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Market Commentary
It was a choppy week of trading as the bulls battled the bears to keep the Dow over 10,000. The market got some solid earnings reports but it wasn’t enough to muster any kind of momentum for the bulls as the lost the battle on Friday. The Dow lost 109 points and ended the week down 24 points to settle at 9,972.
The Nasdaq fell 2 points for the week and closed at 2,154 while the S&P 500 closed at 1,079, down 8 points. The bears didn’t do any real damage but there were a couple of days last week that selling was heavy into the close. That suggests Wall Street is getting nervous and we should get a clear picture on things going forward with another heavy round of corporate earnings this week.
In the earnings section below, we have a number of companies in BOLD and those are the ones that we are watching for clues on the economy. Others are in bold because they will likely move significantly, up or down, when they announce earnings.
We outlined some near-term targets for the market in last week’s Weekly Wrap (Dow, 10,400; Nasdaq 2,275; S&P 500 1,175) but the better-than-expected earnings results have not translated to any big gains for the market. Companies are still doing a great job of cutting costs but by trimming their workforce it continues to weigh on unemployment which in turn hurts consumer spending.
These factors alone have weighed on the market but companies are saying good things. However, the bulls appear tired and we could continue to have choppy trading if the bears take advantage of them resting. This was pretty clear a few days last week when the market plunged in the final hour of trading.
Either way, it should be another interesting week.
Before we get into the list of companies reporting earnings this week, we wanted to talk about Microsoft (MSFT, $28.02, up $1.43) again. In our 1pm update on Friday we talked about playing earnings and we took a look at what would have happened if you had placed your bets on Microsoft before the company announced earnings on Friday.
If you were bullish you got paid. The November 27 calls (MSQKB, $1.40, up $0.75) closed with a 115% gain on Friday and traded as high as $2.40. They closed at 65 cents on Thursday. This is why you SELL into strength the next day after a company announces earnings. If you bought 10 contracts, you gave back $1,000 if you didn’t get out at the high which was achieved in the first 10 minutes of trading.
If you were bearish, they you got your lunch money stolen. The November 26 puts (MSQWA, $0.17, down $0.50) fell 75%.
Now, with Microsoft at $26.50 on Thursday before the closing bell, you could have bought BOTH contracts which is known as a strangle option trade. A straddle is when you buy both a call and put option with the same strike price.
To maximize your returns on the strangle trade you would have had to close the calls at the open and sold the puts at the close, OR, you could have left the puts open in hopes of the stock falling back down over the next few weeks. The put options do not expire until November 20th.
So what would the return have been you ask? Well, the call options were going for 65 cents and the put options were going for 67 cents on Thursday. Together, you were looking at $1.40 for both options or $1,400 for 10 contracts of each.
If you could have managed to get out of the calls at $2.35 and if you would have sold the puts at 15 cents, you would have netted $2.50, or $2,500. That would have been a return of nearly 80% by playing it safe. Of course, for strangle option trades to work you usually need a 5%-10% move or more in the stock AND you have to make sure the option prices aren’t inflated. As you can see, there are numerous ways to trade earnings and we wanted to show you other ways to use options in your portfolio.
We will be back in the morning with the 9am update. The current trades will be covered as well and don’t forget RadioShack (RHS, $15.66, up $0.12) reports before the bell. For those of you who are not current subscribers, you can sign up anytime between now and 8am Monday morning to get the trade updates and any new trades in the comings days, weeks, and months…
EARNINGS for the week (quotes are from Friday’s close):
Monday: Arch Capital Group (ACGL, $68.88, down $0.17), Atlas Air (AAWW, $35.47, down $0.76), Cabot Oil & Gas (COG, $38.90, down $0.85), Corning (GLW, $15.65, up $0.05), Dollar Thrifty Automotive (DTG, $24.81, down $0.83), Flextronics (FLEX, $7.24, down $0.27), Lacrosse (BOOT, $14.75, up $2.00), National Oilwell Varco (NOV, $46.89, down $1.71), PrePaid Legal (PPD, $41.68, down $1.87), RadioShack (RSH, $15.66, up $0.12), Rent-A-Center (RCII, $20.63, down $0.04), SOHU.com (SOHU, $71.35, up $2.61), Verizon (VZ, $28.85, down $0.17) and Winn-Dixie Stores (WINN, $13.55, down $0.09).
Tuesday: Apollo Group (APOL, $74.03, down $0.78), Baidu (BIDU, $435.31, up $19.71), Black Box Network Services (BBOX, $27.59, down $0.06), Buffalo Wild Wings (BWLD, $40.51, down $0.80), Cephalon (CEPH, $53.92, down $0.82), DeVry (DV, $55.50, down $0.19), DreamWorks Animation (DWA, $31.90, down $0.66), Franklin Resources (BEN, $112.93, up $0.69), Group 1 Automotive (GPI, $32.84, down $1.63), Harris (HRS, $39.45, down $0.93), Massey Energy (MEE, $31.64, down $1.08), McKesson (MCK, $60.31, down $0.46), NutriSystem (NTRI, $19.54, up $0.39), Open Text (OTEX, $39.28, down $0.55), Panera Bread (PNRA, $55.95, up $0.36), Rayonier (RYN, $42.86, down $0.40), Under Armour (UA, $31.51, up $0.23), United States Steel (X, $40.87, down $0.76), ValueClick (VCLK, $12.85, down $0.17), Visa (V, $74.12, down $1.57) and Wynn Resorts (WYNN, $62.46, down $0.92).
Wednesday: Akamai Technologies (AKAM, $21.50, down $0.10), Cerner (CERN, $82.02, down $1.33), Churchill Downs (CHDN, $36.92, down $1.42), ConocoPhillips (COP, $51.97, down $0.96), Express Scripts (ESRX, $80.70, down $0.78), First Solar (FSLR, $152.39, down $3.69), Flowserve (FLS, $105.15, down $1.04), GlaxoSmithKline (GSK, $40.24, down $1.30), Goodyear Tire & Rubber (GT, $17.75, up $0.02), Hanesbrands (HBI, $23.20, up $0.08), International Paper (IP, $23.72, down $0.66), Jones Apparel Group (JNY, $18.55, down $0.72), Lazard (LAZ, $40.37, down $0.22), O’Reilly Automotive (ORLY, $35.02, down $0.79), Owens Corning (OC, $23.18, down $0.70), Praxair (PX, $82.68, down $1.81), Ryland Group (RYL, $20.99, down $1.14), StellarOne (STEL, $11.92, down $0.33) and WellPoint (WLP, $46.03, up $0.01).
Thursday: Allergan (AGN, $56.73, down $0.76), Apache (APA, $99.39, down $2.69), Barrick Gold (ABX, $37.57, down $0.36), Chicago Mercantile Exchange Holdings (CME, $319.96, up $2.44), Dynamic Materials (BOOM, $19.48, down $0.71), Expedia (EXPE, $26.36, up $0.48), ExxonMobil (XOM, $73.57, down $0.87), Genworth Financial (GEN, $10.40, down $0.64), Kellogg (K, $50.20, down $0.44), MetLife (MET, $36.95, down $1.14), Mohawk Industries (MHK, $48.02, up $0.42), Moody’s Corporation (MCO, $25.03, down $0.55), OfficeMax (OMX, $11.70, down $1.23), Procter & Gamble (PG, $57.64, down $0.49), Shaw Group (SHAW, $28.86, down $0.50), Stanley (SXE, $25.75, down $0.87), Strayer Education (STRA, $220.95, down $1.05), Timberland (TBL, $14.40, down $0.34) and Waste Management (WM, $30.93, down $0.55).
Friday: Alliant Energy (LNT, $27.47, down $0.42), Black Hills (BKH, $25.29, down $0.40), Chevron (CVX, $76.68, down $0.61), Coventry Health Care (CVH, $18.70, up $0.06), Dominion Resources (D, $35.17, down $0.32), Penske Automotive Group (PAG, $18.35, down $0.42), Regency Centers (REG, $36.05, down $0.19), Sony (SNE, $28.91, down $0.35) and Washington Post (WPO, $467.10, down $9.00).
Tags: Microsoft, MSFT, option trading picks, RadioShack, RHS
