Option Investor
Newsletter

Daily Newsletter, Tuesday, 9/10/2013

Table of Contents

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

Market Wrap

Peace Dividend

by Jim Brown

Click here to email Jim Brown

The potential for a peaceful conclusion in Syria has produced a powerful short covering rally this week.

Market Statistics

After two weeks of choppy trading and testing of support over concerns about the aftermath of a Syrian attack the sudden reversal of those fears has powered the market higher. While a "deal" is far from done and my never get done the potential for an eventual attack has declined significantly. Negotiations may drag on for weeks and then implementation for months but the U.S. has apparently escaped the red line box that was pushing us towards the attack.

The president is scheduled to speak to the nation tonight at 9:PM ET but his tone and content will be significantly different than it would have been just 48 hours ago. The market is factoring in the escape with only a "threat of force" to drive the negotiations rather than an actual "use of force."

The other headlines we were dreading for September included the debt ceiling debate and the budget battle. Somebody must be spreading laughing gas in the House and Senate chambers because there are tentative proposals already circulating to raise the debt ceiling and pass a temporary budget resolution to push the deadline into December.

Obviously proposals are a long way from approval votes but potential resolutions so soon after Congress returned from the August break is nothing short of amazing.

The FOMC meeting for next week has also morphed into a back page headline with analysts unanimous that the Fed will only announced a token taper and put the next decision point well into the future at the December meeting. With all the potentially good news breaking out in Washington the Fed has been back paged and forgotten. That may change by next Wednesday but for today they are old news.

Lastly, Chinese economics appear to be getting better every day. Factory output rose to a 17 month high this week and retail sales grew at the fastest rate of the year in August. Factory output ros e+10.4% in August, up from 9.7% in July. That is the biggest increase since March 2012. Retail sales rose an annualized +13.4% in August and the fastest rate for the year. The annual pace of fixed investment rose slightly to 20.3% for the first eight months of 2013. Bank loans rose to 711.3 billion yuan and higher than a forecast for 700 billion. That is a sign of growing confidence. The central bank said an aggregate of all social financing nearly doubled from 808.8 billion in July to 1.57 trillion yuan in August.

With Europe moving out of the two-year recession and China suddenly shaking off the worries from Q2 we are seeing investors turn bullish on emerging markets and markets in general. Could it be that the long awaited global recovery is actually here?

EEM - Emerging Markets ETF

Economics in the U.S. were mixed but the reports were lightweights so there was no hindrance to the market moving higher. The NFIB Small Business Survey declined -0.1 point to 94.0 for August. While the decline was minimal the anecdotal data from the survey showed that small companies were seeing sales and earnings decline in Q3. A larger number of respondents said they expected the economy to deteriorate through the end of 2013. The earnings trend component declined from -22 to -35 for August after being in the -22 to -26 range for the last 7 months.

The Job Openings and Labor Turnover Survey (JOLTS) for July showed the number of job openings declined -200,000 to 3.689 million. Hires rose slightly from 4.318 million to 4.419 million. Separations fell more than 100,000 from 4.228M to 4.109M. Quits rose from 2.205M to 2.268M. Layoffs declined -1.4% to 1.513M.

The JOLTS report was slightly negative and continued to reinforce the weak labor market outlook. This was a lagging report for the July period and was ignored by the market.

The calendar for Wednesday is uneventful except for the 9/11 event risk. Al Qaeda likes to remember anniversaries of successful attacks. Last year we had the Benghazi embassy attack and with all the Syrian implications this year there could be a series of anniversary attacks. The U.S. has already evacuated the embassies in several Middle East countries and there is always the risk of an attack in the USA. I am always relieved when we get to 9/12 without some major event in the USA.


Apple is set to announce their opening of sales through China Mobile (CHL) on Wednesday morning. They announced the iPhone 5S and 5C today as expected. However, the 5C at $549 was not as cheap as many expected. There were analysts expecting prices as low as $395. The higher price has a double result for Apple. They will make more money per phone but they will sell fewer phones. Apple shares fell -11 today in a typical sell the news decline. More than 71% of the time Apple shares decline after new product announcements.


The Dow Jones people are shaking up the big cap index by removing the three lowest priced stocks in the Dow. Those are Hewlett Packard (HPQ), Bank of America (BAC) and Alcoa (AA). Those are being replaced with Goldman Sachs (GS), Visa (V) and Nike (NKE). The inclusion of three much higher priced stocks will change the ratio of the price weighted index. Currently any change in a Dow stock by $1 impacts the Dow Index by roughly 8.22 points. After the change a $1 move in a single stock will impact the Dow by roughly 6.5 points.

The combination of AA, BAC and HPQ totaled only a 2.3% weighting in the Dow because of their low prices. By comparison IBM at $186 has an 8% weighting in the Dow. After the new stocks are added beginning at the open on Monday September 23rd the three heaviest weighted stocks in the Dow will be IBM, GS and Visa. Yes, two of the new stocks will be the number 2 and 3 largest weighted.

What this does is potentially create some additional volatility since GS and Visa tend to move in big jumps and that will create larger moves in the Dow. For instance GS gained +3.50 today and Visa +3.38 and that would equate to roughly a 23 point Dow gain for each of those stocks.

In the graphic below I highlighted the stocks being removed in yellow and added in green. Some analysts were wondering if this dumping of low priced stocks meant that Intel, GE and Cisco were also in danger. Of the three I would think GE was safe because it is the largest industrial. I would think DuPont would be at risk more than GE. Cisco is a relatively new addition so I would think it was safe for the time being.


It was a low news day for individual stocks. We are still a couple weeks away from the height of the earnings warning season for Q3 and headlines about Syria and Apple blanketed the news.

After the bell Texas Instruments (TXN) disappointed investors with a warning of sorts although it was mixed. TXN guided analysts to earnings of 55 cents for Q3 compared to prior guidance of 49 to 57 cents. Obviously the new guidance was at the top end of the range and analysts were only expecting 53 cents. However, they guided for revenue in the $3.15-$3.29 billion range compared to prior guidance of $3.09-$3.35 billion. Analysts were expecting $3.23 billion and just barely over the midrange of the new guidance. Shares fell slightly in afterhours after closing at a new 52-week high.

International Paper (IP) said after the close they were hiking their dividend by +17% to 35 cents and announcing a $1.5 billion stock repurchase program. Shares of IP rallied about 60 cents in afterhours.

Restoration Hardware (RH) posted adjusted earnings of 49 cents and beating estimates for 43 cents. They posted a 30% increase in revenue, +26% same store sales and issued guidance that topped prior forecasts. Unfortunately, GAAP earnings were actually a loss of 46 cents or $17.8 million. Shares of RH fell -$4 to $72 in afterhours. Last time they beat earnings and raised guidance they spiked +$7. Can you say, "Buy the dip?"


NetFlix rallied +$19 after announcing a deal with Virgin Media, a U.K. cable company, to offer NetFlix streaming TV and movie service over the company's Tivo DVR. Virgin said it was giving NetFlix access to 1.7 million customers that currently have the Tivo set-top box. No financial terms were released. Customers would still need to have a NetFlix account to access the service but analysts believe there will be a rush to sign up to get access to the NetFlix portfolio of shows.

Shares of NFLX are now trading with a lofty PE of 372. I am sure Amazon is regretting the decision not to buy NetFlix when it was $53 last fall. The gains today pushed it to a new historic high.



Headlines are a killer to market forecasts. Even those that are highly anticipated rarely turn out as expected. For the prior three weeks the market was setting up for a deluge of bad news and closed at two month lows the Friday before Labor Day. What a difference a week makes.

The Dow has rebounded +450 points since the 14,760 low on August 30th. The S&P has gained +56. However, the real winner in percentage terms has been the Nasdaq with a +150 point gain or +4.1% in just over a week. Not only did it post a +4% gain but broke out to a new 13 year high both days this week. The Russell 2000 gained +46 points, a gain of +4.5% but is still stuck under strong resistance at 1060.

I had expected the markets to succumb to the debt ceiling fight and the budget battle. With both of those events fading into the future, Syria off the table for weeks if not months and China suddenly surging again we have to wonder if this rally will continue for the foreseeable future.

Sometimes the best laid plans of mice and men do go astray. They say in the military the battle plan is always perfect only until the first shot is fired. We have had several shots this week and the noise has stampeded the bulls.

The S&P has rallied back to strong resistance at 1685 and barring any resurgence of negative headlines I could see it continuing to move higher. However, when looking at hundreds of individual charts there is a lot that look way over extended. We all know the old market axiom, "The market can remain irrational longer than you can remain liquid." Anyone betting against the bull this week has been pounded into the dirt by the stampeding hooves. That can continue just as easily as this entire rally could reverse in an instant with the right headline.

Resistance is 1685 followed by the prior high at 1709.67, call it 1710. Numerous analysts were recommending selling the rally at the close today. It will be interesting to see how those predictions fare by this weekend. Who knows, the FOMC may suddenly become a worry again if analysts begin ratcheting up their taper estimates based on China's economics.


The Dow sprinted back above 15,000 to 15,191 but is still well below the August 2nd high of 15,658. The Dow looks rather unsupported after its gains for the week but don't fight a bull market. The resistance at 15,325 could be a speed bump or a stop sign since it would take another +135 point gain to get there. That would mean the Dow had rebounded nearly +600 points since August 30th and that is pretty short term over extended in anybody's book.

Support remains 14,800 and the Dow is still trading at the bottom of the range for the last five weeks. Somebody is buying Dow stocks and until they run out of incentive that could continue. Short squeezes like this tend to take on a life of their own.


The Nasdaq new high is actually a bearish candle and it will be interesting to see if the short squeeze will continue on Wednesday. Apple will more than likely be a drag on the index and the +4.5% gain is short term overextended. This could be a climax top but I am not calling it that. Just be careful about going long Nasdaq stocks until the direction is confirmed.

Support should be back at 3650 and that could be a launch point for a continued rebound.


The biggest risk I see for Wednesday is the potential 9/11 risk and the possible backlash if the president's speech tonight goes in an unexpected direction. Those buying stocks this week are putting their faith in Russia and Syria. I don't think either of those countries are our friends and obviously neither are trustworthy. This entire scenario could self destruct at any moment.

Personally I would stay away from crowded public locations on Wednesday. We never know when Al Qaeda will begin a new offensive in America.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Apparel, Healthcare, & Home Furnishings

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Hanesbrand Inc. - HBI - close: 63.00 change: +1.03

Stop Loss: 59.90
Target(s): 68.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
HBI is looking pretty comfortable here. Bloomberg ran an article recently discussing how lower Chinese imports and a multi-year cotton surplus is boosting HBI's margins. Cheaper input costs (cotton) certainly doesn't hurt HBI's bottom line. Technically shares spent about three weeks building a new base in the $59-62 area. Now HBI is breaking out and closed near its high for the day. After the closing bell tonight HBI reaffirmed its 2013 guidance.

I am suggesting a trigger to buy calls at $63.25. If triggered our target is $68.50. I do expect to see some temporary resistance at the prior high near $65.00.

Trigger @ 63.25

- Suggested Positions -

buy the Oct $65 call (HBI1319j65) current ask $1.35

Annotated Chart:

Entry on September -- at $---.--
Average Daily Volume = 612 thousand
Listed on September 10, 2013


UnitedHealth Group - UNH - close: 74.63 change: +0.38

Stop Loss: 73.40
Target(s): 79.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Wall Street is pretty bullish on the managed care names. The recent trend of analyst opinions on UNH has been positive. Shares did just spend about five weeks digesting gains in a sideways consolidation. Yet now UNH is on the rise and breaking out to new all-time highs.

UNH is currently sitting just below round-number resistance at the $75.00 level. I am suggesting a trigger to buy calls at $75.25. If triggered our target is $79.75.

Trigger @ 75.25

- Suggested Positions -

Buy the Oct $75 call (UNH1319j75) current ask $1.97

Annotated Chart:

Entry on September -- at $---.--
Average Daily Volume = 3.3 million
Listed on September 10, 2013


NEW DIRECTIONAL PUT PLAYS

Bed Bath & Beyond Inc. - BBBY - close: 71.78 change: -0.67

Stop Loss: 73.55
Target(s): 66.50
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to earnings on Sept. 25th
New Positions: Yes, see below

Company Description

Why We Like It:
BBBY runs a chain of retail stores focused on home furnishings, linens and similar products. Most of the market peaked in early August and BBBY was no exception. Yet now the broader market has reversed higher and BBBY is not participating in the rally. Shares have continued to underperform and they look poised to breakdown below technical support at the 100-dma soon. BBBY's long-term up trend of higher lows is in danger of being broken.

Today's low was $71.64. I am suggesting a trigger to buy puts at $71.45. If triggered our target is $66.50, just above the simple 200-dma. Please note that I would not be surprised to see a short-term bounce from the $70.00 level and the $72.00 area, once broken as support, should be new resistance. FYI: BBBY is expected to report earnings on September 25th. We will most likely exit prior to the earnings report to avoid any surprises.

Trigger @ 71.45

- Suggested Positions -

buy the Oct $70 PUT (BBBY1319v70) current ask $1.86

Annotated Chart:

Entry on September -- at $---.--
Average Daily Volume = 1.45 million
Listed on September 10, 2013



In Play Updates and Reviews

Global Markets Rally

by James Brown

Click here to email James Brown

Editor's Note:

Asian stock markets, European stock markets and the U.S. stock markets were all in rally mode as investors reacted to Russia's proposal on the Syrian chemical weapon issue.

Positive economic data out of China didn't hurt either.

AAP has been removed.
VGK (long-term play) met our entry trigger requirements with today's gain.


Current Portfolio:


CALL Play Updates

Alnylam Pharmaceuticals - ALNY - close: 57.20 change: -0.30

Stop Loss: 53.20
Target(s): sell half at $60.0 and half at $64.00
Current Option Gain/Loss: + 2.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
09/10/13: After big gains yesterday ALNY pulled back 30 cents today. Shares did hit a new high this morning above $58.00. Nimble traders might want to consider buying calls on a dip near $56.00.

Earlier Comments:
We want to keep our position size small to limit our risk. I am suggesting we sell half of our position at $60.00 and then we'll aim for $64.00 with the other half.

*small positions* - Suggested Positions -

Long Oct $60 call (ALNY1319j60) entry $2.45

Entry on September 09 at $56.50
Average Daily Volume = 464 thousand
Listed on September 07, 2013


Anadarko Petroleum - APC - close: 93.40 change: -0.62

Stop Loss: 91.65
Target(s): 99.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 5 weeks
New Positions: Yes, see below

Comments:
09/10/13: Crude oil turned lower on the Russian proposal for Syria's chemical weapons lessened the likelihood of a U.S. strike. The energy stocks were some of the market's worst performers today. APC spiked to $94.15 this morning before falling to its 10-dma. Fortunately, traders bought the dip at this short-term support and APC rebounded.

I am suggesting a trigger to buy calls at $94.25. If triggered our target is $99.50.

Trigger @ 94.25

- Suggested Positions -

buy the Oct $95 call (APC1319j95) current ask $2.67

Entry on September -- at $---.--
Average Daily Volume = 2.55 million
Listed on September 09, 2013


Lennox Intl. - LII - close: 72.78 change: +0.32

Stop Loss: 68.95
Target(s): 74.90
Current Option Gain/Loss: +16.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/10/13: LII seemed to struggle with the $73.00 level today. Shares managed a +0.4% gain but that follows yesterday's +2.75% rally. I am not suggesting new positions at this time.

Our short-term target is $74.90. More aggressive traders could aim higher.

- Suggested Positions -

Long Oct $70 call (LII1319j70) entry $3.10*

*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on September 09 at $71.00
Average Daily Volume = 386 thousand
Listed on September 07, 2013


NetSuite Inc. - N - close: 105.68 change: +2.19

Stop Loss: 99.45
Target(s): 109.00
Current Option Gain/Loss: +56.3%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
09/10/13: Shares of N continue to show relative strength with a +2.1% gain on top of yesterday's rally. The close above the $105 level is encouraging since $105 could have been round-number resistance. I am raising our stop loss up to $99.45.

Earlier Comments:
Our multi-week target is $109.00. I would not be surprised to see N find some short-term resistance around the $105 area.

- Suggested Positions -

Long Oct $105 call (N1319j105) entry $2.75*

09/10/13 new stop loss @ 99.45
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on September 09 at $101.05
Average Daily Volume = 294 thousand
Listed on September 03, 2013


Sturm, Ruger & Co. Inc. - RGR - close: 55.94 change: +1.40

Stop Loss: 51.75
Target(s): 57.50
Current Option Gain/Loss: +37.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
09/10/13: RGR saw some volatility this morning but traders bought the midday pullback and shares closed near their highs for the session. RGR managed to outperform the market with a +2.5% gain.

We are aiming for $57.50 but more conservative traders might want to take profits early as RGR near the August high around $56.75. Please note our new stop loss at $51.75.

Earlier Comments:
If this rally continues it could spark a short squeeze. The most recent data listed short interest at 30% of the very small 18.8 million share float.

- Suggested Positions -

Long Oct $55 call (RGR1319j55) entry $1.24

09/10/13 new stop loss @ 51.75
09/07/13 new stop loss @ 50.90
08/28/13 trade opened on gap higher at $53.45. Trigger was 52.65

Entry on August 28 at $53.45
Average Daily Volume = 341 thousand
Listed on August 27, 2013


Starbucks Corp. - SBUX - close: 74.22 change: +1.78

Stop Loss: 69.95
Target(s): 78.00
Current Option Gain/Loss: Oct75c: +37.2% & 2014Jan75c: +15.3%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
09/10/13: SBUX was a hot stock today with shares gapping open higher and then surging to a +2.45% gain. It is important to note that the rally today stalled exactly at the early August high near $74.25. A reversal here would look like a potential bearish double top. I am not suggesting new positions at this time.

Our target is $78.00. I do expect the recent high near $74.00 to offer some short-term resistance.

- Suggested Positions -

Long Oct $75 call (SBUX1319j75) entry $1.18

- or -

Long 2014 Jan $75 call (SBUX1418a75) entry $3.25

Entry on September 05 at $72.35
Average Daily Volume = 3.0 million
Listed on September 04, 2013


Tractor Supply Company - TSCO - close: 129.30 change: +2.46

Stop Loss: 121.75
Target(s): 134.00
Current Option Gain/Loss: +54.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
09/10/13: Tuesday was another strong day for TSCO. Shares added +1.9% and closed at new all-time highs. Shares are also approaching what could be round-number resistance near the $130.00 mark. I would not be surprised to see a brief pullback here.

Earlier Comments:
Our target is $134.00. More conservative traders may want to take profits near $130 instead.

NOTE: The company has announced a 2-for-1 stock split set for Friday, September 27th.

- Suggested Positions -

Long Oct $130 call (TSCO1319j130) entry $2.20*

*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on September 09 at $125.25
Average Daily Volume = 352 thousand
Listed on September 05, 2013


PUT Play Updates

Diamond Offshore Drilling - DO - close: 65.18 change: +0.16

Stop Loss: 66.01
Target(s): 57.50
Current Option Gain/Loss: -52.9%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
09/10/13: Shares of DO only managed a meager bounce today in spite of the stock market's widespread strength. The intraday high was $65.55 and had the market been open longer DO would have likely closed in negative territory. This relative "weakness" should be a good signal for our bearish play.

I'm not suggesting new positions at this time.

Earlier Comments:
Our target is the $57.50 level. I would not be surprised to see a temporary bounce near the $60.00 mark.

- Suggested Positions -

Long Oct $60 PUT (DO1319v60) entry $0.85

Entry on September 03 at $63.75
Average Daily Volume = 1.0 million
Listed on August 28, 2013



Longer-Term Play Updates



Chicago Bridge & Iron - CBI - close: 62.98 change: +2.18

Stop Loss: 55.75
Target(s): 74.50
Current Option Gain/Loss: +11.7%
Time Frame: 4 to 6 months
New Positions: see below

Comments:
09/10/13: Great news! The rebound in CBI continued today (+3.5%) and shares appear to have broken out from its large consolidation pattern.

*Small Positions* - Suggested Positions -

Long 2014 Jan $65 call (CBI1418A65) entry $2.55

07/20/13 new stop loss @ 55.75
06/29/13 CBI might be poised to dip into the $57-55 zone again.
06/24/13 triggered @ 56.75
06/22/13 adjust entry trigger to $56.75
06/15/13 entry strategy change: change the breakout trigger at $65.25 to a buy-the-dip trigger at $56.50. Adjust the stop loss to $53.75.
Adjust the option strike to the 2014 Jan. $65 call

chart:

Entry on June 24 at $56.75
Average Daily Volume = 1.8 million
Listed on June 01, 2013


Vanguard FTSE Europe ETF - VGK - close: 53.57 change: +0.66

Stop Loss: 50.95
Target(s): 58.50
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to 2014 March option expiration
New Positions: see below

Comments:
09/10/13: The big rally in the European stock ETF continued today with the VGK gapping open higher at $53.42 and closing at a new two-year high. Our plan was to wait for shares to close above $53.50 and then buy calls the next day. That requirement has been met. We'll open positions tomorrow morning. Please note that I am adjusting our stop loss to $50.95.

Earlier Comments:
We are taking a multi-month time frame with this trade. If we are triggered our target is $58.50 but we'll adjust it as the trade progresses.

FYI: The Point & Figure chart for VGK is bullish with a $63 target.

Trigger: Wait for a close above $53.50,
then buy calls the next morning.

- Suggested Positions -

Buy the 2014 Mar $55 call (VGK1422L55) current ask $1.75

09/10/13 entry trigger met. open positions tomorrow.
09/10/13 new stop loss @ 50.95
08/24/13 adjust the option strike from 2013 Dec $55 to $2014 Mar $55.

Entry on September 11 at $---.--
Average Daily Volume = 3.0 million
Listed on August 10, 2013


CLOSED BEARISH PLAYS

Advance Auto Parts - AAP - close: 81.08 change: +1.44

Stop Loss: 80.60
Target(s): 75.10
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/10/13: The stock market's new strength is sparking a bounce in AAP. It seems less likely that AAP will hit our suggested entry point at $78.80 any time soon. Therefore we are removing AAP as an active candidate.

Trade did not open.

09/10/13 removed from the newsletter. Trigger was 78.80

chart:

Entry on September -- at $---.--
Average Daily Volume = 640 thousand
Listed on September 07, 2013