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New Plays

New Option Plays

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Call Options Plays
Put Options Plays
Strangle Options Plays
CAT None QQQQ
DO    
VMC    

Play Editor's Note: This is the first real week of third quarter earnings. Earnings reports can produce some very big moves in individual equities so it's a great time to play a strangle or some sort of neutral strategy. I would like to give readers an early look of what we are considering as potential plays. MAN reports earnings on Wednesday morning. We are thinking about a strangle on MAN. IBM reports earnings on Tuesday. We're thinking about adding a strangle on IBM for Monday night. GOOG reports earnings on Thursday. Our bias for GOOG is bearish. We're expecting a sell-the-news reaction. Instead of a strangle we're considering a put spread for the Tuesday night newsletter. At the moment we're thinking readers could buy the November $600 GOOG put for $14 and sell the November $550 put for $4.60.


New Calls

Caterpillar - CAT - cls: 80.30 change: +0.86 stop: 78.59

Company Description:
For more than 80 years, Caterpillar Inc. has been making progress possible and driving positive and sustainable change on every continent. With 2006 sales and revenues of $41.517 billion, Caterpillar is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines. (source: company press release or website)

Why We Like It:
This is a very short-term, aggressive play. CAT is due to report earnings on Friday, October 19th, before the opening bell. We suspect that shares will rally into the report. Last week the stock pulled back but traders bought the dip near its trendline of higher lows (see chart). We'll put the stop loss just under last week's low. Our target is the $84.00-85.00 range. We will plan to exit on Thursday at the closing bell if CAT doesn't hit our target.

Suggested Options:
October options expire in five days. We plan to exit in four days. It's up to you if you want to play the October or November strikes.

BUY CALL OCT 80.00 CAT-JP open interest=14581 current ask $2.36

or

BUY CALL NOV 80.00 CAT-KP open interest= 8687 current ask $3.55
BUY CALL NOV 85.00 CAT-KQ open interest=16271 current ask $1.62

Picked on October 14 at $ 80.30
Change since picked: + 0.00
Earnings Date 10/19/07 (confirmed)
Average Daily Volume = 5.6 million

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Diamond Offshore - DO - cls: 117.20 chg: +0.90 stop: 112.45

Company Description:
Diamond Offshore provides contract drilling services to the energy industry around the globe and is a leader in deepwater drilling. (source: company press release or website)

Why We Like It:
We have been avoiding the oil sector because we keep thinking that crude oil is going to see a significant correction. Instead crude oil has gone on to hit a string of new highs. This strength in the commodity and the stock market has led the oil services sector to breakout to new all-time highs after a multi-week consolidation pattern. Shares of DO are seeing a similar breakout to new record highs. Broken resistance near $115 should be new support. We're going to try and play this with a stop at $112.45. If we had more time we'd put the stop under $110. Time is an issue. DO is due to report earnings in nine trading days. If shares don't hit our target we'll plan to exit on October 24th at the closing bell. Our short-term target is the $124.50-125.00 range. One of our biggest concerns is that a correction in crude oil would spark some heavy profit taking in the oil service stocks. FYI: The P&F chart is bullish with a $173 target.

Suggested Options:
We are suggesting the November calls.

BUY CALL NOV 115 DO-KC open interest= 554 current ask $6.70
BUY CALL NOV 120 DO-KD open interest=2253 current ask $4.20

Picked on October 14 at $117.20
Change since picked: + 0.00
Earnings Date 10/25/07 (confirmed)
Average Daily Volume = 2.0 million

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Vulcan Materials - VMC - cls: 92.32 chg: +1.74 stop: 89.90

Company Description:
Vulcan Materials Company, a member of the S&P 500 index, is the nation's largest producer of construction aggregates and a major producer of asphalt and concrete. (source: company press release or website)

Why We Like It:
Shares of VMC are bouncing from support near $90 and its 50-dma. Friday's move looks like a new bullish entry point to buy calls. This rebound follows a bullish double bottom pattern through August and September and it follows a bullish breakout in early October. We are suggesting positions now. Our target is the $99.00-100.00 range. The P&F chart is bullish with a $103 target.

Suggested Options:
We are suggesting the November calls. We do not want to hold over the late October earnings report.

BUY CALL NOV 90.00 VMC-KR open interest=424 current ask $6.20
BUY CALL NOV 95.00 VMC-KS open interest=360 current ask $3.60
BUY CALL NOV 100.0 VMC-KT open interest=557 current ask $1.85

Picked on October 14 at $ 92.32
Change since picked: + 0.00
Earnings Date 10/30/07 (unconfirmed)
Average Daily Volume = 1.4 million
 

New Puts

None
 

New Strangles

NASDAQ 100 trust - QQQQ - cls: 53.53 chg: +0.87 stop: n/a

Company Description:
The QQQQ is an Exchange Traded Fund (ETF) based on the NASDAQ 100 index.

Why We Like It:
This week could be a turning point in the markets. It is the first real week of third quarter earnings and the parade of earnings is bound to raise market volatility. This looks like a good spot to try and capture that volatility with a strangle on the QQQQs. We want to exit this strangle if either side hits $1.50 or higher. This is somewhat aggressive since we're using October options, which expire in five days. You could do the same play using November options but you'll pay more and have to adjust your exit price.

Suggested Options:
A strangle involves buying both an out of the money call and an out of the money put. We are suggesting the October $54 call and the October $53 put. Our estimated cost is $0.76. We want to sell if either side hits $1.50 or more.

BUY CALL OCT 54.00 QQQ-JB open interest=141201 current ask $0.41
-and-
BUY PUT OCT 53.00 QQQ-VA open interest=118111 current ask $0.35

Picked on October 14 at $ 53.53
Change since picked: + 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 125 million
 

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