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New Option Plays

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Call Options Plays
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New Calls

Editor's note:

We encourage everyone to read this weekend's market wrap. If you have then feel free to skip ahead to the play updates. If not we want to caution you about initiating any new bullish positions. The Dow Jones Industrial Average is up 700 points in just the last four weeks and looks very overdue for some profit taking. To make matters worse the rally in the DJIA stopped right at major resistance (see chart) at its five-year trendline. Granted the DJIA is an index of just 30 stocks but the S&P 500 and the NASDAQ composite, while both have broken out to new highs, both also look just as overbought and due for a correction.

Chart of the DJIA:


Dominion Res. - D - close: 78.24 chg: +0.64 stop: 74.75

Company Description:
Dominion is one of the nation's largest producers of energy, with an energy portfolio of about 28,100 megawatts of generation, about 6 trillion cubic feet equivalent of proved natural gas reserves and 7,900 miles of natural gas transmission pipeline. Dominion also operates the nation's largest underground natural gas storage system with more than 965 billion cubic feet of storage capacity and serves retail energy customers in nine states. (source: company press release or website)

Why We Like It:
So why are we suggesting D as a new call candidate after warning readers not to open new long positions? We like D because the company is both an electric utility and a natural gas producer. Its exposure to natural gas could help lead the stock higher if natural gas prices begin to surge again as winter begins to mature here in the U.S. Secondly, we like D because the stock has produced a new short-term bottom in the $74-78 range against rising technical support at its 200-dma. We are willing to initiate longs right here but readers have a choice. You can wait for a move over the simple 50-dma (currently at $78.97), wait for a move over $80, which could be round-number resistance, or look for another dip back toward the $76 region (specifically 76.40) and buy the dip or bounce there. We are aiming for a run into the $84.50-85.00 range before January options expire. We do not want to hold over the company's early February earnings report.

Suggested Options:
We are suggesting the January calls. We prefer the $75 or $80 strikes.

BUY CALL JAN 75 D-AO open interest=2447 current ask $4.90
BUY CALL JAN 80 D-AP open interest=9713 current ask $1.80
BUY CALL JAN 85 D-AQ open interest=1201 current ask $0.50

Picked on November 27 at $ 78.24
Change since picked: + 0.00
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume = 1.8 million

New Puts

Invitrogen - IVGN - close: 63.06 chg: -0.72 stop: 66.05

Company Description:
Invitrogen Corporation provides products and services that support academic and government research institutions and pharmaceutical and biotech companies worldwide in their efforts to improve the human condition. The company provides essential life science technologies for disease research, drug discovery, and commercial bioproduction. Invitrogen's own research and development efforts are focused on breakthrough innovation in all major areas of biological discovery including functional genomics, proteomics, bioinformatics and cell biology -- placing Invitrogen's products in nearly every major laboratory in the world. Founded in 1987, Invitrogen is headquartered in Carlsbad, California and conducts business in more than 70 countries around the world. The company globally employs approximately 4,500 scientists and other professionals and had revenues of more than $1 billion in 2004. (source: company press release or website)

Why We Like It:
IVGN has had a tough few months. The stock peaked in July and has been sinking ever since. In late October the company reported earnings and missed estimates by 8 cents and then guided lower. The stock reacted by gapping lower and bouncing from the $60 level. Now IVGN's oversold bounce has failed multiple times at the $66.00 level (new resistance). Technicals are beginning to fade again and IVGN looks ready for the next leg lower. There is potential support at the $60 mark but the BTK biotech index looks overbought and due for a pull back. We suspect that when the BTK corrects it could be enough to push IVGN under the $60 level. The P&F chart for IVGN points to a $56 target. We're going to aim for a decline into the $57.50-56.50 range. Our time frame is eight weeks. We do not plan on holding over IVGN's late January earnings report.

Suggested Options:
We're going to suggest the February puts although more aggressive traders might want to play the Januarys.

BUY PUT FEB 65 IUV-NM open interest= 66 current ask $4.40
BUY PUT FEB 60 IUV-NL open interest=663 current ask $2.35

Picked on November 27 at $ 63.06
Change since picked: + 0.00
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume = 1.2 million

New Strangles

Texas Ind. - TXI - close: 49.57 chg: +0.14 stop: n/a

Company Description:
TXI is the largest producer of cement in Texas and a major cement producer in California. TXI is also a major supplier of construction aggregates, ready-mix concrete and concrete products. (source: company press release or website)

Why We Like It:
TXI has been consolidating sideways for the last seven weeks and with earnings coming up it makes a tempting strangle candidate. The last couple of earnings reports have produced some big moves so we have a catalyst that can shock shares of TXI out of its current consolidation. We're going to suggest initiating positions in the $49.00-51.00 entry window although the closer to the $50.00 mark the better! TXI's earnings date hasn't been nailed down yet but it should announce sometime in the 12/15-12/19 range. This only gives us about four weeks after its earnings report to see a move in the stock before the January options expire. More conservative traders might want to pay more and use April options.

Suggested Options:
We're going to suggest January strikes for this strangle. As a strangle we need to buy an out of the money call and an out of the money put. At current prices this strangle costs about $2.70 We're going to aim for a rise to $5.00 or more.

BUY CALL JAN 55 TXI-AK open interest=3527 current ask $1.30
BUY PUT JAN 45 TXI-MI open interest= 767 current ask $1.40

Picked on November 27 at $ 49.57
Change since picked: + 0.00
Earnings Date 12/15/05 (unconfirmed)
Average Daily Volume = 354 thousand

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