Option Investor

Daily Newsletter, Monday, 1/24/2011

Table of Contents

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

Market Wrap

Bulls Come Running Back

by Todd Shriber

Click here to email Todd Shriber
If one is to consider last week's small declines on the Nasdaq and the S&P 500 a dip then it was bought with a fair amount of enthusiasm today as the Dow Jones Industrial Average flirted with 12,000, reaching its highest level since 2008 after chalking up a triple-digit gain. That is a very impressive way to start the week considering the blue chip index has notched eight consecutive weekly gains. The S&P 500 gained just over half a percent while the Nasdaq closed higher by over 1%. The Russell 2000 made some headway toward erasing last week's loss by adding almost 1% today.

Stats Table

Whether it was some mergers and acquisitions news, share buyback headlines or speculation about higher dividends, there were plenty of catalysts to help the bulls reassert themselves on Monday and large-caps were the place to be. On the dividend front, 2011 is shaping up to be a dandy year for income investors. You may have heard the factoid thrown about that as of the end of the third quarter, U.S. nonfinancial companies were sitting on north of $1.9 trillion in cash and it would appear some of that stash is destined to be returned to shareholders this year in the form of higher dividends and share repurchases.

I assume Warren Buffett's Berkshire Hathaway (BRK-A, BRK-B) is not included in the $1.9 trillion figure because the company is a financial stock, but Berkshire could be sitting on $50 billion in cash by the end of 2011, according to Barron's, which issued a bullish report on the company over the weekend. While the recent chatter surrounding Buffett and Berkshire has been about the Oracle of Omaha's retirement plans, it is worth noting that Barron's says the company could pay a dividend this year.

That is assuming that Buffett cannot find a big acquisition to take part in and that is a very real possibility if equity markets continue to soar higher. A noted value investor such as Buffett probably will not be doing much shopping with stocks at higher levels than where they currently trade. The dividend chatter played a part in boosting Berkshire shares and I have included the chart of the ''B'' shares as they are more reasonably priced than the ''A'' shares.

A Berkshire dividend would be big news because, for all the dividend stocks Buffett has acquired over the years, his company has not paid a dividend since he took over in 1965.

Berkshire B Chart

Speaking of Buffett stocks, one of Berkshire's largest holdings, Dow component American Express (AXP) reported fourth-quarter results after the bell and the New York-based company said its profit soared 49% to $1.05 billion, or 88 cents a share, on revenue of $7.32 billion. Excluding severance charges, AmEx earned 94 cents a share. Analysts were expecting a profit of 95 cents a share on revenue of $7.28 billion.

The good news comes on two fronts for AmEx. Not only did large corporate customers, small businesses and consumers boost their spending in the fourth quarter, they have also gotten better about paying their bills on time, allowing the company to set aside less cash for bad accounts.

AmEx set aside $239 million for future losses, 68% less than the same period in 2009, and released $672 million from an account to cover soured loans while write-offs for bad loans fell to 4.1% in December from 7.1% a year earlier, according to Bloomberg News. Investors apparently wanted more as shares of AmEx are down 1.4% in the after hours session.

American Express Chart

In other Dow-related headlines, McDonald's (MCD), the world's largest fast-food chain, stepped into the earnings confessional before the bell, delivering a slight increase in fourth-quarter results that translated to a small bump higher for the stock today. Illinois-based McDonald's said its fourth-quarter profit rose 2.1% to $1.24 billion, or $1.16 a share, compared with $1.22 billion, or $1.11 a share, a year earlier.

Excluding a one-time charge, McDonald's earned $1.15 a share on sales of $6.21 billion, which was in line with analysts' estimates. Same stores sales in the U.S. rose 2.6% compared with the 4% estimate of analysts surveyed by Bloomberg.

Shares of McDonald's have been nothing if not volatile for a company of this nature over the past few months The stock surged roughly 25% from July through early December only to give back about 10%, tumbling from $80 to $72. Now at just over $75 with a forward P/E of just over 15, the purveyor of Big Macs could be a compelling play for income investors looking to start or add to a position on any market dips. The yield is fair at 3.24% and McDonald's has raised its dividend for 37 consecutive years.

McDonald's Chart

There is plenty of news to get in the world of semiconductors today. Intel (INTC), the world's largest semiconductor maker, got the ball rolling this morning by announcing a $10 billion share repurchase plan. The company had taken a break from share buybacks to conserve cash during the financial crisis, but waded back into the water late last year, repurchasing $1.5 billion of its own stock during the fourth quarter.

Intel also made good on its promise made last year to raise its first-quarter dividend. Still, some pundits were critical of the Intel buyback news, saying it means Intel is taking a pass on delving deeper into the lucrative smartphone market where it is a laggard, not a leader.

In the semiconductor sector, the smart play on smartphones may just be Nvidia, which surged $2.51, or 11.3%, to $24.73 thanks to a Barron's bounce. Barron's said Nvidia shares could run to $40 if the company's Tegra chip helps it boost market share.

Nvidia is banking on Tegra to help it become a market leader for mobile chips, the chips used in smartphones and tablet devices like the iPad. At the Consumer Electronics Show in Las Vegas earlier this month, Tegra chips were spotted in several new smartphones and tablets running on Google's (GOOG) Android operating, indicating Nvidia is ahead of rivals like Qualcomm and Texas Instruments (TXN) in the mobile chip market.

Nvidia Chart

After the bell, Texas Instruments, the largest maker of analog chips, said its fourth-quarter profit jumped 44% to $942 million, or 78 cents a share, from $655 million, or 52 cents, a year earlier as revenue surged 17% to $3.53 billion.

Texas Instruments said its inventory was up $318 million to $1.52 billion in the quarter and that is by design. As such, orders fell a bit as customers are not as worried as they previously have been about obtaining supply from TI. The company's first-quarter guidance left something to be desired and that is probably why the stock is 2.5% in the after-hours session.

The company said it expects to 54 cents to 62 cents a share on sales of $3.27 billion to $3.55 billion for the current quarter. Analysts polled by Bloomberg are currently forecasting a profit of 57 cents a share on revenue of $3.33 billion. By sales, TI was the third-largest U.S.-based chipmaker last year, trailing Intel and Qualcomm.

Texas Instruments Chart

Looking at the charts, the S&P 500 is back to 1290 and a move above that number means it is time to be long again. The first attempt at 1300 for the index failed, but the slide from there did not really test support at 1260, so that still remains the number where I would be looking for the bulls to step in if the market wants to move lower. From there, next support would be 1235-1240, but with more than 100 S&P 500 constituents left to report earnings this week, if we see bullish guidance and more positive dividend news, we could be talking about what to look for over 1300.

S&P 500 Chart

As I mentioned earlier, the Dow is now building on eight straight weekly gains and a move to 12,000 seems to be a foregone conclusion at this point. You would have to go back to 2008 to find the last time the Dow traded that high. AmEx may not be a problem for the Dow on Tuesday as Jonhson & Johnson (JNJ), Travelers (TRV) and Verizon (VZ) all report before the bell. The 11,600 area is where we go if the headlines turn noticeably negative over the coming weeks.

Dow Chart

I am still not overwhelmed by the Nasdaq because Apple's (AAPL) gain of over 3% today probably did most of the heavy lifting with Nvidia chipping in, but the index is back above 2700. Earnings reports from Netflix (NFLX) and Amazon (AMZN) should be watched closely later this week, particularly the former. I have mentioned before the problems facing Netflix and Whitney Tilson's short position in the name. Any news about higher costs and lost subscribers would be a disaster for this stock and perhaps help shorts get the Nasdaq to 2675.

Nasdaq Chart

After last week's plunge of almost 4.3%, a gain of 0.8% for the Russell 2000 leaves the index with some work to. The index is now just below old support at 780 and that may turn into new resistance. Multiple failures there could send the volatile index down to real support at 764.

Russell 2000 Chart

This week has the potential to be a real roller coaster with so many earnings reports left to come and a full economic calendar, which includes the FOMC announcement on Wednesday and GDP on Friday. In other words, this would not be a good week for marquee names to deliver disappointing results and forward guidance or for the market to have to contend negative non-U.S. events. The mental impact of the Dow hitting 12,000 and the S&P 500 topping 1300 may be enough to drive stocks higher for the rest of the week, but the indexes have to get there first.

New Option Plays

Technology and Agriculture

by James Brown

Click here to email James Brown

Editor's Note:

Tonight we've got a trade for both the bulls and the bears. Plus, a watch list of additional candidates.

HMSY - shares look bullish and a breakout past $67 could be an entry point. Keep in mind that HMSY doesn't move very fast.

SLG - This stock tagged new two-year highs today. The relative strength is encouraging and the next level of resistance could be $80.

QSII - This tech stock also tagged new highs today. A move past $75 or a bounce near $70 might be an entry point.

ROST - This retailer is holding up pretty well. A close over resistance near $66 might be an entry point.

FISV - This stock was showing relative strength today and set new all-time highs.

CTXS - This tech stock broke down last week. Shares are not seeing much of a bounce. The path of least resistance could be down!

- James


FactSet Research Systems - FDS - close: 96.98 change: +0.88

Stop Loss: 94.75
Target(s): 99.90, 103.50
Current Option Gain/Loss: + 0.0%
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The stock market refuses to correct. There is a growing chance that stocks could see some month end window dressing. If that's the case then we want to play some momentum stocks for the next few days. FDS looks like a bullish candidate. Shares broke out of their consolidation last week and have since retraced to test prior resistance as support. I'm suggesting small bullish positions now. Our first target to take profits is at $99.90.
The Point & Figure chart for FDS is bullish with a $105 target.

Open Small Positions Now.

Buy the 2011 February $95 call (FDS1119B95) current ask $3.50

- or -

Buy the 2011 February $100 call (FDS1119B100) current ask $0.90

Annotated Chart:

Entry on January 25th at $ xx.xx
Earnings Date 03/16/11 (unconfirmed)
Average Daily Volume = 181 thousand
Listed on January 24th, 2010


Monsanto Co. - MON - close: 71.12 change: +1.01

Stop Loss: 75.51
Target(s): 69.00, 66.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
The action in MON last week produced a bearish reversal pattern. I am tempted to buy put options right here but I suspect the market might see one more push higher. Therefore I'm suggesting we wait and use a trigger to buy puts at $73.00. The recent high was $75.34 so we'll put our stop loss at $75.51. If triggered at $73.00 we'll target a drop to $69.00 and $66.00.

Trigger to buy PUTS @ $73.00

- Suggested Positions -

Buy the 2011 February $70 PUT (FDS1119N70) -only four weeks left

- or -

Buy the 2011 March $70 PUT (FDS1119O70)

Annotated Chart:

Entry on January xxth at $ xx.xx
Earnings Date 03/31/11 (unconfirmed)
Average Daily Volume = 6.2 million
Listed on January 24th, 2010

In Play Updates and Reviews

Not Over Yet

by James Brown

Click here to email James Brown

Editor's Note:

Clearly the rally is not over yet with stocks surging again on Monday. The DJIA hit new two-year highs. Some of this move could be short covering on the unexpected strength. I am suggesting an early exit from our NTAP play.


Current Portfolio:

CALL Play Updates

FedEx Corp. - FDX - close: 94.37 change: +1.03

Stop Loss: 91.75
Target(s): 99.90, 104.75
Current Option Gain/Loss: -34.7%
Time Frame: 4 to 6 weeks
New Positions: see below

01/24 update: The industrials bounced and the DJIA surged to new two-year highs, largely thanks to a big gain in IBM. That helped FDX bounce from its rising trendline of higher lows. Yet I remain cautious on FDX. You could launch bullish positions here but I'd only do it with a stop loss near $92.90.

- Suggested Positions (only small positions so far) -

Buy the 2011 April $100 call (FDX1116D100) Entry @ $2.96

01/22: January options have expired (-100%)
01/13: New targets for the April calls (99.90 and 104.75)
01/12: New stop loss @ 91.75
01/08: New exit strategy for January calls. Try to exit at 40 cents or more.
12/17: FDX opens at $94.23 - our entry point.
12/16: Adjusted Entry - initiate small positions now (@ Friday's open)

Entry on December 17th at $94.23
Earnings Date 12/16/10 (confirmed)
Average Daily Volume = 2.1 million
Listed on November 29th, 2010

Research In Motion - RIMM - close: 62.69 change: +1.14

Stop Loss: 59.90
Target(s): 64.75, 67.50
Current Option Gain/Loss: -13.7%, and - 8.0%
Time Frame: 4 to 6 weeks
New Positions: see below

01/24 update: RIMM is bouncing from its Friday lows and its 20-dma. I would be tempted to buy calls right here but if you do I'd consider a stop loss close to Friday's low of $61.11 or at least a stop near the 50-dma near $60.35. Our final target remains $67.50.

- Suggested Positions -

Long the 2011 February $62.50 calls (RIMM1119B62.5) Entry @ $2.47

- or -

Long the 2011 March $65.00 calls (RIMM1119C65) Entry @ $2.35

01/13: New stop @ 59.90
01/13: 1st Target Hit @ 64.75. Feb. call @ $4.00 (+61.9%) Mar. call @ $3.75 (+59.5%)
01/12: New stop loss @ 58.45

Entry on January 6th at $61.00
Earnings Date 03/31/11 (unconfirmed)
Average Daily Volume = 9.9 million
Listed on January 5th, 2010

PUT Play Updates

Cognizant Technology Solutions - CTSH - close: 73.05 change: -0.56

Stop Loss: 75.25
Target(s): 70.25, 68.00
Current Option Gain/Loss: -23.0%
Time Frame: exit ahead of earnings
New Positions: see below

01/24 update: Over the weekend we moved CTSH from our call section to our put section based on the stock's breakdown. Naturally Murphy's law sent tech stocks higher on Monday. Shares are testing short-term overhead resistance near the 10 and 20-dma. I'd still consider new put positions but keep your position size small. Our stop loss is at $75.25. Our first target is $70.25. Our secondary target is $68.00. We still want to avoid holding over earnings. That only gives us a few trading days (earnings are Feb. 7th).

- Suggested Positions (very small positions only!) -

Long the 2011 February $70.00 PUT (CTSH1119N70) Entry @ $1.30

01/24 CTSH opened at $73.13. Put option opened at $1.30 01/22 Moved from call candidate to put play.

Entry on January 24th at $73.13
Earnings Date 02/07/11 (confirmed)
Average Daily Volume = 1.8 million
Listed as a PUT on January 22nd, 2010

Decker's Outdoor Corp. - DECK - close: 72.38 change: -0.52

Stop Loss: 80.25
Target(s): 70.50, 65.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see Trigger

01/24 update: We may have to give up on DECK. It looks like we may have missed the entry point. Shares are continue to fall lower without us. I don't see any changes from my prior comments. Right now our plan is to launch small bearish put positions on a bounce at the $77.00 mark. We may need to adjust our entry point toward the $76.00 level instead.

If we are triggered at $77.00 I'm suggesting a stop loss at $80.25. Bear in mind that DECK can be somewhat volatile and readers may want to keep their position size small. Our targets are $70.50 and $65.50.
The Point & Figure chart for DECK is bearish with a $65 target.

Trigger @ $77.00

- Suggested Positions -

Buy the 2011 February $75.00 PUTS (DECK1119N75) current ask $4.00

- or -

Buy the 2011 March $75.00 PUTS (DECK1119O75) current ask $6.00

Entry on January xxth at $ xx.xx
Earnings Date 02/24/11 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on January 20th, 2010

Google Inc. - GOOG - close: 611.08 change: - 0.75

Stop Loss: n/a
Target(s): n/a
Current Option Gain/Loss: see below
Time Frame: 1 month
New Positions: No

THIS IS A STRANGLE TRADE (not a simple put play)

01/24 update: The action last week produced a huge failed rally/bearish reversal pattern on GOOG. While I am not surprised by the bounce near $600 and the 50-dma today I think it's temporary. I'm not suggesting new strangle positions at this time.

We will keep the February strangle position for a few more days and re-evaluate our exit strategy.

STRANGLE TRADE: Buy an out of the money CALL and PUT

STRANGLE #2 (February) initial cost $15.10, currently: $5.05 (-66.5%)

2011 February $680 call (GOOG1119B680) Entry @ $6.20

- AND -

2011 February $580 put (GOOG1122N580) Entry @ $8.90

01/22: Exit the January strangle at the open.

Entry on January 20th at $626.77
Earnings Date 01/20/11 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on January 19th, 2010

iShares Russell 2000 Index - IWM - close: 77.76 change: +0.57

Stop Loss: 80.80
Target(s): 75.00
Current Option Gain/Loss: - 7.8%
Time Frame: 1 to 2 weeks
New Positions: see below

01/24 update: The small cap Russell 2000 index produced a small oversold bounce on Monday that underperformed the NASDAQ and the Dow Jones Industrials. Look for a failed rally near $79.00 as a potential entry point to buy puts.

Small Position only

Long the 2011 February $77 puts (IWM1119N77) Entry @ $1.65

Entry on January 20th at $78.14
Earnings Date --/--/--
Average Daily Volume = 38 million
Listed on January 19th, 2010

Lockheed Martin Corp. - LMT - close: 78.03 change: -1.19

Stop Loss: 80.25
Target(s): 76.25
Current Option Gain/Loss: + 7.1%
Time Frame: 3 DAYS
New Positions: see below.

01/24 update: Our new short-term trade on LMT is off to a good start. Remember, this is a three-day trade. We want to exit on Wednesday at the closing bell to avoid holding over earnings on Thursday morning.

LMT opened at $78.88 and fell to a -1.5% decline. Our target to exit is $76.50.

- Suggested Positions -

Long the 2011 February $75.00 PUT (LMT1119N75) Entry @ $0.70

Entry on January 24th at $78.88
Earnings Date 01/27/11 (confirmed)
Average Daily Volume = 907 thousand
Listed on January 22nd, 2010

Lubrizol Corp. - LZ - close: 103.08 change: +0.30

Stop Loss: 107.25
Target(s): 98.00, 91.00
Current Option Gain/Loss: - 9.3%
Time Frame: 2 weeks
New Positions: see below

01/24 update: Monday turned out to be a quiet day for LZ. Shares opened at $103.00 and settled with a very minor gain. I don't see any changes from my weekend comments.

I'm suggesting put positions now. We'll plan on taking profits at $98.00 and at $91.00. Earnings are early February. We do not want to hold over the announcement. I do see potential support at $100.00 and the 200-dma at 97.75. Don't be surprised to see a little oversold bounce at either level.

- Suggested Positions -

Long the 2011 February $100 PUT (LZ1119N100) Entry @ $2.15

Entry on January 24th at $103.00
Earnings Date 02/02/11 (confirmed)
Average Daily Volume = 514 thousand
Listed on January 22nd, 2010

Panera Bread Co. - PNRA - close: 96.96 change: -2.61

Stop Loss: 103.05
Target(s): 95.50, 91.00
Current Option Gain/Loss: + 0.0%
Time Frame: 3 weeks
New Positions: Yes

01/24 update: PNRA continued to drop as we expected but shares gapped open lower this morning so our entry point could have been better. PNRA opened at $97.96 and slipped to $96.23 before trimming its losses. If you're nimble enough look for a bounce into the $99-100 zone as a new entry point to buy puts. Our first target is the $95.50 mark. Expect an oversold bounce near $95.00. We do not want to hold over the February earnings report. Traders should be aware that PNRA has higher-than average short interest (about 8% of the float) and a move over $103 could spark some short covering!

- Suggested Positions - (small positions)

Long the 2011 February $95 PUTS (PNRA1119N95) Entry @ $2.85

Entry on January 24th at $97.96
Earnings Date 02/10/11 (unconfirmed)
Average Daily Volume = 364 thousand
Listed on January 22nd, 2010


NetApp, Inc. - NTAP - close: 55.55 change: -0.22

Stop Loss: 54.90
Target(s): 62.25, 64.50
Current Option Gain/Loss: -69.2%
Time Frame: 4 to 5 weeks
New Positions: see below

01/24 update: It's time to hit the eject button on NTAP. Tech stocks were in rally mode on Monday and yet NTAP failed to participate. Shares dipped to $54.96 before paring its losses. I am suggesting an early exit now.

- Suggested Positions (small positions only) -

Long the 2011 February $60 calls (NTAP1119B60) Entry @ $2.50, exit 0.77

01/24: Exit Early. Option @ $0.77 (-69.2%)


Entry on January 12th at $59.04
Earnings Date 02/16/11 (unconfirmed)
Average Daily Volume = 3.8 million
Listed on January 11th, 2010