Option Investor
Newsletter

Daily Newsletter, Monday, 12/13/2010

Table of Contents

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

Market Wrap

What Could Have Been

by Todd Shriber

Click here to email Todd Shriber
Everything was going along quite well for the S&P 500 and the Dow Jones Industrial Average until a late day sell-off struck, sending the indexes careening into the close. Headlines that the Senate was preparing to vote on the Obama/Republican tax-cut agreements were probably the culprit that sent the Dow down 40 points in the last hour of trading. Both the Dow and S&P 500 eked out small gains while the Nasdaq was in the red by the time the closing bell rang. Breadth was lousy as four stocks fell for every three that advanced.

Stats Table

While Monday's action was not much to cheer about, the outlook for U.S. stocks is still rosy, at least according to some the major U.S. banks. Citing rising profits and impressive cash hoards, strategists think the S&P 500 has another 11% left to run, according to Bloomberg News. Goldman Sachs sees the index rising by 17% next year and Barclays sees the S&P 500 reaching 1420 by the end of 2011. Goldman says U.S. companies are sitting on $1 trillion in cash and look ready to deploy some of that capital, especially in the form of mergers and acquisitions and share repurchases, Bloomberg reported.

Share buybacks and M&A activity are well and fine and certainly better than no positive catalysts at all, but I cannot help but think that higher dividends (which I think will be seen) would be nice as well, but increased hiring would be a real game-changer in 2011.

While it is disappointing that U.S. indexes did not hold the gains made earlier in today's session the argument could be made that the bulls should be grateful there was not a nasty sell-off to deal with today on the back of China's inflation data, which was released over the weekend.

Chinese inflation jumped to a 28-month high of 5.1% in November, but the Peoples Bank of China took a pass on raising interest rates to deal with the issue. At least for now and that was enough to send the Shanghai Composite up by almost 3%, its best one-day performance since October. While Chinese policymakers are showing restraint with regards to interest rates, they are not shy about requiring banks to hold more capital. The PBOC raised the minimum amount Chinese lenders must keep in reserve for the third time in a month.

Chinese interest rate swaps gave up nine basis points on Monday, but there is no getting around the fact that an interest rate hike out of Beijing is still a very real possibility. China's real interest rates have been negative since February and with a small amount of trading days left in 2010, it is not a stretch to say the PBOC will not raise rates this year, but the move is probably coming. It is a matter of when, not if.

Speaking of assets are intimately tied to China, oil gained half a percent on the day, but like stocks, black gold had difficulty holding early session gains. NYMEX-traded crude for January delivery flirted with $90 earlier today despite news that OPEC members are not obliging by their own production quotas and are producing more oil in anticipation of the return of $100 per barrel prices next year.

Some of the headlines used the term ''cheating'' with regards ramped up production, but when one looks at OPEC's roster, it would almost be more surprising if this motley crew was not engaged in some chicanery for its own benefit. OPEC's production quota is 24.85 million barrels per day for 11 of its members (Iraq is not subject to the quota), but real production is in the area of 29 million barrels, the Wall Street Journal reported.

I find it hard to trust countries like Venezuela when the Venezuelan oil minister is out saying $100 oil is fair to producers and consumers (try telling that to the consumers), but OPEC is what it is and the news of $100 oil, which options traders are betting on in a big way, isn't all bad. Four of the new 52-week highs on the New York Stock Exchange today were Exxon Mobil (XOM), Chevron (CVX), ConocoPhillips (COP) and Occidental Petroleuem (OXY), the four largest U.S. companies.

Oil Chart

Moving over to tech, a bunch of bullish analyst chatter was helpful to the individual names to which that chatter pertained, but it was not enough to lift the sector at large nor the Nasdaq. Goldman Sachs was full of praise for Apple (AAPL) today, calling the iPad maker's platform-centric business model its ''secret sauce'' while saying Apple could ship 37.2 million iPads next year.

Still, Apple shares only gained 0.35% even after all the Goldman gushing. In fact, it was a really disappointing day for Apple bulls (they can handle it, trust me). The stock traded between $321-$325, a new high, but managed to close at $321.67. Remember, this is after Goldman added the stock to its conviction buy list with a $430 price target. Assuming Goldman is right, Apple shares still have some decent upside left in them.

Apple Chart

Goldman's magic did a little bit to help EMC (EMC), the largest provider of data storage services, which gained almost 1.1% after the bank resumed coverage of EMC with a ''buy'' rating and a $27 price target. In a note to clients, Goldman cited ''secular tail-winds and expanding margins'' as potential catalysts for EMC shares. NetApp (NTAP), seemingly a perpetual acquisition target in the data storage space was raised to ''overweight'' from ''equal weight'' by Barclays. The bank also raised its price target on NetApp to $67 from $56, helping the stock gain 2.6% on the day.

Dell has enjoyed a solid run over the past three months, gaining 12%, but the shares plunged almost 4% today on volume that was roughly a third higher than the daily average on news of the company's $883 million offer for Compellent Technologies (CML), another name that is frequently the subject of takeover chatter.

It is not unusual to see the acquirer decline on M&A news, but it is rare for the target to decline. Yet, that is what happened with Compellent today. The shares shed 2.6% on volume that was eight times the daily average because Dell is only offering $27.75 for Compellent, which is below where the stock closed on Friday and today.

Poor Dell. The company that cannot seem to get out of its own way has been trying to make deals this year only to be outdone by rivals like Hewlett Packard (HPQ), but by offering less for Compellent than where the stock currently trades, it is obvious Dell has not learned any lessons. What Compellent shareholder is going to feel compelled (pun intended) to sell his shares to Dell for less than he get on the open market?

Dell Chart

Looking at the charts, the S&P 500 built on Friday's two-year closing high in the most meager of ways today, but still trading around 1240, the index looks poised to start fresh move to the upside. For those worried about support, that is 1200 and on the move upward. The 1250 could be a brief stumbling block simply because so many analysts have pegged that as their year-end target, but once that level is cleared, 1270 looks to be the next serious resistance point.

S&P 500

Add up the Dow's 18-point gain on Monday, 40 points on Friday and eight points for the previous days and we get a whopping 66-point move for the industrials over the past seven trading days. Not to sound too alarmist here, but what is it going to take to move the Dow? GE (GE) raised its dividend last Friday. Chevron announced it would spend more on exploration. Pfizer (PFE) raised its dividend today. Support at 11,335 is being honored, but it will be interesting to see if how the Dow acts at 10,450.

Dow Chart

The Nasdaq was finally able to find its way above resistance at 2625 on Friday and that is where the index settled today, ending an eight-day winning streak. Support is 2620 and after a move over 2650 would result in some clear sailing to 2800, perhaps a bit higher. Nasdaq Chart

The Russell 2000 took a step back from its exciting advance today, support at 767 was not threatened and the index still looks to be in fine shape for a positive run through the end of the year. With another 70-80 points to go before resistance is seen again, I am not betting on the Russell getting to those areas this week, but the small-cap space is getting harder and harder to ignore. I have personally been adding to positions in the PowerShares small-cap sector ETFs in recent weeks, which are basically the small-cap cousins to the SPDR funds.

Russell 2000 Chart

Obviously, I am bullish, but more so on small-caps, metals and energy than other market segments at this juncture. I am off to referee some high school basketball, holiday time equals tournament time, but I will be with you again on Wednesday.

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New Plays

Running out of Gas

by James Brown

Click here to email James Brown


NEW BULLISH Plays

JB Hunt Transport Services - JBHT - close: 39.96 change: -0.49

Stop Loss: 36.75
Target(s): 40.70, 43.75
Current Option Gain/Loss: unopened
Time Frame: 8 to 10 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
The outlook for our economy and GDP growth in 2011 is improving. If the data continues to back up these positive expectations then transports could be in for a long trend higher. Big picture the transports already look bullish. Short-term the sector looks a little tired and due for a pull back. The action in JBHT actually turned bearish today with a bearish engulfing (reversal) candlestick pattern. Odds are good that JBHT will correct back toward broken resistance and new support at $38.00. A week ago the NASDAQ announced they were removing JBHT from the NASDAQ-100 index and this removal takes place on Dec. 20th. Firms should start selling shares of JBHT to make room for those stocks being added to the index. Nimble traders could try and scalp the decline. I would rather wait to just buy the dip. If triggered we'll start with a stop loss at $36.75.

Trigger to buy the dip at $38.00

Suggested Position: Buy JBHT stock @ 38.00

- or -

Buy the 2011 February $40 calls (JBHT1119B40)

Annotated chart:

Entry on December xx at $xx.xx
Earnings Date 01/28/11 (unconfirmed)
Average Daily Volume: 1.2 million
Listed on December 13th, 2010


In Play Updates and Reviews

Stocks Look Tired

by James Brown

Click here to email James Brown

Editor's Note:
The stock market's rally is looking a little bit tired. A pull back would be a welcome event since we would like to buy a dip. We had both Citigroup (C) and LRCX hit our final exit targets today. Plus, WWE hit our trigger to open bullish positions.

-James

Current Portfolio:


BULLISH Play Updates

Alcoa Inc - AA - close: 14.36 change: +0.11

Stop Loss: 12.90
Target(s): 14.95, 15.95
Current Option Gain/Loss: + 8.9%
Time Frame: 8 to 10 weeks
New Positions: Yes, but see below

Comments:
12/13 update: Weakness in the dollar fueled gains in the commodity space and AA added +0.77% but the rally stalled at last week's highs. I don't see any changes from my weekend comments. There is short-term support at $14.00 but I would wait for a dip near $13.60 before considering new positions. (If we do see another entry point we might consider buying some 2011 call options).

Current Position: Long AA stock @ 13.18

Entry on November 16 at $13.18
Earnings Date 01/10/11 (unconfirmed)
Average Daily Volume: 26.1 million
Listed on November 6th, 2010


Alaska Air Group - ALK - close: 56.49 change: -0.46

Stop Loss: 53.90
Target(s): 59.75
Current Option Gain/Loss: + 2.8%
Time Frame: 8 to 9 weeks
New Positions: see below

Comments:
12/13 update: Airline stocks were underperformers today and the XAL index looks poised to breakdown under its 50-dma. That could be bad news for ALK. Shares of ALK actually hit new relative highs this morning but if the sector breaks down then ALK could be headed for $55 or lower. I would hesitate to launch new positions at this time.

Current Position: Long ALK stock @ $54.91

- or -

Long the 2011 January $60 calls (symbol: ALK1122A60) entry @ $1.60

Entry on November 22 at $54.91
Earnings Date 01/27/11 (unconfirmed)
Average Daily Volume: 331 thousand
Listed on November 20th, 2010


American Express - AXP - close: 46.37 change: +0.11

Stop Loss: 41.95
Target(s): 47.50, 49.85
Current Option Gain/Loss: unopened
Time Frame: 10 to 12 weeks
New Positions: Yes, see trigger

Comments:
12/13 update: AXP extended its gains but found new short-term resistance near $46.75 all day long. We are still waiting for a correction. We want to buy AXP or calls on AXP on a dip to $44.50.

Trigger @ $44.50 Suggested Position: Buy AXP stock at $44.50

- or -

Buy the 2011 April $45 calls (AXP1116D45)

Entry on December xx at $xx.xx
Earnings Date 01/20/11 (unconfirmed)
Average Daily Volume: 9.0 million
Listed on December 2nd, 2010


Popular Inc. - BPOP - close: 3.03 change: -0.08

Stop Loss: 2.69
Target(s): 3.40, 3.95
Current Option Gain/Loss: unopened
Time Frame: 12 to 16 weeks
New Positions: Yes, see trigger

Comments:
12/13 update: BPOP gapped open higher this morning only to see the rally immediately fail. Shares lost -2.5% and look poised to hit $3.00 tomorrow. I am very tempted to lower our trigger but we will keep our entry point to buy the dip at $3.00. Cautious traders may want to use a trigger at $2.95 or even $2.90 instead. If triggered our first target is $3.40. Our second, much longer-term target is $3.90.

Buy the Dip trigger @ $3.00

Suggested Position: Buy BPOP stock @ $3.00

- or -

Buy the 2011 April $3.00 calls (BPOP1116D3) current ask $0.36

Entry on December xx at $xx.xx
Earnings Date 01/20/11 (unconfirmed)
Average Daily Volume: 11.7 million
Listed on December 11th, 2010


Companhia Brasileira de Distribuicao - CBD - close: 39.96 change: +0.39

Stop Loss: 36.75
Target(s): 44.95, 49.00
Current Option Gain/Loss: - 0.7%
Time Frame: 10 to 12 weeks
New Positions: Yes, see below

Comments:
12/13 update: After the recent correction CBD is bouncing near the rising 40-dma. I would still consider new bullish positions here but there is a decent chance that CBD could dip toward $38 if the market corrects.

More conservative traders may want to consider a stop loss closer to $38.00. We have a wide stop because CBD can be so volatile. Bear in mind this is a higher-risk trade.

Current Position: Long CBD stock @ $40.25

Entry on November 23 at $40.25
Earnings Date 03/02/11 (unconfirmed)
Average Daily Volume: 608 thousand
Listed on November 20th, 2010


City National Corp. - CYN - close: 60.15 change: -0.09

Stop Loss: 54.75
Target(s): 60.00, 64.00
Current Option Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
12/13 update: CYN tagged a new relative high before consolidating sideways the rest of the day. There is no change from my prior comments. We don't want to chase CYN. The plan is to wait for a dip to $57.00. FYI: The Point & Figure chart is bullish with a $77 target.

Trigger @ $57.00

Suggested Position: buy CYN stock @ $57.00

- or -

Buy the 2011 February $60 calls (cyn1119B60)*

*Caution: most of the option spreads on CYN seem a little too wide. I consider the options a more aggressive trade. You may want to keep your position size small.

Entry on December xx at $xx.xx
Earnings Date 01/27/11 (unconfirmed)
Average Daily Volume: 223 thousand
Listed on December 4th, 2010


Microsoft Corp. - MSFT - close: 27.25 change: -0.10

Stop Loss: 25.45
Target(s): 27.45, 29.00
Current Gain/Loss: + 6.6%
Time Frame: 8 to 10 weeks
New Positions: Yes, see below

Comments:
12/13 update: MSFT tagged a new relative high and reversed late this afternoon. I'm still expecting a correction. If you're looking for a new entry point I would wait for a dip toward the $26.00 area.
FYI: We may need to adjust our time frame and focus on three or four months for MSFT to pay off. If you're buying calls, keep that in mind.

Current Position: Long MSFT stock @ 25.55

- or -

Buy the 2011 January $25.00 calls (symbol: MSFT1122A25) Entry @ $1.39

12/11/10 New stop @ 25.45
11/29/10 New stop @ 24.70

Entry on November 17 at $25.55
Earnings Date 01/27/11 (unconfirmed)
Average Daily Volume: 68.4 million
Listed on November 15th, 2010


Peir 1 Imports - PIR - close: 10.65 change: +0.11

Stop Loss: 9.75
Target(s): 11.90
Current Option Gain/Loss: + 4.0%
Time Frame: 10 to 12 weeks
New Positions: No

Comments:
12/13 update: PIR is still inching higher. There is no change from my weekend comment. We have to decide by Wednesday's close if we want to hold over this high-risk event. Currently I am tempted to close this position ahead of the earnings report. I'm not suggesting new positions at this time. Please note that I am raising our stop loss to $9.75.

Current Position: Long PIR stock @ $10.24

- or

Buy the 2011 March $10.00 calls (PIR1119C10) Entry @ $1.55

Entry on December 2 at $10.24
Earnings Date 12/16/10 (confirmed)
Average Daily Volume: 2.3 million
Listed on December 1st, 2010


Starbucks Corp. - SBUX - close: 31.99 change: -0.60

Stop Loss: 29.90
Target(s): 34.75
Current Option Gain/Loss: unopened
Time Frame: 8 to 10 weeks
New Positions: Yes, see trigger

Comments:
12/13 update: SBUX is finally starting to see some profit taking. I'm expecting a dip toward support near $31.00. We have a trigger to launch bullish positions at $31.25. If triggered our first target is $34.75.

FYI: SBUX is currently in a legal battle with Kraft Foods (KFT) over distribution of SBUX's ground coffee brand but investors seem to be ignoring it.

Trigger @ $31.25

Suggested Position: Buy SBUX stock @ $31.25

- or -

Buy the 2011 January $32.00 call (SBUX1122A32)
Buy the 2011 April $33.00 call (SBUX1116D33)

Entry on December xx at $xx.xx
Earnings Date 01/20/11 (unconfirmed)
Average Daily Volume: 7.1 million
Listed on December 8th, 2010


SAKS Inc. - SKS - close: 11.51 change: -0.41

Stop Loss: 10.90
Target(s): 13.95, 14.95
Current Option Gain/Loss: - 3.9%
Time Frame: 10 to 12 weeks
New Positions: No

Comments:
12/13 update: Ouch! What happened to SKS on Monday? I could not find any specific news to account for this stock's relative weakness. The S&P 500 posted a very minor gain. The RLX retail index only lost 0.7%. Yet SKS gave up -3.4% and failing at the $12.00 level this morning. Today's session has created a bearish engulfing candlestick (reversal) pattern. Normally these patterns need to see confirmation. I am not suggesting new bullish positions at this time. Cautious traders may want to raise their stop loss (maybe toward $11.30-11.40ish).

Suggested Position: Long SKS stock @ $11.98

- or -

Buy the 2011 February $12.50 calls (SKS1119B12.5) Entry @ $0.65

Entry on December 13 at $11.98
Earnings Date 02/22/11 (unconfirmed)
Average Daily Volume: 3.1 million
Listed on December 11th, 2010


Sara Lee Corp - SLE - close: 15.89 change: -0.11

Stop Loss: 14.70
Target(s): 17.00, 17.90
Current Option Gain/Loss: + 1.3%
Time Frame: 10 to 12 weeks
New Positions: see below

Comments:
12/13 update: SLE was hit with some profit taking this morning but traders were buying the dip this afternoon. There is no change from my weekend comments. If you're looking for a new position I would prefer to buy a dip near $15.50.
FYI: the Point & Figure chart is suggesting a long-term bullish target of $32 for SLE.

Current Position: Long SLE stock @ $15.68

- or -

Long the 2011 April $15.00 calls (SLE1116D15) Entry @ $1.35

Entry on December 8 at $15.68
Earnings Date 02/03/11 (unconfirmed)
Average Daily Volume: 7.6 million
Listed on December 7th, 2010


Sony Corp. - SNE - close: 35.88 change: +0.05

Stop Loss: 33.45
Target(s): 36.50, 39.00
Current Option Gain/Loss: unopened
Time Frame: 10 to 12 weeks
New Positions: Yes, see trigger

Comments:
12/13 update: SNE managed a bounce this morning but shares failed twice under $36.15. I am still expecting a correction lower toward the bullish trend line of higher lows. Currently our plan is to launch bullish positions on a dip at $34.50.

Trigger @ $34.50

Suggested Position: Buy SNE stock
- or -
Buy the 2011 APRIL $35 calls (SNE1116D35)

Entry on December xx at $xx.xx
Earnings Date 02/03/11 (unconfirmed)
Average Daily Volume: 888 thousand
Listed on November 23rd, 2010


Trimble Navigation - TRMB - close: 41.66 change: +0.40

Stop Loss: 36.40
Target(s): 41.00, 43.00
Current Option Gain/Loss: unopened
Time Frame: 8 to 10 weeks
New Positions: Yes, see trigger

Comments:
12/13 update: TRMB rallied again with a spike over $42 this morning. We do not want to chase this move. I'm going to keep TRMB on the newsletter for a couple of more days. If we don't see a correction soon we'll drop it. Currently our plan is to launch bullish positions at $38.50.

Trigger @ $38.50

Suggested Position: Buy TRMB stock @ $38.50

- or -

Buy the 2011 February $40.00 calls (TRMB1119B40) current ask $2.35

Entry on December xx at $xx.xx
Earnings Date 02/02/11 (unconfirmed)
Average Daily Volume: 435 thousand
Listed on December 4th, 2010


Wells Fargo & Co - WFC - close: 30.22 change: -0.05

Stop Loss: 27.90
Target(s): 29.25, 31.90
Current Option Gain/Loss: +12.4%
Time Frame: 10 to 12 weeks
New Positions: see below

Comments:
12/13 update: After last week's impressive gains we knew that banks would see some profit taking sooner rather than later. Today's losses were pretty mild for WFC. If you're looking for a new entry point I would wait for WFC to pull back and redefine short-term support. That support might be $29.25 or it could be the 200-dma near $28.00. Our final target to exit is $31.90.

Current Position: Long WFC stock @ $26.88

- or -

Long the 2011 January $27.50 call (WFC1122A27.5) Entry @ $1.16

12/09: New stop loss @ $27.90
12/08: Target Hit $29.25 (+8.8%), Option @ $2.30 (+98.2%)

Entry on November 30 at $26.88
Earnings Date 01/19/11 (unconfirmed)
Average Daily Volume: 32.7 million
Listed on November 29th, 2010


World Wrestling Entertainment - WWE - close: 14.28 change: -0.20

Stop Loss: 13.75
Target(s): 14.95, 16.40
Current Option Gain/Loss: + 1.2%
Time Frame: 10 to 12 weeks
New Positions: see below

Comments:
12/13 update: Ah-hah! I really wasn't expecting this much volatility out of WWE. Shares have been quietly drifting sideways, building base, over the last couple of months. The stock gapped open lower this morning but managed a bounce at $14.10. The gap down today can be explained by the company's dividend. Shares began trading ex-dividend this morning. The decline today was low enough to hit our trigger at $14.10. Now that the play is open we have a stop loss at $13.75.

Suggested Position: Long WWE stock @ $14.10

- or -

Buy the 2011 April $15.00 calls (WWE1116D15), entry @ $0.45

*Note: The call options on WWE have very large spreads, making them a higher-risk trade.

chart:

Entry on December 13 at $14.10
Earnings Date 02/10/11 (unconfirmed)
Average Daily Volume: 242 thousand
Listed on December 9th, 2010


CLOSED BULLISH PLAYS

Citigroup Inc - C - close 4.81 change +0.04

Stop Loss: 4.35
Target(s): 4.60, 4.85
Current Option Gain/Loss: +16.5%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
12/13 update: Bingo! Target achieved. Shares of Citigroup continued to rally on Monday and the stock hit an intraday high of $4.85. Our final target to exit was $4.85. This play is closed. I would keep C on your watch list. We might reconsider new bullish positions following a significant correction.

Closed Position: Long C stock, entry @ $4.16, exit @ $4.85 (+16.5%)

12/13: Final target hit @ $4.85 (+16.5%)
12/07: Target achieved @ $4.60 (+10.5%)
12/04 Exit the December $4.00 calls (+40%)

chart:

Entry on October 27, 2010
Earnings Date 01/19/11 (unconfirmed)
Average Daily Volume: 523 million
Listed on October 25, 2010


Lam Research - LRCX - close: 52.13 change: +0.52

Stop Loss: 47.75
Target(s): 48.50, 52.50
Current Option Gain/Loss: +14.0%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
12/13 update: Target achieved. The trading gods have smiled on us today. The SOX semiconductor index posted a -0.8% loss. Yet LRCX gained another +1% and more importantly hit an intraday high of $52.57. Our final target to exit was $52.50. This play is closed but I would keep LRCX on your watch list. We might reconsider new positions on a dip toward support.

Closed Position: Long LRCX stock @ 45.25, exit @ $52.50 (+16.0%)
- or -
Closed Position: Long the 2011 January $45 calls (LRCX1122A45) Entry @ $2.85, exit @ $6.80 (+138.5%)

12/13 Final Target Hit @ $52.50, option @ $6.80 (+138.5%)
12/11 New stop loss @ $47.75
12/09 New stop loss @ $45.90
12/04 New stop loss @ $44.90
12/02 Target hit @ $48.50, LRCX +7.2%, option @ $4.55 (+59.5%)

chart:

Entry on November 30 at $45.25
Earnings Date 01/27/11 (unconfirmed)
Average Daily Volume: 4.5 million
Listed on November 18th, 2010