Options Trader: Friday Morning Ideas

by: Philip Davis

Options Expiration Day!

Have a nice Weekend - end of column.

Ok, I'll say something...

Nothing that happens today is real. We have chased the white rabbit through the looking glass after eating a mushroom and pretty much anything goes today.

I will not be surprised if we have a massive sell-off nor will I be surprised if we have another huge day. The healthiest thing would be to have a sideways day which would set us up for a good week next week as a big gain will certainly lead people to think we are overbought (see Trader Mike's 8/17 post).

Is Apple overbought? It was at $50 on July 15th. Just last Friday it was at $62. The p/e is 31, about double the S&P average. I'm going to say right now that it isn't Apple that's too high, it's the S&P that's too low!

First of all, we are 20% below the normal S&P p/e of 18, second of all forward earnings are based on a worst case scenario: Rising oil, higher inflation, runaway material pricing, rising labor costs, slowing productivity, war(s), terror, Sarbanes-Oxley, rising consumer debt and slowing consumer spending in a collapsing housing market. Did I miss anythng other than the slowing global economy?

What if some of these things don't happen? Have we even considered that?

OK, back to work then...

Asia was up outside of China - the bank of China raised rates .27% in another move to slow that economy. In the real world, that should hurt commoditiy pricing but we will have to see how things go here in Wonderland. Europe is flat and waiting for US direction.

We held our levels very nicely yesterday and hopefully will today as well. Holding 11,300 would be just fine on the Dow and its amazing that the S&P is holding 1,290 and the NYSE is right between 8,300 and 8,400, up from 7,824 on July 17th. The Nasdaq needs to hold 2,150 today to make me a believer.

Lets watch the SOX and the TRANQ for early trouble indicators. The transports rest right on resistance at 2,450 and will be a big surprise if it breaks up before the weekend. The SOX are on their own special journey but got big rejection at 450 yesterday afternoon.

Tech will take a hit today as Dell is blaming "market conditions" for its troubles. I guess their market is on some other planet than HP's as HP raised guidance considerably. If this causes a sell-off in HPQ then BUY!!!

Oil traders are hanging their hat on August 22nd as that is the day that the 12th Imam is supposed to return to earth and Iran has chosen that day to respond to the UN deadline on its nuclear ambitions. Apparently no one is betting that the Imam is going to usher in a new era of peace and prosperity...

If the world does not end on Tuesday, we should certainly short oil on Wednesday but I may pick up a few puts on Tuesday afternoon, just in case. Until then, oil may hold $70 on this new and even more ridiculous than usual fear factor.

Copper broke below its 50 dma yesterday and, in an amazing coincidence of timing, BHP's strike talks broke down and the mine is being totally shut down, knocking out another 4% of of the world's copper supply, enough to bring the price right back up. Now I'm not county BHP's money but in 2004 they made $1Bn and in 2005 they made $4.6Bn and this year they are likely to make more than $6Bn on rising copper prices (held up by a series of strikes). They are refusing to offer workers more than a 3% raise.

They don't have to shut down gold mines because gold is easy to shove into storage when you make too much of it and there is so much of it around that we put it on chocolates and in drinks and plate very expensive stereo cables with it. Gold prices are based on perception of value as there is certainly no need for it in the grand scheme of things.

Gold last peaked at $800 an ounce in 1980 but was less than half of that in 1979 and 1981. If gold breaks back below $600 then I will have to predict that next year we will average under $400 an ounce and that all other commodities will follow suit. It's nice to know that pretty much any stock you bought in 1979 was pretty much a double by 1984 (Macintosh introduced - see how it all comes full circle?).

UBS is blaming the US consumer for the coming global slowdown. Realize that these studies are at least a month old beforre they publish them but people will take it very seriously for a day or two.

As I always say, don't short oil into a Jihad, so it looks like we need to take profits off the table on any uptick despite the fact that the fundamentals all point down for black gold.

I am just watching today, mainly in cash into the weekend, unless some of these picks get too cheap to resist.

WiFi on planes took a big step back as BA throws in the towel on its $1Bn investment in Connexion. All that stuff they've been promising us just doesn't really work very well and they are going to give up (I think WiMax may be a factor but that's just speculation). I will take advantage of any pullback to pick up Sept $80s, currently $1.50.

TIVO won an $89M suit against DISH which bodes very well for the company in further patent disputes. The Sept $7.50s are expensive, even at .25 so you are better off owning the stock at $6.25.

Goldman Sachs downgraded Dell to sell (must be a reader) so we may not need to rush into selling those $22.50 puts we picked up yesterday but don't let a 500% gain slip away and please do not let an in the money option trigger on you!!! Realize that this is a $51Bn company that will lose about $10Bn in cap today which can only weigh heavily on the indices.

I'm not clear on the celebration ocurring with the tobacco companies as they have been found guilty of RICO violations. While they may have escaped this lawsuit, the potential for damages on further suits is staggering and criminal indictments may be rocking that industry. I'm going contrarian with the BTI Jan $55 puts for $2.60 and will take the MO $80 puts for $1.50 or less.

Good call taking Merck off the table wasn't it? Sometimes we get lucky...

TSO is another one that should be taken off the table, the .50 entry on the $70 puts is up to $1.90 - I took mine yesterday and holding it on a Friday is just pushing your luck.

GPS is also chipping in to bring the retail run to an end with awful forecasts but it's based on their own internal issues, not market forces.

TOL reports next week so let's see if they hold the 50 dma at $25.50 into the weekend. Dollar strength is driving rates down (you don't short the dollar into a Jihad!) so it will be very interesting to see how this sector shakes out.

Have fun today, don't take things seriously - it's bound to be a trip.

- Phil