Options Trader: Wednesday Morning Ideas

by: Philip Davis

See Trader Mike's Nasdaq chart on the previous post to get an idea of what's going on in the market today.

I'm still bullish but the Hang Seng disagrees with me but India recovered 186 out of 800 points and the Nikkei posted a small gain despite the fact that the BOJ is almost certain to leave rates flat in order to prop up the dollar.

This hurts our Mitsubishi UFJ Financial Group Inc. (NYSE:MTU) Jan '08 $10s, but they are way up at $3.50 (up 25%) and we only just got them, so I'm going to give it a little slack.

Vote 13 12 06

I think the general consensus in Hong Kong is that they're not sure what's going to happen this week, but with two of the world's most powerful bankers en route, they are pretty sure they are going to get screwed somehow...

Obviously our lower trade deficit lowered their trade surplus somewhat, so that's kind of a drag as well.

Also of note in Asia is The Home Depot Inc. (NYSE:HD) signing an agreement to buy Homeway, China's DIY shop with 6 stores in 12 cities. It's not about the company they bought -- it's about the fact that China's letting them in! HD May $40s are $1.95 and it's a good entry, but I was waiting for them to come down to $37. With this news a small entry is called for, but it is very possible we'll be taking the bulk of our entry lower. Best Buy Co. Inc. (NYSE:BBY) may make a China announcement as well ahead of Paulson's visit -- we have 2 positions in that one...

cowboybush 13 12 06Europe is in a pretty good mood this morning and they are exercising their economic might to further crack down on industrial pollution with some strict restrictions on chemicals used in manufacturing as well as cracking down on price gouging by energy companies. This may have a very nasty side effect of damaging the global natural gas cartel as the EU has been after Germany for some time to free up that market. Formal charges have been filed against Germany!

"Other countries charged are: Austria, Belgium, the Czech Republic, Estonia, France, Greece, Ireland, Italy, Lithuania, Latvia, Poland, Spain, Sweden, Slovakia and the U.K. with violations, ranging from setting electricity prices so low that new entrants can't compete, to not enforcing orders aimed at separating energy supplies and network operations."

This is like the U.S. government charging 45 states! Perhaps this is a preview of Nancy Pelosi's first 100 hours for the U.S. oil companies???

We need to get used to being #2 in the world, and hopefully we won't slip to #3, but we'd better get used to China having a seat at the table!

We'll see if the U.S. markets can show their muscle now that we have the Fed out of the way. We get the November Retail and Food Sales Report this morning and, of course, oil inventories.

We are back to looking for the same old breakouts, but it's the SOX and the Transports that need to step up to the plate -- they are holding back the broader markets:

Options Trader 13-12-2006

I was thinking about oil last night (big surprise!) and it occurred to me that February is a short month. If February is a shorter month than January and there are (coming into the close of January's contract period) currently just 189M barrels on order for 31 day January -- why are there 234M open NYMEX contracts for 28 day February?

I'm not trying to cause any trouble, just asking!

As John Belushi taught us, when the regular stuff ain't working you can always hold off the angry mob with a little Rollin' Rollin' Rollin'!

"Keep movin', movin', movin',
Though they're disapprovin',
Keep them doggies movin' Rawhide!
Don't try to understand 'em,
Just rope and throw and grab 'em"

Crude Oil Stock Chart13 12 06Good luck to the oil bulls this week -- I think they may need it! We do have inventories out today and MAYBE we used 10M extra barrels to reduce our total inventory down to 330M barrels -- that would "only" be 15M barrels over the top of the normal range for this time of year. Yeah, that's the ticket! ROFL!

We currently have 19M more barrels of crude than we had this time last year, the weather is warmer and demand is trending down. Crude is $5 above last November's low of $56 but ExxonMobil Corp. (NYSE:XOM) is $20 higher, flying on $117B worth of roach money that fell into that trap this year.

Oh wait, maybe OPEC will actually cut what they said they would this time! They could take another 7M barrels a week off the markets! That would reduce our crude supply down to 275M barrels (the low end of the band) in just 10 weeks!

Dr Evil 13 12 06What? Oh it takes 6 weeks for the tankers to get here? OK -- in just 16 weeks then! Then you will all be DOOMED -- $100 oil is just... What? The U.S. only absorbs 25% of that production cut? OK, OK -- in just 46 weeks then! DOOM! Peak oil! Mu ha ha!

I really don't know who's sillier, the people who buy based on this logic or the analysts who support them...

So I'm not going to worry about oil today despite CNBC's emergency pumping reports. ZMan points out that tanker rates are down 10%, possibly indicating OPEC is serious about some kind of cut, but that brings me back to the main premise -- we don't need the amount of oil they can ship! If we needed the oil, we'd buy it and tankers would be busy. We bought too much (like 234M barrels for February) and it's time to cut back.

We'll see what the dollar does today as it is just .5 above that 82.5 bounce or, more properly called, "it better bounce!" zone.

Gold is struggling at the $630 line and will not be able to hold it on any dollar strength, but that's not going to stop me from picking up a few Goldcorp Inc. (NYSE:GG) Jan $30s for $1.40 just in case our China trip goes badly. This is a protective play with a tight stop, and the 200 DMA is $28.50, a clear sign the party is over.

Options Trader 13-12-2006

The party is not over yet with retail sales (including autos) up 1%, a nice Goldilocks number.


Trader Mike, is sort of on-board with our Textron Inc. (NYSE:TXT) trade but he does point out some critical junctures we need to watch closely:

Textron Chart 13 12 06

We'll see how they handle the critical $95 mark but $94 was my buy target.


I'm not taking too many new positions today as we have to concentrate on managing our oil plays. After taking a lot off the table in the past week, we are ready to pounce if the market makes a nice down move.

We'll be watching for some real strength to jump on the calls we've already made and, of course, following energy plays in strict accordance with the Valero Rule!

  • The pre Christmas sale may already be over for Apple Computer Inc. (NASDAQ:AAPL), up $1.21 in pre-market. Hewlett-Packard Co. (NYSE:HPQ) gave a mosey forecast and all they do is sell computers, and this idiocy about iTunes sales heading south is nothing but media fodder as Apple doesn't make the bulk of their money on the songs.
  • BP PLC (NYSE:BP) looks like it's being held up into expiration as it skims along the 200 DMA.
  • Continental Airlines Corp. (NYSE:CAL) and UAL Corp. (UAUA) are now in merger talks and that will lift the whole airline industry. Our DALRQ Jan '08 $2.50s are already .40 (up 350%) and please try to remember they are almost certain to end up worthless so take some off the table.
  • Let's keep an eye on GlobalSantaFe Corp. (NYSE:GSF), who have been the strength of the Oil Service HOLDRs ETF (NYSEARCA:OIH). Tom made an excellent chart for watching that ETF, and let's be very aware of the components that make it up!
  • Hewlett-Packard Co. (HPQ) is likely being held down for expiration -- the Jan $40s are $1.15.
  • Oceaneering International Inc.'s (NYSE:OII) EVP sold 10,000 shares on Monday -- is this the start of a trend for a stock that practically doubled since October 1st? Apr $40 puts are pricey at $1.60 but maybe they know something...
  • I think Royal Dutch Shell (NYSE:RDS.A) will be affected by the EU actions and I'm hoping they get a nice pump ahead of inventories where I'll be looking for the Jan $70 puts for under $1.
  • With Energy Select Sector SPDR ETF (NYSEARCA:XLE) still looking like a buy to the chartists (sorry Tom) the Jan $59 puts for $1.25 seem very attractive, and I will stand ready to cover with the Jan $62 calls if they hit the same price, but that's only because I already have the Jan $58 puts as a pre-roll.

A big oil rally can still tank the markets, and don't take anything seriously unless the SOX and the transports start coming around.

Be careful out there,

- Phil

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