Option Investor
Newsletter

Daily Newsletter, Thursday, 3/8/2012

Table of Contents

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

Market Wrap

Markets Calm Ahead Of Jobs Numbers

by Thomas Hughes

Click here to email Thomas Hughes
The markets were fairly calm today in front of tomorrows jobs report. A strong opening was met with lack luster trading and a late afternoon rally that was short lived. The late afternoon rally met resistance as sellers stepped in around 12935 on the Dow. The news from Europe, including the impending Greek debt swap and moderate US unemployment data helped to sustain the bounce back from Tuesday's sharp losses and maintain the opening gains plus some.

The data is a little mixed, improving employment and earnings growth are being contradicted by warnings from some big name players. McDonald's warned about slowing earnings growth in upcoming quarters and Texas Instruments dropped sharply after the bell on a disappointing earnings call. Concerns of global slowdown are not really being talked about in the news but they are there. China and Europe have both reduced their expectations of growth for 2012 and I think the market is waiting for some definitive answer to the question of whether the market is going up or down. McDonald's, who had been experiencing strong growth in Europe and Asia, listed them as the biggest drags on February sales. Austerity measure put in place to help the trouble zone escape debt are pinching profits.


Index futures were up nearly 1% in pre-market trading but withdrew a little after the release of the newest unemployment data. Last weeks number of initial jobless claims was revised up to 354,000, an increase of 3000. This weeks advance number, for the week ending March 3rd, is 362,000. This is an increase of 8000 from last week and higher than expectations. Analysts had been looking for claims to remain steady at 351,000. The four week moving average of initial claims, a better gauge of unemployment, rose a mere 250 to a seasonally adjusted 355,000 claims. Continuing claims rose marginally as well to 3.416 million for the week ending 2/25. Futures initially retreated on the news but soon shrugged it off. These small increases are not seen as worrisome and are still in line with the short term trend of declining unemployment. Even though the recovery is slow unemployment is at 4 year lows and improvements are expected to continue. Analysts are expecting a good jobs report tomorrow which would make the third straight month of strong gains in employment. The government thinks its job report data is being leaked to Wall Street, an implication with serious implications. A review by Sandia National Laboratories has been commissioned and is underway.




European markets closed up today on the Greek debt swap and news from some key central banks. The European Central Bank and the Bank of England both left their key interests rates unchanged. The ECB rate is steady at 1% and the Bank of England rates remains at 0.5%. The European markets were up 1.5% ahead of the announcement and finished the day strongly in the green. The FTSE closed up 1.8% led by the DAX and CAC 40 at 2.45% and 2.54% respectively.

The highly anticipated Greek debt swap deadline passed today at 3 pm. An overwhelming majority of bondholders were in support of the deal. Attention will now focus on the next steps in the bailout process including loans and potential credit default swaps.

Gold and silver traded higher today on economic optimism tied to Greece's swap deal. The precious metals did come off their highs though when the European Central Bank warned on inflation. Gold is expected to keep trading higher on expectations the FOMC and European Central Bank will continue with current monetary policies in support of economic growth.

There is a lot of chatter concerning high oil prices. The price of crude oil and gasoline rose again today, threatening to derail the current economic recovery. It is certain for some analysts that higher fuel prices will impact consumer spending. What is not certain is how long oil, and gas especially, will remain at elevated levels. Gas historically goes up in the early spring only to retreat as summer approaches. This year is the same, only earlier, spurred on by fears of Iran. I think global demand will ultimately be less than forecast. The world economy is slowing and no one really knows how much. Some forecasts, notably China, have been revised down again recently, further lowering expected demand for oil and hopefully prices as well. Should oil and gas prices remain at these elevated levels then there is a real chance they could slow world growth further.

Facebook made another move getting ready for its impending and much anticipated IPO. The company added 25 new underwriters and raised $8 billion in revolving credit and bridge loans. The company is boosting cash ahead of the IPO in order to solidify its position. Among the new underwriters are Wells Fargo Securities, Citigroup Global Markets and RBC Capital Markets. Facebook is still anticipated to be the largest internet opening of record and is expected to start a new round of internet based IPO's.

AIG made headlines when the US Treasury announced that it would sell up to $6 billion of its AIG stock with AIG expected to buy half of the offered shares. The move reduces the Fed's portion of AIG by 7%. An agreement was also made ensuring repayment of the remainder of the $8.5 billion preferred equity investment in AIG owned AIA-Aurora LLC. The total stake in AIG held by the treasury would fall to around $42 billion after being repaid by AIG for Aurora. Shares fell over 3% in today's trading.


GM slammed up against it's 30 day moving average on a bounce from recent lows. Today CEO Daniel Akerson announced that the company is expecting losses in the European segment of business to continue for 1-2 more years. The losses are due in part on the current economic crisis in the region. The stock, which had been showing strength and a possible uptrend fell below the 200 day moving average during the week. It is bouncing up from a possible support but is squeezed between a long and short term moving average and looks like it may continue down from here.


Apple and five other suppliers of ereaders and books may be sued by the Justice Department, according to reports. The makers and sellers of ebooks are accused of colluding to raise prices. US and International officials have been investigating the matter but nothing concrete has been released. Shares of Apple traded up today but are still shy of the all time highs set earlier in the week. Action was light considering the recent high and a release of its newest iPad device yesterday. It is likely the announce was priced in because it was not really a secret. Some other companies are expected to do well in the wake of Apple and its latest device. AT&T and Verizon are supposed to be the biggest gainers with the chip makers that supply Apple and other ereader makers coming in close second.


McDonald's took a pounding today. The fast food giant reported smaller than expected same store sales in February and shed 3% for the day. The drop started pre-opening and maintained that level throughout the day. Same store sales came in at a positive 7.5% but analysts had been expecting a more robust 8.2%. The poor result is thought to foreshadow earnings for the rest of 2012 and came with a warning from McDonald's itself concerning quarterly earnings expectations. Globally, all stores, not just comp store sales, grew by 9.4%. The US sales climbed by over 11% and were lagged by Europe and Asia/Pacific/Africa by 4% and 2.4% respectively. Europe is McDonald's largest market by revenue and is being hurt by austerity measures and unemployment in the region. Based on the current state of the Eurozone I expect to see further weakness in results for McDonald's and others, including General Motors which I mentioned earlier. McDonald's stock dropped today on high volume and is sitting on a short term support line. At this level the dividend yields 2.8%, not as good as some others but if the stock moves down a little more then I think it will be a good candidate for a dividend investment.


Dendreon took another hit today, losing roughly 7% in today's trading. The company is facing renewed competition from Johnson and Johnson. JNJ's prostate cancer pill Zytiga received reviews that it set up to challenge Dendreon's Provenge therapy. Dendreon is not out of the fight however, its medicine is currently being used to treat advanced prostate cancer while Zytiga is still in clinical trials. Dendreon's stock opened around 18% lower but moved up on strong volume to close above a key support/resistance line. Dendreon may be at or near its bottom but I think some more evidence is needed to commit to this stock.


Johnson and Johnson did not fare as well as you might think after seeing Dendreon's drop. The stock traded up to its 30 day exponential moving average but failed to break to the upside. The stock has been trading choppy and sideways for years and I do not see any evidence to change that at this time. When Zytiga proves successful and gains wider acceptance the stock could break out and make significant gains. I will keep watching until then.


Wells Fargo is a leader among the biggest US holding banks with return on assets consistently over 1.2%. The bank rose over 3% today to close at $31.39, on top of an announcement of a new banking fee. Customers in 6 states will have to pay a $7 monthly fee if their balances fall below a certain level. A spokesman for the bank said that over 80% of customers would avoid the new fees. The stock is bouncing from its 30 day exponential moving average but does not have volume to support it. A similar move last year by Bank of America was short lived, rousing the wrath of disgruntled customers.


The financial Spyder (XLF) is making a move similar to Wells Fargo but without the percentage gains. It is also bumping up against long term resistance and has negative momentum. The MACD is consistent with XLF trading below the moving average, at least in the short term. As a sector the banks are making big improvements and are gaining strength but global slowdown, especially in Europe, is taking a toll business system wide. I think there are some good investments in banking but they are in the small cap, regional operators that are sheltered from the global exposure faced by the big bank holding companies.


Today marked the biggest two day gain in the stock market in nearly two months. Futures were higher this morning on expectations of growth and a resolution to the Greek debt crisis. I can not help but think the optimism is misplaced. The move put the S&P 500 right up at the long term resistance line it was flirting with last week. The trend is still up but I am watching out for any kind of topping action. Tuesday's drop could be a minor correction, there is some near term support around 1350 but it will take volume and earnings to convince me. So far news, reports and expectations are too disconnected for blind confidence.


The Dow looks exactly the same to me as the S&P. The trend is still up but it now in question due to the recent pull back. The index made up a lot of the losses today but failed to cross 13,000. The index opened up today and traded basically flat throughout the day, declining some and then moving strongly upward as the results of the Greek swap deal became certain. The afternoon rally took the index up to 12,937.50 before sellers stepped in to drive price down to the close. All in all the day was fairly mellow, news failed to really spark any renewed buying ahead of tomorrows jobs report.


The VIX retreated about 5% today to relative historic lows. The current level is consistent with extended rallies in the past. It will be important to watch this, especially tomorrow, as a sudden spike up would help reinforce fears of a possible market top.


The Nasdaq moved up in unison with the other two major indexes today. The short term trend is still up, with near term support and the 30 day exponential moving average equal at 1306. Once again volume is not in the move and technical indicators support at least a retest of the recent dip. Looking at the Nasdaq ETF, QQQ, it appears like a short term double top could be forming.


News and Data seem to be contradicting each other. Some things point to recovery and growth like declining unemployment and earnings. Other things, like growth expectations and earnings, seem to be pointing to further economic weakness. I know I mentioned earnings twice but that is because it is relevant in both columns. Earnings are improving due to balance sheet improvements, expanding markets and organic growth but, like McDonald's today, they are not living up to expectations that have been built into the market. I think for the bull market to continue from here we will need to see signs of earnings growth that exceeds current expectations. I think we are in for a time of earnings revisions while corporations are getting their business outlooks in perspective with global growth expectations. It will be important to monitor economic data and earnings very closely, any negative surprises, especially tomorrow with the jobs report, could keep stocks down.

Thomas Hughes


New Option Plays

Domestic Oil Producer

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Continental Resources - CLR - close: 89.49 change: +0.64

Stop Loss: 86.75
Target(s): 99.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
CLR is a domestic oil producer. The stock could see a short squeeze. The most recent data listed short interest at 19% of the small 40.9 million-share float. Currently the stock is bouncing after a -12% correction from its intraday high near $97. Traders bought the dip near $85 and its rising 30-dma.

I am suggesting we open bullish positions if CLR trades at $90.25 or higher. We will set our exit target at $99.00 since the trend of higher highs should lead CLR toward the $100 area.

FYI: The Point & Figure chart for CLR is bullish with a long-term $140 target.

Trigger @ $90.25

- Suggested Positions -

buy the Apr $95 call (CLR1221D95) current ask $2.80

Annotated Chart:

Entry on March xx at $ xx.xx
Earnings Date 05/03/12 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on March 08, 2012



In Play Updates and Reviews

The Market Bounce Continues

by James Brown

Click here to email James Brown

Editor's Note:

Enthusiasm over the Greek debt swap helped fuel investor appetite for risk assets. The market bounced for the second day in a row. Both the ATHN and CLH trades were opened this morning.

Current Portfolio:


CALL Play Updates

Alexion Pharma. - ALXN - close: 84.91 change: +1.06

Stop Loss: 82.45
Target(s): 89.50
Current Option Gain/Loss: Apri$85c: -13.2% & Aprl$90c: -20.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/08 update: ALXN outperformed the major indices with a +1.2% gain but has yet to break the short-term trend of lower highs. Readers may want to wait for a rally past today's high near $85.50 before considering new positions.

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

- Suggested (SMALL) Positions -

Long Apr $85 call (ALXN1221D85) Entry $4.15

- or -

Long Apr $90 call (AXLN1221D90) Entry $2.00

03/05/12 triggered at $85.55, adjust stop to $82.45
03/03/12 adjust entry strategy: buy calls at $85.55, stop loss @ 82.75
03/01/12 adjust entry strategy. buy calls if both ALXN and S&P 500 open positive tomorrow
02/29/12 trade not open yet. Adjust entry to use a buy the dip trigger at $82.50 with a stop loss at $81.45

Entry on March 05 at $85.55
Earnings Date 04/23/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on February 28, 2012


Airgas Inc. - ARG - close: 83.17 change: +1.61

Stop Loss: 79.90
Target(s): 87.00
Current Option Gain/Loss: -10.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/08 update: Widespread market gains helped push ARG to a +1.9% gain and a breakout to new highs. We only have six trading days left before March options expire. I am not suggesting new positions at this time.

- Suggested Positions -

Long Mar $82.50 call (ARG1217C82.5) Entry $1.00

03/03/12 new stop loss @ 79.90
02/28/12 trade opened @ 82.21
02/27/12 not open yet, buy calls at the open tomorrow
02/24/12 not open yet, try again.

Entry on February 28 at $82.21
Earnings Date 05/07/12 (unconfirmed)
Average Daily Volume = 528 thousand
Listed on February 23, 2012


AthenaHealth, Inc. - ATHN - close: 74.90 change: +2.65

Stop Loss: 69.75
Target(s): 77.50
Current Option Gain/Loss: +42.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/08 update: Our new play on ATHN was triggered at the open. Shares broke out to new highs and outperformed the market with a +3.6% gain. I am not suggesting new positions at this time.

Earlier Comments:
There is a good chance that ATHN could see a short squeeze if it breaks out past its 2011 high at $72.70. The most recent data listed short interest at 34% of the small 34.7 million-share float. FYI: The Point & Figure chart for ATHN is bullish with a $105 target.

- Suggested Positions -

Long Apr $75 call (ATHN1221D75) Entry $2.38

Entry on March 08 at $72.75
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 577 thousand
Listed on March 07, 2012


American Express Co - AXP - close: 52.95 change: +0.68

Stop Loss: 51.40
Target(s): 57.50
Current Option Gain/Loss: -28.3%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/08 update: AXP gapped open higher and closed the session with a +1.3% gain but struggled with prior resistance near $53.00 again. I am not suggesting new positions at this time.

Earlier Comments:
The plan was to keep our position size small. Our multi-week target is $56.50. Keep in mind that AXP doesn't move super fast. FYI: The Point & Figure chart for AXP is bullish with a $75 target.

- Suggested Positions - (Small Positions)

Long Apr 52.50 call (AXP1221D52.5) Entry $2.40

03/03/12 new stop loss @ 51.40
02/29/12 AXP gapped down at $53.46
02/28/12 not open yet. buy calls at the open tomorrow.
02/27/12 not open yet, try again.

Entry on February 29 at $53.46
Earnings Date 04/19/12 (unconfirmed)
Average Daily Volume = 5.7 million
Listed on February 25, 2012


Clean Harbors, Inc. - CLH - close: 69.19 change: +2.02

Stop Loss: 64.75
Target(s): 71.50
Current Option Gain/Loss: +61.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/08 update: Our new CLH trade is off to a strong start thanks to the market's widespread bounce. Our traded opened this morning with CLH at $67.77 and the stock rallied to a +3.0% gain.

Our target is $71.50 but more conservative traders may want to exit near $70.00. Aggressive trades could aim higher.

- Suggested Positions -

Long Apr $70 call (CLH1221D70) Entry $1.30

Entry on March 08 at $67.77
Earnings Date 05/02/12 (unconfirmed)
Average Daily Volume = 344 thousand
Listed on March 07, 2012


Capital One Financial - COF - close: 49.43 change: +0.84

Stop Loss: 47.75
Target(s): 54.75
Current Option Gain/Loss: Mar$50c: -66.9% & Apr$50c: -30.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/08 update: Financials were some of the best performers on Thursday and COF added +1.7%. A close back above round-number resistance at $50.00 would help reaffirm the up trend. I am not suggesting new positions at this time.

Earlier Comments:
We want to keep our position size small to limit our risk. Our multi-week exit target is $54.75.

(small positions)

- Suggested Positions -

Long Mar $50 call (COF1217C50) entry $1.30

- or -

Long Apr $50 call (COF1221D50) entry $2.30

03/03/12 new stop loss at $47.95
02/28/12 triggered at $50.25

Entry on February 28 at $50.25
Earnings Date 04/23/12 (unconfirmed)
Average Daily Volume = 6.4 million
Listed on February 15, 2012


Whole Foods Market - WFM - close: 83.84 change: +1.84

Stop Loss: 79.95
Target(s): 87.50
Current Option Gain/Loss: +14.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
03/08 update: The market's rally helped fuel WFM's push to new record highs. The stock outperformed with a +2.2% gain. I am not suggesting new positions at this time.

- Suggested Positions -

Long Apr $85 call (WFM1221D85) Entry $1.88

Entry on March 02 at $82.55
Earnings Date 05/03/12 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on March 01, 2012


PUT Play Updates

Apple Inc. - AAPL - close: 541.99 change: +11.30

Stop Loss: n/a
Target(s): see below.
Current Option Gain/Loss: Mar$520P: -85.2% & weekly Mar$525p: -98.7%
Time Frame: 1 to 2 weeks
New Positions: see below

Comments:
03/08 update: AAPL must have the wrong script. It's definitely not performing as we expected. Shares continue to rally even in spite of news that the U.S. Justice Department warned AAPL that the government plans to sue them and five other major publishers over potential price fixing for e-books. This news failed to stop the climb in shares of AAPL and the stock added +2.1%.

Our very aggressive weekly $525 March puts will expire after tomorrow (current bid is 11 cents). The normal monthly $520 March puts will expire in six trading days (current bid $1.46).

- Suggested (Small) Positions -

Long Mar $520 PUT (AAPL1217o520) Entry $9.90
Exit target: when the option bid hits $14.50

- or -

Very Aggressive - these expire in 1 day
Long Mar $525 PUT (AAPL1209o525) Entry $9.05
Exit target: when the option bid hits $12.50

03/06/12 AAPL gapped down -$10, which hurt our entry point on these short-term puts. I've adjusted our exit targets!

Entry on March 06 at $523.66
Earnings Date 04/24/12 (unconfirmed)
Average Daily Volume = 22.1 million
Listed on March 05, 2012


AMERIGROUP Corp. - AGP - close: 65.67 change: +0.13

Stop Loss: 68.75
Target(s): 61.00
Current Option Gain/Loss: Mar$65P: -28.5% & Apr$60P: - 4.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/08 update: The initial bounce in AGP faded and shares saw its gains evaporate to a +0.19% gain. The overall picture still looks bearish for AGP. More conservative traders might want to inch their stops lower toward $68.00. Our target is $61.00.

NOTE: March puts expire in six trading days. April puts have much wider spreads.

- Suggested Positions -

Long Mar $65 PUT (AGP1217o65) entry $1.40

- or -

Long Apr $60 PUT (AGP1221p60) entry $1.20 <-- 1.15/1.35 -->

03/06/12 AGP gapped open lower at $66.00

Entry on March 06 at $66.00
Earnings Date 05/02/12 (unconfirmed)
Average Daily Volume = 950 thousand
Listed on March 05, 2012


Cliffs Natural Resources - CLF - close: 61.61 change: +1.42

Stop Loss: 65.25
Target(s): 57.50
Current Option Gain/Loss: Mar$65p: +28.0% & Apr$60p: +22.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/08 update: We were concerned about an oversold bounce in CLF, which is why we decided last night to sell half of our positions at the open this morning. Exit half of our Mar $65 put @ 4.70 (+64.9%) and Apr $60 put @ $2.40 (+18.8%). I'm not suggesting new positions at this time.

- Suggested (Small) Positions -

Long Mar $65 put (CLF1217o65) Entry $2.85

- or -

Long Apr $60 put (CLF1221p60) Entry $2.02

03/08/12 sold half at the open. CLF gapped higher at $61.17
exit half of March $65 put @ $4.70 (+64.9%)
exit half of April $60 put @ $2.40 (+18.8%)
03/07/12 prepare to sell half of our positions at the open tomorrow to lock in a gain.
03/07/12 new stop loss @ 65.25

Entry on March 05 at $63.57
Earnings Date 04/30/12 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on March 03, 2012


Edwards Lifesciences - EW - close: 68.53 change: +0.10

Stop Loss: 72.25
Target(s): 63.00
Current Option Gain/Loss: - 6.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/08 update: EW continues to underperform the market. The stock did see an initial rally higher this morning but gains faded. EW ended the session with a +0.1% bounce. I will warn you that the intraday chart shows a potential very short-term double bottom near $68.00 today. If the market rallies again tomorrow I would expect an oversold bounce in EW. Look for resistance near $70.00 or the 10-dma. I am not suggesting new positions at this time.

- Suggested (Small) Positions -

Long Apr $65 PUT (EW1221p65) Entry $1.65

Entry on March 07 at $68.76
Earnings Date 04/19/12 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on March 06, 2012


Polaris Industries Inc. - PII - close: 66.90 change: +0.91

Stop Loss: 68.05
Target(s): 60.25
Current Option Gain/Loss: Mar65P: -64.2% & Apr65P: -25.3%
Time Frame: 3 to 4 weeks
New Positions: , see below

Comments:
03/08 update: Today's break back above what should have been resistance near $66.00 is a warning signal for bears in PII. More conservative traders may want to consider an early exit now. I am not suggesting new positions at this time.

- Suggested Positions -

Long Mar $65 PUT (PII1217o65) Entry $1.40

- or -

Long Apr $65 PUT (PII1221P65) Entry $3.15

Entry on March 05 at $65.45
Earnings Date 04/19/12 (unconfirmed)
Average Daily Volume = 580 thousand
Listed on March 03, 2012


WellPoint, Inc. - WLP - close: 64.41 change: +0.57

Stop Loss: 65.25
Target(s): 60.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
03/08 update: WLP produced an oversold bounce from support near $64 but shares didn't make it very far. There is no change from my prior comments.

I am suggesting a trigger to open small bearish positions at $63.40 with a stop loss at $65.25. Our target is $60.25.

Trigger @ 63.40 (small positions)

- Suggested Positions -

buy the Apr $62.50 PUT (WLP1221p62.5)

Entry on March xx at $ xx.xx
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 2.5 million
Listed on March 06, 2012