Options Trader: Friday Morning Ideas

by: Philip Davis

Phil Davis submits: At this point it will be very hard to end the week badly! The Dow is up 250 points for the week and 66 points over 11,800 -- well above the previous high. I am still happy to just maintain yesterday's levels:

  • Dow -- 11,800
  • S&P -- 1,350
  • NYSE -- 8,500
  • Nasdaq -- 2,300

That's all we need to have an unblemished celebration that will take us into the weekend.

Asia went into the weekend fairly flat on light profit taking, and Europe is mixed as the ECB hiked a quarter point yesterday with another hike ahead.

The dollar held up well yesterday as most of the world still remembers a crazy guy is about to set off a nuke in Asia (I know, you've been so busy making money you forgot!). This does tend to worry people, and underscores gold's problem, as it used to be the obvious play in uncertain times.

Sentiment is moving towards the dollar and the seemingly unstoppable U.S. economy, a move that does not bode well for commodities!

I'm putting my foot down with this oil nonsense! If I hear one more "analyst" taking a 1Mbd OPEC production-cut seriously I am going to scream.

OPEC supplies the U.S. with 3.5Mbd, and 1M barrels represents 3.3% of their global production, so the net effect on us is 115Kbd or 800K barrels a week. Since we had a build of 3M barrels last week, and since demand tends to drop in the fall, this "cut" amounts to less than nothing.

Would OPEC be calling for emergency production cuts if it wasn't an emergency? They already shipped 6 weeks worth of oil at the old volume, they'll be cutting back over the next 2 weeks (if at all) on supplies that can't possibly reach our shores sooner than December, when we are not likely to be needing it. So of course it's an Emergency for them -- they already shipped us 2-3M barrels a week more than we need for the next 6 weeks!

That will not stop the press and the pump crowd from trying to convince you that an attack on a 50Kbd pipeline facility in Nigeria constitutes a global catastrophe that will disrupt pricing on the 50Mbd that are exported globally.

Today's Picks:
Let's keep an eye on General Electric Co. (NYSE:GE), Apple Computer Inc. (NASDAQ:AAPL), Texas Instruments Inc. (NASDAQ:TXN), Sears Holdings Corp. (NASDAQ:SHLD) and Motorola Inc. (MOT) to gauge the real market sentiment -- they will serve us better than the indices today!

We have some oil puts in place, and I put out a target price list last night on levels to watch, so we'll see if traders are willing to go long on oil into the weekend. If we can break back below $59.50 and stay below it I think cooler heads will prevail into next week and we could have another nice downward price adjustment.

It is possible the news of the "emergency" OPEC meeting may spike prices, but I will be taking that as an opportunity if we come in lower than our target prices.

Strictly follow the Valero Rule, but let's keep an eye on some of our old favorite oil plays -- these are extremely volatile and dangerous trades so play money only! If you make 20% or more today, it would be crazy to hold more than the profits over the weekend from a risk/reward perspective.

  • Baker Hughes Inc. (NYSE:BHI) Nov $65 puts for $1.55.
  • Chevron Corp. (NYSE:CVX) Nov $60 puts for .75.
  • Oil Service HOLDRs ETF (NYSEARCA:OIH) $125 puts for $3.10
  • Schlumberger Ltd. (NYSE:SLB) Nov $57.50 puts for $2.10
  • Tesoro Corp. (NYSE:TSO) $55 puts for .75 and the Nov $55 puts for $2.15
  • Valero Energy Corp. (NYSE:VLO) Nov $47.50 puts for $1.40
  • ExxonMobil Corp. (NYSE:XOM) Nov $65 puts for $1.05.

Have a good time today. If we start heading south let's go to cash. I'm in no mood to mess around because, all kidding aside -- the market is very toppy looking!!!

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