Options Trader: Wednesday Morning Ideas

by: Philip Davis

This is why we use cover plays - one day does not a trend make!

We had a very bullish stance going into the weekend. While we certainly trimmed down a little, we kept a very bullish stance, especially on Google (NASDAQ:GOOG), which we left uncovered after buying back our callers and the LTP, which got of relatively unscathed in yesterday’s carnage.

We found ourselves a little too bearish at the end of yesterday (because we had made too much money on uncashed puts) and switched to upside index covers on the Diamonds Trust, Series 1 (NYSEARCA:DIA) ($140s) and PowerShares QQQ Trust, Series 1 (QQQQ) ($50s) as we expected good things from tech and we covered our oil shorts with ConocoPhillips (NYSE:COP) $85s. These single index (or sector leaders in COP’s case) plays make a lot more sense than flipping in and out of individual positions whenever a market breeze blows against us. If you get your portions right, they can give you just enough protection without impeding your ability to make more money once the market gets back on track.

Sometimes, like yesterday and it looks like again today, your covers can accidentally make you money, but it’s important to remember that is not why you bought them and to treat these gains as a very lucky bonus. After all, you took them to protect you if the market DID NOT do what you thought it would do! As I often say - "Remember why you took your position in the first place - don’t lose site of your goals."


Let’s not forget that yesterday was a TERRIBLE day in the markets with 90% of the very heavy volume coming to the downside so the expected boost we will get from The Boeing Company (NYSE:BA) (terrific earnings) and Amazon (NASDAQ:AMZN) (up 24% pre-market) early on may not be enough to override the very cold slap in the face we got from Countrywide Financial Corporation (CFC) yesterday.

We’ll be watching out for profit taking into the rally, especially with AMZN; I am one relieved investor after yesterday’s scary fall! On our Oct/Aug spread, I will be leaning towards selling the Octobers into the rally and waiting to buy back the Augs when the stock turns down. Margins can be dealt with by buying $95 or $100 calls to turn the position into a bear call spread and we will discuss more complex plays as well as some new plays in chat. However, the $85/$95 bear call spread should be a nice play as a new entry.

Asia held up well this morning with "just" 143 points coming off the Nikkei and "just" 110 points coming off the Hang Seng, but South Korea’s Kospi hit an all-time high as Q1 GDP over there is trending at 7% annual growth. Financials were strong leaders in Korea and I’m not shorting them over here, as a few billion in losses on sup-prime loans are likely to pale in comparison to the fees collected on $2T worth of M&A activity for the year. Japan’s largest investment bank, Nomura Holdings, said Q1 profits nearly quadrupled despite their $260M write down of their US sub-prime portfolio. Energy was the biggest drag on the Asian markets and that’s just fine with us!

The Shaw Group Inc. (SGR) and Westinghouse Electric (owned by Toshiba) signed an agreement to build four four nuclear reactors in China that will be operational by 2015. China plans to increase their nuclear output from 7 to 40 Gigawatts by 2020. Westinghouse CEO, Steve Tritch said, "They have an ambitious program here to build at least 30 more nuclear plants over the next 20 years or so, and we think that will require additional work for Westinghouse and input from Westinghouse to do that." Mr. Tritch noted forecasts from a senior U.S. energy official that there could be as many as 1,000 nuclear power plants globally by 2050, compared with some 435 now. This is why we are long on Cameco Corporation (NYSE:CCJ)!

Turnaround Productions

Europe has already made a nice recovery ahead of our open, but have a long way to go to retrace yesterday’s drop, so let’s keep an eye on them. We get the Beige Book readings this afternoon (2 pm), so any rally on this side of the pond needs to be taken with a grain of salt until we see some numbers that are, if not good, at least not terrible. Centex Corporation (CTX)confirmed low expectations this morning and we’ll need continued capitulation in the energy sector to drive money into the broader markets. Thurs, we’ll be watching the Transports with great interest today to see if 2,950 can hold or if we are heading through the 50 dma right on down to 2,800. That would signal a VERY weak economy, no matter how the Fed tries to spin it!

The dollar tested 80 yesterday and finished at 80.13, but made a spectacular recovery overnight. and is back over 80.25, driving gold and oil lower. That’s starting to look like a trend to nervous foreign traders, who have been betting heavily on a breakdown below 80.

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Oil and Dollar

Until we get a 50% retracement of yesterday’s losses, this is nothing more than a bounce so don’t get too excited. On the other hand, we can finish the day back over Monday’s open then we could be off to the races, especially if Apple (NASDAQ:AAPL) gives us a good reason to be later today. ZMan has a great take on the energy market this morning. He and I will be addressing the nation live on Market News First at 10:25, so tune in for those fireworks. We picked up so much downside action in oil yesterday, though, I’m more concerned about a negative surprise. We took ConocoPhillips (COP) $85 calls, now $1.60, as upside protection yesterday and I also liked the Sunoco, Inc. (NYSE:SUN) $75s, now $1.75, for a bounce.

BA will give the Dow a huge lift right out of the gate and if they stay strong we have a pretty good chance of making a full recovery but if BA runs into profit taking, we have some serious problems!

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