Options Trader: Wednesday Morning Ideas

by: Philip Davis

How are you all liking my cash out call on Friday morning now?

Ugh, Biff, Pow, Ouch! We need Batman cartoon violence balloons to illustrate what the market is doing to investors this week.

As I feared, we never formed a really good bottom and we are paying for it now with sickening pockets of weakness developing everywhere.

Now we are breaking below my Monday levels so go re-read Monday morning's post and let's rethink this bull thing! The Dow did not hold 11,200 but did take a nice firm bounce off 11,100 right at the end of day. You could say the Nasdaq bounced off of 2,050 but that would only be because it is so pathetic that you are just trying to say something nice while the S&P slipped back into the danger zone at 1,270. The NYSE fell back to 8,200 but had no qualms about hitting 8,150 by 10am this morning so I have little confidence in this level.

Exactly as we were worried about yesterday morning, gold broke $650 and confirmed that there really was something to worry about in the world and oil was able to hold just under $75 while decent economic news and signs of inflation put the Fed back in the race. Oddly, natural gas had a huge pullback (not so oddly as I mentioned a few weeks ago they have until Sept 30th before they have to shut down gas production due to oversupply) and we will have to wait until inventory tomorrow to see what the real deal is on oil.

Another factor that hurt the markets yesterday was some extensive interviews with Paulson who seemed to indicate he was going to say the same "Strong dollar, blah blah, China currency, blah blah, social security" that every Treasury Secretary since Hamilton has been BSing about. I believe it was Wimpy J Wellington who first said "I will gladly pay you Tuesday for a hamburger today."

Paulson needs to borrow $2Bn a day to feed his boss' debt binge spending habit and the world is wising up to our game and is asking us to show them the money and the Secretary will have no choice but to fire up the presses to pay down some of that debt.

Somehow people were surprised that auto sales were off from a year ago when the majors were practically paying you to take their cars ("employee" discounts) and no one seems to be buying trucks (another surprise to some).

So all in all pretty crappy isn't it? No, not at all! We have a war, and another war and another war and another war and inflation is at 5 year highs and the government is going bankrupt and housing is falling apart and corporate outlooks are disappointing and Iran and Korea are going nuclear on us and terrorists are plotting to kill us and the dollar is collapsing and a hurricane is around the corner... Biff, Pow, Blamm!

And all that does is take us down to Dow 11,125?!? Come on, bring it on!!! The Nasdaq was at 1,889 last year, the S&P was at 1,136 - this is a rally, not a funeral!

Like any good cartoon hero, look for the markets to make a sudden, unexplainable recovery just when you think it's all over. I don't know why they will recover, either lower oil or the ECB may pause or Fedspeak or whatever but don't get sucked into it today unless we retake the levels we were looking for on Monday!

I'm still expecting my bottom move and it may come soon, but it's always most exciting when the hero is holding onto the ledge with just one finger before he makes a spectacular recovery.


AQNT did even better than I thought with a 59% jump in net on 37% more revenue (about the same as on-line ads are growing in general). This is a 40% beat on earnings, even better than I expected. Those Aug $22.50s will not look pricey at all tomorrow but if you took the reverse trade and sold them you should at least be able to lock in 10% on a one day trade.

GM was the only downside play and it gave us a nice open and the $30 puts finished the day at .75 (up 50%) but this one is nowhere near done if the markets continue down today.

Those were the only makeable trades other than the longs we already had but this might be a good time to look at better bargains that are forming.

I will not be around today so I'm just going to restate that unless we retake the levels we were looking for on Monday, then these are day trade positions (take profits quickly, set tight stops). These are the ones I am still into on a market starts to turn but getting out quick if we can't hold our technicals:

CAKE bottomed just around my $22 target and the Jan $25s got tasty at $1.20.

The VIA spread is looking very good.

SHLD still looks nice with the Sept $150s up .20 to $3.70.

JOE did not drop (up 4.5%) on down guidance so I would say that the builders will be back shortly! Read the article, then look at the chart, then read the article and look at the chart again - this is a big bottom signal!

I like XOM $67.50 puts for $1, the Sept $70s are now $1.15 (up 45%) but I don't think I want to wait for the Sept $70 puts to hit my target so I'm adding on the $67.50s now, expecting Exxon to get a firm rejection off either $69 or $70.

TWX is giving us another shot at the Oct $17s for .45 (up .05) and they should follow the market whichever way it goes.

It's a good thing our Google play was halted by poor action because now the puts are starting to look really attractive!

IBM was also a voided call but I would love to pick up the $75s for around $1 if the opportunity presents itself.

BA made a nice statement Tuesday with a market-busting 1% gain. The $80s are reasonable at .95 but the Sept $85s look good too for .75.

Limbo contest winner EBAY (how low can it go?) is now 33% below its 200 dma of $38 as Vonage continues to prove that Skype was the overpay of the decade so far. Still they make $1Bn on $4.5Bn in sale and are growing top-line at 30% despite all the silly side projects so let's give them another quarter and pick up the Oct $22.50s for $2.75. In a pinch we can either get out or sell the Sept $25s for .75 or so to ride out another dip.

GE Sept $32.50s are .80 and make a nice momentum play as long as the stock can hold $32. I will take a 1/2 position here and double down if it goes to .40.

CYMI is buying back 10% of the company and the stock is way too low anyway. I've been looking for an entry on AMAT and noticed these guys are way more oversold. Read this earnings report and see why I Sept $40s for $2.10 even though its already up 15% since last week's silly bottom.

Perspective is very important in the markets and despite this chart, I'm still buying PFE Sept $25s for $1.35 - but only a little.

MGM has earnings today and I will be shocked if they deserve to be trading this close to last year's lows. Sept $40s are a little pricey at .50 but there is no way I'd pay $2.40 for the $35s on the off chance they miss. LVS also reports and that should be fun!

If MGM does well (ignore LVS) then HET (also at last year's lows for no reason) Sept $60s for $2.10 make a nice play.

If gold stays above $650 then MRB is still a bargain at $3.16. NAK might make a power move if it can break the 50 dma at $8.30 as well (currently $8.25).

The Nasdaq is 11% above last year's low but the QQQQ is just 5% higher indicating sentiment has falllen below reality. That makes the $37s a good gamble at .50 but getting out quickly if we fall below 2,050.

TIF has earnings at the end of the month and I rarely see it crossing COH like this so the Sept $30s for $1.85 make a nice earnings play. There is some danger that NILE is eating into TIF's sales but I think it will more affect Zales than top of the market Tiffany (I don't know any strippers named Zales...)

HUM is at an all-time high with a p/e of 33 and looking very strong. UNH is having a very hard time breaking $50 with a p/e of 18, trading 30% off last year's high. I like a slow entry (3/10 max) on the Dec $50s for $3 or less as we may need to retest $45 before we really get going.

Be REALLY careful out there today. Watch out for oil turning down and dragging the markets with it if the inventory builds are higher than expected (10:30). All of these trades assume a positive open AND a positive direction so don't just get sucked in by a strong open that sells off.

Keep your eye on AAPL, GE, SHLD and TXN for market sentiment, they should give the first downturn signals. If they don't join the rally, be super skeptical!

Have fun,

- Phil