Options Trader: Thursday Morning Ideas

by: Philip Davis

How much does a coup cost? Well, in Thailand, it only dropped their market about a point -– food for thought...

Asia was strong across the board as a Fed pause was considered good news for exporters. Only commodity-king Australia (also with close trade ties to Thailand) was down along with the Thai exchange. Europe seems to be expressing cautious optimism ahead of the US open.

Today it’s all about whether we can hold our new levels:

  • Dow Jones 11,600
  • S&P 1,325
  • NYSE 8,400
  • Nasdaq 2,250
  • SOX 460

I’d like to see the TRANQ break and hold 2,500, because there are still a lot of naysayers regarding the holiday season, so it will be interesting to see what view wins out.

Distillate (heating oil) inventories are at their highest level since 1999, when oil averaged $16.56/barrel. How fast can oil fall? In 1985, oil was trailing gradually down from its 1980 high of $37 to $27, but in 1986 prices plunged to $14.44 (averages), and stayed below $18 until 1990. In 1998 (and I will refrain from tying this in to who was in office), a barrel of oil averaged $11.91, climbing back to $16.56 during the economic boom of 1999.

After starting 2000 at $24, oil spiked from $25 to $35 during the 2000 election, peaking in November, but dropping back to $26 (27%) in just 30 days on speculator concerns in December as the Supreme Court decided who would be President. The rest is, of course history! Again, this is not a political statement, just using time markers we can all relate to...

The gold market is being buoyed by strong jewelry demand in India, but there should be some offsetting pressure as commodity funds are all lightening up in light of the Amaranth scandal.

Gold has very strong support at $570 but $550 is the next leg down and there is still a looming concern of Central Bank sales driving prices further down.

Just like silly airlines, who hedged oil at $70 a barrel, silly jewelers are hedging gold around $570. Should the retail buyers not actually show up for the holidays, gold may take a power dive in Q4.

It is time to play Amaranth dominoes! Who is linked to a $5B (it gets bigger every day) evaporation of assets?

I said yesterday, and I will repeat: "According to the NY Times, “funds operated by Morgan Stanley, Credit Suisse, Bank of New York, Deutsche Bank and Man Investments all had stakes in Amaranth, as of June 30, the most recent figures available. Those holdings, which ranged from 4 percent to 7 percent of the assets of the funds, are worth far less now than their stated values in June.”

Well today the Man Group, the world’s largest manager of funds, becomes domino number two, saying its Glenwood Capital group will lose 25% of its YTD returns thanks to their investment in Amaranth.

Today's Picks:
Overall, I expect a good market today, but I am going to be cautious as we move back towards new highs as we’ve seen this movie before! Just keep raising stops and lock in the profits, when we have some cash we need to go back to Tuesday’s list and pick up some of the laggards.

  • If the Nasdaq really takes off (2,300) I like Advanced Micro Devices Inc. (NASDAQ:AMD) Nov $30s for $1.10
  • I still like Dell Inc. (DELL) and Nokia Corp. (NYSE:NOK).
  • Caterpillar Inc. (NYSE:CAT) is still cheap (and getting cheaper!).
  • Microsoft Corp. (NASDAQ:MSFT), of course.
  • Yahoo! Inc. (YHOO) Jan $27.50s are expensive at $1.65, but you can sell the Nov $27.50s against them for .95 for a cheap calendar spread. Either one makes a nice play if Google Inc. (NASDAQ:GOOG) heads higher. Yahoo was at $42 last December...
  • Our Google plays are still buyable but not if GOOG goes below $394.

I won’t be around today so have fun and be careful!

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