1. Commentary
2. Dendreon’s Next Move
3. Olin – Under the Radar
4. Earnings
5. Current Trades
6. Monday Morning Playbook
7. Closing Thoughts

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1. Commentary

The market extended its winning streak to six straight weeks although the gains were marginal. Still, the streak was in jeopardy after the pounding we got on Tuesday and part of Wednesday as the Dow slipped below 8,000. However, we got a turnaround late in the day on Wednesday that carried through for the rest of the week. At one point on Friday, the Dow hit a high of 8,250.

The bears showed their faces after Goldman Sachs (GS, $120.60, down $0.59) and Intel (INTC, $15.60, down $0.29) reported earnings and both stocks fell hard following the announcements. However, both stocks ended only slightly down from where they started the week despite reporting stellar profits. Goldman hit $130 on Monday, then fell to $113 on Tuesday and closed above $120 everyday afterwards. Intel started the week off at $15.98.

With April options expiring on Friday, I thought we would see more volatility then we did. I used “option expiration week” to show you how to make some incredible gains using cheap out-of-the-money options. We got into the Goldman Sachs April 140 calls on Monday morning and were out by the afternoon for a 229% profit. The calls were $20 out-of-the-money and the options were trading for 70 cents. Our exit was $2.30.

We rode the Intel April 17 calls from 16 cents to 32 cents for a quick 100% return and there were four Citigroup (C, $3.65, down $0.36) trades that did rather well. The Citigroup April 3 and 4 call options returned 257% and 333% respectively. Overall, there were nine trades that were profiled last week for this special event and all of them returned over 100%. Now that’s making money.

For the week, the Dow added 47 points to finish at 8,131, up 0.6% for the week. As far as the other indexes, the Nasdaq added 20 points, or 1.2%, and finished at 1,673 while the S&P 500 was up 1.5%, or 13 points, and closed at 869.

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2. Dendreon’s Next Move

It was a great week for Dendreon (DNDN, $17.99, up $0.96), a stock I have been talking about for a month, after they gave the market some details concerning its drug, Provenge. Although we didn’t get any numbers concerning the survival rate, the company’s CEO delivered an upbeat message which was enough to lift the stock from $7 to over $22 last Tuesday.

Many of you emailed to thank me for the trade and I was glad that some of you took my advice. The April 10 call options soared from a closing price of 20 cents on Monday to over $11.00. That folks is a 2,650% return. Incredible.

When I first talked about the trade back in March I had said it was one of those trades that comes around once or twice a year and it was by far, the biggest winner I have profiled this year. My point is that you shouldn’t always expect these kinds of returns because they just don’t happen.

When the news came out, you should have sold all of your position because the April calls were at their highest point on Tuesday. I also suggested you could roll positions out until August by using the August 10 calls (UKOHB, $9.30, up $1.35 which were going for $2.20 last Monday. They are up over 300%.

I also recommended the May 25 calls (UKOEE, $1.75, up $0.50) on Friday morning at $1.25.

Naturally, your next question is “where is the stock headed”?

Two years ago when we went through this same process, the stock hit a high of $25. That is my first target. However, things are different this time. I don’t think the company’s CEO comes out and says the things he does without the survival data being stronger than what it is. If that were the case and the data isn’t as revealing then the stock could get hammered.

It’s still a crapshoot on where the stock will trade and technical charting does not help. This stock is news driven and it is impossible to get a feel on the daily gyrations that it makes.

If the news is so unbelievable, then there is a chance we go higher than $25. The bottom line is that approval of the drug could still be a long wait but there could be the possibility of a larger drug company making a pitch for Dendreon.

Of course, this is all speculation on my part but I do think we head higher from here. The big date is set for next Tuesday and I still want to be in Dendreon when that news comes out. Is it risky? You bet.

It’s always dangerous to go back to the well after such a big move in a stock but I’m still thirsty. Obviously, don’t go overboard with the May 25’s if you do decide to go long and you could always pick up a few cheap out-of-the-money put options for protection. The May 10 puts (OKOQU, $0.39, down $0.08) could be used just in case the news isn’t all that rosy.

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3. Olin – Under the Radar

I stumbled upon Olin (OLN, $15.97, down $0.01) over the weekend in my quest for another profitable option trade.

The main thing you need to know about Olin is that is basically has two businesses. One is its chemical business (chlorine…think pools) and the other is ammunition. I recently did a write-up on Smith & Wesson (SWHC, $6.61, up $0.12) and profiled an option trade that doubled in 10 days back in early March.

I’m not sure if lightning will strike twice but there is a chance that Olin could be that bolt.

The company’s Winchester segment is the part of the business that has me stoked. In case you haven’t heard, there has been a major shortage of ammo and demand is at a feverish pitch. Some guns shows are only allowing customers to buy two boxes per person. The price of guns has nearly doubled in a year on some models and you can bet ammunition has followed suit.

The chemical business had weighed on Olin’s share price up until March which is when this “ammo shortage” started. Sure enough, when I looked at the chart, the stock started its move from $10 to current levels which is about a 60% pop. Naturally, some of that has to do with the market moving up for five-straight weeks but is there something else here? Maybe.

In January, when the company reported its 4Q earnings, it said it expected 1Q’s profits to come in between 50 and 65 cents a share. On March 18th, Olin raised that guidance to 60-65 cents a share. That means they are expecting earnings at the higher end which could also mean a surprise.

Since they have given guidance and then updated that guidance again, that means its Winchester unit is doing really well. In fact, Olin had this to say when it raised guidance: “Demand in our Winchester business has remained strong and we now expect Winchester to achieve a record level of quarterly earnings in the first quarter”…

Bingo. I like the sound of that but I don’t like the chemical Gremlin that could affect the trade. In any event, instead of doing a full position on this trade, maybe do half positions. Given the punishment stocks have gotten for actually beating earnings recently, this trade carries those same risks.

However, this is a low-profile trade so hopefully Wall Street doesn’t catch on to this one. I’m pretty sure there aren’t that many analysts that cover the stock so we should be good. I’m watching the May 15 calls (OLNEC, $1.60, unchanged) and the May 17.50 calls (OLNEW, $0.50, down $0.05). Set a limit price to enter the 15′s at $1.20 and the 17.50′s at 30 cents.

The chart shows strong resistance at $20 and it is clearly visible. The ideal situation would be a bounce from these levels back up to $20 before earnings on April 28th. Then we could get out before the event. If the call options trade higher from here and we don’t get filled Monday or Tuesday then cancel the trade.

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4. Earnings

Monday: Bank of America (BAC, $10.60, up $0.26), Boston Scientific (BSX, $9.02, down $0.03), Eli Lilly (LLY, $33.75, up $0.48), Halliburton (HAL, $18.78, up $0.21), Hasbro (HAS, $27.91, up $1.72), International Business Machines (IBM, $101.27, down $0.16) and Texas Instruments (TXN, $17.97, up $0.17).

Tuesday: Bank of New York Mellon (BK, $30.22, down $0.99), BlackRock (BLK, $135.92, down $0.68), Brinker International (EAT, $19.33, up $0.55), Broadcom (BRCM, $22.93, down $0.13), Capital One Financial (COF, $17.85, down $0.01), Caterpillar (CAT, $32.29, down $0.42), Coca-Cola (KO, $45.02, down $0.08), Cree (CREE, $26.91, up $0.04), Gilead Sciences (GILD, $44.69, down $0.16), Lockheed Martin (LMT, $76.94, down $0.64), Merck (MRK, $25.73, down $0.12), Norfolk Southern (NSC, $37.79, up $0.57) and Yahoo (YHOO, $14.39, down $0.04).

Wednesday: Altria Group (MO, $16.99, up $0.01), Apple (AAPL, $123.42, up $1.97), Chipotle Mexican Grill (CMG, $79.25, up $0.24), eBay (EBAY, $14.39, down $0.02), F5 Networks (FFIV, $26.70, up $0.09), Freeport-McMoRan (FCX, $43.40, down $0.34), Kimberly-Clark (KMB, $50.24, up $0.46), Qualcomm (QCOM, $40.98, down $0.66), St. Jude Medical (STJ, $36.20, up $0.44), VMware (VMW, $30.70, up $0.51) and Wells Fargo (WFC, $20.26, up $0.81).

Thursday: Amazon.com (AMZN, $78.05, up $0.80), American Express (AXP, $21.81, up $1.12), Amgen (AMGN, $47.07, down $0.11), Black & Decker (BDK, $33.53, up $0.22), Cheesecake Factory (CAKE, $14.33, down $0.32), ConocoPhillips (COP, $40.17, p $0.38), EMC (EMC, $12.81, down $0.05), Juniper Networks (JNPR, $18.49, down $0.70), Microsoft (MSFT, $19.20, down $0.56), Netflix (NFLX, $48.83, up $0.56), PepsiCo (PEP, $52.13, up $0.17), PNC Financial Services (PNC, $41.60, up $2.54), Potash (POT, $86.77, down $0.55), Rambus (RMBS, $10.20, unch.), Raytheon (RTN, $42.51, down $0.77), Union Pacific (UNP, $48.29, up $1.11) and Zimmer Holdings (ZMH, $42.96, up $1.56).

Friday: 3M (MMM, $53.81, down $0.95), Arch Coal (ACI, $14.89, up $0.25), Ford Motor (F, $4.00, down $0.16), Honeywell (HON, $31.49, unch.), Schlumberger (SLB, $46.57, up $0.57) and Xerox Corporation (XRX, $5.92, up $0.17).

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5. Current Trades

Dendreon (DNDN, $17.99, up $0.96)

May 25 calls (UKOEE, $1.75, up $0.50)

Entry Price: $1.25 (4/17/09)
Exit Price: $1.75 (open)
Return: 40%

August 10 calls (UKOHB, $9.00, up $1.05)

Entry Price: $2.20 (4/13/09)
Exit Price: $5.00 (open)
Return: 309%

The last thing I said Friday was to start small positions if you are already out of the other Dendreon trades. The August options should have been picked up on Monday when the stock was gaining another $1 and volume was surging. I still think we have a good shot at the mid $20’s when the company presents its research at a conference on April 28. The CEO’s body language convinced me that the stock was going higher. You can check out the interview on YouTube in case you missed it. There is no stop on the May calls and a $5 stop on the August calls.

International Business Machines (IBM, $101.27, down $0.16)

IBM May 110 calls (IBMEB, $1.15, down $0.10)

Entry Price: $1.00 (4/16/09)
Exit Price: $2.00 (open)
Return: 15%

We got into this position on Thursday before Wall Street started talking about next week’s earnings so we got and early jump ahead of the bulls who were buying on Friday. The calls traded to a high of $1.25 but pulled back slightly before the close. IBM announces earnings after the bell on Monday. Check the blog sometime during the day for an update.

NetApp (NTAP, $17.59, down $0.38)

May 17.50 calls (NULEW, $1.15, down $0.35)

Entry Price: $1.10 (4/9/09)
Exit Price: $2.20 (open)
Return: 5%

May 20 calls (NULED, $0.30, down $0.20)

Entry Price: $0.40 (4/9/09)
Exit Price: $0.80 (open)
Return: -25%

NetApp made a run at $18 Thursday and Friday but faded by the closing bell. The May 17.50’s traded to a high of $1.50 while the May 20’s traded to a high of 55 cents. I was hoping the call options would hold up and hopefully we bounce back this week. Set stops at 55 cents for the 17.50’s and which point you would also close the 20’s if it were hit.

ValueClick (VCLK, $10.02, up $0.21)

May 10 calls (QCSEB, $0.80, up $0.15)

Entry Price: $0.75 (4/9/09)
Exit Price: $1.50 (open)
Return: 7%

September 12.50 calls (QCSIV, $0.80, unchanged)

Entry Price: $0.80 (4/9/09)
Exit Price: $1.60 (open)
Return: 0%

ValueClick traded above $10 last Monday morning and struggled the rest of the week to get back there. Stops are set at half our entry prices.

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6. Monday Morning Playbook

There are a couple of trades I’d like to get into Monday morning. One is Amazon.com, the other is Yahoo. The market has been in a strong uptrend and I like Amazon on the long side and, for protection, I like Yahoo. Over the past few weeks I have profiled mostly call options and that has worked. But it is never a bad idea to have some protection in case the market does fall back.

Having said that, these two companies have clearly gone in opposite directions. Last week, I went out of my norm and recommended a number of profitable plays on option expiration week. We used cheap “out-of-the-money” options and captured triple-digit returns in a matter of a day or two. Although very profitable, you would have had to follow me 24/7 to keep up with the activity we had last week. Kidding, but I was busy in the blog updating the action.

This week will be pretty much the same so check the blog daily. I usually post once before the market opens (9:00am) and once or twice between 10am and 2pm. Sometimes I’ll post after the market closes. All times are EST. The blog can be found by going to:

Blog.OptionsMentoring.com

As far as Amazon.com, they will be reporting earnings on Thursday. We were very profitable playing the April 80 calls on Amazon from March 27 through April 3. We got into these calls at 90 cents and we were out when they hit $2.35 for a 160% return.

The stock has held up extremely well even with the “downgrade” bombs being dropped on it weekly. One brokerage firm issued a “sell” rating on the stock last Wednesday which pushed the shares down $4 that day to a low of $73.50 but by Friday, Amazon’s share price was pushing $80 again.

The stock continues to turn heads and Wall Street analysts are growing leery of its lofty share price. The company surprised Wall Street with an unexpected earnings gain last quarter and has gained 50% for the year. However, Amazon is firing on all cylinders right now. It has a hot new product with the Kindle and sales should be strong. Amazon does not disclose sales figures and expect them to beat on this front. Also, Amazon is starting to steal eBay’s lunch money by focusing on newer items and offering free shipping.

The 52-week high for the stock is $91.75.

So do we get there? There are some risks with Amazon’s numbers and maybe the shares can get into the $80′s before earnings. We have four days before then so try to get the May 90 calls (ZQNER, $1.38, down $0.05) on Monday morning shortly after the market opens. If the calls are lower when we open then try and target $1.30 or less as an entry point. If the call options open higher, don’t pay over $1.50 for them.

With Yahoo, they announce earnings on Tuesday. The company is still a mess and it’s hard to short a stock or buy puts when there has been some momentum in a stock. Additionally, there is a “whisper number” of 10 cents a share being floated which would beat estimates by a penny.

This is one of those “gut feeling” calls, or should I say puts, that I have going into this week. For what it is worth, the May 14 puts (YHQQP, $1.04, up $0.01) could make a quick double if Yahoo fails to impress the Street. Even if Yahoo announces something special, the position has a lot of time to take shape in case Yahoo powers higher from here.

Try to get into the put options for under a $1.00 but do not pay over $1.10 for them.

There may be a few more plays this week but we have our fingers in a lot of pies right now with our other open positions. I try not to hold more than three positions at a time, personally, but there have been a lot of good trading opportunities lately.

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7. Closing Thoughts

Last week I spent some time talking about trends and the current market environment. The “dip” that so many talking heads and analysts are talking about hasn’t come (yet) and more are piling on calling for a correction. Of course you are going to look good if you call for a pullback after we have rallied for six straight weeks but many on Wall Street have said the rally was done three weeks ago.

Last week I went out on a limb and said that we could still go higher with a pullback in May but that could come sooner, it might not come at all, or it could come this week. I could care less because when it does we will switch gears. But for now the trend has been our friend.

We saw a lot of companies beat earnings last week, sell-off, then we watched the stocks bounce back or hold steady after an initial sell-off. There were a few stocks that powered higher as a result of good earnings and the fact that the market held up along with the major stocks of the companies that reported was another bullish sign.

So far, over 50 companies in the S&P 500 have reported earnings and over 30 have beaten Wall Street’s expectations. This means that 60% of the companies reporting are beating their numbers. Granted, the bar has been lowered but this is also another bullish sign.

The start of the week was not all that great but the market held support as the bears roamed around through Wednesday. The Dow held at 7,800 (7,600 is further support) and the S&P 500 held 825 (800 is floor support). The real story is the Nasdaq which is now up 6% YTD. Tech has been leading us higher and for now that trends remains in tact.

This week will be another huge test for the market because we will get the bulk of the earnings announcements and a key housing report. Existing Home Sales come out Thursday and Durable Goods Orders will be released on Friday.

If IBM can get the ball rolling on Monday then we could see the market extend its winning streak to seven straight weeks. The January high for the S&P 500 is 943. The Dow reached a high of 9,175. At current levels, a 10% move from both would get them right around their highs.

That might be asking a lot and it’s hard to say if we get that much of a pop. With so much on the line it does appear this week will be a true test for both the bulls and bears.

Rick Rouse
Rick@OptionsMentoring.com