Options Trader: Thursday Morning Ideas

by: Philip Davis

My weekend starts as soon as we start pulling back. We might not pull back (see earlier article), we should not pull back, but if we do then I will take the money and run...

It's been a good week; we have a lot of winners, and there is no reason to push our luck going into the long weekend. Also, options expiration (9/15) will be upon us quickly after the weekend, so no sense in letting things deteriorate if we don't have to!

Despite my earlier bearish article on gold and bullish article on the markets (below), I'm still concerned that we may be short-term overbought without more of a commodity pullback. The combination of $70 oil and $340 copper is not a recipe for a rally. We need another 10% pullback on each before I think the timing is right for a proper breakout.

The European economy is looking fairly strong, but Japan is slowing slightly. Bernanke will break the tie today, and I've already given him the go-ahead to use my "outsourcing is good for the global economy" speech in case he wants to get radical, but he might wimp out and go with the "shifting global paradigm" we discussed last weekend.

So, needless to say, we will be watching our technicals very carefully. I'd rather wait to see what the big boys do when they get back from vacation on Tuesday than place heavy bets trying to guess next week's direction.

Oil over $70 is as much a sell signal as any of our market technicals. Today is a day we want to see breakouts and, as I said, I will be getting out if we fail to do so:

  • The Dow is just under 11,400 and if my 12,000 call is going to come true by year's end, now would be a good time to break up!
  • I said on Tuesday that, "the S&P will have a hard time breaking 1,305," and it has been torture so far, but we did get a little peak yesterday.
  • Also on Tuesday I said, "The Nasdaq may top out at 2,200 on this run, anything above that is uber bullish."
  • The NYSE also bounced right off my 8,400 mark yesterday and, as I said before, the markets are just not strong enough to rally without breaking this level.

It's going to come down to Nasdaq leadership (or lack thereof) as the SOX gave us every reason in the world to be optimistic yesterday, making a 2 month high at 453. We need to watch this index very closely as 450 must now establish a floor while 460 may be a tough nut to crack on the upside.

The transports were just awful yesterday, even as oil pulled back below $69, actually dropping back down to 2,373 after grazing against 2,400 for 3 straight days. $70+ oil could seal the fate of this index, and they are likely to take the markets with them, as the Transports are generally viewed as a proxy for the overall economy.

Can oil hold $70? Perhaps over the holiday. We have a long three-day weekend for the world's scariest leader to say something crazy — and after Bush is done we might hear from Iran too!

Some clever oil PR guy got this little gem in Bloomberg yesterday, and if you think the people buying up oil yesterday didn't know about this, then I have a bridge I'd like to sell you in Brooklyn!

Bloomberg should be ashamed of themselves for featuring this sensationalistic nonsense, especially coming with such patently obvious market timing.

Our thanks to ZMan who posted this information in comments that is extremely useful ahead of gas inventories:

Gas Storage: Cooling degree days were 71, versus 72 for last week, so looking for a similar high-50 low-60 bcf (billion cubic feet) injection today. The CPC (Climate Prediction Center) has cdd's (cooling degree days) falling off a cliff to 59 through 9/2, so I'd bet on a 70-plus number next week.

Moreover, temperatures really drop in the producing region (Texas), where they have injected only minimally of late (2 Bcf out of 57 last week).

Combine that with all the rain on the east coast which helps cool things off and you get a big injection next Thursday. We're 13.5% ahead on storage to norms, and roughly 300 bcf ahead of year-ago levels.

Barring a major storm in the GOM, prices have got to come in promptly leaving analysts very vulnerable on 3Q E&P group estimates.

And to think I was just short because it hasn't been too hot, people are cutting back, and the inventories are full... I might make this guy my new energy correspondent!

Joy Global (JOYG) has earnings today; let's keep an eye on this one as an indicator of how much faith the miners really have in themselves. 70% of their revenue comes from coal mining (more volume, more broken stuff), so this will be my first buy indication for Peabody Energy (BTU). The earnings bar is set very low so I will be more concerned with top-line revenues than whether or not they have an earnings beat.

A 20% increase in sales is expected to $613M, and we already know coal is off for the quarter on decreasing natural gas prices. If Joy beats these earnings, it is likely that the metal miners are overproducing, and we can expect an excess supply in Q4.

If we break our technicals, it will be a good time to get into the week's laggards but otherwise there is nothing to buy until we get some firm indications.

California has broken away from the United States and joined the rest of the World in limiting greenhouse gases. This is not only great for the planet, but there should be a lot of plays to make here as polluters have to get their emissions in line pronto! Please send me any suggestions you may have (for instance Corning (NYSE:GLW) is a play in this market).

Electronic Arts (ERTS) announced deals for in-game advertising, but this will be a "sell on the news" kind of event as the revenues are pretty lame...

Tiffany & Co. (NYSE:TIF) missed! Sales were great (+ 9%), but margins were painful (-19%), perhaps due to renovations in NY.

Somebody did a study and decided .it costs you $20,000 a year in medical costs to live the extra 7 years we've gained since 1960. Good news for United Health (NYSE:UNH) and Sunrise Senior Living (SRZ) I suppose...

Today's Picks:

  • Speaking of SRZ, those Jan $30s are starting to look good at $2.70, up 20% from our 8/11 pick, which may have been just a little ahead of itself (but that's why we went with the leap!):

SRZ 1-yr Daily Chart
  • Harrah's Entertainment (HET) is buying London Clubs Casinos for $530M, giving them 6 UK locations plus 5 under development, 2 in Egypt and one in South Africa for less than $37M each. Harrah's generates an average of $6M net from each of its 40 current properties, and even if you cut that number in half the deal is still coming in at a 30% discount to current operations. There is no reason to worry about the Jan $65s, currently at $2.85 (up 30%) but we may get a chance to pick up the Oct $60s for $2.50 or less.
  • Royal Caribbean Cruises (NYSE:RCL) says they are part of the 'Consolation Prize Team' and have raised guidance as nothing replaces a new home quite like a cool trip! If this calms down a little we should take a play, as they have been beaten way down on economic fears. If Carnival (NYSE:CCL) makes it to $46, then I would like the RCL Oct $40s for, perhaps .40.
  • Nokia (NYSE:NOK) is getting into the GPS game by acquiring gate5. Nokia says this will help double its navigation sales to $15M, a jump they seriously needed. I doubt this cost them very much, and it's a very good move, if nothing other than to keep their current suppliers in line! They needed an excuse to catch up to Motorola (MOT) and this should do it, so I like the Oct $22.50s for .45.
  • I saw Marvell Technology (NASDAQ:MRVL) on a milk carton yesterday, the SOX are looking for them! After our Micron (NASDAQ:MU) pick went through the roof, I always look to swap into a slowpoke rather than to keep riding the bronco, and I looked down the charts and saw this old friend. Apple (NASDAQ:AAPL) overcame multiple options scandals, but MRVL just can't find forgiveness. Let's take advantage of the very oddly priced Jan $21.25s for $1.10 which I really like, as the stock was at $36 last January.
  • We dumped our oil puts yesterday, and while I'd love to get back in, I just can't see taking more than a day-trade position ahead of the weekend. Chesapeake Energy (NYSE:CHK) and EnCana (NYSE:ECA) are still in play, and we need to see a nice build in natural gas inventories over 55 bcf. Anything higher will be bad for oil and gas, but the effect is likely to be muted until we get an all-clear on the war front on Tuesday. Watch Peabody Energy (BTU) at $44 for a good energy indicator!
  • BTU is looking like Apple looked at $52 when I waited too long to buy it, so I am going to take the $45s for $1.05 as insurance against my gas puts. Hopefully it will open a little lower, but if it breaks $44 I am in!
  • Don't forget about the BHP Billiton (NYSE:BHP) strike (8% of the world's copper) possibly ending today. We need to watch the action on this one. The Phelps Dodge (PD) $80 we took off the table at .90 has pulled back to .60, and doesn't seem likely for re-entry, but I might want to look at the $85 puts if they come closer to $1 (now $1.95) on consolidation news. This will allow me to sell the Oct $82.50 puts for $3.20 against the Jan $82.50 puts we hold at $6.40 to lock in a good position through the month.
Have fun today but keep your eyes open!