Options Trader: Monday Morning Ideas

by: Philip Davis

I was away so no weekly wrap-up other than to say Friday was very disappointing and I am very concerned about this week. We were worried about a Fed party hangover on Friday morning and that's exactly what we got - the market woke up and quickly went back to bed on anemic trading.

The Asian markets posted small gains last night and Europe is trading flat to up so it will likely fall to US traders to set market direction. We can't place any confidence in today's action as most of the traders are off today and anything other than light volume will be surprising.

The Dow came to rest a bit under the 50 dma of 11,187 but was soundly rejected from that mark in intraday trading. The S&P bounced off its rapidly declining 50 at 1,262 in a set-up that does not look at all encouraging while the Nasdaq is 30 points away from being rejected by its 50 at 2,208. The NYSE posted the strongest gains but was also pushed down from its 50 dma of 8,200. With all these indices so close to critical tests, this short, holiday week is likely to set the tone for the entire Summer.

Oil is hitting $74 in the overnight and gold is way up at $617 as the dollar falls off a cliff, crashing right through 50 day resistance to lose 3 weeks' worth of hard fought gains.

Possible acquistion talks will boost Dow component AA today while GM is enjoying their rumor while it lasts with a 10% leap in share prices. I occurs to me that a pump-up like this give Kerkorian the excuse to finally dump his shares if they can't form the alliance that he instigated in the first place.

Today should be an up day as there is no particular reason for it to go down and anything negative will be a big concern. With light volume we can assume that buyers will be scarce so sellers will want to hold out until Wednesday to get a decent price.


Now that the second quarter is closed we are back on earnings watch.

WMT had disappointing numbers again and should sell off. The $47.50 puts are just .35 but I prefer the Aug $47.50s for .75 bearing in mind that that is exactly the 50 dma.

AAPL is still out of control with the options pricing but the Aug $55s for $4.80 are tolerable but only if the Nasdaq is heading up.

Now rumor has it that Google is getting into the microchip business. This seems insane to me, perhaps it is a bet on whether Google can save the SOX or whether the SOX can drag Google below $300...

This GM rumor has some legs so I may have been a big early with my $27.50 puts on Friday but if it gets rejected from $31 again I will be picking up the $30 puts for $1 or less.

TRMP is a company I never bet against but NJ is shutting down and they in turn will shut down casino operations in the state as there will be no one to regulate them. Every day that happens is a million dollars (1% of profits) Trump will never recover and, even if the budget crisis is solved, increased sales tax or other tax concessions will worry investors as core customers may be forced to cut back slightly. The Jan $20 puts are a little pricey at $2 but they should degrade slowly enogh to let us out if the stock crosses the 50 dma of $20.35.

If the markets are heading up I am pulling the trigger on the rail stocks which should have another record capacity year fueld by ethanol production and a generally good year for crops.

BNI Aug $85s are such a rip-off at $1.55 that I would rather pick up the Jan $70s for $11.10 and sell the shorter calls.

CNI did not look good coming off its 50 dma at $44.30 but I like the Aug $45s for $1.05.

NSC is also looking ready to rock and the Aug $55s are $1.60.

In a related trade, after a very timely short last month, BTU is back on my buy list as the rails have to move a lot of coal to keep the rails running which uses more coal so they have to carry more coal which uses more coal... The Aug $60s are overpriced at $2.70 so I will only buy if oil holds $74 or above. FDG has been beaten down and the Sept $35s are a fun gamble at .55.

We know the oil patch is very strong when a scandal on Friday and falling production in Venezuela still lead to gains in BPs share price. That's what makes XOM's 1.6% drop on friday confusing... If they're going to sell the Aug $62.50s for $1.60, I'm willing to chance it. They can be covered with the current $60 puts for just .45 if you are worried.

CFK is another lagger in the oil patch with earnings up 53% this quarter. No options but a good company for $14.49.

DWSN had a tough time getting back over its 200 dma but, if oil stays high they should have no trouble with the 50 at $32 but, alas, no options at $30.77. Do options cause stocks to move quicker? Is it possible to make good money picking up otionless laggards after a trend begins? Let's keep an eye on these and see...

I'm keeping my eye on OII to see if it can possibly go any higher to guage oil sector momentum, NBR $35s look pretty good at .45 if OII and Valero agree.

If HOV continues to move up then we need to look at TOL and DHI. I am also watching middle America builder DHOM which has been very rocky of late as an early indicator.

MRB still lags the miners at $3.09. NAK may be consolidating at $8.79. Both should go much higher if gold hits $650 again.