Option Investor
Newsletter

Daily Newsletter, Monday, 1/9/2012

Table of Contents

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

Market Wrap

Ahead Of Earnings, Stocks Eke Out Gains

by Todd Shriber

Click here to email Todd Shriber
It was a Monday of meager gains, but gains nonetheless as all three major U.S. indexes closed higher ahead of the start of fourth-quarter earnings. German Chancellor Angela Merkel and French President Nicolas Sarkozy, the duo affectionately known as ''Merkozy,'' were meeting again to try to hash out a plan for Europe’s sovereign debt woes and just that meeting helped stocks trade higher.

Market Stats

For those that are fans of stock market history, the fact that stocks closed higher today is significant because it means the S&P 500 is higher on the fifth trading day of the new year than it was when the year started. My parents got me a copy of the Stock Trader's Almanac for Christmas and since I do not want to copy directly from those guys without their permission, I will merely say it is fun reading and I encourage you to get a copy to see just how good the odds are the S&P 500 will finish higher for the year now that the index moved higher over the first five trading days of 2012.

If there is any bad news in terms of historical market musings it might come in the form of the lethargic performance of small-caps to start the year. Those that are believers in the January Effect might be concerned that small-caps, as measured by the iShares Russell 2000 Index Fund (NYSE: IWM), are slightly lower to start the year. The January Effect assumes small-caps will be leaders to start the new year. Maybe that will materialize and it is worth noting IWM is not all that far removed from its 200-day moving average.

Russell 2000 ETF Chart

Good news for beleaguered gold bugs. Goldman Sachs was out with a bullish call on the yellow metal today, saying Comex-traded gold could jump to $1,940 an ounce in 12 months aided by depressed interest rates here in the U.S. That price is not much higher than the September 2011 record we saw, but gold has tumbled more than 15% since then. Morgan Stanley is even more bullish on gold. That bank said gold may average a record $2,200 an ounce, Bloomberg reported.

It will be interesting to see how accurate those predictions on gold are. Last year, investors pulled a net $372 million from the SPDR Gold Shares (GLD), the largest gold ETF, but the December outflow number was over $2.24 billion.

Gold Chart

To be sure, this was not a real ''Merger Monday,'' but there was one sizable deal to discuss and it actually leaked out last Friday. Pharmaceuticals giant Bristol-Myers Squibb (BMY) is buying Inhibitex (INHX) for $2.5 billion. You may recall that in November when Gilead Sciences (GILD) ponied up $11 billion for Pharmasset (VRUS), I, along with many others, opined that that deal would probably touch off more mergers and acquisitions activity among big pharma companies looking for ways to get their hands on potentially lucrative Hepatitis C treatments.

Before I delve too deeply into that, I am going to stand on one of my favorite soapboxes: Suspicious options trading leading up to a deal announcement. It was reported that someone bought 2,000 Inibitex $10 calls last Friday for $2 per contract. Nice move considering the stock closed at $23.70 today. What makes that options buying all the more, shall I say interesting, is the fact that last Tuesday Inhibitex lost 8% and the following day the stock was down as much as 16%.

Oh well. Better to be lucky than good, I suppose. For those of us that do not have that type of good fortune, the field of potential Hepatitis C takeover candidates has been narrowed to two: Achillion Pharmaceuticals (ACHN) and Idenix Pharmaceuticals (IDIX).

Oddly enough, Idenix was downgraded to market perform by JMP Securities today, but Bank of America raised its price objective on the stock to $18, well above the $9.67 the stock closed at.

Idenix Chart

For its part, Achillion probably was not moving higher today just because of the deal for Inhibitex. The company’s Phase II trial for its Hepatitis C drug is apparently going well as interim results released today indicate. That probably piques the interest of possible suitors even more.

Achillion Chart

After hours, Dow component Alcoa (AA), the largest U.S. aluminum maker, kicked off the fourth-quarter earnings parade by reporting a loss of $34 million, or 3 cents a share on revenue of $5.99 billion. Alcoa said it has a debt-to-capital ratio of 35% and free cash flow of $906 million.

''Alcoa turned in solid performance in a volatile year by responding quickly to changing market conditions and relentlessly managing cash. We stayed focused on growth and took aggressive action to cut costs, improve our competitiveness, and strengthen our balance sheet,'' said Alcoa Chairman and CEO Klaus Kleinfeld said in a statement.

Pennsylvania-based Alcoa said aluminum demand climbed 10% last year and the company is forecasting a 7% increase this year. The company plans to trim capacity by 12% to improve its competitive position and earlier today said it would reduce capacity at a smelter in Italy and two in Spain.

It seems like Alcoa always reports on a Monday, so I get to include that news in this wrap and as I always say, do not expect a $9.43 to move the Dow, a price-weighted index. Alcoa is up just two cents in the after-hours session and remains the second-lowest priced stock in the Dow buffered from the basement by only Bank of America (BAC).

Alcoa Chart

Looking at the charts, closed right around 1280 and that means the next hurdle is some fairly stiff resistance at 1285. The best case scenario for getting through that area is Europe at least remaining quiet, earnings reports that are positive surprises following previous warnings and a fresh round of dividend increases sure would not hurt. If 1285 results in one of those January sell-offs, the S&P 500 probably returns to the 1260-1265 range and from there 1250 becomes an issue.

S&P 500 Chart

The Dow is back to flirting with 12,400 and as I said, I do not expect Alcoa to do much for the Dow in either direction. Monday’s close puts the index less than 35 points away from resistance at 12,425 and support is 12,200. There are no more Dow components reporting this week until JPMorgan Chase (JPM) on Friday before the bell.

As an aside, I am not sure if this means the risk on trade is really back on, but it is interesting to note that CAT is up almost 4% to start the year while PG is flat and Coca-Cola (KO) is down more than 2%.

Dow Chart

The Nasdaq was fortunate to eke out a gain today, but the same cannot be said of the Nasdaq 100. Apple (AAPL) and Amazon (AMZN) both traded lower, but Google (GOOG) was the real problem, tumbling more than 4.2% after Motorola Mobility (MMI), the smartphone maker Google is acquiring (some would say for too much), forecast fourth-quarter sales of $3.4 billion. That is well below the $3.88 billion analysts were expecting. For the composite, support is 2660 and resistance is 2680.

Nasdaq Chart

I cannot say I have been impressed with much of anything thus far in 2012, as I said before, gains are gains. That said, it would be nice to see small-caps show a little more moxy and give fund managers a reason to get involved with that group. Something else that I found interesting is the performance to start the year by the Utilities Select Sector SPDR (XLU) and the Consumer Staples Select Sector SPDR (XLP), two obvious defensive plays and two of the best performing sector funds from 2011. XLU is down 2.6% while XLP is down about 1.5%. On the other hand, the Materials Select Sector SPDR (XLB) is up almost 1.5%.

Todd Shriber


New Option Plays

Potential Takeover Target

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidate, consider these stocks as possible trading ideas:

CAT - Caterpillar is showing strength and just rallied past its simple 200-dma. A breakout past significant resistance at the $98.00 level could be a bullish entry point.

RRC - Shares of this oil stock are underperforming. The stock just broke down under support near $60 and its 200-dma and 200-ema. Today's move may be a bearish entry point to buy puts.

- James


NEW DIRECTIONAL CALL PLAYS

Starwood Hotel & Resorts - HOT - close: 51.41 change: +0.99

Stop Loss: 48.75
Target(s): 55.75
Current Option Gain/Loss: Unopened
Time Frame: exit prior to earnings
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of HOT have been showing relative strength lately. That might be due to speculation that HOT is a takeover target. The stock's recent strength has produced a breakout past resistance near $50.00 and its simple 200-dma.

I am suggesting bullish positions tomorrow but only if both HOT and the S&P 500 index open positive. If the S&P 500 is flat then we'll base our entry on HOT's opening price. We'll place our stop at $48.75, which is under technical support at the exponential 200-dma. Our target is $55.75 but we want to exit prior to the early February earnings report. FYI: The Point & Figure chart for HOT is bullish with a $64 target.

*See Entry Details Above*

- Suggested Positions -

buy the Feb $52.50 call (HOT1218B52.5) current ask $1.86

Annotated Chart:

Entry on January xx at $ xx.xx
Earnings Date 02/02/12 (confirmed)
Average Daily Volume = 2.4 million
Listed on January 09, 2012



In Play Updates and Reviews

More of the Same

by James Brown

Click here to email James Brown

Editor's Note:

Stocks were mostly higher today. Overall the prevailing trends continue.

-James

Current Portfolio:


CALL Play Updates

Boeing Co. - BA - close: 74.53 change: +0.55

Stop Loss: 72.65
Target(s): 77.00
Current Option Gain/Loss: -26.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/09 update: BA bounced back toward the top of its $73-75 trading range. Readers looking for a new entry point could use a breakout past $75.00 as a trigger but you'll want to consider aiming for a move into the $78-80 zone. Currently our exit target is $77.00.

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

01/07/12 new stop loss @ 72.65
01/05/12 new stop loss @ 72.25
12/31/11 new stop loss @ 71.75
12/28/11 new stop loss @ 71.40
12/22/11 new stop loss @ 69.85
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


Coach, Inc. - COH - close: 62.86 change: +0.22

Stop Loss: 60.75
Target(s): 65.75
Current Option Gain/Loss: - 9.3%
Time Frame: up to the earnings report
New Positions: see below

Comments:
01/09 update: Our new play on COH is open. The stock rallied to $63.64 this morning before paring its gains. Traders bought the dip near short-term support at $62.00. I would still consider new positions now at current levels.

Our upside target is $65.75. More aggressive traders could aim higher. NOTE: We do not want to hold over COH's late January earnings report, which is not confirmed yet (around January 25th).

- Suggested Positions -

Long Feb $65 call (COH1218B65) Entry $2.04

Entry on January 09 at $62.99
Earnings Date 01/25/12 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on January 07, 2012


Deere & Co. - DE - close: 82.73 change: +0.43

Stop Loss: 78.45
Target(s): 84.75
Current Option Gain/Loss: +53.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/09 update: DE continues to inch higher. I don't see any changes from my prior comments. The $80 level should be short-term support. More conservative traders may want to raise their stop loss. DE is arguably short-term overbought and due for a dip. I am not suggesting new positions at this time.

Our target is $84.75. More aggressive traders could aim higher. FYI: The Point & Figure chart for DE is bullish with a $96 target.

- Suggested Positions -

Long 2012Jan $80 call (DE1221A80) entry $2.05

Entry on January 04 at $80.50
Earnings Date 02/15/12 (unconfirmed)
Average Daily Volume = 3.3 million
Listed on January 03, 2012


Hi Tech Pharmacal Co. - HITK - close: 41.84 change: -0.40

Stop Loss: 39.40
Target(s): 44.50
Current Option Gain/Loss: +51.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/09 update: After three days of gains HITK was due for a little profit taking. Shares gave up -0.9%. The $41.00 level might offer some short-term support but if you're looking for a new entry point I'd wait for a dip or a bounce near $40.00 instead.

Earlier Comments:
We want to keep our position size small to limit our risk. The most recent data listed short interest at more than 13% of the very small 10 million share float. Our target is $44.50. Readers might want to aim higher. The Point & Figure chart for HITK is bullish with a $58 target.

(small positions) - Suggested Positions -

Long 2012Jan $40 call (HITK1221A40) entry $1.45

01/07/12 new stop loss @ 39.40
01/05/12 trade opened at $40.15 (trigger)
01/04/12 still not open yet. Adjust stop loss to $37.95
12/27/11 new trigger @ 40.15, stop loss 38.85
12/22/11 not open yet. New Trigger @ 37.25, stop 36.70
12/21/11 trade not open yet. (SP500 opened lower) Try again. New stop loss @ 37.90

Entry on January 05 at $40.15
Earnings Date 03/12/12 (unconfirmed)
Average Daily Volume = 298 thousand
Listed on December 20, 2011


iShares Transportation - IYT - close: 90.90 change: +0.59

Stop Loss: 88.75
Target(s): 94.75 or 98.50
Current Option Gain/Loss: Jan$95c: -50.0% & Feb$95c: -41.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
01/09 update: The transportation index and ETF continues to churn sideways. It just so happens that today ended on an up swing with the IYT gaining +0.6%. I am still cautious when it comes to new positions. Readers may want to wait for a move past $91.25 or last week's high of $91.81 before considering new positions.

- Suggested Positions -

Long Jan $95 call (IYT1221A95) entry $0.20
target 94.75

- or -

Long Feb $95 call (IYT1218B95) entry $1.45
target 98.50

01/07/12 new stop loss @ 88.75
01/03/12 IYT gapped open higher at $91.20, above our trigger at $90.75

Entry on January 03 at $91.20
Earnings Date --/--/--
Average Daily Volume = 582 thousand
Listed on December 22, 2011


TJX Companies - TJX - close: 65.70 change: -0.76

Stop Loss: 63.25
Target(s): 68.00
Current Option Gain/Loss: Jan$65c: +35.0% & Feb$65c: +25.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
01/09 update: Before the opening bell Goldman Sachs removed TJX from its conviction buy list and slapped a neutral rating on the stock. Shares of TJX reacted by gapping open lower but traders bought the dip near $65.00 midday. I am not suggesting new positions at this time. More conservative traders may want to exit now to lock in gains.

Earlier Comments:
On January 5th, management announced a 2-for-1 stock split payable on February 2nd, 2012.

- Suggested Positions -

Long 2012Jan $65 call (TJX1221A65) Entry $1.00

- or -

Long Feb $65 call (TJX1218B65) Entry $1.75

01/07/12 readers may want to take profits now (Jan$65call +90%, Feb$65call +57%)
01/05/12 new stop loss @ 63.25, TJX announced strong same-store sales and a 2:1 split.
12/31/11 new stop loss @ 62.75

Entry on December 22 at $64.10
Earnings Date 02/23/12 (unconfirmed)
Average Daily Volume = 2.7 million
Listed on December 21, 2011


Whole Foods Market, Inc. - WFM - close: 72.89 change: +0.01

Stop Loss: 69.25
Target(s): 74.00
Current Option Gain/Loss: +60.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/09 update: Monday proved to be another quiet session for WFM. The stock churned sideways and closed almost unchanged on the session. Readers may want to go ahead and lock in profits now. We should expect a minor gap down on Wednesday morning. WFM begins trading ex-dividend on January 11th for its dividend payable on Jan. 23rd (WFM's annual yield is 0.8%).

Wait for another dip or a bounce near $70.00 before considering new positions.

- Suggested Positions -

Long 2012Jan $70 call (WFM1221A70) entry $1.90

01/07/12 new stop loss @ 69.25
01/05/12 new stop loss @ 68.75
01/03/12 WFM gapped open higher at $70.55, above our trigger (70.25)

Entry on January 03 at $70.55
Earnings Date 02/08/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on December 28, 2011


PUT Play Updates

Accenture Plc, - ACN - close: 51.74 change: -0.09

Stop Loss: 54.15
Target(s): 48.50
Current Option Gain/Loss: - 7.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/09 update: ACN lost nine cents on Friday and lost another nine cents today. While momentum has slowed the trend is still bearish. I would still consider new put positions now or you could wait for a new lower high in the $53.00 area.

Our target is $48.50. We'll use a stop loss at $54.15, just above Wednesday's high. FYI: The Point & Figure chart for ACN is bearish with a $43 target.

(small positions) - Suggested Positions -

Long 2012Jan $52.50 PUT (ACN1221M52.5) Entry $1.35

Entry on January 06 at $51.91
Earnings Date 03/26/12 (unconfirmed)
Average Daily Volume = 4.6 million
Listed on January 05, 2012


Cash America Intl. - CSH - close: 45.43 change: -0.17

Stop Loss: 46.75
Target(s): 40.50
Current Option Gain/Loss: Unopened
Time Frame: up to the earnings report.
New Positions: Yes, see below

Comments:
01/09 update: CSH continues to drift lower. We are waiting on a breakdown below support.

We want to use a trigger to buy puts at $44.75 with a stop loss at $46.75. Our target is $40.50. FYI: The Point & Figure chart for CSH is bearish with a $33 target.

NOTE: We do not want to hold over CSH's earnings report on January 26th.

Trigger @ 44.75

- Suggested Positions -

buy the Jan $45 PUT (CSH1221M45)

- or -

buy the Feb $45PUT (CSH1218N45)

Entry on January xx at $ xx.xx
Earnings Date 01/26/12 (confirmed)
Average Daily Volume = 292 thousand
Listed on January 05, 2012


Coinstar, Inc. - CSTR - close: 43.18 change: +2.20

Stop Loss: 44.75
Target(s): 40.25
Current Option Gain/Loss: + 25.0%
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Comments:
01/09 update: Ouch! CSTR almost completely erased Friday's losses with a +5.3% bounce. The low this morning was $40.68 before the stock rebounded. I couldn't find any news behind this relative strength. Readers can watch for a failed rally near $44.00 as a new bearish entry point.

Earlier Comments:
I do want to point out that the larger trend for CSTR is suggesting a long-term target in the $25.00 area. If you've got the patience then consider aiming for the $27-25 zone over the next three or four months. The real signal will be a breakdown under significant support in the $38.50-37.50 zone.

NOTE: I have to warn you that being short CSTR is a popular trade. The most recent data listed short interest at almost 45% of the very small 28.2 million-share float. Any unexpected surge higher could produce a short squeeze. We will want to keep our position size small to limit our risk.

FYI: The Point & Figure chart for CSTR is bearish with a $34 target.

(SMALL Positions) - Suggested Positions -

Long Jan $45 PUT (CSTR1221M45) Entry $2.20

01/07/12 new stop loss @ 44.75
Readers may want to take profits now. The put option has already doubled (+100%).

Entry on January 05 at $44.38
Earnings Date 02/02/12 (unconfirmed)
Average Daily Volume = 846 thousand
Listed on January 04, 2012


Fossil, Inc. - FOSL - close: 78.98 change: +0.52

Stop Loss: 83.05
Target(s): 73.50
Current Option Gain/Loss: -26.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/09 update: FOSL tried to rally again this morning thanks to some positive analyst comments. Yet the early gains faded and FOSL trimmed its advance to +0.6%. I am still tempted to buy puts here or you could wait for a new drop under $78.00.

Earlier Comments:
Our target is $73.50. More conservative traders may want to exit in the $75 area instead. FYI: The Point & Figure chart for FOSL is bearish with a $71 target.

- Suggested Positions -

Long 2012Jan $75 PUT (FOSL1221M75) entry $0.95

01/06/12 there was no follow through on Thursday's bounce.
01/05/12 Today's move might be a bullish reversal. Readers may want to consider an early exit immediately

Entry on January 03 at $81.12
Earnings Date 02/15/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on December 31, 2011


LinkedIn Corp. - LNKD - close: 63.55 change: -0.64

Stop Loss: 62.55
Target(s): 51.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
01/09 update: LNKD underperformed the market on Monday with a -0.99% loss but shares are still churning inside its $61-66 trading range. There is no change from my weekend comments.

Bigger picture the stock seems to have a bearish pattern of lower highs and lower lows. Furthermore LNKD has tens of millions of shares that will come to market when their lock up period expires in mid February.

The newsletter is suggesting readers wait for a breakdown with a trigger to buy puts at $59.75 instead. Our exit target is $51.50. FYI: The Point & Figure chart for LNKD is bearish with a $55 target.

Trigger @ 59.75 (small positions)

- Suggested Positions -

buy the Jan $57.50 PUT (LNKD1221M57.5)

Entry on January xx at $ xx.xx
Earnings Date 02/09/12 (unconfirmed)
Average Daily Volume = 1.2 million
Listed on January 04, 2012


Tractor Supply Company - TSCO - close: 70.60 change: +0.89

Stop Loss: 72.15
Target(s): 65.50
Current Option Gain/Loss: -50.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/09 update: Hmm... TSCO displayed some relative strength on Monday with a +1.2% gain. The close above $70 is arguably short-term bullish. Yet TSCO still has a bearish trend of lower highs and still has technical resistance at the 50-dma. I would wait for a new drop under $69.50 before considering new positions.

Earlier Comments:
We will aim for a drop to $65.50 but more aggressive traders may want to aim for the $62-60 zone instead.

- Suggested Positions -

Long Jan $70 PUT (TSCO1221M70) entry $2.20

01/07/12 new stop loss @ 72.15

Entry on January 03 at $69.50
Earnings Date 01/26/12 (unconfirmed)
Average Daily Volume = 550 thousand
Listed on December 31, 2011


Walter Energy, Inc. - WLT - close: 56.87 change: -1.86

Stop Loss: 62.05
Target(s): 50.50
Current Option Gain/Loss: + 5.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/09 update: Our new put play on WLT is off to a good start. Shares opened at $58.96 and quickly broke down to new relative lows. The stock hit our trigger to buy puts at $57.75. I am lowering our stop loss to $62.05.

Earlier Comments:
Before I continue I have to warn you that WLT can be a volatile stock. What makes this trade even more challenging is that WLT has been considered a potential takeover candidate for months. Rumors consistently spark short-term spikes in this stock. Yet the overall trend is definitely bearish. We want to keep our position size pretty small to limit our risk. More conservative traders may want to exit near the 2011 low ($53.41). I am listing our exit target at $50.50. FYI: The Point & Figure chart for WLT is bearish with a $49 target.

- Suggested Positions -

Long Feb $55 PUT (WLT1218N55) Entry $3.50

01/09/12 new trigger 62.05

Entry on January 09 at $57.75
Earnings Date 02/15/12 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on January 07, 2012