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Weekly Newsletter, Sunday, 03/13/2005

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Table of Contents

  1. Commentary
  2. Changes in Portfolio
  3. Portfolio Listing
  4. New Plays
  5. Existing Plays
  6. Watch List

Leaps Trader Commentary

Good News and Bad News

The good news was the rebound on the XLE only +6 cents above out stop at $42. The bad news was the drop by CVX to $57.77 and stopping us out on the Chevron play only two days after we entered. Because of our put we actually made money on the trade but now we are back looking for a new entry point in oil.

I have been looking for a drop in oil prices in March but I did not expect it to come in one day and be so sharp. In reality the drop was caused entirely by the sale of a 25 million-share block of XOM right after the analyst meeting. Evidently a major investor decided to take profits in a hurry after the CEO said there was no fundamental reason for oil prices to be this high. XOM made a new all time high of $64.37 at 1:PM and it dropped to $60.70 by the close as that block of stock was passed.

With the OPEC meeting on Wednesday there is no expectation they will announce any production increases but we are likely to see a sell the news event similar to the Intel update or the MSO drop when Martha got out of jail. Therefore I am hesitant to reenter oil with March winding down.

Interest rate worries ahead of next weeks Fed meeting on March 22nd pressed the homebuilders and all are off their highs. The earnings warning by one builder last week was blamed on weather but all the builders took the hit. Never fear, spring is coming and that is the prime buying season.

With the Nasdaq headed for an apparent retest of 2020, options expiration and the S&P being reweighted I am not going to add any new plays this week. I would like to keep our cash ready for that expected drop in oil when it comes. A little positive thinking there. Also, I would love to buy the builders again should they drop back to the 50-day averages.

The semiconductor holders are nearing our entry point at $33 and I have not weakened on my resolve to take the entry. The SMH has seen support in the $32.50-33.00 range since early February and none of the chip stocks have said anything to change my mind. The 50, 100 and 100 day averages all converge at $32.50 and you can't get better support than that.

The plan this week is to watch and wait. Lots of economics, a weak market, volatile oil ahead of the OPEC meeting and a Fed meeting only seven days ahead. No need to rush into a new position ahead of the "sell in May and go away" crowd. We are rapidly running out of time for the market to make a move higher before the summer doldrums set in and it does not look likely from my view tonight.

Food for thought. Remember that AAPL put a couple readers talked me out of two weeks ago at $44.50? Apple hit $39 this week and still appears weak. In the future we will be entering some Leap puts on likely candidates and those that don't like puts can just pass.


Changes in Portfolio

New Plays
None
  

Dropped Plays
CVX
$58.30
Chevron Texaco ** Stopped at $58.00 **

New Watch List Plays Triggered
None
  

Portfolio Listing & Top Picks

New Plays

Most Recent Plays

New Plays

None today.

Play Updates

Existing Plays

CVX - $58.30 Chevron Texaco ** Stopped $58 **

Chevron Texaco and its various divisions are engaged in petroleum, chemical and coal mining operations. Revenue rose +28% in 2004 to $155 billion with net earnings rising +73% to $13 billion. CVX pays an annual dividend of $1.60 or 2.62%. They currently have about $7 billion cash on hand and could easily finance any acquisition they desired. According to Multex their PE as of Friday's close was 9.99, which was -20% lower than the same time last year. It is lower because earnings are accelerating faster than price.

Chevron is being rumored as a buyer for Unocal but the prospect of a bidding war with China or other major oil companies has pressured the stock for the last week. Regardless of the price paid the oil in the ground is sure to double in value before they can produce it. This is why there is likely to be a bidding war.

Proven reserves are far easier to produce quickly than suspected deposits that require years of drilling experimental wells in sometimes harsh environments. Unocal has extensive holdings in Indonesia and in the Gulf of Mexico. Not exactly prime locations but far easier to develop than the Falklands or the North Sea.

The options are extremely cheap relative to the potential thanks to the worry over the potential Unocal bid. Also, the $62 level is resistance dating back a year. I hesitate to buy resistance but the insurance put is cheap.

Buy 2006 $65 LEAP Call WCH-AM currently $3.40, exit 2.85, -.65
Buy 2007 $65 LEAP Call VCH-AM currently $5.70, exit 4.80, -.90

Insurance Put
Buy April $60 Put CVX-PL currently $1.10, exit $2.70, +1.60

Place a stop on the calls at $58.00
Place a stop on the put at $56.

Entry $61.71 (03/07)


 

EBAY - $38.25 ** No stop **

EBAY broke support at $41 and appears headed for a retest of the $37.50 level it hit in February. No change in outlook for the company and our $40 put is now almost $2 in the money.

Ebay is the only net stock that will consistently continue to improve earnings long term. Their model is self-perpetuating and will continue to grow and expand as they move into other countries. Ebay dropped in January when they said they were going to spend more money on expanding their business. As an investor that is what I would want them to say but the massive profit accumulated in the stock over the last year was too much for traders to risk. There was a substantial drop from which Ebay is just now beginning to recover.

Ebay split 2:1 on the 17th of February and there was very little post split depression at the time.

2006 $45 LEAP Call YRL-AI @ $5.00
2007 $45 LEAP Call OYI-AI @ $8.50

Insurance put:
Buy APRIL $40 Put XBA-PH @ $1.25

Entry $42.24 (02/28)


 

TOL $81.65 Toll Brothers ** No Stop **

OUCH! The interest rate worries and the warning by Ryland knocked -$8 off Toll Brothers. Fortunately we have an $80 put for protection. The current $81 level is only about -$2 below our entry with strong support at $80.

Toll Brothers blew away earnings and raised estimates and the entire sector benefited. Our entry worked out well and we are already profitable with the spring buying season just ahead. I am sure we will see some eventual profit taking but we are in a good position already to weather any storm.

Toll Brothers is unique in that it does not just build homes. This gives them a broader revenue base than many other builders and should insulate them from any softness ahead.

Toll Brothers overview: Source - company press release.

Toll Brothers, Inc. is the nation's leading builder of luxury homes. The Company began business in 1967 and became a public company in 1986. The Company serves move-up, empty-nester, active-adult and second-home home buyers and operates in 21 states.

Toll Brothers builds luxury single-family detached and attached home communities, master planned luxury residential resort-style golf communities and urban low-, mid- and high-rise communities, principally on land it develops and improves. The Company operates its own architectural, engineering, mortgage, title, land development and land sale, golf course development and management, home security, landscape, cable T.V. and broadband Internet delivery subsidiaries. The Company also operates its own lumber distribution, and house component assembly and manufacturing operations.

2006 $85.00 LEAP Call YKW-AQ @ $11.60

Insurance put
March $80.00 Put TOL-OP @ $2.25

Entry $84.10 (02/20)


 

RYL - $65.70 Ryland Group ** No stop **

Ryland spoiled the sector last week with a profit warning they blamed on bad weather and delayed closings on 226 new homes. They dropped back to support at $65 and will likely hold there until the spring thaw. We entered at $65 and have a $60 put so no problem here.

Ryland is one of the countries largest homebuilders and was recently added to the S&P-500. Ryland currently builds in 27 markets across the country and also acts as a mortgage lender. Net income has increased +400% over the last four years and estimates are continuing to increase but RYL trades at a PE of only 10. Ryland sold 16,880 homes in 2004, which was an increase of 1,683 over the prior year.

They recently announced 13 new planned communities around Las Vegas, currently the fastest growing market in the U.S.

2006 $70 LEAP Call YRX-AN @ $7.90

Insurance put
Mar-$60.00 Put RYL-OL @ $0.80

Entry $65.00 (02/11)


 

PCAR - Paccar Inc $75.24 ** Stop loss $73.00 **

PCAR has broken over strong resistance at $75 and appears to be holding. We just need some help from the Nasdaq.

Paccar is the number two maker of heavy-duty trucks with two of their major brands being Peterbilt and Kenworth. Paccar produced a company record of 124,000 trucks in 2004 as healthy freight volume pushed demand. Earnings were announced on Feb-1st and revenue increased +44% and earnings +52%. The company said sales continue to be strong with an expected 15% jump in total truck sales in the U.S. in 2005 and a +5% jump in Europe. Market share in North America increased to +24% on heavy-duty trucks and 9.4% on medium duty vehicles.

Paccar had risen from $52 last January to $81 at the close of 2004. Like all the other winners they were hit hard by profit taking and knocked back to $68.50 on Jan-28th. After two weeks of sideways consolidation they have started to move higher once again. This is a stable company with very strong earnings and growth and should be a target of fund managers once the techs move into overbought territory. $70 appears to be holding as support and hopefully a launching point.

2006 $70.00 LEAP Call YYQ-AN @ $8.80
2006 $75.00 LEAP Call YYQ-AO @ $6.30

Stop loss $73.00

Entry point $71.80 (02/07)


 

ADSK - Autodesk Inc $29.80 ** Stop loss $27.50 **

Autodesk is stuck in an increasingly narrow range with a minor bias to the sell side. Our stop is -1.50 from the current price and I am willing to hold as long as support at $28.50 holds.

Autodesk is the worlds biggest software design maker and the stock has made quite a few investors a lot of money. In 2004 the stock rose from $12 to $39 for a +209% gain. Needless to say the company was hammered once the calendar expired and it dropped to a low of $26 on profit taking. On January 24th, the low for the current market and after a 33% January drop the company was downgraded on valuation my Banc of America. BAC was late to the party but ADSK saw another -12% drop on the news. Smith Barney retaliated that the concerns over share price had already been factored in with the January selling and suggested there was upside potential.

In November ADSK raised guidance for 2006 above analysts estimates and nothing has change from the company. A string of positive press releases continue to paint a picture of business is booming. Earnings are Feb-22nd so we do have event risk but I would like to think the risk is to the upside. The 100-day average has proved to be support in January as is did last August.

Autodesk does not have leaps. Since the normal time in a leap trade is only about two-three months I decided to enter the play with the July $32.50 call instead at $3.20. It is cheaper than a leap and plenty of time to play. The July $30 call is only $4.40 and it is already $1.33 in the money.

I am not going to recommend an insurance put because of the cheap calls. The closest strike at $30 makes the March put $1.60. I can't see paying $1.60 to insure a $3.20 position.

July $30.00 Call ADQ-GF @ $4.40
July $32.50 Call ADQ-GZ @ $3.20

No insurance put

Stop loss $27.50

Entry point $31.33 (02/07)


 

DGX - Quest Diagnostic $99.43 ** Stop loss $96.00 **

Very little pullback from the $101 highs last week. DGX is waiting on the market to firm before breaking to the next level. It is also doing a very nice job of holding its gains despite the weak market.

Quest announced a +21% increase in earnings in January and soared from $89.50 to just over $96 in a week. Instead of consolidating those gains it just keeps moving higher. We entered DGX on Jan-21st as it was moving lower and touched support at the 100-day average at $90. Three days later the rocket ride began from $89. The trick now is to stay far enough away from the price to keep from getting stopped but not give back all of our gains.

Quest Diagnostics Incorporated is the nation's leading provider of diagnostic testing, information and services, providing insights that enable healthcare professionals to make decisions that improve health. The company offers the broadest access to diagnostic testing services through its national network of laboratories and patient service centers, and provides interpretive consultation through its extensive medical and scientific staff.

Quest Diagnostics is also the leading provider of esoteric testing, including gene-based medical testing, and provides advanced information technology solutions to improve patient care. (Source DGX)

2006 $95 LEAP Call YFK-AS @ $6.40

Insurance put
Feb-$85 Put DGX-NQ @ 50 cents expired worthless.

Entry $91.00 (01/21)


 

ADBE - Adobe Systems $64.50 ** Stop $60.00 **

Adobe finally found a bid and is back near its recent highs. We need a break over $65 to get the shorts moving again. A positive Nasdaq would really help.

Adobe is the king of the document and image business and continues to announce new products. The company announced earnings in December that rose +33% and beat estimates. Income for the year rose +69% on a +29% increase in revenue. Adobe affirmed guidance for 2005 and the stock has been beating the Nasdaq in percentage gains. In 2004 the stock rose +60%. Since they have already announced earnings we have very little event risk over the next month.

I recommended the February $55 put as insurance at 80 cents. That gave us six weeks for the Q1 earnings to cycle and for ADBE to pick a direction. If we are not profitable by Feb-18th expiration we will close and take our lumps.

Jan-06 $60 LEAP Call WAE-AL @ $7.50

Put Insurance
Feb-05 $55 Put AEQ-NK @ 80 cents - expired worthless

Added new insurance on Feb-22nd
Mar-05 $60 Put AEQ-OL @ 75 cents.

Stop loss $60.00

Entry $58.78 (01/09)


 

SYMC $21.12 Symantec - Veritas ** no stop **

SYMC held support at $21 all week with stronger support at $20. I am still not worried despite the confirmed downtrend because of our in the money April $22.50 put. Put this one on the back burner and forget it.

We have a good position here with strong support at $20 and an April $22.50 insurance put. Very little risk and plenty of potential.

I believe that the SYMC/VRTS merger is a match made in heaven and analysts will come to that view as more plans are announced. The companies have no overlapping products but all their products are perfect fits for the others. With one company having anti-virus, data security, backup, recovery and storage management it puts the other stand-alone companies in a very difficult position. EMC and QLGC both fell in the storage sector and Mcafee was crushed in the anti-virus sector.

There is no stop on this position. With the 2007 LEAP Call any minor dips will not result in a material drop in the leap. The April $22.50 insurance put will protect us from any potential disaster. For me this is a buy and forget play.

2007 $25 LEAP Call OBL-AE @ $6.30

Insurance Put
APR-2005 $22.50 PUT SYQ-PX @ $1.15

Entry $25.37 (12/19)


 

XLE - S&P Energy SPDR $42.80 ** Stop loss $42.00 **

** Profit target $45 on any bounce **

VERY CLOSE! The XLE dipped to 42.06 before rebounding and came very close to stopping us out. With OPEC meeting on Wednesday I am hopping for another rebound before the end of March weakness appears. Target $45 for an exit on any bounce.

I instituted a stop because the March insurance put at $34 is so far away from the current price. We are up +$7 on the 2006 LEAP and I don't want to give it back. The $34 put is now worthless and I have no hopes of it ever being close to the money again. I consider it insurance well spent.

The XLE SPDR is composed of 27 energy stocks and represents about 8% of the SPX. This is the 8% that helped push the SPX to the current levels with the rise in oil over the last year. In fact the XLE has far exceeded the SPX in performance over the past year.

2006 $35 LEAP Call WHA-AI @ $3.60
2007 $40 LEAP Call ORJ-AN @ $2.65

Drop insurance: March $34 Put XLE-OH @ $1.00

Entry $35.55 on 12/12


 


 


Leaps Trader Watch List

Dropped Entries
None
   

New Watch List Entries 
COP
Conoco Phillips
  
OXY
Occidental Petroleum
  
CVX Chevron Texaco  
WMBWilliams Companies  
FDXFederal Express   
SMH Semiconductor Holders  
JNPRJuniper  

Current Watch List

The oil stocks are listed for reference because the actual prices are so far away from where I would like to get an entry. I am hoping for a sharp correction when it comes and the spring demand slumps.

COP - $106 Conoco Phillips

Conoco is my first choice for an oil stock once the current trend eases. I would like to get an entry around the 100-day average now at $91 but rising. This has been a good support level in the past.

OXY - $71.29 Occidental Petroleum

OXY would be my next choice with the same 100-day average as an entry point. That is currently $59.

CVX - $58.30 Chevron Texaco

Looking for a new entry around the 100-day average currently at $55.

WMB - $17.90 Williams Companies

Williams would be my cheap leap candidate due to its low price. Target a drop back to $16 and the 100-day average.

---

FDX - $99.66 Federal Express

Target $96.00 for an entry on the next pullback.

2006 $100 LEAP Call WFX-AT target $6.50

---

JNPR - $22.37 Juniper

Watch Juniper for an entry at $20 but no strikes yet. We want to see a base built or at least some evidence it is not going lower.

---

SMH - $33.52 Semiconductor Holders

Target $33.00 for entry on a dip
Target $35.50 as a breakout entry

2006 $35.00 LEAP Call YRH-AG currently $3.70
2006 $40.00 LEAP Call YRH-AH currently $1.70

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