Option Investor

Daily Newsletter, Monday, 11/15/2010

Table of Contents

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

Market Wrap

Merger Monday Returns

by Todd Shriber

Click here to email Todd Shriber
A spate of mergers and acquisitions news had the major U.S. indexes trading higher at the open, but enthusiasm for over $10 billion in deals wilted throughout the day. Either that, or the market found another reason to sell-off as the S&P 500 and the Nasdaq closed slightly lower on the day while the Dow Jones Industrial Average and the Russell 2000 grinded their way to gains that would hardly be considered noteworthy.

Stats Table

Before getting into the M&A news, there is some economic news to discuss and it was another mixed bag. Starting off with the good news, the Commerce Department reported that retail sales popped 1.2% in October, good for the best jump in seven months and almost double the revised September increase of 0.7%. Auto sales surged 5.7%, perhaps good news ahead of the biggest joke, I mean IPO, that we have seen in a while and that is General Motors. Without the help of auto sales, retail sales were up just 0.4% last month.

Ten of 13 categories posted gains, but two of the three that did not, furniture and home furnishings and electronics and appliances, are obviously directly tied to the housing market, which apparently still needs some help.

Retail Sales Chart

The other key bit of economic data out this morning, the Empire State Manufacturing Survey, was not as rosy as the retail sales report. The index for current business conditions slumped 11.14, but future conditions rose to 54.55. Current new orders took a big dive, slumping almost 24.4, but future new orders increased to 53.25. So the survey is not great now, but it should improve in the future.

And before I review the M&A activity that is alive, one noteworthy deal officially met its demise on Sunday evening when BHP Billiton (BHP), the world's largest mining company, waived the white flag and withdrew its $38.6 billion hostile bid for Potash Corp. of Saskatchewan (POT). Not really a surprise after Ottawa blocked the bid earlier this month, but now it is official.

Meeting the net benefit requirements set forth by the Canadian government, whatever those requirements were, did not appeal to BHP. For its part, Potash issued a boring press release that reiterated its view that BHP was grossly undervaluing the crop nutrient producer and that global food demand will serve Potash well going forward.

In the near-term, there's little consolation for shareholders of either company. BHP said it will resume an old share repurchase plan that has $4.2 billion left on it though Morgan Stanley said the company could buyback up to $25 billion in the coming years. Potash is left on its own and the market did not like that news, at least not today.

Potash Chart

In news of deals that are merely being speculated on Massey Energy (MEE) gained almost 1%, but traded much higher than that earlier in the session, after the Wall Street Journal reported ArcelorMittal (MT), the world's largest steelmaker, might be considering making a run at the Virginia-based coal producer.

The synergies between a steelmaker and a coal producer that has ample metallurgical reserves, which Massey does, are obvious. After all ''met'' coal is a key ingredient in the production of steel. Massey has been generating a lot of speculation in the coal sector in recent weeks after announcing it was considering strategic options, including a possible sale.

We go into greater depth on the matter at OilSlick.com, but ArcelorMittal probably will not be the only suitor for Massey, assuming the company puts itself up for sale. A decision on that front is expected next week when Massey's board meets and the Journal reported today that Alpha Natural Resources (ANR) is in ''advanced'' talks with Massey.

All of this interest in Massey, a company whose safety record makes comparisons with BP (BP) not only funny in a sordid way, but also accurate, highlights expectations that global demand for coal will remain strong for the forseeable future.

Massey Chart

Staying with King Coal for a moment, Monday's big deal was Caterpillar's (CAT) $8.6 billion purchase of Bucyrus (BUCY), a maker of shovels, drills, draglines and other equipment that is integral in the mining of coal and other natural resources. The deal is the largest ever for Caterpillar, a Dow component.

Illinois-based Caterpillar, already the world's largest maker of mining and construction equipment, will pay $92 a share for Bucyrus, a 32% premium to where the shares closed on Friday. Caterpillar said earlier this year that it was going to invest at least $700 million to expand its line of mining equipment as customers had been asking the company for more mining-related offerings.

The deal is the largest in the mining equipment industry in the past five years and the 32% premium trumps the 28% average premium paid over those five years, according to Bloomberg data. Caterpillar said it expects the acquisition to result in annual cost savings of $400 million starting in 2015. Oddly enough, Bucyrus went bankrupt in 1994.

Bucyrus Chart

I mentioned in a recent OilSlick commentary that when one big deal takes place, it is practically a sport on Wall Street to speculate on who will be next to be acquired in the same sector. That was probably part of the reason why several of Buyrus's closest rivals shot higher today and all did so on volume that was well above their daily averages.

CNH Global (CNH) added almost 5.4% and Terex (TEX) gained nearly 3%. Joy Global (JOYG), Bucyrus's most direct competitor and Wisconsin neighbor, surged 7.45% on volum that was roughly five times the daily average. Heading into Monday, Joy Global was bigger than Bucyrus, so it is reasonable to assume it was cheaper for Caterpillar to acquire the latter.

With Caterpillar getting together with Bucyrus, it remains to be seen what the future holds for Joy Global. It could take out a smaller company like Terex, but I would bet that if Joy Global is a target, it will have to be a larger non-U.S. rival to do the buying. CNH actually fits the bill there, but is only $2.7 billion larger than Joy Global. The best I can do is to recommend keeping an eye on stocks like Joy Global or Terex because they do make for compelling acquisition targets.

Joy Global Chart

The tech sector was not absent from Monday's M&A activity, which is not surprising given that the group ranks third in terms U.S. M&A activity this year when ranked by dollar value. Data storage giant EMC (EMC) is getting bigger in a space it already dominates by acquiring smaller rival Isilon Systems (ISLN) for $2.25 billion in cash.

The deal values Isilon at $33.85 per share, a 29% premium to where the stock closed on Friday. Data storage has been a hot sub-sector of the tech world when it comes to M&A activity this year as EMC, Hewlett-Packard (HPQ) and International Business Machines (IBM) have all made deals to fortify their positions in the data storage arena.

Isilon had already gained 56% in the past 90 days as the company has frequently been the subject of takeover chatter. As is the case in every other sector, attention now turns to who might be next to be acquired in the data storage universe. Jefferies named Compellent Technologies (CML), CommVault Systems (CVLT) and NetApp (NTAP) as possible targets.

Isilon Chart

Looking at the charts, the S&P 500's mild decline today still has the index resting safely above the 1175-1180 support area. While it would appear disappointing that the S&P 500 was not able to hold its early gains on a day of robust M&A newsflow, this situation has occurred several times this year. Stocks disappoint on a Merger Monday only to react to the news in more positive fashion later in the week. Barring bad news our of China or Ireland, I do not see 1175 being tested this week.

S&P 500 Chart

Had Caterpillar been able to close at the high end of its intraday range, the Dow probably would have notched a better result because Caterpillar is the fourth-highest priced stock in the price-weighted index. The Dow still managed to eke out a close above 11,200, putting it 100 points above the beginning of the 11,000-11,100 support area.

Dow Chart

I will admit the Nasdaq was a bit of a disappointment today and I say that simply because Bucyrus and Joy Global are Nasdaq stocks as Isilon. The Nasdaq managed a close above 2500, keeping the spotlight on 2470-2500 as a key support range. Dell (DELL) reports earnings on Thursday and Apple (AAPL) is expected to make a marquee iTunes announcement on Tuesday that folks are saying involves the Beattles. Both could be be pivotal catalysts for the Nasdaq this week.

Nasdaq Chart

The Russell 2000 came to rest just below 720 and well above support at 700. A move below would likely represent a change in overall market trend and an opporunity to at least be short small-caps.

Russell 2000 Chart

I got an email from a reader recently that said he enjoyed the anecdotes that I find from time-to-time regarding market performance around certain events such as elections and movie releases, two of my recent anecdotes. With Thanksgiving approaching, history shows the S&P 500 usually trades higher during Thanksgiving week (next week) and builds on those gains the following week. Statistics also show it's safe bet the index will be higher two Fridays after the day after Turkey Day.

New Option Plays

Failed Rally At the 200-dma

by James Brown

Click here to email James Brown

Editor's Note:
This high-profile tech stock has been struggling with resistance for the last couple of days and looks ready to reverse lower.

- James


Research In Motion - RIMM - close: 57.78 change: -1.02

Stop Loss: 60.25
Target(s): 55.05, 53.00
Current Option Gain/Loss: +0.00%
Time Frame: 1 to 2 weeks
New Positions: Yes

Company Description:
Research In Motion (RIM), a global leader in wireless innovation, revolutionized the mobile industry with the introduction of the BlackBerry® solution in 1999. Today, BlackBerry products and services are used by millions of customers around the world to stay connected to the people and content that matter most throughout their day. Founded in 1984 and based in Waterloo, Ontario, RIM operates offices in North America, Europe, Asia Pacific and Latin America. RIM is listed on the NASDAQ Stock Market and the Toronto Stock Exchange. (source: company press release or website)

Why We Like It:
There are plenty of opinions about RIMM. The stock sank from April through August on worries that RIMM's core Blackberry smartphone was losing share to Apple's iPhone and Google's Android. According to sales figures the iPhone and Android seem to be outselling Blackberry but RIMM says it's core business is still strong. Now the company is trying to compete with Apple in the tablet space with RIMM selling their "Galaxy Tab" versus AAPL's iPad.

I would actually consider bullish positions in RIMM if the stock would correct down toward the $51-50 zone, which should be support. Yet on a short-term basis RIMM's rally is failing. The $60.00 level is resistance that is bolstered by the simple 200-dma. The rally on Thursday last week stalled at $60.00. Friday's intraday strength reversed and RIMM produced a failed rally pattern. Today's failed rally at $60.00 this morning reaffirms the resistance level. I suspect RIMM is poised to correct toward $55 or lower. I'm suggesting we buy puts right now with a stop loss at $60.25. Our first target is $55.05. Our second target is $53.00. Then we'll start looking for a bullish entry point.

Suggested Position: Buy the December $55 puts (RIMM1018X55) current ask $2.36

Annotated Chart:

Entry on November 16th at $ xx.xx
Earnings Date 12/16/10
Average Daily Volume = 17.6 million
Listed on November 15th, 2010

In Play Updates and Reviews

Financial Strength Falters

by James Brown

Click here to email James Brown

Editor's Note:

The market's early morning strength, led by financials, reversed late in the session. It looks like the market's correction may not be over yet. Which means we might get a better entry point in the next day or two to buy the dip.


Current Portfolio:

CALL Play Updates

Ansys, Inc. - ANSS - close: 48.97 change: -0.01

Stop Loss: 44.90
Target(s): 49.50,
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

11/15: ANSS was relatively resistant to any profit taking on Monday and closed virtually unchanged on the session. While I applaud the relative strength we want to see a pull back. The market looks vulnerable to more selling right now so ANSS should follow it lower. Broken resistance near $46.50 should be support. I am suggesting we buy calls on a dip to $46.75. I'm listing a stop loss at $44.90 but you could probably get away with a stop closer to $46.00.

Buy-the-dip trigger @ 46.75

Suggested Position: Buy the 2011 January $50.00 calls (ANSS1018L50)

Entry on November xxth at $ xx.xx
Earnings Date 02/24/11 (unconfirmed)
Average Daily Volume = 651 thousand
Listed on November 13th, 2010

Baidu, Inc. - BIDU - close: 108.80 change: -1.84

Stop Loss: 106.49 *new*
Target(s): 119.75, 124.50
Current Option Gain/Loss: -39.7% and -29.2%
Time Frame: 4 to 5 weeks
New Positions: Maybe

11/15: After Friday's -5% plunge in the Shanghai index on Friday the Chinese market managed a +1% bounce on Monday. Sadly BIDU's participation in the rebound quickly faded and the stock lost another -1.6%. Shares of BIDU are quickly approaching the bottom of its recent trading range near $107. A breakdown below this level will most likely hit our stop loss. I am not suggesting new bullish positions in BIDU at this time.

Current Position: Long the 2010 December $120 calls (BIDU1018L120) Entry @ $2.99
- or -
Current Position: Long the 2011 January $120 calls (BIDU1122A120) Entry @ $5.65

Entry on November 12th at $112.97
Earnings Date 02/09/11
Average Daily Volume = 13 million
Listed on November 11th, 2010

Caterpillar - CAT - close: 81.82 change: +0.78

Stop Loss: 79.40
Target(s): 84.85, 89.50
Current Option Gain/Loss: + 1.4% & +21.3%
Time Frame: 3 to 4 weeks
New Positions: Yes

11/15: CAT was part of the M&A excitement this morning with news the company was buying mining company Bucyrus (BUCY) for $7.6 billion. This is the biggest acquisition in CAT's 85-year history. The deal values BUCY at $92 a share and shares of BUCY gapped open at $90.08 this morning (FYI: The LEAPSTrader newsletter was long calls on BUCY). Shares of CAT saw some volatility with a gap open lower at $79.80 followed by a quick intraday rally toward $83.60. Unfortunately, like most of the market's strength today it faded by the closing bell.

I remain bullish on CAT but I think we might see another entry point near $80.00 soon. Wait for the dip (or bounce) near $80.00 again and use it as another bullish entry point.

Earlier Comments
Our first target is $84.85. We want to exit the majority of our position here. We'll set a secondary target at $89.50 but again I warn you the $85 level should be tough resistance. FYI: The P&F chart is bullish with a $118 target.

Current Position: Long the December $85 calls (symbol: CAT1018L85)
Entry @ $1.40

Double Down
New Position: Buy the December $85 calls (CAT1018L85), current ask $1.17

Entry on November 9th at $ 81.75
Earnings Date 01/27/11
Average Daily Volume = 7.7 million
Listed on November 6th, 2010

Cliffs Natural Resources - CLF - close: 67.52 change: -0.00

Stop Loss: 64.75
Target(s): 71.50, 74.75
Current Option Gain/Loss: + 0.0%
Time Frame: 4 to 6 weeks
New Positions: Yes

11/15: Monday proved to be a quiet session for CLF. Shares traded sideways in a narrow range and closed unchanged on the day. Odds that CLF will see a dip toward $66 are growing. Wait for the dip (or bounce) before considering new bullish positions.

Earlier Comments
Stop loss is at $64.75. Our upside targets are $72.00 and $74.75.

Current Position: Long the 2010 December $70.00 CALL, Entry @ $2.42

Entry on November 12th @ 67.00
Earnings Date 02/17/11
Average Daily Volume = 4.3 million
Listed on November 1, 2010

Costco Wholesale - COST - close: 65.48 change: +0.28

Stop Loss: 62.90
Target(s): 69.00
Current Option Gain/Loss: +25.3%
Time Frame: 3 to 4 weeks
New Positions: Yes

11/15: COST continues to show relative strength. This morning the U.S. retail sales numbers were released. The headline number was much better than expected but ex-autos retail sales for October were in-line with expectations with a +0.4% gain. Shares of COST managed to rally toward resistance at $66.00 before paring its gains. If the market continues to slip we can look for COST to retest support near $64.00. If the market bounces then look for COST to breakout. Keep in mind that COST could see some movement tomorrow as investors react to earnings from rival Wal-Mart (WMT) who reports Tuesday morning.

Earlier Comments
Look for technical support at the 40-dma. We want to keep our position size small to limit our risk. FYI: The Point & Figure chart is very bullish with an $88 target.

Current Position: December $65.00 calls (symbol: COST1018L65)
Option Entry @ $1.50

Entry on November 8th at $64.50
Earnings Date 12/09/10
Average Daily Volume = 3.4 million
Listed on November 6th, 2010

Humana Inc. - HUM - close: 58.55 change: -0.65

Stop Loss: 51.75
Target(s): 59.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes

11/15: The reversal in HUM continues. Shares reversed on Friday and HUM lost another -1% today. Bear in mind the stock remains stuck in the $58-60 zone, which is where it has been trading for over two weeks. We are still waiting for a pullback toward $55.00. If HUM hits our bullish trigger at $55.25 we'll use a stop loss at $51.75.

Suggested Position:

Trigger to buy calls at $55.25

BUY the 2011 January $55 calls.

Entry on November xxth at $ xx.xx
Earnings Date 11/01/10 (confirmed)
Average Daily Volume = 2.1 million
Listed on October 16th, 2010

iShares DJ Financial ETF - IYF - close 54.34 change +0.13

Stop Loss: 52.90 *new*
Target(s): 57.50, 59.75
Current Option Gain/Loss: -40.0%
Time Frame: 6 to 8 weeks
New Positions: Yes

11/15: Financial stocks were showing some relative strength this morning but gains faded into the closing bell. The banking indices still managed to close in positive territory. The IYF rolled over under the $55.00 level and looks ready to retest support in the $54.00-53.50 zone. I would use this dip as a new entry point to buy calls.

Current Position: Long the December $55.00 CALLS, entry @ $2.00

Entry on November 9th @ 55.00
Earnings Date N/A (unconfirmed)
Average Daily Volume: 1.0 million
Listed on November 4, 2010

Macerich Co. - MAC - close: 45.37 change: -0.36

Stop Loss: 43.75
Target(s): 49.75, 54.00
Current Option Gain/Loss: -46.1%
Time Frame: 4 to 5 weeks
New Positions: Yes

11/15: MAC is still slipping slowing and looks like it's going to test support near $45.00 or its 50-dma (near 44.40) soon. Wait for the bounce before launching new bullish positions.

Earlier Comments
Our first target is $49.75. Our second target is $54.00 but that's probably wishful thinking on my part.

Current Position: Long the December $50 calls (symbol:MAC1018L50) Entry @ $0.65

Entry on November 11th at $ 46.48
Earnings Date 02/10/11 (unconfirmed)
Average Daily Volume = 1.2 million
Listed on November 10th, 2010

Nike Inc. - NKE - close: 81.80 change: -0.82

Stop Loss: 79.90
Target(s): 86.75, 89.50
Current Option Gain/Loss: -45.2%
Time Frame: 4 to 6 weeks
New Positions: Yes

11/15: The October retail sales numbers did nothing to help shares of NKE. The stock briefly gapped higher and then fell under short-term support near $82.00. The close today under $82.00 and its 30-dma is very short-term bearish and I'm not expecting NKE to fall back toward the $80.00 level. Wait for the dip (or bounce from) near the $80.50-80.00 zone before considering new bullish positions!

Current Position: Long the December $85.00 CALLS (symbol:NKE1018L85) Entry @ $1.15

Entry on November 11th at $83.00
Earnings Date 12/21/10
Average Daily Volume = 2.3 million
Listed on November 6th, 2010

VimpelCom Ltd - VIP - close 15.62 change +0.16

Stop Loss: 14.80
Target(s): 16.75, 17.75
Current Option Gain/Loss: -33.3%
Time Frame: 6 to 8 weeks
New Positions: Yes

11/15: Shares of VIP saw some volatility this morning. The stock initially dipped to $16.10 only to rocket higher to $15.89 a few minutes later. The stock closed the session up +1.0% after the company announced an interim dividend payment of $0.46 an ADS (stock traded here in the U.S. instead of back in Russia). The dividend will be paid before Dec. 31st, 2010. Meanwhile the bounce in VIP shares looks encouraging but the action in the market today does not. If you're patient we might see another dip near $15.25 again. FYI: VIP is due to report earnings around Nov. 24th.

Current Position: December $15.00 CALLS, Entry @ $1.05

Entry on November 8, 2010 @ 15.60
Earnings Date 11/24/2010 (unconfirmed)
Average Daily Volume: 3.5 million
Listed on November 3, 2010

PUT Play Updates

Lubrizol Corp. - LZ - close: 106.25 change: +0.85

Stop Loss: 110.25
Target(s): 100.50
Current Option Gain/Loss: -10.3%
Time Frame: 3 to 4 weeks
New Positions: Maybe

11/15: The early morning bounce in LZ faded with traders selling into strength near $109.00. The move today looks like a new entry point to buy puts. You may want to keep your position size small to limit your risk.

Current Position: Long the December $105 puts (symbol:LZ1018X105)
Entry @ $2.90

Entry on November 10th at $107.68
Earnings Date 02/03/11 (unconfirmed)
Average Daily Volume = 525 thousand
Listed on November 9th, 2010

Millicom Intl. - MICC - close: 92.52 change: -0.38

Stop Loss: 98.25
Target(s): 92.50, 90.25
Current Option Gain/Loss: + 6.1%
Time Frame: 3 to 4 weeks
New Positions: No

11/15: It was another quiet session for MICC. Shares are trading in the $92-94 zone. If you look at the last few sessions you can see the bounces failing near technical resistance at the 100-dma. The path of least resistance is still down but I'm not suggesting new positions at this time.

FYI: Our final target is $90.25.

Current Position: Long December 2010 $90 puts (MICC1018X90)
Entry @ $2.45

11/08 Target hit @ 92.50, option @ 2.85 (+16.3%)

Entry on November 1, 2010
Earnings Date 02/01/11
Average Daily Volume = 490 thousand
Listed on October 30th, 2010

Oceaneering Intl. Inc. - OII - close: 68.61 change: -0.32

Stop Loss: 72.15
Target(s): 64.50, 62.25
Current Option Gain/Loss: - 3.5%
Time Frame: 3 to 4 weeks
New Positions: Yes

11/15: I don't see any changes from my weekend comments on OII. The stock gapped open at $69.21 and the option opened at $1.45 (entry). Shares of OII spent the session churning sideways in a very tight range. We're expecting a correction toward $65 or lower. I'm still suggesting bearish put positions now. You may want to keep your positions small since this is an aggressive, higher risk trade. Our first target is $64.50. Our second target is $62.25.

Current Position: Long the December $65.00 puts (OII1018x65) Entry @ $1.45

Entry on November 15th at $69.21
Earnings Date 02/17/11
Average Daily Volume = 1.0 million
Listed on November 13th, 2010