Options Trader: Tuesday Morning Ideas

by: Philip Davis

It's tempting to go long, it's tempting to go short and, much like the scarecrow in the Wizard of Oz, my open portfolio points both ways because I really don't trust my brain to make a decision yet.

We have multiple calls on Gannett Co. Inc. (NYSE:GCI), Johnson & Johnson (NYSE:JNJ) and Yahoo! Inc. (NASDAQ:YHOO) with multiple puts on Google Inc. (NASDAQ:GOOG), brokers and energy.

Half our calls are 90 days out or more, as we expected a rough patch while we were generally looking for oil to fall off a cliff in the next 14 sessions.

The Dow might have fallen off a cliff yesterday if it wasn't for a very nice move by Boeing Co. (NYSE:BA), over Airbus' misfortune (which I predicted last year) and HP is also boosting the Dow with a huge relief rally (which I also predicted) but we'll see if the rest of tech is as optimistic today.

The Hang Seng was optimistic this morning but the rest of Asia was mixed, with energy and commodity shares dragging down the broader markets. Sony Corp. (NYSE:SNE) (another put we should have held) fell 2.7% on bad PlayStation news. Europe is down in anticipation of a weak U.S. market but it's a toss-up over here.

Obviously, the more the Dow doesn't break 11,750 (yes it's high but that's what it needs to do), the worse it gets. I'm back to where I was last month calling for a healthy consolidation that never came -- we can only hope I am as wrong this month as I was then when I grudgingly went bullish and we ended up with just 21 losers out of 137 September picks.

So far this month I am an accidental bear and the S&P is the only thing that can bring me out of hibernation with a break over 1,340. Anything short of that and I have no interest in getting back into calls. I think the energy sector still needs to shake off some value to free the other 85% of the S&P to make a meaningful move up.

The NYSE also bears (note to self, stop saying bear) close attention as it may make an early break for 8,400 -- below that and we face a test of the 50 DMA at 8,350. A break above 8,500 would be unexpected and great!

I don't think the Nasdaq can avoid a test of the very flat 200 DMA at 2,225, and that's 12 more points down. That spot has been great support since the 13th, which was the first time we broke back over our death cross s since the May 17th plunge.

Don't look for the SOX to save us as they look more like they will break below 450 than above 460 after a week of failing to get over it. I expect more from them as I am starting to see a lot of quad processor machines and you would think that once the number of processors in a computer catches up to the number of blades in a razor that tech should be hopping again!

Another sector that should be hopping is the Transports, but so far -- no good. If $60 oil and rosy outlooks from FDX and UPS doesn't make these guys happy I'm not sure what will.

Will a gap down open in oil finally get us below $60 for the day or will the pumpers come out in full force to defend $60? I think it will take an "emergency" conference from our own President to save oil today but, like I said over the weekend, I think the administration (and their backers) need the votes more than they need to make money in October this year.

"Market bubbles don't grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception." -George Soros

The dollar gained strength overseas thanks to Kim Jung Il's eternal quest to be taken seriously. This can't be good for gold and should keep the 10-year pretty low (will we test 4.5%?). If gold goes below $595 and drags copper with it, we could be in for a pretty serious commodity correction.

The Fed would be remiss not to take advantage of the flood of capital spilling onto the global markets and a rate raise is the prudent thing to do -- does Bernanke have the nerve to do it?

Tonight we'll see how confident we all are, and tomorrow is another ISM report, but we have to wait for the 12th to see the beige book with Fed minutes coming out the day before. The next FOMC meeting is the 24th but that's November's option cycle so let's keep our head in the game this month first!

Today's Picks:
Marvell Technology Group (NASDAQ:MRVL) is down for the 5th time on the same story and I think it's a buy down here. I was just looking at my recent comments on them and I sound almost schitzo but so is the stock and that's how we play it:

Aug 17th, MRVL at $21.25: "After running up 20% in 2 days MRVL just told 30M shares worth of new suckers that they are not going to be able to have a real earnings report as they have significant adjustments to make on options issues."

Aug 31st, MRVL at $17.78: "Saw MRVL on a milk carton yesterday, the SOX are looking for them! After our Micron Technology Inc. (NASDAQ:MU) pick went through the roof I always look to swap into a slowpoke rather than keep riding the bronco, and I looked down the charts and saw this old friend. Apple Computer Inc. (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."

Sept 21st, MRVL at $20.48: "MRVL stopped us out on the Jan $21.25s at $2.05 (up 50%). (this was actually the third time we profited on those since 8/31)"

  • I'm willing to go back to the well on those Jan $21.25s again but let's get out/don't buy if the stock breaks below $16. We'll check out the price of the Jan $18.75s in comments if someone reminds me to!

I'm advocating just watching today with some possible quick trades to take advantage of market currents sweeping weak (if down) or strong (if up) stocks along with them. In choppy waters like this I pretty much set a 20% of the profit stop as soon as I cross 20% with a 20% stop loss.

Also -- see "My Trading Policies," but I also do not advocate paying full price for any of these options, my goal, as always, is to find one that goes the wrong way and, assuming there's no news driving it, make a bid at a lower price.

  • GameStop Corp. (NYSE:GME) is probably not going to like the Sony news so a quick trade on the $45 puts at .90 makes sense if the markets are heading down.
  • I feel like a traitor shorting Best Buy Co. Inc. (NYSE:BBY) after getting a triple on it just two weeks ago, but that was then, and now I like their Nov $52.50 puts for $1.90 but not if this great stock goes back over $53.75.
  • If the transports are going to break then Continental Airlines Corp. (NYSE:CAL) needs to be a leader. If oil holds under $59 then the Nov $30s for $2.15 could be a fun play but get out/don't buy under $29.
  • Here's an interesting spread for the Arb crowd. SanDisk Corp. (SNDK) $55 puts are $3.80, and you can buy those and sell the $52.50 puts for $2.60, which gives you a $1.20 bet that's in the money by .70 with a $2.50 max gain. There's a test of the 50 DMA at $52.50 coming up very soon and it could go either way so don't fight the Nasdaq on this one!
  • Select Comfort Corp. (NASDAQ:SCSS) did some interesting market bucking yesterday, so I'm going to make this one of my few positive picks with the Nov $22.50s at $1.30, but I will have little tolerance for a loss. As with any positive play, only if we are following the S&P and NYSE up.
  • Infosys Technologies Ltd. (NASDAQ:INFY) is a little toppy looking, and I like the Nov $45 puts for $1.30.

We still have a lot of possibilities in the oil patch if crude continues down but keep a sharp eye on the Valero Rule as anything can happen into tomorrow's inventory report!

  • ExxonMobil Corp. (NYSE:XOM) $65 puts are .55 and the Nov $65 puts are just $1.25. We currently have the Nov $70 call to balance those out at .90.
  • Chevron Corp. (NYSE:CVX) is a very slow dropper and the Nov $65 puts are $2.50 (down 11%) but I liked them enough to pre-roll the Nov $60 puts, currently at .60 (down 8%).
  • Schlumberger Ltd. (NYSE:SLB) is just refusing to go down but in addition to our open October puts, I like the Nov $57.50 puts for $1.45.
  • We already have the Valero Energy Corp. (NYSE:VLO) $50 puts at $1.20 (even) and the Nov $47.50s for $1.35 make a nice pre-roll at this point.
  • Southern Copper Corp. (PCU) split today and let's see if people take that as an excuse to lighten up and (watching copper, of course) let's consider the Phelps Dodge Corp. (PD) $80 puts for $1.15, just looking for a quick in and out.

Read all of Phil Davis's articles on Seeking Alpha.