Options Trader: Thursday Morning Ideas

by: Philip Davis

Today is a biggie!

Will we get some follow-through or will we further define the upper limits of our trading range? Yesterday was huge, but we may only back at the apoapsis (the "highest" point of the orbit and nearing a turn back towards market neutrality).

Members can review the original article on "Stock Market Physics" to get an idea of what I am talking about, but let’s all keep in mind how difficult it is to break orbit, as any of our engines misfiring will force us to abort and take another pass back to the periapsis (the "lowest" part of the orbit).

Asia was ready to blast off this morning as the Hang Seng and the Nikkei both more than made up for yesterday’s losses. The strong U.S. economy is good news for them, as we sure don’t buy cars and electronics that are made in this country. Good thing we took out our
iShares FTSE/Xinhua China 25 Index (NYSEARCA:FXI) $107 caller yesterday for $1.70 - anytime you make 50% on a position like that, it’s good to take it but I think we may bounce all the way back to $106 today.

In fact, it was a pretty good call at 2:22 when I said: "Taking out my FXI $107 caller at $1.70, buying FXI $107s for $1.70 for myself!" as it seemed a pretty obvious way to play the U.S. rally.

Europe is also in a chipper mood today with 1% gains across the board, so it’s all up to us to keep the ball rolling today.

We need to fire all engines to make a permanent move to a higher orbit (trading range) - otherwise we still risk a very real danger of crashing and burning:

• Dow needs a new record (+1 will do it) and can’t fail 12,600!
• Transports below need to hold 2,800.
• S&P needs to break 1,440 - not kiss it!!.
• NYSE 9,250 must hold - it would be nice to get leadership here over 9,300
• Nasdaq is just not impressive below 2,500.
SOX 460 will be a victory - our expectations are still very low for this group. The best we can hope for it is that they not be a drag (see "I Do Believe in Semis").
• Russell 800 is fantastic!! Let’s not blow it…

US Markets 01 02 2007 Chart

Oil will do whatever it does at this point. I’m still looking for a turn at $58.50 but ZMan is calling for a sizable gas withdrawal that will likely help spin us up to $60 - full speed ahead and damn the fundamentals. That’s OK with us as the more overbought the better, but it did smoke our early entries and it sucks to lose anything!

ZMan says:

"Let me just say now that I’m not predicting $20 oil. Please don’t sell your gas station if you own one before talking with your financial adviser. Please don’t get that second mortgage to buy puts on Exxon either. I’m just saying that I don’t think the V-shaped recovery that crude is enjoying will last past $60 nor hold that level. If the days of supply chart for crude didn’t mirror that inventories chart, I wouldn’t even bring it up. And things are different now. You’ve had inflation. You’ve got a terror premium. You’ve had demand growth. You’ve got hedge funds long massive positions in commodities. You have over a billion Chinese who dream of per capita oil consumption just 1/10th that of the average soccer mom. I understand all that. I’m just saying I don’t think the move has legs."

I think we need to get a turn in the dollar, which has been nothing but down lately. I said on Monday:

"With the rising economy and continued employment strength a Fed cut is looking more and more unlikely but this is really good for stocks as it chases people out of bonds and gives a boost to the dollar. Remember what chaos we are looking forward to if we can get the dollar past that critical 85.35 50 dma level as 80% of the planet has been shorting the dollar for a year - that’s a lot of unwinding ahead!"

"For oil to prosper the fear must be real (as opposed to CNBC hype) and gold holding $650 would be our best sign of that. If the dollar pops, it will be over for oil and gold (and copper and zinc…), so get ready for a very exciting week."

Well, the dollar bounced exactly off 85.35 this week and turned down. This more than anything OPEC did, is what gave oil and gold a push.

Oil Dollar Gold 01 02 2007 Chart


Google, Google, Google, Exxon, Google.

That’s all we’re going to talk about today, and we will do so in comments. There may be several opportunities for great Google plays based on the momentum, but let’s wait for an opportunity, not force one.

This flatline (so far) for Google could not possibly be better for us and we will watch our three plays closely:

* GOOG Mar $520s, entered at a $16.19 average, sold $510 calls against 75% of it for $13.
* GOOG Mar $530s, entered at $14, sold $520 calls against for $13.
* GOOG Mar $480 puts, entered at $13.50, sold $490 puts against it for $12.90.

Nothing would make us happier than a flatline into expiration, but let’s stand ready to move once the markets do!