Option Investor
Newsletter

Daily Newsletter, Monday, 12/19/2011

Table of Contents

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

Market Wrap

Europe, Financials Doom Stocks

by Todd Shriber

Click here to email Todd Shriber
Well, that headline could probably have been applied to any number of days over the past 18-24 months and the number is either too high to count or too frustrating to mention, so that will not happen here. However, there is no getting around an ugly performance for equities on Monday as continuing concerns about Europe and downtrodden U.S. bank stocks sent the S&P 500 to a loss of more than 1% and the Dow Jones Industrial Average to a triple-digit loss.


Not the way investors want to be heading into Christmas and as if you needed a reminder, this is the final trading week before Christmas. I was having this conversation with a couple of folks earlier and I predicted volume is about to dry up. Not that I am going out on a limb by saying, I am not, but there are just eight trading days left in 2011 and Hanukah begins tomorrow, so things will probably be at a standstill by the time Friday rolls around. Put another way, time has all but run out on a Santa Claus rally and I say that as someone who is really trying to get into the spirit of the season.

Santa

Stocks were dragged lower after European Central Bank President Mario Draghi merely said things most of us already knew, but none of us really wanted to hear again. He said substantial risks to the economy are still out there and European Union law prevents the ECB from going into the market to buy more bonds.

That helped all 10 industry groups tracked within the S&P 500 tumble on the day as all ignored some decent housing data and some small-scale mergers and acquisitions news. The National Association of Home Builders said homebuilder sentiment rose to 21 in December from 19 in November, good for the third consecutive month of gains. Economists expected a December reading of 20.

As I mentioned at the start, financials were the primary culprit among losers today and one of the main, if not all too familiar villains in that group was Dow component Bank of America. Granted, it is just by a penny, but BofA now resides under $5 for the first time since March 2009. Things are tough when a close at $4.99 is pretty good compared to the intraday low at $4.92.

What is even more interesting about these sub-$5 levels Bank of America is dealing with is that it means Warren Buffett has a real turkey of an investment on his hands thus far. Indeed, even the greatest investors are like baseball players: None of them bat .1000, but late in the day, the Wall Street Journal ran an article saying Buffett's Berkshire Hathaway (BRK-A, BRK-B) was $1.5 billion on its BofA investment that was announced in the summer.

Obviously $1.5 billion is not all that much to Buffett, but to put it into context, that is roughly the market cap JetBlue (JBLU) closed with today. And there is no getting around the fact that Berkshire is deep in the red on its BofA investment. The company has warrants to purchase to 700 million BofA shares at $7.14 a share so that means the stock still needs to rise more than 40% from current levels for those warrants just to break-even. I guess it is a good thing Berkshire is raking in $300 million per year in dividends on its BofA stake, something that would be next to impossible for the rest of us to do based on the current quarterly dividend of a penny a share.

BofA Chart

Speaking of Dow stocks, it was a day of quashed mergers and acquisitions dreams and speculation. I will start with the speculation. On Sunday, a British paper reported that Exxon Mobil (XOM), the largest U.S. oil company, was considering a $10.9 billion bid for U.K.-based Gulf Keystone. That company is supposedly sitting on some plush oil reserves in the semi-autonomous Kurdistan region of Iraq. Exxon also has a footprint in that area.

Gulf Keystone issued a statement today, refuting the rumor, but traders said the company remains an attractive takeover target and the usual suspects popped up as possible suitors if Exxon really is not interested. The Independent, the British daily that initially reported the rumor, said Chevron (CVX) and Sinopec of China, the largest Asian refiner, were monitoring the situation. Today the Wall Street Journal said Royal Dutch Shell (RDS-A) and BP (BP), the two largest European oil companies, would make for logical suitors for Gulf Keystone.

Shares of Exxon Mobil closed modestly lower on the day.

Exxon Chart

And in the let us not make a deal department, Dow component AT&T (T) announced this afternoon it would not move forward with its $39 billion bid for T-Mobile. As previously announced, AT&T will pay a $4 billion breakup fee and that charge will be taken in the current quarter. This is not much of a surprise given the opposition to the deal on the part of the Federal Trade Commission and the Justice Department, but AT&T was not happy.

''AT&T will continue to be aggressive in leading the mobile Internet revolution,'' said Randall Stephenson, AT&T chairman and CEO, in a statement. ''Over the past four years we have invested more in our networks than any other U.S. company. As a result, today we deliver best-in-class mobile broadband speeds – connecting smartphones, tablets and emerging devices at a record pace – and we are well under way with our nationwide 4G LTE deployment.''

AT&T shareholders were not sent away empty-handed. The company raised its annual dividend 2.3% to $1.76 a share today. That is good for 28 straight years of dividend increases. However, the biggest winners in the near-term may be Sprint (S) shareholders. At its highs after-hours, the stock was up almost 9%. As of this writing, it is up nearly 5.6%. Sprint was the ring-leader against AT&T acquiring T-Mobile.

AT&T Chart

Also in after-hours news China-based Yanzhou Coal (YZC), that country's fourth-largest coal miner, said it will acquire Australia-based Gloucester Coal Ltd. for at least $2 billion, Bloomberg reported, citing sources with knowledge of the matter. The deal will need to be approved by Gloucester's largest shareholder, Noble Group. This is not Yanzhou's first Australian foray. The company acquired Felix Resources in 2009 for about $3 billion. Yanzhou's U.S.-listed shares have dropped almost 35% this year.

Yanzhou Coal

Looking at the charts, the S&P 500 is back to flirting with support at 1200. Fall through that level, it would probably be back to 1185. After that 1150, might offer some support, but the S&P could just as easily fall to 1125. Resistance can be found at 1225 and 1255. I am hesitant to believe 1295 will be factor before the end of the year.

S&P 500 Chart

Even with the Dow's 100-point loss today, there is still some breathing between today’s close and support at 11,600. After that, it could be off to 11,500 and then 11,425. From there, things could be get ugly on a return to 10,600. After 12,000 is reclaimed, next resistance from there is 12,285 and 12,750. As is the case with the S&P 500, I think it is a stretch seeing the Dow getting all the way to the best case year-end scenario.

Dow Chart

The Nasdaq is a mess. Round number support at 2500 could be in play in a day or two and from there the declines could be especially nasty with the 2400 level eventually being threatened. Oracle (ORCL) reports earnings after the bell Tuesday and that might be one last saving grace for the beaten down Nasdaq, but not enough to bring 2600 into play on its own.

Nasdaq Chart

There are a couple earnings reports watching over the next couple of days, namely ORCL and GIS, but I doubt either will be monumental to move this market. It is still all about Europe and with that pesky issue showing no signs of abating, the money managers that are positive for the year are not likely to mess with a good thing by making new buys this week and those that are in the red may not want to make things worse with Christmas week trades. Expect light volume and do some Christmas shopping instead of over trading. And since next Monday the market is closed, I will take this opportunity to wish everyone happy holidays.

Todd Shriber


New Option Plays

Education & Healthcare

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

ITT Educational Services - ESI - close: 50.37 change: -1.67

Stop Loss: 52.60
Target(s): 45.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of ESI are on the verge of hitting new multi-year lows. The stock has fallen toward support near $50.00. Shares bounced at this level back in 2010. A breakdown here could produce another sprint lower.

I am suggesting small bearish put positions if ESI hits $49.75. Why small positions? Because the most recent data listed short interest at 55% of the very small 17.9 million-share float. If ESI were to suddenly bounce the stock could shoot higher on a short squeeze.

If triggered at $49.75 we'll aim for $45.25. The Point & Figure chart for ESI is bearish with a $44 target.

NOTE: More conservative traders may want to use a tighter stop loss. My worry here is that ESI sees an intraday dip under $50.00, hits our trigger, and then surges higher (a.k.a. a bear trap).

Trigger @ 49.75 (small positions)

- Suggested Positions -

buy the 2012Jan $47.50 PUT (ESI1221M47.5) ask $2.52

Annotated Chart:

Entry on December xx at $ xx.xx
Earnings Date 01/19/12 (unconfirmed)
Average Daily Volume = 363 thousand
Listed on December 19, 2011


WellPoint Inc. - WLP - close: 63.64 change: -1.31

Stop Loss: 65.75
Target(s): 58.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The oversold bounce in shares of WLP is already failing. The stock looks poised to breakdown under support in the $63.50 area. I am suggesting a trigger to buy puts at $63.25 with a stop loss at $65.75 (just above Friday's high). More conservative traders could aim for a drop to $60.00. We are setting our target at $58.00. FYI: The Point & Figure chart for WLP is bearish with a $56 target.

Trigger @ 63.25

- Suggested Positions -

buy the 2012Jan $60 PUT (WLP1221M60) ask $1.02

Annotated Chart:

Entry on December xx at $ xx.xx
Earnings Date 01/25/12 (unconfirmed)
Average Daily Volume = 2.9 million
Listed on December 19, 2011



In Play Updates and Reviews

SPY Hits Our Bearish Target

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 ETF (SPY) hit our exit target at $120.50. Meanwhile I've updated a couple of stop losses tonight.

-James

Current Portfolio:


CALL Play Updates

Boeing Co. - BA - close: 70.16 change: -0.85

Stop Loss: 69.25
Target(s): 77.00
Current Option Gain/Loss: -59.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/19 update: BA reversed again with another dip toward the bottom of its trading range. I am not suggesting new positions at this time.

Earlier Comments:
There is potential resistance at $75.00 and more conservative traders may want to exit there. I am aiming for $77.00. FYI: The Point & Figure chart for BA is bullish with a $79 target.

- Suggested Positions -

Long 2012Jan $75 call (BA1221A75) entry $1.08

12/13/11 trade opened
12/12/11 adjusted stop loss to $69.25
12/12/11 trade did not open, try again.

Entry on December 13 at $71.67
Earnings Date 02/01/12 (unconfirmed)
Average Daily Volume = 6.2 million
Listed on December 10, 2011


OpenTable, Inc. - OPEN - close: 39.93 change: -0.22

Stop Loss: 38.40
Target(s): 48.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
12/19 update: There was no follow through on Friday's rally in OPEN. Yet shares didn't see that much of a decline today either. We're still waiting for a breakout past resistance that could produce a short squeeze.

The most recent data listed short interest at 53% of the very small 16.2 million-share float. I am suggesting we buy calls if OPEN trades at $41.55. This can be a volatile stock so we'll use a wide stop loss at $38.40. Our target is the simple 100-dma but we'll tentatively put our exit target at $48.50. We want to keep our position size small to limit our risk.

Trigger @ 41.55 (small positions)

- Suggested Positions -

buy the 2012Jan $45 call (OPEN1221A45)

Entry on December xx at $ xx.xx
Earnings Date 02/07/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on December 17, 2011


Phillip Morris Intl. - PM - close: 76.20 change: +0.60

Stop Loss: 74.25
Target(s): 79.75
Current Option Gain/Loss: + 63.3%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
12/19 update: PM is slowly inching higher toward resistance at $77.00. I would not open new positions with the stock just under resistance.

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

12/17 new stop loss @ 74.25
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: 104.23 change: +1.18

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:
12/19 update: Shares of SAM continue to bubble higher. The stock is trading near all-time highs and on the verge of breaking out past resistance near $105.00.

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 22% 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 02 at $102.00
Earnings Date 03/08/12 (unconfirmed)
Average Daily Volume = 72.3 thousand
Listed on December 01, 2011


Varian Medical Sys. - VAR - close: 63.20 change: +0.01

Stop Loss: 62.49
Target(s): 69.75
Current Option Gain/Loss: -54.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/19 update: There is no change from my weekend comments on VAR and almost no change in the stock price. Monday morning's early rally failed near short-term resistance at $64.00 again. I am cautious on this stock and not suggesting new positions at this time.

- Suggested Positions -

Long JAN $65 call (VAR1221A65) entry $2.65

12/14/11 adjust stop loss to $62.49

Entry on December 13 at $65.25
Earnings Date 01/25/12 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on December 12, 2011


PUT Play Updates

AGCO Corp. - AGCO - close: 40.32 change: +0.01

Stop Loss: 42.75
Target(s): 35.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
12/19 update: AGCO is still flirting with a breakdown under support near $40.00. The intraday low today was $39.95. I am suggesting a trigger to buy puts at $39.90.

You could argue that AGCO is already short-term oversold so we'll try and limit our risk by keeping position size small. We'll start with a stop loss at $42.75, just above Wednesday's high. Our target is $35.25.

Trigger @ 39.90

- Suggested Positions -

buy the Jan $40 PUT (AGCO1221M40)

Entry on December xx at $ xx.xx
Earnings Date 02/07/12 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on December 15, 2011


BMC Software Inc. - BMC - close: 32.93 change: -0.24

Stop Loss: 35.05
Target(s): 30.05
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
12/19 update: BMC is on the verge of a major breakdown. The stock dipped to $32.86 this afternoon. The close under $33.00 is bearish. Readers may want to buy puts now. We've been suggesting a trigger to buy puts at $32.75.

We'll start this trade with a wide stop at $35.05. More conservative traders may want to use a tighter stop loss instead. Our target is $30.50. FYI: The Point & Figure chart for BMC is bearish with a $29 target.

Trigger @ 32.75

- Suggested Positions -

buy the 2012Jan $32.50 PUT (BMC1221M32.5)

Entry on December xx at $ xx.xx
Earnings Date 02/01/12 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on December 14, 2011


Check Point Software - CHKP - close: 53.05 change: -1.13

Stop Loss: 55.05
Target(s): 48.00
Current Option Gain/Loss: -37.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/19 update: The rebound in CHKP has already run out of steam. The stock spiked to $54.83 this morning and quickly reversed. Shares underperformed the market with a -2.0% decline. This move looks like a new bearish entry point to buy puts.

Earlier Comments:
There is potential support near $51.00 but we're aiming for the $48.00 level. More aggressive traders could aim lower. FYI: The Point & Figure chart for CHKP is bearish with a $46 target.

(Small Positions) - Suggested Positions -

Long Jan $50 PUT (CHKP1221M50) Entry $1.20

12/13/11 new stop loss @ 55.05

Entry on December 09 at $53.29
Earnings Date 01/30/12 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on December 08, 2011


Coach, Inc. - COH - close: 56.92 change: -0.67

Stop Loss: 60.10
Target(s): 51.00
Current Option Gain/Loss: + 3.4%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
12/19 update: COH opened at $58.08 this morning. The stock tried to rally but struggled with short-term resistance at $58.50 several times before finally rolling over and sinking to new lows. I would still consider new positions now. Our multi-week target is the $51.00 level. FYI: The Point & Figure chart for COH is bearish with a $52 target but this could grow.

- Suggested Positions -

Long 2012Jan $55 PUT (COH1221M55) Entry $1.45

Entry on December 19 at $58.08
Earnings Date 01/25/12 (unconfirmed)
Average Daily Volume = 2.9 million
Listed on December 17, 2011


Fluor Corp. - FLR - close: 47.06 change: -1.03

Stop Loss: 50.65
Target(s): 45.15
Current Option Gain/Loss: + 4.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/19 update: FLR broke down to new relative lows after three days of hovering new support at $48.00. We are lowering our stop loss down to $50.65. Our exit target is $45.15.

Earlier Comments:
We want to keep our position size small because FLR is arguably already oversold but that doesn't mean it can't get more oversold. FYI: The Point & Figure chart for FLR is bearish with a $43 target.

- Suggested Positions - (Small Positions)

Long 2012Jan $45 PUT (FLR1221M45) entry $1.20

12/19/11 new stop loss @ 50.65

Entry on December 14 at $49.35
Earnings Date 02/23/12 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on December 13, 2011


Juniper Networks - JNPR - close: 18.12 change: -0.23

Stop Loss: 20.55
Target(s): 16.75
Current Option Gain/Loss: + 28.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/19 update: JNPR spent the session slowly sinking lower and tagged new two-month lows by the closing bell. I am concerned that JNPR is very short-term oversold here. Readers may want to go ahead and take profits early now. I am not suggesting new positions at this time.

(small positions) - Suggested Positions -

Long 2012Jan $17.50 PUT (JNPR1221M17.5) entry $0.57

12/17/11 readers may want to take profits now. JNPR looks short-term oversold
12/14/11 new stop loss @ 20.55
12/12/11 JNPR gapped open lower at $19.58, opening our trade. Stop loss at $20.75

Entry on December 12 at $19.58
Earnings Date 01/24/12 (unconfirmed)
Average Daily Volume = 8.8 million
Listed on December 10, 2011


Monsanto Co - MON - close: 67.45 change: -0.69

Stop Loss: 71.05
Target(s): 60.50
Current Option Gain/Loss: -19.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/19 update: MON tried to rally again this morning but the bounce reversed near the stock's exponential 200-dma. Readers might want to consider lowering their stop loss closer to the $70.00 level.

Earlier Comments:
Our target is $60.50. More conservative traders may want to exit near $63.00 instead. FYI: The Point & Figure chart for MON is bearish with a $60 target.

(small positions) - Suggested Positions -

Long 2012Jan $65 PUT (MON1221M65) entry $2.05

Entry on December 14 at $67.35
Earnings Date 01/05/12 (unconfirmed)
Average Daily Volume = 3.7 million
Listed on December 13, 2011


Thermo Fisher Scientific - TMO - close: 43.54 change: -0.30

Stop Loss: 46.15
Target(s): 42.75
Current Option Gain/Loss: Dec$45p: +111.1% & Jan$45P: +53.5%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
12/19 update: For the second day in a row shares of TMO saw the early morning rally reverse near $44.50. TMO closed near its lows for the day, which doesn't bode well for tomorrow. Our exit target is $42.75. More aggressive traders may want to aim lower.

- Suggested Positions -

(December position closed 12/15/11)
DEC $45 put (TMO1117X45) Entry $0.45 exit $0.95 (+111.1%)

- or -

Long JAN $45 put (TMO1221M45) Entry $1.40

12/15/11 planned exit for Dec. $45 put. bid @ 0.95 (+111.1%)
12/14/11 Prepare to exit Dec. $45 puts at the open tomorrow, current bid on these puts is $1.20 (+166.6%)
12/14/11 new stop loss @ 46.15
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: 59.65 change: -0.47

Stop Loss: 63.05
Target(s): 56.00
Current Option Gain/Loss: Dec$60p: -12.5% & Jan$60p: + 5.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/19 update: WPI slowly sank to new relative lows and closed under round-number support at $60.00 today. This should be a good sign for bearish traders tomorrow. However, we don't know yet how the market my react to news out just after the close today that WPI was teaming up with Amgen (AMGN) on some cancer medicines. I am not expecting much of a reaction in the stock price.

We are adjusting our stop loss down to $63.05.

- Suggested Positions -

(December position closed 12/15/11)
DEC $60 PUT (WPI1117X60) Entry $0.80 exit $0.70 (-12.5%)

- or -

Long JAN $60 PUT (WPI1221M60) Entry $2.00

12/19/11 new stop loss @ 63.05
12/15/11 planned exit for Dec. $60 puts, bid $0.70 (-12.5%)
12/14/11 Prepare to exit Dec. $60 puts at the open tomorrow, current bid on these puts is $0.65

Entry on December 07 at $61.75
Earnings Date 02/14/12 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on December 03, 2011


CLOSED BEARISH PLAYS

SPDR S&P 500 ETF - SPY - close: 120.29 change: -1.30

Stop Loss: 125.55
Target(s): 120.50
Current Option Gain/Loss: +14.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/19 update: Target achieved. The S&P 500 and the SPY continued to sink. The ETF hit our exit target at $120.50 late this afternoon.

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

- Suggested Positions -

2012Jan $120 PUT (SPY1221M120) Entry $2.67 exit 3.05 (+14.2%)

12/19/11 exit target hit @ 120.50, option @ 3.05 (+14.2%)
12/17/11 new stop loss @ 125.55
12/02/11 trade opened at $126.12 (gap higher), trigger was 126.00

chart:

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