Option Investor

Daily Newsletter, Wednesday, 4/7/2010

Table of Contents

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

Market Wrap

Consumers, Greece Drag Down Stocks

by Todd Shriber

Click here to email Todd Shriber
In what was the worst-single day performance for stocks since February, slumping consumer credit and a familiar concern in the form of Greece weighed on U.S. indexes. Another one of those 2 PM sell-offs had the Dow Jones Industrial Average off by triple-digits, but the Dow finished the day down about 72.5 points to close at 10,897.52. The S&P 500 shed seven points to settle at 1182.45 and the Nasdaq lost less than six points to close at 2431.16. Much as the gains on the up days are nothing extraordinary, Wednesday's losses were tolerable and volume was, as is the case on the up days, fairly weak.

Stats Table

After Wednesday's trade, investors are probably quite ready for issues related to Greece to finally subside and quit being a thorn in the side of equity market bulls. To be fair, it feels like it has been a couple of weeks since Greece was a problem, but that theme ended on Wednesday on news that Greece's financing costs have markedly increased in the near-term. In turn, that problem raises the specter of a sovereign debt default, which has been the heart of the matter regarding Greece all along.

Greece has the dubious distinction of holding the largest budget deficit in the Eurozone and those concerns were exacerbated today when the yield on Greek 10-year bonds increased by 405 basis points over German bunds, the highest level since the Euro debuted in 1999, according to Bloomberg News. Yields on Greek bonds topped 7.2% on Wednesday, not good news considering that when bond yields rise, bond prices fall.

Greece, the 28th largest economy in the world, now faces higher borrowing costs than Iceland, which you may remember had some fiscal issues of its own last year. The bottom line is if you want to insure the equivalent of $10 million in five-year Greek debt, it will cost you $415,000. Credit default swaps on Iceland now look more bullish than their Greek counterparts. To that I say ''Wow.''

Greek Bond Spreads

Comments from the Federal Reserve also played a leading role in equities' decline today. The Fed said consumer borrowing fell by $11.5 billion in February, indicating that consumers are reluctant to incur more debt. That is not good news for credit card companies, so it was not surprising to see American Express (AXP) fall 75 cents, or 1.74%, to $42.37 making it the biggest loser in the Dow. Then again, it should be noted is rare to see stocks move up in a straight line and American Express was the Dow's best performer in 2009. And hey, the stock was up 6% year-to-date before today's drop, again outperforming the Dow.

American Express Chart

Federal Reserve Chairman Ben Bernanke gave a speech in Dallas today in which he said the U.S. economy is ''far from out of the woods.'' Investors also reacted to what Bernanke did not say. He did not mention plans to keep interest rates low for an ''extended period'' and stocks reacted to that omission in negative fashion.

Another marquee name that was weak on Wednesday was agriculture seed maker Mondsanto (MON). The company released disappointing fiscal second-quarter results that showed a decline in profits of 19%. Monsanto said it earned $887 million, or $1.60 a share, compared with $1.09 billion, or $1.97 a share, a year earlier. Revenue fell to $3.89 billion from $4.04 billion. Analysts were expecting a profit of $1.73 a share on sales of $1.9 billion.

Keep in mind that it was just three years ago that Monsanto said it would double its profits by 2012 by making bigger bets on biotech seeds. Now the company is saying that market is proving harder to navigate than previously expected and is forecasting profit growth in the mid-teens through 2012. The problem is genetically engineered seeds costs twice as much as their traditional counterparts and farmers, already faced with rising fertilizer prices, are not willing to pay for pricier seeds. Another way of saying this is that farmers need fertilizer, but they do not need biotech seeds when a legitimate, cheaper alternative exists.

Monsanto's chemicals business saw its sales fall 35% in the second quarter and analysts are saying this division will continue to be a drag on the company's profits. Monsanto gave a tepid affirmation of 2010 EPS guidance, saying it expects its full-year earnings to be at the low end of a $3.10 to $3.30 a share range.

Monsanto Chart

Speaking of not moving up in a straight line, oil prices took a breather today, ending a six-day winning streak that had carried crude futures to 17-month highs. NYMEX-traded crude for May delivery fell $1.20 a barrel to $85.64 after the Energy Information Administration said inventories rose by 2 million barrels last week. That is double the amount the American Petroleum Institute said inventories rose by yesterday.

The news hampered oil equities on Wednesday as 37 of the 40 energy stocks in the S&P 500 declined on the day, according to Bloomberg. That compares with 39 of those names making gains on Monday. One of the biggest losers among that group was Occidental Petroleum (OXY), which slid $2.19, or 2.47%, to close at $86.30 on volume that was roughly 50% higher than the daily average. Occidental is one of the ''oilier'' names out there as more than three-quarters of its production comes from crude, so the stock price is tightly correlated to oil prices. The shares were up almost 9% year-to-date prior to today's decline and it appears that Wednesday's drop may lured some buyers back into Occidental as the stock is back above $88 in after-hours trading.

Occidental Petroleum Chart

There was bigger news to emerge in the after-hours session today as some fodder for the ''two wrongs do not make a right'' crowd emerged. The New York Times is reporting that United Airlines (UAUA) and US Airways (LCC) are in merger discussions. Citing people close to the talks, the Times said an announcement is not imminent and should not be expected for several weeks. Of course, the talks could fall apart and neither airline commented on the rumors.

The news has US Airways trading up by over 25% in the after-hours session and United is up by more than 8% as of this writing. Based on market cap, United is nearly triple the size of US Airways, so it might be logical to assume that United will be the acquirer here. It also might be reasonable to say that old habits die hard and the airline industry really has not learned from past mistakes. These companies are constantly looking to acquire and partner with each other, but along the way they create little in the way of shareholder value. US Airways in its current form is the combination of US Air and AmericaWest and it is difficult to claim that was a rewarding move for shareholders.

United and US Airways went down this road in 2000 and the deal fell apart due to antitrust concerns and labor opposition. If the two companies are successful this time around, the combined company would surpass Delta (DAL) as the largest U.S. carrier, but size has proven to be less than rewarding for long-term investors in the airline sector. At the end of the day, a bigger airline is just that: Bigger. Customer service is not likely to improve, nor are returns to shareholders. This news will probably give a very short-term boost to airline stocks, which have performed surprisingly well recently, but an airline, no matter its size, still has to contend with high oil prices, a very real problem in the current market. (Go to OilSlick.com for more on the oil issue as it pertains to airlines.)

Airline ETF Chart

Even with today's decline, the Dow is still locked in the 10,825-10,950 range. The 11,000 mark is merely round-number resistance, but a more legitimate hurdle can be found over 11,100, a level last seen in fall 2008. It can certainly argued that the Dow is looking overbought at this point and I would not contend with that point, but it will be interesting to see if today's drop represents enough of a dip to induce some fresh buying for the rest of this week.

Dow Chart

Likewise, one could argue that the S&P 500 is overbought, but Wednesday's down move did not even challenge support at 1170. The intraday low was 1177.25 and resistance remains at 1200. As Jim noted yesterday, 1200 and above have been common price targets for more than a few analysts. Assume that earnings season is strong and that means the S&P 500 could be at 1200 before the end of April. That is almost engraved invitation to ''sell in May and go away'' before stocks regroup for another move higher later this year.

S&P 500 Chart

The Nasdaq, also known as the index where Apple (AAPL) makes its home, took a small loss today, but is still a fair bit removed from support at 2420 and even further removed from what is likely a firmer floor at 2400. Apple continues to move in parabolic fashion and if you look at analyst price targets, many of which range from $265-$300, the low end of that range could be reached in a few months if Apple keeps up its current pace. Still, the Nasdaq needs more help and that means Intel (INTC) had better deliver another blow-out quarter next Tuesday.

Nasdaq Chart

I am not going to become a bear because of one down day, but I am anxious to see what earnings season holds. The market realizes the comparisons to the first quarter of 2009 are going to be easy to beat and there will be little to no tolerance for companies that disappoint or beat profit targets through cost-cutting. Full-year guidance had better be robust as well or we could be in for a cruel summer for stocks.

New Option Plays

We are going to wait and see

by Scott Hawes

Click here to email Scott Hawes
The S&P 500 Index sold off to 1,177 in trading today which was broken resistance from last week. We going to wait and see if there is any follow through to this downward move prior to initiating any new plays at this time.

In Play Updates and Reviews

Stocks implode in late day trading.

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:

The market sold off hard this afternoon after an unexpected decrease in consumer credit and continuing concerns that Greece may default. Today's market action has made us more defensive and we are recommending closing and/or lightening up positions.

Current Portfolio:

CALL Play Updates

F5 Networks - FFIV - close: 64.56 change: -0.56 stop: 61.40

Shares of FFIV bounced nicely off of yesterday's lows near the $64 level. The stock has not followed through on the initial break out above $65.25. It will now have to contend with $65.69. If FFIV can follow through we are looking for a target of $69.75. I want to remind readers that this is an aggressive, higher-risk trade and we want to keep our position size small.

Current Position: CALL MAY $65.00 (FFIV 10E65.00) @ $3.00

Entry on April 6th at $ 65.26
Earnings Date 04/21/10
Average Daily Volume = 1.0 million
Listed on April 5th, 2010

Coca-Cola - KO - close: 53.82 change: -0.47 stop: 52.95

Shares of KO underperformed again today, reaching a low of $53.56 before buyers stepped in at the end of the day. The stock should find support near its 200-day SMA which is currently $53.42. More conservative traders may want to exit now or sell into any strength in the coming days. If the stock can't find some legs the remainder of the week we will consider adjusting our position or exit completely next week. Our target to exit is $59.00.

Current Position: CALL May $55.00 (KO 10E55.00) at $1.62

Entry on March 24th at $ 55.22
Earnings Date 04/21/10
Average Daily Volume = 14.6 million
Listed on March 23rd, 2010

L-3 Communications - LLL - close: 92.67 change: -0.43 stop: 88.90

LLL opened the day with a gap down at $92.68 then spent the remainder of the day bouncing around and ultimately closing just about where it began. This created a doji candlestick which is a sign of indecision. We initially viewed this trade as a highly speculative trade and our $0.30 options are now only worth $0.05. I don't think it is worth exiting the options for a nickel so we will hold onto them to see if LLL can muster a rally into next week's expiration. If our miracle gains traction readers should consider selling positions if the April calls increase in value. I am not suggesting any new positions in LLL at this time.

We chose the out of the money $100 calls to keep our capital investment very small and our our position size limited.

Current Position: CALL APRIL 100.00 (LLL 10D100.00) @ $0.30

Entry on March 18th at $ 93.88
Earnings Date 04/22/10
Average Daily Volume = 908 thousand
Listed on March 17th, 2010

NII Holdings Inc. - NIHD - close: 42.47 change: -0.25 stop: 41.88 *NEW*

NIHD continued its retreat from its 52-week high hit on Monday. Considering the market action and there are only 7 trading days left until April options expire we are going to aggressively protect our profits in this trade by moving our stop up to 41.88, which is just below the low on Monday. The trend is up but I would hesitate to launch new positions. If NIHD starts to rally our target to exit is $44.00. Traders should exit positions on any strength in the coming days and/or lighten up on positions by Friday. Remember that we have April calls that expire in 7 trading days.

Current Position: CALL APRIL $40 (NIHD 10D40.00) @ $1.85

Entry on March 11th at $ 40.10
Earnings Date 04/22/10
Average Daily Volume = 2.68 million
Listed on March 10th, 2010

Occidental Petrol. - OXY - close: 88.49 change: +0.08 stop: 83.45

Commodity stocks led the stock market decline today as the U.S. dollar showed overall strength. OXY shed almost -2.50% and traded as low as $86.00. We are suggesting readers take advantage of any further short-term weakness in shares of OXY and use it as an entry point to buy calls. We expect the stock's recent broken resistance near the $85 level to hold as support and are looking to initiate positions if OXY trades to $85.50.

Trigger to buy calls at $85.50

Suggested Position: BUY CALL MAY $85.00 (OXY 10E85.00) current ask $5.35

Entry on April xxth at $ xx.xx
Earnings Date 04/29/10
Average Daily Volume = 5.5 million
Listed on April 6th, 2010

PartnerRe Ltd. - PRE - close: 80.80 change: +0.51 stop: 77.75

PRE showed strong relative strength today, closing up +0.64% despite the overall market being under pressure. The stock closed above the $80.55 resistance level for the first time. There is potential resistance near the October 2009 highs ($81.70) so don't be surprised to see some congestion there. If PRE follows through and breaks through $81.70 we have a good chance to reach our first of $84.75. Our second, longer-term target is $89.00.

Current Position: CALL MAY $80.00 (PRE 10E80.00) $ $2.40

Entry on April 6th at $ 80.55
Earnings Date 04/27/10
Average Daily Volume = 989 thousand
Listed on March 20th, 2010

Wynn Resorts - WYNN - close: 81.66 change: -0.08 stop: 74.45

WYNN held up relatively well today closing marginally lower on the session. Shares continue to look a little overbought here and we want to see a dip back toward the $78 area, which as broken resistance should be support. Our plan remains the same: buy calls on a dip at $78.50 with a new stop loss at $74.45. This remains an aggressive, higher-risk trade so please use smaller position size when initiating new positions. Our target is $84.50.

Trigger to buy calls at $78.50

Suggested Position: BUY CALL MAY $80 (WYNN 10E80.00) current ask $6.35

Entry on April xxth at $ xx.xx
Earnings Date 05/05/10
Average Daily Volume = 2.7 million
Listed on March 24th, 2010

PUT Play Updates

Amedisys Inc. - AMED - close: 57.04 change: -0.39 stop: 59.05

AMED continues to look weak here and appears to be putting in a lower high. The stock has support in the $55.00 area but if the market's decline continues the stock should bust through this level. I am suggesting readers exit positions on any weakness AMED shows in the coming days because our April option expire next Friday. Our target to exit the trade is $50.25 but we will most likely be exiting the trade this week.

Current Position: PUT APRIL $50.00 (AMED 10P50.00) $ 0.85

Entry on April 1st at $ 55.88
Earnings Date 04/28/10
Average Daily Volume = 749 thousand
Listed on March 31st, 2010

Cerner Corp. - CERN - close: 84.89 change: -1.16 stop: 88.25

CERN sold off with the rest of the market today and appears to be putting in a lower high. I am suggesting we stick to the original plan and wait for a breakdown under $84.00. We'll use a trigger to buy puts at $83.75. If triggered at $83.75 our target is $76.50. Please note that I consider this play somewhat aggressive due to CERN's higher than normal short interest. The most recent data listed short interest at nearly 14% of the 68.4 million share float. That raises the risk for a short squeeze. You may want to keep your positions limited.

Trigger to open bearish positions at $83.75

Suggested Position: BUY PUT MAY $80.00 (CERN 10Q80.00) current ask $1.95

Entry on April xxth at $ xx.xx
Earnings Date 04/28/10
Average Daily Volume = 526 thousand
Listed on April 3rd, 2010


Express Scripts - ESRX - close: 101.68 change: -0.38 stop: 99.90

There are 7 trading days left before April options expiration. ESRX has been unable to break above the $103 level and our options are still out of the money. Today's market action doesn't give me much confidence that the stock will be able to follow through prior to expiry. We have closed this position and cut our losses to prevent further time decay. The April 105 calls were still selling for $0.40 at the close of trading.

Current Position: CALL APRIL $105 (ESRX 10D105.00) at $0.40
Entry was at $1.10

Annotated Chart:

Entry on March 24th at $101.99
Earnings Date 04/29/10
Average Daily Volume = 2.51 million
Listed on March 23rd, 2010

Panera Bread Co. - PNRA - close: 81.72 change: +0.49 stop: 75.75

PNRA continued its rally today trading over $83.00 in the first 30 minutes hitting our first target of $82.00, but then the stock slowly sold off the remainder of the day closing at $81.72, which created a topping tail candlestick. This was enough for us to close our positions and lock in a nice gain. Since April options expire next week and the overall market looks weak this was the right thing to do.

1st target hit at $82.00

Exit completely at $82.00

Current Position: CALL APR 80.00 (PNRA 10D80.00) @ $3.00
Entry was at $1.35

Annotated Chart:

Entry on March 11th at $ 77.18
Earnings Date 04/28/10
Average Daily Volume = 519 thousand
Listed on March 9th, 2010

Priceline.com - PCLN - close: 259.81 change: - 1.79 stop: 249.45

PCLN, and the market in general, look tired here and we are expecting the stock to pullback. We decided to close our position today to prevent any further time decay going into April options expiry next week. We bought April calls for $2.15 and are exiting the position at $5.30 and locking in profits.

Exit completely at $259.81

Current Position: CALL APRIL $260 (PCLN 10D260.00) @ $5.30
Entry was at $2.15

Annotated Chart:

Entry on March 25th at $246.60
Earnings Date 05/11/10
Average Daily Volume = 793 thousand
Listed on March 23rd, 2010

Tractor Supply Co. - TSCO - close: 66.57 change: +5.07 stop: 57.75

TSCO offered very strong Q1 guidance this morning and hiked its 2010 view which sent the stock soaring. TSCO was up +10% in early trading easily reaching our target of $64.75. We exited calls at the open for $6.80, locking in a nice gain.

1st target hit at $64.75

Exit completely at $66.25 (opening gap up)

Current Position: CALL MAY $60.00 (TSCO 10E60.00) @ $6.80
Entry was at $2.95

Annotated Chart:

Entry on April 5th at $ 60.75
Earnings Date 04/21/10
Average Daily Volume = 310 thousand
Listed on April 3rd, 2010