Option Investor
New Plays

Bounce Play, Breakout, and an Earnings Bet

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NEW DIRECTIONAL CALL PLAYS

Caterpillar - CAT - close: 32.67 change: -2.99 stop: 31.75

Why We Like It:
It's been all over the news and our intraday update today. CAT reported earnings this morning. The results were terrible. The company significantly guided their earnings forecasts lower. Now that the news is out investors sold the stock but previous support near $32.00 held. I'm betting the stock will see a dead-cat bounce. Buy calls now with a stop loss under support. Our target is the $36.00-38.00 zone.

Suggested Options:
This should be a very short-term move so we're suggesting the February calls.

BUY CALL FEB 30.00 CXJ-BD open interest= 711 current ask $3.60
BUY CALL FEB 35.00 CXJ-BI open interest=3450 current ask $1.04

Annotated Chart:
CAT

Picked on January 26 at $ 32.67
Change since picked:     + 0.00
Earnings Date          01/26/09 (confirmed)
Average Daily Volume =       11 million  


Kaiser Aluminum - KALU - close: 25.97 change: +1.05 stop: 23.45

Why We Like It:
Metal-related stocks are showing strength. Shares of KALU broke out from a three-week trading range in the $22.00-25.00 zone. Broken resistance at $25.00 should now be new support. I'm setting the stop loss at $23.45 but more conservative traders might be able to get away with a stop in the $24-25 region. I am suggesting readers buy today's breakout higher or you could wait for a dip back toward $25.00. We're listing two targets. Our first target is $29.75 and readers should take the majority of their position off the table here because $30.00 and the 100-dma could be tough resistance. I'm also setting a secondary target st $34.00.

Suggested Options:
I am suggesting the March calls.

BUY CALL MAR 25.00 QMK-CE open interest= 181 current ask $3.90
BUY CALL MAR 30.00 QMK-CF open interest= 180 current ask $1.75

Annotated Chart:
KALU

Picked on January 26 at $ 25.97
Change since picked:     + 0.00
Earnings Date          02/17/09 (unconfirmed)
Average Daily Volume =      370 thousand 


NEW MARKET NEUTRAL STRANGLE PLAYS

Yahoo Inc. - YHOO - cloes: 11.17 change: +0.15 stop: n/a

Why We Like It:
Troubled Internet giant Yahoo is due to report earnings after the closing bell on Tuesday. The potential for a surprise is pretty big. The market does not know what to expect from new management. I think the stock makes a tempting bet to use a strangle. That way we don't care what direction it moves as long as the stock really moves. I do see the potential for YHOO to become stuck in a $9.00-13.50 trading range so if YHOO doesn't break sharply before the end of the week we'll probably close the play early.

Suggested Options:
Tomorrow (Tuesday) is our only opportunity to get in before earnings. I'm suggesting the February $13.00 call (YHQ-BM) and the February $9.00 put (YHQ-NJ). Our estimated cost is $0.78. We want to sell if either option hits $2.40 or more.

BUY CALL FEB 13.00 YHQ-BM open interest=11270 current ask $0.47
-and-
BUY PUT FEB  9.00 YHQ-NJ open interest= 3396 current ask $0.31

Annotated Chart:
YHOO

Picked on January 26 at $ 11.17
Change since picked:     + 0.00
Earnings Date          01/27/09 (confirmed)
Average Daily Volume =       17 million  


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