Option Investor
Newsletter

Daily Newsletter, Monday, 12/5/2011

Table of Contents

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

Market Wrap

It's Europe's World...We Just Live In It

by Todd Shriber

Click here to email Todd Shriber
The first trading day of the week started off in fine fashion after Italy ushered in a massive austerity program and Germany and France, the Eurozone's two largest economies, pushed for more debt-fighting solutions. However, stocks pared their gains after the Financial Times broke a story that Standard & Poor's will put German and France on creditwatch negative and that was enough to help equities pare the nice gains seen earlier in the day.

Market Stats

Also potentially vulnerable to an S&P downgrade are Austria, Finland and Luxembourg. Oddly enough, all five countries currently have AAA credit ratings. Perhaps the U.S. will not be so lonely in the ''lost our AAA rating'' club after all.

Initially, S&P did not comment on the speculation. Then after U.S. markets closed, the ratings agency warned that ratings downgrades may await all 17 members of the Euro Zone. Creditwatch means S&P is reviewing its ratings for possible downgrades in no more than 90 days. Moody's Investors Service and Fitch Ratings previously said they are considering downgrades for some of the Euro Zone's AAA countries. European Union leaders meet in Brussels on Thursday and Friday, so yeah, we will be looking at another weekend fraught with headline risk.

Here in the U.S., the economic data points released today were not all that impressive. The Commerce Department said factory orders fell 0.4% in October and the September reading was revised down to a 0.1% drop from an initial reading that showed a 0.3% gain. Commercial aircraft orders fell 17% in October. The Institute for Supply Management said its non-manufacturing index fell to 52% in November from a reading of 52.9% in October. Economists were expecting a November reading of 54%.

ISM Chart

In stock-specific news here in the U.S., there was a little bit of Merger Monday at work. Well, it was actually Merger Saturday playing out today as shares of business software provider SuccessFactors (SFSF) surged over 51.4% on nearly 50 times the average daily turnover after German software giant SAP AG (SAP) announced it will acquire the California-based company for $3.4 billion, or $40 a share. That works out to a 52% premium to where the stock closed on Friday.

Not surprisingly, SAP's deal for SuccessFactors prompted speculation about what company in this space of the software universe might be next to be taken out. Taleo (TLEO) and Conqur Technologies (CNQR) were a couple names that popped up. Ariba (ARBA) was also mentioned in a Jefferies analyst note. Citigroup said today Taleo could find its way into Oracle's (ORCL) always acquisitive arms.

Success Factors Chart

Shares of online auction site and PayPal owner eBay (EBAY) jumped 3.7%, but on below average volume, after Raymond James raised its rating on the stock to ''strong buy'' from ''market perform'' with a $39 price target. That is well above the $30.70 the stock closed at today.

ChannelAdvisor reported on Friday that eBay's November same-store sales increased 18 percent from the same period last year, according to Reuters. Raymond James also sees eBay improving its results through some recent measures it has taken, including 1) shift to fixed price sales; 2) surfacing of top rated sellers (TRS); 3) improved site search; 4) adoption of free shipping; and 5) vertical shopping experiences in key categories, Barron's noted.

EBAY Chart

Speaking of analyst chatter, somehow, someway BlackBerry maker Research In Motion (RIMM) closed higher today despite more negative sentiment from the sell-side community. UBS lowered its price target on RIM to $18 from $26 while paring its fiscal 2013 revenue estimate to $17.4 billion from $20.4 billion and its EPS estimate to $3.87 from $4.73.

Sterne Agee lowered its fiscal 2013 revenue estimate to $20.8 billion from $20.9 billion while R.W. Baird trimmed its fiscal 2013 outlook for RIM to $17.92 billion and $3 per share from $19.98 billion and $3.95 per share. RIM was up today, but it is quite clear this stock is in a death spiral.

RIMM Chart

I do not think you can buy a BlackBerry at Dollar General (DG), but stock was up 1.6% today after the company said its fiscal third-quarter profit climbed 34% to $171.2 million, or 50 cents per share, from $128.1 million, or 37 cents per share, a year earlier. Revenue rose 12% to $3.6 billion. Analysts expected a profit of 47 cents on sales of $3.57 billion. Same-store sales rose increased 6.3%.

The Tennessee-based discount retailer forecast an adjusted 2011 profit of $2.29-$2.32 a share up from previous guidance of $2.20-$2.30 a share. The company forecast revenue growth of 13% and same-store sales growth of 5.6%-5.8% up from prior guidance of 3%-5%.

Dollar General Chart

Adding to the good cheer on the outlook front was Yum Brands (YUM), parent company of KFC, Pizza Hut and Taco Bell. Kentucky-based Yum raised its 2011 profit forecast and said it expects earnings per share to grow at least 10% in 2012. The company said it expects to earn $2.85 a share on an adjusted basis in 2011, implying growth of 13%. That compares with an original estimate of 12% profit growth. The company said it expects to open 600 new restaurants in China next year.

Overall, Yum Restaurants International will open 800 new stores next year, but it is really all about China for Yum, where the company actually far outpaces rivals like McDonald's (MCD). It might also be fair to say that Yum is less and less about Mexico. At least Mexican food as there is a rumor that the company is mulling a spin-off of Taco Bell. Keep the Bell or let it go, either way, Yum hit a new 52-week high today.

Yum Chart

Looking at the charts, the 1265 area proved to be significant resistance for the S&P 500 today and that mountain was too tall to climb as the morning's larger gains dwindled later in the day. If the S&P 500 can get through that barrier, there is some open real estate to next resistance at 1295. And then more resistance at 1350. Look to 1240 as support, then 1225.

S&P 500 Chart

The Dow probably should have finished with a triple-digit gain, but even after leaving something out there, the index is just one more good day away from breaking resistance at 12,200. Twenty-four Dow stocks were higher today and despite disappointing closes, MCD and KFT both touched new 52-week highs today. MCD can be a Dow leader at over $95 a share. First support is 12,000.

Dow Chart

On a percentage basis, the Nasdaq was the top performer among the Big Three Indexes today and that helped the index move solidly past resistance at 2625. Now the Nasdaq is just a small gain away from reclaiming its 200-day moving average at 2673. After that, 2700 is next resistance. Support is 2600.

Nasdaq Chart

I thought it would be interesting to see where the leadership is coming from these days, so I screened for large-cap stocks trading 3% or less below their 52-week highs. Around 60 NYSE-listed stocks turn up and almost 20% of that group are staples stocks. GIS, KFT, MCD, PG, etc. Another 16 are either master limited partnerships or utilities. Not sexy, but not sexy appears to be working these days.

Todd Shriber


New Option Plays

Large Cap Tech Stock

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Hewlett-Packard Co. - HPQ - close: 28.12 change: +0.44

Stop Loss: 26.75
Target(s): 32.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of HPQ look poised to breakout past resistance near $28.50 after spending weeks building a bottom. Arguably the long-term trend is still down but investors could be betting that the new CEO Meg Whitman can turn the company around (again).

I am suggesting a trigger to buy calls at $28.65. However, this is an aggressive entry point. The top of the August gap down near $29.50 could be resistance. Plus HPQ could find round-number resistance at $30.00 and technical resistance at the 150-dma, simple 200-dma and exponential 200-dma all above in the $30.00-34.00 zone. Thus we want to keep our position size small to limit our risk. We'll se our stop loss at $26.75 and our exit target at $32.00. FYI: The Point & Figure chart for HPQ is bullish with a $41 target.

Trigger @ $28.65

- Suggested Positions -

buy the 2012Jan $30 call (HPQ1221A30) ask $0.72

Annotated Chart:

Weekly Chart:

Entry on December xx at $ xx.xx
Earnings Date 02/22/12 (unconfirmed)
Average Daily Volume = 22.4 million
Listed on December 05, 2011



In Play Updates and Reviews

Early Gains Fade on Possible S&P Downgrade

by James Brown

Click here to email James Brown

Editor's Note:

The market's early rally faded on news that Standard & Poor's might downgrade all 17 nations in the euro zone.

I am removing ALXN from the play list. The trade did not open. We do want to go ahead and take profits on our December calls on the ORLY play.

-James

Current Portfolio:


CALL Play Updates

Caterpillar - CAT - close: 96.85 change: +0.56

Stop Loss: 95.45
Target(s): 107.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
12/05 update: CAT spent the day churning sideways under resistance at $98.00. The stock managed a minor gain that erased Friday's equally minor decline. There is no change from my weekend comments.

I am suggesting we buy calls with a trigger to open positions at $98.55. If triggered we'll use a stop loss at $95.45. Our target is $107.00.

Trigger @ 98.55

- Suggested Positions -

buy the 2012Jan $100 call (CAT1221A100)

Entry on December xx at $ xx.xx
Earnings Date 01/26/12 (unconfirmed)
Average Daily Volume = 8.1 million
Listed on December 03, 2011


Edwards Lifesciences - EW - close: 65.24 change: +0.25

Stop Loss: 63.25
Target(s): 69.50
Current Option Gain/Loss: Dec$65c: - 2.5% & Jan$70c: -11.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/05 update: EW produced an "inside day". Essentially it was a day of indecision by traders. I will repeat my comments from this weekend that EW looks like it's ready to dip towards $64.00 or the simple 10-dma. I am not suggesting new positions at this time.

More conservative traders may want to exit early now to avoid or limit any losses.

- Suggested Positions -

Long DEC $65 call (EW1117L65) Entry $1.95

- or -

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

12/03 new stop loss @ 63.25
11/30 new stop loss @ 61.95
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: 59.20 change: +0.50

Stop Loss: 56.75
Target(s): 64.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
12/05 update: FDO continues to churn sideways. shares managed to hit $59.99 midday before paring its gains. I am suggesting readers wait for a dip to $58.00 to open bullish positions. I am suggesting January calls.

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 @ 58.00 (small positions)

- Suggested Positions -

buy the JAN $60 call (FDO1221A60)

12/03/11 Adjust buy-the-dip trigger to $58.00
12/03/11 new stop loss @ 56.75
11/30 New strategy to account for FDO's bullish breakout higher. We want to use a trigger at $58.50 to open bullish positions with a stop at $56.45. New target is $64.00. I've updated our option strikes.
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: 46.03 change: +0.34

Stop Loss: 44.75
Target(s): 48.25
Current Option Gain/Loss: +14.6%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
12/05 update: The transportation average is just barely pushing past resistance at the 5,000 level and technical resistance at its 200-dma. If the transport sector can build on this move it will be bullish for stocks and help JBHT move higher. JBHT did gain +0.7% but the stock was off its best levels of the session. No new positions at this time.

Earlier Comments:
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.

- Suggested Positions -

Long 2012JAN $45 call (JBHT1221A45) Entry $2.05

12/03/11 new stop loss @ 44.75. More aggressive traders may want to leave their stop under $44.00 instead
11/30/11 new stop loss @ 42.45
11/29/11 triggered at $44.35

Entry on November 29 at $44.35
Earnings Date 01/30/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on November 22, 2011


NetApp, Inc. - NTAP - close: 37.54 change: +1.00

Stop Loss: 34.95
Target(s): 39.50
Current Option Gain/Loss: +39.4%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
12/05 update: NTAP rallied to technical resistance near its 50-dma (near $38.25) late this morning. Shares did fade lower but even with the pull back off its highs NTAP outperformed the market with a +2.7% gain. I am not suggesting new positions with NTAP sitting just under resistance.

Earlier Comments:
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.

- Suggested Positions - (small positions)

Long JAN $35 call (NTAP1221A35) Entry $2.51

12/03/11 new stop loss @ 34.95

Entry on November 29 at $35.82
Earnings Date 02/16/12 (unconfirmed)
Average Daily Volume = 9.2 million
Listed on November 28, 2011


O'Reilly Automotive - ORLY - close: 79.53 change: +2.50

Stop Loss: 74.90
Target(s): 84.00
Current Option Gain/Loss: Dec$75c: +64.2% & Jan$80c: +46.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/05 update: Some positive analyst comments helped ORLY rally to new all-time highs. Shares hit $80.67 before paring its gains and the stock settled with a +3.2% advance at the close. Please note we're making some strategy changes. We are moving our final target from $82.50 to $84.00 but this only applies to the January calls. I am suggesting we exit our December calls at the open tomorrow morning to lock in a gain. I am not suggesting new positions at this time.

- Suggested Positions -

Long DEC $75 call (ORLY1117L75) Entry $2.80
(prepare to exit tomorrow at the open)

- or -

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

12/05/11 Strategy change: Exit the December calls tomorrow at the open. Move the exit target for the January calls from $82.50 to $84.00.
12/03/11 new stop loss @ 74.90
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: 75.87 change: +0.40

Stop Loss: 73.75
Target(s): 78.50
Current Option Gain/Loss: +100.8%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
12/05 update: Hmm... that's the second time in three days that PM has seen the rally fail near the $77.00 level. Readers may want to consider an early exit now to lock in a gain, especially with our call +100%. I am not suggesting new positions at this time.

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

12/05 Call is up +100%, readers may want to exit now!
12/03 new stop loss @ 73.75
11/30 new stop loss @ 71.40
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


Boston Beer Co. Inc. - SAM - close: 103.91 change: +1.40

Stop Loss: 98.75
Target(s): 109.50
Current Option Gain/Loss: + 9.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/05 update: SAM gapped higher and then spent most of the session oscillating on either side of the $104.00 level. I am not suggesting new positions at this time.

Earlier Comments:
Our exit target is $109.50. More aggressive traders may want to aim higher. FYI: The Point & Figure chart for SAM is bullish with a $117 target. NOTE: The most recent data listed short interest at 20% of SAM's extremely small 8.3 million-share float. That's definitely a recipe for a short squeeze.

(small positions) - Suggested Positions -

Long JAN $105 call (SAM1221A105) Entry $2.05

12/03/11 new stop loss @ 98.75
12/02/11 trade triggered at $102.00

Entry on December xx at $ xx.xx
Earnings Date 03/08/12 (unconfirmed)
Average Daily Volume = 72.3 thousand
Listed on December 01, 2011


PUT Play Updates

SPDR S&P 500 ETF - SPY - close: 126.22 change: +1.36

Stop Loss: 127.55
Target(s): 120.50
Current Option Gain/Loss: - 1.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/05 update: Our speculative put play on the overbought condition in the SPY is on the verge of getting stopped out. The market rallied again this morning until enthusiasm wanted thanks to headlines that the S&P rating agency might put all 17 euro-zone nations on credit watch negative for a potential downgrade. It's a surprise that stocks still managed to close in positive territory.

The high today for the SPY was $127.18. We have a stop loss at $127.55. More aggressive traders may want to inch their stop higher so it's just above $128.00 instead.

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

- Suggested Positions -

Long 2012Jan $120 PUT (SPY1221M120) Entry $2.67

12/02/11 trade opened at $126.12 (gap higher), trigger was 126.00

Entry on December 02 at $126.12
Earnings Date --/--/--
Average Daily Volume = 224 million
Listed on November 30, 2011


Thermo Fisher Scientific - TMO - close: 46.78 change: +0.24

Stop Loss: 48.25
Target(s): 42.75
Current Option Gain/Loss: Dec$45p: +11.1% & Jan$45P: + 0.0%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
12/05 update: TMO gapped open higher at $47.10 but the rally stalled, twice, near $47.40. This is a new lower high within a short-term pattern of lower highs. The gap higher and the time decay provided a much lower price on our December $45 puts. These have less than two weeks left.

Bigger picture TMO looks poised to roll over again and hit new lows. On a shorter time frame you could argue that TMO is forming a bull-flag pattern.

I would still consider new positions now at current levels. Our target is $42.75. FYI: The Point & Figure chart for TMO is bearish with a $41 target.

- Suggested Positions -

Long DEC $45 put (TMO1117X45) Entry $0.45
(about 2 weeks left for Decembers)

- or -

Long JAN $45 put (TMO1221M45) Entry $1.40

12/05/11 TMO gapped open higher at $47.10

Entry on December 05 at $47.10
Earnings Date 02/01/12 (unconfirmed)
Average Daily Volume = 3.5 million
Listed on December 03, 2011


Watson Pharmaceuticals - WPI - close: 63.26 change: +0.40

Stop Loss: 64.25
Target(s): 56.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
12/05 update: WPI consolidated sideways in a narrow range underneath its 200-dma. There is no change from my weekend comments.

I am suggesting we use a trigger to buy puts at $61.75 with a stop loss at $64.25. There is potential support at $60.00 but I am aiming for the $56.00 level.

Trigger @ $61.75

- Suggested Positions -

buy the DEC $60 PUT (WPI1117X60)
(aobut 2 weeks left for Decembers)

- or -

buy the JAN $60 PUT (WPI1221M60)

Entry on December xx at $ xx.xx
Earnings Date 02/14/12 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on December 03, 2011


CLOSED BULLISH PLAYS

Alexion Pharmaceuticals - ALXN - close: 65.10 change: -1.88

Stop Loss: 67.40
Target(s): 74.75 or 79.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/05 update: ALXN continues to contract lower. Shares underperformed the wider market today. The stock looks poised to retest support in the $63-60 zone. It could be a while before we see ALXN breakout past resistance at $70.00. I am removing it from the play list with the trade unopened. Our trigger was $70.55. I would keep an eye on technical support near the 200-dma.

Trigger @ $70.55 (Small Positions)

Trade Did Not Open

12/05/11 chose to drop ALXN as a candidate.

chart:

Entry on December xx at $ xx.xx
Earnings Date 02/09/12 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on December 01, 2011