Options Trader: Thursday Morning Ideas

by: Philip Davis

Yesterday's "rally" came on weak volume and late, but indexes holding key levels seems to have been enough to excite both Asia and Europe, all posting 1% plus gains across the board.

Our futures markets look strong as well but we still need to see if we can break the same technicals as yesterday: Dow 11,100, S&P 1,260, NYSE 7,932. Of the three, only the NYSE is close enough to give an early signal while the Nasdaq is so far out of the money that we can only watch the 2.100 mark to the downside which would be another (but by no means final) nail in the coffin.

The SOX are on a death sprial but held 429 thanks to a herculean effort by Intel who took their $100Bn market cap up 3.3% offsetting crushing losses by MRVL and TXN. The Sox are off 20% since 5/8 and must either turn up here or they are very likely to make another 5% down leg. Only a very positive Fed announcement can save them at this point. It should be noted that the 20% loss represents a drop from 535 to 429 but it will take a 25% gain to recover - one of the pains of market math.

This is why we try to stop out with no more than a 20% loss - it becomes far too hard to recover once you get past that point. Since many people follow that rule, there is a large danger in the SOX index that another few points down will trigger waves of selling that could bring all the markets back to last year's lows.

Other than that, things look pretty good today!

In preparing for our Maserati challenge (I've decided to get a Range Rover Sport for myself though) I am setting up a tracking screen on ESignal of just the SOX as I think this will be very key over the next couple of months. By the way, the challenge will not start until July 17th as I forgot I will be on vacation the second week of July.

Oil seems happy over $72 and gold is holding $580. There is a natural gas inventory today that is unlikely to be very surprising but a rise in nat gas above $6.50 is a big buy signal on beaten down BTU, who have not participated in the oil sectors recovery as yet. BTU is 33% off its 5/11 high of $76.29 so I like the Aug $60s for $1.50 but only if ACI stays above its 200 dma of $40 (it's .18 below at the moment).

Other than day/momentum trading I'm not touching this mess until after the Fed (2:15) and even then I think I'll wait until tomorrow unless something astounding happens. Of course the meeting did start yesterday and very strong upward movement could be the result of leaks from day 1. With all the doom and gloom of the past 3 weeks I don't see as much downside as upside but I do see the possibility of a fake rally and a big sell-off.


Let's keep our eye on BP (the company that's always telling you how they care about you and the environment) as they are being investigated for cornering the market in propane in 2004 and driving prices up 50%. They are sitting just under the 200 dma at $68 and if this stock doesn't go down nothing in the oil sector can.

ATYT has in-line results but poor guidance so it looks like the puts may have been the way to go!

Right now, to keep from getting too excited by today's bounce, I'm taking a close look at the last few week's picks which are now better values (ie losers!). Only to be kept if we maintian or technicals and watch that Fed at 2:15!

I will not chase anything here but if a rally looks strong I will try to pick up any laggards in the group. If Apple and Intel and TXN aren't moving up, I'm not buying anything!

INTC October $20s are back at .65, where we first picked them.

MOT $20s are all the way down to .50 (down 40%) and I am a motoholic!

MON had a small beat and gave in-line guidance so I'm not expecting much there.

AAPL Jan $55s are down to $8.40 well offset by the $60s which have lost $1.30 to $1.20. If you are in on the spread I would buy out the $60s and hope for a rally to resell. Worst case is sell the $57.50s for about $2 on another drop. This is also a possibly good time to initiate the trade but with the $52.50s at $9.50 and selling the $57.50s for $2.50 or better.

Now that opposition to MCD's dopey China strategy has played out (see 6/20 post), we can get back to concentrating on the fact that this is a company that has $20Bn in revenues worldwide with a 15% net profit that has just spun off the year's best IPO. The $32.50s are being given away at .50.

I don't think news can be worse for the HBs so I like the HOV $30s for $1.10 just in case the Fed says something encouraging.

PD Jan $72.50s are expensive at $11.50 but are nicely offset by selling the $82.50s for $2.50.

GE $32.50s for .85? Gotta do that!

TXN $30s for .50? Yup!

RHAT has my favorite kind of earnings but I'm wary of a Fed induced crash making it impossible to recover. The earnings report is such a mess due to stock option expensing that analysts can't make heads or tails out of it but this company is doing great (also, very few people understand a subscription model). I'll be watching this one closely today but there's no way to guess where the options will play out.

CWTR snuck back down on us and the $25s make a nice play at .45.

AU $45s for $1.35.

NEM $50s for $1.40.

AIR Aug $22.50s for .50 if BA keeps going up.

I always like TM under $100, especially when the $100s are only $1.90.

MTU Nov $15s for .50 are a fairly safe long-term play.

CAT will be happy to go up with the Dow over 11,100 and the Aug $75s are $2 but get out if it has trouble with the 50 dma at $74.


The EU is getting fed up with MSFT who are still not turning over information on their operating system to competitors despite fines of $2M per day. $2M per day is the interest on 20% of the company's annual profits! They are being threatened with an increase in fines to $6M per day, something even Microsoft might notice, but here's my evil corporate monopolist take on that:

I make $12Bn a year in profit ($33M per day) using anti-competitive practices. If I set aside $3Bn for possible fines out of the $40Bn I have on hand the interest will more than pay for even the tripled fines.

Meanwhile I am protecting my lead, keeping my competitors from moving forward while my people can keep working on our new operating system that I have gamed to be so different from current versions that the code I will eventually turn over will be obsolete the minute we comply.

It will take another 5 years of trials and appeals before we get fined for our new version and by then we will have something else to baffle the courts with. By then we will have so much money in the war chest that we will be able to bankrupt most countries who want to take us to court!


If MSFT breaks throught the $23.50 mark, I like the Oct $25s for .50.