Options Trader: Monday Morning Ideas

by: Philip Davis

10 Trading days to the end of Q3! Remember what a disaster this year was supposed to be?

It’s getting a little late on the doomsday clock and the bears are running out of time.

The put/call ratios indicate a lot of bearish sentiment still remains, so it will be interesting to see how the next two weeks play out.

CBOE Put/Call Ratio

I expect a bit of a pullback today and ahead of the Fed; how we handle the pullbacks will tell the tale for the next two weeks.

Don’t be fooled by the Nikkei today -- they’re closed. They were down 75 points on Friday and, if we have another up day, will have a big snap tonight. Think Sony Corp. (NYSE:SNE), Toyota Motor Corp. (NYSE:TM), Honda Motor Co. (NYSE:HMC). The Hang Seng made a nice 1% move up, and Taiwan shot up 3% (like 400 down points) as political tensions ease over there. Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE:TSM) is a nice play there with the $10 calls at .30, or just own it for $9.50. Thailand’s markets continue to improve even as Muslim rebels continue to attack business targets.

LG Philips LCD Co. Ltd. (NYSE:LPL) is concerned about the 3rd quarter, but Sharp thinks things are fine. Perhaps that is because Philips charges about double what Sharp does, and the quality difference just isn’t there anymore (my personal opinion as an electronics fan). This does mean we need to exercise caution with Texas Instruments Inc. (NYSE:TXN), Corning Inc. (NYSE:GLW) and the TV makers, but I think it’s a nice buying opportunity on lowered expectations into earnings.

Europe is up tentatively, awaiting confirmation from the US, but expect choppy trading this week into the Fed meeting. With 90% of the bets on the pause side, there’s not much of an upside to a surprise, but a downside would be horrific. Consolidation into a relief rally is likely but, in our markets lately, consolidation means we just add 2% for the week!
As a fairly cautious fellow I feel silly sounding too bullish but, after last week, it’s getting a little hard to scour at the markets!

Speaking of last week, posted the Google Update exclusively on Seeking Alpha, as the formatting is just too much for this poor little blog site! Thanks to Eli for making my work look so nice...

Back at home, we are so far above levels all we can do is look at psychological barriers:

  • The Dow is sitting between 11,600 (wow!) and 11,500.
  • The S&P is just under 1,320 –- this will be a contest to watch. Breaking untested support at 1,310 is a nice cash-out signal for us!
  • The NYSE is, as we have mentioned, far ahead long-term, and is probably going to be the first to pull back, so let’s watch 8,300 for bullish support, but holding the 50 DMA at 8,250 would be just fine. A break above 8,400 will shock the bears.
  • The Nasdaq punched through the 40 WMA last week, and is sitting just above the 200 dma of 2,222. We need to watch the SOX as they will have a big test at 480, above which we may need to start selling -- just so we can buy more!

Oil is being pumped up like mad this morning, despite Royal Dutch Shell's (NYSE:RDS.A) CEO saying oil prices will be “significantly lower than today.” One could assume he knows oil is at $63 a barrel (Euro spot price was $62.03 as of his interview), and, being an educated fellow, one could also assume that when he says “significantly lower” he doesn’t mean $62.50!

This guy is my new favorite oil exec as he says: “Recent data shows that crude-oil stocks in factories around the world are very normal or even better than normal. It's a bit of a mixed picture, but by-and-large, there is no physical shortage in the world." And, “I've grown up in a physical world, and what I see from the physical world is that the lines of ships at refineries, and things like that, are OK." And, "Nobody knows the correlations there. It's new territory. But some people estimate there is north of $100 billion in hedge-fund money in oil markets right now, which is, of course, significant."

It’s like I always say: If I can just teach fundamentals to one oil executive, I feel I have done my job!

Gold is also pretending none of this is happening, as it jumps back to $588 (200 DMA = $592), but watch platinum pricing today at they have been slow to drop by comparison. Platinum faces 200 DMA resistance at $1,132.

Platinum Futures Index

Like I said, I don’t want to be overly bullish, as we’ve had such a huge run already, but there is still so much money left on the sidelines and so much money tied up in commodities (including homes), that if they get converted into cash, we may get a huge inflow into stocks.

So I don’t want to miss anything but I think we will have hundreds of opportunities to deploy cash in a big rally. I’m still setting very tight stops on our profitable trades, and looking for opportunities to buy a second round on the laggards.

We could get a wild ride up into the end of the quarter, but I will likely get very concerned by the 27th as funds start making big moves.

The Fed have a meeting on Wednesday and, if they don’t raise rates I think we are back on the run with the HBs.

Today's Picks:

  • Lennar Corp. (NYSE:LEN) $50s for .85 are a gamble, but what if the Fed sounds dovish?
  • Standard Pacific Corp. (SPF) is Austin’s top home builder and the $25s are $1.
  • Beazer Homes USA Inc. (NYSE:BZH) is one of the few builders still under the 50 DMA, and last January they were at $81, so I like the Jan $45s for $2. I like the fact that only 2 of 9 analysts have a buy on them.
  • Technical Olympic USA Inc. (TOA) doesn’t even project a bad market for next year, yet they are off 60% from last year’s high. Even if I didn’t like the sector, this would be my safety net with the Mar $10s at $2.85.

All of these are very risky plays, as we fully expect more bad numbers while Fed tightening (or negativity even!) can throw these guys over a cliff! Even if they vote to pause, the number and tone of dissenting opinions by the regional bankers could be enough to spook an overbought market. Either way, it is very possible that rates and the HBs will make a sharp turn up or down on Wednesday. I will be thinking about a safer spread play just in case. Monday we get building permits and, on Tuesday, housing starts -- so the table will be set for the 2:15 minutes on Wednesday.


I posted some potential oil plays over the weekend and let’s remember to follow the Valero rule to the letter this week! Much as we think oil is going down, it always might not... At this point, nothing would please me more than to watch a run-up into Wednesday's inventory, where we can short the bargains...

While Halliburton Co. (NYSE:HAL) is heading to the 3rd circle of hell on their chart, Schlumberger Ltd. (NYSE:SLB) is still 36% ahead of the S&P for the past 12 months, and a full 44% ahead of HAL. Now perhaps SLB didn’t rip off the government as much as HAL, but that’s only because they didn’t get the contract! Earnings are 10/20, and they need to make a company record this and next quarter and project beating that by 30% next year in order not to disappoint.

  • There are 18 Buys, 5 Holds and not a sell in the house on SLB, with UBS just giving them an upgrade on the 8th (no one cared). The Nov $55 puts are $2.70 and can be spread with the Nov $60s for $2.15, as a $5 move would be a very slow month for this stock!

BTW, you can see how desperate the oil pumpers are as they mention hurricane Helene, which could not be more off course from hitting the Gulf if it were in the Pacific!


I’m not buying any calls if any index is down at all. Remember, I am looking for excuses to go back to cash; holding options this long does not usually work this well! These are the plays I'm watching, looking for bargains:

  • Scania rejected Man’s $12.5B bid! I told you Caterpillar Inc. (NYSE:CAT) and Volvo (VOLV) were way undervalued!!! LOL, this is going to be great! Not only do I still like the CAT Oct $70s for .75, but the Nov $72.50s for .80 look attractive as well. Check VOLV for confirmation of direction.
  • Now batting, #5 on the consolation prize team -– Brunswick Corp (NYSE:BC)! That’s right boats, they’re cheaper than houses (until you actually own one, then you realize what a nightmare they are), and I’ve been avoiding them along with anything else that takes 2 gallons per mile to operate, but they popped over the 50 DMA this week and seem like they finally want to go higher. I like the Mar $30s for $2.75 which should give us a reasonable exit if the stock breaks back below $29. Rate hikes and oil spikes are our enemies here. A paranoid person could sell 50% or so of the position in Dec $30s for $1.95 as a cushion, but you may be very sorry you did.
  • Fortune Brands Inc. (FO) broke some serious trend lines last week with a 5% jump, finishing just over the 200 DMA at $75.50. At 20% behind the S&P for the year I’m pretty sure they are on track to double last year’s revenue at a 15% discount to last year’s high, and, if they weren’t so diversified, they would be a player on the Consolation Prize Team. I don’t know why Oct $75s are $2.15, but they look good to me after a $2.50 move since last expiration which followed a $2 move from July 16th... I think it’s a get out/don’t buy if it breaks below $75, but an accumulate above that mark.
  • I don’t know why Shuffle Master Inc. (NASDAQ:SHFL) fell out of favor (well it’s up 4% Friday). Nov $30s at .65 give us a look at the 200 DMA ($30), but beware the inverted 50 DMA at $28!
  • Is Archer Daniels Midland Co. (NYSE:ADM) really worth twice what it was last year after trading between $10 and $20 since 1993? I thought so in the spring when we all made money on ethanol fever, but who knows which way this goes. I think either way we get a big move soon so I like the spread of the Mar $40s for $3.20 and the Jan $35 puts for $1.35.
  • If we do get a real bounce in gold, I like Northern Dynasty Minerals Ltd. (NYSEMKT:NAK) again at $6.89. Metallica Resources Inc. (MRB) is also a gift at $2.90, Falconbridge Ltd. (FAL) likes their La Fortuna deposit enough to spend $40M exploring it, and we should get the result by the year’s end. MRB gave up a 70% interest for the $40M investment, leaving them with what is projected to be 1.2-1.6M ounces of gold as their share. Even at $200 an ounce, that’s not bad for a $242M-cap company, especially when you consider that this is one of several projects underway. Oh, Fun Fact: To get to that gold they have to separate out a pesky 930M-1.6B pounds of copper ($3/lb)!
  • Washington Mutual Inc. (NYSE:WM) was good to us last year with a big finish, so let’s go for an encore with the Jan $45s for $1. The closing of 80 branches is just what the company needs to bring margins in-line.
  • Nobody believes Plum Creek Timber Co. Inc. (NYSE:PCL) is going up, and I’m not sure I do either, but the $35s for .30 make a fun play on this land bank.
  • Boston Properties Inc. (NYSE:BXP) is the way to play a Fed hike shocker. Outperforming the S&P by 44% for the year and having real trouble at $105. Office buildings are just not that sexy! This makes a nice downside balance to positive homebuilder plays, with the Jan $95 puts at $1.85.
  • Genzyme Corp. (GENZ) is an old favorite of mine, and I feel like I already blew it as I haven’t looked at them in ages, but they are firming up for another possible run coming into earnings on the 18th. Guidance will be key but the $70s seem reasonable at $1.80 with, perhaps the $65 puts for insurance at $1, looking for a surprise one way or the other.
  • I’m keeping my eye on Goodrich Corp. (NYSE:GR); it baffles me that they have no faith in their own sector…
  • United Parcel Service (NYSE:UPS) $75s for $1, but not against the transport index. FedEx Corp. (NYSE:FDX) reports today; I thought UPS was a better entry...
  • Applied Micro Circuits Corp. (NASDAQ:AMCC) is a cute little stock that got rocked by option shenanigans, delayed their filing, got a delisting notice, yada yada yada... They sold off Friday as the estimate of option cheating on this $700M cap company is $200M (yet no one goes to jail), so wah wah if you are already a shareholder at $3 or $4 but, for $2.58, I’ll take a company that’s growing 50% a year! They actually have Nov $2.50s you can sell for .35 for a nice 14% profit and a very nice cushion to help hold on for the long haul.
  • Game on again for Dell Inc. (DELL). We already have the Jan ’08 $27.50s at $1.50, but Nov $22.50s are too cheap at .85 coming into earnings on the 16th. These may come down a bit more, but once it turns up it will go fast.
  • We have the Dow Chemical Company (DOW) Dec $40s for $1.05 (up 55%), and I like the $40s for .35 as well for an oil down play.
  • Sempra Energy (NYSE:SRE) is running a little ahead of itself, and the $50 puts are pretty cheap at $1.35 and can be pre-rolled with the Dec $45 puts at .50.

Disclosure: I fully intend to purchase any of the positions discussed today if they pull back. Actual trades will be posted in comments!