Options Trader: Thursday Morning Ideas

by: Philip Davis

Another day, another record open. That's how it looks early in the morning with the Nikkei up 100 points and the Hang Seng up 200 as high oil prices don't matter in Asia either.

Another thing that doesn't matter is Sony's 94% drop in net income. That's right, SNE made just $14.3M on a $429M cost of a battery recall as well as a 21% loss in the gaming division on the delays in the release of the PS3. For the year, profits at Sony are expected to be $673M vs. the $1.1B that was forecast just 3 months ago.

Devastating for Sony's stock? Uh-oh, that sounds like you've been thinking! Of course not! SNE gained .28 for the day as traders chose to focus on strong TV and camera sales and not on the $129M loss in the movie division, even with 12% more sales.

Sony Chart 26 10 06

It doesn't matter to South Korea that their unfriendly neighbor went nuclear, SoKo's economy grew 4.6% this quarter (hmm, maybe we should give Mexico the Bomb!).

Europe was also in a forgiving mood with a strong open this morning, as investors were undeterred by Royal Dutch Shell's (NYSE:RDS.A) 34% decline in profits and a widening of Russia's probe into their $20B Sakhalm project. Poor Shell, only a 4% gain for them today.

Shell Chart 26 10 06

Airbus won a $9.6B contract for 150 A320 planes from China, who chose to balance their trade with Europe since they made a little noise about it. Our government is far too busy to help non energy-related companies succeed!

Our own Fed has told us that the worst housing data since 1989 doesn't matter and the bounce in oil prices doesn't matter and a falling dollar just does not matter! Now we have some shocking data from a study that tells us the Fed doesn't matter!

I don't even know why I look at downside levels anymore, I don't think we've hit one since late September! The Dow will next break through 12,200, hopefully this afternoon as 12,000 becomes just another signpost in the rearview mirror.

We need to start taking a serious look at S&P 1,400 and think about what that psychological level will do for the markets as we break towards a 7-year high.

The NYSE is posting new records every day as well but the media tends to ignore this broad index as it was rebalanced at 5,000 back in 2003. To me that makes it a better, not poorer indicator...

NYSE Chart 26 10 06

The Nasdaq will once again lead the way, and a break over 2,378 will put us back over the top for the year! The last time the index was at 2,400 was 2001, when it was on the way down from 5,048 on March 10th 2000.

In addition to the transports and the SOX, let's keep a very close eye on the Bankers Index, which should give us an early indication of this rally running out of steam. After watching it this week I'm not going to be concerned unless it falls below the 50 DMA, but earnings have been mixed in the group so far.

Bankers Index 26 10 06

See Tom's excellent commentary, on the subject but I'll be using Morgan Stanley (NYSE:MS) as a canary-in-the-coal-mine to keep an eye on the brokers as well.

The SEC is investigating 27 mutual-funds and service providers like SBC and BSG who are involved in a huge kickback scandal

Exxon will tell us exactly how great life is for an oil company and I've decided to look at OPEC from a U.S. oil bull perspective: Your competitor is going to cut production in order to keep the price of a product you sell as high as possible. You can still sell as much as you want, and, it is very likely that if prices fall further they will cut back more, giving you an even greater share of the market. Neat isn't it?

So no more being down on oil! Sure it's a scam, but it can be our scam if we stay on the right side of the Valero Rule and stop trying to outthink the market (remember Thinking = Bad!). Let's look for oil to break over my $61.69 mark and prepare to get really bullish if we get over the $62 mark, which has served as a ceiling since September 20th.

Gold is another scam but, other than the cartel of miners who buy each other up to limit production, it doesn't hurt the general public as it's strictly up to an individual investor if they feel more comfortable with a shiny lump of metal in the safe than government backed securities. It didn't work for Mr. Howell, but it may work for you!

If gold breaks back above $600 all bets are off on commodities, but let's keep an eye on Barrick Gold Corp. (NYSE:ABX) (11/2) who should beat estimates and will raise guidance if gold surges. The $32.50s for .40 make a nice earnings play.

My pals at Northern Dynasty Minerals Ltd. (NYSEMKT:NAK) are getting no respect at $6.42, and let's watch Metallica Resources Inc. (MRB) at the $3 mark -- both are right were we first picked them up on 9/18 when gold was $570.


We really have to watch and wait ahead of the GDP as all bets may be off tomorrow morning, but let's get ready to consider some plays for tomorrow if things do, in fact, go well. Of course, we don't play any upside plays if our indicators are going against us!

Congrats to Berkshire Hathaway Inc. (NYSE:BRK.A) on going well over the $100,000 mark. This was my One Stock to Own for 2006 and, although some have done better, none made us feel safer!

The keep raising guidance on Amgen Inc. (NASDAQ:AMGN) and they keep beating estimates. This week it was by 6% in a year that is looking like a 20% gain over last year when the stock peaked in the mid $80s. Estimates for next year are for another 15% gain so I will balance the $75s for $1.70 against the Jan $70 puts for .80 as you can never be sure in Biotech!

The CAT (Caterpillar Inc. (NYSE:CAT)) is coming back, and I think people are starting to get that the world economy is, in fact, growing. They've hurt me before, but I love them enough to give it another chance with the Dec $60s at $3.50, stopping out at $59.75.

I only needed one more excuse to buy eBay Inc. (NASDAQ:EBAY) and Hewlett-Packard Co. (NYSE:HPQ) accepting PayPal is good enough! The Dec $32.50s for $1.50 will give us a look at how they handle the 200 DMA at $32.83.

MGM Mirage (NYSE:MGM) (11/2) is looking very strong and the $45s are .80.

ExxonMobil Corp. (NYSE:XOM) had another blockbuster quarter -- that is officially that for oil puts unless the price drops significantly below $60!

If you are sitting on a lot of dead November puts you are in luck! Luck I say because you have a tremendous advantage over people who are just coming into the market -- your calls are already covered! That's right, you can make bullish oil plays against your puts and limit your downside. In most cases you can buy up to half your total put contracts in calls with little downside risk.

Who do I like in a bullish oil environment? Subject strictly to the Valero Rule:

Patterson-UTI Energy Inc. (NASDAQ:PTEN) is a standout and looks ready to break its 50 DMA at $24.40 and the $25s are just .65.

Newfield Exploration Company (NYSE:NFX) is still far below last year's levels and had a small beat today but very strong underlying numbers and I like the Dec $45s for $1.35.

Compton Petroleum Corp. (CMZ) has no options but I like the stock at $11 with a stop at $10.75 if it crosses under the 50 DMA -- no need to think with that one!

TODCO (THE) (11/2) has high expectations but, if they hit the 160% gain that is expected of them, people will feel very silly not buying the stock for 40% less than its May high of $53. I like the Nov $40s for $30 as a high risk/reward play.

Anadarko Petroleum Corp. (NYSE:APC) (11/6) has limited expectations as costs are expected to damage earnings on roughly flat sales, that's not going to matter if oil is heading back up and the $50s are just .60 and well off the year's high of $56.

Oil States International Inc. (NYSE:OIS) (10/30) fell off a cliff in September and has retraced nicely. If it makes it past $30 it should have clear sailing to resistance at $32.50. This is another scary stock but, if you already have some oil puts, then the Dec $35s for .20 make a nice balance against a bull market.

Transocean Inc. (NYSE:RIG) (11/2) is set to tell you just how good the ocean drilling business is and with the rates we've seen it looks like everybody's pumping for all they're worth. RIG doesn't care if the price of oil goes down, as long as it's high enough for people to afford the rigs! It's a long way back to $90 so I like the $75s for $2.05.

With all these plays I will be adding Cheniere Energy Inc. (NYSEMKT:LNG) to the Valero group. We made a ton of money on LNG going down and if anything is going to be a sign of irrational spending in the energy sector, it will be a resurgent interest in this wild scheme to freeze natural gas to the point of liquefying it so we can ship it across the ocean even though we already have more of it than we can currently store...

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