Options Trader: Wednesday Morning Ideas

by: Philip Davis

Israel is on the march with over 1,000 Lebanese now dead in fighting that has also taken 100 Israeli lives. It's pretty amazing when you realize that Hizbollah fired over 160 rockets into Israel just yesterday (3,200 total to date) but the threats by Hizbollah that they would begin firing into major cities have put the Israeli army on overdrive this week.

To sum up this war, Hizbollah, which theoretically has nothing to do with the Lebanese government, started taking pot shots at Israel with the new, long-range toys they bought from Iran which provoked Israel to cross a border into a country that they had occupied for 20 years which freaked out the Lebanese people and is being spun by Hizbollah as "the occupiers are returning" which is in turn recruiting people into Hizbollah and giving them more power in Lebanon...

"If a day comes when the world of Islam is duly equipped with the arms Israel has in possession, the strategy of colonialism would face a stalemate because application of an atomic bomb would not leave any thing in Israel but the same thing would just produce damages in the Muslim world", Ayatollah Ali Akbar Hashemi-Rafsanjani told the crowd at the traditional Friday prayers in Tehran.

What a mess!

So oil is not going down anytime soon and you need to stop me if I try to short it (even though it is fundamentally 30% or more overpriced). At some point this will all lead up to a massive and "shocking" collapse in oil prices which will wipe out a lot of hedge funds.

TOL lowered guidance another 10% and Bob Toll said:

It appears that the current housing slowdown, which we first saw in September 2005, is somewhat unique: It is the first downturn in the forty years since we entered the business that was not precipitated by high interest rates, a weak economy, job losses or other macroeconomic factors. Instead, it seems to be the result of an oversupply of inventory and a decline in confidence: Speculative buyers who spurred demand in 2004 and 2005 are now sellers; builders that built speculative homes must now move their specs; and nervous buyers are canceling contracts for homes already under construction. The resulting excess supply has exacerbated the drop in consumer confidence, which first appeared last September, that was already a drag on new home sales.

Now before Prof gets all excited and starts shorting TOL, I will say that I think the company has a firm and realistic handle on the situation and will come out on top when and if the market turns. Let's watch how they handle the 50 dma at $26 (if it even goes down on what I consider not too bad news) and keep in mind that the 200 dma is way up at $32. We may get a pullback as the stock is up 20% during this option period but if the 10 year stays close to 5%, I think we may get a pretty sharp turn in housing.

Bob Toll, by the way hasn't sold a share since last July and has picked up 1.5M shares since the stock crossed below its 200 dma last August. The company is also consistently buying back shares under $30.

Oh yeah, so my original point was that the same "sudden" evaporation of housing demand coupled with oversupply is exactly where oil may be heading. Don't forget housing even had a hurricane that wiped out 100,000 homes, which you would think would drive up prices but here we are, a year later, in a very soft market. I submit that people need houses more than oil and the same comments you are hearing that the demand for oil will never stop is exactly what we were hearing last year from Florida realtors about housing.

Oil is a craze that is fueled by speculators who make their money by charging you an insurance premium to guarantee delivery on a future date at a fixed price, no matter what the cost to them. As long as you believe you must have x amount of oil in December, no matter what you have to pay for it, they can keep sticking it to you. Just as with housing, all it takes is for sentiment to shift and for the buyers to "just say no" and the whole thing collapses like a house of cards.

We just don't know when that will happen.

Anyway, so Asia is booming today except for Australia where they are worried about slowing commodity demand (another mini bubble). Europe was a little more concerned by yesterday's action in our markets and is off slightly, waiting to see what we will do.

We should have at least a good start today but let's keep an eye on upside resistance and how we handle it. I am very ready to just go back to cash if we have a weak day as a Fed pause is the last bit of good news we are likely to get this month.

The Dow opened Friday at 11,300 and should meet little resistance heading back to that level but that would be a big test for the index. 12,250 proved an unbreakable barrier yesterday so there will have to be a pretty broad rally to get this going.

The S&P will hopefully stay above the 200 dma of 1,270 and opened at 1,285 on Friday so anything less than that will be a disappointment. We know we need to see Nasdaq 2,100 and we can count on the NYSE to follow the Dow up 100 points to its 8,300 resistance (chart).

If we see action like the above chart again - GET OUT, GET OUT, GET OUT!

Oil is staying up on nuclear saber rattling at the mosque and what is shaping up to be a full-scale ground war which is completely taking everyone's mind off the continuing mess in Iraq and Afghanistan (remember them?).

31 people died in Iraq yesterday! This war is in its 3rd year (happy anniversary by the way!)...

If oil prices can't break $77 it will be seen as a positive for the markets but not a real negative for the oil sector which is just what we need to make some real gains.

Gold will be the one to watch today as another failure to break $660 against a dollar that is still dropping will indicate continued confidence in the Fed's position that we are achieving a "soft landing."

So we should have a great opening in the very least but let's watch out for a pattern similar to Friday as we are unlikely to get a better reason to rally than we have today.


NWS is too big to play just based on the Google deal but it is a real win for them as Google is paying them a guaranteed $300M a year as their share of "My Space" ads. So far, NWS has only been able to bring in about $50M a year on their own so Google is paying a $750M premium to get in front of My Space's 100M registered users.

My Space had some of the lowest rates on the web, around .10 per 1,000 impressions, so Google is betting that they can do better than .60 to break even. Whether they make a lot of money or not, Google has effectively blocked their rivals from accessing one of the web's premier destinations.

I've been hoping GOOG would pull back but it doesn't look like that's going to happen. If CME can break $500 that should be the signal Google needs to move back over $400.


I will be keeping an itchy trigger finger on yesterday's buys but CSCO profits will let me hold the rest a little longer than I would normally. I'm taking CSCO off the table on the early bump unless it crosses the 200 dma at $19.25, where I will hold it until it crosses back under. Most likely it will pull back from $19 on resistance where I will sell the $17.50s and look at the Sept $20s if they look reasonable (.40 or less).

LUV has trouble at this level and another round of discounting from the majors is underway so the Sept $17.50 puts make sense at .60 as long as oil stays over $75.

AU is kissing the 200 dma at $49 so I like the Sept $55s for .80 if gold breaks $660 and as long as the stock stays above resistance.

It's all hitting the fan at BP as my weekend conspiracy rant is being taken seriously! You'll be hearing a lot of who knew what when questions over the next few days.

So I was smart enough to call for a tech rally yesterday but I didn't think to play the QQQQs (kick, kick)...


STX is down 5% pre-market and had the earnings that I love - sounds terrible ("Profit Plunged 98%") but is were actually pretty good considering they just bought Maxtor and this quarter reflects all of the costs and none of the synergies. Sales were up 16% but there is a price war that they seem to be winning that is hitting the bottom line right now. New perpendicular drives (750G on the desktop) will make all this nonsense moot and I can't imagine how people don't get the growth ahead for this industry as new Windows and DVR will drive demand for the rest of the decade.

Net income at Seagate was just $7M vs $280M last Q2 but that included $218M directly related to the acquisition and another $17M in options expenses under the new rules. If you back out all the nonsense the company looks like it beat by a penny to me but it will take days for analysts to figure this out. The price cutting is everyone dumping old drives that no one will want in the fall so the more you lose now, the less you have to write off later.

The company is confident enough to approve a buy back of 25% of its stock so I will give them a couple of quarters with the Mar $22.50s for, hopefully $1.50 or less. I also like the current $20s as a gamble if they are going to give them away at the open.


It's UNH time again! The Sept $50s are pretty reasonable at $1.75 but I don't trust them to beat the 200 dma at $54 without a runaway market.

DIS did not disappoint with a nice beat, hopefully nice enough to wash out concerns over Pixar options shenanigans. If it can't break $30.20 and hold $30, take the money and run on the September calls.

Despite lowered guidance, TOL is still delivering its backlog, which means that on 8/22 they will announce earnings not too far below last year's record numbers and the backlog is only 15% below last year's but cancellations will be a big concern. I'm playing the 50 dma game and will buy if the stock gets back over $26 but I will take a small position in Sept $27.50s if I can pick them up around .60.

FD had huge numbers so game on with our SHLD play but we know something was up on Friday with that weird move on our calls!

TGT has earnings tomorrow and an improving retail picture could work wonders for them 25% down from their last year's highs. Sept $47.50s are in the sweet spot at .85.

Have fun today but keep an eye on those levels!

If GE, TXN, HPQ and SHLD don't participate in a rally, get very suspicious...