Option Investor

Daily Newsletter, Tuesday, 7/5/2011

Table of Contents

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

Market Wrap

Is Portugal the New Greece?

by Jim Brown

Click here to email Jim Brown
News that S&P cut Portugal's debt four notches to junk with a negative outlook helped to squash the intraday rally but all in all this was a bullish day.

Market Statistics

It was not that the downgrade of Portugal was not expected. Their debt had been trading in junk territory for several months. S&P said it was evident Portugal would need a second bailout in order to survive just like Greece. This goes back to the domino theory that started with the fall of Greece and will end up with Portugal, Ireland, Italy, Spain and who knows who else when the smoke clears. Today's downgrade was just a headline grab by S&P and the excuse for the 2:PM decline.

There was very little in the way of economics or major news as would be expected on the day after a holiday. The only economic report was the Factory Orders for May. The headline number showed a rise of +0.8% compared to a decline of -1.2% for April. This is a lagging report so it does not get a lot of attention. Durable goods orders rose +2.1% compared to a small decline of -0.2% in the nondurables. If you remove aircraft that number declines to +1.6%. Overall it was a good report but nobody was listening.

Semiconductor billings rose +1.8% in May compared to a -2.5% decline in April. Billings have been very erratic recently so any increase is positive. Worldwide billings increased to $25.0 billion in May. Asia Pacific was the biggest gainer at +3.6% while Japan the biggest decline at -2.1%. Obviously that is related to the quake damage.

The calendar increases in intensity as the week progresses with the ISM Services on Wednesday, ADP employment on Thursday and Non-Farm Payrolls on Friday. I am optimistic on the ISM Services but cautious on the ADP and Non-Farm payrolls. The current consensus estimate on Payrolls is for a gain of +88,000. We could see anything from +25,000 to +125,000.

Economic Calendar

The lack of news in the economic arena was matched by the lack of news in the stock arena. The Dominique Strauss-Kahn story was getting more play than the stock news because there was almost no stock news. The White House announced the president was going to speak on the debt ceiling talks late in the afternoon and that became the new topic of discussion.

There was some news on stocks but nothing that rocked the markets. Immucor (BLUD), a maker of blood testing equipment and supplies said it was being bought by TPG Capital for 1.97 billion or $27 per share in cash. That is a 30% premium over the current stock price. Immucor can seek alternate bids through August 15th but there are not expected to be any. Immucor has some expiring patents that make it less desirable than in the past. Since it was a cash offer the shares of BLUD rose +30% to close at $26.99.

JetBlue (JBLU) fell -5% after Morgan Stanley downgraded the carrier to underweight from equal weight. (hold to sell) Morgan Stanley cited concerns over margins and limited growth opportunities.

The transportation sector declined about -1% after closing at a new historic high on Friday. Pushing the transports lower was a spike in crude prices after Barclay's raised their estimates for crude prices for 2012. Barclay's believes Brent will average $115. They said rising global demand and shrinking supplies would push prices higher. Even with their upgrade for prices they still remain one of the lowest estimates. Goldman, JP Morgan and Morgan Stanley all expect significantly higher prices despite the IEA announcement of the strategic petroleum release. Most analysts believe the release of SPR reserves proves Saudi Arabia, Kuwait and the UAE are not able to increase production enough to make any real difference. Secondly the damage from the lost Libyan production will be long lasting.

WTI and Brent prices rose +$2 on the news and this depressed the transport stocks. We also found out that the IEA is only going to release two-thirds of the oil it announced. One third of the 60 million barrels will come from a reduction in the amount of oil some countries are required to keep in inventory. Since most countries keep more on hand than what is required by IEA rules the lowered requirements really mean no oil will be released. For instance a country required to keep 50 million barrels in reserve may actually have 60 million. Lowering their requirement to 49.5 million does not mean they are going to rush out and release 500,000 barrels. This was a political trick from the beginning and nothing more.

Another problem with the IEA release is that in Europe they are not actually going to release oil but release supplies of refined products like gasoline and diesel, which are already in abundance. JP Morgan said out of the 30 million barrels being released by the other 26 countries only about eight million would be oil and the method of the release would have an insignificant impact on the market.

U. S. WTI Chart

Brent Crude Chart

The U.S. actually made 30 million barrels available for purchase. The 30-million barrels were put up for bid and nearly all the major with pipeline access put in a bid at roughly $10 below the current $117 price at the time. Because the oil is stored on the coast the prevailing price at the time was the price of Louisiana Light Sweet crude at $117, which was roughly the price of Brent. Remember, WTI has a technical flaw right now in that there is an abundance of oil in the center of the U.S. in markets served by the Cushing pipelines. There is more oil than there is demand so WTI sells significantly lower than Brent & LLS and will sell at a discount for the next couple years until a pipeline is completed to move oil south from Cushing Oklahoma to the Gulf.

The companies paid about $10 less than the LLS price at the time so basically they were able to increase their profits by $10 per barrel with everything else remaining equal. The graphic below shows the winners of the bid. The average cost of SPR light sweet crude is around $29 and $23 for heavy sour crude. When the government decides to replace that oil the odds are good they will have to pay more than the $107 they received. JP Morgan, Barclay's and Trafigura Trading were buying it to resell.

Crude prices are now back over the level they were when the IEA release was announced. The energy sector was the biggest gainer for the day.

SPR Bidders

Wendy's Arby's Group (WEN) said it completed the sale of Arby's Restaurant Group to Atlanta based private equity firm Roark Capital Group and has now dropped the Arby's brand from its name. Wendy's said it would retain the WEN ticker. Roark Capital bought 81.5% of Arby's for $130 million. The company also assumed $180 million in debt. Wendy's will retain the 18.5% position. Wendy's has about 6,600 stores and Arby's 3,600 stores. The chains were combined by Nelson Peltz in 2008 at the height of the recession and never succeeded in the post recession environment. Roark has been on an acquisition binge lately. That is the eleventh chain it has purchased including Carvel Ice Cream, Cinnabon, Auntie Anne's, Moe's Southwest Grill, Seattle's Best Coffee, Corner Bakery Café and IL Fornaio Restaurants. Wendy's is going to refocus its efforts on improving the Wendy's menu including adding breakfast items and will be updating stores and building new locations both in the U.S. and internationally. Dave Thomas would be relieved the three-year experiment is over and Wendy's is back on its own. The stock closed near a 52-week high.

Wendy's Chart

NetFlix (NFLX) gained +8% or +$22 today after announcing they were expanding their offerings into 43 countries primarily in Latin America and Mexico. Barclay's now expects their subscriber estimates for 2012 year end of 42.7 million to be rather conservative. Latin America is expected to see the fastest growth of broadband installations in the world through 2015 according to consulting firm Analysys Mason. The addressable homes in the announced countries including America now total over 325 million. The service will be offered in English, Spanish and Portuguese. NetFlix customers pay $7.99 to download movies over the Internet. NetFlix has 23 million customers today. Half of all new TVs are expected to have Internet connectivity by 2015.

NetFlix Chart

Tivo (TIVO) is being recommended as a buy given its online interface that allows you to not only record content but surf online content providers like Amazon and NetFlix all in one box. On Tuesday Tivo was being discussed as a possible takeover candidate by Google or Microsoft. With only a $1 billion market cap Tivo would not even be an appetizer. Hulu was being kicked around as a potential acquisition by Google last week. Hulu is now owned by Disney, Comcast and News Corp. Everything is going digital and online and the TV is the biggest video monitor in your house. The future is racing toward us faster than most consumers can imagine.

Tivo Chart

Google (GOOG) rallied another $11 on Tuesday after a new survey showed the Android smartphones move up to 38.1% market share from 33% in the prior survey. Apple's iPhone rose to 26.6% from 25.2%. Research in Motion declined to 24.7% from 28.9%. Microsoft's share declined from 7.7% to 5.8% and Palm fell to 2.4% from 2.8%. Samsung topped the U.S. market with a 24.8% share, LG at 21.1%, Motorola 15.1%, Apple 8.7% and RIMM 8.1%. On another front the Google Chrome web browser increased market share to 20.7%, a +700% increase in the last two years. Microsoft's Explorer slipped to 44% from 59% two years ago. Firefox dipped to 28% from 30%.

Google Chart

If I were grading the market performance today I would have to give it a B+. Given the significant gains from last week we were very susceptible to a decent decline and it did not happen. All the indexes were positive before the 2:PM news headline on Portugal and while they all dipped the Dow and S&P closed slightly negative with the Nasdaq closing strongly positive. For the Dow to lose only 13 points and the S&P less than -2 points that is a good day coming after last week's gain.

The S&P traded in a very narrow range with a solid top at 1340. There is risk to 1320 but we saw no indications of any material attempt to sell stocks today. Volume was very light at 6.01 billion shares as you would expect for post holiday trading. There was just nothing to trade on today but the lack of any selling was bullish.

S&P Chart

The Dow was a carbon copy of the S&P with a solid top at 12,600 but no material attempt to sell off. This was a bullish event BUT volume was light and there was no conviction. Tuesday was a throw away day but the lack of a major decline was bullish.

The key here is the recently improved economics and traders holding their breath ahead of the Thr/Fri payroll numbers. Jobs will be the key indicator on whether the soft patch is behind us or we are just experiencing a short-term volatility spike in the economics.

The Dow, like the other indexes, is at serious risk of a decent decline from overbought conditions. If that decline fails to materialize and we start moving over 12,600 we could see another significant bout of short covering.

Dow Chart

The Nasdaq powered ahead to extend its gains over prior resistance at 2800. The index was helped by the $10 gain in Google, $22 gain in NetFlix, +$6 in Apple and a new all time high in Amazon with a +$4 gain. The rest of the Nasdaq stocks could have been negative and it would have been hard to force the Nasdaq down with those big caps surging ahead.

Look at the chart below and ask yourself if you would buy that spike just below solid resistance at 2835. The Nasdaq is seriously overextended and approaching strong resistance. It clearly is at risk. However, a move over that level could create a feeding frenzy of short covering and investors throwing money at the market. It is not logical but it is possible.

Nasdaq Chart

We will be at the mercy of the jobs numbers on Thursday and Friday. I don't think the ISM services on Wednesday will be bad enough to tank the market and a positive surprise could help build bullish sentiment ahead of jobs.

We could see some additional weak guidance from corporations ahead of earnings. That has been running about 2.5:1 over positive guidance but investors don't seem to care. The bad news bulls appear to be back in charge and these negative data points are proving to be stepping stones higher.

I think we are at a real inflection point. The first week of July is normally positive, fueled by retirement contributions for the quarter, and then the rest of July is weak. Whether this will happen in 2011 is obviously unknown. If the indexes begin pushing over current resistance the funds will be forced to buy it to prevent the competition from getting ahead.

I would remain cautious about adding to longs until we either see a decent dip or a breakout over resistance.

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New Plays

Beverage Producer

by James Brown

Click here to email James Brown

Editor's Note:

Here are a few more stocks for your watch list:

BEAV - this stock has been on a roll with four weeks of gains. A dip back toward $40 or the $39 level might be a bullish entry point.

IPI - this agricultural chemical (fertilizer) stock is on the verge of breaking out past its 100-dma and 200-dma.

BBY - there has been a lot of talk about the resilient consumer. Shares of BBY appear to have formed a bullish double bottom with the lows in April and June. A rally past $33 might be an entry point. I would consider this an aggressive, higher-risk trade.

AG - some of the silver stocks are starting to move again. AG was a big outperformer today with a breakout past some technical resistance. I would not chase it today but it might be worth watching.

SBUX - consumer names and more specifically coffee-related stocks have been soaring higher. SBUX has powered past key resistance at $38.00 and major resistance at $40.00 in the last several days. SBUX is now at an all-time high. I would not chase it but keep your eye on it for a correction. It may be a bullish entry point.

- James


AMBEV - ABV - close: 34.49 change: +0.19

Stop Loss: 31.25
Target(s): 35.75, 37.75
Current Gain/Loss: unopened
Time Frame: 6 to 9 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
AMBEV is an abbreviation for Companhia de Bebidas Das Americas. This is a Brazilian based beverage maker and producer from soft drinks to beer. During the last couple of months when the U.S. market was sinking shares of ABV were consolidating sideways. When the U.S. market rallied sharply higher last week ABV broke out to new all-time highs.

The trend is clearly up but we don't want to chase it. I am suggesting bullish positions on a dip at $33.25. If triggered we'll use a stop loss at $31.25. Our multi-week upside targets are $35.75 and $37.75 (given enough time). My biggest concern is that I can't find an earnings report date for this Brazilian company. If they report earnings and miss or disappoint while we're long the stock it could be very painful.

Trigger @ $31.25

Suggested Position: buy ABV stock @ $31.25

- or -

buy the Aug. $34 call (ABV1120H34) current ask $1.35

Annotated chart:

Entry on July x at $xx.xx
Earnings Date --/--/-- (unconfirmed)
Average Daily Volume: 6.3 million
Listed on July 5, 2011

In Play Updates and Reviews

Stock Market Stalls

by James Brown

Click here to email James Brown

Editor's Note:
It was not a surprise to see the stock market stall after last week's impressive rally higher. Most of our trading candidates consolidated sideways.


Current Portfolio:

BULLISH Play Updates

American Express Co. - AXP - close: 52.33 change: -0.01

Stop Loss: 49.25
Target(s): 54.75
Current Gain/Loss: unopened
Time Frame: up to its earnings report
New Positions: Yes, see trigger

07/05 update: AXP didn't move very much today. Shares churned sideways in a 40-cent range. There is no change from my weekend comments. On a short-term basis the stock is overbought. I am suggesting we launch bullish positions on a dip at $51.00. More conservative traders could wait for a dip closer to $50.00 instead. I'm setting our target at $54.90 but that might be a little optimistic since we do not want to hold over the July 20th earnings report.

Trigger @ 51.00

Suggested Position: buy AXP stock @ 51.00

- or -

buy the Aug. $50 call (AXP1120H50)

Entry on July x at $xx.xx
Earnings Date 07/20/11 (unconfirmed)
Average Daily Volume: 7.0 million
Listed on July 2, 2011

Cheesecake Factory Inc. - CAKE - close: 33.34 change: +0.51

Stop Loss: 30.75
Target(s): 33.60, 37.00
Current Gain/Loss: + 5.7%
Time Frame: 8 to 10 weeks
New Positions: see below

07/05 update: CAKE displayed some relative strength with a +1.5% gain. The stock is nearly potential sport at its December highs in the $33.60-34.00 area. I am adjusting our first target to take profits down to $33.60. Don't forget that July options expire in less than two weeks now. You might want to exit these calls right now. If you sold them here we could recoup our entry cost of $0.75.

I am not suggesting new bullish positions at this time.

Earlier Comments:
Keep in mind that CAKE doesn't move very fast (at least not normally) so we'll need some patience for this trade to work. FYI: The Point & Figure chart for CAKE is bullish with a $59 target.

Current Position: Long CAKE stock @ $31.53

- or -

Long the July $33 call (CAKE1116G33) Entry @ $0.75

07/05 adjusted 1st target to $33.60
07/02 new stop loss @ 30.75
06/30 consider the opportunity cost of staying in CAKE. maybe you should exit early
06/28 New stop loss @ 29.65
06/09 CAKE is bouncing from the 200-dma as expected.
06/04 More conservative traders may want to exit early. We are expecting a drop to the 200-dma.

Entry on May 20 at $31.53
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume: 1.0 million
Listed on May 19th, 2011

Dr. Pepper Snapple - DPS - close: 42.74 change: +0.59

Stop Loss: 39.40
Target(s): 46.00
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

07/05 update: DPS was also showing some relative strength today. The stock surged past resistance at its May highs and closed up +1.3%. I didn't see any specific news behind the rally today. Currently our plan is to buy a dip near support at $41.25. More aggressive traders may want to start inching up their trigger point to launch positions. Normally I would avoid holding over earnings but I am tempted to hold over DPS' late July earnings report. Our multi-week target is $46.00.

Trigger @ $41.25

Suggested Position: buy DPS stock @ $41.25

- or -

buy the Aug. $40 call (DPS1120H40)

Entry on July x at $xx.xx
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume: 1.8 million
Listed on June 30, 2011

Ecolab Inc. - ECL - close: 56.39 change: -0.37

Stop Loss: 53.45
Target(s): 57.00, 59.90
Current Gain/Loss: + 5.7%
Time Frame: 6 to 8 weeks
New Positions: see below

07/05 update: Conveniently ECL rallied toward $57.00 this morning and then reversed at $56.98. Shares eventually erased Friday's gains. Over the weekend I had suggested we sell half of our positions. Readers might want to exit the options completely since we have less than two weeks left before July options expire.

If ECL pulls back the stock should find some support near the $55.00 area. I am not suggesting new positions at current levels.

Current Position: Long ECL stock @ 53.35

- or -

Long July $55 call (ECL1116G55) Entry @ $0.60

07/02 Sell half. ECL @ 56.76 (+6.3%), Option @ $1.75 (+191.6%)
06/30 new stop loss @ 53.45
06/18 new stop loss @ 52.45
06/04 new stop loss @ 51.90

Entry on May 26 at $53.35
Earnings Date 07/26/11 (unconfirmed)
Average Daily Volume: 1.5 million
Listed on May 18th, 2011

Interpublic Group - IPG - close: 12.75 change: +0.04

Stop Loss: 11.49
Target(s): 13.20
Current Gain/Loss: + 4.7%
Time Frame: 4 to 6 weeks
New Positions: see below

07/05 update: IPG was slowly marching higher until some profit taking in the last two hours of trading. IPG remains short-term overbought and I would expect a pull back soon. I am not suggesting new positions at this time. More conservative traders may want to use a stop closer to $12.00 instead.

Our plan was to keep our position size small. Our first target is $13.20 near the 2011 highs. FYI: We do not want to hold over the late July earnings report.

- small positions -

Current Position: Long IPG stock @ $12.17

- or -

Long Aug $12.00 call (IPG1120H12) Entry @ $0.85

07/02 new stop loss @ 11.49

Entry on June 29 at $12.17
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume: 7.5 million
Listed on June 28, 2011

Macy's Inc. - M - close: 29.60 change: -0.28

Stop Loss: 27.90
Target(s): 29.90, 32.25
Current Gain/Loss: + 4.5%
Time Frame: 6 to 8 weeks
New Positions: see below

07/05 update: Macy's rallied to resistance at $30.00 and reversed. This shouldn't be a surprise. My concern here is that a sell-off now would make this look like a bearish double top. On a short-term basis I am expecting a dip into the $29.00-28.50 area. Our final target remains $32.25 but cautious traders may want to exit our July calls completely right here. We have less than two weeks left on July options.

I am not suggesting new positions at this time. Our plan was to keep positions small to limit our risk.

- small positions -

Current Position: Long M stock @ $28.30

- or -

Long July $29 call (M1116G29) Entry @ $0.56

- or -

(a bit longer-term)
Long Aug. $30 call (M1120H30) Entry @ $0.85

07/02 new stop loss @ 27.90
07/01 1st Target Hit @ 29.90 (+5.6%), options @ +107.1% (July) & +52.9% (Aug)

Entry on June 28 at $28.30
Earnings Date 08/10/11 (unconfirmed)
Average Daily Volume: 8.6 million
Listed on June 27, 2011

Marsh & McLennan Companies - MMC - close: 31.48 change: -0.06

Stop Loss: 29.75
Target(s): 34.00
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

07/05 update: MMC saw a dip to $31.20 this morning but that wasn't low enough. I am suggesting a trigger to launch bullish positions at $31.00. More conservative traders may want to use an entry point in the $30.75-30.50 area instead. If triggered we'll use a stop at $29.75. Our target is $34.00 but that might be a little optimistic. MMC does not move super fast. We do not want to hold over the early August earnings report.

Trigger @ 31.00

Suggested Position: buy MMC stock @ 31.00

- or -

buy the Aug. $31 call (MMC1120H31)

Entry on July x at $xx.xx
Earnings Date 08/03/11 (unconfirmed)
Average Daily Volume: 3.4 million
Listed on July 2, 2011

Nanometrics Inc. - NANO - close: 19.74 change: -0.27

Stop Loss: 17.65
Target(s): 19.25, 22.00
Current Gain/Loss: +17.3%
Time Frame: 6 to 8 weeks or more
New Positions: see below

07/05 update: NANO held up very well on Tuesday. The stock is very overbought and shares only fell -1.3%. If the market does see some profit taking this stock could easily fall toward $18.00 or lower. I am raising our stop loss again, this time to $17.65. Cautious traders may want to exit completely right here since the $20.00 level is resistance. Our final target remains $22.00.

FYI: NANO does have options but the spreads are so wide I wouldn't trade them.

Current Position: Long NANO stock @ $16.82

07/05 new stop loss @ 17.65
07/02 new stop loss @ 17.45. Consider an early exit right here @ $20.00
06/30 new stop loss @ 16.90
06/28 First Target hit @ 19.25 (+14.4%)
06/28 New stop loss @ 16.49

Entry on June 13 at $16.82
Earnings Date 08/04/11 (unconfirmed)
Average Daily Volume: 467 thousand
Listed on June 11th, 2011

UnitedHealth Group Inc. - UNH - close: 52.85 change: -0.28

Stop Loss: 49.85
Target(s): 54.75
Current Gain/Loss: + 3.6%
Time Frame: 3 to 4 weeks
New Positions: see below

07/05 update: UNH spent most of the session consolidating sideways under the $53.00 level. There is no change from my weekend comments. I would wait for a dip into the $51.00-50.00 area before launching new positions.

We do not want to hold over the July 19th earnings report.

- small positions -

Suggested Position: Long UNH stock @ $51.25

- or -

Long July $50 call (UNH1116G50) Entry @ $2.07

07/02 new stop loss @ 49.85

Entry on June 24 at $51.25
Earnings Date 07/19/11 (confirmed)
Average Daily Volume: 7.9 million
Listed on June 23, 2011

BEARISH Play Updates

Aon Corp. - AON - close: 51.53 change: -0.18

Stop Loss: 52.05
Target(s): 47.00
Current Gain/Loss: + 0.1%
Time Frame: 6 to 8 weeks
New Positions: see below

07/05 update: AON's intraday rally attempt struggled at the $51.80 level. This trade may not be over yet but I am not suggesting new positions at this time.

(small positions only)

Current Position: short AON stock @ 51.61

07/02 Readers may want to exit early with AON @ 51.75
06/18 adjusted exit target to $47.00
06/16 planned exit, June $50 put @ +11.1%
06/16 new stop loss @ 52.05
05/31 New stop loss @ 52.75
05/23 gap down entry @ 51.61

Entry on May 23 at $51.61
Earnings Date 07/29/11 (unconfirmed)
Average Daily Volume: 1.7 million
Listed on May 21st, 2011

St. Jude Medical - STJ - close: 47.74 change: -0.84

Stop Loss: 50.05
Target(s): 47.00, 45.25
Current Gain/Loss: + 6.3%
Time Frame: 6 to 8 weeks
New Positions: see below

07/05 update: The oversold bounce in STJ appears to be reversing under technical resistance at its 30-dma. I'm not suggesting new positions at this time.

Earlier Comments:
We wanted to keep our position size small (about half or less than a normal trade) to limit our risk.

(Small Positions)

Current Position: Short STJ stock @ 51.00

07/01 STJ has filled the gap just as expected
06/25 Adjusted final target to $45.25
06/23 1st target exceeded. Gap down at $46.50 (+8.8%)
06/23 new stop loss @ 50.05
06/16 exit June $50 put @ $1.95 (+95%)
06/15 prepare to exit our June $50 puts on Thursday at the close
06/04 New stop loss @ 51.05, added second target at $45.75
05/23 New stop loss @ 52.26

Entry on May 20 at $51.00
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume: 2.6 million
Listed on May 16th, 2011