Options Trader: Monday Morning Ideas

by: Philip Davis

This is a great example of why we shouldn't short oil into a weekend!

It's also a great example of why it is good to get back to mostly cash pretty much every day in this market, it takes very little to push the markets over the brink doesn't it?

Tech led the Nikkei down 345 points today but the rest of Asia was mixed and flattish. Toyota was up again after Friday's illogical pullback. Europe is off sharply on the BP news (see earlier posts) and the US futures are in the dumper.

We may finally get a bottom test this week if the Fed adds insult to injury with a rate hike and no real indication of a pause (despite all of Steve's good reasons for a pause in Friday's comments). As I said earlier on Friday, I don't see how the Fed can pause for the sole purpose of helping us to finance $80 oil - the demand side has to be addressed and crashing the economy will take care of that just fine.

The war is ratcheting up in Israel and Lebanon rejected a UN resolution to stop the fighting but oil is being driven by the BP news more than anything and may test $80 again this week. Hopefully we will get a lucky escape on XOM puts as they own part of the pipeline that is being shut down and I am going to be very excited to short oil again at the higher prices.

Absolutely take those BP $70 puts off the table right away as that hit is pure luck!

We'll have to wait and see what kind of sell-off we get on today's disastrous news. If all is truly well, every single one of these levels will hold:

* The Dow's 50 dma is 11,043 but there is psychological resistance (we hope) at 11,200 and 11,100, which is also supported by the 200 dma. A move below 11,100 would be beyond bad!
* The S&P is very close to the 200 dma of 1,270 and then has 10 more points to fall to test its 50 dma but that is an inverted "death cross" so anything below 1,280 is a very bad sign there.
* The Nasdaq was all set to test the 50 dma again, as the bar has been lowered to 2,116 after Friday's failed attempt but now we have to see if 2,050 holds.
* The NYSE is the strongest index and is far above its 50 dma at 8,069 - if this breaks down, all hope is lost!

Of course keep your eye on the impact of oil and possibly gold stocks as strong gainers against an otherwise strong sell-off.

Oil, as we said, is rising rapidly but gold does not seem to be taking it very seriously so far. If oil breaks over $77, then gold should have little trouble breaking $660 and is already looking far too cheap with all these crises raging around us.

It is interesting to note that natural gas is continuing down in the pre-market despite the rise in oil...

I still like ABX and BVN and, of course MRB and NAK. The ABX Sept $32.50s are just 1.30 (a $1.06 premium) but we want to see gold get through $660 as recent action has been weak and a Fed tightening may cause gold to fall back to $620 so I would be inclined to pick up the Sept $30 puts for .50 as insurance.

This is a watching and waiting day but hopefully the markets can surprise us with a show of strength ahead of tomorrow's Fed meeting. An illustration of how hard it is to pick this market is the Wall Street Journal's quarterly summary of Economic Forecasting where expectations were nowhere near reality.

GDP was close to 50% over expectations of the world's leading economists (this is in just a 90 day period folks!), inflation was 35% higher than expected and the dollar was was 10% weaker. Forecasts for this quarter are for a 40% drop in GDP to 3% coupled with a 25% drop in the CPI (no evidence so far). They are already wrong about the 4.7% unemployment rate and it doesn't even make sense that they can forecast the above slowdown along with a 5% rise in T Bills!


I can't lose if I don't play and I'm not going to play today! Although there should be a lot of attractive buying opportunities, I want to see where oil ends up and the Fed is just too much of a wildcard tomorrow.

Let's keep an eye on:

CME, which may give optimists a second chance to get in on the S&P inclusion.

GOOG and Nov leap VIA, who announce a new distribution deal today.

DIS who hiked ticket prices for the second time this year, it now costs $67 for to go to the park for one day (up from $59.75 last year). Sales are up 10% this year on the first increase and operating profits at the park are up 36%. Disney reports on Wednesday and also runs ABC, still the #2 network despite a very bad summer. They had a quick test of the 50 dma on Friday and bounced right off so I like the $30s for .60 or less if they hold $29.60 but it's an earnings gamble.

AAPL still hasn't had the other shoe drop from the SEC but it may escape as they have been very public in their internal investigation and the amounts don't seem to be significant. The same cannot be said for 80 other companies currently under formal investigation and another 1,000 comanies that are thought to be "on deck" if this first round goes well for the SEC. There is an analyst meeting today and often there is some disappointment if the new announcements don't seem too exciting at the time.

XRX is showing the true benefit of lowering corporate tax rates as they take advantage of their recent $343M benefit to lay off thousands of workers (an offsetting expense). This is the second time they've done this recently and the workforce is already down 40% from its peak. Sales have been flat and profits choppy so it's a needed move but I'd rather wait and see if they can hit ambitious October numbers.

ADM was called overvalued by Barrons this weekend and that seems like a buying opportunity to me if they pull back well below $40.

Of course we need to keep a keen eye on oil shares. My bet is that they get sold off into the buying frenzy but, unless they fall well below Friday's close, I will take no chances and cash out my puts until this BP situation settles down (BP says the outage is "indefinite").

EP knocked it out of the park with a 15% earnings beat and is clearly on a positive track. Let's see how a real natural gas E&P story is handled by the markets. They also have a nice safety net of pipeline operations...

OXY is one I'd love to short if it moves up as well as HAL and, of course XOM but let's see where oil really settles first.

RIG has an analyst meeting this week and I will be watching this one with great interest as their earnings were a huge disappointment last week.

FRK's December $45s are still attractive to me at $1.65 as they make a nice proxy for homebuilders but do enough commercial work (which is booming) to surprise analysts in the next quarter (they have already matched last year's earnings with one quarter to go and the stock is off 20% from last years average and down 40% from this year's high).

JOBS announces tonight but my thoughts are, if they can't make money in this market, they never will and the trend has been towards never so it will be interesting to see how they end up but there is no way I would play this one either way.

AMT is a great company that may drop the stock options bomb this morning but the options are way too pricey to play the puts ($1.10 for $32.50 puts - a $1.85 premium!).

CPKI has a very low bar (.29) set for tonight's earnings at 10% under last quarter. This is another beaten down growth stock trading 30% below the year's highs and I think the relatively cheap eats they provide should do well in today's environment. Sept $25s are not a bad pre-earnings premium at $1.55.

PD will not have to up its offer for Inco as the fix is in and Teck's counter offer has been rejected. I think PD may have 3 wins this week: the deal looks done, RTP has a strike and if the Fed pauses the dollar dies and commodities go up. Sept $90s are $3.80 but I would get out/don't buy if we fall below $86.

MVL is confusing people with their outlook and earnings as analysts do not understand their new co-production model and how it will impact future earnings. I expect an upgrade this week so maybe the Sept $17.50s are the best play if they come down to under $1.

Citigroup pointed out that the sell-off of SNY may have been a bit overdone. I was waiting to see how they handle the 200 dma around $44.40 and I'm still waiting as I have no respect for Citi analysts.

HANS shareholders don't seem to want to wait until the conference call to execute the company, Herb Greenberg's favorite punching bag is getting hit for 16% in pre-market as meeting expectations (sales up 83%, earnings up 75%) does not cut it in a jittery market when your p/e is in the 50s. Now that they have options I will be watching action around the 200 dma at $30 with great interest.

The bidding over ANDW makes competitor PWAV look interesting to me. This is a phenomenal little company that has been beaten to death for the same reason as Hansen is going down today, just can't be good enough - in this case it was conservative guidance that did them in. There is a no brainer play on this one of buying the Jan '08 $7.50s for $1.20 and selling the Jan $7.50s for .70 leaving you in for just .50 with a year advantage on your caller.

If the war in Israel is so hopeless what is going on with TEVA? I know I picked this last month at $28 but even I am astounded at the action of the past 5 days - didn't anyone else think they were going to get their approvals?

Be super careful out there today!