Option Trader: Monday Wrapup

by: Philip Davis

Phil Davis submits: Obviously I'm not surprised by today's action. It was a little surprising that oil's drop didn't do more damage to the overall sector, but it looks like the majors are acting like big battleships that are slowly taking on water and listing just slightly to the side.

The Dow made some very ugly topping action from a candle-charting point of view (or any other view, I would imagine!) as it failed to hold a new high for the 3rd consecutive session but with the bulk of today's trading taking place below Friday's close.

Usually it takes a 100-200 point sell-off to get back on track from this point but, with the 50 DMA way down at 11,400 and the 200 DMA at 11,150, I wouldn't want to try to guess a bottom if we do start heading down.

The S&P had a similar disappointment, as did the NYSE, while the Nasdaq gave us leadership, but not the direction we wanted.

SOX and TRANQ say we're not in breakdown yet, but it won't take much to push us down, and it looks like the SOX, in the very least are heading into some rough waters.

Today was a low volume day with enough traders taking the day off to slow things down, and I can't imagine showing up tomorrow after today's action with a BUY BUY BUY button on, so let's wear those hard hats for tomorrow's trading!

The ISM, which I said I was worried about, did come in a little light and that, coupled with last week's negative reports sent the bond yields down. Normally, that would give an automatic lift to the financials, but it didn't, and that should concern everyone...

Oil took a nice little drop as Nigeria and Venezuela misplayed their hands by declaring their own production cutbacks. It was a poor chess move as the amounts (totaling 200Kbd between them) were laughable and indicated a lack of unity on OPEC's part.

Also, they fail to grasp that less than $45 of the current price of oil is based on the commodity while $15-25 is still based on the fear of supply disruption. Once they start proclaiming they have enough spare capacity to cut production, they do more damage to the fear premium than they do to prop up the underlying commodity.

No one is worried about the gold supply; gold is unique as pretty much every ounce that has ever been mined in human history is still in someone's possession (the fleeting popularity of Goldschlager notwithstanding). Even though the dollar took a big hit today, gold still fell back below the 200 DMA at $596, so let's watch that line tomorrow.

Imagine the problems commodities would have had today had the dollar not given up half a point!

Today's Picks:

  • The jig may be up for Cheniere Energy Inc. (NYSEMKT:LNG) (both the stock and the whole concept), as more and more proposed sites question the wisdom of placing one of the single most explosive compounds on the planet in vast concentrated quantities near their homes. While I think the concerns may be overblown, you can't ignore the impact on investment intensive stocks like LNG. There are also huge cost overruns globally, and projects will die on the vine with natural gas below $6. Our Jan $30 puts are well in the money at $3.60 (up 22%).
  • Danisco A/S (NYSE:DCO) stopped out at $18.55 (up 4%).
  • Dell Inc. (NASDAQ:DELL) Jan '08 $7.50s had an iffy day and, although I'm a big believer -- I'm also not an idiot, so I'm going to set a tight (.15) stop on 50% of the position at $2.10 (up 62%).
  • I'm not sure why we took the Genentech Inc. (Private:DNA) puts; doesn't look like we'll need them as the $85 calls are already $2.15 (up 59%), nicely offsetting the .25 loss on the $80 puts.
  • Corning Inc. (NYSE:GLW) Feb $25s stopped us out at $2.05 (up 41%).
  • Southern Copper Corp. (PCU) $95 puts we sold are down to $3.65 (up 40%) and we should set a .40 trailing stop.
  • Public Service Enterprise Group Inc. (NYSE:PEG) $60 puts rewarded a long, painful wait by shooting up to $2.15 (up 36%), an amazing turn from last week!
  • PetMed Express Inc. (NASDAQ:PETS) stopped us out at the open at $10.37 (up 8%).
  • Starbucks Corp. (NASDAQ:SBUX) forced us out of the $35s at .50 (down 17%).
  • I cannot accept the drop in Shuffle Master Inc. (NASDAQ:SHFL), but a sensible person would get out of the Nov $30s at .35 (down 46%). I'm doubling down. Fun Fact: The Jan $30s are $1.05!
  • Oh what a feeling for sticking with those Toyota Motor Corp. (NYSE:TM) Jan $115s, now $4.20 (up 68%). I'm setting .40 trailing stops.
  • Washington Mutual Inc. (NYSE:WM) bought Commerce Capital, and the $50s are back to .90, and will have a rough week, but buying banks for cash is what they are supposed to be doing so I will stick it out.
  • Yahoo! Inc. (NASDAQ:YHOO) is just torture at this point! I'm not even going to talk about it but we may have to give up if the markets keep heading south (not the '08's, just the short calls).

Let's keep a very tight stop on the many nice oil puts we have in play (see spreadsheet). Watch the Valero Rule and please take half of a double off the table before it goes below 85%!

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