Option Investor

Daily Newsletter, Thursday, 05/15/2008

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Table of Contents

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

Market Wrap

Drifting Higher

The day started with the futures up ahead of the Initial Claims, NY Empire State Index and Net Foreign Purchases economic reports. The Initial Claims came in pretty much in line at 371k versus the 370k expected. Todays number was a little higher than the 365k prior number. The big surprise was the NY Empire State Manufacturing Index for May came in at -3.2 versus the expected flat reading. The S&P futures declined to up 2 points above fair value. At the open the S&P and Nasdaq 100 quickly declined and bounced to trade near the flat line for about the first hour of trading. Actually the trading in stocks was fairly subdued with little to motivate investors to buy. At any point the market looks as though it could go either direction. However, once the equity markets got out of this initial congestion the advance was fairly steady up until the last hours surge.

The amount of volatility experienced today is normal around option expiration; especially on the Thursday prior to expiration. One reason is that cash settled indices like the SPX, NDX and RUT settle the price at tomorrows open price. So you have a bunch of institutions trying to adjust their positions and reposition for June expiration which causes the markets to act irrationally. Then theres the push at the close that is probably a play to get long prior to tomorrow mornings economic reports.

One of my favorite retail stocks, Tiffanys (TIF), helped the retail sector today by reporting their 1st quarter guidance and also increasing their quarterly dividend 13% to $0.17. The company is supposed to report earnings on May 30th. I find it strange that they couldnt wait another two weeks to announce this news with their earnings. I guess if I were a CFO of a company I would separate the news to try to get a double pump in price. It really makes sense to report good news in advancing markets.

Intel Corp. (INTC) got a boost midday after a Freidman Billings analyst recommended buying semiconductor stocks. Banc of America analyst, Sumit Dhanda, decided to join the party and reiterate that he too likes Intel because Intels new chip for low end and laptop computers could be the largest growth driver since the Centrino chip.


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Crude Oil seemed to be the initial reason for the broader markets to begin to advance. Oil dropping can be a double edged sword. While lower costs of energy can help the consumer related issues, the energy heavy weighted indexes can be dragged lower from the decline in oil related stocks. But today was a difficult day for short Crude traders that might have left the NYMEX early at 1PM to party only to find the volatile contract closing up $0.255. TransOcean Inc (RIG) closed up $9.71 on reports that US deep drilling is the place to invest. Perhaps that why Ultra Petroleum (UPL), Schlumberger Ltd (SLB) and Apache (APA) were either down or only slightly up while RIG was up over 6%.

Oh yeah, if you have been in a cave until now Billionaire activist investor Carl Icahn is making a play for Yahoo. He even helped the company by giving them 10 biographies of potential board nominees. YHOO closed up $0.61 at $27.75. Even though Microsoft is out of the way it appears YHOO is still in play. Last week the market thought Google might make a bid. I guess we have to see. I have been writing puts for the last few months in the Option Writer newsletter. The premium is especially high due to the uncertainty of a deal being completed and for what price.

After the Bell

In the gaming sector, Multimedia Games (MGAM) reports installed base of player terminals and product mix at April 30, 2008. MGAM reports its total player terminal installed base and product mix. The co had 2,006 Reel Time Bingo, 563 Legacy & Other, 2,569 Total Class II & Other; 5,312 Class III units, 4,338 Mexico Electronic Bingo Units; 2,369 Charity units for a total of 14,688 units.
Kohls beats EPS estimates by $0.05 and reports revenues in line. The company provided 2nd quarter and FY09 guidance in line. Reports Q1 (Apr) earnings of $0.49 per share, $0.05 better than the First Call consensus of $0.44; revenues rose 1.5% year/year to $3.62 bln vs. the $3.63 bln consensus. KSS sees comparable store sales of (3%)-(5%) for FY09. Co issues in-line guidance for Q2, sees EPS of 0.70-0.74 vs. $0.72 consensus. Co issues in-line guidance for FY09, sees EPS of 2.95-3.15 vs. $3.11 consensus. I think this isnt very good news. The fact is that the revenues were lower than the consensus which shows that the price conscious consumer is slowing down their spending.

Also in the consumer sector Nordstroms (JWN) beat the Q1 (Apr) earnings of $0.54 per share, $0.05 better than the First Call consensus of $0.49; revenues fell 3.6% year/year to $1.88 bln vs the $1.9 bln consensus. Same-store sales decreased 6.5% for the quarter, below the company's planned 3 to 5% same-store sales decline. Co issues in-line guidance for Q2, sees EPS of $0.65-0.70 vs. $0.69 consensus. Fo Q2 co sees same store sales of (5%-(7%). Co issues in-line guidance for FY09, sees EPS of $2.65-2.80, previous $2.75-2.90, vs. $2.76 consensus. For FY09 co sees same store sales of (4%)-(6%). I had thought the high line consumer that normally shops at stores like Nordstroms and Saks would be somewhat insulated from an economic slow down. I might be wrong in this assessment. It should be very interesting to see how this news is played out in tomorrows trading.

The Markets

SPX Chart

The $SPX continued to advance today into some serious resistance from the 200 day SMA at 1428 and from price resistance at 1430 from January 2008 intraday highs. There is a strong uptrend that was just successfully tested on last Friday. A break above this resistance would be very bullish. Especially since sentiment indicators like the $VIX continue to decline further to levels not seen since October 10th, 2007 (16.08). The $SPX still has momentum from the RSI and Slow Stochastics. But those can change very quickly if this is just a phantom rally into resistance.

VIX Chart

The above chart is of the CBOE Volatility Index (VIX) and shows back to October. The black line drawn shows the October low mentioned above. Todays close, 16.30, is very close to that level. My take on this chart is that we should hold the low at +/- 16.00 level and move back up from it. This may be done tomorrow as option prices are being adjusted from the roll forward of the option sellers. Option writers generally cause option prices to decline from supply shrinking. The market may open strong and run into the resistance about 8 points higher and therefore force the VIX lower to its support. Once the VIX decidedly advances back up you could take a short position on the SPX or SPY.

NDX Chart

The Nasdaq 100 (NDX) broke above the 200 day SMA two weeks ago and successfully tested the old resistance new support level. It had a strange day yesterday with a good intraday advance and a weak close. Today shrugged the close and moved up over 34 points to 2031. There is a gap that at 2040 that is acting like a black whole sucking the index up into it. Once that gap is filled the market could decline and take an exhaustion break. Both RSI and Stochastics are overbought.

Expiration Strategy

Even though I am new to this I thought it would be fun to run through a fun strategy. It is the SPX expiration strategy. The reason there is a play is that the options actually expire tomorrow morning. Once settlement is calculated, usually around 12:00 PM EST the profit and loss and margin requirements are adjusted. This all probably seems confusing and you may wonder why someone would trade this strategy. The reason is that it is a way to make some quick bucks over night if you are on top of your execution platform.

Here are a few things to note. The settlement price isnt the actual Open print of the index. It is the index weighted market open price of all of the indexs components. Here is the trade setup for tomorrow. Toward the close you could have sold the $SPX May 1430/1435 Call Spread for $0.80 per contract and also the May 1415/1410 Put Spread for $0.50 per contract. This trade is called an Iron Condor.

It is essentially two vertical credit spreads. The total credit is $1.30 per contract or $130 credit per contract. In the above example, I am selling 20 contracts which produced $2,600 initial premium. That premium can help pay for the $10,000 margin requirement to do this trade (20 contracts multiplied by the 5 point spread multiplied again by the number of shares per contract 100). If this trade works, it will produce a 26% return on the margin. Thats pretty good money for having to hold over night. I start to give back premium if the settlement price is above 1430 or below 1415. But I have 7 points in either direction. 7 points used to be a lot last year. The trades biggest risk is foreign market turmoil and the Housing numbers due at 8:30 am EST. I will try to get tomorrows writer to post the conclusion of this trade at the end of Fridays Market Wrap. By the way, there is no way to trade this until next month. However, SPX and OEX options have weeklies. So if you all like this type of trade, we can try it next week.

Robert J. Ogilvie

New Plays

Most Recent Plays

Click here to email James
New Plays
Long Plays
Short Plays
None None

Play Editor's Note: Two stocks we are watching as potential bullish candidates. IHOP Corp. (IHP) has rallied to resistance near $52.50 and its 200-dma. A breakout above its 200-dma could be a new entry point to buy the stock. M G M Mirage (MGM) is trying to breakout from its recent trading range and is near its multi-month trendline of lower highs (resistance). A move over $54.00 might be an entry point to buy MGM. I'd target $60.

New Long Plays

None today.

New Short Plays

None today.

Play Updates

Updates On Latest Picks

Click here to email James

Long Play Updates

Celanese Corp. - CE - close: 47.17 change: +0.03 stop: 44.45

Traders bought the dip in CE near its rising 10-dma. While the intraday bounce looks like a potential entry point a dip near $46.00 would be a more attractive entry. Meanwhile for the second time in two days CE announced it was raising prices on some of its products. Our target is the $49.90-50.00 zone.

Picked on May 11 at $46.35
Change since picked: + 0.81
Earnings Date 04/21/08 (confirmed)
Average Daily Volume: 1.3 million


IAC/Interactive Corp. - IACI - cls: 23.71 chg: -0.02 stop: 21.49

If you see the glass as being half full then the good news today is that IACI did not see any profit taking after a week's worth of gains. The stock continues to look short-term overbought. We're altering our strategy. We're moving the target down from $24.50 to $24.00 and if IACI doesn't hit $24.00 tomorrow we're going to exit at Friday's closing bell anyway. We'd rather lock in a gain now and look for a new entry down the road than see IACI give back all of its gains.

Picked on May 12 at $21.90 *triggered
Change since picked: + 1.81
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume: 3.0 million


iShares DJ US Oil & Gas - IEO - cls: 80.55 chg: +0.58 stop: 77.99

There was some volatility in oil around option expiration and some "loophole" that the U.S. government supposedly closed in energy speculation today. Overall oil and the sector bounced back this afternoon. Today's move in IEO looks like a new entry point. We had suggested readers buy a bounce from $79.00 and that's what IEO delivered today. Our short-term target is $85.00. Our secondary, more aggressive target is $87.50. This should be considered a high-risk play.

Picked on May 13 at $81.06
Change since picked: - 0.51
Earnings Date 00/00/00
Average Daily Volume: 125 thousand


iShares DJ Oil Serv. - IEZ - cls: 74.11 chg: +1.62 stop: 69.90

Traders didn't hesitate to buy the dip in IEZ near its rising 10-dma. We suggested buying a bounce from $72.00 and that's what IEZ gave us. We'd still consider new positions now. Our target is the $79.50-80.00 range. This should be considered a high-risk play.

Picked on May 13 at $73.74
Change since picked: + 0.37
Earnings Date 00/00/00
Average Daily Volume: 67.5 thousand


Agribusiness ETF - MOO - close: 61.90 chg: +0.15 stop: 59.49

The fertilizer and ag stocks look poised to rally so MOO should be poised to move soon. We would still buy it right here. We have two targets. Our first target is the $65.50 level near its old highs. Our second target is the $68.00-70.00 range.

Picked on May 08 at $61.79
Change since picked: + 0.11
Earnings Date 00/00/00
Average Daily Volume: 1.2 million


Oshkosh Corp. - OSK - close: 39.67 change: +0.21 stop: 38.75

Remain patient on OSK. We didn't really get a bounce near $39.00 nor did the stock rally past $40.00. Wait for one or the other as an entry point. More conservative traders might want to wait for a move past the 100-dma near $40.61. Our eight-week target is the $44.50-45.00 range. We would expect some resistance near $42.00. The Point & Figure chart is bullish with a $57 target.

Picked on May 13 at $39.90
Change since picked: - 0.23
Earnings Date 05/01/08 (confirmed)
Average Daily Volume: 975 thousand


Perdigao - PDA - close: 59.55 change: +2.36 stop: 54.35

PDA displayed relative strength. The stock bounced from the $58.00 level and closed with a 4.1% gain. Our only complaint would be the lack of volume on this move, which is a warning sign. Our target is the $64.50-65.00 range. The P&F chart is bullish with a $69 target.

Picked on May 13 at $57.74
Change since picked: + 1.81
Earnings Date 04/24/08 (confirmed)
Average Daily Volume: 163 thousand


Terra Ind. - TRA - close: 46.15 change: +2.46 stop: 41.99 *new*

The fertilizer stocks look poised to rally again and TRA is leading the way. Shares are up 5.6% today. The stock could hit our secondary target at $47.00 tomorrow. We're raising our stop loss to $41.99.

Picked on May 04 at $40.03 /1st target hit 44.00
Change since picked: + 6.12
Earnings Date 04/24/08 (confirmed)
Average Daily Volume: 4.6 million

Short Play Updates


Closed Long Plays

Citi Trends - CTRN - close: 20.85 change: -0.39 stop: 19.75

There were some nervous investors in CTRN today. The stock dipped to $19.75 and bounced. Our stop loss was $19.75 so the play is closed. It will be interesting to see if the retailers can rally past their earnings reports. CTRN is due to report next week.

Picked on May 08 at $20.05 * stopped out 19.75
Change since picked: + 0.80
Earnings Date 05/21/08 (confirmed)
Average Daily Volume: 327 thousand


SanDisk - SNDK - close: 33.10 change: +1.68 stop: 28.24

That's good enough for us. We were aiming for the $34.00 level but SNDK has soared this past week a lot faster than we expected. The stock was up 5.3% just today after being upgraded this morning. The exponential 200-dma near $33.60 is likely resistance. We're suggesting readers exit immediately and lock in a profit. You could choose to just let it run but raise your stop loss and monitor it closely. We'll definitely keep an eye on SNDK for another opportunity.

Picked on May 11 at $29.18
Change since picked: + 3.92
Earnings Date 07/17/08 (unconfirmed)
Average Daily Volume: 9.9 million


SolarFun Power - SOLF - close: 18.47 change: +1.06 stop: 14.85

SOLF continues to shine. The stock added another 6.2% today. The stock is up more than 24% from our picked price. We did have a second, more aggressive target at $19.00 and SOLF hit $18.79 intraday. That's good enough for now. We're suggesting readers exit immediately and lock in a gain. We'll definitely keep an eye on SOLF for another opportunity down the road. More aggressive traders could let it run and just raise your stop loss significantly. the $20.00 level would be round-number resistance.

Picked on May 11 at $14.85 /1st target exceeded
Change since picked: + 3.62
Earnings Date 05/21/08 (confirmed)
Average Daily Volume: 4.5 million

Closed Short Plays


Today's Newsletter Notes: Market Wrap by Robert Ogilvie and all other plays and content by the Option Investor staff.


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