Option Investor

Daily Newsletter, Tuesday, 12/6/2011

Table of Contents

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

Market Wrap

S&P vs Santa Claus

by Jim Brown

Click here to email Jim Brown
For two days now S&P has done its best to kill the Santa Claus rally but the buyers continue to bet on Santa.

Market Statistics

On Monday it was an S&P warning on possible downgrades to 15 euro zone countries that caused the markets to lose significant intraday gains. Today S&P warned it could down the European Financial Stability Fund (EFSF) by one to two notches if the EU did not make substantial progress in solving their debt crisis this week. It appears the S&P is trying to single handedly force Europe to pass needed reforms. They are trying to make up the credibility they lost when they completely blew it on the subprime loan crisis.

Threatening a downgrade on the six AAA credits in the euro zone is a serious challenge to the common euro currency. The strength of those six AAA credits is the backbone of the ECB and the various bailout mechanisms like the EFSF and the ESM. A chain may only be as strong as its weakest link but the euro currency is only as strong as the strongest countries in the euro zone. How much credibility would a currency have if the only countries standing behind it were Greece, Italy and Spain? I doubt anyone would be rushing to buy that currency. Germany and France are the strongest countries in the zone and a downgrade to them would be the equivalent of a downgrade to the euro currency.

By threatening a downgrade to those AAA credits and to the EFSF it put all the euro zone countries on notice they better come up with a serious solution this week or else. This is not the time for a bazooka solution as it has been called in the press or even a howitzer solution. This is the time for a nuclear solution or the euro zone is going into self destruct mode starting next week. The time for talk is over. S&P is not going to be impressed by another plan to make a plan. The rest of this week is going to be critical for the zone and the euro currency.

The threat of a downgrade to all concerned carries the implied threat of sharply higher interest rates on future debt sales. Once they lose the AAA rating their debt will be harder to sell and some funds and institutions will be forced to sell that debt rather than try to tough it out in hopes of better times ahead. Personally I don't understand why anyone would want to be buying or holding any European sovereign debt today. The risk of downgrades and/or eventual default is simply too great. With Europe slipping back into a recession conditions are only going to get worse before they get better. Austerity is here to stay and Europe is looking at years of slow or no growth.

If other countries are downgraded the same problems Greece and Italy are having today will begin to migrate over to other countries. The central bank of Greece reported bank deposits fell by 14 billion euros in Sept/Oct. In the first ten days of November they continued on a "large scale" according to testimony to the Greek parliament. "Our banking system lacks the funds to finance growth."

The central bank governor said deposits were 238 billion euros at the start of 2010. They have declined to 170 billion at the start of November. He estimates more than 20% of those funds have been moved out of the country. A bank worker in Athens says they have a steady stream of people withdrawing 3,000 to 5,000 euros in cash. Citizens are in a panic. They don't trust the banks or the Greek government. Unemployment is 18.5%. Bank loans have declined to 253 billion and the banks no longer have the cash to make new loans and that kills growth. The governor said this is a downward spiral with no recovery in sight.

Multiply the Greek problems by a factor of six and you get Italy. If the euro zone does not come up with a real fix this week we could see those same problems migrate to Italy and that country is six times larger than Greece. Spain could follow right behind Italy. The euro zone has reached the end of the road. If they try to kick the can again it will be off a cliff rather than farther down the road.

Current proposals being discussed include rewriting the treaties to enforce stricter fiscal conditions. That is a long term fix that could take over a year and all 17 countries would have to agree. I seriously doubt it will happen. The debtor countries are not going to allow Germany and France to control their budgets.

Secondly they are talking about allowing the EFSF to remain in existence after the official European Stability Mechanism (ESM) fund is finally launched. The EFSF was supposed to be a temporary vehicle to last until 2013 and the official launch of the ESM. This week they are talking about speeding up the launch of the ESM and then keeping the EFSF active at the same time. The EFSF is a 440 billion euro fund. The ESM is expected to be a 500 billion euro fund. The actual treaty language to form the ESM has not yet been formalized so they are really suggesting an acceleration but it still has to be approved by all the countries involved. They will also have to contribute money to form the fund. Also, by making the ESM an international organization like a bank they could also borrow money from the ECB. Germany ruled that out for the EFSF.

They are still talking, keyword there "talking", about leveraging up the EFSF to 600 billion or more but the satisfactory mechanism to do that has yet to be determined. Lastly there is still talk of the ECB loaning the IMF up to 270 billion euros to establish a European debtor trust fund that would loan money to the weaker nations.

The sky is very crowded in Europe this week given all the trial balloons being floated by the various country heads, finance ministers and committees. The key will be whether they can actually come to a real decision and will that plan be acceptable to the rest of the world.

Just remember, the solution to too much debt is not more debt. Having all these funds loan money to insolvent countries may avoid a short term default it also but increases the size of their already massive debt loads. The austerity promises required to qualify for additional loans makes it even harder to grow their way out of debt.

In the U.S. the economic calendar was slim with only the weekly chain store sales snapshot. Sales for last week declined -2.3% compared to a gain of +1.7% in the prior week. That was the biggest decline in 11 months but big declines after Black Friday are common. This report was ignored.

The calendar for the rest of the week remains driven by the events in Europe. The key event is the EU Debt Crisis Summit on Friday. That is Thursday night our time so Friday could be extremely volatile.

Economic Calendar

In stock news Toll Brothers (TOL) moved to a new four month high after reporting earnings that were down -70%. The key to the move was a major tax refund that distorted Q3 earnings in 2010 and the current earnings on an operational basis were better than last year and better than analysts expected. Toll posted profits of 9-cents compared to estimates of 5-cents. The CEO was upbeat about the market saying the competition had narrowed as small local builders had disappeared. Margins were 23.7%. Contracts increased +15% to 644 with a value of $390 million. The average price of a home rose to $606,000 from $565,000. Toll ended the quarter with a backlog of 1,667 homes, a +12% increase, with a value of $981.1 million. They expect to sell between 2,400 and 3,200 homes in 2012. The CEO said he did not expect a big upsurge in sales until after the election. The Commerce Dept said new home sales in October rose +1.3% and the fastest pace in five months.

Toll Brothers Chart

Delta Airlines (DAL) said passenger traffic fell -1.9% in November even though available capacity declined by -4.1%. Their load factor rose +1.9% to 81.4% as a result of the capacity cut. U.S. Airways (LCC) said they were not seeing any signs of weakness through February. The CFO said corporate travel was still improving. Southwest Airlines (LUV) said they saw "exceptional" revenue growth for November with an estimated +9% gain. December growth is expected to be in the high single digit range. Since 2005 network capacity overall has declined -18%. American's bankruptcy is going to further slash that capacity. They filed over the weekend to reduce flights for Chicago, Dallas and Low Angeles. Rising oil prices are eventually going to impact traffic and profitability. Crude over $100 is going to hurt since more than one third of an airlines expense is related to fuel.

Airline Index

Regional banks were up strongly yesterday. Unfortunately they could not hold their gains. Suntrust (STI) said it recorded a $440 million charge for Q3 to repurchase non performing mortgages. That was a 67% increase and well above previous quarters. In the year ago period that number was $263 million. The CEO spoke at a Goldman Sachs financial conference and he said the foreclosure problem may have peaked but there were still plenty in the pipeline. Banks are being forced by investors to buy back mortgages that were packaged into mortgage-backed securities because of what investors are claiming as misrepresentations when they were sold. These forced payments are killing the smaller banks and what is bad for STI is assumed to be bad for everyone else that initiated mortgages. STI shares declined -6% on the news.

Suntrust Chart

Google shares edged just over resistance at $625 intraday but fell back after news broke that Verizon was blocking the Google Wallet application from Android phones for security reasons. Late in the day Verizon responded with a denial saying they were not blocking it and were still in discussions with Google about the application. "Recent reports that Verizon is blocking Google Wallet are false" according to Verizon spokesman Jeffrey Nelson.

Earlier in the day a Google spokesman had said that Verizon asked it not to include the function in the Galaxy Nexus smartphone due out this month. He claimed Verizon had said the service needed to be integrated into a new, secure and proprietary hardware element in Verizon phones. Google Wallet lets people make payments, redeem digital coupons and earn loyalty points with merchants. Verizon has joined with AT&T and Deutsche Telecom to develop a rival product called Isis to make payments and redeem offers. Apparently Verizon is trying to make competition a little harder. Looks like an antitrust case brewing.

Google shares are still fighting that resistance at $625 and we need one really good Nasdaq spike to push it over and force the shorts to cover.

Google Chart

Starbucks (SBUX) said its first year of nationwide use of its smartphone payment application saw 26 million payments. Starbucks has expended the service to include more than 9,000 stores. Virtual Starbucks cards can be stored on the iPhone and used to pay at the register. In the last nine weeks more than six million payments have been made compared to three million in the first nine weeks of the program.

LinkedIn (LNKD) shares rallied +$3 after JP Morgan upgraded the stock to overweight from neutral. JPM made the call because LNKD shares had lost more than one third of its value since July. Despite the ratings upgrade the analyst lowered his price target to $84 from $98. The stock closed at $73.20.

Linkedin Chart

Darden Restaurants (DRI) warned that lower prices at the Olive Garden restaurants had failed to bring in extra customers. The Garden is its largest chain with 750 stores. Darden has tried campaigns emphasizing high food quality and campaigns stressing lower prices and neither appears to be working. The chain has posted disappointing results for five consecutive quarters. Darden said same store sales would likely decline by -2.5% at the Garden. However, sales at Red Lobster were expected to rise +6.8% and Longhorn Steakhouse +6%. They predicted earnings of 41-cents and analysts were expecting 54-cents. Overall growth is now expected to be only 5% to 7%, down from 12% to 15% in prior estimates. Shares of DRI fell -12%.

Darden Chart

The S&P rallied twice over the last two days to strong resistance at 1265 and the 200-day average but both times the rally failed at that point. Reportedly it failed both times on news of potential downgrades in Europe but I think that was a convenient excuse. If the market rallies to resistance and then holds there for several hours until a headline appears was it the headline that caused the failure or was it resistance?

The events in Europe are critical and definitely not to be ignored. Personally I am surprised we are holding at the highs while the officials in Europe try to walk along the edge of a cliff without falling off. As I said before I don't expect any magic bullet fix but the markets appear to be waiting for some positive news regardless of how slim the chance the solution will hold.

Support on the S&P is rising and the daily ranges are narrowing as it moves towards breaking that resistance. Let's hope the dance in Europe ends with at least a temporary solution and we can escape December with some decent gains. I remain skeptical but the market does not reflect my skepticism. When in doubt the trend is your friend.

S&P Chart

The Dow broke through downtrend resistance and is now just one hurdle away from challenging the July highs. Resistance at 12,200 and 12,285 are the next levels to watch. The Dow is leading the rally today. With the S&P nearly flat and the Nasdaq and Russell in negative territory.

This suggests this is a blue chip rally with funds putting cash in the highly liquid blue chips so they won't miss any breakout but they can also bail out very quickly if the events in Europe turned negative.

Dow Chart

The Nasdaq rallied over resistance at 2,625 on Monday but failed just at the 200-day average at 2,672. Given the rally from last week I don't see this as a major problem. This was normal profit taking ahead of the European decision later this week.

Apple, Amazon, Priceline, Wynn, Bidu and Google were all negative today so for the Nasdaq to post a gain would have taken a super effort. That did not occur.

I believe it was just profit taking as traders position themselves ahead of the Friday decision in Europe.

Nasdaq Chart

The Russell finished fractionally negative after a huge rebound from the prior week's lows. This stall happened exactly at strong resistance at 750 and like the Nasdaq I think this was simply portfolio balancing ahead of the Friday event. The Russell has been strong over the last week but nothing rises forever. There needs to be a day of rest and a -0.25 decline is the least possible profit taking we could ask for.

Russell Chart

S&P, the company not the index, speaks seldom but it carries a big stick. The threat to downgrade 15 euro zone countries and the EFSF if there is no big resolution at the EU summit this Friday was a very big threat. It would raise borrowing costs for everyone in the euro zone including Germany and France. Germany is considered the strongest country but it also has a very large debt load. German officials definitely don't want to see their interest rates rise because it would be a serious blow to future finances.

Downgrading the EFSF would make it harder to leverage that vehicle and harder to make it more effective. S&P may be trying to make up for its prior sins by forcing the EU leaders to take action. No other entity has a club the size of S&P. A one to two notch downgrade to euro zone countries would be devastating. Hopefully the S&P threat will force the EU leaders to actually make a real decision. We will get some kind of a statement on Friday but odds are good it will be highly qualified and require weeks to months to see if they are serious.

I remain skeptical they can work it out and I am worried the market could react badly on Friday. HOWEVER, clearly the market wants to move higher. Will that desire overcome any negative news I don't know.

I recommend small positions with a bullish bias because leaders facing the equivalent of a firing squad may say anything to keep from incurring the S&P wrath. In this case S&P may actually be Santa Claus in disguise if they succeeded in forcing positive results in Europe.

Have You Renewed Yet?

Every December we offer the best prices of the year on a renewal package of our top newsletters. If you have been a subscriber for several years you know this is the best price and the best deal of the year.

This year we are offering Option Investor, Premier Investor, Leap Trader, Option Writer and our new newsletter starting in January, Ultimate Investor.

Please follow the link below to see for yourself the EOY subscription special for 2011. You will not be disappointed!

Jim Brown

Send Jim an email

New Option Plays

Testing Technical Resistance

by James Brown

Click here to email James Brown


Cooper Industries - CBE - close: 56.49 change: +0.45

Stop Loss: 54.65
Target(s): 62.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
CBE is a conglomerate that sells a variety of electrical products and equipment. Shares of CBE are in the process of breaking out from a multi-week sideways consolidation. The Point & Figure chart is already showing the bullish breakout and is currently projecting a $57 target. You'll notice on the daily chart that CBE is facing technical resistance at the simple 200-dma.

I am suggesting we use a trigger to buy calls at $57.05. If triggered we'll use a stop loss at $54.65. Our target is $62.50.

Trigger @ 57.05

- Suggested Positions -

buy the Jan $60 call (CBE1221A60) current ask $1.25

Annotated Chart:

Entry on December xx at $ xx.xx
Earnings Date 01/25/12 (unconfirmed)
Average Daily Volume = 3.7 million
Listed on December 06, 2011

In Play Updates and Reviews

A Quiet Day on Wall Street

by James Brown

Click here to email James Brown
Current Portfolio:

CALL Play Updates

Caterpillar - CAT - close: 95.96 change: -0.89

Stop Loss: 95.45
Target(s): 107.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

12/06 update: CAT failed to make any progress today. Shares actually broke down from the short-term 96-98 trading range. Now the stock looks as if it will dip to its 50-dma or possibly fill the gap with a drop toward $92.00. Our trade is unopened. We're still waiting for a breakout past resistance.

I am suggesting we buy calls with a trigger to open positions at $98.55. If triggered we'll use a stop loss at $95.45. Our target is $107.00.

Trigger @ 98.55

- Suggested Positions -

buy the 2012Jan $100 call (CAT1221A100)

Entry on December xx at $ xx.xx
Earnings Date 01/26/12 (unconfirmed)
Average Daily Volume = 8.1 million
Listed on December 03, 2011

Edwards Lifesciences - EW - close: 65.18 change: -0.06

Stop Loss: 63.25
Target(s): 69.50
Current Option Gain/Loss: Dec$65c: - 5.1% & Jan$70c: -14.7%
Time Frame: 3 to 6 weeks
New Positions: see below

12/06 update: It was a quiet day for EW. Shares did manage a bounce off its intraday lows. Shares are getting squeezed between their 10-dma and 20-dma. I am not suggesting new positions at this time.

More conservative traders may want to exit early now to avoid or limit any losses.

- Suggested Positions -

Long DEC $65 call (EW1117L65) Entry $1.95

- or -

Long 2012Jan $70 call (EW1221A70) Entry $1.70

12/03 new stop loss @ 63.25
11/30 new stop loss @ 61.95
11/28 trade opened. EW gapped higher at $63.97
11/26 trade still not open. Adjusting stop loss to $59.90
11/23 still not open
11/22 not open yet

Entry on November 28 at $63.97
Earnings Date 02/02/12 (unconfirmed)
Average Daily Volume = 1.2 million
Listed on November 21, 2011

Family Dollar Stores - FDO - close: 58.78 change: -0.42

Stop Loss: 56.75
Target(s): 64.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

12/06 update: FDO continues to churn sideways. Shares essentially erased yesterday's minor gain. We have a buy-the-dip trigger at $58.00. More conservative traders may want to use a trigger at $57.50 or $57.00 instead.

Earlier Comments:
We want to keep our position size small because the spreads on the options below are getting wide, making this trade more risky.

buy the dip Trigger @ 58.00 (small positions)

- Suggested Positions -

buy the JAN $60 call (FDO1221A60)

12/03/11 Adjust buy-the-dip trigger to $58.00
12/03/11 new stop loss @ 56.75
11/30 New strategy to account for FDO's bullish breakout higher. We want to use a trigger at $58.50 to open bullish positions with a stop at $56.45. New target is $64.00. I've updated our option strikes.
11/26 new strategy. buy a dip at $54.50, stop loss @ 53.75. Keep positions small because option spreads are wide.
11/22 not open yet

Entry on November xx at $ xx.xx
Earnings Date 01/04/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on November 21, 2011

Hewlett-Packard Co. - HPQ - close: 28.18 change: +0.06

Stop Loss: 26.75
Target(s): 32.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

12/06 update: HPQ rebounded off its morning low and managed to eke out another gain. Yet shares remain under resistance near $28.50.

I am suggesting a trigger to buy calls at $28.65. However, this is an aggressive entry point. The top of the August gap down near $29.50 could be resistance. Plus HPQ could find round-number resistance at $30.00 and technical resistance at the 150-dma, simple 200-dma and exponential 200-dma all above in the $30.00-34.00 zone. Thus we want to keep our position size small to limit our risk. We'll se our stop loss at $26.75 and our exit target at $32.00. FYI: The Point & Figure chart for HPQ is bullish with a $41 target.

Trigger @ $28.65

- Suggested Positions -

buy the 2012Jan $30 call (HPQ1221A30)

Entry on December xx at $ xx.xx
Earnings Date 02/22/12 (unconfirmed)
Average Daily Volume = 22.4 million
Listed on December 05, 2011

JB Hunt Transport Services - JBHT - close: 45.53 change: -0.50

Stop Loss: 44.75
Target(s): 48.25
Current Option Gain/Loss: + 4.8%
Time Frame: 4 to 8 weeks
New Positions: see below

12/06 update: JBHT spent most of the day churning on either side of the $45.50 level. If the market pulls back tomorrow we could easily see JBHT hit our stop loss at $44.75. I am not suggesting new positions at this time.

Earlier Comments:
Our multi-week target is $48.25. JBHT doesn't move super fast so give yourself time for the trade to work. FYI: The Point & Figure chart for JBHT is bullish with a $63 target.

- Suggested Positions -

Long 2012JAN $45 call (JBHT1221A45) Entry $2.05

12/03/11 new stop loss @ 44.75. More aggressive traders may want to leave their stop under $44.00 instead
11/30/11 new stop loss @ 42.45
11/29/11 triggered at $44.35

Entry on November 29 at $44.35
Earnings Date 01/30/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on November 22, 2011

NetApp, Inc. - NTAP - close: 37.28 change: -0.26

Stop Loss: 34.95
Target(s): 39.50
Current Option Gain/Loss: +31.4%
Time Frame: 3 to 5 weeks
New Positions: see below

12/06 update: Profit taking in NTAP was relatively mild. Shares did bounce off their intraday lows. Volume was light on today's dip. Shares are facing resistance near $38.00 and its 20-dma and 50-dma. I am not suggesting new positions with NTAP sitting just under resistance.

Earlier Comments:
I do consider a more aggressive trade. We want to keep our position size small to limit risk. FYI: Readers should note that there is a risk that NTAP might make an acquisition soon. There are rumors floating around that NTAP could buy Quantum (QTM) or CommVault (CVLT) in an effort to better compete with rival EMC. If NTAP does make a bid for either company typically shares of the buyer go down while shares of the target go up.

- Suggested Positions - (small positions)

Long JAN $35 call (NTAP1221A35) Entry $2.51

12/03/11 new stop loss @ 34.95

Entry on November 29 at $35.82
Earnings Date 02/16/12 (unconfirmed)
Average Daily Volume = 9.2 million
Listed on November 28, 2011

O'Reilly Automotive - ORLY - close: 79.54 change: +0.01

Stop Loss: 74.90
Target(s): 84.00
Current Option Gain/Loss: Dec$75c: +61.4% & Jan$80c: +43.3%
Time Frame: 3 to 4 weeks
New Positions: see below

12/06 update: ORLY closed virtually unchanged after a sideways session. Looking at the intraday chart and ORLY appears ready to dip back toward the $78.00 level. I am not suggesting new positions at this time.

NOTE: The plan was to exit our December calls at the open this morning.

- Suggested Positions -

DEC $75 call (ORLY1117L75) Entry $2.80 exit $4.52 (+61.4%)

- or -

Long JAN $80 call (ORLY1221A80) Entry $1.50*

12/06/11 Planned exit Dec. calls at the open. The Bid on the Dec. $75 call was $4.52 (+61.4%)
12/05/11 Strategy change: Exit the December calls tomorrow at the open. Move the exit target for the January calls from $82.50 to $84.00.
12/03/11 new stop loss @ 74.90
11/28/11 ORLY gapped open higher at $76.96, which was above our trigger to buy calls at $76.15.
*Jan $80 call did not trade today. Entry price is an estimate.

Entry on November 28 at $76.96
Earnings Date 02/16/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on November 26, 2011

Phillip Morris Intl. - PM - close: 75.58 change: -0.29

Stop Loss: 73.75
Target(s): 78.50
Current Option Gain/Loss: + 81.2%
Time Frame: 6 to 9 weeks
New Positions: see below

12/06 update: PM also produced a very quiet sideways session. If the market does pull back we can look for PM to dip toward the $74.00 level. I am not suggesting new positions at this time.

Earlier Comments:
Our multi-week target is $78.50. FYI: The Point & Figure chart for PM is bullish with a $95 target.

- Suggested Positions -

Long 2012 Jan $75 call (PM1221A75) Entry $1.12

12/05 Call is up +100%, readers may want to exit now!
12/03 new stop loss @ 73.75
11/30 new stop loss @ 71.40
11/23 adjusted stop loss to $69.49
11/22 trade opened. PM opened at $72.11

Entry on November 22 at $72.11
Earnings Date 02/09/12 (unconfirmed)
Average Daily Volume = 7.3 million
Listed on November 19, 2011

Boston Beer Co. Inc. - SAM - close: 101.72 change: -2.19

Stop Loss: 98.75
Target(s): 109.50
Current Option Gain/Loss: -29.2%
Time Frame: 3 to 4 weeks
New Positions: see below

12/06 update: SAM underperformed the market today with a -2.1% decline. Shares look poised to test the $100 level as support again. Wait for the dip or bounce near $100.00 as our next entry point.

Earlier Comments:
Our exit target is $109.50. More aggressive traders may want to aim higher. FYI: The Point & Figure chart for SAM is bullish with a $117 target. NOTE: The most recent data listed short interest at 20% of SAM's extremely small 8.3 million-share float. That's definitely a recipe for a short squeeze.

(small positions) - Suggested Positions -

Long JAN $105 call (SAM1221A105) Entry $2.05

12/03/11 new stop loss @ 98.75
12/02/11 trade triggered at $102.00

Entry on December 02 at $102.00
Earnings Date 03/08/12 (unconfirmed)
Average Daily Volume = 72.3 thousand
Listed on December 01, 2011

PUT Play Updates

SPDR S&P 500 ETF - SPY - close: 126.26 change: +0.04

Stop Loss: 127.55
Target(s): 120.50
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: see below

12/06 update: The market rallied again this afternoon but the SPY struggled with resistance near the $127.00 level. Readers could use this failure to breakout as a new entry point to launch new bearish positions.

More aggressive traders may want to inch their stop higher so it's just above $128.00 instead.

Earlier Comments:
We want to keep our position size small to limit our risk.

- Suggested Positions -

Long 2012Jan $120 PUT (SPY1221M120) Entry $2.67

12/02/11 trade opened at $126.12 (gap higher), trigger was 126.00

Entry on December 02 at $126.12
Earnings Date --/--/--
Average Daily Volume = 224 million
Listed on November 30, 2011

Thermo Fisher Scientific - TMO - close: 47.18 change: +0.40

Stop Loss: 48.25
Target(s): 42.75
Current Option Gain/Loss: Dec$45p: -22.2% & Jan$45P: -10.7%
Time Frame: 2 to 4 weeks
New Positions: see below

12/06 update: TMO managed to outperform the major indices today with a +0.8% gain. Yet the path of least resistance still appears to be down. I would still consider new positions now or you could wait for a new failed rally under the $48.00 level.

Our target is $42.75. FYI: The Point & Figure chart for TMO is bearish with a $41 target.

- Suggested Positions -

Long DEC $45 put (TMO1117X45) Entry $0.45
(about 2 weeks left for Decembers)

- or -

Long JAN $45 put (TMO1221M45) Entry $1.40

12/05/11 TMO gapped open higher at $47.10

Entry on December 05 at $47.10
Earnings Date 02/01/12 (unconfirmed)
Average Daily Volume = 3.5 million
Listed on December 03, 2011

Watson Pharmaceuticals - WPI - close: 62.39 change: -0.87

Stop Loss: 64.25
Target(s): 56.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

12/06 update: WPI is still churning sideways in the $64-62 zone. There is no change from my weekend comments.

I am suggesting we use a trigger to buy puts at $61.75 with a stop loss at $64.25. There is potential support at $60.00 but I am aiming for the $56.00 level.

Trigger @ $61.75

- Suggested Positions -

buy the DEC $60 PUT (WPI1117X60)
(about 2 weeks left for Decembers)

- or -

buy the JAN $60 PUT (WPI1221M60)

Entry on December xx at $ xx.xx
Earnings Date 02/14/12 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on December 03, 2011