Options Trader: Tuesday Morning Ideas

by: Philip Davis

Once again we have a Tuesday which will set critical market direction.

There are some very confusing market signals so it will be very interesting to see which way things lead us. Asia is down a bit, Europe is up a bit and our futures look down but not with any real conviction.

There was no conviction in yesterday's market either, with a very low volume day in which we mainly held flat. Now that we have a new month perhaps we can get an idea of what the funds are thinking but August is not usually a very good month for the markets (last August was a 300 point Dow drop to 10,400).

It's all about the Nasdaq again which is painfully oversold but will probably get huge resistance at 2,125 and the Nasdaq still isn't going anywhere without their SOX which haven't been this coiled since late August 2004 when they exploded for a 30% gain in 3 months. The SOX picked up 10% last week and it may be late August before they are ready for another move up but, Summer fears aside, I think they are ready to rumble.

My new safety number on the S&P is 1,277, a big jump up but I am now calculating where we need to be to reverse the "death cross" that formed on 7/18. I really like what I see on the charts but what I don't see is the catalyst that will get the party started (I suppose the Fed could pause next week but it is now 65% expected). Getting to 1,281 will be a big deal as it will take out the July high and reverse a trend.

After a made for TV movie, 4 pseudo science reports on major channels and 16 CNBC special editions on the Bird Flu Pandemic - the real scientists at the CDC just completed a study and said it's really not that contagious. Tell that to TSN, who's stock is in critical condition along with PPC who are a better bet for recovery (but wait until after 8/1 earnings!). Should chicken come back in style (and it certainly hasn't from Tyson's earnings report) I think the whole restaurant sector may recover as one of the things that's been hurting profits is less orders for their highest mark-up item.

Maybe it will also turn out that oil isn't as scary as people think but now Israel is building up for a major ground strike and Chavez is talking about "cutting the US off" we may see $75 again. If oil can't break $75 on this news then we should be back to $72 this week or the Fed may have to push the market back down next week with another rate hike. As to the Israeli situation, it's easy to forget that Israel used to occupy Lebanon for exactly this reason - back in the 80s, Lebanon used to toss bombs at Israel and they got fed up and occupied the country for 18 years, finally bowing to International pressure and pulling out in 2000. Now that the kids are unsupervised they are acting up again, what a surprise! (link)

Keep an eye on gold which punched through my $640 target yesterday but again failed to hold it. If gold can't make $650 then there is not enough worry to keep oil at $75.

It's all about the S&P holding 1,277 today but hopefully not on the back of rising crude and commodities. We still need the Nasdaq to break 2,100 which would be a huge sign so let's keep an eye on INTC and which side of $18 it stays on. It would be nice if TXN breaks $30 and GE is always one to watch to see what the markets are really doing.

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Still not trading without the S&P and the Nasdaq holding positive, which is doubtful but I'm not ready to go bearish just yet either.

Speaking of restaurants, what the heck happened to CAKE? They delayed their financials to review option grants, a serious red flag these days but the sell-off from $39 in February to $22 seems a little extreme, even if growth is slowing. Cake's major problem is that they ran out of ideal malls and, rather than take a break in expanding, they bit the bullet and put stores in more marginal locations. I think they learned their lesson and they are far from saturation (105 restaurants doing close to $2Bn in sales) so the Jan $25s look good at $1.40 but stopping out if the stock goes below $22.

Another chicken stock I've been hoping to catch a bottom on is BWLD who reported 30% earnings growth on 27% more sales last week but guided earnings down a penny out of 30 which caused the stock to drop 20% to $32. Silly market! This is not an optionalble stock or I would play it all the time but if you like to buy stocks, this one is fairly safe with a stop at $30.50 (-5%) and about 15% to go up before testing resistance at the 200 dma of $36.

EK had a big miss, looks like we lucked out not entering that trade yesterday! I picked it because I felt it hasn't got much farther to fall in a worst-case scenario and this will certainly test that theory...

HD didn't have much of a move yesterday and here comes a hurricane so the Sept $35s, still $1.10 remain a good bet.

VG lost $1.16 for each $7 share but says they might make money in 2008 but that sounds like another $3 per share down the drain between now and then to me. The people who bought the IPO at $15 in June cannot be thrilled. The company only has 250M in the bank (and more in debt) so I don't see how they will make it without a secondary.

Speaking of companies that will be profitable in '08, Sirius reported an even bigger loss this quarter ($237M) which was in-line but revenue was way up to $150M from $52M on a 15% jump in subscribers (yes, in one quarter!). XMSR lost $232M on Thursday and jumped 20% so we will see if SIRI is similarly rewarded. The Jan '08 $5s are up a whole nickel since we picked them to $1 while the stock is up nicely from $3.85 where we entered.

In one of those quirky things that happen in options the VIA Nov $35s shot up to $1.95 while the Jan $35s are still just $2.15, if you can spread them for less than .40 it should be a great trade since you only have to make a dime for a 25% profit and the Sept $35s are $1.15 to give you an idea of the proper premium.

AQNT options are holding up despite the stock going down and the Aug $22.50s are a bit pricey at .70 but it should be a wild day coming into earnings tonight. Perhaps smarter to own the stock for $20.50 and sell the $20s for $1.80 which gives you a 10% downside cushion and the likelihood of being called away with a 9% profit.

ELN came in just as expected and should get a nice bump today but not so much as to put the $15s into the money.

SHLD (8/14) is close enough to the 200 dma that we have a clear exit/don't buy at $132 and the Sept $150s for $3.50 should have a good risk/reward for the next two weeks.

I advised a GM put position in comments yesterday as it topped out at $32.60 and the $30 puts will make an interesting play at .50 today if the auto sales report is bad.

Cramer favorite, JOE reported in line revenues 25% off last year but dropped guidance by 25% with a range all the way down to a possible .70 vs. $1.16. This will be a good test to see if real estate has really hit bottom yet.

WFMI is still a grocery store, much to the surprise of 13 out of 17 analysts who think a p/e of 50 is good for their clients. I've been against this stock since we took the $140 puts in November '05!