Option Investor

Daily Newsletter, Monday, 5/3/2010

Table of Contents

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

Market Wrap

Economic Reports, M&A Jolt Stocks Higher

by Todd Shriber

Click here to email Todd Shriber
A round of cheery economic reports, some mergers and acquisitions news and positive comments about Goldman Sachs (GS) by Warren Buffett helped stocks to a solid start to May, the ''sell in and go away'' month. The Dow Jones Industrial Average turned in its best performance since February, rising 143.22 points to settle at 11,151.83. The S&P 500 made its way back above 1200, rising 15.58 points to close at 1202.26 while the Nasdaq added almost 38 points, but could not find its way back above 2500, closing at 2498.74.

Stats Table #1

Consumers are showing some strength and that is good news for retail stocks and the broader market. Monday's consumer spending update showed spending was back in vogue as shoppers rang the register more than they had at anytime during the previous five months. On an inflation adjusted basis, spending was up 0.5% for the second straight month.

The increase in consumer spending in March has some pundits pontificating about how strong those spending numbers will be when the economy starts to see some legitimate job and wage growth. Incomes rose just 0.3% in February while wages and salaries advanced a scant 0.2% in March. Consumer spending accounts for about 70% of U.S. GDP and when the consumer is feeling good about his personal economic situation, he is apt to part with some of his cash and splurge on new purchases. Friday's job report will be telling about how strong the consumer recovery really is.

Consumer Spending/GDP Chart

Another positive economic data point in the form of the Institute for Supply Management (ISM) monthly manufacturing update was in the news today. The ISM report said U.S. manufacturing activity rose to 60.4 in April from 59.6 in March. Most economists were expecting a reading of 60 and any number above 50 is considered a sign of expansion. The index now resides at its best level since June 2004 and has risen for nine straight months and 13 of the last 16 months. ISM said the purchasing manager's index was also above 42 for the 12th consecutive month, another sign the economy is expanding.

ISM Chart

In stock-specific news, Goldman Sachs got a decent bounce after getting a vote of confidence from Warren Buffett at the Berkshire Hathaway (BRK-A, BRK-B) shareholder meeting over the weekend. Goldman shares were up $4.30, or 2.96%, to close at $149.50. Nearly 28.3 million shares changed hands compared to average daily volume of almost 16 million shares. Not be Debbie Downer, but it should be noted this was a $160 stock last Thursday.

It is actually pretty easy to discern why positive comments from Buffett alone would not be enough for Goldman shares to make up more last week's decline. Berkshire's stake in Goldman is just $5 billion, an investment that pales in comparison to other Berkshire investments such as the firm's $44 billion purchase of Burlington Northern.

Beyond that, Berkshire is collecting $500 million a year on its $5 billion Goldman stake. That is a lot better than the 1% yield regular shareholders of Goldman get. Buffett also has a say in what executives occupy the top three spots at Goldman and Berkshire has warrants to acquire Goldman shares at $115. So when the mainstream media asks Buffett whether or not he would do this deal again, it seems like a waste of time and calling his comments on Goldman ''eye-popping'' as some did, is just a gross overstatement. The reality is no investor would pass on a deal that is basically guaranteed to make money. The unfortunate reality is that not every investor can get their hands on a deal like Buffett has with Goldman.

Goldman Sachs

Onto companies that actually provide services that are readily attainable to most consumers, Continental Airlines (CAL) and UAL (UAUA) finally agreed to terms on a $3 billion merger, creating the world's largest airline in the process. On their own, United and Continental are the third- and fourth-largest U.S. carriers, respectively.

Under the terms of the stock-swap transaction, United will acquire Continental and the new airline will sport the United name, but use the Continental logo. The two money-losing carriers said they expect annual savings of $1 billion to $1.2 billion by 2013 and revenue increases of up to $900 million. The combined company will have more than half its routes in the U.S. with hubs in Chicago, Cleveland Denver, Houston, Los Angeles, Newark and San Francisco.

From the standpoint of international travel for U.S. customers, competition will be diminished as a result of this deal. There will be only three U.S.-based carriers with significant access to international routes Delta (DAL), American (AMR) and the new United. The deal must be approved by the Justice Department and the European Commission and labor issues could be a problem for the carriers to deal with as headcount reductions usually do not go over well when the airline industry consolidates. Still, the news was warmly received by investors as both stocks were up more than 2% and the Claymore Airline ETF (FAA) was also up more than 2%.

FAA Chart

Apple (AAPL) was another name on the receiving end of some positive trade on news of strong iPad sales. The company said today that the millionth iPad was sold last Friday. Putting that statistic into context, it took 73 days for the first iPhone to reach 1 million units sold. The iPad reached the million unit mark in 28 days. According to Fortune's Apple 2.0 Blog, Piper Jaffray analyst Gene Munster said he and his team called 50 Apple stores on Sunday and 49 had run out of the 3-G iPad and most were out of all versions of the product.

Given the robust demand here in the U.S., it will certainly be interesting to see how the iPad performs when it makes its international debut in June. Apple has delayed selling the product outside of the U.S. due to strong demand here, but the company is planning to announce international release dates next Monday. As is the case with the iPhone, apps are also a lucrative revenue for stream Apple when it comes to the iPad. Two of the three most popular iPad apps to date are developed by Apple and they cost $10 each to download.

iPad Sales Estimates

The bottom line is Steve Jobs said demand for the iPad is outpacing supply and that is a nice problem to have. Apple was up $5.26, or 2% to $266.35 today. The 52-week high is $272.46.

Apple Chart

Oil services names that had been battered in the wake of the oil spill in the Gulf of Mexico caused by an explosion at the Deepwater Horizon rig got a boost on rumors that BP (BP) has stemmed the flow of leaking oil from the well. Unfortunately, BP confirmed that the flow of leaking oil remains unchanged. Some estimates put the flow of leaking oil as high as 5,000 barrels per day.

What may have been behind the jump in oil services stocks is the thought that the bulk of the costs related to this disaster are going to arrive on BP's doorstep. President Obama placed the blame squarely on BP's shoulders this weekend and federal law dictates that if the oil being extracted by the rig belongs to BP, then BP is liable.

That could spell some relief for oil services names like Cameron International (CAM), Halliburton (HAL) and Transocean (RIG), all of which traded higher today. Cameron led the way, gaining 3.32% on more than five times its average daily volume. The costs for BP still are not clear, but one analyst estimated the Horizon spill could cost the company $5 billion to $15 billion in cleanup costs and legal bills. That compares with $4 billion Exxon (XOM) had to shell for the Valdez spill.

OIH Chart

Looking at the charts, volatility is back in a big way as the Dow has swung in triple-digit ranges for the past three days and six of the past seven. The Dow found support at 11,000, a level that has been support since mid-April. If 11,000 is violated, 10,850 should be the first support level and from there we could see 10,700. Uptrend resistance would be found at the recent high of 11,258 and with today's close, the Dow was able to move back above its 21-day moving average just above 11,050.

Dow Chart

The S&P 500 flirted with an important support level at 1185 with Friday's close, but rebounded today to reclaim 1200. Even with Monday's bullish move, the S&P 500 remains locked in a range that we have seen since mid-April. A breakout above 1225 would be bullish while a violation of 1185 would encourage selling.

S&P 500 Chart

Apple and its iPad sales were not enough to move the Nasdaq to a close above 2500 and the intraday high was just 2503, but there were some other positive signs, though faint. After being battered last week, semiconductor makers rebounded on Monday with the Semiconductor HOLDrs ETF (SMH) gaining 2.1%. Uptrend resistance looms around 2520, but if support at 2450 is broken, 2400 becomes the next number to worry about and after that, things really get ugly.

Nasdaq Chart

A confluence of factors ranging from a lack of clarity over Greece's bailout package to ratings downgrades for Portugal and Spain to the Gulf oil spill and further pressure on Goldman Sachs contributed to last week's sell off. Remember that stocks had advanced for eight consecutive weeks, so the aforementioned factors only exacerbated selling that was probably overdue.

It appears that Greece finally has a bailout package in place, so that would serve to possibly remove one negative story from the market and if BP can finally deliver some positive news on its spill containment efforts, energy names should see further relief. Monday was a good day for stocks overall, but it was just one day of trading and not we are not deep enough into the month to know if ''sell in May and go away'' is going to work this year.

New Option Plays

We Are Adding a Trading Exchange

by Scott Hawes

Click here to email Scott Hawes


The NASDAQ OMX Group - NDAQ - close 21.11 change +0.11 stop 51.15

The NASDAQ OMX Group, Inc. is a global exchange group that delivers trading, exchange technology, securities listing, and public company services across six continents. The Company’s offerings include trading across multiple asset classes, market data products, financial indexes, capital formation solutions, financial services and market technology products and services. It operates in three segments: Market Services, Issuer Services and Market Technology. In the United States, it operates The NASDAQ Stock Market, a registered national securities exchange. In addition, in the United States, it operates a second cash equities trading market, two options markets, a futures market and a derivatives clearinghouse. In Europe, it operates exchanges in Stockholm (Sweden), Copenhagen (Denmark), Helsinki (Finland), and Iceland as NASDAQ OMX Nordic and exchanges in Tallinn (Estonia), Riga (Latvia) and Vilnius (Lithuania) as NASDAQ OMX Baltic. (source: company press release or website)

Why We Like It:
NDAQ has 3 levels of support in the $20.60 to $20.80 level that are converging right now. First, $20.60 is a key pivot level dating back to August 2009, October 2009, and December 2009. The stock broke above this pivot level in mid March and has retraced back to test it which should now act as support. NDAQ also bounced nicely off of its 50-day SMA and an upward trend line from February at about $20.80. This gives us a good reference point to place a stop just below at $19.90, which is also below its 100-day and 200-day SMA's. I suggest traders buy CALLS at current levels. Our target is $22.25 with a more aggressive target at $22.90. The stock will probably find some resistance at its 20-day SMA near $21.75. Our stop is $19.90 and our time frame is about two weeks.

Suggested Position: Long JUNE $21.00 CALL, current ask $1.00

Annotated chart:

Entry on May xx at $xx.xx
Earnings Date More than 2 months (unconfirmed)
Average Daily Volume: 2.9 million
Listed on May 1, 2010

In Play Updates and Reviews

The Ups and Downs Continue

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:

The wide market swings and volatility is making it difficult to manage swing trades. I wrote in the weekend updates that I anticipated volatility to continue and that we would probably see another bounce early this week before a bigger drop comes later. I just didn't expect the hard reversal to the upside that we got today. This makes me cautiously bearish on the market. I still suggest tightening stops on long positions, especially with today's strength. Our portfolio has some defensive names on the long side and we also have short positions to take advantage of any more sell offs. The balance of longs and shorts will enable you to take profits in both directions. Staying nimble in the name of the game right now.

Current Portfolio:

CALL Play Updates

Biogen Idec Inc. - BIIB - close 53.60 change +0.31 stop 51.15

BIIB didn't trade up to our trigger to buy calls. The stock has formed a bull flag on the intraday charts and I would like to see confirmation of a break out to the upside which means BIIB needs to trade above Friday's highs of $54.04 before entering positions. My comments from the new play release remain the same. BIIB gained +44% between its October 29th low and its March 22nd high. The stock has proceeded to retrace almost 50% of that gain and has found support at about $51.50. The stock appears ready to break through its downtrend line that started on March 22 and I suggest traders take advantage of any strength. BIIB also trades at a low 16.1 PE ratio when compared to its peers in biotechnology. In fact, BIIB trades below the S&P 500 average PE of 21.72. Biotechnology can be defensive so I like the play if the stock trades above Friday's high of $54.04. Our stop is $51.15 which is below the 200-day SMA and a recent swing low. Our target is $56.90 with a more aggressive target at $58.90. The stock may experience some resistance with its 20-day SMA just overhead but if there is momentum it should overcome it. Aggressive traders may consider entering the position at current levels but will have to deal with overhead resistance.

Trigger to buy CALLS if BIIB trades to $54.10

Suggested Position: Long JUNE $55.00 CALL, current ask $1.70

Entry on May xx at $xx.xx
Earnings Date July 15, 2010 (unconfirmed)
Average Daily Volume: 2.7 million
Listed on May 1, 2010

Gold Fields Ltd - GFI - close 13.22 change -0.22 stop 12.79

Gold miners took a breather today and so did GFI closing down -1.64%. I expected the miners momentum to continue today but it just wasn't meant to be. The company reports earnings Thursday before the bell so I suggest readers exit this position prior to Wednesday's close to limit risk and preserve capital. There may not be enough time to reach our target of $13.75 so I would like to lower the target to $13.50 which is just below Friday's high. If GFI can make back up here I will gladly take a small profit on the trade. Our calls are about breakeven right now. The delta on our call position is .59 so if GFI can rally to our target of $13.50 our calls should be worth about 75 cents which is a +25% gain. Gold Miners were one of the strongest sectors on Friday while the market was under severe pressure. This could happen again if the market breaks lower tomorrow. Our stop is $12.79 which is just below the low from April 28th and the 20-day SMA. Our time frame is 1 to 2 days. I am not suggesting new positions at this time. *NOTE: Please use small position size to limit risk as gold stocks tend to be volatile.*

Current Position: Long MAY $13.00 CALL, entry at $0.60

Annotated chart:

Entry on April 29 at $0.60
Earnings Date May 6, 2010 (unconfirmed)
Average Daily Volume: 5.3 million
Listed on April 28, 2010

Research In Motion - RIMM - close 71.53 change +0.34 stop 69.29

RIMM traded in a tight range today closing higher +0.48%. The stock found resistance right at its 50-day SMA which is $72.17. I am looking for RIMM to break above today's high ($72.19) which should get us headed towards our target of $74.19. However, I also see some resistance at $73.30 which is an area that traders should consider tightening stops or taking some profits off of the table. Readers who haven't initiated positions may consider doing so at this time. Our stop is $69.29. This is just below a swing low on March 5th and also below the 200-day SMA. Our time frame is a couple of weeks.

Current Position: Long JUNE $75.00 CALL, entry at $2.15

Entry on April 30 at $2.15
Earnings Date June 18, 2010 (unconfirmed)
Average Daily Volume: 15.3 million
Listed on April 29, 2010

Weatherford International - WFT - close 17.92 change -0.19 stop 16.55

WFT gave us a scare today as oil stocks were under severe pressure in early trading. However, WFT found support at about $17.25 and then surged in the afternoon, closing near its highs. I mentioned $17.30 as a interesting support level on Saturday and this area proved to be correct as buyers stampeded into the stock. WFT was able to close above $17.80 which is another key support/resistance level. However, the stock broke below its bull flag on the daily chart so I urge traders to be cautious here. Today's initial decline may have been a head fake to shake out the weak hands but there is also a lot of headline risk with the oil disaster in the Gulf of Mexico. Our calls are now just above breakeven and I have identified $18.60 as a logical exit target, which is just below Friday's highs. If WFT trades to this level I would be looking to take profits, especially if the overall market is showing weakness. A move to $18.60 is not too far from our original target ($18.95) and should garner a +34% profit based on the delta and projected move in the stock. A second more aggressive target is $20.45. Longer term I think WFT can easily test $20.45 but I do not suggest hanging on to call options waiting for this target as time decay could end up hurting you. Obviously if WFT and the market are ripping higher we could get lucky and hit the higher target, but more often than not when traders become complacent by waiting they end up losing in the long run. A strategy readers may consider is to take profits if the first target is hit and then buy further dated options. The August $19.00 calls are going for about $1.25 as of the today's close. Readers who haven't initiated positions may consider doing so on weakness in the stock. Today's dip was a perfect opportunity. Our stop is 16.55.

Current Position: JUNE $17.00 CALL, entry at $1.58

Entry on April 28 at $ 1.58
Earnings Date Over 2 months
Average Daily Volume = 14.9 million
Listed on April 24 2010

PUT Play Updates

iShares Dow Transports - IYT - close 86.56 change +2.20 stop 87.10

We are getting whipsawed in our IYT position. The ETF re-gained all of its losses from Friday, and then some, closing up +2.20%. I have tried to keep a good balance of CALLS and PUTS in the model portfolio to take advantage of the extremely volatile price action so it should be expected some positions will struggle, while other perform better. Our $2.00 PUTS are now worth about $1.70 for -15% unrealized loss. My thesis on this trade was to catch a quick pullback in an extremely overbought sector and a market that desperately needs a healthy correction. But every time the transports head lower buyers step in. And every time the sector heads higher sellers step in. So there is quite a fight going on between the bulls and bears which I anticipate ending soon. Someone will eventually get exhausted. I expect IYT trade down to its 20-day SMA soon, but this is increasing everyday (currently at $83.47). Conservative traders may want to tighten stops at this level or simply exit to take profits. A second more aggressive target is $81.50. If the market gets any sustainable correction IYT could easily reach this level. There is still plenty of trend line resistance overhead as well as a congestion area from 2008 to keep IYT in check. But if IYT breaks out and hits our stop $87.10 I will have been proven wrong and suggest readers step aside. Our time frame is 1 to 2 weeks but will have no issues exiting sooner if there is a correction to the aforementioned targets or if our stop takes us out. Readers who haven't initiated positions may do so at current levels with a tight stop. *NOTE: Some of the strike prices in IYT have wider than normal bid/ask spreads. Use a limit order in the middle of the spread and you should get filled.

Current Position: JUNE $83.00 PUT, entry at $2.00

Entry on April 29 at $2.00
Earnings Date N/A
Average Daily Volume = 1.0 million
Listed on April 28, 2010

Sina Corporation - SINA - close 36.68 change -0.02 stop 42.25

We did not get triggered on SINA today as it traded in a tight range. The stock traded as high $37.31 in the first 15-minutes but was weak the remainder of the day. My comments from the weekend remain the same. SINA is forming a descending triangle on its daily and weekly charts. The stock did find support at $35.25 last week and bounced nicely. However, I feel the conditions are ripe for this stock trade lower in the coming weeks, especially if we get a sustainable market correction. Its 20-day SMA and 20-week SMA are overhead which should provide good resistance. The 50-period and 200-period SMA's are providing some support for the stock right now, but I feel it is only a matter of time before the stock breaks these SMA's. I suggest readers buy PUTS if SINA trades up to $37.60 or if the stock trades down to $34.95, whichever occurs first. I am going to place a wide initial stop at $42.50 until we know where the position was entered. Once we are triggered the stop will be adjusted. Our first target is $33.25 which is a point where I would tighten stops to protect profits. A more aggressive 2nd target is $30.50. If a market correction gets going I think SINA could easily trade down to this level.

Suggested Position: JUNE $35.00 PUT, current ask $1.60

Entry on May xx at $xx.xx
Earnings Date June 9, 2010 (unconfirmed)
Average Daily Volume: 1.1 million
Listed on May 1, 2010

Toll Brothers - TOL - close 23.15 change +0.58 stop 24.25

My comments on TOL are not too different than my comments on IYT. TOL regained all of its losses from Tuesday and then some, closing higher +2.57%. The bulls and bears are putting on quite a fight. Our calls are in the red by -25 cents. The recent bounce still looks like it is trying to form a lower high on the daily chart, but we TOL to follow though to the downside and break $22.00, which should see sellers step in and push TOL down to its breakout level near $21.50. I have identified three targets as possible exit points: $21.80, $21.50, and $20.60. These are the levels where I suggest traders tighten stops or simply take profits. The $22.00 to $22.25 area should act as support this week. Aggressive traders can enter the position at this time. Our stop remains at $24.25 and our time frame is about 1 week.

Current Position: JUNE $23.00 PUT, entry @ $1.40

Entry on April 27 at $ 1.40
Earnings Date Over 2 months
Average Daily Volume = 3.2 million
Listed on April 26, 2010