Option Investor
Newsletter

Daily Newsletter, Monday, 11/28/2011

Table of Contents

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

Market Wrap

Black Friday Bounce

by Todd Shriber

Click here to email Todd Shriber
Following the worst Thanksgiving week since 1932, the S&P 500 surged nearly 3% today and the other major U.S. indexes took part in the good cheer as record Black Friday sales and some less bad news out of Europe helped the S&P 500 snap a seven-day skid. The Nasdaq added 3.2% and the Russell 2000 notched its best day in weeks with a gain of nearly 4.8%.

Stats Table

While shoppers headed to stores in droves over Black Friday, which actually is counted as four days not one, one place folks still are not spending much money is in the real estate market. The Commerce Department said new home sales rose 1.3% in October to to a seasonally adjusted annual rate of 307,000, but the September reading was revised down to 303,000. No matter how you slice the September and October readings, they are both well below the 700,000 sales economists view as necessary for the housing market to be considered healthy.

The median sales price fell to $213,200. That is the lowest level since October 2010. The National Association of Realtors said there is 6.3 months worth of excess supply on the market today.

As I mentioned at the start, Black Friday 2011 was a banner one for U.S. retailers as consumers spent an estimated $52.4 billion during the four-day weekend, up from $45 billion last year, according to the National Retail Federation. Even with that big number, SPDR S&P Retail ETF(XRT) did not offer much intraday follow through after a small gap up at the open.

XRT Chart

While it really was not a Merger Monday, it is Cyber Monday today. I was reading the Los Angeles Times over the weekend and there was an interesting anecdote about Cyber Monday in there. Back in 2006, Cyber Monday was merely 12th-largest online spending day of the year. Last year, it was tops with $1 billion in sales. Some analysts forecast a jump to $1.2 billion this year.

That is good news for a stock like Amazon (AMZN) and could easily explain why that stock soared 6.4% today on above average volume. Morgan Stanley was out with a note today, rating Amazon ''overweight'' with a $260 price target. That is some excellent upside from $194.15 where Amazon closed today.

The shopping procrastinators among us ''will likely have to turn to a retailer that can provide guaranteed delivery as late as possible. With December 24 falling on a Saturday, only those retailers with the best logistics systems will be able to fulfill orders that Friday, December 23,'' Morgan Stanley said in a note.

Amazon Chart

In case you did not hear or you are not a big sports fan, the NBA owners and players reached a tentative labor agreement over the weekend that will end the league's 149-day work stoppage. The NBA's regular season normally starts with games on or around Halloween, but the labor strife will lead to training camp starting next week with the first games scheduled for Christmas Day. A normal NBA regular season is 82 games, but 66 will be played this year if the deal is ratified as soon as expected.

I mention this because the news did have an impact on select stocks. Sure, shares of Nike (NKE) and Under Armour (UA) were on the move because of Black Friday results and Foot Locker for the same reason and an analyst upgrade. However, it would be foolish to under estimate the impact the return of the NBA on these stocks. Dow component Walt Disney (DIS) was up 1.7% and I will go out on a limb and say most of that gain was attributable to the NBA news.

If you need further convincing the NBA news moved some stocks higher, check out the chart of Madison Square Garden (MSG), the company that owns the famous arena and the New York Knicks.

MSG Chart

Moving away from discretionary and retail names, it was no surprise to see high-beta energy and materials names contributing to Monday's rally in a big way. Shares of Molycorp (MCP), the largest U.S-based rare earths miner, screamed higher by nearly 14% after the company signed a deal with Japan's Daido Steel Co and Mitsubishi to produce and sell high-powered rare earth magnets. Colorado-based Molycorp will have a 30% stake in the venture.

First production will take place in Japan and Molycorp did say in a statement that some production could be seen here in the U.S. at a later date. At the very least, the news provided beleaguered Molycorp investors with a reason to smile today.

Molycorp Chart

As you could see in the stats table, it was a fine day for oil futures, which boosted oil equities as well. One of the big movers in that group was Anadarko Petroleum (APC). The second-largest U.S. independent oil and natural gas producer said one of its wells off the coast of the African nation of Mozambique might hold more gas than previously expected. A lot more. Try 15 trillion to 30 trillion cubic feet.

One analyst opined that this might mean that Anadarko might look for a partner to help harvest this bounty of natural gas. Still, the headlines sent the stock up by almost 5.5%. I get the feeling I have written about Anadarko a lot lately. I also get the feeling that it is almost always good news. Maybe there is something to that.

Anadarko Chart

The big news after hours once again came courtesy of one of Big Three ratings agencies. Fitch said today that it will maintain a AAA rating on Uncle Sam's long-term debt obligations, but Fitch also pared its outlook on the U.S. to negative from stable. Fitch said the switch to a negative outlook meant the credit agency believed there was slightly greater than a 50 percent chance it would downgrade long-term U.S. debt in the next two years, according to the Associated Press.

Fitch said what most of us already: The failure of Congress to make substantive spending cuts until after next year's elections means cuts will just be that much harder to when Congress actually gets around to them.

Looking at the charts, the S&P 500's big jump today brings the index within earshot of resistance in the 1195-1200. From there, it could be a slow grind higher in increments of 10-15 points. Or we could get another day like today and that would have the S&P 500 sniffing 1250 sooner rather than later. In the even of another pullback, it would be encouraging to see 1185 hold as support this time.

S&P 500 Chart

The Dow Jones Industrial Average has a chart that is only moderately more attractive than the S&P 500's and to the Dow's credit, it never challenged support at 10,600 during the November slide. Of course the good news is the Dow ran through resistance at 11,400 with ease today and with the close above 11,500, we can start talking about resistance at 11,600. My reservation regarding the Dow, particularly in the case of a stock like CVX, is that we are seeing an oversold rally and nothing else.

Dow Chart

The Nasdaq is another case of an index that easily sliced through resistance today. The tech-heavy index ran through resistance at 2475 and round-number resistance at 2500 and could make at a run at 2535 on Tuesday. Even with the big gains today for AMZN and AAPL, those two Nasdaq darlings are still well off their highs and well below the lofty price targets some analysts have on the stocks. Maybe tech is starting to offer some value in what is supposed to be the best time of the year to be involved with tech stocks.

Nasdaq Chart

I am usually skeptical of, well, just about anything and I feel the same way about Monday's rally. Still, it is a happy time of year and Monday's action certainly is conducive to a Santa Claus rally. Then again, hopes for that rally depend largely on Europe and Friday's jobs report. I did some buying today, starting a small position in a tech ETF, but I did not make a large bet and I am not sure when I will.

Todd Shriber

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New Option Plays

Technology & Small Caps

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

NetApp, Inc. - NTAP - close: 35.72 change: +1.47

Stop Loss: 33.95
Target(s): 39.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 5 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Last week while the market was plunging lower, shares of NTAP consolidated sideways. That might be due to the fact that NTAP was hammered lower the prior week on its earnings news and guidance. It certainly looks like the bad news has been priced in and NTAP may have found a bottom.

Today's widespread market surge higher produced some short covering in NTAP and the stock rallied +4.2%. If the market continues higher we could see NTAP try and fill the gap.

I am suggesting we open small bullish positions in NTAP tomorrow morning but only if both NTAP and the S&P 500 index open positive. If the S&P opens flat then the determining factor will be NTAP's open. I do consider a more aggressive trade. We want to keep our position size small to limit risk.

FYI: Readers should note that there is a risk that NTAP might make an acquisition soon. There are rumors floating around that NTAP could buy Quantum (QTM) or CommVault (CVLT) in an effort to better compete with rival EMC. If NTAP does make a bid for either company typically shares of the buyer go down while shares of the target go up.

*See Entry Details Above*

- Suggested Positions -

buy the JAN $35 call (NTAP1221A35) current ask $2.61

Annotated Chart:

Entry on November xx at $ xx.xx
Earnings Date 02/16/12 (unconfirmed)
Average Daily Volume = 9.2 million
Listed on November 28, 2011


NEW DIRECTIONAL PUT PLAYS

iShares Russell 2000 ETF - IWM - close: 69.79 change: +3.17

Stop Loss: 72.05
Target(s): 65.50
Current Option Gain/Loss: +0.0%
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
After a very sharp two-week decline the market finally produces an oversold bounce. Today's move looks a lot like short covering. The small cap Russell 2000 index was down -7% just last week. Today the IWM surged +4.75%. Yet it stalled at resistance near 70.00 and its 50-dma.

We are not convinced this rally has legs so we're listing a bearish put position on the IWM to speculate on the bounce rolling over. I do consider this a more aggressive trade. We want to keep our position size small to limit our risk. The plan is to buy puts at the open tomorrow morning. More nimble traders could wait to see if the IWM can rally into the $71.00-71.50 zone first before initiating positions.

Make sure you're buying the normal December puts that expire on the 17th and not the one-week puts.

(Small Positions)

- Suggested Positions -

buy the Dec $69 PUT (IWM1117x69) current ask $2.11

Annotated Chart:

Entry on November xx at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 66.2 million
Listed on November 28, 2011



In Play Updates and Reviews

Finally, An Oversold Bounce

by James Brown

Click here to email James Brown

Editor's Note:

Headlines out of Europe and a big bounce for European stock markets fueled a sharp surge higher for U.S. stocks on Monday morning.

Many stocks gapped open higher, which didn't help our attempts to start new bullish positions and it wreaked havoc with our put positions.

-James

Current Portfolio:


CALL Play Updates

Edwards Lifesciences - EW - close: 63.86 change: +1.36

Stop Loss: 59.90
Target(s): 69.50
Current Option Gain/Loss: Dec$65c: -10.2% & Jan$70c: -11.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
11/28 update: Our trade on EW is now open. Unfortunately most of today's gains were all at the opening gap higher. EW opened at $63.97 and slowly faded to $63.86. The next level of short-term resistance EW needs to push through is the $65.00 level and its 10-dma. More conservative traders might want to use a stop loss closer to $62.00. We have a stop at $59.90.

- Suggested Positions -

Long DEC $65 call (EW1117L65) Entry $1.95

- or -

Long 2012Jan $70 call (EW1221A70) Entry $1.70

11/28 trade opened. EW gapped higher at $63.97
11/26 trade still not open. Adjusting stop loss to $59.90
11/23 still not open
11/22 not open yet

Entry on November 28 at $63.97
Earnings Date 02/02/12 (unconfirmed)
Average Daily Volume = 1.2 million
Listed on November 21, 2011


Family Dollar Stores - FDO - close: 56.48 change: +0.68

Stop Loss: 53.75
Target(s): 59.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
11/28 update: FDO bounced toward its trend of lower highs and then faded lower. Shares settled with a +1.2% gain, which underperformed the major indices. I don't see any changes from my prior comments.

Currently we have a buy-the-dip trigger to buy calls at $54.50. Readers might want to consider an alternative entry point on a rally past $58.50 instead.

Earlier Comments:
We want to keep our position size small because the spreads on the options below are getting wide, making this trade more risky.

buy the dip Trigger @ 54.50 (small positions)

- Suggested Positions -

buy the DEC $57.50 call (FDO1117L57.5)

- or -

buy the JAN $60 call (FDO1221A60)

11/26 new strategy. buy a dip at $54.50, stop loss @ 53.75. Keep positions small because option spreads are wide.
11/22 not open yet

Entry on November xx at $ xx.xx
Earnings Date 01/04/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on November 21, 2011


JB Hunt Transport Services - JBHT - close: 43.78 change: +1.03

Stop Loss: 41.99
Target(s): 48.25
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Comments:
11/28 update: The Dow Jones Transportation average produced a strong bounce with a +3.5% gain. Shares of JBHT only settled with a +2.4% gain. The stock rallied to $44.15 this morning before paring its gains. Our strategy has not changed.

JBHT has resistance near $44.00. I am suggesting a trigger to open bullish positions at $44.35. If triggered our multi-week target is $48.25. JBHT doesn't move super fast so give yourself time for the trade to work. FYI: The Point & Figure chart for JBHT is bullish with a $63 target.

Trigger @ 44.35

- Suggested Positions -

buy the 2012JAN $45 call (JBHT1221A45)

Entry on November xx at $ xx.xx
Earnings Date 01/30/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on November 22, 2011


O'Reilly Automotive - ORLY - close: 75.73 change: +0.22

Stop Loss: 73.85
Target(s): 82.50
Current Option Gain/Loss: Dec$75c: -33.9% & Jan$80c: -40.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/28 update: Warning! The action in ORLY is not very encouraging. The stock gapped open higher at $76.96 and quickly reversed. ORLY gave back almost all of its gains to settle up +0.2% versus a +3.5% move in the NASDAQ. At this point I would wait for a new rally past $76.25 before considering new bullish positions.

Earlier Comments:
Our target is $82.50 but more conservative traders may want to exit in the $79.50-80.00 zone instead. FYI: The Point & Figure chart for ORLY is bullish with a $103 target.

- Suggested Positions -

Long DEC $75 call (ORLY1117L75) Entry $2.80

- or -

Long JAN $80 call (ORLY1221A80) Entry $1.50*

11/28/11 ORLY gapped open higher at $76.96, which was above our trigger to buy calls at $76.15.
*Jan $80 call did not trade today. Entry price is an estimate.

Entry on November 28 at $76.96
Earnings Date 02/16/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on November 26, 2011


Phillip Morris Intl. - PM - close: 73.09 change: +1.78

Stop Loss: 69.49
Target(s): 78.50
Current Option Gain/Loss: + 6.2%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
11/28 update: PM was showing some strength today. The stock added +2.5% and closed near its recent highs. PM could see new all-time highs again soon.

Earlier Comments:
Our multi-week target is $78.50. FYI: The Point & Figure chart for PM is bullish with a $95 target.

- Suggested Positions -

Long 2012 Jan $75 call (PM1221A75) Entry $1.12

11/23 adjusted stop loss to $69.49
11/22 trade opened. PM opened at $72.11

Entry on November 22 at $72.11
Earnings Date 02/09/12 (unconfirmed)
Average Daily Volume = 7.3 million
Listed on November 19, 2011


PUT Play Updates

Alliance Resource Partners - ARLP - close: 70.75 chg: +2.08

Stop Loss: 72.55
Target(s): 60.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
11/28 update: The stock market's big move higher on Monday lifted ARLP to a +3.0% gain. This looks like a simple oversold bounce. There is no change from my weekend comments.

I am suggesting we use a trigger at $68.45 to buy puts and we'll use a stop loss at $72.55. It's a bit wide for a stop but ARLP can be a volatile stock. Our target is $60.50. FYI: The Point & Figure chart for ARLP is bearish with a $62 target.

NOTE: I would feel more comfortable buying the January puts to have more time but the spreads are too wide to trade. We want to keep our position size small to limit our risk.

Trigger @ 68.45 (small positions)

- Suggested Positions -

buy the DEC $65 PUT (ARLP1117X65)

Entry on November xx at $ xx.xx
Earnings Date 01/30/12 (unconfirmed)
Average Daily Volume = 45 thousand
Listed on November 26, 2011


Deutsche Bank - DB - close: 35.18 change: +2.84

Stop Loss: 36.55
Target(s): 30.50
Current Option Gain/Loss: Dec$35p: - 3.8% & Jan$30p: +12.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
11/28 update: Wow! Either the market's timing or my timing couldn't be better (or worse). After a -17.0% drop we decided over the weekend to take some money off the table and sell half of our puts at the open on Monday morning. What happens next? The market explodes higher and DB gaps higher at $35.59 and settles with a +8.7% gain. This was due in large part to news that EU leaders were considering radical steps to reign in the region's financial instability.

The $36.00 level and the 50-dma should offer some overhead resistance. 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

11/28 planned exit to sell half of our puts at the open.
Dec $35 put @ $2.40 (- 7.6%)
Jan $30 put @ $2.00 (- 4.3%)
Both of these puts positions were up about +60% at Friday's close
11/26 new stop loss @ 36.55
11/26 Sell half at the open on Monday morning to lock in a gain.
11/23 new stop loss @ 37.55
11/23 more conservative traders may want to take profits now. The Dec $35 put (+61.5%) and the Jan $30 put (+62.6%)
11/21 new stop loss @ 38.75
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


PACCAR Inc. - PCAR - close: 38.52 change: +1.24

Stop Loss: 40.25
Target(s): 35.50
Current Option Gain/Loss: - 8.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/28 update: The market's oversold bounce this morning pushed PCAR to gap higher at $38.60. Shares spiked to their 50-dma near $39.20 before fading lower and closing up +3.3%. If we see PCAR fail under $40 or the $39 level again tomorrow then readers can use it as a new entry point for bearish positions.

- Suggested (Small) Positions -

Long DEC $39 PUT (PCAR1117X39) Entry $1.75

11/23 new stop loss @ 40.25
11/21 new stop loss @ 41.50

Entry on November 18 at $39.42
Earnings Date 02/01/12 (unconfirmed)
Average Daily Volume = 3.7 million
Listed on November 17, 2011


United Continental Holdings - UAL - close: 16.58 change: +0.68

Stop Loss: 17.25
Target(s): 12.75
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
11/28 update: Our plan was to open bearish put positions at the opening bell this morning. Yet shares of UAL actually gapped above our stop loss. We had a stop at $16.55 and the stock opened at $16.75 so our trade did not open. We're still bearish on UAL. I am suggesting we try again.

We'll open bearish put positions at the open tomorrow morning and list a stop loss at $17.25. Our target is $12.75 but more conservative trades may want to exit on a decline near $14.00, which might offer some support.

- Suggested Positions -

buy the DEC $15 put (UAL1117x15) current ask $0.29

- or -

buy the JAN $14 put (UAL1221M14) current ask $0.49

11/28/11 Our initial entry strategy did not work. UAL gapped open above our stop loss. We will try again. New stop loss at $17.25.

Entry on November xx at $ xx.xx
Earnings Date 01/26/12 (unconfirmed)
Average Daily Volume = 5.0 million
Listed on November 26, 2011


Western Digital Corp. - WDC - close: 26.56 change: +1.56

Stop Loss: 27.05
Target(s): 21.00
Current Option Gain/Loss: Dec$25p: + 3.3% & Jan22.50p: +20.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/28 update: Today looks like another short covering rally with the super sharp spike higher this morning. Shares couldn't quite get past resistance near $27.00 and its 50-dma. We are at risk should the rally continue tomorrow. I am not suggesting new positions at this time.

Earlier Comments:
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 -

Long DEC $25 PUT (WDC1117X25) Entry $1.49

- or -

Long JAN $22.50 PUT (WDC1221M22.5) Entry $1.13

11/26 new stop loss @ 27.05

Entry on November 18 at $26.04
Earnings Date 01/18/12 (unconfirmed)
Average Daily Volume = 6.4 million
Listed on November 17, 2011


CLOSED BEARISH PLAYS

Lululemon Athletica - LULU - close: 48.93 change: +2.67

Stop Loss: 50.25
Target(s): 42.50
Current Option Gain/Loss: Dec$47.50p: -40.6% & Jan$45p: -21.4%
Time Frame: Seven Trading Days or 6 weeks
New Positions: see below

Comments:
11/28 update: Our very small (+10%) gains in these puts evaporated at the open this morning thanks to the market's super surge higher. Shares of LULU gapped open higher at $49.00 but failed at resistance near $50.00 and its 200-dma. Over the weekend we had decided to exit these positions at the open on Monday morning.

- Suggested Positions -

DEC $47.50 PUT (LULU1117X47.5) Entry $3.54 exit $2.10 (-40.6%)

- or -

2012 JAN $45 PUT (LULU1221M45) Entry $3.63 exit $2.85 (-21.4%)

11/28 planned exit at the open. LULU gaps higher at $49.00
11/26 plan to exit on Monday morning at the open
11/23 new stop loss @ 50.25
11/23 LULU is not falling very fast. Readers may want to consider an early exit now.
11/21 trade opened on LULU's gap down at $47.63.

chart:

Entry on November 21 at $47.63
Earnings Date 12/01/11 (confirmed)
Average Daily Volume = 2.8 million
Listed on November 19, 2011