Option Investor
Newsletter

Daily Newsletter, Thursday, 2/16/2012

Table of Contents

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

Market Wrap

U.S. Data, Europe Speculation Lift Stocks

by Todd Shriber

Click here to email Todd Shriber
Whether it was attributable to renewed speculation that Greece is edging close to a debt agreement or several strong economic data points courtesy of the U.S., stocks surged to their highest levels of 2012. Hopefully, it was more attributable to the U.S. than Europe. Maybe I am biased, but think the U.S. is a bit more reliable these days.

My opinion aside, the facts are the Dow Jones Industrial Average notched its third triple-digit up day of 2012. The S&P 500 jumped to its highest close in almost 10 months and the Nasdaq is just one or two good days away from 3000.

Market Stats

As I said, hopefully today's bullish action can be pinned on the U.S. and it very well could be. In economic news, the producer price index rose 0.1% in January following 0.1% drop in December, but that was still far better than 0.4% increase economists expected. Excluding volatile food and energy prices, the core index rose 0.4%, more than the 0.2% economists forecast. However, that was not the best news.

Weekly jobless claims fell by 13,000 to 348,000, easily surpassing the 365,000 new claims economists were expecting. That was the fourth drop in the past five weeks and the less volatile four-week moving average fell to 365,250. That is the fifth straight week the four-week moving average has declined. The average has fallen nearly 13 percent in the last year, according to the New York Times.

Jobless Claims

The Commerce Department said housing starts rose to a seasonally adjusted annual rate of 699,000 homes last month, a 1.5% jump from December's reading, providing further evidence the U.S. residential real estate market is improving.

Housing Starts

The rally was widespread, touching every sector, but there were a few laggards here and there. It probably was not that much of a surprise that 29 of the Dow's 30 components were higher today, nor was it too surprising that the one that closed in the red was Kraft (KFT). This was a risk on day after all.

To that end, there were a couple of noteworthy disappointments from the oil sector. Exxon Mobil (XOM) and Chevron (CVX) certainly chipped in toward the Dow's triple-digit jump, but ConocoPhillips (COP), the third-largest U.S. oil company, was down almost 1% today. The company announced the sale of its Vietnam operations for $1.3 billion. That news should not have caught anyone by surprise because Conoco has pledged to sell billions of dollars in non-essential assets over the next few years and that cash will likely be used for dividends, buybacks or increased oil production.

Near as I can surmise, the stock may have been down because financier Carl Icahn mentioned Conoco as a possible suitor CVR Energy (CVI). Icahn is doing with CVR what he most recently did with Clorox (CLX) and that is make a tender offer for the company himself with the hopes of prompting another suitor to get in the game.

Staying with oil disappointments, there is the case of Apache (APA), the second-largest of the U.S. independent oil and gas producers. Apache shares finished slightly lower, and I emphasize slightly, after the company reported a 75% increase in fourth-quarter profits. The company ended 2011 with proven reserves of 3 billion barrels of oil equivalent, up 1 percent from 2010, according to the Associated Press.

I am going to go out on a limb here and say this was just some moderate profit-taking. The stock is up about 19% year-to-date and if the average analyst price target of almost $130 proves accurate, there is still a lot of upside in this stock.

Apache Chart

There was plenty of upside in Itron (ITRI) today. The provider of products and services for the global energy and water markets surged more than 20% on volume that was nearly 10 times the daily average after forecasting 2012 EPS of $3.80-$4.20 on revenue of $2.1-$2.3 billion. Analysts were expecting full-year earnings of $4.10 on a revenue of $2.37 billion. The company posted a fourth-quarter loss of $55 million, or $1.35 a share, compared with a profit of $27 million, or 65 cents a share, a year earlier. On an adjusted basis, company earned $1.19 a share as revenue climbed 4% to $642.5 million. Analysts expected EPS of 99 cents a share on a revenue of $582.14 million.

Itron Chart

Give the Nasdaq some credit. The composite was up 1.51% and the Nasdaq 100 was up 1.42% and those sporty gains with Apple (AAPL) gaining ''just'' 0.9%. It was another volatile day for Apple shares, and that is saying something because this is a volatile stock to begin with. The shares traded in a range of $18 today and volume was more than 2.5 times the daily average. I saw a lot folks on Twitter yesterday saying they caught Apple short from $519-$520 and rode it below $500. Right...

Anyway, the path of least resistance with Apple is higher for the simple reason that there is no good reason to sell this stock beyond the belief it is overbought.

That sentiment cannot be extended to Amazon (AMZN), which was down 2.5% today, making the Nasdaq's jump all the more impressive. Morgan Stanley pared its rating on Amazon to equal weight today, citing risks from, you guessed it, Apple. I am sure this should have been an issue months ago when Amazon said they were going to challenge Apple in the tablet market, but better late than never.

Amazon might yet making something of its battle with Apple and if there is a company that can, I would put Amazon on the short list, but it also must be acknowledged that while Nasdaq is trading near its highest levels in a over a decade, Amazon could be back at its 52-week low with just a couple more bad days.

Amazon Chart

In news about what I would call ''Lazarus stocks,'' General Motors (GM) gained almost 9% after the company said it earned $7.6 billion in 2011. That is a record for the U.S. auto giant and it comes just a couple of years after the company was basically a ward of Uncle Sam. GM said it might have a hard topping that record this year, but the company did say its share of the global auto market will at least remain steady. Uncle Sam still owns 26.5% of GM.

GM Chart

Looking at the charts, as I mentioned earlier this week, only once in the past dozen or so attempts to crack 1350 has the S&P 500 been successful. Well, it was once prior to today. Today's stopping point was 1358, putting the index above the bullish 1355 area. It would be constructive if 1345-1355 turned into new support as the S&P 500 attempts to make its way to 1375.

S&P 500 Chart

The Dow is now less than 100 points away from 13,000. Just over 13,000 is some old uptrend resistance. Lost in all the hyperbole about AAPL being a $500 stock is that as IBM approaches $200, that is excellent news for the Dow. Oh, and here CAT is right near new 52-week highs. And imagine if CVX realizes the average price target of roughly $120. Support is 12,5000.

Dow Chart

I have already discussed the Nasdaq at length, but this is an increasingly bullish chart that may only find resistance at 3000 and only because of the psychological impact of that number. I know everyone is talking about AAPL, GOOG, AMZN, PCLN, etc. However, I would diminish the impact biotech can have on the Nasdaq going forward. Keep an eye on IBB and FBT.

Nasdaq Chart

A positive close on Friday, particularly one that came on somewhat decent volume, could really ignite this rally because as I mentioned earlier this week, the day before and the day after President's Day are usually down days for stocks. I am cautious only because of the three-day weekend and if bad news courtesy of Greece arrives on Sunday or Monday, the result could be ugly come Tuesday. Enjoy the long weekend.

Todd Shriber


New Option Plays

Auto Parts & Property Management

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

BorgWarner Inc. - BWA - close: 81.91 change: +1.33

Stop Loss: 78.75
Target(s): 89.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
BWA makes parts for automobile production. The company recently reported earnings that were somewhat mixed but the stock is climbing on the news anyway. A downgrade for BWA yesterday had little affect on the stock price. Now BWA is on the verge of breaking out past major resistance near the $82.00 level.

A breakout would mean new record highs and could produce a some short covering in BWA. The most recent data listed short interest at 14% of the 108 million share float.

I am suggesting a trigger to open bullish positions at $82.35. If triggered we'll use a stop loss at $78.75. Our target is $89.00. FYI: The Point & Figure chart for BWA is bullish with a $108 target.

Trigger @ $82.35

- Suggested Positions -

buy the Mar $85 call (BWA1217C85) current ask $1.40

Annotated Chart:

Entry on February xx at $ xx.xx
Earnings Date 04/30/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on February 16, 2012


Jones Lang LaSalle - JLL - close: 83.41 change: +2.98

Stop Loss: 79.95
Target(s): 89.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
JLL is in the real estate and property management industry. After a very strong January rally the stock has spent the last couple of weeks digesting gains in a sideways consolidation.

Now JLL appears to be on the verge of breaking out from this trading range. The high today was $83.49. I am suggesting a trigger to buy calls at $83.75 with a stop loss at $79.95. Our target is $89.50. FYI: The Point & Figure chart for JLL is bullish with a $105 target.

Trigger @ $83.75

- Suggested Positions -

buy the Mar $85 call (JLL1217C85) current ask $2.50

Annotated Chart:

Entry on February xx at $ xx.xx
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 518 thousand
Listed on February 16, 2012



In Play Updates and Reviews

FLS Hits Our Target

by James Brown

Click here to email James Brown

Editor's Note:

Flowserve continues to climb and hit our exit target this afternoon. We also had plans to exit CTXS and PLL this morning. I have removed GMCR and WLP as potential trades.

Current Portfolio:


CALL Play Updates

Caterpillar, Inc. - CAT - close: 113.96 change: +1.43

Stop Loss: 111.95
Target(s): 119.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
02/16 update: CAT managed to rally +1.2%, which was better than the S&P 500 and the Dow Industrials. Yet shares remain under resistance at the $115.00 level.

I am suggesting a trigger to open bullish positions in CAT at $115.25. If triggered we'll use a stop loss at $111.95. Our initial target is $119.75. It's possible that the 2011 high near $116.50 could be resistance but I doubt it, not after CAT spent the last two weeks building up steam for a new leg higher.

FYI: The Point & Figure chart for CAT is bullish with a $165 target.

Trigger @ 115.25

- Suggested Positions -

buy the Mar $120 call (CAT1217C120)

Entry on February xx at $ xx.xx
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 7.5 million
Listed on February 14, 2012


Capital One Financial - COF - close: 49.29 change: +0.11

Stop Loss: 47.75
Target(s): 54.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
02/16 update: I am a little surprised by the trading action in COF today. Financial stocks were showing relative strength with the XLF ETF up +1.5% on Thursday. Yet COF gapped open lower and only managed a +0.2% gain.

Currently our plan is to launch bullish positions when COF trades at $50.25 or higher. Our multi-week exit target is $54.75. I am suggesting we keep our position size small to limit our risk.

Trigger @ $50.25 (small positions)

- Suggested Positions -

buy the Mar $50 call (COF1217C50)

Entry on February xx at $ xx.xx
Earnings Date 04/23/12 (unconfirmed)
Average Daily Volume = 6.4 million
Listed on February 15, 2012


CommVault Systems - CVLT - close: 54.49 change: +0.52

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:
02/16 update: CVLT is drifting higher. I still don't want to chase it. If CVLT doesn't cooperate tomorrow we'll likely drop it to make room for something else.

No changes from my prior comments yet. 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: 87.76 change: +0.07

Stop Loss: 84.75
Target(s): 89.75 & 92.50
Current Option Gain/Loss:(Feb$87.5c:+130.0%) & Mar$87.5c: +10.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/16 update: Hmm... DLTR did not truly participate in the market's rally today. Shares were moving lower after the early morning rally. The stock traded near $87.00 before finally paring its losses in the last hour of trading. The relative weakness today is worrisome.

I am not suggesting new positions at this time. Our exit target for the March calls is $92.50 but the $90.00 level could be round-number resistance.

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

02/14/12 scheduled close for the Feb. $87.50 calls at the closing bell tonight. bid on the call option was $1.15 (+130%).
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


3M Co. - MMM - close: 87.65 change: +0.64

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:
02/16 update: MMM managed a +0.7% rebound. Shares remain inside the four-week sideways consolidation. Currently the plan is to open bullish positions at $88.50.

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


Sherwin-Williams - SHW - close: 99.74 change: +0.52

Stop Loss: 97.45
Target(s): 104.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 5 weeks
New Positions: Yes, see below

Comments:
02/16 update: Traders bought the dip near SHW's rising 10-dma and shares almost erased yesterday's pull back. The stock continues to consolidate under resistance near the $100.00 mark. Our plan is to open bullish positions if SHW can trade at $100.25 or higher. If triggered we'll aim for $104.75.

Trigger @ $100.25

- Suggested Positions -

buy the Mar $100 call (SHW1217C100)

Entry on February xx at $ xx.xx
Earnings Date 04/23/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on February 14, 2012


S&P Oil ETF - XES - close: 38.24 change: +0.81

Stop Loss: 36.45
Target(s): 43.00
Current Option Gain/Loss:(Feb37c: -48.1%) & Mar36c: - 2.0%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
02/16 update: Energy stocks were showing some relative strength today and the XES rallied +2.1%. The close back above the $38.00 level is a positive. Today's bounce negates yesterday's bearish reversal candlestick. I am not suggesting new positions at this time.

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 Mar $36 call (XES1217C36) Entry $2.45

02/14/12 exited Feb. calls at the close: bid @ $0.70 (-48.1%)
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


Oil & Gas Exploration ETF - XOP - close: 60.35 change: +1.13

Stop Loss: 56.45
Target(s): 63.00
Current Option Gain/Loss: Mar$60c: +39.4% & Jun$60c: +18.2%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
02/16 update: The XOP continues to show strength. Traders quickly bought the dip this morning and the ETF closed at new multi-month highs. Shares were also able to close above potential round-number resistance at the $60.00 mark. FYI: The Point & Figure chart for XOP is bullish with a $74 target.

- Suggested Positions -

Long Mar $60 call (XOP1217C60) Entry $1.70

- or -

Long Jun $60 call (XOP1216F60) Entry $4.10

Entry on February 14 at $58.75
Earnings Date --/--/--
Average Daily Volume = 3.8 million
Listed on February 13, 2012


PUT Play Updates

Currently we do not have any active put trades.


CLOSED BULLISH PLAYS

Citrix Systems - CTXS - close: 75.55 change: +1.39

Stop Loss: 69.75
Target(s): Mar calls: $76.50
Current Option Gain/Loss: (Feb70c: + 8.1%) & Mar70c: +77.2%
Time Frame: 2 to 4 weeks
New Positions: , see below

Comments:
02/16 update: Yesterday the stock market looked poised for bigger declines so we decided to exit our CTXS positions at the opening bell this morning. Shares gapped open higher at $74.41 and eventually rallied to a +1.8% gain.

Earlier Comments:
The plan was to keep our position size small.

(small positions!) - Suggested Positions -

Mar $70 calls (CTXS1217C70) Entry $3.30 exit $5.85*(+77.2%)

02/16/12 exited positions at the opening bell
*option did not trade at time of our exit
02/15/12 prepare to exit at the opening bell tomorrow
CTXS almost hit our exit target today. Target = $76.50, high today = $76.45
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%)

chart:

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


Flowserve Corp. - FLS - close: 117.89 change: +1.31

Stop Loss: 115.40
Target(s): 114.50 for Feb call & 118.00 for April call
Current Option Gain/Loss: (Feb $110c: +48.2%) & Apr$115c: +91.2%.
Time Frame: 3 to 4 weeks
New Positions: , see below

Comments:
02/16 update: Target achieved.

We were planning to exit our FLS positions at the closing bell tonight but shares did us a favor and hit our exit target at $118.00 instead.

- Suggested Positions -

APR $115 call (FLS1221D115) Entry $4.00 exit $7.65 (+ 91.2%)

02/16/12 exit target hit at $118.00
02/15/12 prepare to exit positions at the close tomorrow
02/15/12 new stpo loss @ 115.40
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

chart:

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


Pall Corp. - PLL - close: 63.81 change: +0.55

Stop Loss: 61.75
Target(s): 64.75
Current Option Gain/Loss:(Feb$60c: + 91.4%) & Mar$60c: +34.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/16 update: PLL opened lower by a few cents before dipping toward short-term support at $63.00 and bouncing higher. Shares ended the day up +0.8%. We had adjusted our plan to exit positions at the opening bell this morning.

- Suggested Positions -

MAR $60 call (PLL1217C60) Entry $2.90 exit $3.90 (+34.4%)

02/16/12 exited at the opening bell
02/15/12 prepare to exit positions at the opening bell tomorrow
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

chart:

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


CLOSED BEARISH PLAYS

Green Mountain Coffee Roasters - GMCR - close: 69.05 change: +3.30

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:
02/16 update: I am giving up on GMCR as a potential short-term put trade. The stock has continued to bounce with a little support from its rising 10-dma. Our trigger to buy puts was never hit.

Buy Puts Trigger @ $61.75 (small positions)

Trade did not open.

02/16/12 GMCR removed from the newsletter.

chart:

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: 66.23 change: +1.08

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:
02/16 update: WLP continues to bounce and looks poised to breakout through the top of its recent trading range. Our trigger to open bearish positions was not hit and doesn't look like it will be hit any time soon.

Buy Puts Trigger @ 63.25

Trade did not open.

02/16/12 WLP removed from the newsletter.

chart:

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