GLD - close: 174.98 change: +4.13

Stop Loss: 164.95
Target(s): 182.50
Current Option Gain/Loss: +41.6%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
11/07 update: Gold made a lot of headlines today with the precious metal's relative strength. The GLD rallied +2.4% to close at new multi-week highs. After a five-day bounce from the $164 area it might be time for a little dip. Readers may want to consider buying calls on a bounce from the $170 area.

We will adjust our stop loss higher to $164.95. More conservative traders may want to raise theirs higher. Cautious traders might also want to consider an exit target near $179.00 instead.

Our multi-week target is $182.50.

- Suggested Positions - (Small Positions)

Long 2012 Jan $175 call (GLD1221A175) Entry $6.00

11/07 new stop loss @ 164.95

Entry on November 2 at $168.59
Earnings Date --/--/--
Average Daily Volume = 15.3 million
Listed on November 1, 2011


Goldman Sachs - GS - close: 105.57 change: +0.53

Stop Loss: 97.45
Target(s): 113.75
Current Option Gain/Loss: + 7.3%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
11/07 update: It was a generally quiet day for GS with the stock trading sideways in a narrow range. I don't see any changes from my weekend comments. Nimble traders may want to consider buying a dip near $102.00.

We have a stop loss at $97.45 but more conservative traders may want to consider using a stop loss closer to $100.00 or near $102.00 instead.

Earlier Comments:
We do want to keep our position small because GS can be a volatile stock.

- Suggested Positions - (small positions)

Long NOV $105 call (GS1119K105) Entry $3.40

11/02 corrected our entry price for the correct November call
11/01 new stop loss @ 97.45
11/01 GS gapped open lower at $103.49, under our trigger. Play opened.

Entry on November 1 at $103.49
Earnings Date 01/19/12 (unconfirmed)
Average Daily Volume = 8.5 million
Listed on October 31, 2011


McDonald's Corp. - MCD - close: 94.62 change: +0.81

Stop Loss: 91.60
Target(s): 99.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/07 update: Our new MCD trade has been opened. The stock rallied past $94.00 this morning, hit our trigger at $94.05 and then pulled back midday. Traders bought the dip near $93.25 and then MCD surged to a new record high. The close above $94.00 is bullish. Thus we got two chances to buy a breakout past $94.00.

Earlier Comments:
I am suggesting small positions to limit our risk. We will list both November calls and Decembers, but keep in mind that Novembers will expire in about two weeks. FYI: The Point & Figure chart for MCD is bullish with a $112 target.

(small positions)- Suggested Positions -

Long NOV $95 call (MCD1119K95) Entry $0.70

- or -

Long DEC $95 call (MCD1117L95) Entry $1.55

11/07 MCD hit our trigger at $94.05

Entry on November 7 at $94.05
Earnings Date 01/24/12 (unconfirmed)
Average Daily Volume = 6.0 million
Listed on November 5, 2011


Schnitzer Steel Industries - SCHN - close: 48.05 change: -1.02

Stop Loss: 44.49
Target(s): 51.90
Current Option Gain/Loss: -10.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/07 update: Hmm... SCHN underperformed the market on Monday. The stock failed at its exponential 200-dma again and slipped to $46.79 intraday before paring its losses. The stock closed down -2.0% and looks like it's poised for a dip into the $46-45 zone. I am not suggesting new positions at this time.

Earlier Comments:
FYI: The Point & Figure chart for SCHN is bullish with a $61 target.

- Suggested Positions -

Long DEC $50 call (SCHN1117L50) Entry $2.50

11/05 adjusted exit target to $51.90
11/03 SCHN gapped open at $48.38

Entry on November 3 at $48.38
Earnings Date 01/05/12 (unconfirmed)
Average Daily Volume = 311 thousand
Listed on November 2, 2011


Tech Data Corp - TECD - close: 49.73 change: -0.72

Stop Loss: 47.49
Target(s): 53.75
Current Option Gain/Loss: -24.5%
Time Frame: up to November earnings
New Positions: see below

Comments:
11/07 update: TECD had a rough morning thanks to an analyst downgrade. Shares gapped lower and dipped to $48.92 before rebounding. The stock closed with a loss of -1.4%. I would not be surprised to see TECD dip toward $48.00 on any market weakness.

Earlier Comments:
Our target is $53.75. Don't be surprised if the $52.00 level acts as short-term resistance. FYI: The Point & Figure chart for TECD is bullish with a $67 target.

- Suggested Positions -

Long DEC $50 call (TECD1117L50) Entry $2.85

11/03 TECD gapped open at $50.03

Entry on November 3 at $50.03
Earnings Date 11/21/11 (confirmed)
Average Daily Volume = 650 thousand
Listed on November 2, 2011


Under Armour, Inc. - UA - close: 83.50 change: -0.80

Stop Loss: 81.90
Target(s): 92.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
11/07 update: UA underperformed the major indices today with a -0.9% decline. Today's breakdown under the simple 10-dma is also short-term bearish. Currently our plan is to launch small bullish call positions when UA hits $86.25. However, we will also be on the look out for a dip toward what should be support near $80.00. Nimble traders may want to go ahead and prepare for a rebound off the $80 level.

Earlier Comments:
We do want to keep our position size small to limit risk since UA can be a volatile stock. FYI: The Point & Figure chart for UA is bullish with a $106 target.

Trigger @ 86.25 (small positions)

- Suggested Positions -

buy the NOV $87.50 call (UA1119K87.5)

- or -

buy the DEC $90 call (UA1117L90)

Entry on November xx at $ xx.xx
Earnings Date 01/26/12 (unconfirmed)
Average Daily Volume = 1.4 million
Listed on November 5, 2011


Visa, Inc. - V - close: 92.96 change: +0.32

Stop Loss: 88.75
Target(s): 99.75
Current Option Gain/Loss: Nov$95c: -12.7% & Dec$95c: - 5.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
11/07 update: Monday proved to be a quiet session for V. The stock rebounded off its intraday lows and closed up +0.3%. I don't see any changes from my weekend comments. I would not launch positions here. Wait for a dip into the $90.50-90.00 zone or wait for a breakout past $94.50 as alternative entry points.

- Suggested Positions -

Long Nov. $95 call (V1119K95) Entry $1.10

- or -

Long Dec. $95 call (V1117L95) Entry $2.75

11/01 new stop loss @ 88.75
11/01 Visa gapped lower at $91.16
10/31 adjusted trigger to $92.25

Entry on November 1 at $91.16
Earnings Date 10/26/11
Average Daily Volume = 5.0 million
Listed on October 29, 2011


VMware, Inc. - VMW - close: 99.59 change: -0.73

Stop Loss: 96.75
Target(s): 107.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
11/07 update: We are making an adjustment to our strategy. Instead of waiting for a dip to $97.00 I am suggesting we buy calls on a breakout at $101.00 and we'll aim for $107.75. I will adjust our stop loss up to $96.75.

I have updated our strike prices below.

Trigger @ $101.00

- Suggested Positions -

buy the NOV $105 call (VMW1119K105) (aggressive)

- or -

buy the DEC $105 call (VMW1117L105)

11/07 Adjust strategy. Instead of buy the dip at $97.00 we want to buy calls on a rally at $101.00. Stop loss at $96.75. Target 107.75.

Entry on November xx at $ xx.xx
Earnings Date 01/24/11 (unconfirmed)
Average Daily Volume = 2.2 million
Listed on November 3, 2011


PUT Play Updates

Shutterfly, Inc. - SFLY - close: 41.11 change: -0.68

Stop Loss: 44.15
Target(s): 35.25
Current Option Gain/Loss: + 5.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/07 update: SFLY is still underperforming the major indices. The S&P 500 looks poised to rally higher while SFLY looks poised to breakdown under support at $40.00. Nimble traders may want to launch new positions on a new dip at $39.85. Cautious traders might want to lower their stop loss on current positions.

Earlier Comments:
FYI: The spread on our put is a bit wide, which makes an impact on our gain/loss for this trade.

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

11/01 new stop loss @ 44.15

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