Options Trader: Monday Morning Ideas

by: Philip Davis

War wages on but the markets don't seem to mind too much.

I was reading the Times this weekend and there was an article on the war in Afghanistan followed by a page on Iraq followed by a page on the war in Africa (which we usually ignore but millions are dead) and then a few pages on the "I don't know how it isn't called a war" in Lebanon. It really is a wonder there is any consumer confidence but even Europe is recovering.

Remind me to invest in whoever makes bullets though...

Israel suspended bombing for 48 hours while waiting for Condi to work her magic but that message apparently didn't get to their Air Force which just dropped some bombs this morning. Oil was heading right down but a pipeline ruptured in Russia and Nigerian rebels forced an oil platform to be abandoned and there are heat warnings for the US (nat gas should shoot up) so it headed right back up again.

Asian stocks are still playing catch-up from last week and are up across the board while Europe is down, despite very good retail numbers in Germany and an apparent housing recovery in England.

OK, so I'm a little concerned in general and we are already in cash so let's see how trading plays out today before we go crazy. We are right about at key Fibonacci points in the indices so direction will be very key this week, hopefully we can get over this hump.

Will the Dow hold 11,200? Will the S&P break 1,280 while it absolutely MUST hold 1,271 (still creeping up)? Can the NYSE break 8,300 while holding 8,242 (the prior high) and can the Nasdaq break 2,100 (which will only happen if the SOX can make 415 but 420 would make me happier).

We'll keep our eye on oil today and see how it handles $74 which should form a good upside resistance if prices are really trending down. I've already seen that $73 will fall quickly and $72 is the next resistance level but current events don't look like they will give us a chance to test that theory unless we get a good inventory report on Wednesday.

Gold remains flat to the dollar, which itself is flat at the moment and that means the current oil bump is really being driven on the Nigerian and Russian supply disruptions rather than war fears. I think Nigeria is baked into the cake already so keep an ear out for a change on the pipeline status to time a move back down on oil.

The dollar will be in play this week after a big 5% drop last week and any combination of ECB tightening or Fed loosening will drop it below its 50 dma of 85.64 and we could be on the way to testing new 5 year lows around 80! The problem is that the Fed is in a no-win situation and probably has to keep tightening, no matter how much we suffer...


If the markets head down today I buy nothing
, unless they turn up but today is the last day of the month and many strange things can happen so I wouldn't read too much into a rally either but it would be very encouraging if we can shake off global concerns.

I was going to say I like PD in this environment but so do a lot of people now that the Falconbridge trade is off. I guess the analyst at Prudential read my column on Friday because they upped PD to overweight today and the stock is already up 6% in the pre-market. Those $80s for $2.25 are going to look like a real bargain today, but I'd sell on the morning bump as N is going to get competing bids. Hopefully PD will be smart enough to let this one go and get back to work.

We got out of COH a little early as Barron's gave them a nice article over the weekend but I wouldn't be comfortable holding that kind of gain into tomorrow's earnings anyway.

SNKD is buying Israeli firm FLSH for a 13% premium, not too bad, and both stocks should benefit but SNDK will now take a little on the chin every time a bomb goes off near MSystem's offices but it's a great play for both companies.

TWX is cheap enough to take the Oct $17s for .40 as I'm expecting an upgrade on the whole sector. There should be heavy resistance right around $17 so I would want to have an itchy trigger finger on this one.

VIA is very strong now that they have trimmed down and I think the Nov $35s are a great value at $1.30.

Record heat is causing the grid failures I predicted 2 weeks ago but not having electricity doesn't stop people from finally going to HD, LOW or BBY for fans and air conditioners. BBY (9/12) Dec $50s are $2.80 and should be stopped out at $2. HD is one hurricane away from $40 so I like the Sept $35s for $1.10 while LOW (8/21) Sept $30s aren't bad at .75.

In Friday's comments I mentioned Pfizer would announce a new CEO and it says a lot about the drug industry that they chose their General Counsel to run the company. I like it as our unfortunate reality is that litigation is a bigger concern to big pharma than curing cancer and this shows that Pfizer has their priorities in order.

XOM got an upgrade from JPM and I will be picking up some $67.50 puts if they dip below $1 as I think there will be some profit taking later in the week. There is also an appealing spread play of the Sept $70s for .80 and waiting to pick up the Sept $70 puts for under $1.

I eagerly await WFMI's excuse for this quarter's earnings but they are a little too beaten up already to bet against them.

AQNT is out tomorrow and I think the sell-off had nothing to do with them, just following techs straight down. Money is coming back into this sector and I think .11 (+10%) is a very low bar for earnings expectation as revenues should be well ahead (+25%) of last year. Google, Yahoo and Microsoft's reports clearly show that the pie is growning and Aquantive has a nice service niche to that market. It is risking a wipeout but the Aug $22.50s for .75 are a nice gamble.

Tomorrow is time for recent IPO BKC to put up or shut up. It will be very interesting to have something to compare MCD to now.

Something very strange is going on with CEPH which is losing 2 weeks worth of gains in the pre-market.

EK has a nice low bar too and the Sept $22.50s might work well at $1.10.

ELN earnings should be no great shakes but outlook should be great. Best bet is to buy it for $14.94 and sell the $15s for $1.40.

ERTS will be a big pointer for that industry tomorrow.

Be very careful out there today!