Options Trader: Monday Morning Ideas

by: Philip Davis

Well Ernesto's a bust and oil is down over a buck at $71.16 (6 am). Natural gas is already down 8% on the mornings wind direction...

If gold begins to decline (flat so far), we could get a real collapse in oil prices but we may have to wait a week as we still have the "sanctions" issue to deal with this week. The current doomsday scenario of the week, after no Armegeddon and no Storm of the Century in the past two weeks, is that Iran will respond to UN sanctions by blockading the Gulf and cutting off the flow of oil to the West.

As I said last week, we only get about 3M barrels a day delivered from the Gulf and we have a 250 day supply (at that rate) in storage. Also there is a congo line of tankers already heading our way so unless Iran can figure out how to recall them, we wouldn't even feel the first real effect of a gulf shutdown (highly unlikely) for about 2 weeks.

Asia was down a bit on concerns that the US economy may be finally slowing down (we will see when we get Friday's jobs numbers). Europe is having a mixed open but strengthening as oil falls and consumer news from the UK and Germany is surprisingly strong.

Our own indices are at a critical juncture but I have the same concern as I had last Monday, that we still face a week of continued consolidation on low, pre-holiday volume. Last weekend, on a lark, my friend and I checked whether there was any unusual helicopter activity coming in from the Hamptons to see if the traders were returning (they weren't). I should have thought to ask again as that is what it will take to get a rally going earlier than next week.

This is another one of those times when I would rather see a healthy pullback than a weak upturn. We are in the same consolidation range as last week:

* Dow: Support at 11,200 and resistance at 11,400.
* S&P: Support at 1,290 with a breakout at 1,330.
* NYSE: Support at 8,200 and resistance at 8,400.
* Nasdaq: Support at 2,100 with 200 dma breakout at 2,230.

I want to add Russell watch to the mix as that index is resting right on death cross support of the 50 dma at 697 with upside resistance from the 200 dma at 715 more likely to be tested. I like the IWM Oct $72s for $1.35 as it will be easy to get out cheap if we drop below the 50. Again, there is no need to rush into positions this week so I will be hoping for a pullback, not jumping right on any picks!

Tom has also go me watching he BKX, which made a very ugly downturn on Friday, possibly on hurricane fears but we may have a healthy retest of the 50 dma at 109.

Speaking of economies, one of the world's greatest growth stories, India, is aiming to hold inflation down to 5% this year as "robust tax revenue" and an 8% GDP growth has allowed the Government to balance their books and the Central Bank to raise rates to 6%. Salaries in India are up 33% in the past 4 years (helps pay for gas!). Boo, bad inflation!

We will see how well oil holds $71 today but I'm more interested to see if $72 can form proper upside resistance as it had been a fair floor all last week. While the daily chart looks like it may be done going down, I think we have to throw out the fear-driven data points and extrapolate a correction that should draw oil down to a more natural bottom, at least a retest of $69.

Gold will be the key indicator as we have no fundamental reasons for oil to go up so we just need to watch our for butterflies who flap their wings in Africa as well as insane political leaders (on both sides) who flap their mouths at the UN this week. Gold has fallen below the 50 dma of $623 so let's keep a sharp eye on that level but gold, like oil was held up unnaturally by fear for the past week.

We need to keep our eye on the possibly-soon-to-be-mighty-again Dollar as a breakout over the 50 dma at 85.65 could send it flying on a wave of short covering that can lead to a quick retest of the 200 at 88. A move like that can shave $20 off the price of gold and $3 off the price of oil very fast!

Here's what I see as a possible scenario with dollar stops in brackets:

1. I give the oil people US dollars in April (90) to insure that gas will be in my tank in October, there is a significant insurance premium that is not actually used in any part of the economy.
2. These dollars flood the market as the speculators put them to play on other commodities and the demand for dollars is low as consumers are handing them over to traders at the pump (83.6).
3. Now, we come to the end of "demand season" (now) and there is too much oil (85).
4. Traders begin to convert oil back into dollars (their loss is no problem to you) creating a huge demand for greenbacks (88).
5. The rising Dollar causes other commodities to sell off, further increasing the demand for more Dollars (92).

Keep an eye on the 10 year at the 4.8% level to test my newest theory, which I still need to come up with a catchy name for, perhaps we can call it Dollar does Dubai...
Still watching and waiting, let's keep those pokey weekend picks on the hopper but, just like last week, it will be very painful if commodities start to sell off without a serious change in leadership from a SOX-led Nasdaq or the Industrials or the Financials (unlikely if oil starts to tank as many firms are firmly on the wrong side of that trade).

Be super careful about there, the overriding strategy is still to stay mainly in cash, watching our levels very carefully. Take profits off the table before they retrace 20% (of your profit) as a repete of last week's up and down action is likely unless we get a serious uptick in volume.


I am mostly just looking, will pick up any real bargains but only if we hold our levels on the Russel and the S&P today.

Take the Valero Rule very seriously today. They knew the hurricane was a bust by 11 am on Friday! Take the emotion out of oil trading and let VLO, OIH, XOM, SU and OGX be your guide!

Bad Barron's cover for the Prof this weekend as they make a Buy Buy Buy call on the homebuilders. They probably wrote this when I made my slightly premature bullish call on builders last Monday.

Kinder Morgan raised their price target on Intel to $23 and upgraded them to outperform so our leaps should be in very good shape. We got out of our Sept $17.50s with a 200% profit already but the Jan $17.50s are still looking very good at $2.40 (up 50%). Oct $20s are the next stop at .45.

TIF will put my Consolation Prize Theory to the test this week as they report Q3 earnings. We are sitting on the Jan $35s for $1 and I'm hoping that nothing says "I'm sorry we didn't get that new house you wanted" like a little blue box from Tiffany! Aside from concern that the luxury buyer is paring back, there is a lot of fear that Blue Nile is taking market share but this is the same logic that scared everyone out of Barnes and Nobel when Amazon started selling books!

Of course we are pleased with our XOM $70 puts at .75 and we may want to consider the $67.50 puts again at .30.

Of course we get out of PEIX until we see which way the wind blows.

HD should get on a roll as Ernesto still looks like it will make landfall in Florida and those $35s were just .30 on Friday (down 40%).

ECA may be very, very good to us with the $55 puts at $1.60.

CHK is holding its ground in the pre-market and I will take advantage to double up on the $30 puts at .15 (down 50%) while I ride out the $32.50 puts at .90 (up 20%).

If you are in the ADM Oct $40s it may be cheaper to take the Sept $40 puts for .40 as insurance rather than selling as we should get a bounce off the 50 dma at $41 but below that is an absolute sell!

DD $40s for .40 are a nice play on oil moving down.

EBAY's train may be leaving the station on a new alliance with Google. I'm not chasing it but we will see how it handles the 50 dma at $26.50. I should have gone with my gut and picked it up on Thursday's sell-off.

WMT posted a 2.7% increase in sales which may not seem like much until you multiply it by $360Bn which gives you an increase larger than the total GNP of hundreds of nations. Still, it was so awful last fall I just don't trust them.

CAL will like a drop in oil prices with the $22.50s at $1.55.

The gyrations on LUV are ridiculous since they hedge anyway! The $17.50s are .25.

CAT options are a little pricey but I'll gamble on the Oct $70s for $1.45.

GE Oct $35s, on the other hand are .30, that's a 'mon back!

GM may crash the Dow as it is way overweighted in the index. Do not mistake the lame bounce off the 50 dma on Friday for a sign of strength.

RDS.A $70 puts are .40!

STX Mar $22.50s are coming back to $1.50 so I'll go there again.

SUN $75 puts look good for $1.25.