Option Investor

Daily Newsletter, Wednesday, 8/5/2009

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Service-Sector News Helps Cool Rally

by Judy Alster

Click here to email Judy Alster
Today started off with a plummet thanks partly to the weak service sector report. Even so, some kind of breather was to be expected after the heartening rally that sent the Dow and the S&P 500 up some 14% in 16 days, especially with all the tension ahead of Friday's jobs report. The Dow got as low as 9206, the S&P500 slid to 994 and the Nasdaq got as far down as 1980. The market closed lower almost across the board, but made a valiant effort to recover and did regain a lot of ground:



S&P 500:


S&P500, intraday:

It was a very big morning for economic reports, and they did have an effect on the markets. Before the open came two reminders that employment usually lags a recovery. Challenger's July count of layoff announcements jumped to 97,373, up from 74,393 in June. (Note that factory shutdowns and re-openings in the auto sector have been skewing job-cut reports and jobless claims all over the place for the last month.) The Challenger Job-Cut Report categorizes announcements of corporate layoffs based on mass layoff data from state departments of labor and is considered a decent leading indicator of new jobless claims.

Caution, though: Job-cut reports don't distinguish between layoffs scheduled for the short-term or the long term, or whether job cuts are being handled through attrition or actual layoffs, it doesn't include jobs eliminated little by little over time and it's not adjusted for seasonal variation. Announcements of layoffs don't correlate immediately to actual layoffs, since not every layoff announcement results quickly in a near-term job loss.

The numbers are different, but this Department of Labor Graph confirms the recent spike up in the job-cut report:


Automatic Data Processing's national employment report focuses on monthly changes in payrolls and it wasn't too bad: minus-371,000 for July, down from a loss of 463,000 jobs in June. In other words, people are still losing jobs but at the slowest rate since October of last year. The labor market could be stabilizing and at this rates bodes hopeful for Friday's jobs report. Some consider the ADP figure a stand-in for the government's non-farm payroll reading. The ADP report represents about 400,000 U.S. businesses and 24 million U.S. private sector employees and also looks like a confirmation of, if not a bright employment picture, at least an unemployment picture that's getting definitely less bleak.

This Department of Labor graph shows the slowing of unemployment beginning in March:


The Mortgage Bankers' Association index of mortgage purchase applications was reported as rising 0.9% in the July 31 week "to an undisclosed level," with the MBA saying only that "It's been little changed over the last three weeks between 260 and 265. (When you add 0.9% to last week's 262, you get 262.9.) Likewise, the MBA did not post a level for the refinance index, saying it increased 7.2% in the week and is about 35% higher than the low in June. Mortgage rates were mostly lower in the week with 30-year loans down 19 basis points to an average 5.17 percent. Here's a look at 30-year mortgage rates through July and their virtual twin, 10-year Treasury yields:


Helping to throw cold water on the rally was the Institute of Supply Management's Non-Manufacturing Index report, which said business at service companies was weaker than expected last month. The group's services index, which measures the health of retail, financial services, transportation and health care companies, fell to 46.4 from 47 in June, falling short of expectations and marking the 10th straight month of declines; a reading below 50 indicates the sector is shrinking.

Prices also fell, down more than 12 points. That reflected a drop in energy prices but more important than that, it signified poor pricing power. That's nice for consumers who can afford anything, but it's not good for future earnings and consequently could drag on stocks and commodities.

Look at it in context, though. The last four NMI reports are all well off the March low, and the latest month is still well above the 12-month average. Should we really jump off a bridge because of a six-tenths-of-one-percent drop?


Even some cheerful news from the Commerce Department didn't help much: Factory orders, the dollar level of new orders for both durable and non-durable goods, improved in June for the fourth time in five months. The 0.4% gain fell short of May's 1.1% but was much better than the expected 1% decline. Inventories continued to fall and one day soon those rapidly-emptying shelves will transform into big new orders. Some analysts think that could happen as early as next month, since the Institute for Supply Management reported an increase in shipments in June, up 1.4% after a 0.8% fall in May.

Despite these recent signs of improvement in manufacturing and housing, the market is evidently still worried that rising unemployment will stop consumers from spending and put the kibosh on the recovery.

I'm not so sure. Look at this unassuming government graph, below; it shows domestic purchases and demand rising markedly in the second quarter. They're still in negative territory, but at their best level in almost a year. On this very topic, I was in Las Vegas for a couple of days last month and all I could mumble to my friends, as we attempted vainly to navigate the 24-hour-a-day crowds without getting stepped on, was, "What recession?" Big cigar-chomping guys were lined up three deep at the craps tables as they always have been and nobody blinked an eye at paying $150 to see a show or $19 for the calamari appetizer. If Vegas is any indication at all, we may be seeing the light at the end of the tunnel soon.


Today there were several announcements of upcoming Treasury auctions. On the 11th the Treasury will auction $37 billion in three-year notes; on the 12th, $23 billion in 10-year notes and on the 13th, $15 billion in 30-year bonds. I mention this as a prelude to telling you that you -- you personally, the regular individual investor -- can bid on these instruments. As of last year, all Treasury marketable securities -- bills, notes, bonds and TIPS -- are sold and transferred in increments of $100, replacing the $1,000 minimum purchase and transfer amount that had been in effect since 1998. Go to www.treasurydirect.gov to read about it.

Maybe not surprisingly, the Energy Information Administration said crude supplies continued to grow. Crude oil stocks rose 1.7 million barrels in the July 31 week to 349.5 million. To try to offset the buildup, product stocks fell, down 0.2 million barrels for gasoline to 212.9 million, and down 1.1 million barrels for distillates to 161.5 million. Demand continued weak, at just +0.5% year-over-year for gasoline; for the month of July, demand was down 3.1%. Refineries are limiting output, continuing to operate at less than 85% percent of capacity.

As some have pointed out, of course demand is down: Millions of people don't have jobs to drive to. One also suspects that driving patterns may be slowly changing, even without $4-a-gallon gasoline, as more people think twice before using the car for a single errand.

Crude prices bounced around in initial reaction to the EIA report but despite weak demand and rising supplies, closed higher, at $71.97 a barrel. This chart tells us what spot crude's been doing since 2005 through Tuesday:


Gold futures, in response to the job-cut and service-sector reports, fell from their highest levels in two months. It gave the dollar a lift. August gold futures fell $4.10 or 0.4% to $963.40 an ounce; precious metals indexes followed suit:


In stock news, financials outperformed the broader market with ease for the second straight session, remaining in the green for almost the entire session before closing up over 3%. Regional banks advanced 2.9%, diversified banks climbed 5.4% and diversified financial services stocks were up 5.4%, including Bank of America (BAC), and JPMorgan Chase (JPM). Financials are now up more than 8% this week.


News Corp (NWS) lost $203 million in the fourth quarter on a MySpace writedown and operating profit worse than expected due to, what else, the economy. The net loss of 8 cents per share compared was way down from a net profit of $1.1 billion or 43 cents per share a year ago. News Corp. bought MySpace, you'll recall, in 2005 for $580 million. Hamlet was right: Timing is everything. The stock gained one cent today.

Cisco earnings fell 46% but beat expectations anyway. The company says it sees the recession loosening and is confident this is the bottom. Sales fell 18% to $8.5 billion and earnings were an adjusted-for-stock-compensation 31 cents share; analysts were expecting 29 cents. Cisco sees another drop in revenue this quarter, but says its cost-cutting program -- which was fierce -- is over, and it's going to focus on growth. The stock lost about $1 to $21.42 but it's probably no big deal since it's clearly trading well into new territory,


Some stocks were up wildly with the kind of charts we haven't seen in a long time. Some big gainers included mortgage insurer Radian Group (RDN), who surged more than 83% after announcing a second-quarter profit and revenue that more than doubled. The stock closed at $6.72, up $3.05. Radian earned almost $232 million or $2.82 a share on revenue up 58% to $577 million.


Also on a tear was embattled insurer American International Group Inc. (AIG), up $8.48 at $22. The company gained more than 60% and it doesn't even announce earnings until Friday. Obviously a lot of that jump was short-covering after better-than-expected earnings from Marsh & McLennan (MMC) gave insurers a boost.


Shares of auto supplier American Axle (AXL) leapt $1.14 or 44%. Investors were responding to the announcement that the company had cut its second-quarter losses by more than half, despite the fact that its revenue plummeted due to extended shutdowns at General Motors and Chrysler Group plants. The Detroit company reported a loss of $288.6 million or $5.20 per share, compared with a loss of $644.3 million or $11.98 per share last year. Revenue fell 50% to $245.6 million. Can you imagine what the reaction would have been if they'd turned a profit?


So . . . What do we take away from today's session? That a big concern on Wall Street is layoffs and the concomitant drop in personal income. Job cuts have to slow for the economy to have a solid recovery. In the meantime, the market is perceptibly creeping up. There are signs of strength and one is the fact that Wednesday's mild loss was the biggest point drop in the Dow since July 7. Investors were expecting the market to pause: as we know, trees don't grow to the sky. Stock dips will probably stay muted because investors who missed the early part of the rally will look to buy on weakness. Me, I'm looking for shipping prices to firm and will discuss the Baltic Dry Index next week.

Tomorrow's economic reports bring the inflation-fighting Bank of England's announcement and that of the European Central Bank, the Natural Gas Report, Jobless Claims and others.

A fraction of the companies scheduled to release earnings tomorrow are Unilever, Sun Life, Abiomed, Theragenics, Comcast, Abraxis BioScience, Blue Nile, Brinker International, Beazer Homes, Gerdau SA, Linn Energy, Maxwell Technologies, Crocs, Dollar Tree, Diana Shipping, Hansen Natural, Immunogen, IMAX, Manulife Financial, NovoNordisk, Nvidia, Portugal Telecom, ResMed, Sapient, Silicon Graphics, VeriSign, Westar Energy, WestJet and Williams Partners.

New Option Plays

Defense and Gambling

by James Brown

Click here to email James Brown

Editor's Note:

If you're looking for another trading idea I almost added a strangle play on AMZN currently at $84.29. The long-term trend is now up but the post-earnings rally failed and shares have reversed. I believe the jobs report on Friday could be a market mover and options are cheap right now. Traders could buy a strangle on AMZN with the August $80 puts and August $90 calls for less than $2.00. You'll want to open positions on Thursday in front of the jobs report.


Lockheed Martin - LMT - close: 74.32 change: -1.15 stop: 77.05

Why We Like It:
LMT has been under performing both the S&P 500 and the defense sector. Shares have not participated in the market's rally and the sideways consolidation looks like it's about to breakdown into another leg lower. I'm suggesting put positions now. More conservative traders can wait for a new relative low under $73.00. Our first target is $70.25. Our second target is $66.00. Currently the Point & Figure chart is bearish with a $65 target. FYI: More conservative traders might want to consider a tighter stop just above the $76.00 level.

Note: Traders should be aware that ATK reports earnings tomorrow morning and their results could have affect on the whole defense sector.

Suggested Options:
I am suggesting the August or September puts. Don't forget that August puts expire in about two weeks.

BUY PUT AUG 75.00 LMT-TO open interest=2943 current ask $2.20
BUY PUT AUG 70.00 LMT-TN open interest=1835 current ask .50

BUY PUT SEP 75.00 LMT-UO open interest=10482 current ask $3.80
BUY PUT SEP 70.00 LMT-UN open interest= 8249 current ask $1.60

Annotated Chart:

Picked on   August 05 at $ 74.32
Change since picked:      + 0.00
Earnings Date           10/21/09 (unconfirmed)
Average Daily Volume =       3.4 million  
Listed on August 05, 2009         

Wynn Resorts - WYNN - close: 56.57 change: -1.43 stop: 60.26

Why We Like It:
I'm taking a gamble that after a 100% rally in WYNN the short-squeeze is topping out. The $60.00 level is overhead resistance and the rally reversed under $60 this morning. Shares are obviously overbought and due for a correction. Due to the high-risk nature of the trade I am suggesting very small position sizes at least 1/2 to 1/4 your normal trade. Our first target is $51.00. Our second target is $48.00.

Suggested Options:
I am suggesting the August or September puts. Don't forget that August puts expire in about two weeks.

BUY PUT AUG 60.00 UWY-TL open interest=1691 current ask $5.60
BUY PUT AUG 55.00 UWY-TK open interest=3185 current ask $2.80
BUY PUT AUG 50.00 UWY-TJ open interest=10115 current ask $1.20

BUY PUT SEP 55.00 UWY-UK open interest= 956 current ask $4.70
BUY PUT SEP 50.00 UWY-UJ open interest= 913 current ask $2.75

Weekly Chart:

Daily Chart:

Picked on   August 05 at $ 56.57
Change since picked:      + 0.00
Earnings Date           10/29/09 (unconfirmed)
Average Daily Volume =       4.7 million  
Listed on August 05, 2009         

In Play Updates and Reviews

The Rally Stumbles

by James Brown

Click here to email James Brown

CALL Play Updates

Fluor Corp. - FLR - close: 53.80 change: -0.21 stop: 48.45

Rival FWLT reported earnings this morning that were better than expected but the company missed the revenue estimates. Shares of FLR managed to pop higher on the news and eventually rallied to new relative highs after testing the $54.00 level again.

Today's close over the June highs is bullish and more aggressive traders may want to consider launching call positions now. We are still waiting for a dip but we'll raise the entry point to $51.00 and raise the stop loss to $48.45. If triggered our first target is $54.80. Our second target is $59.00.

Picked on     July xx at $ xx.xx <-- TRIGGER @ 51.00
Change since picked:      + 0.00
Earnings Date           08/10/09 (confirmed)
Average Daily Volume =       2.4 million  
Listed on  July 25, 2009         

Euro Currency ETF - FXE - close: 144.09 chg: +0.13 stop: 139.95

Nothing has changed for our FXE play. The dollar is still slipping lower and the FXE is slowly marching higher. I am not suggesting new bullish positions at this time.

Our first target is $144.50. Our second target is $148.50. The P&F chart is bullish with a $168 target.

Picked on     June 23 at $140.76
Change since picked:      + 3.33
Earnings Date           00/00/00
Average Daily Volume =       461 thousand    
Listed on  June 23, 2009         

Gold Miner ETF - GDX - close: 40.95 change: -0.13 stop: 36.90

The action in the GDX was healthy today. The ETF dipped toward $40.00and filled the gap from Monday morning. Aggressive traders may want to buy calls on the intraday bounce and just raise your stop loss a bit. GDX has already exceeded our first target. Our second target is $44.00.

Picked on     July 13 at $ 36.49 /gap higher entry
                               /originally listed at $35.93
Change since picked:      + 4.45
            gap higher exit   /1st target hit @ 39.95 (+9.4%)
Earnings Date           00/00/00
Average Daily Volume =       6.8 million  
Listed on  July 13, 2009         

IDEXX Labs - IDXX - close: 50.75 change: -0.04 stop: 44.95

IDXX rallied to new 2009 highs and hit $51.44 this afternoon. Yesterday we added an aggressive entry point to open very small positions at $51.10 with a stop loss at $48.99. The original plan is still in place to buy calls on a dip at $47.50.

Aggressive strategy: Entry point at $51.10. Stop loss at $48.99. Our first target is $54.85. I suggest very small positions sizes (about 1/4 of your normal trading size).

Original plan is to buy calls at $47.50 with a stop at $44.95. If triggered at $47.50 our first target is $52.00. Our second target is $54.90. Our time frame is four to eight weeks.

*Aggressive Strategy*
Entry on    August 05 at $ 51.10 *stop loss @ 48.99   
Change since picked:      - 0.35

*Original Strategy*
Picked on     July xx at $ xx.xx <-- TRIGGERs @ 47.50 
Change since picked:      + 0.00
Earnings Date           07/24/09 (confirmed)
Average Daily Volume =       383 thousand 
Listed on  July 25, 2009         

J.C.Penney - JCP - close: 30.83 change: -0.21 stop: 28.40

JCP dipped toward $30.00 and its 10-dma and bounced. This looks like a new bullish entry point. However, the monthly same-store sales data comes out for several major retailers tomorrow. Readers may want to wait and watch to see how the market reacts. July could deliver some disappointing results.

Our first target is $32.75. Our second target is $34.90. I would be tempted to aim higher but JCP is due to report earnings on August 14th and we do not want to hold positions over the announcement. Traders should consider this a more aggressive bullish play with the market overbought. I would trade half your normal position size.

Picked on   August 03 at $ 31.05 *triggered /gap higher entry
Change since picked:      - 0.22
Earnings Date           08/14/09 (confirmed)
Average Daily Volume =       5.5 million  
Listed on August 01, 2009         

Legg Mason - LM - close: 28.12 change: +0.30 stop: 23.99

Nothing has changed for our LM play. We are waiting for LM to correct back toward support near $25.00. Our trigger is $25.55. If triggered our first target is $29.75. Our second target is $33.40. My time frame is four to eight weeks.

Picked on     July xx at $ xx.xx <-- TRIGGER 25.55
Change since picked:      + 0.00
Earnings Date           07/20/09 (confirmed)
Average Daily Volume =       3.4 million  
Listed on  July 25, 2009         

Lorillard Inc. - LO - close: 71.79 change: -1.29 stop: 69.45

Cigarette and tobacco maker LO is starting to correct. Shares lost 1.7% and closed under their 10-dma. The low today was $71.32. Buy calls on a dip in the $70.50-70.00 zone. Our first target is $74.50. Our second target is $77.00.

Picked on   August xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/27/09 (confirmed)
Average Daily Volume =       1.5 million  
Listed on August 01, 2009         

S&P 100 index - OEX - close: 466.21 change: -1.10 stop: 458.10

The market appears to have a very precarious grip on the rally here. More conservative traders may want to start taking profits on our OEX play right now. The plan is to exit at $469.00. More aggressive traders may want to aim for the 480 region.

Picked on     July 30 at $458.10 *triggered              
Change since picked:      + 8.11
Earnings Date           00/00/00 
Average Daily Volume =        xx 
Listed on  July 28, 2009         

Polaris - PII - close: 37.98 change: -0.12 stop: 31.95

There is no change for our PII play. We're waiting for a correction. The plan is to buy calls at $34.15. Our first target is $37.50. Our second target is $39.90. FYI: The Point & Figure chart is bullish with a $43.50 target.

Picked on     July xx at $ xx.xx <-- TRIGGER @ 34.15
Change since picked:      + 0.00
Earnings Date           07/16/09 (confirmed)
Average Daily Volume =       436 thousand 
Listed on  July 18, 2009         

Trina Solar - TSL - close: 29.24 change: -0.73 stop: 26.69

I would still buy calls on TSL in the $29.00-30.00 zone but readers need to realize this is a very aggressive, higher-risk trade. We need to use smaller than normal position sizes (1/2 to 1/4 the norm) because of our aggressive entry point.

Furthermore I am labeling this an aggressive play because TSL can be a volatile stock and the closest level of possible support is $27.00 and Friday's low at $26.71. Our first target is $34.00.

Picked on   August 04 at $ 29.97
Change since picked:      - 0.73
Earnings Date           08/18/09 (unconfirmed)
Average Daily Volume =       1.7 million  
Listed on August 04, 2009         

Valmont Industries Inc. - VMI - cls: 75.44 chg: +0.92 stop: 69.94

VMI continues to show relative strength. The stock gained 1.2% and closed over the $75.00 level. More conservative traders might want to start inching up their stop loss. I am not suggesting new positions at this time. We want to use very small position sizes because this is a higher-risk trade. Our target is $78.50.

Picked on   August 03 at $ 72.98 /gap down entry
                               /originally listed at $73.88
Change since picked:      + 2.46
Earnings Date           07/21/09 (confirmed)
Average Daily Volume =       414 thousand 
Listed on August 03, 2009         

PUT Play Updates

Genzyme - GENZ - close: 49.16 change: -0.64 stop: 52.55

GENZ continues to sink to new relative lows on above average volume. A broker downgrade this morning didn't help the stock. This is another entry point for puts. Our first target to take profits is $45.25. Our second target is $41.00. The P&F chart is bearish with a $40 target.

Picked on   August 03 at $ 49.90 *triggered         
Change since picked:      - 0.74
Earnings Date           10/22/09 (unconfirmed)
Average Daily Volume =       3.9 million  
Listed on August 01, 2009         

Biotech Ishares - IBB - close: 78.16 change: -1.26 stop: 80.75

The biotech sector is reversing under resistance again. The IBB has produced a bearish engulfing candlestick reversal pattern today. If you haven't opened positions yet consider buying puts on a new drop below $78.00. Our target on the IBB is $75.50. More aggressive traders may want to aim for the $74-73 area.

Picked on     July 30 at $ 79.44
Change since picked:      - 1.28
Earnings Date           00/00/00
Average Daily Volume =       892 thousand 
Listed on  July 30, 2009         

LEAP Wireless - LEAP - close: 24.17 change: -0.83 stop: 26.05 *new*

It looks like the oversold bounce is rolling over again. I am lowering our stop loss down to $26.05 since tomorrow is our last day. We want to exit at the closing bell on Thursday to avoid holding over earnings. Our official target to exit, should LEAP hit it intraday, is $23.25.

Picked on     July 17 at $ 26.80 *triggered    
Change since picked:      - 2.63
Earnings Date           08/06/09 (confirmed) 
Average Daily Volume =       2.2 million  
Listed on  July 16, 2009         

QQQ ProShares - QLD - close: 45.26 change: -0.63 stop: 46.55

Tech stocks were under performing today. The NASAQ, NDX and the QLD all appear to have produced a short-term bearish reversal. I see this as a new entry point to buy puts but readers could wait for a new decline under today's low (44.65). We want to trade very small position sizes given the aggressive nature of this play. Our target is $40.50.

Picked on     July 30 at $ 44.89 
Change since picked:      + 0.37
Earnings Date           00/00/00 
Average Daily Volume =      13.5 million  
Listed on  July 30, 2009         

VistaPrint - VPRT - close: 42.82 change: +0.23 stop: 42.05

Today's action has produced a failed rally at the $44.00 level. This is another entry point for our aggressive trade. Our normal trade remains unopened.

Aggressive strategy: Buy puts in the $42.00-44.00 zone with a stop loss at $44.05. Targets at $35.20 and $31.50.

Original strategy: Buy puts with a trigger at $38.80. Stop loss at $42.05. If triggered at $38.80 our first target is $35.20. Our second target is $31.50.

Picked on   August xx at $ xx.xx <-- TRIGGER @ 38.80
Change since picked:      + 0.00
Earnings Date           07/30/09 (confirmed)
Average Daily Volume =       1.3 million  
Listed on August 01, 2009         

*Aggressive Trade (small position 1/2 to 1/4 your normal size)*
Picked on   August 04 at $ 42.59   (stop loss @ 44.05)
Change since picked:      + 0.23

Strangle & Spread Play Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)

McDonald's - MCD - close: 55.09 change: +0.08 stop: n/a

MCD is going nowhere fast. The stock has been hugging the $55.00 level all week long. We're not suggesting new strangle positions at this time.

I suggested the August $60 calls (MCD-HL) and the August $55 puts (MCD-TK). Our estimated cost is $1.25 (0.70 + 0.55). We want to sell if either option hits $2.75 or higher. This may take a few weeks to succeed.

Picked on     July 18 at $ 57.84
Change since picked:      - 2.89
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       7.8 million  
Listed on  July 18, 2009         


Alliant Techsystems - ATK - close: 78.98 change: -0.36 stop: 81.15

We have run out of time for our ATK play. The company reports earnings tomorrow morning and it was our plan to exit today at the closing bell. The stock has been churning sideways in a tight range as investors wait for the earnings results.


Picked on     July 27 at $ 78.88
Change since picked:      + 0.10 <-- exit early @ 78.98 (+ 0.001%)
Earnings Date           08/06/09 (confirmed)
Average Daily Volume =       443 thousand 
Listed on  July 27, 2009