Options Trader: Monday Wrapup

by: Philip Davis

Come on bears, is that all you have? In comments today we discussed how I would rather see a pullback so we can remove some doubts about the true market direction. But if this is the extent of the sell-off, we may have to get downright bullish soon!

The Dow barely budged down after wiggling up and down 20 points during the day. The S&P closed over 1,320, pretty much above it all day. The NYSE was positive all day long peeking above and finishing just under 8,400, giving us a great indicator for tomorrow. The Nasdaq got a rejection at 2,250, but finished almost dead flat for the day.

Investopedia says: “The levels of resistance and support within the consolidation are created through the upper and lower bounds of the stock's price. Once the price of the asset breaks through the identified areas of support or resistance, volatility quickly increases and so does the opportunity for short-term traders to generate a profit.”

So bears, it’s not even a proper consolidation when the S&P breaks through resistance! Let’s try it again tomorrow shall we?

The only real resistance the markets encountered was the price of oil. As this chart indicates, all the indices sold off as the oil pumpers worked their magic in the afternoon, and rallied back as oil trailed off after the 2:35 NYMEX close. So when someone asks you what the markets are really afraid of, you know it isn’t Bernanke!

The dollar gave up a quarter point today, but also may be consolidating for a move up. But commodities should get a respite from dollar pressure for a couple of days as traders digest the very low foreign demand for U.S. securities in July.

Oil did manage to finish down slightly at $63.80 a barrel, but you would have thought crude retook $70 from the way the sector reacted, running up about 2.5%, giving us great (we hope) entries on our Valero Energy Corp. (NYSE:VLO) and Schlumberger Ltd. (NYSE:SLB) puts.

Gold also had a party and made a leap at the 200 DMA of $592 to finish at $586; another test to keep an eye on tomorrow. Any sort of firm statement from the Fed will give us a great short on some gold stocks, which also jumped 2.5% on a sliver of good news.

Closer examination of the contracts indicates that the gains were posted on the dead September and November contract periods, while the very active October and December contracts were down and flat. The next contract out, February, also lost ground.

Always remember when you see these figures on TV that they are subject to gross manipulation, which doesn’t stop hedge funds from throwing Billions of dollars at them.

Today's Picks:
To avoid last week’s mess, we are just going to comment new calls and interesting plays of older ones on a daily basis, and do a full run down in the Weekly Wrap-Up. Tight stops (20% of profits) are taking us out of some of last weeks plays and all our old oil plays...

  • The Valero Rule did such a good job of keeping us out of oil trades that we decided, in comments, to short Valero Energy Corp. (VLO) with the $50 puts at $1.10, and the Schlumberger Ltd. (SLB) $55 puts for $1.10, as both gained over 4% on the day. We also added the BP PLC (NYSE:BP) $65 puts, as $1.15 seemed fair.

Other than that, we are waiting to see what happens tomorrow to make our oil plays but this is exactly what we hoped would happen, a new round of effective pumping setting the sector up for another great fall after inventories.

  • Also in comments, we picked up the Nokia Corp. (NYSE:NOK) $20s for .40, too cheap in my opinion.

Tight stops this morning took us out of a some of last weeks winners with few regrets, especially on our oil plays, as it is certainly time to reposition anyway.

  • Caterpillar Inc. (NYSE:CAT) finally got it in gear today and the Oct $70s are just a penny out of the money at $1 (up 33%), and the Nov $72.50s ran up to $1.10 (up 40%) already.
  • Brunswick Corp (NYSE:BC) was very timely, and the Mar $30s finished in the money but unloved at $3.10 (up 15%) despite today’s 2% run-up.
  • Fortune Brands Inc. (FO) had a nice opening drop which kept us out of the trade, but I do still like the Oct $75s, now at $1.60.
  • Shuffle Master Inc. (NASDAQ:SHFL) had a good first day, and the Nov $30s moved up a nickel to .70.
  • Northern Dynasty Minerals Ltd. (NYSEMKT:NAK) gave us a nice, low open at $6.77, and finished the day up 5% at $7.07.
  • Metallica Resources Inc. (MRB) opened at $2.92 and rose just .06 for day one.
  • Washington Mutual Inc. (NYSE:WM) Jan $45s dropped a dime to .90.
  • Boston Properties Inc. (NYSE:BXP) did what I wanted Vornado Realty Trust (NYSE:VNO) to do last month, and the Jan $95 puts finished at $2.20 (up 20%).
  • Genzyme Corp. (GENZ) opened low and headed lower, but that’s why we take insurance. The $65 puts gained .35 while the $70s dropped .55 to $1.25, where I would now buy more without the spread.
  • United Parcel Service (NYSE:UPS) went nowhere, but I was wrong about FedEx Corp. (NYSE:FDX) -- they report on the 21st.
  • Applied Micro Circuits Corp. (NASDAQ:AMCC) climbed 4% today, bad if you sold the Nov $2.50s which are now in the money!
  • Dell Inc. (DELL) and Dow Chemical Company (DOW) both gave us great entries, a little excitement, and no real movement in the end.
  • Sempra Energy (NYSE:SRE) dropped 1.5% and the $50 puts moved up to $1.70 (up 20%) and the Jan (my mistake this morning) $45 puts hit .65 (up .15).

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