Option Investor

Daily Newsletter, Wednesday, 2/10/2010

Table of Contents

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

Market Wrap

Not Much Action While Waiting for Greece's Bailout

by Judy Alster

Click here to email Judy Alster
Greece's bailout plan to be announced soon . . . . U.S. trade deficit higher than expected . . . . and also making news Wednesday was Federal Reserve Chairman Ben Bernanke's remarks prepared for but not delivered to a House committee, due to the blizzard strafing the mid-Atlantic coast; the Fed released them nevertheless. Bernanke's comments about raising interest rates as soon as the economy firms up didn't come as a big surprise, really, but the first method he mentioned of doing it was kind of interesting. Instead of the customary decades-old method of loosening or tightening credit, namely, raising the federal funds rate -- the interest rate, now near zero, that banks charge each other for very-short-term loans -- one Fed remedy for excess liquidity will be something different: It plans to raise the amount of interest it pays to banks on their excess reserves that are in effect "left" at the central bank.

That rate is currently 0.25%. Raising it would give banks an incentive to keep money parked at the Fed, rather than lend it, effectively reducing the amount of money available for loans (and doubtless forcing the rates for borrowers to rise). It's an effective way of "mopping up" some of the excess cash that may be sloshing around in a financial system without -- it's hoped -- tipping the economy back into a recession.

The indexes mostly sulked all day, not even responding to better-than-expected December export data. Sulky is probably the market's true mode, since yesterday's big gain was mostly attributable to headlines regarding the EU's bailout of Greece. The details of that bailout should be made public Thursday, according to the French press. As for today, the hint at higher interest rates couldn't exactly be expected to cheer the market. Financials managed to get today's gold star, but barely:


Paying interest on excess reserves is fairly new for the U.S., authorized here only in late 2008 in the depths of the financial meltdown, although many foreign central banks have used it for years. As for when to expect a rise in the record low discount rate, Bernanke said that will depend on economic and financial conditions, but evidently the Fed wants to keep interest rates low until the economy is stronger, with Bernanke repeating his "extended period" trademark phrase.

Many observers seemed to think that raising interest on excess reserves would in effect be a policy tightening, in much the same way an expired tax cut is a tax hike. In addition to pulling money out of the system, the hike would raise rates tied to the prime rate of commercial banks and thus affect many consumer loans, making it more expensive for businesses and you and I to borrow money. And incidentally, whose tax dollars do you think would be paying that higher interest?


(Kudos to whoever came up with that in-joke of an acronym for knowing what an excrescence is . . . ) The Dow Jones Industrial Average ended the day down 20.26 points or 0.20% at 10,038.38, far away from the 10,325 or so we need to breathe really easily, and with nothing on the immediate horizon to take it there.


The S&P500 lost 2.39 points or 0.22%, closing at 1,068.13, similarly needing a roughly-3% gain to make it to safety.


The Nasdaq fell 3 points or 0.14%, ending at 2,147.87.


The dollar also advanced -- even after the government reported the U.S. trade deficit widened to $40.2 billion in December from $36.4 billion the month before. An interesting equity, the Powershares DeutscheBank US Dollar Index Bullish Fund (UUP), composed solely of long futures contracts, replicates pretty closely the performance of being long the US dollar against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. Here's how you'd have done if you bought it in December:


If you're ever feeling down on the buck, there's also a bearish dollar fund (UDN). A stronger dollar usually pressures commodity prices, as it makes them more expensive for holders of other currencies and in fact, March crude prices fell Wednesday morning. They later turned around and gained 77 cents to end the day at $74.52. Individual oil company prices were generally flat to down, with Chevron (CVX), BP and Exxon-Mobil (XOM) all off a fraction of a percent.


Financial stocks fell immediately after Bernanke's comments were made public but they rebounded faintly and closed mildly higher. Tuesday's big market jump was due mainly to the expected resolution to Greece's debt crisis, for which we have Germany and the other EU partners to thank. Wednesday it seemed banks and others were waiting for the details of exactly how that bailout would work.

Before the open came news that the U.S. trade deficit unexpectedly soared in December. But it's not quite as bad as it sounds -- we can mostly blame higher oil prices and restocking oil inventories. The overall U.S. trade deficit ballooned to $40.2 billion from a revised $36.4 billion gap in November, with the December shortfall coming in far worse than forecast, with a $35.7 billion differential. Imports jumped 4.4% but exports rose a heartening 3.3%.

The worsening in the trade deficit was largely due to a widening of the petroleum deficit, which came in at $23.5 billion, due to both higher prices and more barrels imported. The nonpetroleum gap actually shrank to $26.9 billion from $27.2 billion in November. The widening in the petroleum deficit was due to both a gain in prices and more barrels -- a lot more. Physical barrels imported jumped 12.9% after a 5.2% decline in November. The price of imported oil increased from $72.54 a barrel in November to $73.20 in December.


Of course, a low starting point helps but until-recent weakness in the dollar combined with Asian economic growth continue to boost U.S. non-petroleum exports. Year-over-year, overall exports in December rose to 7.4% from minus 2.4% the previous month, as imports increased to 4.6% percent from minus-5.6%. In a word, overall trade continues to increase, although both imports and exports are still below the pre-financial crisis levels. The jump in oil imports is likely to reverse next month but the widening trade gap might bode ill for the dollar.

As for earnings, no stories moved the market Wednesday but there were a few items of interest: The New York Times Co. (NYT) reported that fourth-quarter profit more than tripled to $90.9 million, the publisher's highest quarterly earnings since mid-2007. Credit an 18% cut in the company's work force (yikes!) that more than offset the steep slide in ad sales. The company expects more ad erosion this year, probably leading to more job cuts. Investors really don't like that kind of earnings quality; shares fell $1.05 or 9% to $10.62 . . . .

NEW YORK TIMES bleeding ad money:

Berkshire-Hathaway's rating was cut two notches to AA by Fitch ahead of the company's planned acquisition of Burlington Northern Santa Fe. Fitch says is concerned about the deal's effect on Berkshire's "asset profile, capitalization, and interest coverage" as Berkshire-Hathaway sells $8 billion in notes to help finance its purchase. The stock dropped $150, but when you're starting out at $111,700, and when your stock has risen over 10% since the middle of January (yes), that's a mere 0.13% drop . . . . Big Irish drug maker Elan (ELN) lost 10 cents in the fourth quarter but said it expects an operating profit in 2010 for the first time in nearly a decade, thanks in part to its multiple-sclerosis drug Tysabri, although revenue growth would slow before accelerating next year; the stock fell five cents to $7.02 . . . . Advertising conglomerate Omnicom Group (OMC) announced a not-surprising 15% drop in earnings for its fourth quarter due to tight marketing budgets that reduce profits from media and advertising agencies, although international revenue increased slightly (In journalism school I was taught that in tough times you increase advertising) . . . .

European shares gained on Wednesday, helped by hopes that Greece's financial woes won't bring down the EU. Luxembourg's steel mammoth ArcelorMittal (MT) obviously missed that news, as it declined on much-lower-than-expected earnings and a disappointing outlook, with rising costs and lower selling prices offsetting higher shipments, along with an increase in debt for the first quarter. Many steel stocks on this side of the ocean followed MT down: AK Steel (AKS) fell 27 cents to $20.48, U.S. Steel (X) tumbled $1.64 to $44.37 and Steel Dynamics (STLD) was down 37 cents to $15.06 has fallen 2.3% (note the fair-enough 2% dividend). Hopes that the EU will come to Greece's rescue may be helping, but at the risk of being a spoilsport, what will happen when markets start looking at the debt problems of Spain, Portugal and Italy?

ARCELOR-MITTAL, not a part of Europe's hopeful celebration Wednesday:

Other than Jobless Claims, Thursday will be a slow day as regards economic reports. Pepsi, Viacom, Rio Tinto, McAfee, Diageo and AutoNation are among companies reporting earnings. The EIA's petroleum and natural gas reports have been moved to Friday.

New Option Plays

Defense Looking Defenseless

by James Brown

Click here to email James Brown

Editor's Note:

My market bias is still bearish. However if you are looking for a bullish candidate I suggest you check out the restaurant stocks. CMG, PFCB, and BWLD all have bullish shares and appear to be resisting the market's weakness. CMG and BWLD do have some resistance directly overhead but they might be worth a look on a breakout higher.


General Dynamics - GD - close: 67.64 change: -0.40 stop: 70.55

Why We Like It:
The up trend in the defense sector has been broken. Now we don't know if the trend has actually changed or if this is just a correction but short-term the trend is down. I want to take advantage of the bounce in GD to buy puts. Shares bounced back toward technical resistance at its 50-dma and stalled. We can buy puts now and use a stop above the early February high. There is potential support at $65 and the exponential 200-dma but we want to aim for the simple 200-dma near $61.85. We'll set our actually exit price at $62.60.

Suggested Options:
I'm suggesting the March $65 puts.

BUY PUT MAR 65.00 GD1020O65 open interest=1495 current ask $1.30

Annotated Chart:

Entry  on  February 10 at $ 67.64
Change since picked:       + 0.00
Earnings Date            04/28/10 (unconfirmed)
Average Daily Volume =        2.4 million  
Listed on  February 10, 2010         

In Play Updates and Reviews

Lack of Direction

by James Brown

Click here to email James Brown

CALL Play Updates

Freeport McMoran - FCX - close: 71.03 change: -0.55 stop: 65.85

FCX isn't making much progress. Traders did buy the dip this morning. I have to stress how aggressive this trade is. Yes, it looks like a potential double-bottom near its 200-dma but FCX is going to move based on commodities and they are going to move on the dollar. If Greece gets an aid package the euro should rally and the dollar should retreat, lifting commodities and thus FCX. EU leaders are holding a special summit on Thursday to discus the "economy", which might be code for "how do we get out of this Greek debt mess without tanking our currency?"

We want to use small positions. Out first target to take profits is at $74.75. Our second target is the 100-dma near $77.50.

Entry  on  February 06 at $ 70.23 
Change since picked:       + 0.80
Earnings Date            04/22/10 (unconfirmed)
Average Daily Volume =       20.6 million  
Listed on  February 06, 2010         

Teva Pharmaceutical - TEVA - close: 56.86 change: -0.24 stop: 55.75

TEVA is starting to act like it wants to go lower. Today appears to be a new lower high on a short-term basis. I am expecting another test of support near $56.00 and its 50-dma very soon. More conservative traders may want to exit early right here! I'm not suggesting new positions.

This should be a short-term trade. TEVA reports earnings on Feb. 16th and we do not want to hold over the announcement. Our short-term target to take profits is at $59.50. Our second target is $61.50.

Entry  on  February 02 at $ 57.58 
Change since picked:       - 0.72
Earnings Date            02/16/10 (confirmed)
Average Daily Volume =        6.0 million  
Listed on  February 02, 2010         

PUT Play Updates

Apple Inc. - AAPL - close: 195.11 change: -1.07 stop: 210.51

AAPL spent the session churning sideways still under technical resistance at its 10-dma and the 100-dma. The path of least resistance should be down! More conservative traders may want to lower their stops closer to $206.

Our first target to take profits is at $182.50. Our second target is $165.00 although we might exit at the 200-dma. This is an aggressive trade and I'm suggesting small positions.

Entry  on   January 28 at $201.08 (small positions)/gap open entry
Change since picked:       - 5.96
Earnings Date            01/25/10 (confirmed)
Average Daily Volume =         26 million  
Listed on   January 28, 2010         

Abbott Labs - ABT - close: 53.26 change: -0.09 stop: 55.05

Our new play in ABT is now open. We didn't have to wait long. Shares dipped to $52.67 this morning, hitting our trigger at $52.80. Shares did pare their losses but the rebound was starting to stall this afternoon. Now that the play is open our first target is $50.15. More aggressive traders can target the 200-dma or support near $48.00.

Correction: The option symbol I listed yesterday was incorrect. I'm suggesting the March $50 puts (symbol: ABT1020O50). The high today was $0.38. Last night I suggested the March $50 puts but listed the May 50 put symbol.


Entry  on  February 10 at $ 52.80
Change since picked:       + 0.46
Earnings Date            04/21/10 (unconfirmed)
Average Daily Volume =        7.5 million  
Listed on  February 09, 2010         

Franklen Resources Inc. - BEN - close: 97.30 change: +0.08 stop: 106.80

BEN spent another day drifting sideways. Financials were some of the best performers today but BEN could not build on its gains. I don't see any changes from my prior comments. Look for short-term resistance near $100. If that breaks then the $104-105 zone. Our target to exit is $92.50.

Entry  on   January 30 at $ 99.59 /gap higher entry point (small positions)
Change since picked:       - 2.29
Earnings Date            01/28/10 (confirmed)
Average Daily Volume =        1.2 million  
Listed on   January 30, 2010         

Goldman Sachs - GS - close: 153.63 change: +1.14 stop: 156.05

GS is also churning sideways but shares did manage a 0.7% gain. We are still waiting for a breakdown. I am suggesting a trigger to buy puts at $147.45. If triggered our first target to take profits is at $138.00.

Entry  on  February xx at $ xx.xx <-- TRIGGER @ 147.45
Change since picked:       + 0.00
Earnings Date            04/13/10 (unconfirmed)
Average Daily Volume =         17 million  
Listed on  February 00, 2010         

Gymboree - GYMB - close: 41.82 change: -0.06 stop: 42.26

GYMB is still inching higher although shares closed down fractionally on Wednesday. I'm a little nervous given the stock's recent relative strength but so far $42.00 is holding as resistance. The high today was $42.11. Yesterday it was $42.16. I am not suggesting new bearish positions at this time. Our first target is $35.50. Our second, longer-term target is $32.00. Consider using small positions to limit your risk.

Entry  on   January 23 at $ 39.74 
Change since picked:       + 2.08
Earnings Date            03/04/10 (unconfirmed)
Average Daily Volume =        513 thousand 
Listed on   January 23, 2010         

Intl. Bus. Mach. - IBM - close: 122.81 change: -0.40 stop: 131.55

The consolidation in IBM is coiling more tightly and that suggests a breakout one way or the other is almost imminent. The trend of lower highs suggest the breakout will be down. More nimble traders may want to buy puts under $121.75. I'm concerned the 200-dma near $118.25 will be significant support.

Currently our plan is to buy puts at $127.75. If triggered at $127.75 our first target is $122.00. Our second target is the 200-dma.

Entry  on  February xx at $ xx.xx <-- TRIGGER @ 127.75
Change since picked:       + 0.00
Earnings Date            04/20/10 (unconfirmed)
Average Daily Volume =        8.2 million  
Listed on  February 03, 2010         

Infosys Tech. - INFY - close: 53.11 change: -0.15 stop: 55.15

The high today was $53.60. Could the rebound already be running out of steam. I'm expecting the 50-dma to act as resistance near $54.20. Currently the plan is to buy puts again at $53.90. If triggered on this new trade we'll take profits again at $50.15 and $46.50.

We want to use the March $50 puts.

-2nd Entry-
Entry  on  February 00 at $ 00.00 <-- trigger @ 54.50
Change since picked:       - 0.00

-1st Entry Closed-
Entry  on   January 28 at $ 53.40
Change since picked:       - 2.47 <-- early exit @ 50.93 (-4.6%)
                            /1st target hit @ 50.15 (-6.0%)
Earnings Date            04/15/10 (unconfirmed)
Average Daily Volume =        1.5 million  
Listed on   January 25, 2010         

JPMorgan Chase - JPM - close: 38.87 change: +0.48 stop: 41.65

Banks were bouncing but they were one of the few sectors in positive territory on Wednesday. JPM gained 1.25% but remains under resistance near $40.00 and its 200-dma. Our first target to take profits is at $35.25. Our second target is $32.00.

Entry  on   January 26 at $ 38.44 
Change since picked:       + 0.43
Earnings Date            04/15/10 (unconfirmed)
Average Daily Volume =         46 million  
Listed on   January 26, 2010         

Mckesson Corp. - MCK - close: 58.61 change: -0.14 stop: 62.51

MCK rebounded from its morning lows only to stall at its 10-dma. I would still consider new put positions now even though a bounce near $60 would be more attractive. Our first target to take profits will be $54.00.

Entry  on   January 30 at $ 58.82 
Change since picked:       - 0.21
Earnings Date            01/26/10 (confirmed)
Average Daily Volume =        2.8 million  
Listed on   January 30, 2010         

MEDCO Health Solutions - MHS - close: 61.96 change: +0.71 stop: 64.26

MHS outperformed the market with a 1.15% gain thanks to a broker upgrade this morning. Shares hit an intraday high of $62.56. Our plan was to buy puts at $62.75 so we are still on the sidelines. More aggressive traders may want to jump in now instead of waiting. The $64.00 level and the 50-dma should be overhead resistance. Use a bounce to $62.75 as an entry point. Our first target is $57.50.

Entry  on  February xx at $ xx.xx <-- TRIGGER @ 62.75 
Change since picked:       + 0.00
Earnings Date            02/23/10 (unconfirmed)
Average Daily Volume =        3.2 million  
Listed on  February 09, 2010         

Retail Holders - RTH - close: 91.08 change: -0.32 stop: 94.10

The bounce in the RTH is losing steam. I would still consider new positions here at current levels. Or if you think the market's bounce isn't over yet then look to open positions near the 50-dma near $93.50. Our first target is the $87.00 level. The 200-dma will probably be support. The RTH moves kind of slow so make sure you use an option that gives you enough time.

Entry  on   January 23 at $ 91.42 
Change since picked:       - 0.32
Earnings Date            --/--/--
Average Daily Volume =        1.7 million  
Listed on   January 23, 2010         

SIEMENS - SI - close: 86.43 change: -1.16 stop: 94.05

The oversold bounce in SI is already fading. Shares lost 1.3% but managed a bounce from its simple 200-dma.

Our second and final target is $81.00. More aggressive traders may want to aim lower.

Entry  on   January 26 at $ 94.34 /gap higher entry
Change since picked:       - 7.91
                            /1st target hit @ 87.55 (-7.1%)
Earnings Date            01/26/10 (confirmed)
Average Daily Volume =        368 thousand 
Listed on   January 26, 2010         

United Technology - UTX - close: 66.64 change: +0.12 stop: 69.05

UTX is still trying to bounce but it was stuck under its 10 and 100-dma today. There is no change from my prior comments. This move could be used as a new entry point but a failed rally near $68 would be more attractive. Our target to take profits is $61.00, just above the simple 200-dma. Our time frame is just two or three weeks.

Entry  on  February 04 at $ 66.38 
Change since picked:       + 0.26
Earnings Date            04/21/10 (unconfirmed)
Average Daily Volume =        5.1 million  
Listed on  February 04, 2010