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New Option Plays

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Call Options Plays
Put Options Plays
Strangle Options Plays
AAPL XLE AZO
C   DJX
SYK   LEH
TMA   XLF

Play Editor's Note: Historically September is the worst month for stocks, especially the second half of September. This should make you ask why would we be adding new bullish positions at this time? Good question! We suspect that the markets experienced their September-October sell-off a bit early with the big market decline in August. Second, the Federal Reserve appears poised to launch a new series of rate cuts. While this will be offset by the fear that the U.S. is in or rapidly heading into a recession, the market usually looks past the present to the future. It's a well-known market maxim that you "don't fight the fed." We expect that the markets will remain volatile but if we can get past this week with the Fed meeting and a number of financial and broker earnings reports then the path of least resistance is likely to be up. More conservative traders might feel safer to just step aside and wait until Wednesday before considering any new positions.


New Calls

Apple Inc. - AAPL - cls: 138.81 change: +1.61 stop: 133.69

Company Description:
Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. Today, Apple continues to lead the industry in innovation with its award-winning computers, OS X operating system and iLife and professional applications. Apple is also spearheading the digital media revolution with its iPod portable music and video players and iTunes online store, and has entered the mobile phone market this year with its revolutionary iPhone. (source: company press release or website)

Why We Like It:
It looks like the price-cut news that took shares of AAPL from $145 to $130 has been fully digested. Shares are rebounding with a very bullish trend of higher lows. There was something in the news recently on how the price cut has temporarily tripled the sales pace of the iphone. Speaking of the iphone the company just announced on September 10th it had sold its one-millionth iphone. The stock has short-term resistance at $140.00. We're suggesting a trigger to buy calls at $140.25. If triggered we have two targets. Our first, more conservative target is the $144.75-145.00 range. Our second, more aggressive target is the $149.00-150.00 range. We do have a very wide (aggressive) stop loss because the markets and AAPL have been so volatile. Readers are strongly encouraged to find their own stop loss placement that best suits their risk level. We will note that the technicals are somewhat mixed but the P&F chart is still bullish with a $180 target. We do not want to hold over the mid October earnings report.

Suggested Options:
We are suggesting the October calls. Our suggested trigger to open positions is at $140.25.

BUY CALL OCT 135 APV-JG open interest=30892 current ask $9.80
BUY CALL OCT 140 APV-JH open interest=46347 current ask $7.00
BUY CALL OCT 145 APV-JI open interest=34835 current ask $4.90

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/18/07 (unconfirmed)
Average Daily Volume = 39.9 million

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Citigroup - C - clos: 46.64 change: +0.28 stop: 44.49

Company Description:
Citi is todays pre-eminent financial services company, with some 200 million customer accounts in more than 100 countries. Our history dates back to the founding of Citibank in 1812, Bank Handlowy in 1870, Smith Barney in 1873, Banamex in 1884, and Salomon Brothers in 1910. (source: company press release or website)

Why We Like It:
Market pundits are expecting the financial sector to turn higher this week once we pass the Fed meeting and the brokerage earnings releases. If that's true then C is definitely poised to benefit as one of the largest and most liquid stocks for funds to move into. Looking at the chart it appears that C has found a short-term bottom in the $44.50-45.00 range. The stock does still have overhead resistance at its 50-dma and trendline of lower highs. Plus, the P&F chart is still bearish. We're suggesting call positions now. You might want to wait until after the Fed meeting or until after C can clear the $47.50 mark. Our initial target is the $49.85-50.00 range but we might decide later to add a more aggressive target at the 200-dma.

Suggested Options:
We are suggesting the October calls. Please note that we do not want to hold over the mid October earnings report.

BUY CALL OCT 45.00 C-JI open interest=12022 current ask $3.40
BUY CALL OCT 47.50 C-JW open interest=16561 current ask $1.90
BUY CALL OCT 50.00 C-JJ open interest=14670 current ask $0.85

Picked on September 16 at $ 46.64 <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/19/07 (confirmed)
Average Daily Volume = 40.7 million

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Stryker - SYK - cls: 70.09 change: +0.64 stop: 65.90

Company Description:
Stryker Corporation is one of the world's leading medical technology companies with the most broadly based range of products in orthopaedics and a significant presence in other medical specialties. (source: company press release or website)

Why We Like It:
Shares of SYK have spent the last few months digesting its previous 12-month rally. This sideways consolidation looks like it's finally about to end. SYK is testing resistance at the $70.00 mark and hit a new all-time high on Friday. We want to see more confirmation of the breakout. We're suggesting a trigger to buy calls at $70.65. If triggered our target is the $74.90-75.00 range. Given the length of SYK's consolidation we would actually aim higher, maybe the $77.50-80.00 range, but we don't have much time and plan to exit ahead of the mid October earnings report. More conservative traders might be able to get away with a tighter stop loss near $67.50 or $68.00. The P&F chart is bullish with an $83 target.

Suggested Options:
We are suggesting the October calls. Our trigger to open positions is at $70.65.

BUY CALL OCT 70.00 SYK-JN open interest= 900 current ask $2.55
BUY CALL OCT 75.00 SYK-JO open interest= 563 current ask $0.70

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/17/07 (confirmed)
Average Daily Volume = 1.4 million

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Thornburg Mtg - TMA - cls: 13.63 chg: +0.05 stop: 10.90

Company Description:
Founded in 1993, based in Santa Fe, New Mexico, and built on a foundation of quality, innovation, and discipline, Thornburg Mortgage has rapidly grown to become a nationwide mortgage lender backed by a balance sheet of high quality assets. We have developed into a fully integrated mortgage originator and portfolio lender with a niche focus on jumbo adjustable rate mortgages for clients with complex financial profiles. (source: company press release or website)

Why We Like It:
This is a case of throwing the baby out with the bathwater. TMA has virtually zero exposure to the subprime mess but the stock got hammered anyway. Thus the pull back can be seen as a buying opportunity. Shares are developing a bullish trend of higher lows and we're suggesting call positions anywhere in the $12.50-14.00 range. We have two targets. Our first target is the $16.25-16.50 zone. Our second target is the $17.50-19.00 range. The P&F chart has reversed into a new buy signal with a $19.50 target. We do not want to hold over the mid October earnings report.

Suggested Options:
We are suggesting the October calls.

BUY CALL OCT 12.50 TMA-JV open interest=5499 current ask $1.65
BUY CALL OCT 15.00 TMA-JC open interest=9952 current ask $0.55

Picked on September 16 at $ 13.63
Change since picked: + 0.00
Earnings Date 10/15/07 (unconfirmed)
Average Daily Volume = 5.4 million
 

New Puts

Energy Sector SPDR - XLE - cls: 72.50 chg: +0.20 stop: 73.65

Company Description:
The XLE is the Energy Select Sector SPDR and is an Exchanged Traded Fund (ETF) designed to track the oil, gas, and services industries.

Why We Like It:
Crude oil futures have produced a huge rally over the last couple of weeks but it looks like it has run into significant resistance at $80.00 a barrel. The oil sector has followed it higher and the XLE has broken out to new six-weeks highs. If you look at the P&F chart on the XLE it looks pretty bullish. However, if you read the wrap this weekend then you know that Jim is expecting a sharp correction in crude oil that is assuming no one starts shooting at Iran over the weekend. We are suggesting that readers buy puts on the XLE to capture any correction in oil. However, we're going to list a trigger to open positions at $71.15, which is just under the 10-dma. More conservative traders could put their trigger under the $70.00 mark and the 50-dma. If the play is triggered at $71.15 our target is the $65.50-65.00 range. An alternative target could be the rising 200-dma (currently near $63.80).

Suggested Options:
We are suggesting the October puts. Our trigger to open positions is at $71.15. Feel free to choose your own strike price! The ones listed below are suggestions.

BUY PUT OCT 73.00 XBT-VU open interest= 309 current ask $2.75
BUY PUT OCT 72.00 XBT-VT open interest= 700 current ask $2.25
BUY PUT OCT 71.00 XBT-VS open interest= 412 current ask $1.90
BUY PUT OCT 70.00 XBT-VR open interest=12895 current ask $1.55
BUY PUT OCT 68.00 XBT-VP open interest=37200 current ask $1.05
BUY PUT OCT 66.00 XBT-VN open interest= 5912 current ask $0.75

Picked on September 16 at $ 72.50
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 25.9 million
 

New Strangles

AutoZone - AZO - cls: 109.90 change: +0.78 stop: n/a

Company Description:
As of May 5, 2007, AutoZone sells auto and light truck parts, chemicals and accessories through 3,881 AutoZone stores in the United States and 110 AutoZone stores in Mexico, and also sells the ALLDATA brand automotive diagnostic and repair software. (source: company press release or website)

Why We Like It:
AZO has sold off sharply in September but shares spent the last few days churning sideways near $110 as investors wait for the company's earnings report. AZO is expected to report earnings on Tuesday morning (September 18th) ahead of the opening bell. That gives us Monday to open positions. We'd use the $109.00-111.00 range to open strangle positions. We're going to list the play with September options but doing so probably makes it an aggressive play since September strikes expire in five days.

Suggested Options:
A strangle requires buying an out of the money call and an out of the money put. We're suggesting the September strikes below. Our estimated cost is $2.50. We want to sell if either option hits $3.85 or higher.

BUY CALL SEP 115 AZO-IC open interest=920 current ask $1.25
-and-
BUY PUT SEP 105 AZO-UA open interest=1091 current ask $1.25

Or try this combo...with an estimated cost of $0.95. We would sell if either option hits $1.85.

BUY CALL SEP 120 AZO-ID open interest=838 current ask $0.50
-and-
BUY PUT SEP 100 AZO-UT open interest=845 current ask $0.45

FYI: You could do the $115/$105 strangle with October options but it would cost about $6.40.

Picked on September 16 at $109.90
Change since picked: + 0.00
Earnings Date 09/18/07 (confirmed)
Average Daily Volume = 812 thousand

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Dow Jones Industrial Avg. - DJX - cls: 134.43 chg: +0.18 stop: n/a

Company Description:
The DJX index is a 1/100 representation of the Dow Jones Industrial Average.

Why We Like It:
We're expecting a big move this week, one way or the other, in the DJIA. To capture that move we have a strangle on the Diamonds (DIA) and this new strangle on the DJX. We would suggest opening the play on Monday or at the latest on Tuesday ahead of the Fed decision on interest rates.

Suggested Options:
A strangle requires buying an out of the money call and an out of the money put. We're suggesting two strangles. One is with September options for the adventurous reader. One is with October strikes. Strikes are available at $1.00 increments so it's very easy to create your own strangle if you're so inclined.

Our estimated cost on the September strangle is $1.25. We want to sell if either option hits $2.00.

BUY CALL SEP 137 DJY-IG open interest=1465 current ask $0.50
-and-
BUY PUT SEP 132 DJW-UB open interest=9876 current ask $0.75

Our estimated cost on the October strangle is $4.75. We want to sell if either option hits $6.75.

BUY CALL OCT 137 DJY-JG open interest= 660 current ask $2.25
-and-
BUY PUT OCT 132 DJW-VB open interest=1754 current ask $2.50

Picked on September 16 at $134.43
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = million

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Lehman Brothers - LEH - cls: 59.50 chg: -0.18 stop: n/a

Company Description:
Lehman Brothers, an innovator in global finance, serves the financial needs of corporations, governments and municipalities, institutional clients, and high net worth individuals worldwide. Founded in 1850, Lehman Brothers maintains leadership positions in equity and fixed income sales, trading and research, investment banking, private investment management, asset management and private equity. (source: company press release or website)

Why We Like It:
LEH kicks off the broker earnings this week on Tuesday morning before the opening bell. They could set the tone for the financials although we'd still have to endure the FOMC meeting on Tuesday afternoon. The stock could see some huge volatility if LEH drops an earnings bomb or as investors breathe a huge sigh of relief should the company offer good news. We're going to be aggressive and use September options, which expire in five days. You might want to reconsider and check out October options instead. Monday is our only day to open positions. We're suggesting the $58.50-61.00 entry range.

Suggested Options:
A strangle requires buying an out of the money call and an out of the money put. We're suggesting the September strikes below. Our estimated cost is $1.55. We want to sell if either option hits $2.50 or higher. FYI: For some reason the puts seem too expensive. Traders might want to be patient and see if you get a better entry point later in the day. You will want to try and keep your investment relatively equal on both sides of the trade to keep the strategy neutral.

BUY CALL SEP 65.00 LES-IM open interest=16437 current ask $0.55
-and-
BUY PUT SEP 55.00 LES-UK open interest=21804 current ask $1.00

Picked on September 16 at $ 59.50
Change since picked: + 0.00
Earnings Date 09/18/07 (confirmed)
Average Daily Volume = 15.4 million

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Financial SPDR - XLF - cls: 33.98 chg: +0.12 stop: n/a

Company Description:
The XLF is the Financial Select Sector SPDR. This is an Exchanged Traded Fund (ETF) that is designed to follow the banks, financials, and insurance stocks.

Why We Like It:
Financial stocks could see a lot of movement this week with the Fed meeting and a number of brokerage company earnings releases. By playing the XLF we don't have to pick a specific company but can try and capture the move for the whole sector. We're going to be aggressive and suggest the September options, which expire in five days. You might want to reconsider and check out the October strikes. We are suggesting that you open your strangle position ahead of the Fed's decision on interest rates Tuesday afternoon.

Suggested Options:
A strangle requires buying an out of the money call and an out of the money put. We're suggesting the September strikes below. Our estimated cost is $0.65. We want to sell if either option hits $0.95 or higher. FYI: The puts are more expensive than the calls so you'll want to try and keep your investment relatively even on both sides of the trade to keep the strategy neutral.

BUY CALL SEP 35.00 XLF-II open interest=115061 current ask $0.15
-and-
BUY PUT SEP 33.00 XLF-UG open interest=170819 current ask $0.40

Picked on September 16 at $ 33.98
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 69.1 million
 

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