Options Trader: Monday Wrapup

by: Philip Davis

Hey, that wasn't so bad! We held our levels -- that's all we were hoping for but it was decidedly not easy.

The Dow dropped 23 points and tested 12,300 at the close but finished at 12,316 while the S&P had a real Indiana Jones moment but held on to the ledge to close at 1,400.50!

The NYSE was a little disappointing at 8,884 but nothing tragic while the Nasdaq actually turned a profit and finished at 2,452. The Russell also helped out with a 2 point gain to finish above the critical 790 mark.

The SOX punched right through the 490 mark propelled up by our old friend Marvell Technology Group (NASDAQ:MRVL), who gained 10% on the day finally breaking that $20 mark. The transports were weak all day but held 2,650 and finished at 2,669 -- we must watch this tomorrow as they gave us the best indication all day that there was to be no rally.

S&P Chart 21 11 06 SOX Chart 21 11 06 TRANQ Chart 21 11 06

We broke in the January crude contract with an early sell-off that took oil all the way down to $58 but it bounced from there and finished the day down just .17 (after a .40 last minute pump) at $58.80.

While it was an admirable pump-job, the boys forgot something... They forgot to boost the February contract! The February, March and April contracts all lost more than the January today, and the Februarys lost .26 closing the $1.57 gap by 6%. Why do we care about this?

As contango shrinks, it becomes less profitable for traders to hold oil contracts as the cost of carrying the current contracts is no longer rewarded in the following month. With storage costs rising contango can give way to backwardation, where current contracts are higher than closer ones, which can lead to wholesale dumping of crude.

Just like in any deflationary environment, it becomes cheaper for buyers to wait while those holding contracts and high priced commodity stocks find their investments evaporating over time.

We'll start keeping tabs on this, as the nearest month of backwardation is currently December '08, just a few pennies higher than Jan '09 at $68.35, while just .50 separates August and September '07 at $65.13.

Oil never made $59 today as it peaked at $58.85 against a fairly flat dollar. Gold picked up just .45 to finish at $622.

More of the same is in store tomorrow but we may have a lot to be thankful for if we can go into the weekend looking as good as we do today!

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We picked up Dow Chemical Company (NYSE:DOW) Mar $45s for .50 in comments.

Cramer just ruined a pullback on eBay Inc. (NASDAQ:EBAY) as it was coming down nicely but spiked up on his mention tonight. If the cat is out of the bag I'd better stake our claim on the Jan $35s for $1.10 while I can!

Freeport-McMoRan Copper & Gold Inc.(NYSE:FCX) got complicated as I kept the Jan $50 puts, which came in at an average of $1.35 on a silly morning spike and finished at $1.90 (up 41%). Because of the spike, we got excited and added the Dec $55 puts at $1.55 and I took mine off the table at $2.55 (up 65%) as they reduced the basis of the Jan $50s to just .35! Later in the day we added some Dec $50 puts for .75 in case we get a nice drop.

IntercontinentalExchange Inc. (NYSE:ICE) Dec $85s stopped us out on an early dip at $17 (up 38%); that was the last of that very nice trade. I could have let it ride but, as I said this morning, I'll be away for a few days so any excuse to lighten up is being taken!

Nordstrom Inc. (NYSE:JWN) had great earnings and raised outlook but didn't get much of a pop so far in after-hours trading. That suits us just fine as we picked up the Jan '08 $50s in comments for $6.80 and sold the Jan $50s for $2 against them. We also took the Jan $50 puts for .90 as a safety, and hopefully we'll get a bit of a dip in the morning so we can get out of those.

Medtronic Inc. (NYSE:MDT) beat, as expected, so I should have been braver an played them directly, but that does make it game-on for the Boston Scientific Corp. (NYSE:BSX) play in the morning!

Metallica Resources Inc. (MRB) closed at $4.25 (up 47%) on a spike and dip in the afternoon.

The Children's Place Retail Stores Inc. (NASDAQ:PLCE) turned choppy so I let the Dec $70 puts go at $4.50 (up 73%) as I didn't want to sit out a test of the 50 DMA, but we may have to look again if it fails!

Starbucks Corp. (NASDAQ:SBUX) turned ugly and wasn't worth holding on to and the Dec $37.50s finished at $1.10 (up 47%).

Texas Instruments Inc. (NASDAQ:TXN) forced a stop out on a big morning spike and we gave up the Dec $30s for $1 (up 43%) and kept the longer Apr $27.50s which are well in the money at $4.10 (up 28%).

Tyco International Ltd. (NYSE:TYC) is perking up nicely and the Dec $30s are at .35 (up 70%).

China Southern Airlines Co. Ltd. (NYSE:ZNH) has been performing very well since we picked it up on the 13th, now $22.43 (up 21%).

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