Option Investor
Newsletter

Daily Newsletter, Thursday, 11/17/2011

Table of Contents

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

Market Wrap

Europe Fears Send Stocks To One-Month Lows.

by Todd Shriber

Click here to email Todd Shriber
Thursday's market action was an unfortunate, yet familiar refrain of what investors have had to deal with far too long. Fears regarding Europe's ability to contain its sovereign debt crisis trumped some decent economic data points here in the U.S. and the result was an ugly trading day that saw the Nasdaq lose almost 2% and the S&P 500 drop almost 1.7%. The Dow Jones Industrial Average shed 1.1%.

Stats Table

As I mentioned yesterday, correlations are so elevated in this market that even gold can get whacked. Some days, it is apparent the yellow metal is indeed a safe have. Other days, Thursday being a prime example, it is obvious gold is nowhere to hide. Gold dropped the most in seven weeks today and silver, platinum and palladium went along for the ride.

Marcus Grubb of the World Gold Council said in an interview with Bloomberg that some investors may be moving out of gold ''to shore up losses in the rest of their portfolio.'' That is probably a valid thesis and one I believe we have seen come to pass several times recently. However, that does not make nasty sell-offs in gold, such as the one we saw today, any easier to stomach. Oh yeah, the U.S. dollar index is on a four-day winning streak.

Gold Chart

Looking at some of those aforementioned economic data points, industrial production rose 0.7% last month, topping the consensus estimate of 0.4%. Capacity utilization rose up to 77.8% from 77.3%. That is the highest level since August. The November Housing Market Index showed a reading of 20, topping the October reading of 17. November's reading is also the best since May 2010.

On the jobs front,new claims for jobless benefits fell by 5,000 to 388,000 last week. That's good for a seven-month low and below the 395,000 new claims economists expected. There is a tug-of-war of sorts at play in the U.S. labor market right now. Layoffs are easing and that is certainly good news. However, new hires remain slack. In other words, do not always equate lower jobless claims with a strong gains in new jobs. Overall, the last few weeks have shown the claims picture is definitely improving.

Jobless Claims

On the surface, this would not appear to be the type of market environment in which to scramble to file and list an IPO, but the opposite may be true. Consumer-reviews site Angie's List (ANGI) made its debut as a public company today on the Nasdaq and saw its shares rise by more than 25%. Angie's List is kind of like Yelp meets Craigslist. If you want to find a new doctor, housekeeper or something along those lines, Angie's List is the place and the site has reviews.

Apparently there is something to modeling a business based on other people's opinions because Yelp filed for a $100 million IPO today. The company did not say on what exchange it will trade, but predictably, its ticker will be YELP. Goldman Sachs and Citigroup are leading the offering.

Yelp

In earnings news, there was an avalanche of reports from retailers today. Starting with the bad one, shares of Sears Holdings (SHLD) plunged more than 12% after the company said its third-quarter loss widened to $421 million, or $3.95 per share, compared with a year-earlier loss of $218 million, or $1.98 per share. On an adjusted basis, Sears lost $2.57 a share. Analysts expected a loss of $2.29. Revenue fell to $9.57 billion from $9.68 billion. Analysts expected $9.63 billion. Same-store sales dropped 0.7%.

Eddie Lampert has been trying and trying to get the Sears ship headed in the right direction, but the stock has been almost cut in half since March 2010 and the chart is not pretty at all.

Sears Chart

There is hope among discount retailers and the really deep discount ones at that. I have not been in Dollar Tree (DLTR) store, but the concept of a place that sells everything for less than a buck is interesting. Appar it is profitable, too. Dollar Tree actually finished higher today after saying said its fiscal third-quarter profit climbed to $104.5 million, or 87 cents per share, from $93.2 million, or 73 cents per share, a year earlier as sales rose to $1.6 billion from $1.43 billion. Analysts expected a profit of 83 cents per share on revenue of $1.58 billion. Dollar Tree expects a fiscal fourth-quarter profit of $1.50-$1.57 a share on sales of $1.89-$1.94 billion. Analysts are expecting $1.54 on revenue of $1.92 billion.

The company raised its full-year guidance to $3.94-$4.01 a share from $3.82-$3.95. Revenue guidance is $6.57-$6.62 billion. Analysts are expecting a profit of $3.95 on sales of $6.58 billion.

Dollar Tree Chart

In the tech world, Amazon (AMZN) is supposedly preparing another product that will intensify its rivalry with Apple (AAPL). Citigroup analyst Mark Maheny said Amazon is readying a smartphone that will go on sale in the fourth quarter of 2012. Maheny told Bloomberg that the Amazon smartphone would use chips from Texas Instruments (TXN) and Qualcomm (QCOM). Amazon shares were flat after-hours after falling 3.5% during regular trading.

One stock that was getting slammed after-hours was enterprise software maker Salesforce.com (CRM). The company reported a third-quarter loss of $3.76 million, or 3 cents a share, compared with a year-earlier profit of $21 million, or 15 cents a share, after the bell today. On an adjusted basis, Salesforce.com earned 34 cents topping the 31 cents Wall Street expected. Revenue climbed to $584 million from $429 million, beating the $572 million analysts expected.

Salesforce forecast an adjusted fourth-quarter profit of 39-40 cents, but as Barron's reported today, 20% of the company's revenue comes from Europe and that is not a good thing these days. After losing 4.3% during regular trading, the stock was down 6.3% after-hours.

Salesforce Chart

Looking at the charts, this was a destructive day from a technical perspective. I mentioned yesterday that after the S&P 500 fell below 1240, next support would be 1225. Well, that area failed today and 1200 is beckoning. From there, 1185 would be next. Suddenly, there is a lot resistance facing the S&P 500 at 1225, 1240, 1255 and 1275 and that is assuming stocks move higher.

S&P 500 Chart

On Wednesday, 29 of 30 Dow stocks closed lower with one unchanged. The situation was barely better today with 28 falling and only VZ and WMT closing higher. Maybe the best thing that can be said of the Dow today is that support at 11,600 did not come into play, but I get the feeling it is only a matter of time. Old support at 12,000 did not hold, so that is probably next resistance for the Dow.

Dow Chart

The Nasdaq is arguably the weakest of the three major indexes. Support at 2600 did not hold and we may be looking at how firm support at 2575 is as soon as Friday. CRM is not a Nasdaq stock, but it is one of the more important tech names. The Nasdaq is now almost 100 points below its 200-day moving average and it closed below its 50-day line on Thursday.

Nasdaq Chart

Here is what is extremely problematic about this market: There is nothing that even smacks of bailout support for Italy. Spain fell $600 million short of its target in a bond auction today. France is reportedly in danger of losing its AAA credit rating. All of that will continue to overshadow anything remotely positive the U.S. can offer up. Obviously, things change on a dime these days, but I am not feeling encouraged about a fourth-quarter rally.

Todd Shriber


New Option Plays

Trucks & Hard Drives

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

PACCAR Inc. - PCAR - close: 39.41 change: -0.88

Stop Loss: 42.05
Target(s): 35.50
Current Option Gain/Loss: +0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
PCAR spent more than two weeks trying to breaokut past resistance near $44.00 and its exponential 200-dma. It looks like the bulls ran out of fuel and now selling pressure has resumed. The stock's breakdown under the psychological $40.00 level today is a new sell signal.

I am suggesting small bearish put positions now. We'll buy the open tomorrow morning with a stop loss at $42.05. More conservative traders might consider a stop closer to $41.50 instead. We'll set our target at $35.50 to start.

NOTE: It is possible that the 50-dma near 39.00 could be technical support so more conservative traders may want to wait for a drop under the 50-dma as their entry point instead.

- Suggested (Small) Positions -

buy the DEC $39 PUT (PCAR1117X39) current ask $1.80

Annotated Chart:

Entry on November 18 at $ xx.xx
Earnings Date 02/01/12 (unconfirmed)
Average Daily Volume = 3.7 million
Listed on November 17, 2011


Western Digital Corp. - WDC - close: 25.26 change: -1.56

Stop Loss: 27.75
Target(s): 21.00
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Massive flooding in Thailand has been wreaking havoc among some of the hardware makers. WDC makes hard drives and the disaster in Thailand is going to have a very negative impact on their business.

Traders quickly sold the bounce from yesterday. I am suggesting small bearish put positions now (tomorrow morning) with a stop above yesterday's high. WDC is currently resting on support at the $25.00 level and more conservative traders may want to wait for a drop under $25.00 to initiating positions instead.

It is possible that the 2010 lows near $23.00 could be support but we're aiming for a drop to the $21.00-20.00 zone.

We do want to keep our position size small because WDC has been very volatile the last few weeks.

- Suggested (Small) Positions -

buy the DEC $25 PUT (WDC1117X25) current ask $1.61

- or -

buy the JAN $22.50 PUT (WDC1221M22.5) current ask $1.36

Annotated Chart:

Entry on November 18 at $ xx.xx
Earnings Date 01/18/12 (unconfirmed)
Average Daily Volume = 6.4 million
Listed on November 17, 2011



In Play Updates and Reviews

Stopped Out

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market accelerated lower on Thursday. The S&P 500 has broken down from a triangle or pennant formation. The NASDAQ has broken support near the 2600 level.

We had several trades get stopped out today. I am updating our entry point strategy on SWK. We've also dropped a couple of unopened trades.

-James

Current Portfolio:


CALL Play Updates

Pioneer Nat. Res. - PXD - close: 91.07 change: -3.20

Stop Loss: 89.45
Target(s): 99.75
Current Option Gain/Loss: Dec$100c: -48.4% & Jan$100c: -38.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/17 update: Warning! I cautioned traders about yesterday's pull back from PXD's intraday high. Now today's decline (and underperformance, -3.3%) is follow through on yesterday's reversal. Wednesday's rally looks like a bull trap. PXD dipped to support near $90 this afternoon and if the market continues lower tomorrow we will likely see PXD hit our stop at $89.45.

I am not suggesting new positions at this time.

Earlier Comments:
We want to keep our position size small because PXD can be a volatile stock and we're using a wide stop loss.

(Small Positions Only) - Suggested Positions -

Long DEC $100 call (PXD1117L100) Entry $3.20

- or -

Long JAN $100 call (PXD1221A100) Entry $5.50

Entry on November 16 at $95.05
Earnings Date 02/06/12 (unconfirmed)
Average Daily Volume = 2.6 million
Listed on November 15, 2011


Stanley Black & Decker Inc. - SWK - close: 64.52 change: -0.84

Stop Loss: 63.25
Target(s): 69.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes , see below

Comments:
11/17 update: SWK has dipped to short-term support near $64.00 and its exponential 200-dma. We are going to gamble on a bounce here and adjust our entry point strategy. The new plan is to buy calls on SWK tomorrow morning but only if SWK and the S&P 500 index both open positive. We'll adjust our stop loss to $63.25.

NOTE: I've adjusted our option strikes below.

*See Entry Details Above*

- Suggested Positions -

buy the DEC $65 call (SWK1117L65) current ask $2.70

- or -

buy the JAN $70 call (SWK1221A70) current ask $2.15

11/17 new entry strategy. Buy calls if both SWK and S&P500 open positive tomorrow morning. New stop loss @ 63.25.

Entry on November xx at $ xx.xx
Earnings Date 01/26/12 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on November 15, 2011


PUT Play Updates

Deutsche Bank - DB - close: 36.03 change: -1.08

Stop Loss: 41.55
Target(s): 30.50
Current Option Gain/Loss: Dec$35p: +11.5% & Jan$30p: +24.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
11/17 update: European stocks continue to sink while the EU debt crisis smolders. Shares of DB have closed under technical support at the 50-dma and are now resting near possible price support near $36.00. After a drop from $40.00 you could argue DB is short-term oversold and due for a bounce so I am not suggesting new positions at this time.

Earlier Comments:
Keep position size small to limit risk. This is going to be a volatile trade. FYI: The Point & Figure chart for DB is bearish with a $30 target.

- Suggested Positions - (small positions)

Long DEC $35 PUT (DB1117x35) Entry $2.60

- or -

Long JAN $30 PUT (DB1221m30) Entry $2.09

11/12 new stop loss @ 41.55
11/11 DB gapped open higher at $39.00

Entry on November 11 at $39.00
Earnings Date 02/02/12 (unconfirmed)
Average Daily Volume = 4.3 million
Listed on November 10, 2011


CLOSED BULLISH PLAYS

Anadarko Petroleum - APC - close: 76.44 change: -2.51

Stop Loss: 77.45
Target(s): 98.50
Current Option Gain/Loss: Dec$85c: -49.2% & Jan $90c: -45.6%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
11/17 update: APC accelerated lower with a -3.1% decline. Shares traded under their 30-dma and 200-dma intraday. Our stop loss was hit at $77.45.

I'd keep APC on your watch list for a bounce from support in the $75-74 zone or a close over resistance at $85.00.

- Suggested Positions -

DEC $85 call (APC1117L85) Entry $2.60 exit $1.32 (-49.2%)

- or -

JAN $90 call (APC1221A90) Entry $2.76 exit $1.50 (-45.6%)

11/17 stopped out at $77.45
11/11 Triggered at $81.05
11/09 adjusting our trigger to buy calls down to $81.05 and stop loss to $77.45.

chart:

Entry on November 11 at $81.05
Earnings Date 01/31/12 (unconfirmed)
Average Daily Volume = 5.0 million
Listed on November 8, 2011


DaVita Inc. - DVA - close: 71.26 change: -2.09

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

Comments:
11/17 update: DVA underperformed the market with a -2.8% decline. Shares look headed for the $70.00 level or its 50-dma near $69.

Given the market's (and DVA's) new weakness we are removing this stock from the newsletter. Our play has not opened. Readers may want to keep it on their watch list for a breakout past $75.00 down the road.

Trade Did Not Open

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: 95.17 change: -2.79

Stop Loss: 94.90
Target(s): 106.00
Current Option Gain/Loss: Dec$105c: -50.8% & Jan$105c: -27.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/17 update: Our aggressive entry point on FLS did not pay off. Shares underperformed the market today with a -2.8% decline and an intraday breakdown under the $95.00 level. Our stop was hit at $94.90.

Traders may want to keep FLS on their watch list for a bounce from $90 or a breakout past $100.

Earlier Comments:
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.

(small positions) - Suggested Positions -

DEC $105 call (FLS1117L105) Entry $2.95 exit $1.45 (-50.8%)

- or -

JAN $105 call (FLS1221A105) Entry $4.65 exit $3.35 (-27.9%)

11/17 stopped out at $94.90
11/12 adjusted exit target to $106.00
11/11 trade opened at $97.30
11/09 New strategy: trigger to buy calls at $97.30, stop loss $93.95. Small positions only

chart:

Entry on November 11 at $97.30
Earnings Date 02/23/12 (unconfirmed)
Average Daily Volume = 712 thousand
Listed on November 8, 2011


SPDR Gold Shares - GLD - close: 167.10 change: -4.41

Stop Loss: 168.45
Target(s): 182.50
Current Option Gain/Loss: -22.5%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
11/17 update: Ouch! It was a rough day for gold prices. Futures fell -3% to $1,720.20 an ounce. The theory behind today's losses was traders selling gold to raise money for margin calls on other assets (like stocks).

The GLD gapped open lower at $170.04 and fell to its 30 and 50-dma near $167. Our stop loss was hit at $168.45.

- Suggested Positions - (Small Positions)

2012 Jan $175 call (GLD1221A175) Entry $6.00 exit $4.65 (-22.5%)

11/17 stopped out at $168.45
11/16 new stop loss @ 168.45
11/15 new stop loss @ 166.40
11/07 new stop loss @ 164.95

chart:

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: 92.29 change: -0.86

Stop Loss: 91.95
Target(s): 99.75
Current Option Gain/Loss: Nov95c: -98.5% & Dec95c: -58.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/17 update: Traders were in a mood to take money off the table. Profit taking in MCD pushed the stock under the $92.00 level and shares hit our stop at $91.95. I would keep MCD on your watch list. A dip or a bounce near the $90.00 level and its 50-dma could be a new bullish entry point.

(small positions)- Suggested Positions -

NOV $95 call (MCD1119K95) Entry $0.70 exit $0.01 (-98.5%)

- or -

DEC $95 call (MCD1117L95) Entry $1.55 exit $0.65 (-58.0%)

11/17 stopped out at @91.95
11/12 new stop loss @ 91.95
11/07 MCD hit our trigger at $94.05

chart:

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


Occidental Petroleum - OXY - close: 94.43 change: -3.17

Stop Loss: 95.75
Target(s): 104.50
Current Option Gain/Loss: Dec$100c: -48.8% & Jan105c: -42.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/17 update: Oil and energy stocks were hit hard today with the OIX index down -2.1% and the OSX oil services index down -3.1%. Shares OXY underperformed with a -3.2% plunge. Shares broke down under the 200-dma and its trend of higher lows. Our stop was hit at $95.75.

Earlier Comments:
We do want to keep our position size small because the oil stocks can be a volatile bunch.

(small positions) - Suggested Positions -

DEC $100 call (OXY1117L100) Entry $5.04 exit 2.58 (-48.8%)

- or -

JAN $105 call (OXY1221A105) Entry $4.79 exit 2.75 (-42.5%)

11/17 stopped out @ 95.75
11/11 trade opened.

chart:

Entry on November 11 at $99.67
Earnings Date 01/26/12 (unconfirmed)
Average Daily Volume = 5.4 million
Listed on November 10, 2011


Parker Hannifin Corp. - PH - close: 80.86 change: -2.32

Stop Loss: 81.45
Target(s): 89.75
Current Option Gain/Loss: Dec$90c: -60.0% & Jan $90c: -40.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/17 update: Suddenly Tuesday's breakout past resistance near $85.00 looks like a bull-trap pattern. PH accelerated lower with a breakdown under its simple 200-dma. Our stop loss was hit at $81.45.

- Suggested Positions -

DEC $90 call (PH1117L90) Entry $1.75 exit $0.70 (-60.0%)

- or -

JAN $90 call (PH1221A90) Entry $3.60 exit $2.15 (-40.2%)

11/17 stopped out at $81.45
11/15 trade triggered at $85.25

chart:

Entry on November 15 at $85.25
Earnings Date 01/19/12 (unconfirmed)
Average Daily Volume = 2.6 million
Listed on November 12, 2011


Under Armour, Inc. - UA - close: 78.60 change: -2.25

Stop Loss: 79.35
Target(s): 92.50
Current Option Gain/Loss: -53.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/17 update: UA is down sharply in the last two session. Today's -2.7% drop is a breakdown under what should have been support near $80.00. Our stop loss was hit at $79.35.

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

(small positions) - Suggested Positions -

DEC $85 call (UA1117L85) Entry $3.75 exit $1.75 (-53.3%)

11/17 stopped out at $79.35
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.

chart:

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: 91.40 change: -2.00

Stop Loss: 91.25
Target(s): 99.75
Current Option Gain/Loss: Nov$95c: -31.8% & Dec$95c: -34.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
11/17 update: Visa has lost two dollars twice in a row. Shares actually fell to $90.86 intraday before bouncing off its 50-dma. Our stop loss was hit at $91.25.

I would keep Visa on your watch list for a breakout past the $96.00 level.

- Suggested Positions -

Dec. $95 call (V1117L95) Entry $2.75 exit $1.80 (-34.5%)

11/16 new stop loss @ 91.25
11/16 scheduled exit for Nov.$95 calls. exit $0.75 (-31.8%)
11/15 plan to exit Nov.$95 calls at the open tomorrow morning.
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

chart:

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: 97.84 change: -3.27

Stop Loss: 97.40
Target(s): 107.75
Current Option Gain/Loss: -46.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/17 update: It was a rough morning for VMW. The stock opened lower, under support near $101.00. Shares briefly bounced off the $99.00 level only to roll over again and plunge toward $96.50. Our stop loss was hit at $97.40.

Earlier Comments:
We want to keep our position size small to limit risk.

(small positions) - Suggested Positions -

DEC $105 call (VMW1117L105) Entry $3.35 exit $1.80 (-46.2%)

11/17 stopped out @ 97.40
11/14 trade opened at $101.00
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.

chart:

Entry on November 14 at $101.00
Earnings Date 01/24/11 (unconfirmed)
Average Daily Volume = 2.2 million
Listed on November 3, 2011


Whole Foods Market, Inc. - WFM - close: 65.86 change: -0.99

Stop Loss: 67.40
Target(s): 74.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/17 update: We are giving up on WFM as a bullish candidate. Shares have continued to slip slowly lower with a pattern of lower highs and lower lows. I might reconsider if we see WFM bounce from its simple 200-dma near $63.00.

Our trade never opened.

chart:

Entry on November xx at $ xx.xx
Earnings Date 02/09/12 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on November 12, 2011