Options Trader: Monday Morning Ideas

by: Philip Davis

Can the markets make a real positive move today?

We've been teased so many times on so many Mondays I hardly want to hope but, for today at least, we have peace in the Middle East as the UN calls a cease fire which allows Hezbollah to save face by giving up without actually giving up as things were going poorly for them to say the least.

It would be nice if the UN could call for a cease fire in Iraq where 62 people died yesterday alone but the UN generally only passes resolutions that they know people will listen to so that they don't look too impotent.

The global economy is on fire with Chinese workers getting a 13% raise this year and European GDP far ahead of expectations. Wage pressures will be the story of the rest of the year as even US workers are starting to wonder if the paycheck may be greener elsewhere (with 4% unemployment) if their own boss doesn't come through with an increase.

You'll hear a lot about a blackout in Tokyo today disrupting trading but the real story is that the Asain markets are flying and not even a shutdown at the Nikkei could slow them down. Europe is also up about a point as the UK downgrades their terror level from "horrifying" to "very scary" but a lot of flights remain grounded.

Our futures are looking very good at the moment (6am) but we will have to watch out for the kind of pullback that gave us such a bad signal last Wednesday. We will obviously need some new leadership as commodities are likely to be a letdown today.

The Dow took a nice bounce off 11,050 on Friday (2 days in a row) so we will keep a hopeful eye on 11,200 but anything under 11,100 is a big signal to run away. The S&P will open well above the 200 dma at 1,270 so we will treat 1,280 as the make or break point for today - if the S&P cannot break 1,280, that will be our first caution flag.

The NYSE is again the one to watch as it is right on what is either a short-term floor or a consolidation point at 8,200. I consider it a red flag if this broad index fails to hold that line. As usual the Nasdaq can gain 100 points and I still won't be buying it until it hits 2,300 but let's keep a wishful eye on 2,100 this week but it will take several strong sessions to get there. More productive to see if the SOX manage to retake 415, perhaps finally breaching 420 for more than 90 seconds this week.

Oil - ROFL! Looks like I picked the wrong Friday not to short oil! Sometimes I don't know why I don't listen to myself... Oh well, let's say I was right last week and oil is fundamentally 30% overpriced, that would mean that we can easily break below the 50 dma of $73.50 today and that the 200 dma of $67 may be tested before the next run up - if nothing blows up! That is a very big if though...

Gold is also losing a lot of it's terror premium and may be heading to a test of $620 but it will still take its cues from the dollar which is likely to get rejected from its 50 dma at 85.70.

Don't chase things in the morning, there will be plenty of time to join in by picking up the laggards in a runaway market but let's keep both eyes on our target prices and watch out for toppy looking action.

This is one of those days when it would be really great if I had a proper service and could send out intraday updates!


A couple of weeks ago I complained that key statistics like earnings and inflation data can be very misleading due to rounding. As a demonstration of the power of this column, we are already getting action from the Department of Labor who will soon start giving us CPI reports with a 3rd decimal place.


If you play metals, this might be a good day to short copper (although that has been a bad idea for the past 3 years) as Chinese demand numbers are being given too much weight. The Chinese economy is $1.5T and is growing at 10% - very impressive but also very offset by the $12T US economy slowing by 1%.

If you believe that US growth is falling on a turndown in housing, then a copper trader should be concerned that 35% of US copper consumption is in construction and another 10% is used in auto manufacturing. The US consumes about 25% of the world's coppper.

BHP Billiton may settle a mining strike that is holding back 8% of the world's copper output and the contracts roll over next week so the August premium you see now may quickly evaporate over the next weekend. We called a nice top on PD on Friday and we may want to continue that play with the Sept $80 puts for $1.80 or you can buy the Jan $82.50 puts for $5.50 and sell the Septembers for a nice income producer.

This is a dangerous play as PD may back out of the Inco purchase and become a buyout target themselves. I'm betting they up their Inco bid just as copper starts to fall and people scramble out of the stock...


This is going to be a wild options expiration week so watch out for wild things to happen! There are still a dozen major world crises on the burner and some major earnings still to come (WMT, HD, HPQ and DELL) so market direction is subject to change without notice.

We got the Apple/Nasdaq delisting rumor that I promised last week! This should show us where the bottom is on Apple and I am still hoping for $60 but it will be interesting to see what happens to Apple with bad news in a strong market. If they don't come back I think I will just wave bye bye to this stock for now.

More bad news for GM: Michelin is raising tire prices 8% and others are sure to follow and they got another downgrade. The Sept $30 puts are gamble at $1.60 as the premium is outrageous but there are 75,000 contracts on the opposite side of that bet so I like the odds if the market doesn't hold our marks.

MED just consolidated at a nice 30% retracement point and look ready to go back up int0 earnings tomorrow afternoon. You can buy the stock $18.05 and sell the Sept $17.50s for $2.40 for a nice 12% one month return.

Let's look for a bottom on ATI as they are down for all the wrong reasons (like BA). Today Prudential downgraded them to neutral citing "slow paces of the Airbus A350 and A380 programs and traffic slowdowns after new security measures could slow titanium demand." Holy Cow! People pay for this analysis??? OK Mr. Pru Analyst - first of all they use titanium to make planes, this often happens before they are delivered. Second, a week of air traffic slowdowns stops planes from being built (a 3 month process) how exactly? Third, Boeing just had to go to Russia to find titanium as there is a tremendous shortage of the stuff...

Speaking of BA - the $75s are $1.50 and make a nice momentum play if the Dow breaks 11,200. They held $76 quite well on Friday and are trading well below last months expiration point of $80. There is a lot of put activity on this stock with 40,000 January put contracts below $80 so watch that line.

Refer to last weeks slow movers if the market is really flying, there is nothing wrong with any of them in a good environment - especially HD, who have earnings tomorrow and the $35s for .20 make a fun trade in addition to the longer plays.


Oil Plays

Look for a lot of effort to be made by US traders to hold $73.50 and for a sharp downturn in the oil sector if they fail to bring it back over that mark at the close (2:35). We can follow the Valero Rule on some puts but I am still wary of the massive manipulation we've seen in oil the past few weeks.

We are looking for oil to break below and stay below $73.50 above all else but the critical issue is where it closes.

I wish CLB had options but its still a good short at $67.50.

XOM $67.50 puts are just .20 and could double very quickly. Sept $67.50s are .90 and make a more sensible play.

SUN has held up very well but is up is up $16 since last expiration so I am liking the Sept $75 puts for $1.95 but watch out if it holds the 200 dma at $76.

CAL is a reverse oil play that is down 20% since last week. Since the 200 dma should prove good support at $23.25, we can hold the Sept $22.50s for $1.75 with a good exit point.

CVX shoud be a nice slow dropper. I like the Sept $65 puts for .85.

ECA has a long way to fall on the Sept $55 puts for $2.55.

For some reason RDS.A Sept $70 puts are just $1.35 - too good to miss.

VTS may be in trouble if people stop looking for oil. In one of those quirky option situations the Sept $60 puts are just $4.80 while you can sell the Sept $55 puts are $3.10 so you are net investing $1.70 and will be ahead unless the stock makes a new all-time high at $58.30. I would buy the put and wait a bit before selling as you may end up getting $3.10 for the Sept $50 puts if oil goes below $72.