Options Trader: Tuesday Wrapup

by: Philip Davis

Phil Davis submits: I'll tell what doesn't matter -- today's action! It doesn't matter what the Dow did (new high), or the S&P (another high), or any of the other indices did today. It doesn't matter that the transports broke 2,600, or that oil dropped to $58.45 (down $1.50), or that gold fell to $572. It just doesn't matter because it's officially earnings season!

That's right, it's put up or shut up time and for Dow components like Alcoa Inc. (NYSE:AA), who put up a 19% gain in revenues and an 86% rise in profit. It just didn't matter because it was less than analysts expected, and they sold off 6% in after hours trading.

Genentech Inc. (Private:DNA) put up a 58% rise in profits, which doesn't matter when your P/E is 56, and they went down 1.8% in AH trading.

When you are at record highs, you need record earnings to support them!

One company that won't be setting any records is Legg Mason Inc. (NYSE:LM), who took a whopping 9% dive this evening as they lowered guidance due to acquisition fees and "less-than-expected revenue." As B4 suggested in comments, perhaps that housing bet didn't pan out...

Tomorrow we hear from Dow component Monsanto Co. (NYSE:MON) (expected to lose .21) and Infosys Technologies Ltd. (NYSE:INFY) (expected to earn .32 -- up 23%) before the bell as traders scramble to read the tea leaves off these early reports.

We also hear from my selection, Gannett Co. Inc. (NYSE:GCI), as well as Host Hotels & Resorts Inc (NYSE:HST), M&T Bank Corp. (NYSE:MTB), Ruby Tuesday Inc. (RI), Yum! Brands Inc. (NYSE:YUM) and Sealy Corp. (ZZ).

I doesn't matter if you're a builder, unless you also have options scandals, as KB Home (NYSE:KBH) found out today. They "only" went up 2% today, while many in their sector, including, of course, Toll Brothers Inc. (NYSE:TOL) ran into the 5% rule after DR Horton Inc. (NYSE:DHI) said sales were off 25%.

Does it matter if North Korea conducted a second nuclear test? Word is they might have, and one has to wonder how Drudge ran that story from an Australian paper a day in advance...

Bush says they will work to resolve this political opportunity right after the elections. Here's part 2 of the N. Korea post.

Today's Picks:
It was a rough day in the oil patch as most oil stocks went up, even though crude dropped all day long. Tom confirmed Suncor Energy Inc. (NYSE:SU), Schlumberger Ltd. (NYSE:SLB), Anadarko Petroleum Corp. (NYSE:APC) and Universal Compression Holdings Inc. (NYSEARCA:UCO) as plays that had chart support, and we started buying our puts.

We'll count this group as entered today, although we only took SLB in comments, but I will log them as follows:

  • SU Nov $65 puts came in at just .65. Our original Nov $65 puts stopped out at $2.50 (up 25%) as they lost 20% of their profits early.

***Important note for new readers: Please read "My Trading Policies" for a general idea about entering and exiting trades. If you don't know what rules I trade by, it doesn't make much sense to look at my picks.***

The most important rule in a choppy market is the 20% Rule:

Once a trade nets 20%, I immediately set a stop at a 15% gain. Making 15% on a short trade is a lot of money!!! Whether you make $5 or .05 per contract, 15% is still 15% and you need to be able to live with that.

  • SLB was one we waited for, with the Nov $57.50 puts coming down to $1.80 at 11:30, they finished the day at $2.
  • Anadarko Petroleum Corp. (APC) Nov $40 puts came in at .85 and the stock was strong all day.
  • Universal Compression Holdings Inc. (UCO) Nov $50 puts came down to $1.75 on fairly flat action.
  • In comments we also took Devon Energy Corp. (NYSE:DVN) $60 puts for .60 and .40, so we'll call it .50, and they closed at .45.
  • I got the Valero Energy Corp. (NYSE:VLO) $50 puts for .90 and they finished at $1.05.
  • The ExxonMobil Corp. (NYSE:XOM) $67.50 puts were irresistible at $1, now $1.15.
  • Credit to Zman with the unrecognized call of the day when, just after noon, he said: "Hmmm, very frustrating. I like those protective calls down here at $53.70 United States Oil Fund ETF (NYSEARCA:USO)." Sometimes you just have to go with those instincts, as the sector rallied just after that!
  • I called an official (and wrong so far) top on the markets at 12:29 with the Diamonds Trust Series 1 ETF (NYSEARCA:DIA) $118 puts for .55, now .60.

All October positions should have very tight stops at this point!

  • Sprint Nextel Corp. (NYSE:S) opened very low but went up so fast it was a no trade, too bad as it worked well!
  • We closed the XOM $67.50 calls at .90 for a nickel loss, insurance well spent!
  • We closed the Alcoa Inc. (AA) Nov $27.50s in comments this afternoon at $1.75 (up 84%), and (unfortunately it looks like!) let the Nov $30s ride at .65 (up 44%). It wasn't actually greedy to hold them as it was a roll of profits, but we'll see how happy we are about it in the morning... I did not think the earnings were that bad, but the AH traders disagree.
  • I raised the stop on the Google Inc. (NASDAQ:GOOG) Dec $400s to $40 and the Dec $420s to $25, as the profits from these more than pay for all the dead puts we have left!
  • Oil Service HOLDRs ETF (NYSEARCA:OIH) $125 puts are a great example of how we stop out properly. It opened at $4 (up 33%, $1), and I set a stop at $3.80 (up 27%), which triggered right away, an hour later it was at $2.60, about where it finished the day. Even though we wanted to take new short positions, you still need to protect existing winners -- regardless! We keep a stop at 20% of the highest paper profits achieved.

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