Option Investor

Daily Newsletter, Wednesday, 9/14/2011

Table of Contents

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

Market Wrap

Opex Wednesday Produces Strong Rally on Lighter Volume (again)

by Keene Little

Click here to email Keene Little
Market Stats

The stock market has been reacting to news out of Europe and acting like a ping-pong match as news about more plans to save the banks, um, I mean countries (most are giving up on Greece even if they say so differently now), comes out and then denied, then a new plan and then denied. Each news item spikes the market up and then back down and the result has been a very choppy market stuck in a trading range for over a month.

Last night's futures showed the same response and ES (S&P 500 emini) sunk to 1148 after closing the day near 1165. News that all is right with the world sent ES up to 1175, for a 27-point rally in the pre-market. That was just the overnight session! Not to be outdone, the cash market initially sold off, with the S&P dropping down to 1162 and then proceeded to rally 40 points to 1202, helped by some positive news about Greece -- Germany's Merkel and France's Sarkozy reaffirmed their support for Greece and assurance that they would help it avoid a "disorderly default". Funny what we consider good news these days.

We of course have opex shenanigans this week but basically the market is being news driven at the moment and that makes it difficult to trade, especially holding anything overnight. Mix up some low volume, opex and European news and it's a recipe for chop and whipsaws. The 3-day rally this week has been on successively lower volume, not a healthy sign. With a choppy price pattern it's very difficult to figure out whether the choppy consolidation is going to continue, with new highs for the bounce, or break down from what looks like a bearish consolidation pattern. Today's rally, typical on a Wednesday of opex week, was strong and it makes me wonder how much stronger it could have been had we had some GOOD economic news to report.

Starting off the day's economic reports were the two PPI numbers, which were benign. PPI was flat at 0% and the core PPI (less energy and food) was only +0.1%. This gives the Fed some wiggle room to say they can inject more liquidity into the market without fear of stoking inflation, which the market likes.

Retail sales came in flat as well -- 0% and +0.1% excluding auto sales. This is a little disappointing considering even the small expectation for a +0.2% increase (down from July's +0.3%). Consumers spent more at the pump and in grocery stores (where prices aren't, cough, going up). July sales were revised down to 0.3% from the prior estimate of +0.5% and June's was revised lower from +0.3% to +0.2%. So it's not good news for retailers and by extension for the economy. Consumers are hunkering down again.

The only thing that surprises me is that consumer spending has stood up as well as it has. When you consider the high level of unemployment and the rapidly declining consumer sentiment I would have thought retail spending would be much lower. And the employment picture is not expected to get any better any time soon. What's amazing is to see how dismal the employment picture has been since the start of the recession. Joe Weisenthal posted his Chart of the Day last week, which shows the recovery in employment following previous recessions (it might be hard to see the numbers in the chart below but it's the number of week's past the start of the recession, running from 0 to 47. Each recession since 1948 is shown on the chart and how deep it got and how long it took to recover. A picture is worth a thousand words and the current unemployment streak speaks volumes about how this recession is clearly different than anything experienced since WWII (since the Great Depression actually).

Post WWII Recessions and Unemployment, chart courtesy calculatedriskblog.com

So the economy continues to cause worry for the stock market. Recessions are typically met with stock market declines averaging about -40%. We've had only half that so far. Since the decline into the August 9th low emotions have been running high and we've had a market reacting to news. Between hope and fear we've seen an increase in volatility, including today. Europe is currently one of the bigger worries since we're all so interconnected these days. The market's various asset classes have been tightly correlated and the world's stock markets have been mostly in synch with one another.

The worry about Europe is the spreading contagion with multiple countries having unsustainable debt. Right behind Greece is Italy and then Spain and of course there's still Portugal and Ireland on deck. Even France is now being threatened with a downgrade based on its debt load. The problems in Europe are significant and they're going to be with us for a long time (especially considering the tight global financial linkages). Solving Greek's debt issue will not make this problem go away, no matter how much we wish it would.

And lest we think this is strictly a European problem, do not forget that Japan is in even worse financial shape. Their debt-to-GDP ratio is above 200% and the only reason they've been able to sustain this level of debt for as long as they have is because the Japanese are huge savers and they own most of the debt. The U.S. is not so fortunate -- much of our debt is owned by foreigners and when they get worried and stop buying our debt there's going to be trouble. The chart below shows debt for the troubled European countries (PIIGS) and no surprise we see Greece at the top of the list, followed by Italy. But look who's tied with Ireland -- the U.S. with a debt-to-GDP greater than 100% (projected by 2012).

European and U.S. Gross Debt as % of GDP, chart courtesy caseyresearch.com

Carmen Reinhart and Kenneth Rogoff wrote a book "This Time Is Different: Eight Centuries of Financial Folly" in which they state no country has ever been able to get itself out of trouble once the national debt exceeds 90% of GDP. It's considered the point of no return. Unless it is different this time you can see by the above chart that we're all in this together and we'll likely all fail together (the end of fiat currencies as they exist today). It's a sobering thought.

The strongest of the European countries is Germany, an exporting powerhouse and relatively wealthy as compared to several other European countries. So the fact that its stock market has lost a third of its value since July it should be of concern to all of us. The chart below compares the DAX and SPX to show that the U.S. stock market will either join the DAX or the DAX is due a big bounce. As I'll point out, it might be a little bit of both. When the DAX lost its June low near 5800 it would be like SPX dropping below 1010. Instead its flirting with 1200 in the current bounce. Granted, Germany's banks are on the hook more for European sovereign debts but our banks are not immune since we're all connected (and our banks are responsible for a lot of swaps (insurance) on the debt).

Germany's DAX vs. SPX, Weekly chart

The good news for the DAX at the moment is that it looks like it's going to get a decent bounce, which could obviously help the U.S. stock market. Following a bullish descending wedge pattern, with confirming bullish divergences, we could see the DAX bounce back up to the 5800 area, at least, for a back test of broken price-level support.

Germany DAX Composite, DAX, Daily chart

One other thing that could provide a lift for the stock market is the sentiment picture. Simply put, too many have turned bearish for the bear's comfort. It's not a timing tool and with negative consumer sentiment and a poor economy/jobs picture, the bearish sentiment could in fact be a harbinger of a bad moon risin'. Speaking of the moon, did you notice the market turned back up on the full moon on Monday. Highs on new moons (next one is September 27th) and lows on full moons is the pattern so far this year. But I digress. For now the bears need to pay attention to the fact that they have a lot of company.

Bullish vs. Bearish sentiment, AAII data, chart courtesy schaefferresearch.com

Moving to my regular charts, the SPX weekly chart hasn't changed much from last week since price is still stuck in a trading range. While I've pointed out a few reasons above why we could see a market bounce, the bigger price pattern warns me to expect another leg down. We could go higher for a week or so but the path of least resistance is going to be down. In other words, in this news-driven market, one news break about Europe could send our stock market spinning to the downside.

S&P 500, SPX, Weekly chart

SPX poked its head out of its down-channel today and must have been scared up there -- it closed back inside the channel after the late-day selloff. Somebody didn't like it out there. Upside potential remains 1250-1270 if SPX can get above 1205. Otherwise another breakdown could drop it below 1136, which would be a sell signal. There are multiple support levels starting at 1100 on down to a potential downside target near 950.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1205
- bearish below 1136 and more bearish below 1090

The 120-min chart below shows price poked above the top of its down-channel but now it looks potentially bullish since it has pulled back to the top of the channel. This could be setting up a bullish back test if tomorrow rallies. However, a drop back below 1188 would leave a head-fake break and bull trap. It could signal the end of the correction, with the throw-over finish, and I'd want to be short with a stop at today's high. Confirmation of a breakdown doesn't come until 1136 gives way.

S&P 500, SPX, 120-min chart

While the DOW is not challenging the top of its down-channel it did challenge its shorter-term downtrend line from September 1st. The daily chart shows this is potentially bearish but like the intraday chart for SPX, it could be a bullish back test if the market rallies tomorrow.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 11,477
- bearish below 10,700

NDX did a little better against its 50-dma today than it did on August 31st and September 1st. It was able to rally above it and its broken uptrend line from March 2009 - August 2010. Too bad it wasn't able to hold it. Once again, the daily chart looks bearish with resistance holding but the intraday chart looks potentially bullish with a back test to support if tomorrow rallies. If the market declines tomorrow it will leave bull traps behind and the potential for a strong selloff to follow would mean those who bought the breakout had better sell at the open and get what they can.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2253 and more bullish above 2330
- bearish below 2139

The downtrend line from July 22nd for the RUT is the line in the sand for the bears here. The RUT broke above the line, near 704 but couldn't hold it. Or will it with an intraday back test? It's a common theme tonight and tomorrow could give us the direction for the rest of the month. I'm showing a slightly different idea for a decline into month end -- a descending wedge pattern that sets up a stronger multi-month (into year end) correction of the decline from May/July. It's just an idea at the moment but consider the possibility since it will be a choppy affair.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 704 and more bullish above 775
- bearish below 665

Last week I showed the possibility for a minor new low for TNX, the 10-year yield, to be followed by a stronger bounce that should lead to a multi-month rally. The rally will either be just a correction of the leg down from February or a much stronger rally that will take TNX to new multi-year highs (above the 2007 high near 5.3%). A break above 2.6% is needed to at least give the bond bears a foothold (bearish bonds gives us higher yields). But a bounce up to the 2.6% area would be a back test of the broken uptrend line from December 2008 and a 38% retracement of the decline from February. The longer-term bearish pattern (bullish for bond prices) calls for the back test to fail and a continuation lower (towards 1%). There remains the possibility for TNX to work its way a little lower (dashed red line) before setting up a bigger bounce.

10-year Yield, TNX, Weekly chart

If the Fed starts rolling out their debt to longer maturities, as they say they plan to do, their demand for those bonds could certainly press rates lower over the next year or two. They've made it abundantly clear that they want investors in the riskier assets, such as stocks, instead of bonds. And if they're very successful at doing this it could push bond buyers out the longer-term maturities (30-year) in an effort to get the higher yields. This would also please the Fed since lower 30-year rates should help the mortgage market (sorry retirees, you don't fall into the "I care about you group"). Looking at the longer-term down-channel since 1994 for TYX, the 30-year yield, I can see the potential for a drop down to the bottom of the channel in 2013-2014, which would be near 1.5% (for a 30-year bond!!). It takes a rally above 4.38% to show the bond vigilantes are in complete disagreement with the Fed and abandoning the bonds (driving prices lower, yields higher).

30-year Yield, TYX, Monthly chart

I wider look at the bank index tonight shows a pattern I think will play out this year and into next. Ideally, for a 5-wave count for the leg down from February, the current consolidation since August should be followed by a 5th wave, with a downside target at 27.65 (wave-5 = wave-1). From there a larger bounce correction into the end of the year followed by another leg down to below 20.

KBW Bank index, BKX, Weekly chart

The TRAN was successful in breaking its downtrend line from July and holding above it today. That keeps the door open for the completion of a 2nd leg up for an a-b-c bounce off the August low. The upside target is its 50-dma near 4844, which is also where the a-b-c bounce would have two equal legs. But a drop back below 4500 would be a bearish heads up.

Transportation Index, TRAN, Daily chart

Last week I pointed out the similarities between the basing pattern in 2008 and the current one in 2011. Price came bounding out of the pattern last week and so far is only chopping its way back in a bull flag, pointing to higher highs. We could see a test of the 200-week MA near 78.75 before pullback back again. There remains the possibility we'll see a slightly larger descending wedge pattern with one more new low (dashed line) but at this point the higher-probability is for the dollar to rally into year end and beyond. There is significant upside potential (98-100) and that would place some serious pressure on other assets (unwinding of the dollar carry trade for one thing).

U.S. Dollar contract, DX, Weekly chart

Gold is holding up and the pullback is choppy enough to support the idea that it will at least chop its way higher this month. I'm showing an ascending wedge as just one idea for what could happen if it holds up but continues to chop up and down. A break below 1793 would be a sell signal.

Gold continuous contract, GC, Daily chart

Silver is trying to hold onto the bottom of its rising wedge pattern and just below it is its' 50-dma near 40.10. So a break below 40 would be a bearish heads up and below 39 would create a sell signal. Another leg up within the wedge remains a possibility.

Silver continuous contract, SI, Daily chart

Oil's little rising wedge pattern should resolve the same way as its previous wedge and triangle -- down. A break of the uptrend line from August 9th would be a bearish heads up and below 83 would create a sell signal. In an "all the same" market, a breakdown in oil should be accompanied by a breakdown in the stock market.

Oil continuous contract, CL, Daily chart

Tomorrow morning will be a busy one with potentially important economic reports, especially the Empire Manufacturing and Philly Fed. But we're in one of those times when bad news could be good because the market will expect the Fed to give us some more happy juice to make the pain go away, even if it is temporary relief. Good numbers might get the Bronx cheer (the 3 finger, minus 2, salute).

Economic reports, summary and Key Trading Levels

Selling is on increasing volume and buying is on decreasing volume. The price pattern has been very choppy (corrective) since the August low. The spike down into the August low followed by corrective price action tilts the odds heavily in favor of another leg down, whether directly from here or from a higher bounce. The higher bounce could mean SPX 1250-1260 so respect that possibility if you're playing the short side (above 1205 is potentially bullish).

The next leg down, assuming we get it, could be just a test of the August low (SPX 1101) or it could drop down to 950, with several support levels in between. What that means is the potential for a short play is large but it will have to be managed on the way down and protect/take profits along the way.

Good luck during the rest of opex week and I'll be back with you next Wednesday.

Key Levels for SPX:
- bullish above 1205
- bearish below 1136 and more bearish below 1090

Key Levels for DOW:
- bullish above 11,477
- bearish below 10,700

Key Levels for NDX:
- bullish above 2253 and more bullish above 2330
- bearish below 2139

Key Levels for RUT:
- bullish above 704 and more bullish above 775
- bearish below 665

Keene H. Little, CMT

New Option Plays

Rally Stalls At Resistance

by James Brown

Click here to email James Brown

Editor's Note:

Stocks are up three days in a row. The recent strength is encouraging but we could see another sell-off as we near the weekend. Trade carefully. If you have gains, consider taking some money off the table.

A close over 1206 on the S&P500 would bolster my confidence in the market but the larger pattern (like the bear-flag pattern) could still be in play.

You may want to consider a market-neutral strategy. Research In Motion (RIMM) is due to report earnings after the closing bell on Thursday. The stock has not participated in the market's rebound. Investors could be expecting another disappointing quarter. That sets up an opportunity for an upside surprise. Whatever the results are from RIMM the stock will most likely see a big move one way or the other.

There are multiple ways to play this event. Two of them are an option straddle or an option strangle. With RIMM near $30 you could buy an option straddle at the $30.00 strike price (this involves buying both a call and a put at the same strike). Or you could buy an option strangle, which involves buying an out of the money call and an out of the money put (I wouldn't make them too far out of the money).

Personally, I'd probably look at October options but you could actually trade Septembers. Buying options near the close on Thursday would give you one day for this trade to work before Septembers expire after the close on Friday. If this trade works, it could be a big win. If it doesn't you'll probably lose the entire trade with September strikes.

- James


iShares Russell 2000 ETF - close: 70.42 change: +1.24

Stop Loss: n/a
Target(s): see below
Current Option Gain/Loss: + 0.0%
Time Frame: 1 or 2 days
New Positions: Yes, see below

Company Description

Why We Like It:
The stock market is up three days in a row. The rally stalled right at last week's high. What are the chances that the market will see another decline as we head toward the weekend? The last couple of Friday investors have been afraid of the weekend and stocks dropped sharply. With the major indices at short-term resistance this looks like a good spot to bet on a very short-term pull back.

I would consider this a lottery ticket type of play. We're going to pick September puts. The plan is to buy our September puts at the open tomorrow (Thursday) and sell them at the close on Friday. They will expire after the closing bell on Friday. You may want to adjust your exit to Thursday's close or Friday morning instead. I would keep our position size small. We're not using a stop loss.

FYI: You might be able to enhance this play by using the double-long Russell 2000 ETF (symbol: UWM).

- Suggested Positions -

buy the SEP $69 PUT (IWM1117U69) current ask $0.60

Annotated Chart:

Entry on September 15 at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 80 million
Listed on September 14, 2011

In Play Updates and Reviews

New Highs On Takeover Rumors

by James Brown

Click here to email James Brown

Editor's Note:

One of our bullish candidates surged to new highs on takeover rumors. That stock is MJN, which hit our trigger to open positions this morning.

The market's widespread gains fueled a breakout in MCO and our put play has been stopped out.


Current Portfolio:

CALL Play Updates

Dollar Tree, Inc. - DLTR - close: 74.76 change: +2.76

Stop Loss: 68.95
Target(s): 76.00, 79.00
Current Option Gain/Loss: Sep$75: +10.0% & Oct$75: +21.2%
Time Frame: 2 to 4 weeks
New Positions: see below

09/14 update: It was a big day for DLTR. Shares outperformed the major indices with a +3.8% gain. The stock tagged a new all-time high at $75.52 this afternoon. I am suggesting we exit our September $75 calls immediately. The bid has risen to 55 cents, which means this position has gone from -90% to +10%. The newsletter will exit these Sep. $75 calls at the open tomorrow.

Our first exit target for the October calls is at $76.00. More conservative traders may want to consider raising their stop loss. No new positions today.

- Suggested Positions -

Long SEP $75 call (DLTR1117I75) Entry $0.50

- or -

Long OCT $75 call (DLTR1122J75) Entry $2.35

09/14 exit the September $75 calls ASAP (tomorrow morning)
09/07 trade is open. DLTR gapped open at $72.97
09/06 trade not open. Adjusted entry point strategy, stop loss, and targets.

Entry on September 7 at $72.97
Earnings Date 11/17/11 (unconfirmed)
Average Daily Volume = 2.2 million
Listed on September 3, 2011

Ingersoll-Rand Plc. - IR - close: 33.65 change: +0.43

Stop Loss: 31.25
Target(s): 34.75, 36.75
Current Option Gain/Loss: Sep$33: -29.6% & Oct$35: -21.6%
Time Frame: 2 to 4 weeks
New Positions: see below

09/14 update: Trading in IR was not terribly exciting. Shares mirrored the action in the S&P 500 index although this does look like a breakout over the 40-dma.

I am suggesting we exit our September $33 calls immediately at the opening bid tomorrow.

I am not suggesting new positions tonight.

- Suggested Positions -

Long SEP $33 call (IR1117I33) Entry $1.35*

- or -

Long OCT $35 call (IR1122J35) Entry $1.85

09/14 exit Sep. $33 calls tomorrow morning at the open
09/07 trade opened. IR gapped higher at $33.39
*price is an estimate. option did not trade today
09/06 play not open. try again. new stop loss $31.25

Entry on September 7 at $33.39
Earnings Date 10/20/11 (unconfirmed)
Average Daily Volume = 8.0 million
Listed on September 3, 2011

Mead Johnson Nutrition - MJN - close: 75.25 change: +2.73

Stop Loss: 69.90
Target(s): 77.00, 79.50
Current Option Gain/Loss: Oct$70: +29.8% & Oct$75: +11.1% Time Frame: 3 to 4 weeks
New Positions: see below

09/14 update: Our new trade on MJN was triggered at the open. Our plan was to buy calls at $73.00. The stock gapped open higher at $73.22 and rallied to $76.31 intraday. The stock closed with a +3.7% gain thanks to rumors that MJN might be a takeover target. Broken resistance in the $72-73 area should be new support. I am raising our stop loss to $69.90. More conservative traders may want to raise their stop even higher but keep in mind that MJN can be a volatile stock.

I would not open positions at current levels. Look for another bounce from the $73-72 area.

Earlier Comments:
NOTE: The spreads on the Oct. $75 calls are a lot wider than the spreads on the $70s. Buying the $75s would be a riskier bet.

- Suggested Positions -

Long OCT $70 call (MJN1122J70) Entry $5.20*

- or -

Long OCT $75 call (MJN1122J75) Entry $3.15

09/14 new stop loss @ 69.90
*09/14 entry price is an estimate

Entry on September 14 at $73.22
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 1.6 million
Listed on September 13, 2011

PriceSmart Inc. - PSMT - close: 72.64 change: +2.90

Stop Loss: 66.60
Target(s): 74.00
Current Option Gain/Loss: +58.8%
Time Frame: 3 to 4 weeks
New Positions: see below

09/14 update: It was another bullish day for PSMT. The stock garnered bullish analyst comments this morning and an $87 price target. Shares gapped open above the $70.00 level and rallied to $73.19 intraday. Our exit target is at $74.00, which could be hit tomorrow. More aggressive traders could aim higher. Please note that I am adjusting our stop loss to $66.60, which is just under the simple 10-dma.

NOTE: Cautious trades will want to consider exiting tomorrow even if PSMT does not hit our target at $74.00 since the stock market might see another Friday sell-off.

Earlier Comments:
It's possible the $70.00 level could be resistance but I'm setting our target at $74.00. The Point & Figure chart for PSMT is bullish with a $77 target.

- Suggested Positions -

Long OCT $70 call (PSMT1122J70) Entry $3.40

09/14 new stop loss @ 66.60

Entry on September 13 at $68.25
Earnings Date 11/10/11 (unconfirmed)
Average Daily Volume = 307 thousand
Listed on September 12, 2011

Range Resources Corp. - RRC - close: 62.25 change: -1.12

Stop Loss: 59.90
Target(s): 69.75, 72.50
Current Option Gain/Loss: Oct$65: -24.2% & Oct$70: -17.2%
Time Frame: 4 to 6 weeks
New Positions: see below

09/14 update: Uh-oh! RRC is suddenly showing relative weakness on no news. The stock retreated back toward the rising 50-dma. I'd want to see another bounce or maybe a close over $64.00 before considering new positions.

The next obstacle for bulls is resistance in the $66.50-67.00 zone. Conservative traders may want to take profits near $66.50 instead.

- Suggested Positions -

Long OCT $65 call (RRC1122J65) Entry $3.50

- or -

Long OCT $70 call (RRC1122J70) Entry $1.45

09/13 trade opened. RRC @ 63.12

Entry on September 13 at $63.12
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on September 8, 2011

Sina Corp. - SINA - close: 112.41 change: -1.57

Target(s): 124.00
Entry #1) Current Option Gain/Loss: - 6.7%
Stop Loss: 104.75
Entry #2) Current Option Gain/Loss: +10.0%
Stop Loss: 101.70
Time Frame: 4 to 6 weeks
New Positions: see trigger

09/14 update: After yesterday's $7 gain it's not surprising to see a little profit taking today. Readers might want to look for another bounce from the $110 level before considering new bullish positions.

Earlier Comments:
We do want to keep our position size small because SINA can be a volatile stock and we have a wide stop loss. I am setting our target at $124.00. More aggressive traders could aim higher. The inverse H&S pattern would suggest a target in the $150 area.

FYI: The Point & Figure chart for SINA has recently broken through resistance and is bullish with a $146 target.

Entry #1) Triggered @ 112.55, stop: 104.75 (SMALL positions!)

Long OCT $125 call (SINA1122J125) Entry $ 5.15

Entry #2) Entry @ 107.29, stop: 101.70 (SMALL positions!)

Long OCT $120 call (SINA1122J120) Entry $ 6.00

09/13 trade opened. both entry points hit.

Entry #1) Entry on September 13 at $112.55
Entry #2) Entry on September 13 at $107.29
Earnings Date 11/15/11 (unconfirmed)
Average Daily Volume = 6.0 million
Listed on September 8, 2011

SPDR S&P500 ETF - SPY - close: 119.37 change: +1.63

Stop Loss: 109.90
Target(s): 119.00, 122.00
Current Option Gain/Loss: Unopened
Time Frame: 4 weeks
New Positions: see below

09/14 update: It was another strong day for stocks. The market is up three days in a row. Yet the S&P 500 failed near its highs from last week. Nimble traders may want to consider some short-term puts with a stop just over $121.00 and scalp a few points toward $116-115.

If we see the SPY close over $121.00 we will remove this trade with the buy-the-dip entry point at $112.50 or we'll adjust our strategy.

Earlier Comments:
This trade is a bet that investors are willing to buy the dip near the August lows (ignoring the bearish H&S pattern) instead of selling stocks toward the August 2010 lows. We are suggesting readers use a trigger to buy calls on the SPY at $112.50 (just above the 1120 lows on the S&P500 index). More conservative traders could wait for a dip closer to the 1100 level on the index, which is $111.00 on the SPY.

If we are triggered at $112.50 on the SPY we'll use a stop loss at $109.90. Our upside targets are $119.00 and $122.00.

Buy-The-Dip Trigger @ $112.50

- Suggested Positions -

buy the OCT $118 call (SPY1122J118)

Entry on September xx at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 293 million
Listed on September 10, 2011

PUT Play Updates

Credit Suisse Group - CS - close: 23.74 change: +0.46

Stop Loss: n/a
Target(s): 19.00, 16.00
Current Option Gain/Loss: -27.5%
Time Frame: 4 to 10 weeks
New Positions: see below

09/14 update: European stocks were up big today as investors pinned their hopes on a conference call with Germany, France and Greece this afternoon. The leaders of these three countries were discussing if Greece would meet its austerity requirements. The call helped cool recent calls for Greece to leave the Euro zone or default on its debt.

Don't believe the hype. The credit markets are still predicting a default by Greece.

Shares of CS rallied to $24.00 and stalled. This can be used as a new entry point or you could wait for a bounce toward the simple 10-dma and launch positions there instead.

Remember, this is a lottery ticket style of trade. European banks could see a lot of volatility on back and forth headlines regarding the fate of the PIIGS countries and their debt woes.

Earlier Comments:
The credit markets are telling investors that a Greek default is almost guaranteed but no one knows the actual date. It could be this month or it could be six months from now. Therefore, we need to label this CS put play as a speculative, aggressive bet. Greece and the EU do not want the country to default so CS could see a lot of volatility with sharp rebounds on positive headlines but these will be temporary.

With so much potential for volatility I am not listing a stop loss on this trade. Limit your risk by using small positions.

*Small Positions*

- Suggested Positions -

Long DEC $20 PUT (CS1117X20) Entry $2.00*

*09/12 option did not trade today but the $ASK did not move and remained at $2.00 (bid is $1.80)

Entry on September 12 at $22.48
Earnings Date --/--/-- (unconfirmed)
Average Daily Volume = 2.3 million
Listed on September 10, 2011

Stanley Black & Decker - SWK - close: 56.88 change: +1.94

Stop Loss: 58.05
Target(s): 50.25, 46.00
Current Option Gain/Loss: Oct$50: -50.0%, & Oct$55: -41.0%
Time Frame: 3 to 4 weeks
New Positions: see below

09/14 update: Bears were on the run in SWK today and the stock added +3.5%. The close over resistance at $56.00 is bullish but the rally stalled at its 10-dma. The high today was $57.67 and we have a stop loss at $58.05.

I would wait for a new drop under $56.00 before considering new positions.

Earlier Comments:
Conservative traders could use a stop closer to $56.50-56.00. Our first target is $50.25. The $50-49 area might be support. Yet I'm setting a secondary target at $46.00. FYI: SWK recently produced a new quadruple bottom breakdown sell signal on its Point & Figure chart, which currently points to a $46 target.

- Suggested Positions -

Long OCT $50 put (SWK1122V50) Entry $1.90

- or -

Long OCT $55 put (SWK1122V55) Entry $3.90

Entry on September 12 at $54.78
Earnings Date 10/18/11 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on September 10, 2011

CBOE Volatility Index - VIX - close: 34.60 change: - 2.31

Stop Loss: n/a
Target(s): 26.00, 22.50
Current Option Gain/Loss: -100.0%
Second Position Gain/Loss: -100.0%
Third Position Gain/Loss: -98.2%
Time Frame: 2 to 3 weeks
New Positions: see below

09/14 update: The VIX lost another -6.2% but I would not place any new bets on a decline. The stock market might see another Friday sell-off, which would send the VIX higher again. There is no change from my prior comments.

We have less than two weeks left before September VIX options expire on Wednesday, Sep. 21. We are not suggesting new positions at this time.

Earlier Comments:
I am not listing a stop loss on this trade. We should consider this a higher-risk, speculative trade. I'm setting our targets at 26.00 and 22.50.

NOTE: These VIX options expire on Wednesday, September 21st.

- Suggested Positions -

Long SEP $25.00 PUT (VIX1121U25) Entry $4.00

- Second Position, entered at the open on Monday, Aug. 8th -
(very small positions)

Long SEP $25.00 PUT (VIX1121U25) Entry $2.50

- 3rd Position, listed Aug. 8th, Open Aug. 9th @ open. -

Long SEP $30.00 PUT (VXI1121U30) Entry $5.70

08/17 August VIX options expire
1st position Aug. $25 put @ $0.00 (-100%)
2nd position Aug. $25 put @ $0.00 (-100%)
08/08 3rd position listed to buy at the open on Aug. 9th
08/08 2nd position was filled the open.

Entry on August 5 at $28.48
Earnings Date --/--/--
Average Daily Volume = ---
Listed on August 4, 2011


Moody's Corp. - MCO - close: 31.65 change: +1.18

Stop Loss: 30.85
Target(s): 26.50 , 25.25
Current Option Gain/Loss: Sep$30: -87.5% & Oct$27: -58.3%
Time Frame: 2 to 4 weeks
New Positions: see below

09/14 update: Another bid day of widespread gains for the stock market helped push MCO to a +3.8% gain. I warned readers that MCO was on the verge of a breakout. Today's rally through resistance hit our stop loss at $30.85 early this morning.

Earlier Comments:
FYI: There are plenty of investors who are bearish on MCO. The most recent data listed short interest at almost 15% of the 183 million-share float. That does raise the risk of a short squeeze. We want to keep our position size small.

The Point & Figure chart for MCO is bearish with a $19 target.

* Small Positions * - Suggested Positions -

SEP $30 PUT (MCO1117U30) Entry $2.00*, exit $0.25* (-87.5%)

- or -

OCT $27 PUT (MCO1122V27) Entry $1.80*, exit $0.75* (-58.3%)

09/14 stopped out @ 30.85
* options did not trade today. this is an estimate
09/10 new stop loss @ 30.85
09/06 *Entry price on these options are estimates. Options did not trade today.


Entry on September 06 at $28.06
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 4.5 million
Listed on September 3, 2011