Option Investor

Daily Newsletter, Monday, 3/21/2011

Table of Contents

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

Market Wrap

''Let's Make A Deal'' Lifts Stocks

by Todd Shriber

Click here to email Todd Shriber
Good news out of Japan regarding the country's efforts to cool nuclear reactors and a return of Merger Monday helped the market overlook what is a deteriorating situation in Libya as stocks spent a third consecutive in rally mode. The S&P 500 and the Dow Jones Industrial Average both jumped 1.5% while the Nasdaq added 1.8%.

Stats Table

Overall, Monday's headlines were positive for the most part, but there was some gloomy news and it came courtesy of the housing sector (where else?). I will start with this so the bad news is out of the way first. The National Association of Realtors said existing home sales in February fell to 4.88 million units on a seasonally adjusted basis.

That is well below the 5.4 million units seen in January's upward revision and the 5.02 million units in February 2010. Remember that economists usually say a reading of 6 million units is positive. Making matters is the fact that the median home price fell to its lowest level in nine years last month.

For those looking for something positive out of this report, NAR says existing home sales remain 26.4% above the cyclical low seen last July and that first-time buyers accounted for 34% of purhases last month. Still, NAR says ''unnecessarily tight credit'' is hampering the housing market. On that note, I offer this anecdote: A friend of mine, who has good credit and makes over $100,000 per year, recently tried to purchase a home here in Southern California for $399,000. He went to Bank of America (BAC), JPMorgan Chase (JPM) and Wells Fargo (WFC) with an $80,000 down payment and was rejected for a mortgage by all three.

Home Sales Chart

Mergers and acquisitions news was in full bloom today and I will get into the big deals of the day in the minute, but it is worth noting that just week a removed from the announcement that Berkshire-Hathaway (BRK-A, BRK-B0 will acquire Lubrizol (LZ) for $9 billion, Warren Buffett was providing life to the markets again by saying he is still on the hunt for more big deals. Buffett is currently in South Korea and called the country a ''hunting ground'' for acquisitions. Buffett already holds a stake in South Korean steelmaker Posco (PKX), though that name was not specifically mentioned as a possible Berkshire target.

The big deal of the day was actually announced on Sunday when Dow component AT&T (T), currently the second-largest wireless carrier in the U.S., said it will acquire Deutsche Telekom's T-Mobile USA business for $39 billion in cash and stock. The deal will allow AT&T to surpass Verizon's (VZ) Verizon Wireless business to become the largest U.S. mobile phone carrier.

AT&T will add 34 million new subscribers, but that is of course assuming none of them leave for Verizon or other competitors. No surprise here: The deal, which is the largest in the wireless business since 2004, could face heavy antitrust scrutiny as it combines the second- and fourth-largest U.S. wireless providers, according to Bloomberg News. In its statement, AT&T cautioned that regulatory approval could take up to a year to win.

Still, AT&T CEO Randall Stephenson said he is confident his company will win approval for the deal. Purchasing T-Mobile represents AT&T's biggest acquisition since the 2003 deal to acquire Bell South for $83 billion.

As is usually the case in the financial markets, there are clearly winners and losers with this deal. Deutsche Telekom is clearly a winner. The company has had some issues with execution in the U.S. and will retain in an 8% in T-Mobile after the deal is completed so it can potentially benefit from AT&T's hard work.

Clearly, Apple (AAPL) is a winner, too. AT&T lost its exclusive rights to the iPhone and analysts are expecting Verizon to sell 11 million iPhones this year, but T-Mobile never had access to the iPhone partly because Apple never wanted to make a version of the phone that operates on T-Mobile's 3G network. It is safe to assume some of these T-Mobile customers want an iPhone and Apple will not need to do any work to convert them. Again, AT&T is doing the legwork by making this deal.

Sprint (S) is clearly the loser here. The company had been trying to acquire T-Mobile itself, but the two sides could never come to terms on valuation. Now Sprint is destined to be the smallest U.S. wireless carrier and they do not even have access to the iPhone. Shares of Sprint lost 13.6% today.

AT&T agreed to a $3 billion breakup fee if the deal fails to go through, Bloomberg reported, citing two sources with knowledge of the matter.

AT&T Chart

The AT&T/T-Mobile is a deal I expect will have some impact on more than a few readers, but another acquisition that was announced on Monday is one that I suspect is also noteworthy to Option Investor readers. Charles Schwab (SCHW), the largest U.S. discount broker, is looking to beef-up its options trading offerings and its $1 billion acquisition of optionsXpress Holings (OXPS) certainly helps accomplish that objective.

While Schwab has been active in the past 18 months or so in terms becoming a player in the ETF business, the company has not made an acquisition of note in about 10 years. As I am sure you know, options volume on U.S. exchanges has been soaring in recent years and Schwab's all-stock deal to acquire optionsXpress is viewed as a move by the company to attract and keep more of the savvy investors that generate more brokerage commissions through active trading. The company currently gets about 10% of its daily average revenue trades from the options arena.

The deal values optionsXpress at a 17% premium to where the stock closed on Friday. Under the terms of the transaction, optionsXpress investors will trade each of their shares for 1.02 shares of Schwab. California-based Schwab is expected to issue 60 million new shares for the deal that is slated to close in third quarter.

optionsXpress had 379,000 client accounts and $7.9 billion in client assets at the end of last year; Schwab had nearly 8 million accounts and $1.6 trillion in assets, according to Reuters. This deal is easily summarized: Options traders have triple the assets and trade six times more often than other clients, Reuters cites Schwab as saying.

optionsXpress Chart

In other M&A news, and I admit this is from Friday, but I think the deal is not getting much attention, General Mills (GIS), the second-largest U.S. food company, is now in exclusive talks with French private equity firm PAI Partners to acquire 50% of Yoplait. General Mills confirms is in said talks on its Web site though does not give a price tag. Several reputable press agencies have reported $1.1 billion is what Big G is offering for the world's second-largest yogurt brand.

Minnesota-based General Mills already distributes Yoplait here in the U.S. and I mention the deal for a couple of reasons, not the least of which is the difficulty foreign firms face when trying to acquire French companies. Sodiaal, which owns the other half of Yoplait, will retain that stake and the French government has been vocal in its desire to see another French firm at least gain part of the stake that PAI is looking to part with.

General Mills reports earnings on Wednesday before the open, another reason I mention the deal, and perhaps we will get an update on the Yoplait news then. Full disclosure: I am long General Mills.

General Mills Chart

In today's ''putting lipstick on a pig'' segment, there is Citigroup (C). Several of Citi's big rivals made headlines by announcing the dividend increases investors had been clamoring for from bank stocks. Citi was not conspicuous by its absence because CEO Vikram Pandit had previously said 2012 would be the year his company started to return capital to shareholders.

So imagine the market's surprise when Citi announced it will begin paying a dividend of a penny a share later this year. That's not all. Citi is pulling an AIG (AIG) and implementing a 1-for-10 reverse split on May 6. The split makes sense as there are nearly 30 billion Citi shares outstanding, though I remember opining about the AIG reverse split a while back and that stock was hammered following the split. Only time will tell if the same fate awaits Citi.

As for the dividend, something is better than nothing, but at just one cent a quarter, the yield on Citi shares will be just 0.09%, the third-lowest dividend yield among S&P 500 dividend stocks, according to Bloomberg News. As one who is long Citi, I am not sure what to make of this news, but as the Wall Street Journal notes, there are probably a few high-frequency traders out there that are less than happy about the reverse split.

Citi Chart

Looking at the charts, the S&P 500 could only manage a flirtation with 1300 today, showing that area has probably become psychological resistance. When the index moved above 1275 last Friday, that became intraday support and I think the lifespan of that support level has now been extended. Today's close above 1290 should be a small positive, but put me in the cautious camp because it sure looked like the market glossed over Libya and rising oil prices today.

S&P 500 Chart

A somewhat similar situation can be found with the Dow as the close above 12,000 may be a good sign, but there is plenty of resistance just 40-50 points away from Monday's close and then again just over 12,200. If the Dow retreats again, I am watching 11,800 to see how strong that support is, though I have a feeling a firmer floor can be found at 11,600.

Dow Chart

As for the Nasdaq, I'd like to see a close over 2700, before I start becoming intrigued, but the move above 2690 today could be a start and support should be found at 2675. There is still Japan-related headline risk here and I do not want to rain on anyone's parade, but I happened to see some pictures of Apple CEO Steve Jobs on the Web last week and he did not look well. These photos were taken and published by reputable sources and I think it goes without saying Jobs' health is an issue tech investors need to be mindful of, if they are not already.

Nasdaq Chart

To be sure, the market has proven resilient over the past few days. That was certainly case on Monday when it appeared that news out of Libya was all but ignored. On Saturday, Shokri Ghanem, chairman of Libya's National Oil Corp. said that Libyan output is plunging and I feel like the only reason I know about this is because I wrote a news article about it for OilSlick, which you can register for (HERE).

Point is, Libya is still an issue to contend with though I get the feeling the news flow out of Japan has taken a turn for the better. Perhaps that will be enough to lead the market higher this week.

New Option Plays

Rivaling Google

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidate check out these stocks that caught my eye. You might want to put them on your radar screen:

ROK - ROK is poised to challenge its February high near $91.25. A breakout past this level could portend a run at the $100 mark.

BHI - A breakout past resistance near $72.00 might e a bullish entry point.

NE - This energy stock has resistance near $46.00. A breakout past this level could be a bullish entry point.

GWW - GWW has short-term resistance at $138.00 and then at $140.00. I've put it on my radar screen for a move past $140.00.

ITW - ITW has been consolidating sideways for several weeks. A breakout past the $56 level might be a bullish entry point.

- James


Baidu, Inc. - BIDU - close: 124.00 change: +3.50

Stop Loss: 119.95
Target(s): 139.00, 147.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 5 weeks
New Positions: Yes, see Trigger

Company Description

Why We Like It:
BIDU is Google's biggest rival in China. The stock has been showing a lot more strength than GOOG's. Shares of BIDU have been consolidating sideways the last three weeks with a bullish trend of higher lows. BIDU has short-term resistance in the $125-127 area. If the new strength in big cap tech continues I suspect BIDU will outperform.

Aggressive traders could buy calls on BIDU on a move over $125.00. I am suggesting that reader use a trigger at $127.00 to open positions. There is potential resistance at $130.00 but I'm setting our targets at $139.00 and $147.50. We will plan to exit ahead of BIDU's late April earnings report.

BIDU can be a volatile stock so I would consider this a more aggressive, higher-risk trade.

Trigger @ 127.00

- Suggested Positions -

Buy the April $130 calls (BIDU1116D130) current ask $2.07

- or -

BUy the May $135 calls (BIDU1121E135) current ask $4.05

Annotated Chart:

Entry on March xxth at $ xx.xx
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume = 6.0 million
Listed on March 21st, 2010

In Play Updates and Reviews

Risk is Back On!

by James Brown

Click here to email James Brown

Editor's Note:

Japan was making progress cooling its troubled nuclear reactors. The U.N. forces were successful in knocking out Gaddafi's air force and taking the pressure off of the Libyan rebels. News that AT&T (T) would spend $39 billion to buy its rival T-Mobile from Deutsche Telekom was seen as a sign of confidence by Wall Street. The acquisition would leapfrog AT&T into the largest U.S. carrier, past Verizon.


Current Portfolio:

CALL Play Updates

Caterpillar Inc. - CAT - close: 107.59 change: +2.53

Stop Loss: 99.00
Target(s): 109.00, 114.00
Current Option Gain/Loss: +33.8%, and +14.2%
Time Frame: 4 to 6 weeks
New Positions: see below

03/21 update: Dow-component CAT continues to perform well. The stock surged +2.4% to close at new all-time highs. Shares are starting to look a little overbought here but there is nothing stopping CAT from running to the next level of potential round-number resistance at $110. I would prefer to wait for a dip near the $106-105 area before considering new bullish positions.

Our targets are $109.00 and $114.00.

- Suggested Positions -

Long the April $105 calls (CAT1116D105) Entry @ $3.40

- or -

Long the May $110 calls (CAT1121E110) Entry @ $3.15

Entry on March 18th at $104.99 (gap higher)
Earnings Date 04/29/11 (unconfirmed)
Average Daily Volume = 7.4 million
Listed on March 17th, 2010

Cerner Corp. - CERN - close: 106.01 change: +2.91

Stop Loss: 99.45
Target(s): 104.85, 109.00
Current Option Gain/Loss: +11.1%
Time Frame: 4 to 8 weeks
New Positions: see below

03/21 update: CERN delivered a very strong day. Shares rallied +2.8% and broke out past resistance near the $105 level. I am adjusting out final target from $109.00 to $109.50.

FYI: I want to point out that the most recent data (as of Feb. 15th) listed short interest at 13.9% of CERN's 70-million share float. That definitely seems like a high amount of shorts and fuel for a short squeeze. Plus, the Point & Figure chart for CERN is bullish with a $115 target and what appears to be a relatively fresh quadruple top breakout buy signal.

- Suggested Positions -

Long the April $105 calls (CERN1116D105) Entry @ $2.70

03/21 Adjusted final target to $109.50
03/12 New stop loss @ 99.45
03/04 1st Target Hit @ $104.85, Option @ $3.15 (+16.6%)

Entry on March 3rd at $102.62
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume = 600 thousand
Listed on March 2nd, 2010

Capital One Financial - COF - close: 51.24 change: +0.19

Stop Loss: 47.75
Target(s): 54.75, 59.00
Current Option Gain/Loss: - 9.5% and -44.6%
Time Frame: 4 to 6 weeks
New Positions: see below

03/21 update: After outperforming on Friday the financial sector underperformed on Monday. Shares of COF bounced around the $51 area. I don't see any changes from my prior comments. Readers can open call positions now or hope for another dip closer to the $50.00 mark. Our targets are $54.75 and $59.00.

- Suggested Positions -

Long the April $50 call (COF1116D50) Entry @ $2.63

- or -

Long the April $55 call (COF1116D55) Entry @ $0.65

Entry on March 16th at $51.08
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume = 4.4 million
Listed on March 15th, 2010

CSX Corp. - CSX - close: 78.09 change: +1.87

Stop Loss: 73.45
Target(s): 79.90, 83.75
Current Option Gain/Loss: +17.9%
Time Frame: 4 to 6 weeks
New Positions: see below

03/21 update: Oil continued to rise but that did not stop a rally in the transport sector. Shares of CSX were showing strength. The stock opened at $77.25 and rallied +2.4% to close at another new record high. If you don't feel like chasing it then wait for a dip near the $77-76 area.

Our plan was to keep our position size small to limit our risk. FYI: The Point & Figure chart for CSX is bullish with a $98 target.

- Small Bullish Positions -

Long the April $80 calls (CSX111680) Entry @ $1.06

Entry on March 21 at $77.25
Earnings Date 04/13/11 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on March 19th, 2010

Jones Lang Lasalle Inc. - JLL - close: 100.37 change: +2.02

Stop Loss: 93.85
Target(s): 102.50, 109.00
Current Option Gain/Loss: + 8.8%
Time Frame: 4 to 8 weeks
New Positions: see below

03/21 update: The bounce in JLL continues and shares closed just over round-number resistance at the $100 level. I am not suggesting new positions at this time but if we see JLL pull back and bounce again at $98, then I might buy calls again.

Prior Comments:
We wanted to keep our position size small to limit our risk. Our targets are $102.50 and $109.00.

- Suggested Positions - (Small Positions)

Long the April $100 calls (JLL1116D100) Entry @ $3.40

03/17 Exited March calls @ open, Estimated exit @ 0.10 (-94.2%)
03/10 New stop loss @ 93.85

Entry on February 28th at $97.96
Earnings Date 04/27/11 (unconfirmed)
Average Daily Volume = 386 thousand
Listed on February 26th, 2010

Polaris Industries, Inc. - PII - close: 84.28 change: +2.41

Stop Loss: 78.49
Target(s): 84.95, 89.00
Current Option Gain/Loss: + 5.0%
Time Frame: 4 to 7 weeks
New Positions: see trigger

03/21 update: PII continues to show relative strength. The stock rallied with a +2.9% gain. This is a new record high. Shares almost hit our first target at $84.95 and odds are good PII will tag this level tomorrow. Our final target is $89.00.

I would not open new positions here. Wait for a dip near $82.00. Our plan was to keep our position size small. FYI: The Point & Figure chart for PII is bullish with a $98 target.

- Small Positions -

Long the April $85 calls (PII1116D85) Entry @ 2.00

Entry on March 18th at $82.25
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume = 396 thousand
Listed on March 14th, 2010

Quality Systems Inc. - QSII - close: 80.11 change: +0.60

Stop Loss: 77.90
Target(s): 87.25, 94.50
Current Option Gain/Loss: -62.9%, and -26.4%
Time Frame: 4 to 8 weeks
New Positions: see below

03/21 update: With all of the big gains across the market today, the action in QSII is disappointing. The rally stalled once QSII came close to filling the gap down from March 15th. This is bearish. Readers may want to wait for a new rise past $81.25 before initiating new positions. More conservative traders might want to raise their stops toward this past week's low near $78.66. For the moment I am keeping our stop loss under the 50-dma (near $78.00).

Prior Comments:
FYI: Readers will be interested to note that the most recent data listed short interest in QSII at almost 28% of the very small 17.5 million-share float. That's definitely a recipe for a short squeeze. Plus, the Point & Figure chart for QSII is bullish with a $119 target.

- Suggested Positions -

Long the April $85 calls (QSII1116D85) Entry @ $1.35

- or -

Long the June $85 calls (QSII1118F85) Entry @ $3.40

Entry on March 4th at $81.44
Earnings Date 05/31/11 (unconfirmed)
Average Daily Volume = 154 thousand
Listed on March 3rd, 2010

Whole Foods Market Inc. - WFMI - close: 61.73 change: +1.29

Stop Loss: 57.95
Target(s): 64.75, 69.00
Current Option Gain/Loss: + 1.5%, and + 1.3%
Time Frame: 3 to 4 weeks
New Positions: see below

03/21 update: Our new play in WFMI is already triggered. Shares opened at $61.00 and rallied toward the $62.00 level intraday. I was suggesting a trigger to buy calls at $61.55. I would still consider new positions now or you could wait for a dip near $61.00.

Our upside targets are $64.75 and $69.00. FYI: The Point & Figure chart for WFMI is bullish with an $86 target.

- Suggested Positions -

Long the April $65 calls (WFMI1116D65) Entry @ $0.65

- or -

Long the May $65 calls (WFMI1121E65) Entry @ $2.25

Entry on March 21 at $61.55
Earnings Date 05/11/11 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on March 19th, 2010

PUT Play Updates

Infosys Technologies - INFY - close: 65.20 change: +0.65

Stop Loss: 68.15
Target(s): 60.25, 57.50
Current Option Gain/Loss: -23.3%
Time Frame: 4 to 6 weeks
New Positions: see below

03/21 update: INFY gapped higher at the open but there was no follow through. The stock closed with a +1% gain but shares still look vulnerable. I would watch for a failed rally in the $66-67 zone as a new entry point to buy puts. However, you want to be careful buying puts when the market is moving higher. Keep your position size small. An alternative entry would be to wait for a drop under $64.00.

Our targets are $60.25 and $57.50. INFY looks like it might have support near $60.00 and the $57.00 levels.

- Small Bearish Positions -

Long the April $65 PUT (INFY1116P65) Entry @ $2.48

Entry on March 18th at $65.30
Earnings Date 04/15/11 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on March 17th, 2010


Fortune Brands Inc. - FO - close: 61.30 change: +1.18

Stop Loss: 62.05
Target(s): 55.15
Current Option Gain/Loss: -46.8% and -33.3%
Time Frame: 4 to 6 weeks
New Positions: see below

03/21 update: Given the strength of the market's rally on Monday I am suggesting an early exit in our FO put play. The stock gained +1.9% and looks poised to rally toward the top of its prior range near $63.00. A breakout past $63.00 could be used as a new bullish entry point.

Remember our plan was to keep our position size small to limit our risk.

- Small Bearish Positions -

April $60 put (FO1116P60) Entry @ $1.60, current bid $0.85 (-46.8%)

- or -

June $55 put (FO1118R55) Entry @ $1.35, current bid $0.90 (-33.3%)

03/21 Exit Early now. FO @ $61.30. Options @ -47% & -33%


Entry on March 17th at $60.26
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on March 16th, 2010