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New Calls

Goldman Sachs - GS - close: 106.12 chg: +2.12 stop: 102.00

Company Description:
Goldman Sachs is a leading global investment banking, securities and investment management firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high net worth individuals. Founded in 1869, it is one of the oldest and largest investment banking firms. The firm is headquartered in New York and maintains offices in London, Frankfurt, Tokyo, Hong Kong and other major financial centers around the world. (source: company press release)

Why We Like It:
Over the last couple of months we've highlighted GS on our watch list as a potential bullish candidate if shares could ever breakout of its trading range. The stock did just that on Friday with a two-percent gain pushing shares through resistance at $106.00 on above average volume. The move was fueled by the Procter & Gamble-Gillette merger news. GS and rivals Merrill and UBS are all investment banks facilitating the deal and all three are expected to split between $50-to-$95 million in advisory fees for the $57 billion merger (source: CBSMW). While we hesitate to add a new bullish candidate given the market's bearish attitude during the month of January one could argue that GS has been showing relative strength. The stock has consolidated sideways between $102 and $106 during the past six-weeks instead of trading lower like most of the market. The XBD broker-dealer index, while still under resistance is showing signs of a potential bullish turnaround. Normally Wall Street sees M&A activity as bullish for the market. If corporate management is willing to make a bid for another company it's seen as a sign of confidence for the future. Plus M&A tends to spark more M&A and that means more advisory fees for the likes of GS. Technically the move over its 50-dma and the new buy signal in the MACD indicator also look encouraging. There is some resistance at $110 but we suspect that GS can make it to $115 by mid-March. Short-term traders can plan to exit at $110.

Suggested Options:
We're going to suggest the March and April calls.

BUY CALL MAR 100 GS-CT OI= 56 current ask $7.40
BUY CALL MAR 105 GS-CA OI= 449 current ask $3.60
BUY CALL MAR 110 GS-CB OI=1258 current ask $1.25

BUY CALL APR 105 GS-DA OI=16336 current ask $4.50
BUY CALL APR 110 GS-DB OI=12029 current ask $1.95


Picked on January 30 at $106.12
Change since picked: + 0.00
Earnings Date 03/17/05 (unconfirmed)
Average Daily Volume = 3.4 million

New Puts

Eli Lilly - LLY - close: 53.58 change: -1.99 stop: 56.01

Company Description:
Lilly, a leading innovation-driven corporation, is developing a growing portfolio of first-in-class and best-in-class pharmaceutical products by applying the latest research from its own worldwide laboratories and from collaborations with eminent scientific organizations. Headquartered in Indianapolis, Ind., Lilly provides answers-through medicines and information- for some of the world's most urgent medical needs. (source: company press release)

Why We Like It:
The DRG drug index has been struggling for over a year and has seen some pretty volatile ups and downs (namely bearish reversals) in the last couple of months. In spite of all the volatility the downtrend remains intact. The same can be said for LLY. Shares had been consolidating in a triangle pattern the last three-months but eventually hit longer-term resistance at its trendline of lower highs dating back to June 2004. A few days later on January 26th the company reported earnings that beat by a penny and management guided inline with estimates. The stock reacted with a gap up and the open that quickly faded. Now shares are breaking down. Friday's drop was partially fueled by the 1.1 percent decline in the DRG index and news that LLY said it has "withdrawn its application to market its Yentreve drug for incontinence after U.S. regulators said they would not approve it based on submitted data" (source: Reuters). Volume on Friday's breakdown was about 50 percent above average and its P&F chart has produced a new triple-bottom breakdown sell signal with a $47 target. We want to target a short-term drop to round-number support at $50.00. Readers can open positions at current levels of on a bounce to but not over $55.00. We're looking for a failed rally under $55.

Suggested Options:
We are going to suggest the March and April puts.

BUY PUT MAR 55 LLY-OK OI= 4629 current ask $3.60
BUY PUT MAR 50 LLY-OJ OI=17909 current ask $1.55

BUY PUT APR 55 LLY-PK OI=13433 current ask $4.10
BUY PUT APR 50 LLY-PJ OI=26625 current ask $2.10


Picked on January 30 at $ 53.58
Change since picked: - 0.00
Earnings Date 01/26/05 (confirmed)
Average Daily Volume = 4.0 million

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