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Eaton Update

Friday, May 30th, 2008

Eaton (ETN, $96.68, up $2.42) continues to roll. The stock gained another 2.5% today and is up nearly $8 for the week. I had mentioned the activity building in the June 95 calls (ETNFS, $3.40, up $1.30) when they were trading for $1.80. Trading volume was strong and the stock made higher highs throughout the week. This sets up well for next week as Eaton continues its assualt on $100. If Eaton can get to $100 then the June 95 calls will be worth at least $5.00.

Apple (AAPL, $188.75, up $2.06) traded higher every day this week ahead of its June 9 release of the 3G iPhone launch next month. Although the impact won’t be seen in its upcoming quarter many expect Apple will crush their estimated 10 million iPhone target well before the end of the year.

Options traders are targeting the June 200 calls (APVFT, $2.91, up $0.16) and the longer-term July 200 calls (APVGT, $6.85, up $0.35).

Before closing, I also wanted to mention the American Society of Clinical Oncology’s (ASCO) annual meeting which is being held over the weekend. Imclone (IMCL, $43.58, up $0.58) and Bristol-Myers Squibb (BMY, $22.79 up $0.31) could see some action come Monday. The companies are expected to give an update on Erbitux that could help lift these stocks higher. Imclone saw plenty of action today in the June 45 calls (QCIFI, $1.55, Up $0.28) as 11,000 contracts traded hands. The July 50 calls (QCIGJ, $0.80, up $0.10) aslo experienced some brisk trading as over 2,000 contracts traded hands.

I’ll give you an update on Monday.

Rick Rouse
Rick@OptionsMentoring.com

Tags: American Society of Clinical, Apple, Eaton, Imclone
Posted in Hot Stocks | No Comments »

Dell Rocks!

Friday, May 30th, 2008

Dell (DELL, $21.81, up $0.12) reported earnings last night and investors loved what they heard. The numbers came in four cents above expectations on strong international sales and from cutting costs and slashing its workforce. For the quarter, Dell earned $784 million, or $0.38 a share versus $756 million, or $0.34 a share, a year earlier. Revenue came in at a little over $16 billion, about $400 million above estimates. In after-hours trading Dell was up $2.16 to $23.97.

I profiled the June options and mentioned that option traders were favoring a good report. Let’s take a look at those options and see where they might open this morning and what kind of scenarios might play out.

If you were totally bullish on Dell and just bought the June 22 calls (DLQFV, $0.74, up $0.03) right before the close, your total cost would have been $75 a contract. If you bought 10 of them you are looking at $750. Now, assuming Dell opens at $24 and holds last night’s after-hour gains then the calls will be worth at least $2.00 and you more than doubled your money overnight. Your $750 is now worth $2,000. Good bet.

If you were totally bearish and you thought Dell was going to go down and you bought 10 June 20 puts (DLYRD, $0.22, down $0.04) then you are in “the house of pain” right now and you probably didn’t sleep too well last night. Your $225 is history. Not a good bet.

Now, what if you had bought 10 calls and 10 puts (known as a strangle option trade)? Your total cost would have been $1,000. The calls would still be worth $2.00 and you still would have made a 100% return even if the puts expire worthless. By “hedging” your Dell option trade you were protected either way unless the stock stayed flat. But I told you Dell could move 5-10% and last night’s 9.9% after the close was right on the money. Great bet.

However, as I also mention time-and-time again, after-hour trades do not mean realized profits. The stock and options actually have to open at 9:30 EST before you can book a gain or loss. Sometimes a 10% move in after-hour trading translates into a 5% gain or even a 5% loss in the stock price by the time the opening bell rings.

Hats off to Dell and to those option traders brave enough to play the earnings!

Rick Rouse
Rick@OptionsMentoring.com

Tags: Dell earnings strangle, hedge dell options
Posted in Earnings, Hot Stocks | No Comments »

Dell After the Bell

Thursday, May 29th, 2008

It wasn’t suppose to go this way for Micheal Dell, CEO of Dell (DELL, $21.69, up $0.20). Since returning to the company he founded, Mr. Dell has seen the stock price fall from $31 to a low of $18 in April.

Despite expanding dealer outlets for its computers with deals like Best Buy (BBY, $44.00, up $0.75), Dell appears to be fading in the race to get in the consumer’s face. Not only is Dell losing market share to Apple (AAPL, $187.01, up $0.58) and Hewlett-Packard (HPQ, $46.52, up $0.82) but it recently got hit with some nasty news. Just this week a judge ruled against the company saying it engaged in “fraud, false advertising, deceptive business and abusive debt collection practices.”

Dell is expected to report earnings after the bell today and Wall Street is not looking for much out of the company. Although sales may show an increase of about a billion from roughly $15 to $16 billion for the quarter when compared to last year’s first quarter, analysts are expecting $0.34 a share which would only match the year-ago quarter.

Again, the thing that will most likely move Dell is what guidance it gives. If Dell’s sales and earnings guidance are weak and they show they are losing market share then it could be an ugly open come Friday. Even if Dell surprises and woos Wall Street, I think we get a 5-10% move either way.

Playing earnings is a risky game but a lot of option traders do it. Trading in the June 22 calls (DLQFV, $0.78, up $0.07) is brisk with over 9,000 contracts traded. The June 20 puts (DLYRD, $0.24, down $0.02)have traded nearly 5,000 contracts. Judging by the call/ put ratio, traders are expecting a good report. If you take a look at Dell’s option chain you will notice the options are available in $1 increment strike prices. Not unusual but rare.

I’ll revisit Dell on Friday and we will see how these options fared.

Rick Rouse
Rick@OptonsMentoring.com

Tags: Dell earnings blog
Posted in Earnings | No Comments »

Wachovia Continues Slide

Thursday, May 29th, 2008

More bad news from the Financial stocks. It what can compared to catching a falling knife, shares of Wachovia (WB, $23.80, down $0.59) fell another 2.4% yesterday and hit a fresh 52-week low of $23.13 in the process. I’ve been beating the drum on how risky Financial stocks are right now and who knows when and where the next tidal wave is coming from?

You know it gets scary when Moody’s (MCO, $36.20, up $1.33) drops 20% in one day, falling from $44 to $37, after saying a “computer error” was the reason behind the company giving out improper credit ratings. I didn’t blog on the matter because I think I’m still in shock. Moody’s has always been well respected in what it does but this was a shocker to say the least.

Wachovia is a mess and even at 52-week lows, the stock doesn’t appear to be headed for a recovery anytime soon. The company has taken massive write-downs to the tune of $4 billion, slashed its dividend, and is diluting the value of its stock. The dividend was cut from 64 to 37.5 cents a share and Wachovia raised $8 billion in new common and preferred stock. A billion here, a billion there in losses…just what the heck is going on here Wachovia?

I still don’t trust Financial sector and there will be a time when these stocks will appear to be dirt cheap. Maybe they are right now but I would wait for two consecutive quarters of good earnings before even thinking about buying a bank stock right now. I will be keeping an eye on the Financial Select Sector (XLF, $24.64, down $0.14) for any signs of a turnaround. This exchange traded fund is a safer way to play the Financial’s instead of finding a true bottom for a particular stock.

Rick Rouse
Rick@OptionsMentoring.com

Tags: Financial stocks blog, Wachovia blog
Posted in Company Commentary, Sectors | No Comments »

Eaton Poised For New Highs

Thursday, May 29th, 2008

Every now and then a company adapts to the environment and is able to see the road ahead. Eaton (ETN, $93.27, up $4.02) has done just that and now it is rewarding its shareholders. The company has slowly switched its focus from auto engines to “developing “green” engines for mass transit. Eaton is supplying the hybrid power system for the 500 hybrid electric vehicles that United Parcel Service (UPS,$70.54, up $2.14) recently ordered.

Eaton’s has grown internationally through acquisitions (11 in 2007) that is helping fuel its growth. In April, the company reported earnings of $247 million, or $1.64/ share. If you exclude charges, they actually hit the high end of their guidance of $1.70. Eaton also raised estimates for 2008 by a nickel to $7.80 to $8.30 a share.

The stock took a big hit from late December when it was at $100 to its $78 bottom in late February. Since then, Eaton has slowly proved to Wall Street that the synergies from these acquisitions are starting to pay off and investors are rewarding the stock. Want even more proof? Eaton’s CEO said he expects top line growth of 25% and nearly 20% of that will come from these acquisitions.

Was yesterday’s big move the one that kick-starts Eaton’s run towards a new 52-week high of $104? As much hype as this stock is getting you would think its Big Brown going for the Triple Crown (that would be June 7 my friends). And since I just mentioned June, I might as well tell you about the June 95 calls (ETNFS, $1.80, up $1.22) for Eaton. They were up 210% yesterday. They are still out-of-the-money but that will change if Eaton starts to race towards $100. Place your bets!

Rick Rouse
Rick@OptionsMentoring.com

Tags: Eaton, Eaton blog
Posted in Company Commentary | No Comments »

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Archive for May, 2008

Eaton Update

Dell Rocks!

Dell After the Bell

Wachovia Continues Slide

Eaton Poised For New Highs