Options Trader: Wednesday Morning Ideas

by: Philip Davis

Every dollar oil falls is $20M-a-day that gets to work in other parts of the economy. A $20 drop in oil since our July high of $79.86 is $400M per day, $2.8B a week, $145B a year that becomes available for Sears Holdings Corp. (NASDAQ:SHLD), Wal-Mart Stores Inc. (NYSE:WMT), Abercrombie & Fitch Co. (NYSE:ANF), Gap Inc. (NYSE:GPS), Best Buy Co. Inc. (NYSE:BBY), Bed Bath & Beyond Inc. (NASDAQ:BBBY)...

We need to start thinking about the kind of things that benefit when you end the week with more money than you thought. Not big ticket items; the little things like movies, restaurants, something at the mall that people are inclined to pick up when Saturday comes and there's an extra $50 in their pocket.

I don't want to get too excited yet, but I have long maintained that the $1.7T annual global oil scam is sucking the world economy dry, holding back the very prosperity that made it possible to get us to believe we should/could pay $50 a barrel for oil in the first place.

There's nothing we can do to get back the $600B (just the U.S. payments of oil over $40 in the past 24 month) that we've handed over to oil companies, which they've transferred to foreign countries, some of whom immediately to use it to try to kill us. Iran alone spent over $200M last year to fund terrorist organizations (just 3M barrels -- a day's production).

Personally, I would rather arm my daughters to spend at the mall than hand my paycheck over to oil companies who feel it is their patriotic duty to enrich their shareholders (oh yes, and themselves) while ignoring the deadly byproduct of that enrichment. Click on the graphic in this link -- that's 3,300 dead (our side) in August in Iraq alone! "Only" 63 were Americans, so I guess we're "winning"! They don't even bother keeping track of Iraqi civilian injuries, but our soldiers are wounded (arms, legs blown off -- not just cuts and bruises) at a 10:1 rate to being killed, so you can only imagine the total carnage...

So let's not get all giddy celebrating $60 oil; that's still $30 higher ($230B a year -- U.S. alone!) than when this administration first took power. If they want to remain in power -- let's have a real plan for getting us back there!

The new administration in Japan isn't having fun today, with the Nikkei giving up 159 points. But having a guy shooting off nukes in your backyard is bound to make you a little skittish. Last time Mr. Il went nuclear, it was an excuse for oil to rise $15, way back in Sept/Oct. 2004, when oil first broke the $50 mark. We celebrate the 2-year anniversary of ridiculously high oil prices with yet another attempt by North Korea to officially join the nuclear club.

Although the last two nuclear tests were a failure, what will the market's reaction be to a nuclear explosion detonated by 1/2 of the remaining spokes on "The Axis of Evil?" Whatever it is, I'm sure Toll Brothers Inc. (NYSE:TOL) will go up!

Europe has decided to celebrate Dow 11,727 with half point gains across the board, very good considering the total meltdown of Airbus which now has to deal with conflicting turbulence studies. The EU is taking a swipe at Intel on behalf of AMD but after the Microsoft fiasco, people at Intel just aren't that worried.

Back at home -- we have our record, now let's see if we can hold it!

The Dow needs to stay positive to look serious today, but yesterday's rally turned a lot of technical indicators positive. In reality, anything over 11,700 is good and it will be interesting to see what kind of follow-through the components get today.

The S&P is still looking at a glass ceiling at 1,340 and falling below 1,330 will be a real caution sign so let's take that index very seriously!

As I said yesterday, the NYSE, which dipped close to the 8,400 level, gravely concerned me; we are watching that channel closely today.

The Nasdaq had an up day but also tested the 200 DMA at 2,225 for the first time in 7 sessions and we really, really, really don't want to see 2,224! The SOX lost a point yesterday and dipped below the 450 level, finishing below it for the first time since Sept 11th.

The transports also failed us despite a nice 1% gain -- still well below the triple top tested 2,500 level. We need to break 2,530 to show that we are serious, and, with oil down $8 since the transports were over that mark on Sept 13th, one wonders what the heck is wrong over there. TRANQ was at 2,843 on July 1st!

Oil is just below our nice, tidy 5% level at $58.75 so we can expect a "bounce" as high as $60.21 as a matter of course. $61.69 remains our worry-zone to the upside, but anything below that keeps us on a strong downtrend. $57.14 was my target price from 9/25, and who am I to argue with that guy -- he was on a roll!

It would be far healthier for THEM to let oil test $56 ($55.80 being the next 5% drop), but I don't think they have the nerve to test it so expect a big pump job today.

Gold did a power dive yesterday and hit it's 5% mark, finishing at $576.34 for the week that began on 9/28 at $607.30. I don't make these numbers up, the rule just forces them on us! Anything can happen to gold right now with a nuclear wildcard in play, so I'm not touching this (week 3 of that philosophy!).

I'm not even going to talk about this anymore as I have become the Chicken Little of the hedge fund industry but Vega Asset Management seems to have misplaced $3B since January on bad bond bets, but they intend to soldier-on with their remaining $3B. Just two years ago the fund had $12B. The $1.5B Vega Select fund lost 11.5% of its value in September alone.

Today's Picks:
It's another tricky day and I'm mainly in cash and just looking for some oil opportunities if we get a nice pump into inventories.

  • Toyota Motor Corp. (NYSE:TM) is on fire with a 25% gain in sales as they continue to wipe the floor with the U.S. auto industry. At this point we should pre-roll our Jan $115s into the Jan $125s for $1.10 to protect our double!
  • What the heck happened to our Sirius Satellite Radio Inc. (NASDAQ:SIRI) play? I just realized we never tracked it... Too bad because subscriber numbers are great and ahead of estimates while XM Satellite Radio Holdings Inc. (XMSR) has downgraded their projections!

There's a few good oil plays, paying strict attention to the Valero Rule as king -- Valero Energy Corp. (NYSE:VLO) lowered guidance yesterday. Inventories are out today so let's be super careful out there -- it is possible we will have a don't play today but we'll have to wait until 10:30!

I'm listing prices as the MOST I would pay as I'm not chasing anything and I'm counting on a nice pump to give me bargains today.

  • Baker Hughes Inc. (NYSE:BHI) still looks putable with the Nov $65 puts at $2.60.
  • Chevron Corp. (NYSE:CVX) is well above its June $56 lows so I love the $60s at .30 and the Nov $60s for $.90.
  • Anadarko Petroleum Corp. (NYSE:APC) is not looking too smart with that massive overpay for Kerr-McGee Corp. (NYSE:KMG) and they are already rolling notes The company hedged 75% of its production at $52 per barrel through 2007 to stave off a potential disaster, but they did a better job with gas at $7 per MBTU. Still, the shares are trading significantly higher than $52 oil would seem to justify, especially when you consider the $16B they paid for KMG, just 40% of which was over and above KMG's inflated June trading average. That makes the Nov $40 puts an interesting play for .75 and I'm going to take some Jan $30s for .15 just for fun.
  • Royal Dutch Shell (NYSE:RDS.A) is still in denial. This is the biggest, least noticed major aside from Total S.A. (NYSE:TOT). I'll take the $65 puts for under $1 as well as the Nov $65 puts for $1.25 if possible.
  • It's always time to buy more ExxonMobil Corp. (NYSE:XOM) as they stubbornly hold onto $65. .85 is my magic number for the $65 puts and I will take more $62.50s if they come down to .25. This is also the only protective call I want with the Nov $67.50s at $1.20 but I'm hoping for under $1 and even then it's hard to buy.

I'm also looking for re-entry on any of yesterday's oil puts at lower prices than yesterday's finish but, again, very strictly following the Valero Rule!

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