Options Trader: Tuesday Morning Ideas

by: Philip Davis

Well the stock market limbo game was a bust -- just a quick duck under the pole -- so we'll see what games the market makers want to play today.

I'm in a good mood, Mrs. Jones is waking up on the right side of bed in pre-market, so let's see if we can make some progress with just 181 points to go for yet another Dow record.

Asia had a PMA (Positive Mental Attitude) today with the Nikkei taking back 47 points but, more significantly, the Hang Seng came back from a day off without even bothering to sell off. This, despite a real slowdown in Japanese consumer spending.

LG Phillips LCD Company Ltd. (NYSE:LPL), who made us 143% earlier in the month, is back on the move and I like the Dec $15s for .90 for a quick play.

Europe seems ready to play as well despite a huge disappointment from UBS AG (NYSE:UBS) and sanofi-aventis (NYSE:SNY). One thing hurting banks is a British law that allows a forgiveness of debts outside of bankruptcy. In an interesting turn of events, Ireland is actively seeking skilled U.S. labor to come and work there, as Europe's best expansion economy booms along.

We haven't liked BP PLC (NYSE:BP) for a very long time, and now the investigators are catching up with them as well. A Democratic victory on Tuesday should sent these guys back below $65 so I like

As we made no progress yesterday, we can just cut and paste yesterday's level watches, but I'll be looking for more upside indicators that we are getting back on track.

  • Dow over 12,100
  • S&P breaking 1,380
  • NYSE over 8,800
  • Nasdaq 1,375
The markets will need to overcome disappointment from Proctor & Gamble Co. (NYSE:PG), who did well but, as I warned yesterday, not well enough to match expectations. Archer Daniels Midland Co. (NYSE:ADM) beat expectations, and Eastman Kodak Co. (EK) was, as expected, so-so. To me all that matters is Cummins Inc. (NYSE:CMI) had a great quarter despite weakness in the auto sector, indicating that other parts of the economy are doing very well!

Any positive movement by the SOX is good, but they have a long way to go to impress us, while the transports are just 7 points shy of a real breakout.

Oil should help the transports roll today as it slides down below $58 as a conga-line of full tankers heading our way makes any OPEC action meaningless until after the holidays.

Don't be surprised that commodities can go down without dragging down the broader markets: this is what sector rotation is all about! Energy stocks make up 15% of the S&P and, even if they drop to 10%, the money doesn't evaporate completely -- a lot of it gets pumped into the other 85% of the market. The real danger is when the final roach is in the box and the trap is shut, leaving the remaining roaches with shares that are worth significantly less than they used to be, and causing a material loss to the index.

Zman points out that crack spreads are dropping, and the last time the spread fell below the $6 mark (9/28), Valero Energy Corp. (NYSE:VLO) teed up for a $4 drop in 3 days! Earnings are today, but outlook will be suspect in this environment.

Yesterday I advocated a short in Tesoro Corp. (NYSE:TSO) (11/2), and I will amend that today by saying you could get a nice hedge on the $63.50 short by selling the ridiculous $65 puts for $3.20. This gives you protection all the way up to $66.70, a high not seen since 8/21, when oil was $72 a barrel. On the way down you may be disappointed to get called away with a $1.70 profit, but that's 2.6% in 18 days -- better than 60% of all hedge funds have done for the year!

Of course you should follow the Valero Rule and sell the put for a bit more today if possible, or even flip to selling the $60 put if we catch it right -- tune into comments later and we'll see what happens.

Going into the Wayback Machine, we'll stick with my September 25th prediction of oil hitting $57.14 before coming to a rest, and I'll work up a new set of targets if I have some free time today.

Gold will do whatever the dollar doesn't, but crossing back under $603 will be a bad sign. As I said last week, let's keep an eye on copper to gauge reality in metals -- and copper is certainly slipping.

Bush continues to pound the pulpit, letting us know that we will all go to hell if we vote Democrat next Tuesday. The Best War Ever is a great read on the war.

Yesterday in comments we discussed how odd it was that there are multiple publishing problems in the blogosphere just prior to the elections. Is it just the strain of traffic bringing down web sites or something more insidious? At the time I was guessing that anti-Bush blogs outnumbered pro-Bush blogs, but a simple search on the word Bush turned up almost NO pro-Bush blogs -- very interesting...

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I took the opportunity yesterday to press up my December oil puts, but left my remaining November puts alone, as I will be thrilled to get even half of my money back on some of them.

I'm looking at a few plays under strict Valero Rule guidelines but with less emphasis on Valero today as it announces earnings and could prove volatile. Energy Select Sector SPDR ETF (NYSEARCA:XLE) is still a primary indicator and the OGX (Oil And Natural Gas Index)should be watched closely as it is a nicely diverse group.

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Valero had record earnings with a good outlook and they are buying back $2B in stock! Needless to say, if they can't make something of that then this sector is doomed... I see a hole in the earnings as they beat $2.30 expectations by 0.12 BUT they beat revenues expectations of $20.2B by $4.1B -- 5% earnings beat on a 20% sales beat is a sign of trouble...

Let's hope for a nice sector bounce so we can pick some puts up cheap, but only if Valero starts to give up gains and we get group confirmation:

  • Chevron Corp. (NYSE:CVX) is still lost in space at $66.39 and the $65 puts are just .80
  • ExxonMobil Corp. (NYSE:XOM) $70 puts gave us a good ride yesterday but unless they pull back from .95 I'd rather add some Dec $67.50s at .75
  • Royal Dutch Shell (NYSE:RDS.A) is buying back their own shares to save their roaches. I am loving the Dec $70 puts at $1.50 or less as $70 should be a nice resistance point.
  • Core Laboratories N.V. (NYSE:CLB) has no options but may be breaking down if they fall below the 50 DMA at $67.50.
  • Oceaneering International Inc. (NYSE:OII) $35 puts are expensive but I'll take a momentum play at $1.25.
  • McDermott International (NYSE:MDR) is right on the 50 DMA and the $43.38 puts are $1.50.
  • Ultra Petroleum Corp. (UPL) is in a power dive and the Dec $50 puts are $1.90

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What if you spin off an evil division and no one wants it? Halliburton Co. (NYSE:HAL) may be about to find out as they put investigation-pending KBR up for bids. Of course it's a Goldman offering, so the fix is in, but that's why the $32.50 puts are just $1.35, a .65 premium.

Yet another new IPod Shuffle should give Apple Computer Inc. (NASDAQ:AAPL) another boost today, and Google should be doing well despite Blogger being an official disaster at this point, so it's up to the BKX (Bank Sector Index) to set direction for the day.

If we are holding positive on ALL indices, then there are still some fun calls to make:

  • Merrill Lynch & Co. Inc. (MER) gave Yahoo! Inc. (NASDAQ:YHOO) an upgrade so we are now officially in pretty good shape there!
  • If the markets start moving on us, let's look at General Electric Co. (NYSE:GE) $35s for .50 as a nice momentum play.
  • Texas Instruments Inc. (NASDAQ:TXN) will move with the SOX and the Dec $32.50s for .35 were in the money less than 2 weeks ago.
  • Alcoa Inc. (NYSE:AA) Dec $30s are just .40 if other metals don't fall down.

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