Option Investor
New Plays

New calls in education, transports, oil and more. Plus, a strangle.

HAVING TROUBLE PRINTING?
Printer friendly version
Play Editor's Note: We are adding a bunch of new candidates to the newsletter this evening. However, I want to point out the charts in Jim's weekend market wrap. The specific charts that show the huge range for the DJIA and the S&P 500 and we're stuck right in the middle.

If you are feeling the least bit hesitant to jump back into the markets I want to say, "it's okay." You don't have to. More conservative traders should probably NOT open new positions at this time. A better entry point would be on a bounce from the bottom of the range or a breakout through the top of the range if you're bullish, just the opposite if you're bearish.

I also wanted to add a few notes on some stocks I'm watching.

GD might be a buy here with the mini-double bounce from the $60.00 mark. Use a tight stop under $60.00.

GOOG looks bearish here. It remains stuck in its long-term down trend and the last couple of sessions look like a breakdown from its consolidation pattern. I would consider puts with a stop loss around $342.50, maybe a stop above $350. It depends on how much risk you can handle and if you're trading GOOG you need to handle a lot. Actually, a better play instead of just buying puts and aiming for a drop could be selling calls. Volatility is still historically high. I wouldn't sell naked calls on it but a credit spread might work. November options expire in two weeks. You could sell the November $330 puts for about $18.00-20.00. Then it's up to you to pick how much risk you want and buy a higher-price put to complete your spread.

FLR got some action on Friday as investors speculate on the new administration building a bunch of roads. A rise over $44.00 or $45.00 might be a bullish entry point.

TAP is showing some strength. A breakout over its simple 50-dma or a dip back toward $40.00 might be an entry point to buy calls.

LFC might be worth watching. A rise over last week's high near $42.65 could be an entry point for calls.

Now, just a reminder with all of our suggested plays below...It is up to the individual trader to decide which month and which strike price best suits your trading style and risk.


New Option Plays
Call Options Plays
Put Options Plays
Strangle Options Plays
APOL None GLD
BDX    
BG    
CMP    
ESI    
FDX    
HES    

NEW DIRECTIONAL CALL PLAYS


Apollo Group Inc. - APOL - close: 69.61 change: +2.71 stop: 66.45

Why We Like It:
The late October spike in shares of APOL was investor reaction to a better than expected earnings report and management comments about revenue growth for 2009. The stock has been relatively stable the last few days and failed to see any serious sell-off during the market's recent weakness. The stock looks poised to breakout over resistance near $70.00, which should set it on a course for a rally to the next level of resistance near $80.00.

We are suggesting readers buy calls at $70.55. If triggered our target is the $79.90 mark as APOL has resistance in the $80-81 zone. The Point & Figure chart is bullish with an $80 target.

FYI: APOL is not the only education stock on the letter tonight. We're also adding ESI. You may want to limit your exposure to the sector to just one stock.

Suggested Options:
We are suggesting the December calls.

BUY CALL DEC 70.00 OAQ-LN open interest=2774 current ask $5.30
BUY CALL DEC 75.00 OAQ-LO open interest= 441 current ask $3.00
BUY CALL DEC 80.00 OAQ-LP open interest= 486 current ask $1.50

Annotated Chart:
APOL

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           10/28/08 (confirmed)
Average Daily Volume =       4.0 million  


Becton, Dickinson & Co. - BDX - close: 70.73 change: +2.36 stop: 67.45

Why We Like It:
BDX is a medical device company. It looks like shares have finally reversed their bearish trend. The stock recovered very quickly last Wednesday thanks to investor reaction to its earnings report. Thursday's decline did not break the 10-dma and Friday saw BDX challenging short-term resistance again.

We are suggesting readers buy calls right here with Friday's move over $70.00. More conservative traders may want to wait for the stock to clear last week's high near $71.65 first. Our target is the $74.95-76.00 zone or the simple 50-dma, whichever one BDX hits first.

FYI: The Point & Figure chart, while still bearish, is very close to a new buy signal.

Suggested Options:
We are suggesting the December calls.

BUY CALL DEC 70.00 BDX-LN open interest= 137 current ask $4.10
BUY CALL DEC 75.00 BDX-LO open interest= 292 current ask $1.75

Annotated Chart:
BDX

Picked on November 09 at $ 70.73
Change since picked:      + 0.00
Earnings Date           11/05/08 (confirmed)
Average Daily Volume =       1.9 million  


Bunge Ltd. - BG - close: 44.22 change: +3.22 stop: 40.49

Why We Like It:
Investors did not show much reaction on Wednesday when it was announced that Corn Products International (CPO) said its Board of Directors planned to withdraw its support of the proposed merger between CPO and BG. Bunge, the acquirer, naturally said they were disappointed but has not announced any action yet to this news. I suspect, deal or no deal, that BG's stock may have bottomed here. On Thursday, when the market selling was at its worst, the stock found support in the $41.00-40.60 zone. Traders were quick to buy the dip on Friday.

We are suggesting readers buy calls on BG now with a stop loss at $40.49. More aggressive traders may want to use a stop loss just under $40.00 instead. We're setting two targets. Our first target is $49.50. Our second target is $54.75. More aggressive traders may want to try for a rise toward $59.

FYI: The latest data listed short interest at 13% of BG's 133.8 million-share float. That is an above average amount of short interest. If BG continues to rally short-covering could give the stock a boost. Plus, it's worth noting that the P&F chart for BG is very bullish with an $86 target.

Suggested Options:
We are suggesting the December calls.

BUY CALL DEC 45.00 BGW-LI open interest=1152 current ask $4.90
BUY CALL DEC 50.00 BGW-LJ open interest= 440 current ask $2.85

Annotated Chart:
BG

Picked on November 09 at $ 44.22
Change since picked:      + 0.00
Earnings Date           10/23/08 (confirmed)
Average Daily Volume =       3.7 million  


Compass Minerals Intl. - CMP - close: 58.19 change: +3.32 stop: 52.35

Why We Like It:
Winter is around the corner are you ready for it? One company that looks poised to do well is CMP, which has two main divisions. It has a salt division that sells a lot of rock salt for deicing roads and a division for specialty fertilizer (a.k.a. potash). Last year the road-salt division sold out and they're expecting another strong year this year. The last couple of weeks has seen CMP's stock price breakout from a multi-month bearish channel. Shares displayed a lot of relative strength on Friday. We think the rally will continue although we'll need to keep a wary eye on potential resistance at the 100-dma and 200-dma.

We're starting the play with a stop loss 10% under current levels. Our first target is $63.50. Our second target is $69.00.

FYI: The most recent data listed short interest at 7% of the very small 31.7 million-share float. That could be an additional catalyst for sharp moves higher if bears decide to cover. Plus, the P&F chart is bullish with a $93 target.

Suggested Options:
We are suggesting the December calls.

BUY CALL DEC 55.00 CMP-LK open interest= 144 current ask $8.30
BUY CALL DEC 60.00 CMP-LL open interest= 248 current ask $5.70
BUY CALL DEC 65.00 CMP-LM open interest= 647 current ask $3.70

Annotated Chart:
CMP

Picked on November 09 at $ 58.19
Change since picked:      + 0.00
Earnings Date           10/28/08 (confirmed)
Average Daily Volume =       982 thousand 


ITT Educ. Services - ESI - close: 86.20 change: +1.87 stop: 82.85

Why We Like It:
Some of the education stocks are turning around. ESI recently reported strong earnings and said that in spite of the financial market woes that most of its students are not having additional trouble getting funding. It's true that lending has tightened somewhat but the schools are seeing higher enrollments.

Shares of ESI just bounced from a test of short-term support near its 10-dma and 50-dma. This looks like an entry point to buy calls. There is some round-number resistance at $90.00 but we are targeting a rally into the $95 region. Our exit point will be $94.50. There is some resistance just above $95 (see chart). FYI: The Point & Figure chart is bullish with a $108 target.

Suggested Options:
We are suggesting the December calls.

BUY CALL DEC 85.00 ESI-LQ open interest= 300 current ask $6.90
BUY CALL DEC 90.00 ESI-LR open interest= 727 current ask $4.40
BUY CALL DEC 95.00 ESI-LS open interest= 275 current ask $2.50

Annotated Chart:
ESI

Picked on November 09 at $ 86.20
Change since picked:      + 0.00
Earnings Date           10/23/08 (confirmed)
Average Daily Volume =       1.4 million  


FedEx Corp. - FDX - close: 64.58 change: +2.04 stop: 61.95

Why We Like It:
It might seem kind of silly to add FDX as a bullish play when we're facing an economic recession. However, the crushing drop in oil prices and thus fuel prices could be a real boon for the company. The wildcard that I can't answer is how much, if any, FDX hedged their fuel costs and if those hedges are now losses. Based on the chart and the bounce from its 10-dma on Friday this looks like a new entry point to buy calls.

We're suggesting readers buy calls now with a stop loss under Thursday's low. We have two targets. Our first target is $68.85. Our second target is 73.00 or its 50-dma, whichever one FDX hits first. FYI: The Point & Figure chart is bullish with a $100 target.

Suggested Options:
We are suggesting the December calls.

BUY CALL DEC 65.00 FDX-LM open interest= 379 current ask $5.30
BUY CALL DEC 70.00 FDX-LN open interest= 555 current ask $3.10

Annotated Chart:
FDX

Picked on November 09 at $ 64.58
Change since picked:      + 0.00
Earnings Date           12/18/08 (unconfirmed)
Average Daily Volume =       4.0 million  


Hess Corp. - HES - close: 61.23 change: +4.50 stop: varies

Why We Like It:
Believe it or not a good number of the oil stocks have turned bullish in spite of the breakdown in oil prices. HES is one such stock that held up reasonably well during last week's two-day sell-off. Traders quickly bought the dip on Friday but we are somewhat concerned by the lack of volume on Friday's gain.

We are going to list two different entry points depending on what happens on Monday. Our first entry point will be to buy calls on a breakout over short-term resistance at $62.00 with a trigger at $62.25. Under this scenario our stop loss will be 56.95. Our alternative entry point will be a dip in the $58.00-57.00 zone. If triggered at $58.00 our stop loss will be $54.95.

Our target is the $68.00-70.00 zone.

Suggested Options:
We are suggesting the December calls.

BUY CALL DEC 60.00 IGG-LL open interest= 601 current ask $8.00
BUY CALL DEC 65.00 IGG-LM open interest=1133 current ask $5.50

Annotated Chart:
HES

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           10/29/08 (confirmed)
Average Daily Volume =       6.5 million  


NEW STRANGLE & SPREAD PLAYS


SPDR GOLD Trust - GLD - close: 72.50 change: +0.28 stop: n/a

Why We Like It:
Gold prices have been incredibly volatile this year. This relative calm over the last couple of weeks is narrowing, which suggests a breakout should be imminent.

We are listing two strangles to take advantage of this set up in gold prices. The first strangle uses November options, which expire in two weeks. Thus it's much more risky. The second strangle uses December options.

Note: If GLD prices gap open outside the $71.75-73.50 range on Monday morning we'll have to adjust our strike prices based on the move or abort the play.

What is a strangle?
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.

-November Strangle-

Suggested Options:
We are suggesting readers buy the November $75 call and the $70 put. Our estimated cost is $3.10. We want to sell if either option hits $5.25. There are only two weeks left before November options expire.

BUY CALL NOV 75.00 GVD-KW open interest=8569 current ask $1.60
-and-
BUY PUT NOV 70.00 GVD-WR open interest=5443 current ask $1.50

-December Strangle-

Suggested Options:
We are suggesting readers buy the December $75 call and the $70 put. Our estimated cost is $6.30. We want to sell if either option hits $12.00

BUY CALL DEC 75.00 GVD-LW open interest=3083 current ask $3.30
-and-
BUY PUT DEC 70.00 GVD-XR open interest=2795 current ask $3.00

Annotated Chart:
GLD

Picked on November 09 at $ 72.50
Change since picked:      + 0.00
Earnings Date           00/00/00
Average Daily Volume =           million  

New Play Archives