Option Investor
Newsletter

Daily Newsletter, Monday, 2/13/2012

Table of Contents

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

Market Wrap

Greek Progress Spurs Stocks Higher

by Todd Shriber

Click here to email Todd Shriber
Most of last Friday's losses evaporated today as the news out of Europe was significantly better today. In an effort to secure more bailout funds, Greece approved austerity plans. European policymakers will meet in Brussels on Wednesday to approve or reject another aid package to Greece, but chances are, that package will be approved and it is exactly why all the major indexes were higher today, led by an almost 1% gain for the S&P 500.

Market Stats

Monday's gains have the S&P 500 trading above the all-important 1350 level again. As CNBC reported today, the S&P 500 has traversed 1350 at least half a dozen times in the past 13 years, but only once has the index managed to keep on trucking higher. The one time the S&P 500 managed to break 1350 and keep on going was late 2006. That was before the all-time high almost 200 points away a year later. And we all know what happened after that.

I suppose it can be argued that history has a way of repeating itself and it certainly does in the financial markets, so the question becomes what version gets replayed here? The one where the S&P 500 makes its way beyond 1350 or the one where sellers step in and force the index lower?

It is worth noting that, as CNBC reported, short interest is currently at its lowest levels since March 2009 and company insiders are doing a lot more selling than buying of their own shares. In terms of insider selling, too much can be made of this issue because, as I am fond of saying, there is only one reason an executive buys his or her company’s shares, but there are several reasons why they sell and not all are bad. However, the reality is some of these executives are selling because they might think their company’s stock is overbought or due for a decline.

The lack of short interest may be perceived as a positive, but it is also constructive to have a large short interest when the market is moving higher for the simple reason that it forces shorts to cover and fans the flames of the rally. And before anyone gets mad and thinks I do not approve of short-selling, I love short-selling and when I traded professionally I did it a more than going long.

Speaking of stocks one probably does not want to be on the wrong side of because it keeps on climbing to new stratospheric heights, there is Apple (AAPL). The iPad and iPhone maker and all-around tech juggernaut closed above $500 today.

Bernstein was out with a note addressing a familiar topic: Apple possibly paying a dividend. Long story short, the research firm said Apple could afford an ''ongoing dividend'' with a payout ratio of 30% of free cash flow. ''On balance, we believe that prevailing circumstances should enable Apple to pay a meaningful ongoing dividend (i.e., 2.5%-3%) if it so chose, with no impact to its earnings or cash flow,'' Bernstein said in the note.

Apple really does not need to pay a dividend, not when its chart looks like this. The gap between Apple and Exxon Mobil (XOM) for the largest U.S. market cap crown has widened to almost $70 billion.

Apple Chart

In other stock-specific news, it was not a ''Merger Monday,'' but there was one deal that caught my. General Mills (GIS), the second-largest U.S. food company, is reportedly in talks to buy Brazilian food company Yoki for $1.16 billion. I bring this deal up for a couple of reasons. First, I know some folks like more conservative stocks with decent dividends and General Mills certainly fits the bill there. Second, if there has been a knock on Big G in recent years it has been that the company does not have enough emerging markets exposure. One deal in Brazil does not cure that dilemma outright, but it is a step in right direction.

General Mills

Shares of Regeneron Pharmaceuticals (REGN) surged over 12% on volume that was nearly triple the daily average after the after the company forecast higher sales of its eye drug Eylea. The company now expects U.S. sales of $250-$300 million of the drug compared with a previous forecast of $140-$160 million.

The company said its fourth-quarter loss widened to $53.4 million, or 58 cents per share, from $14.6 million, or 17 cents per share, a year earlier as revenue fell 8% to $123 million. Analysts expected a loss 60 cents per share and $132 million in revenue.

Regeneron Chart

Staying in the biotech arena, shares of Chelsea Therapeutics (CHTP) plunged almost 38% on volume that was approximately 15 times the daily average after the company said it received inquiries from the U.S. Food and Drug Administration regarding concerns about the company’s hypertension drug Northera. The FDA raised questions related to previously discussed issues such as the short duration of clinical studies and the limited size of the study population given the orphan status that the drug has, according to Reuters.

Chelsea Therapeutics Chart

Shares of Chesapeake Energy (CHK), the second-largest U.S. natural gas producer, climbed 2.4% on double the average daily turnover on news of planned asset sales that could reach up to $12 billion. This is an effort by Oklahoma-based Chesapeake to convince the investment community it is committed to increasing oil production and bolstering its balance sheet.

Still, Moody's Investors Service lowered its outlook on Chesapeake to Stable from Positive. Moody's already rates Chesapeake debt in junk territory and the ratings agency said ''the company’s capital expenditure plans far exceed its cash flows, necessitating the execution of continued asset sales and capital raising transactions in 2012.''

I am not saying its going to happen, but it is my OPINION and I have written to this effect elsewhere, that Chesapeake is a takeover target and BHP Billiton (BHP) makes for a logical suitor.

Chesapeake Chart

Looking at the charts, first support for the S&P 500, should the market pullback, is 1340 and then 1310. I do not want to jinx it, but if the index keeps stringing together closes above 1350, that is clearly a bullish sign and could mean we are off to 1375.

S&P 500 Chart

With today's close at 12,874, the Dow Jones Industrial Average is not too far from resistance at 12,900. The 12,750 area would be first support followed by 12,650 and 12,600. Twenty-five of 30 Dow stocks closed higher today and the pop was led by high-beta names such as BAC, CAT, JPM and CVX.

Dow Chart

The Nasdaq is flirting with 3000 for the first time since the third quarter of 2000 and everyone seems to be making a big deal about that, talking about 11-year highs for the composite. I do not want to ruin anyone's party, but I think it bears noting even 3,000 for the Nasdaq is more than 50% below the January 2000 highs. Resistance will be 3000 and support is found at 2900, 2885 and 2800.

Nasdaq Chart

Clearly, the big event for the week is getting that Greek bailout package approved on Wednesday and then the Philly Fed survey on Thursday. For those that are long, hope the market keeps grinding higher through Thursday because the day before and the day after the President's Day weekend are usually down days for stocks.

Todd Shriber


New Option Plays

Energy Stocks

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 and watch list candidates:

(bullish candidates): WHR, ALK, DE, CLB, JAZZ, IDXX

I'd also keep an eye on MNST. A rally past $110 could be a bullish entry point. MNST is due to split 2-for-1 on Feb. 16th. I'd wait until after the split occurs if you're going to trade options on it. Resistance at $110 will become $55.

- James


NEW DIRECTIONAL CALL PLAYS

Oil & Gas Exploration ETF - XOP - close: 58.30 change: +0.88

Stop Loss: 56.45
Target(s): 63.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Oil and energy sector stocks are on the move. The XOP looks like it's about to breakout from the short-term $57.00-58.50 trading range. The high today was $58.55. I am suggesting a trigger to buy calls at $58.75. FYI: The Point & Figure chart for XOP is bullish with a $74 target.

Trigger @ $58.75

- Suggested Positions -

buy the Mar $60 call (XOP1217C60) current ask $1.54

- or -

buy the Jun $60 call (XOP1216F60) current ask $3.85

Annotated Chart:

Entry on February xx at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 3.8 million
Listed on February 13, 2012



In Play Updates and Reviews

FLS is nearing our target

by James Brown

Click here to email James Brown

Editor's Note:

Shares of FLS rallied to new eight-month highs on positive analyst comments. The stock is about to hit our exit target. Readers may want to go ahead and lock in gains now.

The same goes for our PLL trade.

Current Portfolio:


CALL Play Updates

Citrix Systems - CTXS - close: 73.62 change: +2.16

Stop Loss: 69.75
Target(s): Mar calls: $76.50
Current Option Gain/Loss: (Feb70c: + 8.1%) & Mar70c: +51.5%
Time Frame: 2 to 4 weeks
New Positions: , see below

Comments:
02/13 update: CTXS displayed some relative strength on Monday with a +3.0% surge to new six-week highs. We are raising our stop loss to $69.75. I am not suggesting new bullish positions at this time.

Earlier Comments:
The plan was to keep our position size small. Our target is $76.50 for the March calls.

(small positions!) - Suggested Positions -

Long Mar $70 calls (CTXS1217C70) Entry $3.30

02/13/12 new stop loss @ 69.75
02/10/12 planned exit for Feb. $70 calls @ the open.
bid on calls opened at $2.00 (+8.1%)
02/09/12 new stop loss @ 68.75
02/09/12 prepare to exit Feb. $70 calls at the open tomorrow. current bid $2.50 (+35%)

Entry on February 07 at $70.50
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 2.4 million
Listed on February 06, 2012


CommVault Systems - CVLT - close: 53.81 change: +0.16

Stop Loss: 49.75
Target(s): 58.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
02/13 update: CVLT spent Monday consolidating sideways. Our plan is to buy calls on a dip at $51.50. More conservative traders may want to wait and buy the bounce from this area. FYI: The Point & Figure chart for CVLT is bullish with a long-term $86 target.

NOTE: We want to keep our position size small because the option spreads on CVLT are a bit wide.

buy-a-dip trigger @ 51.50

- Suggested Positions - (small positions!)

buy Mar $55 call (CVLT1217C55)

02/09/12 trade did not open (barely). Adjust entry point strategy to buy a dip at $51.50, stop loss $49.75

Entry on February xx at $ xx.xx
Earnings Date 05/10/12 (unconfirmed)
Average Daily Volume = 531 thousand
Listed on February 08, 2012


Dollar Tree - DLTR - close: 87.72 change: +0.89

Stop Loss: 84.75
Target(s): 89.75 & 92.50
Current Option Gain/Loss: Feb$87.5c: +40.0% & Mar$87.5c: +13.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/13 update: DLTR continues to rally as expected and shares closed at new highs. We do not have much time left on our February calls (just four trading days). I am suggesting we exit our Feb. $87.50 calls tomorrow at the closing bell.

Earlier Comments:
Keep a wary eye on the $90.00 level since it might be round-number resistance. FYI: The Point & Figure chart for DLTR is bullish with a long-term $113 target.

(small positions) - Suggested Positions -

Long Feb $87.50 call (DLTR1218B87.5) entry $0.50
exit target: 89.75

- or -

Long Mar $87.50 call (DLTR1217C87.5) entry $2.30
exit target: 92.50

02/13/12 prepare to exit our Feb. calls at the close tomorrow
02/09/12 trade opened
02/04/12 Only open small (half-sized) positions if DLTR hits our entry point at $86.75

Entry on February 09 at $86.75
Earnings Date 02/22/12 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on February 02, 2012


Flowserve Corp. - FLS - close: 117.42 change: +2.07

Stop Loss: 114.40
Target(s): 114.50 for Feb call & 118.00 for April call
Current Option Gain/Loss: (Feb $110c: +48.2%) & Apr$115c: +60.0%.
Time Frame: 3 to 4 weeks
New Positions: , see below

Comments:
02/13 update: Positive analyst comments this morning helped fuel FLS' rally and its breakout to new multi-month highs. The intraday high was $117.50. Readers will want to seriously consider exiting our April calls immediately. Our official exit price is $118.00. I am raising our stop loss up to $114.40. More aggressive traders could aim for the $120 level.

- Suggested Positions -

Long APR $115 call (FLS1221D115) Entry $4.00
exit target: $118.00

02/13/12 new stop loss @ 114.40, readers may want to exit now. April $115 call (bid) is at $7.20 (+80.0%)
02/11/12 new stop loss @ 112.40
02/09/12 new stop loss @ 111.75
02/04/12 new stop loss @ 109.45
02/03/12 exit target hit at $114.50 for Feb. $110 calls. exit $5.00 (+48.2%)
02/02/12 new stop loss @ 107.95
02/01/12 new stop loss @ 106.95
02/01/12 adjusted exit targets: $114.50 for Feb call, $118.00 for Apr call
01/30/12 new stop loss at $105.75
01/26/12 trade opened on FLS' gap open higher at $109.21.
01/25/12 adjusted entry point strategy to buy calls when FLS hits $109.05, and use a stop loss at $105.45

Entry on January 26 at $109.21
Earnings Date 02/23/12 (unconfirmed)
Average Daily Volume = 400 thousand
Listed on January 21, 2012


3M Co. - MMM - close: 88.03 change: +0.89

Stop Loss: 86.45
Target(s): 94.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
02/13 update: MMM bounced back toward resistance near $88.00 but shares have not yet broken out to new relative highs. The plan is to open bullish positions at $88.50.

NOTE: MMM begins trading ex-dividend on Feb. 15th. We can expect shares to gap down by 60 cents.

Earlier Comments:
The $90 level could be round-number resistance but we're setting our exit target at $94.00. FYI: The Point & Figure chart for MMM is bullish with a $109 target.

Breakout Trigger (buy calls) @ $88.50

- Suggested Positions -

buy the MAR $90 call (MMM1217C90)

02/09/12 removed the February call.

Entry on February xx at $ xx.xx
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on February 07, 2012


Pall Corp. - PLL - close: 64.24 change: +0.97

Stop Loss: 61.75
Target(s): 64.75
Current Option Gain/Loss:(Feb$60c: + 91.4%) & Mar$60c: +65.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/13 update: PLL continues to show relative strength. The stock added another +1.5% to close at new highs. Our exit target is $64.75 but readers may want to lock in gains now.

- Suggested Positions -

Long MAR $60 call (PLL1217C60) Entry $2.90

02/13/12 readers may want to exit early to lock in gains on our March calls.
02/10/12 exit Feb $60 call, bid @ $3.35 (+91.4%)
02/09/12 prepare to exit Feb calls at the open tomorrow. current bid is $3.60 (+105%)
02/09/12 new stop loss @ 61.75
02/04/12 new stop loss @ 59.45

Entry on February 02 at $61.00
Earnings Date 03/12/12 (unconfirmed)
Average Daily Volume = 769 thousand
Listed on January 31, 2012


S&P Oil ETF - XES - close: 37.94 change: +0.43

Stop Loss: 36.45
Target(s): 43.00
Current Option Gain/Loss: Feb37c: -40.7% & Mar36c: - 8.1%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
02/13 update: Oil and energy stocks enjoyed a strong bounce this morning but gains in the XES faded. The ETF still managed a +1.1% gain. I am not suggesting new positions at this time.

February options expire in four trading days. I am suggesting we exit our February calls at the closing bell tomorrow.

Earlier Comments:
The option spreads on the XES a bit wide, which makes this a higher-risk trade. I am suggesting we keep our position size small to limit our risk. Our multi-week exit target is $43.00. I prefer the March calls but short-term traders can use February options but these expire in two weeks.

(small positions) - Suggested Positions -

Long Feb $37 call (XES1218B37) Entry $1.35

- or -

Long Mar $36 call (XES1217C36) Entry $2.45

02/13/12 prepare to exit our Feb. $37 calls at the closing bell tomorrow.

Entry on February 06 at $37.75
Earnings Date --/--/--
Average Daily Volume = 177 thousand
Listed on February 04, 2012


PUT Play Updates

Green Mountain Coffee Roasters - GMCR - close: 65.39 change: +2.54

Stop Loss: 65.01
Target(s): 56.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
02/13 update: GMCR broke a four-day losing streak with a +4.0% bounce today. We're on the sidelines waiting for a drop to new relative lows.

I am suggesting a trigger to buy puts $61.75 with a stop loss at 65.01. Our exit target is $56.00. GMCR can be a volatile stock so we want to keep our position size small. Plus, the $60.00 level could still act as potential support.

Buy Puts Trigger @ $61.75 (small positions)

- Suggested Positions -

buy the Mar $60 PUT (GMCR1217O60)

Entry on February xx at $ xx.xx
Earnings Date 05/03/12 (unconfirmed)
Average Daily Volume = 6.4 million
Listed on February 11, 2012


WellPoint Inc. - WLP - close: 64.66 change: +0.49

Stop Loss: 65.15
Target(s): 58.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
02/13 update: WLP also participated in the market's widespread bounce on Monday. Shares gained +0.7% but volume was pretty low. There is no change from my weekend comments.

The late January low was $63.48. I am suggesting a trigger to open bearish positions at $63.25. If triggered our target is $58.50 but more conservative traders may want to exit near $60.00 which could act as round-number support.

Buy Puts Trigger @ 63.25

- Suggested Positions -

buy the Mar $62.50 PUT (WLP1217O62.5)

Entry on February xx at $ xx.xx
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 4.1 million
Listed on February 11, 2012