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New Plays

New Option Plays

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Call Options Plays
Put Options Plays
Strangle Options Plays
BNI ATK LEH
FDG   VLO

Play Editor's Note: If you have read this weekend's market wrap then you know that Jim is very cautious but still bullish. We are both concerned about next week. Not only is the bounce already struggling but we're about to move into the two worst months of the year for stocks. Keep in mind that you could easily argue we are in no-man's land without any clear short-term market direction and the best trade may be to just sit on the sidelines. Bigger picture we're still in a bear-market bounce, which will roll over sooner or later.


New Calls

Burlington Northern - BNI - cls: 98.05 chg: -0.72 stop: 93.90

Company Description:
Burlington Northern Santa Fe Corporation's subsidiary BNSF Railway Company operates one of the largest railroad networks in North America, with about 32,000 route miles in 28 states and two Canadian provinces. The railway is among the world's top transporters of intermodal traffic, moves more grain than any other North American railroad, transports the components of many of the products we depend on daily, and hauls enough low-sulfur coal to generate about ten percent of the electricity produced in the United States. (source: company press release or website)

Why We Like It:
The railroad sector has recovered nicely from its July lows and looks like it could retest the 2008 highs. BNI has been lagging its peers and now that earnings are out of the way the stock has space to catch up to the group. Shares have broken the bearish trend of lower highs and investors bought the dip on Friday near the 10-dma, which has turned upward again. It is possible that BNI could fill the gap from July 22nd, which would mean a dip back toward $94.00. We're going to use a stop loss at $93.90. More conservative traders may want to place their stop loss closer to $96.00 instead to reduce their exposure. There is potential technical resistance at the 50-dma. Our target is the $104.75 mark. FYI: The Point & Figure chart is bullish with a $119 target but there is resistance near $102.

Suggested Options:
We are suggesting the September calls. August options are available but they expire in three weeks.

BUY CALL SEP 100.00 BNI-IT open interest=3127 current ask $4.30
BUY CALL SEP 105.00 BNI-IA open interest= 441 current ask $2.40

Picked on July 27 at $ 98.05
Change since picked: + 0.00
Earnings Date 07/24/08 (confirmed)
Average Daily Volume = 3.9 million

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Fording Cand. - FDG - close: 80.35 change: +2.85 stop: 78.49

Company Description:
Fording Canadian Coal Trust is an open-ended mutual fund trust and one of the largest royalty trusts in Canada. The Trust makes quarterly distributions to unitholders using royalties received from its 60% interest in the metallurgical coal operations of the Elk Valley Coal Partnership. Elk Valley Coal Partnership is the world's second largest exporter of seaborne metallurgical coal, supplying high-quality coal products to the international steel industry. (source: company press release or website)

Why We Like It:
If you look at the consolidation pattern in FDG over the last four weeks the stock sort of has a pennant-shaped pattern. Normally a pattern of higher lows and lower highs is a neutral one and the breakout could go either way although usually the prevailing trend tends to resume. I seriously considered a strangle on FDG given its pennant-shaped consolidation but I felt the options were a little too pricey. You may want to take a look yourself and consider if a strangle would be a good trade or not for you. If you look at the overall trend in FDG the direction is still up. The stock hasn't suffered quite the same sell-off that many of the coal names have. It is this relative strength that could give the bulls an edge. I suspect the next move will be higher. However, FDG does have short-term resistance in the $81.00-81.50 zone. We're suggesting a trigger to buy calls at $81.75. If triggered our target is the $89.50 mark. I would expect some additional resistance near $85.00 on the way up.

Suggested Options:
We are suggesting the September calls. August options are available but they expire in three weeks. Our trigger to open positions is at $81.75.

BUY CALL SEP 80.00 FDG-IP open interest=2993 current ask $8.10
BUY CALL SEP 85.00 FDG-IQ open interest=1910 current ask $6.10
BUY CALL SEP 90.00 FDG-IR open interest=2995 current ask $4.40

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/23/08 (confirmed)
Average Daily Volume = 2.7 million
 

New Puts

Alliant Tech.- ATK - close: 99.33 chg: -0.31 stop: 101.75

Company Description:
ATK is a premier aerospace and defense company with more than 17,000 employees in 21 states and $4.5 billion in revenue. (source: company press release or website)

Why We Like It:
ATK is stuck in a down trend and just produced a failed rally at the top of its bearish channel. This is an entry point to capture another move toward the bottom of the channel. We are aiming for $95.25. More aggressive traders could aim lower (see chart). The Point & Figure chart is bearish with a $78 target. We do not want to hold over the August 8th earnings report. This could be considered a higher-risk more aggressive play because the spreads on the options are a little too wide!

Suggested Options:
We are suggesting the August puts or the September puts. Keep in mind that August options expire in three weeks.

BUY PUT SEP 100.0 ATK-UT open interest= 10 current ask $4.30
BUY PUT SEP 95.00 ATK-US open interest= 27 current ask $2.25

BUY PUT AUG 100.0 ATK-TT open interest= 213 current ask $3.10
BUY PUT AUG 95.00 ATK-TS open interest= 210 current ask $1.15

Picked on July 27 at $ 99.33
Change since picked: + 0.00
Earnings Date 08/07/08 (confirmed)
Average Daily Volume = 307 thousand
 

New Strangles

Lehman Brothers - LEH - close: 17.05 chg: -1.47 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:
I wanted to just buy puts on LEH's failed rally at $22.00 this past week. However, I couldn't bring myself to make a directional play on such a volatile stock. More aggressive traders may want to consider it. If your right and LEH moves your direction it could be a big winner but if you're wrong and LEH moves against you it's going to move fast and the option could drop toward zero pretty quick. The stock is so volatile that trying to place a stop loss somewhere is going to be tough - at least today. We opted for a strangle play again. If LEH is going to move it's going to move big so we're using some petty wide options.

Suggested Options:
A strangle involves buying both an out-of-the-money call and an out-of-the-money put. We don't care what direction the stock goes as long as it moves one direction. If the stock moves far enough one side of our trade will rise in value and pay for the entire trade and make a profit.

We are suggesting the September options below. Our estimated cost is $2.15. We want to sell if either option hits $3.50 or higher.

BUY CALL SEP 24.00 LYH-IR open interest= 930 current ask $1.15
-and-
BUY PUT SEP 10.00 LYH-UB open interest=1591 current ask $1.00

Picked on July 27 at $ 17.05
Change since picked: + 0.00
Earnings Date 09/18/08 (unconfirmed)
Average Daily Volume = 63 million

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Valero Energy - VLO - close: 31.88 chg: +0.44 stop: n/a

Company Description:
Valero Energy Corporation is a Fortune 500 company based in San Antonio, with approximately 22,000 employees and 2007 revenues of more than $95 billion. The company owns and operates 16 refineries throughout the United States, Canada and the Caribbean with a combined throughput capacity of approximately 3.1 million barrels per day, making it the largest refiner in North America. (source: company press release or website)

Why We Like It:
VLO, the nation's largest refiner, is due to report earnings on Tuesday morning. The group has been crushed this year. The refiners can't seem to win no matter what direction crude oil goes. There is a lot of pessimism in the stock and if VLO can say anything significantly positive it could spark some serious short covering. On the other hand if they unveil that the situation is a lot worse than expected the stock could plummet. We're suggesting a strangle position. You may want to consider using September options. We're listing this play with August options. If we don't get a big move on Tuesday following the report we'll close it! Wall Street is expecting a profit of $1.33 a share. Just a reminder, Monday is our only day to open positions ahead of earnings.

Suggested Options:
A strangle involves buying both an out-of-the-money call and an out-of-the-money put. We don't care what direction the stock goes as long as it moves one direction. If the stock moves far enough one side of our trade will rise in value and pay for the entire trade and make a profit.

We are suggesting the August options below. Our estimated cost is $1.38. We want to sell if either option hits $2.25 or higher.

BUY CALL AUG 37.50 VLO-HU open interest=11553 current ask $0.68
-and-
BUY PUT AUG 27.50 VLO-TS open interest=4476 current ask $0.70

Picked on July 27 at $ 31.88
Change since picked: + 0.00
Earnings Date 07/29/08 (confirmed)
Average Daily Volume = 12.7 million
 

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