Option Investor
Newsletter

Daily Newsletter, Tuesday, 11/8/2011

Table of Contents

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

Market Wrap

One PM Down, One to Go

by Jim Brown

Click here to email Jim Brown
Greek Prime Minister George Papandreou has agreed to resign and now Italy's Prime Minister Silvio Berlusconi has also agreed to resign once the current austerity budget passes.

Market Statistics

I hated history in school. I can imagine how bored future history students are going to be studying this current period and the various political events surrounding the European debt crisis. I know I am bored now and I am sure most other traders are as well.

The markets rallied on news of Berlusconi's departure as if some major company had just raised its earnings guidance. The market has deteriorated into a political betting parlor much like the sports betting rooms in Las Vegas. Every little rumor of some political event in a European country is a reason for some traders to place new bets. Somebody please slap me. I am in a horrible recurring nightmare and I can't wake up.

In theory the end of Berlusconi's tortured reign is a good thing for Italy but nobody knows who will replace him. Sometimes it is better to deal with the devil you know rather than take a chance on an unknown successor. For now the markets appear to be happy to see progress of any kind on the European scene but there is a pothole in our future. We just don't know today what that pothole will be.

The Italian 10-year bonds did not show a lot of excitement about the change. Yields on the bond traded at 6.8% and analysts are now expecting 7% soon. With euro 1.9 trillion in debt there is a train wreck in Italy's future unless something happens to change the trend on those yields. The ECB is continuing to buy Italian bonds in order to hold the rates down but obviously that is not working too well and the ECB does not have enough money to continue buying Italian bonds forever.

In the U.S. the limited economic calendar today was positive. Chain store sales rose +1.0% compared to +0.7% in the prior week. No big deal but a continued weekly gain suggests consumers are not pulling back and there are no recession fears.

The biggest report for the day was the Job Openings report for September. Job openings increased by +7.1% to 3.354 million, up from 3.129 million in August. This is the largest number of available jobs since the second half of 2008. Hiring also improved with 4.25 million new hires compared to 4.06 million in August.

The 3.354 million job openings at the end of September was +21.7% more than September 2010. This is another sign the economy is improving. Since it takes an average of 30-90 days to fill a position this suggests the Nonfarm Payroll report should improve in the months ahead despite the normal seasonal trends. The Job Openings report covers part of two Nonfarm reporting periods and is seen as more accurate since it has the benefit of being a lagging report using more data.

The economic calendar for the rest of the week is light with Consumer Sentiment on Friday the most watched report remaining.

Economic Calendar

In stock news the battle for Yahoo (YHOO) is heating up. Alibaba and Softbank are accelerating their talks with private equity firms to raise money for a full buyout of Yahoo. Reportedly the companies have grown impatient with the lack of progress in direct talks with Yahoo. Private Equity firms are reluctant to sign the nondisclosure forms from Yahoo because once signed it prevents them from talking to anyone else. This is because Jerry Yang wants to impede any transaction and limit the size of potential bids until he can orchestrate a buyout on his own. By signing the forms the companies do get advanced financial information and a management presentation about Yahoo operations and goals.

Yahoo owns 40% of Alibaba and that company wants to buy that stake back. Yahoo owns 35% of Yahoo Japan, which is majority owned by Softbank. That company also wants to buy back its stake. Rumors making the rounds have the two companies making a joint bid for all of Yahoo then removing their assets and transferring the rest to a private equity company.

Yahoo, AOL and Microsoft announced they were teaming up to sell advertising across all three networks. The news broke after the close and shares rallied to $16.44 in afterhours trade.

Yahoo Chart

McDonald's (MCD) reported same store sales for October rose +5.2% in the U.S., +4.8% in Europe and +6.1% in Asia. The company said the popularity of its Monopoly game in the U.S. helped push sales higher. A Sanford Bernstein analyst reiterated that "value continues to resonate with consumers in China due to the high inflation environment." Food inflation in China is up 3-4 times that of other countries. Food is the number one expense for most Chinese consumers.

McDonald's Chart

Weight Watchers (WTW) reported earnings of $1.09 compared to estimates of 94-cents on revenue that soared +81%. Their advertising campaigns over the last year are reaping benefits with many high profile celebrities joining the stable of testimonial promoters. Internet sales are really booming with an increase of +69% along with a 25% increase in North American meeting sales. Attendance in meetings rose +13.6%. The company raised full year guidance to a range of $4.05-$4.10 and well over analyst estimates of $3.99 per share. However, they killed the excitement over their shares when they said "As we enter 2012, we remain cautious about the uncertain economy and assume competition from other commercial weight loss competitors will be robust." That came from CEO David Kirchkoff and I am sure investors are lining up to lynch him after the stock declined -$10 from yesterday's high to $65.85 despite the good earnings.

WTW Chart

Activision (ATVI) reported earnings of 7-cents compared to analyst estimates of 2-cents. However, shares ticked lower on a decline in the number of World of Warcraft subscribers. WOW subscribers fell to 10.3 million from 11.1 million at the end of Q2. WOW generated more than $1 billion in revenue for ATVI in 2010. They said they are continuing to develop new content to draw subscribers back to the game. ATVI raised revenue estimates for the year by 10% on stronger than expected sales of Call of Duty, the most successful video game ever. The last version generated $1 billion in revenue in less than two months and set an industry record. Shares fell in afterhours trading.

ATVI Chart

Priceline (PCLN) rallied +44 to resistance at $550 after reporting earnings Monday night that more than doubled to $9.17 per share, up from $4.41 per share. Adjusted earnings were $9.95 compared to estimates of $9.30. Shorts were not happy. The company issued guidance for +29% growth for Q4 to a range of $929-$965 million and that was less than the $999.8 million analysts expected. Apparently investors were not concerned.

PCLN Chart

Gold rallied to $1804 intraday but gave back its gains once Berlusconi agreed to resign. Gold shares have been in rally mode because of the decline in the dollar. The apparent progress in Europe has strengthened the euro and weakened the dollar as a safe haven.

Gold Chart

Crude oil rallied +1.50 to close at $97 on the falling dollar but also on the worries over Iran. The UN's International Atomic Energy Agency (IAEA) was set to release a report critical of Iran and showing specifically how the country was attempting to build nuclear weapons and delivery systems. That rumor had been powering crude for the last week and when the report was released there was no material spike as the news was already priced into the market. Oil is also up on a slowdown in deliveries from the North Sea, violence in Nigeria, a lack of material progress on restarting Libyan production and expectations for rising demand as a result of better economic growth in America.

Crude Oil Chart

Don't look now but the markets have put in two consecutive gains and we are closing in on the October highs. The market action has been lackluster in the mornings but the afternoons have seen those slow meltups that indicate real buying rather than a surge in short covering. If we can break through the October high resistance stocks could really catch fire.

The S&P closed at 1275 with a gain of +15 points and that puts it only about 17 points below the October high at 1292. This was another technical close over the 200-day at 1272 but not enough points to really generate any trading excitement. However, every point we move higher from here is a buy signal with a move over 1292 and resistance at 1295 very positive.

S&P Chart

The Dow rallied ever closer to the October highs with only MCD (-0.02) and HPQ (-0.14) failing to close in positive territory. Strange that MCD did not close positive given their surge in same store sales but investors are probably moving to stocks with more risk now that the market appears to be healing.

The Dow should test the October highs this week at 12,285 but the real test will be the double top resistance in July at 12,750. That would be a good target for the normally bullish Thanksgiving week. Initial support is now 12,000.

Dow Chart

The Nasdaq extended its gains above the 200-day average of 2689. Apple returned to resistance just under $407 with a gain of $6.50 but it has yet to attract enough buyers to push over what I would call confirmation territory at $410. Once over $410 I think cautious buyers will begin jumping on for the next leg up to the October highs around $425. Once this happens the Nasdaq should respond accordingly and accelerate.

The Nasdaq 100 is testing the closing high at 2401 from October. The next few points will be critical and Apple's resistance will be the key. The next resistance points on the NDX are 2417 and 2435 then off to new 52-week highs.

Nasdaq Composite Chart

Nasdaq 100 Chart

Russell Chart

I don't know what news will power the markets on Wednesday. We are running out of European leaders. After the bell Cisco reports earnings and that could be a cloud over techs at the close. Hopefully they will have risen enough early to move over that critical resistance.

Overnight futures have been crazy of late with big double digit swings in reaction to headlines. This is no way to run a market but we have to play the hand we are dealt.

I am still in buy the dip mode with expectations of a continued move higher through Thanksgiving.

Jim Brown

Send Jim an email


New Option Plays

Oil, Healthcare, & Industrials

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Anadarko Petroleum - APC - close: 83.95 change: +1.40

Stop Loss: 79.90
Target(s): 98.50
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of APC are on the verge of a major breakout past resistance near $85.00. This would produce a new all-time, record high for the stock. We want to be ready when that happens. I am suggesting a trigger to buy calls at $85.50. Our multi-week target is the $98.50 level.

FYI: The Point & Figure chart for APC is bullish with a $105 target.

Trigger @ $85.50

- Suggested Positions -

buy the DEC $90 call (APC1117L90) current ask $2.17

- or -

buy the JAN $90 call (APC1221A90) current ask $3.80

Annotated Chart:

Entry on November xx at $ xx.xx
Earnings Date 01/31/12 (unconfirmed)
Average Daily Volume = 5.0 million
Listed on November 8, 2011


DaVita Inc. - DVA - close: 74.46 change: +0.36

Stop Loss: 72.25
Target(s): 79.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
DVA provides kidney dialysis and similar services across the U.S. The stock has been consolidating under heavy resistance near $75.00 and its 100-dma and exponential 200-dma. A breakout here would be very bullish.

I am suggesting a trigger to buy calls at $75.25. If triggered we'll aim for the $79.50 mark. More aggressive traders could aim for the May-June lows near $82.50 instead. FYI: The Point & Figure chart for DVA is bullish with a $97 target.

Trigger @ $75.25

- Suggested Positions -

buy the DEC $75 call (DVA1117L75) current ask $3.10

Annotated Chart:

Entry on November xx at $ xx.xx
Earnings Date 02/09/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on November 8, 2011


Flowserve Corp. - FLS - close: 99.98 change: +1.21

Stop Loss: 96.75
Target(s): 109.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of this industrial stock have been consolidating under resistance at the $100 level and its exponential 200-dma the last few days. A breakout here could signal a run toward the July highs.

I am suggesting a trigger to buy calls at $101.00 with a target at $109.50. More conservative traders may want to exit at the simple 200-dma instead. Please note that I do consider this a slightly more aggressive trade because FLS can be so volatile. We want to keep our position size small to limit our risk. FYI: The Point & Figure chart for FLS is bullish with a $108 target.

Trigger @ $101.00 (small positions)

- Suggested Positions -

buy the DEC $105 call (FLS1117L105) current ask $3.30

- or -

buy the JAN $105 call (FLS1221A105) current ask $5.20

Annotated Chart:

Entry on November xx at $ xx.xx
Earnings Date 02/23/12 (unconfirmed)
Average Daily Volume = 712 thousand
Listed on November 8, 2011



In Play Updates and Reviews

Stocks Extend Gains on Tuesday Afternoon

by James Brown

Click here to email James Brown

Editor's Note:

News that Italian Prime Minister Berlusconi might step down helped fuel market gains.

We had both our COG and ROST trades opened today.

-James

Current Portfolio:


CALL Play Updates

Cabot Oil & Gas - COG - close: 83.00 change: -0.67

Stop Loss: 79.65
Target(s): 89.75
Current Option Gain/Loss: Nov$85c: -34.1% & Dec$90c: - 4.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/08 update: Our trade on COG is open but shares reversed lower after failing near the $85 level this morning. I would still consider new positions now or you could wait for a bounce from the $81-80 zone instead. 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.

(small positions)

- Suggested Positions -

Long NOV $85 call (COG1119K85) Entry $2.58

- or -

Long DEC $90 call (COG1117L90) Entry $2.45

11/08 trade opened.
11/07 not open yet. try again

Entry on November 08 at $84.66
Earnings Date 02/22/12 (unconfirmed)
Average Daily Volume = 2.6 million
Listed on November 5, 2011


Costco Wholesale - COST - close: 85.00 change: +1.08

Stop Loss: 81.80
Target(s): 97.50
Current Option Gain/Loss: Nov$85 call: -28.2% & Jan $90 call: +13.8%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
11/08 update: The trading action in COST seems to be improving. Traders bought the dip near its 30 and 40-dma. The stock's afternoon rally appears to have broken the short-term trendline of lower highs. I would use this move as a new bullish entry point to buy calls. More conservative trades could wait for a close over $86.25 instead.

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: 173.53 change: -1.45

Stop Loss: 164.95
Target(s): 182.50
Current Option Gain/Loss: +26.6%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
11/08 update: Gold futures briefly traded over $1,800 an ounce but gold failed to hold these gains. As stocks rallied on news that Italian Prime Minister Berlusconi could resign soon the metals reversed lower. The GLD lost -0.8%. That's not a big drop and you could argue gold was due for a little profit taking. I don't see any changes from my prior comments. If you're looking for a new entry point consider waiting for a dip or a bounce near the $170 level.

Cautious traders might also want to consider an exit target near $179.00 instead. Our 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: 108.58 change: +3.01

Stop Loss: 99.75
Target(s): 113.75
Current Option Gain/Loss: +51.4%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
11/08 update: GS displayed some relative strength today with a +2.8% gain. The stock appears to have broken out from its $102-108 trading range but we'll need to see some follow through higher tomorrow. Our exit target remains the $113.75 mark. More aggressive traders may want to aim for the simple 100-dma or the recent highs near $117.50-118.00 instead.

Please note that we're raising our stop loss to $99.75.

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

11/08 new stop loss @ 99.75
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: 94.60 change: -0.02

Stop Loss: 91.60
Target(s): 99.75
Current Option Gain/Loss: Nov95c: +14.2% & Dec95c: + 1.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/08 update: MCD rallied to a new high at $95.45 before pulling back to settle virtually unchanged on the session. The move higher was a reaction to news out of MCD that worldwide same-store sales rose +5.5% in October. I would still consider new positions now at current levels.

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


Ross Stores Inc. - ROST - close: 90.32 change: +0.70

Stop Loss: 87.75
Target(s): 94.75
Current Option Gain/Loss: Nov90c: -18.0% & Dec92.50c: -16.0%
Time Frame: up to earnings on Nov. 17th
New Positions: see below

Comments:
11/08 update: ROST has broken out past resistance at $90.00 and hit our trigger to open positions at $90.10. Unfortunately it looks like the call options we picked saw a gap higher this morning. I would still consider new positions at current levels. Our target is $94.75 but more aggressive traders could aim higher. 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.

- Suggested Positions -

Long NOV $90 call (ROST1119K90) Entry $2.50

- or -

Long DEC $92.50 call (ROST1117L92.5) Entry $2.50

11/08 trade opened.

Entry on November 08 at $90.10
Earnings Date 11/17/11 (confirmed)
Average Daily Volume = 1.0 million
Listed on November 7, 2011


Schnitzer Steel Industries - SCHN - close: 48.84 change: +0.79

Stop Loss: 44.49
Target(s): 51.90
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/08 update: SCHN continues to churn sideways under resistance near $50.00 and its exponential 200-dma. I am not suggesting new positions at this time. Our exit target is $51.90. If you think SCHN can breakout past its simple 200-dma as well then you may want to aim higher.

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: 50.16 change: +0.43

Stop Loss: 47.49
Target(s): 53.75
Current Option Gain/Loss: -21.0%
Time Frame: up to November earnings
New Positions: see below

Comments:
11/08 update: Traders bought the dip midday but TECD is still stuck in a sideways consolidation. I am still tempted to buy calls here since TECD seems to be building on a bullish trend of higher lows. Readers may want to wait for a rally past $50.75 as their entry point instead.

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: 80.90
Target(s): 92.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
11/08 update: UA dipped to $81.00 before bouncing back into positive territory. Aggressive traders may want to go ahead and buy this bounce. I am suggesting we adjust our trigger from $86.25 to $85.25 and we can move our stop loss down to $80.90.

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 @ 85.25 (small positions)

- Suggested Positions -

buy the DEC $90 call (UA1117L90)

11/08 adjusted entry trigger from $86.25 to 85.25 and moved stop loss from $81.90 to $80.90.

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: 94.54 change: +1.58

Stop Loss: 89.75
Target(s): 99.75
Current Option Gain/Loss: Nov$95c: +27.2% & Dec$95c: +12.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
11/08 update: Visa was showing a little bit of relative strength today with a +1.6% gain. Yet shares remain inside their trading range. Readers might want to buy calls on a breakout past the $95.00 level or the highs near $96.00. We are raising our stop loss up to $89.75.

- Suggested Positions -

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

- or -

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

11/08 new stop loss @ 89.75
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: 100.77 change: +1.18

Stop Loss: 97.40
Target(s): 107.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
11/08 update: Wow! I am surprised that our trade in VMW is not open yet. We set our new trigger to buy calls at $101.00 and shares hit $100.99 today. Odds look pretty good that VMW will hit $101.00 tomorrow.

Our target is $107.75 and I am raising our stop loss to $97.40.

Trigger @ $101.00

- Suggested Positions -

buy the DEC $105 call (VMW1117L105)

11/08 adjust stop loss to $97.40.
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: 39.90 change: -1.21

Stop Loss: 43.15
Target(s): 35.25
Current Option Gain/Loss: +26.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/08 update: So far so good. SFLY underperformed the market again. Today's session produced a -2.9% decline and a breakdown under round-number support at $40.00. We are lowering our stop loss to $43.15. Our exit target remains $35.25 for now but with November puts I am thinking we might want to exit before the week is out.

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

11/08 new stop loss @ 43.15
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