Option Investor
Newsletter

Daily Newsletter, Thursday, 11/10/2011

Table of Contents

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

Market Wrap

A Europe Rebound...Sort Of

by Todd Shriber

Click here to email Todd Shriber
A day after equity markets were rocked by stark reminders there are still significant problems in Europe to be dealt with, the dip was bought, but not enough to erase Wednesday's savage beating. A calmer outlook on the political front in Italy helped the S&P 500 and the Dow Jones Industrial Average each gain almost 1% while the Nasdaq barely closed higher.

Market Stats

Despite all the chaos in Europe, there was one good economic data point out today here in the States. Weekly jobless claims dropped to 390,000 last week, easily beating the reading of 400,000 claims economists expected. More importantly, the number is the lowest in seven months. The four-week moving average also ticked lower. I am not saying it is time to breakout the bubbly, but there are some slight indications the jobs market is improving.

That said, there is still too much commotion in Europe to forecast an entirely smooth ride in the months ahead for the U.S. economy. On Friday we get the latest reading of the Reuter's/University of Michigan's consumer sentiment index. The consensus estimate is 61.3 compared with the previous reading of 60.9.

Jobless Claims

As noted in the market stats table, gold took a beating today, probably because Italy looked like less of a disaster. For one day at least. As I always say, one day does not make a new trend and it would a lot more than a one-day decline to reverse gold's long-term trend. If you like to use the options market as a tell, then traders remain quite bullish on gold.

The gap of calls to buy the SPDR Gold Trust (GLD) compared to puts to sell the largest gold ETF has risen 6.5% this month, with ownership of June $220 calls showing the biggest increase, according to Bloomberg. Last week, long bets on gold futures jumped almost 7% to 148,279 contracts and a Bloomberg survey indicates analysts and money managers see the yellow metal touching $1,950 an ounce in the first quarter of 2012. Disclosure: I am long the iShares Gold Trust (IAU).

GLD Chart

Taking a closer look at Italy, the Euro Zone's third-largest economy was able to sell bonds today with a yield of 6.9% and there was relief in the market that the sale went smoothly and that Italy was able to escape a 7% yield. Still, that's the highest yield on 12-month debt Italy has paid in 14 years, Reuters reported. Such is life when the market takes its eyes off Greece and focuses squarely on Italy.

Problem with that is Italy probably cannot keep issuing debt with these lofty yields and while European policymakers might be able to craft a bailout plan for an economy as small as Greece's, they have basically said already they cannot afford a similar plan for Italy. So forgive me if I say the 3.3% jump in the iShares MSCI Italy Index Fund (EWI) today was not all that impressive. Volume was about 20% below the daily average and the ETF closed right in the middle of its 40-cent intraday range. And the ETF is still down almost 9% in the past month.

Italy ETF Chart

In stock-specific news, shares of controversial Green Mountain Coffee Roasters (GMCR) plunged 39% after the Vermont-based company posted fiscal fourth-quarter sales of $711.9 million, well below the $757.7 million analysts expected. The company's profit for the quarter rose to $75.4 million, or 47 cents a share, from $27 million, or 20 cents, a year earlier. For fiscal 2012, Green Mountain expects to earn $2.65 a share. Analysts were expecting $2.60.

Predictably, this was not a light volume decline. Nearly 47.4 million GMCR shares changed hands compared to average daily volume of almost 5.7 million. The stock has been halved in about a month, but if one is desperate to say something nice about the stock, it's still positive year-to-date as the chart indicates.

Or that could mean there is more downside to come, a bet that hedge fund manager David Einhorn has made in GMCR. That looks like a winning to me. And for what it is worth, Einhorn is also bullish on gold miners. Noteworthy is the fact that one online source touted GMCR as a takeover candidate today, naming Starbucks (SBUX) and Nestle (NSRGY) as the possible suitors.

Green Mountain Chart

Shares of Kohl's (KSS) gained almost 2% after the company said its third-quarter profit rose 20% to $211 million, or 80 cents per share, from $176 million or 57 cents per share a year earlier. Revenue increased 4.1% to $4.38 billion and same-store sales rose 2.1%. Analysts expected a profit of 80 cents on sales of $4.38 billion.

Kohl's gave decent guidance of a fourth-quarter profit of $1.93-$2.04 a share on revenue of $6.28-$6.4 billion. Analysts were expecting a profit of $1.96 per share on revenue of $6.3 billion. The company expects a full-year profit of $4.34-$4.49 a share. Analysts were expecting $4.46.

Kohl's Chart

In after hours news, another former darling continues to see its star lose some luster. I am referring to Molycorp (MCP), the largest U.S.-based rare earths miner. The company reported a profit of 67 cents a share on revenue of $138.1 million, but analysts were expecting 70 cents on revenue of $161.6 million. That miss was not viewed as slight and that shares of Molycorp down 9.6% as of this writing.

Sales, margin and income were all records in the third quarter, but that was not enough to impress investors. The company did provide an update on its important Mountain Pass, Calif. rare earths project.

''Molycorp’s ''Project Phoenix'' modernization and expansion plan at its flagship Mountain Pass, California rare earth facility has been accelerated, with the Company now expecting to achieve its Phase 1 production run rate of 19,050 metric tons per year by September 30, 2012, three months earlier than originally planned. The Company's Board of Directors authorized an additional investment of $114 million to fund the acceleration, which includes contingency funds. The acceleration of Project Phoenix Phase 1 will increase the Company’s estimated 2012 production by approximately 3,500 metric tons of Rare Earth Oxide equivalent to between 8,000 and 10,000 metric tons,'' according to a statement.

Molycorp Chart
Looking at the charts, Wednesday's slide was extremely damaging to the S&P 500 as it forced the index below its 200-day moving average. Thursday's gain was not nearly enough to get the index back to that level. Another drop below the 1220-1230 area probably takes the S&P 500 down to 1215, perhaps lower. If the index can reclaim its 200-day moving average, then the 1305-1310 area could come into play on the upside.

S&P 500

The Dow's chart looked just as ugly following the Wednesday dive as that drop represented a violation of the uptrend established last month. Obviously, Thursday's up move was not enough to put much of a dent in the previous day's loss, but the bears were not able to force the Dow down to the critical 11,630 level. That would be the area where selling could accelerate. Resistance can be found just below 12,200. From there, look for 12,350 and 12,875 as next resistance.

Dow Chart

The Nasdaq is not any more impressive than the other two major indexes. In fact, a lethargic Thursday performance might be cause for concern. The bright side is the Nasdaq remains above 2611. A drop below that area probably gets us back to 2585. From there another 20 points could come off. Next resistance lies around the 2680 area, then 2715 and 2733. I say worry about 2700 first and then the other resistance points will come into focus.

Nasdaq Chart

With a strong day on Friday, the S&P 500 and the Dow could actually close the week flat or slightly higher. Either scenario could be viewed as a victory following Wednesday's action. I would not say that is an invitation to get really heavy. However, if the consumer sentiment number is strong and the news out of Italy improves, those would at least be signs to do some selective buying.

Todd Shriber


New Option Plays

Energy & European Banks

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Occidental Petroleum - OXY - close: 98.10 change: +1.59

Stop Loss: 95.75
Target(s): 104.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Energy and oil stocks were showing relative strength today. If crude oil can breakout past the $100 a barrel level then this sector could really outperform. OXY looks like a potential bullish candidate. Traders bought the dip near its 200-dma and 10-dma (essentially at $96.00).

I am suggesting we open small bullish positions tomorrow morning but only if both OXY and the S&P 500 index both open positive. We do want to keep our position size small because the oil stocks can be a volatile bunch and OXY is arguably a little bit overbought here. We will use a stop loss at $95.75. Our target is $104.50. FYI: The Point & Figure chart for OXY is bullish with a $116 target.

*see Entry Details Above* (small positions)

- Suggested Positions -

buy the DEC $100 call (OXY1117L100) current ask $4.30

- or -

buy the JAN $105 call (OXY1221A105) current ask $4.10

Annotated Chart:

Entry on November xx at $ xx.xx
Earnings Date 01/26/12 (unconfirmed)
Average Daily Volume = 5.4 million
Listed on November 10, 2011


NEW DIRECTIONAL PUT PLAYS

Deutsche Bank - DB - close: 37.48 change: +1.35

Stop Loss: 40.75
Target(s): 30.50
Current Option Gain/Loss: +0.0%
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The escalation of the EU sovereign debt crisis from Greece to Italy is a major issue. The EU can live without Greece but Italy is the third largest economy in the union. You've probably heard it before. Italy is too big to bailout. Yesterday's spike past 7% in Italy's bond yields was a danger sign. Previously Greece, Ireland and Portugal all asked for a bailout when their bond yields hit 7%. These countries cannot finance their debt burdens when they're paying that much interest.

No one seems to have a solution for Italy's troubles. A new government and new austerity might help short-term but longer-term it's a major problem. I suspect it's going to get a lot worse before it gets better. These troubles are going to cause further declines for all the major banks in Europe and DB is one of the biggest targets we can trade (many of the European banks are already at single digit stock prices). We could see shares of DB drop toward their 2011 lows near $29 or the 2008-2009 lows near $22.

I am suggesting bearish positions starting tomorrow morning. You could choose to wait for a new failed rally under $40.00 instead. Bear in mind that this could be a very volatile trade with stocks jerking up and down in reaction to the various headlines spinning out of Europe. FYI: The Point & Figure chart for DB is bearish with a $30 target.

open positions tomorrow morning

- Suggested Positions -

buy the DEC $35 PUT (DB1117x35) current ask $3.10

- or -

buy the JAN $30 PUT (DB1221m30) current ask $2.60

Annotated Chart:

Weekly Chart:

Entry on November xx at $ xx.xx
Earnings Date 02/02/12 (unconfirmed)
Average Daily Volume = 4.3 million
Listed on November 10, 2011



In Play Updates and Reviews

Shutterfly Hits Our Stop

by James Brown

Click here to email James Brown

Editor's Note:

Our put play on Shutterfly (SFLY) has been stopped out just before shares dropped to new relative lows. Our trade was successful but the morning spike dented our potential profits.

We also saw COST and TECD get stopped out.

-James

Current Portfolio:


CALL Play Updates

Anadarko Petroleum - APC - close: 79.49 change: +1.68

Stop Loss: 77.45
Target(s): 98.50
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
11/10 update: After a $6 plunge yesterday APC continued to fall and hit $77.32 before rebounding. The stock remains under potential resistance at $80 and $81. Our plan is unchanged. I am suggesting we open small bullish positions at $81.05.

FYI: Our target is for the January position. We will likely exit the December calls at a lower price.

Earlier Comments:
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.

Trigger @ $81.05

- Suggested Positions -

buy the DEC $85 call (APC1117L85)

- or -

buy the JAN $90 call (APC1221A90)

11/09 adjusting our trigger to buy calls down to $81.05 and stop loss to $77.45.

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


Cabot Oil & Gas - COG - close: 86.55 change: +6.21

Stop Loss: 79.65
Target(s): 89.75
Current Option Gain/Loss: Nov$85c: +31.7% & Dec$90c: +55.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/10 update: Hmm... I could not find any specific catalyst for today's +7.7% rally in COG but we're not complaining. The stock gapped open higher and then surged to a new high. If this rally continues tomorrow we could see COG hit our exit target at $89.75. I am not suggesting new positions after such a big one-day move.

NOTE: More conservative traders may want to exit any November options tomorrow (Friday) since they will see any time premium shrink over the weekend (with only a week left until expiration).

Earlier Comments:
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


DaVita Inc. - DVA - close: 73.39 change: +0.71

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

Comments:
11/10 update: DVA managed a minor bounce today. The early morning rally attempt failed at the $74.00 level. On a positive note shares still held above the 10-dma. I do not see any changes from my prior comments.

Earlier Comments:
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)

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: 95.78 change: +0.89

Stop Loss: 93.95
Target(s): 109.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
11/10 update: After a -$5 drop yesterday I was expecting a bigger bounce today. Shares rebounded to $97.07 before fading lower. There is no change from my prior comments.

Earlier Comments:
We are going to take a more aggressive approach to bullish positions. More conservative traders will want to wait for the breakout past $100.00. I am suggesting a trigger to open small bullish positions at $97.30. We will adjust our stop loss to $93.95.

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.

Trigger @ $97.30 (small positions)

- Suggested Positions -

buy the DEC $105 call (FLS1117L105)

- or -

buy the JAN $105 call (FLS1221A105)

11/09 New strategy: trigger to buy calls at $97.30, stop loss $93.95. Small positions only

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


SPDR Gold Shares - GLD - close: 171.14 change: -0.93

Stop Loss: 164.95
Target(s): 182.50
Current Option Gain/Loss: + 8.3%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
11/10 update: Gold hit some profit taking today with a -$32 drop to $1,759.60 an ounce. You would think that worries over Europe and a falling dollar would have fueled gains for the precious metal today.

The larger trend is still up. I have been suggesting readers look for a dip or a bounce near $170 as a new bullish entry point (we got it today).

Earlier Comments:
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


McDonald's Corp. - MCD - close: 93.26 change: +0.61

Stop Loss: 91.60
Target(s): 99.75
Current Option Gain/Loss: Nov95c: -60.0% & Dec95c: -27.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/10 update: MCD recouped about a third of yesterday's decline. If both MCD and the S&P 500 index open positive tomorrow I would be tempted to buy calls again in MCD. Otherwise, no new positions at this time.

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 soon. 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


Under Armour, Inc. - UA - close: 81.04 change: +0.15

Stop Loss: 79.35
Target(s): 92.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
11/10 update: UA dipped to $79.41 before bouncing back into positive territory. This does look like a rebound from prior resistance and what should be support near $80. Aggressive traders may want to buy calls now. We will wait for further strength. I am adjusting our trigger to buy calls from $83.50 down to $82.55 and moving our stop loss to $79.35. We still want to keep our position size small to limit our risk. We will adjust our strike price to the Dec $85 call.

Earlier Comments:
We do want to keep our position size small to limit risk since UA can be a volatile stock.

Trigger @ 82.55 (small positions)

- Suggested Positions -

buy the DEC $85 call (UA1117L85)

11/10 adjusted trigger to 82.55 and stop to 79.35
11/09 new strategy: use a trigger at $83.50 to buy calls, stop loss @ 79.90
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: 93.04 change: -0.09

Stop Loss: 89.75
Target(s): 99.75
Current Option Gain/Loss: Nov$95c: -26.3% & Dec$95c: - 1.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
11/10 update: It was a quiet session for Visa. Outside of the opening gap higher shares spent the session churning sideways. There is no change from my prior comments.

Earlier Comments:
If shares see another dip toward the $91-90 zone I would use it as a new bullish entry point, or you could wait for a new breakout past $95.00 instead.

- 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: 97.19 change: +0.28

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:
11/10 update: It was a volatile session for VMW. Shares hit $98.50 this morning and then fell to $95.41 before bouncing back into positive territory. Some of the technical indicators are starting to look more bearish. We want to keep our position size small to limit risk.

Our plan is to buy calls at $101.00.

Trigger @ $101.00 (small positions)

- 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

Currently we do not have any active put trades.


CLOSED BULLISH PLAYS

Costco Wholesale - COST - close: 82.72 change: -0.69

Stop Loss: 82.45
Target(s): 97.50
Current Option Gain/Loss: Nov$85 call: -81.5% & Jan $90 call: -30.6%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
11/10 update: COST continued to fade lower. Shares briefly traded under their simple 50-dma. The low today was $82.45, which just happens to be our stop loss. The play is closed.

I'd keep COST on your watch list for a bounce from $80 or a breakout past $85.

Earlier Comments:
Keep positions small.

(small positions)- Suggested Positions -

NOV $85 call (COST1119K85) Entry $1.52 exit $0.28 (-81.5%)

- or -

2012 Jan $90 call (COST1221A90) Entry $1.01 exit $0.70 (-30.6%)

11/10 stopped out at $82.45
11/09 new stop loss @ 82.45
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.

chart:

Entry on October 27 at $85.00
Earnings Date 12/07/11 (unconfirmed)
Average Daily Volume = 2.9 million
Listed on October 22, 2011


Tech Data Corp - TECD - close: 47.41 change: -0.52

Stop Loss: 47.49
Target(s): 53.75
Current Option Gain/Loss: -61.4%
Time Frame: up to November earnings
New Positions: see below

Comments:
11/10 update: TECD continues to show weakness. The stock tried to rally this morning and then reversed. Today's close under its simple 200-dma is technically bearish. Our play has been stopped out at $47.49.

- Suggested Positions -

DEC $50 call (TECD1117L50) Entry $2.85, exit $1.10 (-61.4%)

11/10 stopped out at $47.49
11/03 TECD gapped open at $50.03

chart:

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


CLOSED BEARISH PLAYS

Shutterfly, Inc. - SFLY - close: 36.84 change: -0.22

Stop Loss: 38.55
Target(s): 35.25
Current Option Gain/Loss: +110.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/10 update: SFLY almost hit our exit target (35.25) with the late day spike down to $35.38. Unfortunately, shares saw an early morning spike higher to $39.32 first. Our new stop loss was hit at $38.55 shortly after the opening gap higher (38.14). That's too bad too since the morning spike knocked over a $1.00 off our put. Instead of a +215% gain it's +110%.

- Suggested Positions -

NOV $40 PUT (SFLY1119W40) Entry $0.95, exit $2.00 (+110.5%)

11/10 stopped out at $38.55
11/09 new stop loss @ 38.55, readers may want to go ahead and take profits now
11/08 new stop loss @ 43.15
11/01 new stop loss @ 44.15

chart:

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