Option Investor

Daily Newsletter, Monday, 8/16/2010

Table of Contents

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

Market Wrap

Slow Going On Monday

by Todd Shriber

Click here to email Todd Shriber
Stocks were afflicted with a case of the weak volume blues on Monday as just 5.8 billion shares changed on the American Stock Exchange, Nasdaq and New York Stock Exchange combined. The Dow Jones Industrial Average was in positive territory for part of the day, but closed lower by one point to settle at 10302.01, extending its losing streak to five days. The S&P 500 finished the day higher by a scant 0.13 points to close at 1079 while the Nasdaq led the way among the major indexes, adding 8.4 points to settle at 2181.87. By comparison, the Russell 2000 was impressive, adding almost six points to close at 615.10.

Stats Table

Overall, it was a boring day for equities, but the same cannot be said for metals futures and the materials sector. Disappointing growth data from Japan and lingering concerns about a double-dip recession and U.S. growth propelled gold to a six-week high. Gold was also helped by a slumping U.S. Dollar. The U.S. Dollar Index, which measures the greenback's strength against six other major currencies, traded down by as much as 0.9%, ending a five-day winning streak. That helped gold trade in a range of $1216.20 to $1229.5 an ounce before settling at 1226.20 an ounce, up $9.60 for the day.

Gold Chart

Copper, like gold, was buoyed by the weaker dollar as the red metal finished higher in both the London and New York sessions. For the all the concerns about the global economic recovery, copper has been resilient as of late and demand apparently is not drying up as highlighted by a Bloomberg report that said orders to draw copper from stockpiles surged the most in two months today.

Positive comments on commodities from Goldman Sachs (GS) did not hurt the metals complex today. Goldman said rising demand from emerging markets and limited supply growth will prop up commodities prices through the end of 2010. In its forecast, Goldman favored copper, gold, oil, platinum and zinc in alphabetical order.

Goldman has an ''overweight'' weighting on commodities and expects gold to rise to $1260 an ounce in three months and to $1300 an ounce in six months. The bank thinks oil will be trading at $92 a barrel in three months. Goldman put a six-month price target of $7925 a ton on copper and that was good enough to lift the red metal today.

Copper Chart

The Goldman commodities outlook helped most mining and materials to some fair gains on Monday. Freeport McMoRan (FCX), the largest publicly traded copper producer in the world, added 0.8%, but volume was less than half the daily average. BHP Billiton (BHP), the world's largest mining company, gained almost 1%, but again, volume was less than half the daily average. Gold miner Newmont Mining (NEM) added nearly 2%, but it is hard to get excited about that when the stock traded just 3.5 million shares compared to average daily volume of almost 8.6 million shares.

Nemont Mining Chart

Tech stocks saw a bit of relief on Monday and in testament to how lethargic the action was on Wall Street today, tech was the top-performing sector among the industry groups tracked by the S&P 500, gaining a mere 0.4%. Cisco (CSCO) was the Dow's biggest winner, adding 2.6%, representing only a slight rebound from last week's big tumble. Ebay (EBAY) also jumped 2.6% on news that its PayPal electronic payments unit is in discussions to have its services added to Google's (GOOG) Android smartphone platform. Android users would be able to use PayPal to pay for new apps.

None of that news is particularly exciting, nor is an acquisition of just $1.15 billion, but that is the news that Dell (DELL), the third-largest maker of personal computers, graced investors with today. Between Apple's (AAPL) dominance, the management shakeup at Hewlett-Packard (HPQ) and Cisco's earnings disappointment, it has been easy to forget about Dell lately. Well, there have been multiple to reasons to have ignored Dell for months, if not longer, but that is a conversation for another day.

On Monday, Dell said it would purchase data-storage firm 3Par (PAR) for $1.15 billion, paying $18 per share in cash, a whopping 86% premium to where 3Par closed on Friday. Dell is using the deal to bolster its footprint in the corporate technology market. Including the 3Par purchase, Dell has made five acquisitions this year in an effort to move away from PCs. The 3Par buy certainly helps Dell in that effort, but analysts speculated that the deal will only have a negligible impact on Dell's bottom line and that the Texas-based company is paying a steep price for 3Par.

3Par has reported three consecutive quarterly losses and one analyst said that Dell needs to integrate its acquisitions in more expeditious fashion, but the 3Par deal is not likely to result in speedy integration. In others, there is not much to be excited about when it comes to Dell.

Dell Chart

In other news from the world of large-caps that have seen better days, Lowe's (LOW), the second-largest home improvement retailer, said its second-quarter profit jumped 10% to $832 million, or 58 cents a share, from $759 million, or 51 cents a share, a year earlier. Revenue increased 4% to $14.36 billion, but that fell short of the company's estimate. Analysts were expecting Lowe's to post a profit of 59 cents a share on sales of $14.52 billion.

North Carolina-based Lowe's raised the low end of its full-year guidance, but trimmed the top end, saying it now expects to earn $1.38 to $1.45 a share this year, compared with previous guidance of $1.37 to $1.47 a share. The company also pared its revenue outlook to growth of 4% from growth of 5% to 7%. That would equal sales of $49.11 billion compared with previous guidance of $49.58 billion to $50.53 billion. Analysts are currently forecasting a full-year profit of $1.42 a share on sales of $49.57 billion.

Despite those cuts to the full-year outlook, Lowe's was able to muster a small gain on the day on strong volume, but I would expect Home Depot's (HD) earnings on Tuesday to be a similar non-event.

Lowe's Chart

As I have mentioned a couple of times already, it was a slow day for stocks, but one glaring exception would be for-profit education providers. Companies like Career Education (CECO), Corinthian Colleges (COCO), Strayer Education (STRA) and Washington Post (WPO), which owns Kaplan, were hammered on that students are not repaying their federal student loans.

According to Bloomberg News, Corinthian, Career Education and Washington Post manage campuses where less than 20% of federal student loans have been repaid. The national repayment average at traditional public and private universities is 55%, but at for-profit schools, that number dips to just 36%. Washington Post shares slumped more than 8% on the news and Career Education finished the day lower by by more than 6%.

Those losses seem tame in comparison to the more than 18% drop suffered by Strayer. Nearly 2.7 million shares changed hands in that name compared with average daily trade of less than 194,000 shares. The biggest loser in the group was Corinthian, which slid by almost 22% on volume that was roughly 11 times the daily average. Barclays downgraded the stock to ''equal weight'' from ''overweight'' while BMO Capital Markets trimmed its rating to ''market perform'' from ''outperform.''

Corinthian Colleges Chart

Looking at the charts, not much has changed since Friday. The S&P 500 still needs to deal with resistance at 1087, also the 50-day moving average, before1100 and the 200-day line at 1115 can be discussed. On the downside, 1050 remains the support area to watch, and from there things get dicey with a drop to the 1015 area a possibility if 1050 is violated.

S&P 500 Chart

The Dow traded below its 50-day line at 10,273 today with an intraday low of 10,209, but index was able to close above that moving average, but still needs to contend with resistance at 10,350. Volume is so anemic that it is tough to be bullish on the Dow and if financials do not start showing some signs of like sooner rather than later, we could be looking at 10,100 if 10,300 does not hold as support.

Dow Chart

Despite today's ''rebound,'' there is still little reason to be involved with tech. Research In Motion (RIMM) shed 5% today on news of weak Torch sales. Semiconductor names have been hammered and Cisco failed to impress last week. The Nasdaq lost more than 5% last and could not reclaim even a half percent of that on Monday. Resistance lies around 2227, also the 50-day moving average. Support is 2140.

Nasdaq Chart

Like the Nasdaq, the Russel 2000 suffered a major loss last week (6.3%), so Monday's small gain is nothing to get excited about. The Russell 2000 would probably need to move back above 640, which is in between the 50- and 200-day moving averages before there is any reason to be constructive on small-caps. If support at 590 does not hold, then 550 could be retested and that neighborhood has not been seen since late 2009.

Russell 2000 Chart

In the hunt for strong sectors, I keep finding my way back to materials, but I wonder how long that party can last on weak volume. The reality is materials stocks are not setting the world on fire, they are merely booking small gains when other sectors decline. With financials and tech being slammed, I would not be rushing into any long positions because those two sectors account for more than a third of the S&P 500's weight. The broader market is not going higher without help from at least one of those sectors, but both will need to get their respective acts to boost the market in the fourth quarter.

New Option Plays

Heathcare Play

by Scott Hawes

Click here to email Scott Hawes


UnitedHealth Group Inc - UNH - close 31.90 change -0.13 stop 30.35

Company Description:
UnitedHealth Group Incorporated is a diversified health and well-being company. The Company operates in four business segments: Health Benefits, which includes UnitedHealthcare, Ovations and AmeriChoice; OptumHealth; Ingenix and Prescription Solutions. On June 1, 2009, the Company completed the acquisition of AIM Healthcare Services, Inc. (AIM). In March 2010, the Company acquired QualityMetric Incorporated.

Target(s): 33.40, 34.25, 35.00
Key Support/Resistance Areas: 35.00, 34.40, 33.50, 31.50,
Time Frame: 1 to 2 weeks

Why We Like It:
UNH is a relative strength play in a defensive sector that should do well in the current market environment. Technically, UNH recently broke out of a key pivot level near $31.50 and has retraced some the gains by turning back to re-test the pivot from above (see dashed line on chart), which is where the stock bounced today. UNH is above all of its major moving averages and is maintaining an upward trend line from the 7/1 lows. I think UNH is poised to retest its recent swing highs and possibly move up towards the $35.00 area. I suggest we initiate long positions now. Our stop is below all of the major moving averages which should provide support on any weakness, and we have realistic targets to book a nice winning trade should UNH bounce from here.

Suggested Position: Buy September $32.00 CALL, current ask is $1.10

Annotated Chart:

Entry on August xx
Earnings Date 10/19/2010 (unconfirmed)
Average Daily Volume: 8.5 million
Listed on August 16, 2010

In Play Updates and Reviews

Two Winners Closed

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:

CALL Play Updates

Cameron International - CAM - close 38.51 change +0.57 stop 35.45

Target(s): 40.50, 42.00, 43.95
Key Support/Resistance Areas: 45.00, 42.50, 41.00, 38.75, 36.00
Current Gain/Loss: +21%
Time Frame: Several weeks
New Positions: Yes, on weakness

8/16: CAM gapped lower and the stock was bought the remainder of the day. September $40 were going for 95 cents at the open and they have gained +21%. CAM closed right on its 20-day and 100-day SMA's so we may get a pause or pullback at current levels. Any weakness would give readers who haven't entered positions a 2nd chance. If the broader market bounces from CAM should easily break through the moving averages and trade up towards our targets.

8/14: CAM was caught in the middle of the drama of the Gulf of Mexico oil spill. The stock has been beaten down because they built the blow out preventer (BOP) on the Horizon well. However, the BOP was heavily modified by RIG/BP so they don't really have any exposure to the damages. CAM is world's largest seller and manufacturer of BOP's so any new rules from the government means a lot of new business for Cameron. And the company recently reported over a $1 billion in new orders. I suggest we capitalize on the gaining momentum and initiate long positions now. Our stop $35.45 which is below Thursday's low, and the 50-day SMA. At a minimum I'm looking for CAM to retest its recent swing high and possibly charge up to its 52-week highs if the broader market cooperates.

Current Position: Long September $40.00 CALL, entry was $0.95

Entry on August 16, 2010
Earnings Date 11/3/2010 (unconfirmed)
Average Daily Volume: 4.6 million
Listed on August 14, 2010

FMC Technologies, Inc - FTI - close 62.82 change +0.85 stop 58.25

Target(s): 65.25, 67.00
Key Support/Resistance Areas: 69.00, 65.50, 62.40, 59.00
Current Gain/Loss: +13.6%
Time Frame: Several weeks
New Positions: Yes, on weakness

8/16: FTI also gapped lowered and was bought remainder of the day. The stock closed right on its 20-day SMA so we could get a pause or pullback. Any weakness will readers a second chance to enter positions. I am looking for a move up towards FTI's recent swing highs which is just above our first target of $65.25.

8/14: This is another play on the Gulf oil spill as FTI stands to benefit from new regulations in underwater robotics. The company reported solid earnings results in July and this past week's dip is a buying opportunity. The stock is maintaining an upward trend line while the broader market has not, which is a sign of overall relative strength. I believe FTI should easily retest its recent swing high which is just above our first target of $65.25. Our more aggressive target is $67.00 but if the broader market is strong FTI could even make a run at its YTD highs. Our stop is $58.25 which is below the upward trend line and the 200-day and 50-day SMA's. I see some potential in this trade and am going to push the suggested option out to October, but that doesn't mean we can't take quick profits should FTI break higher soon.

Current Position: Long October $70.00 CALL, entry was at $1.10

Entry on August 16, 2010
Earnings 10/27/2010 (unconfirmed)
Average Daily Volume: 1.5 million
Listed on August 14, 2010

Human Genome Sciences - HGSI - close 25.88 change -0.14 stop 24.65

Target(s): 27.20, 28.20, 29.20
Key Support/Resistance Areas: 29.80, 28.24, 27.80, 26.80, 25.00
Current Gain/Loss: -11%
Time Frame: Several weeks
New Positions: Yes

8/16: HGSI broke down from its 20-day SMA but when the stock hit its 50-day SMA it bounced hard. The stock looks poised to bounce higher and should make a run at our first target if there is strength in the broader market. 8/14: We are long HGSI calls at 90 cents. The stock traded within yesterday's range so there not much to report. HGSI remains in its upward channel and above its 20 and 50-day SMA's. I'm looking for HGSI to bounce back up towards its 200-day SMA. My comments from below remain the same.

8/12: We're back for another long play in HGSI which produced a winner for us a few weeks ago. The biotech sector has been a relative strong performer recently as it has maintained its upward trend line from the 7/1 lows while the broader market has not. I like HGSI and I suggest we initiate long positions now. The stock is trading in an upward channel and bounced nicely today at the bottom of the channel. HGSI is above its 20-day and 50-day SMA's and looks poised to make another higher high. I'm looking to make $1.50 to $3.00 on this trade. We'll use a stop at $24.65 which is below the 50-day SMA.

Current Position: Long September $28.00 CALL, entry was at $0.90

Entry on August 13, 2010
Earnings Date N/A (unconfirmed)
Average Daily Volume: 2.9 million
Listed on August 12, 2010

SPDR Gold Trust - GLD - close 119.73 change +0.99 stop 115.95 *NEW*

Target(s): 121.60, 123.00, 125.00
Key Support/Resistance Areas: 123.00, 119.10, 116.50, 113.50
Current Gain/Loss: +22.2%
Time Frame: Several weeks
New Positions: Yes, on weakness

8/16: GLD is hanging tough and gained +1% today. The ETF broke above $119.15 which was a resistance point and I believe GLD should make a run higher from here. Our positions have gained +22% and I suggest readers begin to tighten stops or take profits as our targets approach. I've tightened our stop to $115.90 which is below the 20 and 100 day SMA's and GLD's recent upward trend line.

8/14: GLD is consolidating in a tight range above its 50-day SMA. We need a break above $119.15 which should spark more buying. If readers are not in positions a break above this level could be used as a more conservative approach. There is a swing high of $119.54 from December that may also act as resistance but I think the aforementioned level is more important. I also like GLD on any weakness.

8/12: GLD gained +1.43% today. Unfortunately for us, the gains came overnight so we did not get filled at a better price. Nonetheless, gold is gaining momentum and if it trades above $119.15, which is near the July highs, GLD should be on the fast path to retest its YTD highs and possibly print new highs. We may see a pullback to close the gap higher today, and if it does it will present another opportunity to get in if readers aren't already in.

Current Position: Long September $120.00 CALL, entry was at $1.80

Entry on August 12, 2010
Earnings Date N/A (unconfirmed)
Average Daily Volume: 12.4 million
Listed on August 10, 2010

PUT Play Updates

Apple, Inc - AAPL - close 247.64 change -1.46 stop 267.50

Target(s): 240.00, 233.00, 226.00
Key Support/Resistance Areas: 21.50, 20.50, 19.80, 19.00, 18.50
Time Frame: Several weeks

8/16: AAPL closed -0.60% lower while the broader market was relatively flat. Our triggers to enter short positions were not hit. I want remove the trigger to enter short positions on weakness at $245.95 because I do not want to get caught in a short lived dip. The market looks ready to bounce and AAPL should also bounce. If it does I like short positions in AAPL at $255 which is just below the 20 and 50-day SMA's and its recent down trend line. I am also going to suggest we change the strike to the September $240 put which should go for $3.20 at our higher trigger. My comments from below remain the same.

8/14: AAPL has been in a fuzzy cloud recently and I believe it looks vulnerable at these levels. Recent reports on smart phone market share point to the Android capturing 18% market share compared to Apple's 14%. Technically, AAPL had a daily and weekly close below its long term upward trend from its March 2009 lows for the first time this past week. I believe AAPL should test its 200-day SMA which is below our two most conservative targets. I also think this is a good hedge against some of our long positions in the model portfolio. I suggest we initiate short positions in AAPL on strength if it trades to $255 or on weakness at $245.95. This is a position that I suggest being quick to tighten stops and/or take profits.

An alternative strategy readers may consider on a short AAPL position is to buy a PUT spread. For example, buy the September $230 PUTS (current ask $3.10) and sell the September $210 PUTS (current ask $1.03) to finance the cost. This is a well defined risk strategy where your max loss is $214 (the amount you paid for the spread) and your max gain is $1,786 if AAPL closes at $210 at expiration.

Suggested Position: Buy September $240.00 PUT, current ask $5.55, estimated ask at entry $3.20

Entry on August xx
Earnings: 10/21/10 (unconfirmed)
Average Daily Volume: 23 million
Listed on August 14, 2010

Occidental Petrol. - OXY - close: 75.90 change: +0.51 stop: 81.05

Target(s): 74.00, 71.50, 67.50
Key Support/Resistance Areas: 75-74.00, 70.00, 65.00
Current Gain/Loss: N/A
Time Frame: Several Weeks
New Positions: Yes, trigger at $77.50

8/16: Its a good thing we removed our lower trigger to enter positions as OXY hit $73.90 and bounced over $2 into the close. I'm looking for the stock to bounce a little more and suggest we initiate short positions at $77.50. We've chosen a further out of the money option than normal to limit risk.

8/14: Hope is not a good strategy when you are in a position, but I suppose it's OK if you're not in yet. I sure hope OXY bounces to $77.50 so our trigger to enter short positions is reached. All we want is a bounce in the stock so we can exploit it. There is so much overhead congestion, moving averages, trend lines, etc. to keep this stock in check. I want to remove the lower trigger to enter for now. If OXY breaks down prior to bouncing the stock could reverse on us so I don't want to get trapped. I like the short set up on strength and suggest looking for a quick move down to the adjusted targets above. I will also add that OXY could bounce higher than $77.50. It really just depends on the strength in the oil sector and how far the broader market can bounce. A bounce much over $79.00 doesn't seem likely.

8/12: OXY came within 25 cents of our trigger to enter short positions. I think this is a good entry and there is a lot of overhead resistance to keep any additional strength in check. My comments from below remain the same.

Suggested Position: Buy September $70.00 PUT, current ask $1.03, estimated ask at entry $0.75

Entry on August XX
Earnings Date 10/21/10 (unconfirmed)
Average Daily Volume 4.4 million
Listed on August 7th, 2010

Procter & Gamble - PG - close: 59.77 change: -0.05 stop: 63.26

Target(s): 59.50 (hit), 59.20, 58.05, 57.25
Key Support/Resistance Areas: 59.00, 61.00
Current Gain/Loss: +44%
Time Frame: 2 to 3 weeks
New Positions: Yes, on strength

8/16: I want to raise our second target to $59.20 to take profits in PG. Our target of $59.50 was hit in early trading today and this position could have been closed for a +70% gain in early trading. don't want this to turn into a loser and suggest readers begin looking for a exit. The broader market looks like it wants to bounce and the time value of our PG options could begin suffer as time is not on our side. $59.50 is still a valid target and where stops should be tightened to protect profits if PG shows any weakness in the coming days.

8/14: Rallies in PG keep getting sold into. We have a nice gain in this position and it could turn into a big winner if PG breaks below $59.00 which is below our 2nd target. I'm inclined to hang on to this position to see if the selling begins, however, that probably means enduring a bounce this week. PG is also a defensive play so the decline in the stock may take a while. If we get down to $59.05 I suggest tightening stops too see if we can get more out of the trade. If we do get to this level we should have close to a +100% gain. That's hard to beat.

8/12: This morning PG came within 8 cents of reaching our 1st target before reversing with the market. Positions could have exited for a +60%. So I've raised that target 20 cents to $59.50 should PG retest this area. The PG chart looks good to the short side but there is support near $59.00. Tomorrow we get CPI and retail sales data and this could spark selling if the reports are bad. If PG gets down to $59.50 again it may break through this support. There is more support $59.00 which are the January and July lows. PG bounced hard at these levels so I've added $59.05 as a target as well. I would be inclined to take profits or at least tighten stops as PG approaches these levels. We now have a +44% gain so protect profits if the weakness continues.

Current Position: Long September $57.50 PUT, entry was at $0.36

Annotated Chart:

Entry on August 10, 2010
Earnings Date 10/28/10 (unconfirmed)
Average Daily Volume 2.5 million
Listed on August 7th, 2010


Volatility Index - VIX - close: 26.10 change: -0.14 stop: 19.60

Target(s): 25.95 (hit), 27.20 (hit), 28.00 (hit), 31.50, 35.00
Key Support/Resistance Areas: 20.00, 22.00, 24.00, 26.00, 28.00
Final Gain/Loss: +25.4%
Time Frame: 1 week
New Positions: Closed

8/16: VIX gapped higher and quickly surged to our 3rd target of $28.00. In the weekend play updates below I mentioned that a quick move lower in the market this week could be a reversal point and to either exit positions or tighten stops if that happened. As such we are flat the position for +25% gain. Frankly, I'm surprised the price of our calls weren't higher but sticking with the exit plan was the right thing to do and we booked gains.

8/14: VIX closed near its highs of the day and we currently have a +25% gain in this position. Exiting this trade could become somewhat tricky depending on what happens next week. I suspect we may get a bounce in the broader market next week so we may need to exhibit some patience with this trade. However, if we head lower first I believe the chances of a hard reversal becomes higher. So if that happens I suggest tightening stops as the VIX heads higher and as our targets approach. $27.20 and $28.00 are likely exit points on a quick down move prior to a bounce.

8/12: The VIX came within 9 cents of hitting our second target so I am going to lower the target to $27.20. If we get further weakness in the S&P 500 prior to a bounce the VIX may spike up to our targets and then retreat like it did today. Therefore, taking profits or tightening stops if that happens is the smart play. If the market finds its legs and bounces from here we will need to exhibit some patience with the trade.

NOTE: September VIX options expire on Wednesday, Sept. 15th, not Friday

Closed Position: Long VIX September $30.00 CALL at , entry was at $2.95

Annotated Chart:

Entry on August 11, 2010
Earnings Date N/A
Average Daily Volume N/A
Listed on August 7, 2010


Leggett & Platt - LEG - close 19.68 change -0.00 stop 21.75

Target(s): 19.85(hit), 19.40 (hit), 18.70 18.40
Key Support/Resistance Areas: 21.50, 20.50, 19.80, 19.00, 18.50
Final Gain/Loss: +73.3%
Time Frame: 1 to 2 weeks
New Positions: Closed

8/16: Per the weekend updates LEG quickly sold off to $19.40 prior to bouncing so we booked profits for a +73% gain. The broader market looks poised to bounce so if readers still have positions please protect profits. Any bounces in LEG up towards its downtrend line ($21.00 area) and moving averages ($20.50 area) from below may present another shorting opportunity.

8/14: LEG closed below the $19.80 support level I mentioned in Thursday's updates and our gain is now +46%. If there is weakness in the broader market early this week our $19.40 target could be hit fast, and it should give us a +65% gain so I suggest either taking profits or tightening stops to protect gains if we get there. I've added a more aggressive target of $18.40 for readers interested in riding this down farther but I doubt we get there before a some sort of bounce. You can always get back in later.

8/12: LEG hit our first target today and we now have a +33% gain in the position. The stock is finding support at the 7/19 and 7/20 lows which were just below $19.80. This is why my first target was $19.85. If it breaks here it should be a vacuum down to the $19.40 area which is our second target (raised 5 cents). This target should give us a +65% gain so I suggest either taking profits or tightening stops to protect gains if we get there.

Closed Position: Long September $20.00 PUT at $1.30, entry was at $0.75

Annotated Chart:

Entry on August 11, 2010
Earnings: 10/21/10 (unconfirmed)
Average Daily Volume: 1.45 million
Listed on August 10, 2010