Options Trader: Tuesday Morning Ideas

by: Philip Davis

Is it time to get rally fever? The big boys come back today, and before I get too excited I want to see how they play it. If I had a hundred billion or so to play with, I would be waiting to see how the other big boys play it too, so expect some indecisive trading until someone makes a move, then a lot of following the leaders (think program trading).

Let's try to remember I am still rooting for a pullback as it will be very tough to just keep going up and up for the rest of the year. September is often a market disaster but, then again, so is August...

Asian stocks were down a bit today. But notably, Yahoo Japan was up 2.5% for no particular reason. The fairly reliable OECD(.org) sees European growth "slowing somewhat" in the second half but a pickup both here and in Japan. Stocks in Europe are trending down at the open, indicating there is still a lot of bearish sentiment on the US market.

The Dow made a huge move on Friday, but it could have been nervous short covering. Today will not give us the answer (unless that answer is blowing through 11,500 on big volume). I won't be upset unless we go back below 11,400, which is about where we started Friday.

The S&P needs to hold 1,305 but, as I said over the weekend, I expect great things in the year ahead. The Nasdaq must break 2,200 for us to get anywhere but could fly up once it breaks out.

Let's keep our eyes on the NYSE, right between 8,400 and 8,500 and the SOX, which have no reason not to at least test the 200 dma at 480 if we are having any kind of rally at all.

They found a bunch of oil in the Gulf. Timing is everything, yet the press never questions it as a project that has been in the works for 7 years ("today's" test has been producing oil for a month already) suddenly bears fruit on Tuesday morning after Labor day, just as the oil stocks are falling off a cliff...

Support for oil should be strong at $67.50, but a bounce below $70 will just be a consolidation for the next big down move.

Gold has a lot of support at $620 but may also be consolidating for a cliff dive below $600. I'm watching the overhead resistance at $640, as well as copper, which will have to slide as well in order for gold to move down.

The dollar is key to oil and gold this week. With Europe and Japan slowing there will be less external pressure for us to hike rates, so the dollar can actually go up without the Fed having to act.

We are close enough to resistance that I will be waiting for a solid, positive sign before committing more money, as we already have plenty of open positions. We should, in the very least, get a positive run at resistance. I won't even be around to trade today, but I will certainly be taking profits off the table if we fail tests and start reversing.

I'm sure there will be something to buy tomorrow if I'm back in cash!

Way back on July 24th I said about PETS at $10.80: "It's meds for pets—what could be more simple? 200 Million patients who can't sue you!!!" Now at $12.42 Barron's still doesn't get it, and focuses on the ownership struggle:

My penny pals at SmartVideo Technologies Inc. (SMVD) gained 28% on Friday, blasting through the 50 dma on news of a change in management (the same one we talked about a month ago).

Here’s a fun top ten list from Trader Mike’s Feed.

Ben Stein makes a point I’ve often said about BS corporate buyouts but he writes much better than I do.

Thanks to Chris for pointing this very good analysis of Gold’s demise from Bernie Schaeffer:

Today's Picks:
• We have earnings from Goldman Sachs Group Inc. (NYSE:GS), Morgan Stanley (NYSE:MS) and Bear Stearns Companies Inc. (NYSE:BSC) coming up, and they have pulled back of late, but I can't believe that BSC should be below the 200 dma of $131. I like the spread of the Oct $140s for $1.35 with the Oct $120 puts for $1.70 but I will take 30% more calls than puts.

• Force Protection Inc. (NASDAQ:FRPT) is a very interesting company. It’s already up a lot, but I like it for $6.50 until World Peace breaks out.

• Not part of the Consolation team, but Bed Bath & Beyond Inc. (NASDAQ:BBBY) is just too cheap at $34.25. The Oct $35s are $1.20, and the stock is trading just over the 50 dma of $33.60, which is your exit point. This is one I will hope to pick up for closer to $1 rather than jump right in.

• PW Eagle Inc. (OTC:PWEI) looks like it may be having an Apple-like breakout. The stock is already up 6x from last year but is on track to make $6 per share this year (P/E=5). Declining oil prices can only help the bottom line in this plastics based company. I want to play this one for a pullback by owning the stock for $35.75 and selling the Mar $35s for $5.10 (15%), hoping to retest the 50 dma at $31 so I can buy out my caller, but taking the 15% for 6 months if we don't.

• Yahoo! Inc. (NASDAQ:YHOO) Oct $30s are $1.35 and we can exit with a small loss if it breaks below the 50 dma at $29.35.

• Amgen Inc. (NASDAQ:AMGN) looks good with the Oct $70s at $1.45.

• I'm watching Walt Disney Company (NYSE:DIS), as I would love to buy the Oct $30s if the stock goes back to $29 again.

• Eagle Materials Inc. (NYSE:EXP) got way oversold with the builders, and the Jan '07 $40s for $2.75 give them plenty of time to bounce back.

• WOW! I am now so glad we are out of those Phelps Dodge Corp. (PD) puts!!! They dropped the Inco (NYSE:N) bid and got a $125m breakup fee for their troubles! PD also stands to collect another $350m if N sells to anyone in the next 12 months... The BHP Billiton Limited (NYSE:BHP) calls should do well today also.

• In the longer PD play, today should be a great day to buy out the Oct $82.50 puts we sold for $3.20 against the Jan $82.50 puts, which were $6.40 on entry. If PD doesn't break $95, I will hold—otherwise I'm out.

• I'm taking Intel Corp. (NASDAQ:INTC) off the table as I don't like job cuts as a success model.

• Florida Rock Industries Inc. (FRK) is consolidating for a move up but it might take a while.

• Dow Chemical Company (NYSE:DOW) Oct $40s are cheap at .40 if oil keeps going down.

• General Electric Co. (NYSE:GE), GE, GE - I'm not going to say it again. OK one more time - GE.

• ExxonMobil Corp. (NYSE:XOM) $67.50 puts for .65 are risky but fun!

• Chevron Corp. (NYSE:CVX) $67.50 puts or Oct $65 puts will be a nice play once they come down. The news has been baked into CVX since late June when they started the test. Market cap is already up $28b since then. Check on smaller partner Devon Energy Corp. (NYSE:DVN) (who were not counting on it) to see how great this really is.

• Other companies that have Gulf explorations in the area are Petroleo Brasileiro S.A. (NYSE:PBR) (2), BP (NYSE:BP), Chevron Corp. (CVX) (5 more) and Royal Dutch Shell (NYSE:RDS.A) (2). There should be some excitement about all these companies, but remember that this is very deep (2 miles), very expensive, and very risky (hurricanes) oil to bring to market.

Expect this to lead to actual talks with Cuba, who have this stuff a lot closer to shore than we do.