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Weekly Newsletter, Saturday, 03/26/2005

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Table of Contents

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

Leaps Trader Commentary

Parachute Time

The market action this week convinced me even further that rough times are just ahead. The oil weakness has yet to find any follow through but if oil inventories next Wednesday show another build up it could be a sharp crash. We could still see one more bounce in equities with a dip in oil, end of quarter window dressing and some pre-earnings speculation but I don't hold out much hope for April. Time to buckle on the parachute and get ready for some volatility.

We were finally stopped out of the XLE position for a nice profit on last weeks dip and I am dropping ADSK for lack of performance. With potential market weakness ahead I am going to shrink the portfolio and trim us to trading weight for the opportunities ahead.

The watch list performed perfectly this week with prices moving toward our targets but nothing was triggered. I had been hoping to add the refiners VLO, TSO and/or PCO to the list ahead of the driving season but the refinery explosion sent them sharply higher.

RIMM is coming back to earth nicely after the +22 spike but I am not ready to risk another entry into a tech. Until the Nasdaq starts to show some life I am comfortable waiting.

Metals stocks like CLF and CMC are also cooling for a possible entry but Nucor (NUE) continues to trade flat and volatile at its recent highs. There is lots of indecision there.

I considered adding UNH to the list but it is currently at a new high at $92 and any post quarter undressing could see the high fliers targeted for profits.

That brings us back to the status quo. No new plays today and we will continue to watch for a new trend to appear. If we do get a bounce in equities I plan on buying put leaps on those most attractive at the time. We have several candidates on the watch list and a drop in oil should let them rise to our entry points. Just consider a drop in oil as their ski lift to the top of the mountain. Once there it could be a long drop for CAL, JBLU and company.

I do plan on loading up on oil but hopefully not all at once. A quarter is a long time to hold a losing position and I would like to see a bottom form before backing up the truck. Once we enter a couple positions I will lower the entry points on the rest.

It is hard to put a happy face on results in a market that has lost ground for nearly a month. We took some hits but our wins more than made up for it. Have patience and we will be rewarded.


Happy Easter!
 


Changes in Portfolio

New Plays

None


Dropped Plays
XLE
$42.05 Ebay ** Profit Stopped at $43 **
ADSK $28.27 Autodesk ** Nonperforming Drop **

New Watch List Plays Triggered

None


Portfolio Listing & Top Picks


New Plays

Most Recent Plays

None


Play Updates

Existing Plays

FDX - $93.89 Federal Express ** No Stop **

Our dip entry at $96 is looking a little suspect with the continued drop. Fortunately our insurance put at $95 is taking up the slack. If oil dips I suspect the shippers will rebound. If not we will be out before the April expiration.

Federal Express reported stronger than expected earnings on Thursday with net income up +53% and revenue up +21%. They hit a high near $102 in early March but returned to the bottom of their range at $96 after the earnings announcement. This was the entry we were waiting for.

FDX warned that higher oil prices could crimp earnings in the current quarter. Still according to FDX customer demand was so strong that it was driving new investment in aircraft, facilities and technology.

Comparing the FDX earnings with UPS it appears FDX is the clear winner and taking substantial market share away from UPS. On a broader note Yellow Roadway said on Friday that freight tonnage was at an all time high. They raised rates +4.5% and their fuel surcharge to 11%. FDX is the premium shipper in the sector and they are also having no problems with rates. According to UPS the fuel surcharge is turning into a profit center as the carriers learn how to hedge against oil prices. FDX already hedges but they also warned that rapid rises in crude could negate that hedge. You can bet that the fuel surcharges will continue to climb and earnings will remain at the top end of the spectrum.

Morgan Stanley said the FDX guidance to the top of the range was a positive sign and a couple cents of energy pressure was to be expected.


Target $96.00 for an entry on the next pullback.

2006 $100 LEAP Call WFX-AT @ $6.50

Insurance put:
April $95.00 FDX-PS @ $1.45


Entry $96.00 (03/17)

SMH - $32.65 Semiconductor Holders ** No Stop **

The SOX held 410 and the SMH is holding $32. There was one major dip on Tuesday but it was quickly bought. If we are going to see any buying into the end of the quarter I believe chips could see a decent rebound. The problem is what to do after any April bounce occurs but we will deal with that when it happens.

The current level is well above any attractive puts for insurance with a -2.50 move on the SMH a big move from this level. However real support could be found at $31 so I am going to recommend a 60 cent May put just in case. I believe we will know if this trade is going to be a winner very quickly.

2006 $35.00 LEAP Call YRH-AG @ $2.75

Insurance put:
May $30 Put SMH-QF @ 45 cents.


Entry $33 (03/15)

ADSK - Autodesk Inc $28.87 ** Dropped **

I gave up on Autodesk with the support at $28.50 looking more fragile on a daily basis. With potential market weakness ahead it was not worth any further risk with no insurance put.

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, exit 1.90, -2.50
July $32.50 Call ADQ-GZ @ $3.20, exit 1.00, -2.20

No insurance put

Stop loss $27.50

Entry point $31.33 (02/07)

DGX - Quest Diagnostic $99.85 ** Stop loss $99.00 **

DGX just can't seem to break that $101 barrier but did succeed in testing it twice in the last two weeks. There is no put in range to protect our position so I am raising the stop to $99.

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 $66.60 ** Stop $65.50 **

** Set a profit stop at $69.00 **

Adobe is holding its gains but I am starting to get nervous. I raised the stop to $65.50 and I am hoping for end of quarter window dressing. I am setting a profit stop at $69.

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 - expired worthless

Stop loss $65.00

Entry $58.78 (01/09)

SYMC $20.92 Symantec - Veritas ** no stop **

SYMC finally dipped to support at $20 and our insurance put is in the money and still protecting us. It is put up or shut up time for SYMC and we have about two weeks before our put is at risk. If we don't get a decent bounce I may exit soon rather than wait for April expiration. We have very little risk from here but we are down a couple bucks overall. I was hoping a touch of $20 would generate some buying interest and it did. I heard Kramer saying something nice about SYMC and I did see a broker upgrade it from a sell to a hold. Heck, we have to start somewhere.

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 until April.

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 $42.05 ** Stopped $43.00 **

The XLE rose to just over $44 on Tuesday but failed to hit our profit exit at $45 before rolling over and stopping us out at $43. We had a nice run from $35 and nobody should be complaining.

I have initiated a new entry on the XLE at $38 in the watch list.

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, exit $9.25, +5.65
2007 $40 LEAP Call ORJ-AN @ $2.65, exit $7.75, +5.10

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

Entry $35.55 on 12/12


Leaps Trader Watch List

Oil eased off its highs but until we pass April 1st I am not expecting a big drop. Higher inventory levels on Wednesday could pressure prices again but I am expecting many funds to hold through the end of the quarter to prove how smart they were to invest in energy.

I am adding VLO, an independent refiner of sour crude, at $62 but with the refinery explosion I seriously doubt we will see it any time soon. I am adding Premcor (PCO), another refiner at $54.

If we do get a big drop in oil and we start to get some entries triggered I want to avoid buying them all. After TWO energy stocks are triggered I want you to lower all the entry points $2 on everything else. If TWO more are triggered then lower the entry points $2 once again. Stop all entries at six energy positions.
 

Dropped Entries  

None


New Watch List Entries 
COP
Conoco Phillips
   
OXY Occidental Petroleum    
CVX Chevron Texaco    
UCL Unocal    
XOM Exxon Mobil    
XLE Energy SPDR    
VLO Valero Energy    
PCO Premcor    
GM General Motors    
CAL Continental    
JBLU Jet Blue    

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. The targets are above the 100-day averages but with the averages rising it is where I expect them to meet.

COP - $105 Conoco Phillips ** Target $95.00 **

COP dropped -$6 this week. When the real oil price drop appears we could easily get filled on COP at $95.

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 $93 but rising. This has been a good support level in the past.

BUY 2007 $100 LEAP Call OJP-AT
 

OXY - $69.88 Occidental Petroleum ** Target $65.00 **

OXY would be my next choice with the same 100-day average as an entry point. That is currently $61.

BUY 2007 $70 LEAP Call VXY-AN


CVX - $58.29 Chevron Texaco ** Target $55.00 **

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

BUY 2007 $60 LEAP Call VCH-AL


UCL - $59.58 Unocal ** Target $50.00 **

Unocal is a takeover target and any dip would make it more attractive to a buyer. Target the 100-day currently at $47.

BUY 2007 $55 LEAP Call VCL-AK


XOM - $59.00 Exxon Mobil ** Target $55.00 **

XOM has larger reserves and more cash than any other oil company. They have to find something to do with their $28 billion and it will either be returned to the shareholders or used to buy more reserves.

BUY 2007 $60 LEAP Call ODU-AL


XLE - $42.05 Energy SPDR ** Target $38.00 **

The XLE covers all the bases and the options are cheap. We will not get the same move in the XLE as an individual stock but it is much more steady.

BUY 2007 $40 LEAP Call ORJ-AN


PCO - $59.66 Premcor ** Target $54.00 **

Premcor is an independent refiner with higher margins and upside potential from diversification.

BUY 2007 $60 LEAP Call VJE-AL


VLO - $72.27 Valero Energy ** Target $62.00 **

Valero is an independent refiner that has made the switch to the higher profit margins of sour crude.

BUY 2007 $75 LEAP Call VHB-AO


GM - $29.30 General Motors ** Target $32 and $27 **

If oil declines GM could rebound and try to fill the gap at $34. I doubt it will make it. I am putting in an upside target and a breakdown target of $27.

BUY 2007 $30 PUT VGN-MF if $32 target is hit
BUY 2007 $25 PUT VGN-ME if $27 target is hit


CAL - $10.95 Continental Airlines ** Target 9.50 and $12 **

Same story as GM. If oil declines CAL could attempt to rally but the outlook is still bleak.

BUY 2006 $7.50 LEAP Put YFJ-MU if $9.50 target is hit
BUY 2007 $10.00 LEAP Put OVJ-MB if $12.00 target is hit


JBLU - $17.85 Jet Blue ** Target $19.50 and $16.50 **

If oil declines JBLU could attempt to rally but the outlook is still bleak.

BUY 2007 $15.00 LEAP Put VYO-MC if $16.50 target is hit
BUY 2007 $20.00 LEAP Put VYO-MD if $19.50 target is hit


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