Options Trader: Wednesday Morning Ideas

by: Philip Davis

Ah, the pre Fed day!

Japan couldn't wait to sell off, dropping 285 overnight and crashing right through the 15,000 mark, putting it in danger of forming its own 'death cross'. I think its very ironic that Mad Money had a special last night on fantastic Japanese investments - the portfolio Cramer suggested lost over 2% just hours after the show. Timing is everything!

I endorse Cramer's picks but, as my readers know, I haven't endorsed a buy on anything for about 3 weeks now - very dull but safe. I have become very concerned of late by the constant stream of advice from pundits and newsletters telling people what sectors to get into in the midst of the worst sell-off since '02.

Europe is flat to down again and I don't expect much out of our own markets ahead of tomorrow's Fed announcement. At home, we need to keep a close eye on 10,900 for the Dow or 11,000 to the upside as well as the downside psychological break-point of Nasdaq 2,100. I will again be staying out of the market if the NYSE can't retake 7,935 -- its 200 dma.

Today is oil inventory day and MER upped their target price for oil to $67, still a little shy of reality but an indicator that no one is expecting oil to go lower despite 10 year high inventory levels. Oil traders are already preparing for bad news by saying, "sure there's a build but next week is a big driving week" and, of course - Hurricanes are Coming! For now I'd rather see the oil sector go up to give us more fuel for shorts on the way down.

As predicted last night, gold made a spectacular recovery in Asia and Europe overnight but, if the manipulation game is on, we can expect another US sell-off around noon today so it might be smart to take it off the table by then and consider a rebuy in the afternoon although I will stay out entirely until after the Fed announcement as a .50 hike could really hammer the gold market.

The past two week's rise in oil and gold has come against a 2% dollar recovery so look for a big jump in commodities if the Fed gives any indication of a pause.


I'm going to take a pass on today as I have meetings and such so I am 100% cash at the moment. I have some puts that are worth watching if the Nasdaq is on the way down and some calls if the NYSE can beat the 200 dma but this is way too tough to make a real prediction.

Nonetheless, I see more interesting call plays than put plays as the cost of puts has syrocketed so I would be more into buying calls if our indicators hold up, still looking to take profits off the table asap!

ADM is retesting the 50 dma at $40.33 and could go either way but the safer play at the moment is the $40 put for $1.70 (a $1.05 premium) but get out/don't buy if it goes over $40.40. You can also watch CAG (earnings today), who are sitting right above their 200 dma at 21.56 for direction. A look at competitor BG's chart shows why I'm interested in this short.

I have been thinking about the chart I posted last month showing that takes more oil/gas to produce ethanol than you get out of it and it occurs to me that that might make for a very disappointing quarter for the companies that sell it, regardless of how inflated ethanol pricing has become.

BA sells another 50 planes, they are kicking Airbus's backside... Ho humm, what have they done for us lately? This may be one of the greatest companies on the planet but they can't fight the gravity of the market, so I like the $80 puts for $1 or less as long as the Dow is heading south but watching the 50 dma at $84 for an don't buy/get out point.

Boeing Buddies TIE and ATI have drifted apart with TIE 20% of ATI over the past 3 months. One of them is wrong and the other one is due for a nice correction.

Lukoil posted a 43% gain in net profits to $1.69Bn on $15Bn in sales but it was short of analyst's predicitons. Either way, the refinery business looks very, very good as relatively stable oil prices lead to better margins for the quarter. We need to keep a close eye on VLO as they broke over the 50 dma of $62 yesterday so today's direction will be critical for the next week.

I like the MGM Jan $37.50s for $5, selling the Aug $40s for $1.60 as I expect MGM to go lower but I would hate to miss the recovery.

I'll be watching MLHR to see if the rich are still spending. They post earnings this evening and that stock has been hammered this quarter. A purveyor of $1,000 chairs would likely be an early victim of corporate budget constraints. This is a sensational company that grows earnings by 30%+ regardless of sales and would be a great play in a recovery. Aug $30s are .50 and are a high risk/reward trade.

RHAT has earnings tonight as well but they slammed through the 200 dma yesterday to the downside so I'm not touching them but it will be interesting on many fronts.

ATYT could go either way in tomorrow's earnings but it's too scary to play and $1 each way is a little stiff for a $15 put/call spread.

If GIS (6/29) isn't making money we have BIG TROUBLE, as these are the "safety stocks" we are supposed to run to in times of trouble. With a 3% dividend yeild there should not be downside below the 50 dma of $50.30 and expectations are fairly low at .61 so I really like the $50s at $1.55 (a .60 premium).

MON also has earnings tomorrow and I'm pretty sure these guys make money so I've been very surprised by the 18% sell-off. They just announced a 2:1 split and expectations for tomorrow's earnings are pretty low at $1.20. If they have been able to control oil costs these guys could be a huge winner but the $80s are a tremendous gamble at $1.65.


TSO, practically a twin of VLO is not following the Valero rule this week. Here is the 3 month chart of the pair.

In the past 5 days TSO has pulled up 5% from Valero and I will tell you that VLO is by far the superior company so TSO is my favorite oil short following the Valero rule after inventories today. I would want to see firm direction before commiting to the $65 puts, currently at .85.

A safer play is the COP spread of the $65s for .85 and the $60 puts for .60. It is very rare to get a shot at a volatile oil play right in this sweet spot ($62.50) with a month to go to expiration. COP was rejected from the 200 dma at $62.75 after poking the 50 dma at $64 at the open. This one is likely to break one way or the other and two weeks ago it was at $58, well off the April high of $72.

Be careful out there today! It's not a rally unless the Dow holds 11,000 and the NYSE breaks above 7,935. We are still looking for S&P 1,262 (it is still creeping up and away) but will be happy to break 1,250 at this point.