Option Investor

Weekly Newsletter, Sunday, 02/24/2008

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Table of Contents

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

Leaps Trader Commentary

New Highs, New Records

Short covering in the expiring March futures pushed crude prices to closes of more than $100 on back-to-back days. The new high close was $100.74 and the new all time high was $101.32. Adjusted for inflation the 1979 high would be just over $103 today. The news continued to cause shorts to run for cover as Turkey invaded Iraq on the ground with 10,000 troops. There are fears the conflict could drag on for months and oil output from the region slowed or stopped altogether.

The cold weather in the U.S. was shutting down airports from the Midwest to the northeast and causing heating demands to rise to 30-year levels. Back to back weeks of strong draws of natural gas from storage and the expiration of options on gas futures next week combined to push natural gas prices to $9.15 and a nine month high. Prices were already being pressured higher from the $500 million bearish spread that was closed the prior week by the Saracen Energy fund when they got in trouble.

It was an eventful week in the energy sector with Transocean blowing out earnings with a 70% increase in profits. RIG posted profits of $4.17 including items compared to estimates of $2.54. RIG also guided estimates higher on rising day rates and a shortage of rigs. The company said capex spending would rise to $2.5 billion from $1.4 billion partly due to spending on new rigs. Average day rates for the Transocean fleet rose to $224,000 per day with a new contract announced this week for $535,000 per day for one deepwater rig. That has got to hurt to write a check for a half million a day to drill a well. It makes you appreciate how much money the production companies make from those deep wells. RIG rose +$10 on the news.

Boone Pickens was interviewed on CNBC on Thursday morning and the energy bull said he was shorting both oil and natural gas as we head into the second quarter. Pickens said slowing demand and rising inventories would knock $10-$15 off oil prices in the second quarter. However, he projected $107-$120 in the second half of the year. He was very firm in his belief that we would never see 88 mbpd as projected by the IEA for Q4 of 2008.

Pickens was adamant that the U.S. had to do something to stop the half trillion dollar outflow of cash from the U.S. to OPEC countries each year for oil. He said this massive outflow of U.S. wealth was crippling the U.S. consumer and enriching the coffers of people that hate us. He favors moving to natural gas for transportation and a gasoline tax to force drivers to cut back on gasoline expenditures. The tax money could go to fund new technology for replacement fuels. I personally believe we are very close to a monster gas tax whether applied by the government or peak oil. Gasoline will be double today's prices in the next 3-4 years so just plan on it now.

The OPEC meeting on March 5th is not expected to produce any changes in production quotas. OPEC increased production just before the Asian financial crisis and saw prices fall $10 a barrel over the weeks that followed. With the U.S. teetering on the brink of a recession they are not going to add to production just because oil prices are near $100 and politically incorrect. They don't want prices to go back to $85 or even $90. It is also politically incorrect for them to cut production with prices at $100 even though global inventories are rising by about 10 million barrels per week. They will simply meet and say the world is fully supplied and speculators are causing the price increases. In reality that is true. With the dollar falling crude provides a hedge much like owning gold. As the dollar falls hard commodities rise. It appears everything is working in OPEC's favor and they will not want to rock the boat.

Hugo Chavez said he was not serious about cutting off oil exports to the U.S. or sales to Exxon. Did somebody actually believe him when he made those statements? I seriously doubt it but he had to save face within Venezuela.

If you are going to travel now is the time to do it. Reports out last week claim China's growth is going to cause a rise in jet fuel consumption by 11-13% per year through 2020. That will be a good trick since the world will be hard pressed to produce a 12% increase in fuel each year after 2009. Either way the cost of air travel is going to continue to rise by leaps and bounds until only the very rich can afford it.

I have a friend that works at a major online travel agency in the top 10% worldwide. He said bookings were down 66% in January compared to January 2007. This is due to multiple reasons but part of it is the increase in travel costs. They are afraid the price of oil will continue to limit travel in the coming years. I was actually shocked that anyone in what I call the general public was even aware that we were moving into a period where air travel would be phased out for the working class. I am glad to see that there are independent thinkers and observers still operating in the business world. By far the vast majority of people I come in contact with look at me like I am explaining an alien abduction rather than the reasons they will be paying $6 for gasoline soon.

AAA reported that diesel rose to a record of $3.503 per gallon in the U.S. last week and it is not even summer yet. Gasoline futures hit $2.62 on Tuesday despite gasoline inventories being at 14-year highs of 230.3 million barrels. Crude inventories rose by +4.2 million barrels stretching to six weeks the consecutive inventory builds. Supplies have increased by 22.6 million barrels over that six-week period. Capacity utilization fell to 83.5% as refiners took capacity offline rather than produce excess gasoline and depress prices. Gasoline inventories rose for the 15th consecutive week.

All those statistics sound bearish for crude prices but that is not the whole story. Crude inventories are still 4.9% below last year's levels. Distillates are 6.8% below the same period in 2007. Only gasoline inventories are above last year's levels by 4.0% due to slowing demand due to high prices and is nearing a 2-year low. Despite the drops in crude and distillates the rising excess in gasoline should be a prime reason for prices to fall.

For a dismal week in the markets we had a pretty good week in the LEAPs portfolio. Only one stock lost ground and many of the rest were big movers. We paid the price in the market drop but being invested in the right stocks when the gains return makes it all worthwhile.

Jim Brown

April Crude Futures Chart - Daily

March Natural Gas Futures Chart - Daily

March Gasoline Futures Chart - RBOB Daily


Changes in Portfolio

New Energy Plays
USO $78.60 Short *** Stop Loss $80.50 ***

New Non-Energy Plays


Dropped Plays


New Watch List Plays Triggered
OII $62.18 Oceaneering Intl

Portfolio Listing & Top Picks

Top Ten List

If you are looking to add another position this is my top ten list for this week. The target prices listed would be the ideal entry points for these stocks today. There is no assurance any stock will ever return to these support levels and you will need to make your own decision about an entry point above these levels. I believe these stocks have the best potential this week. The list will change from week to week based on technicals, fundamentals, crude prices and market action. The list is not sorted in any particular order.


The Top Ten list expanded to nine from seven but I just could not stretch it to ten. Earnings and resistance levels kept me from adding that last one. The targets on a couple are OVER the current price. I want to see resistance broken before adding to positions.

The yellow means they are very close to those entry levels and green means they are at the target level.

New Plays

Most Recent Plays

USO $78.60 - Oil Fund - Short *** Stop Loss $80.50 ***

I sent out an alert on Tuesday afternoon to change the strike and take a hard entry with the price of the USO at $78.66 the day before futures expiration.

Pickens comments on Thursday caused crude to ease slightly but prices firmed ahead of the weekend. Assuming nothing happens in the energy sector over the weekend we might see a decline begin next week.

I am putting a stop on this play just in case something happens to push prices higher.

I believe the spike in oil prices is going to fail at current resistance and decline towards the end of March. I am using the USO as a direct reaction to the price of oil rather than the XLE or equivalent index, which contains oil service stocks and could soften the drop.

Entered before the close on 2/19 with USO @ $78.66

Position: April $77 PUT UNA-PY @ $3.50

Target $70.00 for an exit.

New Watch List Plays Triggered

OII $62.18 - Oceaneering Intl

OOPS! I messed up on this one. I thought OII already had reported earnings or I would not have initiated the play. The guidance caused a -$5 drop to $60 but OII had a nice day on Friday. I actually thought the guidance was not that bad only a few cents light. Given all the maintenance problems they were facing for the quarter I was surprised they guided so high. I think we are going to be all right but I will watch it closely.

Company Info:

Oceaneering International, Inc. is a global oilfield provider of engineered services and products primarily to the offshore oil and gas industry, with a focus on deepwater applications. Through the use of its applied technology capabilities, the Company also serves the defense and aerospace industries. The services and products the Company provides to the oil and gas industry include remotely operated vehicles, mobile offshore production systems, built-to-order specialty hardware, engineering and project management, subsea intervention services, nondestructive testing and inspection, and manned diving. Oceaneering International, Incs business segments are contained within two businesses: services and products provided to the oil and gas industry (Oil and Gas) and all other services and products (Advanced Technologies). In July 2007, the Company announced the acquisition of Ifokus Engineering AS, a Norwegian designer and manufacturer of specialty sub-sea products.

Breakout trigger: $65.50 (2/19)

Position: Short July $75 PUT OII-SO @ $12.80


Play Updates

Existing Plays

UNT $54.21 +1.85 - Unit Corp

Still pressing upside resistance. One good pop to get us past $55 and we should be good to go. Earnings on Tuesday.

Breakout trigger: $52.00 hit 02/04

Position: Sept $55 Call UNT-IK @ $3.80


PBR $118.55 +4.10 Petrobras *** Stop Loss $104 ***

No material news and Petrobras hit a new historic high on Thursday. The trend is up but resistance at $120 is holding.

Breakout trigger: $101.50, hit 1/24

Position: 2009 $110 LEAP Call XVQ-AB @ $12.70


VLO $59.93 +1.56 Valero *** Stop Loss $54 ***

It was a quiet week in the refinery sector and VLO is still stuck under resistance at $61. Once oil begins to decline the refiners should rise on expectations of wider margins.

Breakdown trigger: $50.00, hit 1/23

Position: 2009 $60 LEAP Call VHB-AL @ $5.00


FLS $102.97 +6.80 Flowserv *** Stop loss $90 ***

Nice move despite news that Flowserve will pay $10.5 million for a penalty for kickbacks in the U.N. Oil for Food Program. No complaints here.

Breakdown trigger: $77.50, hit 1/22

Position: July $90 Call FLS-GR @ $6.00


FLR $131.84 +11.06 - Fluor Corp *** Stop $105 ***

FLR is rocking now! Up +$20 over just the last two weeks and Friday's move broke over resistance at $130. No complaints. Earnings are Feb-28th. Let's hope they don't screw this up. Boone Pickens added to his FLR holdings in Q4.

Earnings schedule: Feb 28th

Breakdown trigger: $145 Hit 12/13

Position: 2009 $160 LEAP Call XOB-AL @ $22.30

Remediation plan: 1/20
LONG: April $110 Put FLR-PB @ $9.20
SHORT: Jan $170 LEAP Put XOB-MN @ $58.40


RIG $137.96 +8.89 - Transocean Inc

RIG reported earnings that rose +70% and quickly sprinted for a $10 gain. That took RIG to solid resistance at $140 but continued strength in the energy sector should allow that to be broken over the next couple of weeks. Should oil decline I could see RIG return to $130 to wait. Goldman raised RIG to a BUY after their earnings.

Earnings: Feb 20th, +70%

Breakdown trigger: Hit 12/4 @ $130

Position: 2009 $140 LEAP Call VOI-AH @ $15.80


CLB $125.70 +7.15 Core Labs

Core Labs is kicking butt after earnings the prior week. Nearing resistance at $125-$130 but garnering upgrades on almost a daily basis.

Earnings: $1.36, +39%.

Breakdown Trigger: $130 hit 11/12

Position: 2009 $140 LEAP Call ZYM-AH @ $21.30

Remediation addition:
Position: June $130 Call CLB-FF @ $6.10


FWLT $76.24 +4.31 - Foster Wheeler

Earning next Tuesday. Let's hope they pull a RIG and not an OII. No specific news. It looks like FWLT has finally eased over resistance at $72 but it has not yet broken the bounds of gravity. We could pickup speed over $77.

Earnings schedule: Feb-26th

2:1 split on Jan-22nd.

Breakdown trigger: $67.50 hit 11/06 (post split)

Position: (2) 2009 $75 LEAP Call ZHF-AO @ $14.55


NOV $64.85 +2.81 - National Oilwell Varco *** Stop $52 ***

Moving in the right direction but just moving slow. No specific news. Resistance at $66.

Earnings: Feb 6th +57%

Breakout Trigger: $80, hit 10/11/07

Position: 2008 May $90 Call NON-ER @ $7.20


HP $43.73 +1.78 Helmerich & Payne *** Stop Loss $33 ***

Another new high on no news. I think I will just put this one on "ignore" and check back in a month or so. (grin)

Earnings: Jan-31st $1.02

Position: Jan 2009 $35 LEAP Call ZQA-AG @ $4.50

Insurance put:
Position: Nov $30 HP-WF. @ .50, Stop $28.50

Non-Energy Positions

ATI $83.64 +1.18 - Allegheny Technology

After last week's big move I am not complaining about ATI today. Resistance at $85 and no news. It was a crappy market and we still saw a gain.

Entry: ATI 76.60 02/10

Position: 2009 $90 LEAP Call OYG-AR @ $8.90


TEX $67.64 +7.84 Terex Corp

Dead stop on resistance at $67.50 after a $5 spike on earnings. Profits soared +72% on a 27% jump in revenue. Go TEX!

Earnings: Feb 21st, +72%, +27% in revenue

Position: Jan 2009 $70 LEAP Call VXQ-AN @ $8.60


SGR $64.53 +4.71 Shaw Group

Shaw is picking up speed on no news. We are approaching resistance at $67.50 but the trend is strong.

Breakdown trigger: $55 Hit Jan-16th

Position: 2009 $60 LEAP Call OWA-AL @ 11.50


MOS $108.96 +5.59 - Mosaic Co

MOS gave back $3 on profit taking on Friday and still closed up +$5.50 for the week. POT made bullish comments all week about the business and guided analysts higher for years to come.

Breakdown trigger: $85 Hit Jan-10th

Position: 2010 $100 LEAP Call LXW-AT @ $24.20

Covered LEAP Calls

AAPL $119.46 -5.17 Apple Inc *** Covered LEAP Call ***

It was an ugly week with a decline every day. The low on Friday was a retest of the Feb-7th low but unless the Nasdaq bigcaps suddenly catch fire this is going to be a long-term hold. No change.

When Apple starts to post a new positive trend we will do a put spread to recover some more money. First we wait for the trend.

Long: AAPL @ open of $177.52 (Jan-14th open)
Short: 2009 $150 LEAP Call VAA-AW @ $20.80
Breakeven: AAPL @ $136.12

Position changes:
Closed $200 LEAP Short @ $9.40 ($30.00 - 9.40 = gain +20.60)
Replaced with $150 LEAP short @ $20.80
AAPL cost basis $177.52 - $41.40 (20.60 + 20.80) = 136.12
Breakeven: AAPL @ $136.12


RIMM $107.95 +12.76 Research in Motion - Stop Loss $80

Finally a decent move by RIMM. I said last week I would be a buyer of short term calls over $98 but I did not expect a $10 move all in one day. RIMM upgraded its guidance well above analyst expectations.

See the Jan-13th LEAPs newsletter for the description of the change in the options.

Alert entry 11/12 @ $102.60

Covered LEAP Call:

LONG RIMM @ $102.60 (cost $102.60 -9.10 $150 LEAP = 93.50)
SHORT 2009 $110 LEAP Call VHO-AB @ $18.30 on 1/14/08

Closed: 1/14
SHORT 2009 $150 LEAP Call XTB-AJ @ $18.50, close $9.40 +9.10

Leaps Trader Watch List

Dropped Entries
CAM Cameron Struggling compared to the others in the sector

New Watch List Entries

None - expecting oil to decline

Current Watch List

JEC - Jacobs Engineering

JEC stopped us out on a dip to $70 and appears to have decent resistance at $80. I am going to reenter the position on a breakout over that $80 resistance.

Company Info:

Jacobs Engineering Group Inc. (Jacobs) is a professional services firm in the United States. The Companys business focuses on providing a range of technical, professional and construction services to industrial, commercial, and governmental clients around the world. Jacobs provides four categories of services: Project Services (which include engineering, design, architectural, and similar services); Process, Scientific and Systems Consulting services (which includes services performed in connection with a variety of scientific testing, analysis and consulting activities); Construction services (which encompasses traditional field construction services, as well as modular construction activities, and includes direct-hire construction and construction management services), and Operations and Maintenance services (which includes services performed in connection with operating large, complex facilities on behalf of clients, as well as services involving process plant maintenance).

Breakout trigger: $82.50

Buy: 2009 $90 LEAP Call VJE-AR


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