1. Commentary
2. Power Stock Trading Strategies
3. Covered Calls
4. Earnings
5. Current Trades
6. Monday Morning Playbook
7. Closing Thoughts

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1. Commentary

Well, we knew it was coming. After a two-month rally, we saw some major profit taking last week. The Nasdaq which had been up nine straight weeks fell 59 points, or 3.4%, to finish at 1,680.

The Dow and S&P 500 had rallied eight out of those nine weeks, but they too, took hits. The Dow fell 3.6%, or slightly over 300 points, to close at 8,268. The S&P was dropped like a rock as it fell 5%, or 46 points, and ended at 882. The break below 900 was not pretty for the bulls.

The decline was led by the Financial stocks as they fell a whopping 12% on average. The volatility has been amazing to watch but we knew after the bank stress tests were out there would be some profit taking. Not to mention the flood of secondary offerings. Many firms are anxious to pay back the TARP money and there’s rumors floating around that Goldman Sachs (GS, $134.40, up $0.80) could pay it back this week.

Retail sales came in worse-than-expected and Intel (INTC, $15.19, down $0.35) got slapped with a $1.5 billion fine. All-in-all it was a good week for the bears and we will have to see if the bulls were simply taking a break or if they are gearing up for another charge.

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2. Power Stock Trading Strategies

I wanted to take some time this week to talk about one of our mentoring programs, Power Stock Trading Strategies (PSTS).

Determining the direction of a stock is crucial if you are trading options especially if you are buying a call or put option without protection. A 10% move in a stock often translates into a 100% return on an option and the PSTS course can help you find these types of winning trades.

This course is a powerful tool you can use to pick stock direction and has been proven to be over 80% accurate. The course also comes with an options trading manual which is what I’ll be expanding. The PSTS course focuses on at-the-money or in-the-money options that correlate with the trend the stock is trading in. They are a little more expensive than out-of-the-money options but they move nearly dollar for dollar depending on the option.

As you know, options are a lot less expensive to trade than stocks and this part of the option part of the course was designed for those who may be a little undercapitalized and would still like to make money in the market.

Once you finish reading, studying, watching the DVD’s and mentoring, you will be able to find trades based on a great foundation for option trading.

More and more people are managing money themselves instead of trusting it with a money manager. And why shouldn’t you? It is possible for anyone to manage their own account, the problem is that people don’t take the time to understand the market or how to protect themselves from a downtrend.

In fact, most people don’t know how to make money when the market is going down. Even when we tested the lows of the year and everything was gloom and doom, I was recommending option trades that did very well. The key is not be be afraid of a down market or a sideways market.

I have been getting a lot of questions about the options manual I’ve been putting together and I wanted to give everyone an update. Once the revised option manual is completed it will sent out to anyone who signs up for the PSTS course now.

The PSTS course comes with lifetime mentoring and endless access to training classes. You will become a better trader, I’m certain. If you are interested in learning more about the course, please send me an email.

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3. Covered Calls

I’m not a big fan of covered calls but they can provide you with steady income or the opportunity of lowering your the cost basis on a stock that you want to hold in your portfolio.

The biggest thing with a covered call is that you have to own at least 100 shares of stock before you can sell a call option on it. I would also recommend it be a stock that you don’t mind owning in case the price falls after you buy it.

There are numerous candidates that look safe right now and I’m going to start with one and use it as an example. The picks from the blog should be posted sometime in June but I wanted to start this portfolio for those of you who do own stock or are interested in how covered call options work.

The first thing is picking a stock and the one I’d like to start with is Cisco Systems (CSCO, $17.92, down $0.17). The downside risk is that Cisco falls below $15 over the summer but longer-term it should be in the $20′s.

If you went out and bought 100 shares on Monday it would cost you around $1,800. The July 19 calls (CYQGA, $0.58, down $0.09) would get you about $60 back into your account and lower you cost basis to $17.30 or so. You would then be obligated to sell your 100 shares of Cisco at $19 should the stock trade past this level when July hits.

That wouldn’t be a bad deal because you would make about 8% on your money in two months. That may not sound like much but if you do it six to eight times a year, the returns add up.

The risk is if Cicso falls below $15 which could easily happen. You would then have to be careful on which option you sell in the future because you could get taken out and end up losing money on the trade. You would have to wait for a rebound before selling another option.

Holding Cisco isn’t like holding a financial stock or a penny stock. It is a solid company with tons of cash that should only get stronger during this weaker environment. Cisco isn’t out of the water by no means but I think it will bigger and better once the economy picks back up.

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4. Earnings

Monday: AirMedia Group (AMCN, $5.62, down $0.10), Lowe’s (LOW, $18.45, down $0.42), Perfect World (PWRD, $18.02, down $0.32) and Tsakos Energy Navigation (TNP, $19.81, up $0.80).

Tuesday: Hewlett-Packard (HPQ, $35.01, up $0.08), Dick’s Sporting Goods (DKS, $18.19, up $0.25), Home Depot (HD, $24.40, down $0.13), Medtronic (MDT, $33.40, down $0.19), OceanFreight (OCNF, $1.49, $0.10), Saks (SKS, $3.34, down $0.26) and Solarfun Power Holdings (SOLF, $4.78, up $0.03).

Wednesday: Advance Auto Parts (AAP, $40.66, up $0.73), BJ’s Wholesale Club (BJ, $36.75, up $0.35), Computer Sciences (CSC, $36.29, down $0.18), Deere (DE, $41.91, up $0.13), Gymboree (GYMB, $3.40, up $0.64), Intuit (INTU, $23.98, down $0.34), NetApp (NTAP, $17.57, up $0.16), Target (TGT, $40.37, down $0.11) and Toll Brothers (TOL, $18.57, down $0.21).

Thursday: Aeropostale (ARO, $31.00, down $1.79), Autodesk (ADSK, $19.00, up $0.16), Barnes and Noble (BKS, $22.42, up $0.19), Foot Locker (FL, $10.55, down $0.21), Gamestop (GME, $26.47, up $0.50), Gap (GPS, $15.16, down $0.25), Patterson Dental (PDCO, $22.08, down $0.17), Red Robin Gourmet Burgers (RRGB, $20.07, up $0.14), Salesforce.com (CRM, $40.20, up $0.43) and Toro (TTC, $27.12, down $0.19).

Friday: Campbell Soup (CPB, $26.89, up $0.14), Met-Pro (MPR, $9.92, up $0.04) and Mobile Telesystems (MBT, $34.00, up $0.58).

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5. Current Trades & Closed Trades (Friday’s closing price)

Note: I profiled a lot of trades this week and a few were very specualtive by nature. When I classify something as a “lottery” trade then that is exactly what it is. Lottery trades are just that, lottery plays.

If an option is trading for 50 to 75 cents, please realize that there is a good chance they may dip below a 50% loss. I still adhere to my 50% stops but for lottery trades, you may not have that luxury. My track record for the blog is over 70% as I have profiled over 200 plus trades over the past year.

The percentage would be higher if I didn’t include the lottery trades but these are the trades that can make you a mint. Dendreon (DNDN, $20.52, down $0.29) wasn’t really a lottery trade but the April call options lost 50% before they returned 2,500%.

I don’t think the current trades have that potential but some of them have lost over 50%. With the market in transisition, these trades were against the herd trades that are extremly risky but I still have to report the news.

Advanced Micro Devices (AMD, $4.01, down $0.23)

June 5 calls (AMDFA, $0.20, down $0.10)

Entry Price: $0.50 (5/13/09)
Exit Price: $1.00 (open)
Return: -60%

July 6 calls (AMDGI, $0.15, down $0.15)

Entry Price: $0.44 (5/13/09)
Exit Price: $0.88 (open)
Return: -66%

AMD saw a lot of action on Wednesday and this was one of the lottery plays I had mentioned. The current semiconductor cycle is in a bottoming process and AMD’s market share in the first quarter came in at 22%, up nearly 5% from a year ago.

The dip below $4 on Friday was a backbreaker but AMD’s value for pricing is working well in the mobile and desktop markets. The 50% stop loss was hit for these positions but I wouldn’t be surprised if they finish in-the-money when expiration rolls around.

Barrick Gold (ABX, $33.49, down $0.62)

May 30 calls (ABXEF, $3.50, down $0.65, expired)

Entry Price: $1.35 (4/21/09)
Exit Price: $5.00 (5/12/09)
Return: 270%

Barrick rallied all the way to $36 on Wednesday and the options hit a high of $5.80. That was our signal to get out and we did just that as our $5.00 stop was hit on the way back down. Investors bid up gold as people were looking for a “safe haven” to park some cash while they figured out the market’s next move. This was a huge winner and a stress free trade that allowed us to take advantage of gold’s move.

Dendreon (DNDN, $20.52, down $0.29)

August 10 calls (UKOHB, $10.40, unchanged)

Entry Price: $2.20 (4/13/09)
Exit Price: $15.00 (sold 1/2 on 4/28/09 @ $14.60, 1/2 open)
Return: 564%, 373%

I am kind of glad the May options are over with and the company has gotten the $220 million stock offering out of the way. The offering was needed as Dendreon rolls out the next phase of marketing Provenge and preparing for FDA approval.

I would expect things to quite down over the next few weeks but keep watching the volume and option pits. Before the hoopla, the stock was averaging 2 million shares in average daily volume. That has moved closer to 8 million shares on average but I would expect that to come back down over the next few weeks. However, this is what you want to watch for as far as clues about any upcoming data that might come out. There are always “leaks” and these leaks mean volume and volatility which may provide us with another opportunity to go long Dendreon.

ExxonMobil (XOM, $69.11, down $0.65)

May 70 calls (XOMEN, $0.00, down $0.27, expired)

Entry Price: $0.65 (5/11/09)
Exit Target: $1.20 (5/12/09)
Return: 85%

June 75 calls (XOMFO, $0.33, down $0.20)

Entry Price: $0.63 (5/11/09)
Exit Price: $1.25 (open)
Return: -48%

We made a good return on the May options but the break below $69 for the stock was disappointing. The stock hit a high of $71.20 on Tuesday but faded with the rest of the market. Although shares were up 25 cents in after-hours on Friday, we need to see $70 this week. If we dip below $68, close the position.

Ford Motor (F, $5.49, up $0.33)

June 5 puts (FRA, $0.35, down $0.10)

Entry Price: $0.63 (5/13/09)
Exit Price: $1.25 (open)
Return: -53%

Ford Motor was actually down over 20% for the week but shot higher after I profiled them in the blog. Go figure. The better trade was probably a straddle but the company is flooding the market with new stock which rots shareholder value. The latest offering is for 300 million shares at $4.75.

However, there are a lot of bullish calls on Ford right now and the stock could be headed to $6 before it falls back below $5. I still like the trade because I am expecting weakness when the shares do hit the market. That is why we went with June, but then again, if Ford is the only company around after GM declares bankruptcy, then the stock could be headed to $10.

The December 6 calls (FLI, $1.27, up $0.12) and the December 7 calls (FLJ, $0.99, up $0.09) could be used as a hedge against the current position or if you think Ford is headed to $10.

Las Vegas Sands (LVS, $9.23, down $0.20)

September 12.50 calls (LVSIC, $1.75, down $0.25)

Entry Price: $1.70 (5/15/09)
Exit Price: $3.50 (open)
Return: 3%

I covered this trade in the blog on Friday and we got some good entry points. If you notice, I went over four months out on this trade because we could experience some more volatility in the coming weeks.

Longer-term, I think Las Vegas could test $15 but we are really only looking for a run back to $12 over the next couple of weeks.

Wells Fargo (WFC, $24.87, down $0.82)

June 30 calls (FHUFD, $0.60, down $0.20)

Entry Price: $1.20 (5/12/09)
Exit Price: $2.40 (open)
Return: -50%

June 23 puts (WFCRI, $1.50, up $0.15)

Entry Price: $1.30 (5/12/09)
Exit Price: $2.25+ (open)
Return: 15%

We have lost a little fluff as our entry price was $2.50 for both sides of the trade. I am looking for Wells Fargo to trade back to the low $20′s this week which should gives us enough profit to ride the calls for free. We are only looking to make 10% with the chance of a free trade, either long or short.

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6. Monday Morning Playbook

We are going to see some action in quite a few “key” companies that will also give us a huge picture of things going forward. On Monday and Tuesday we get Lowe’s and Home Depot earnings. The action was in Home Depot on Friday and it appears traders are leaning towards taking the other side of $25 as a trade. The June 25 calls (HDFE, $0.86, down $0.13) traded over 4,000 contracts while the June 25 puts traded (HDRE, $1.72, up $0.06) around 3,000.

HPQ also reports on Tuesday and could sway Tech stocks.

Target and Toll Brothers are due out on Wednesday. GameStop may offer clues on what video games are doing and Toro will be reporting as well.

OceanFreight has been getting a ton of action recently and the December 2.50 calls (QZVLZ, $0.40, down $0.10) are getting some looks. The stock made a run to $2 last week and is down from a 52-week high of $27.

I’m not recommending any new positions this week until we close a few but it will be interestng to see where these calls will be trading at in 6 months…

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7. Closing Thoughts

The market will be tested this week and the key level I am looking at is Dow 8,000. This is where its 100-day moving average rests and if we go below 8, there’s not much stopping the Dow from falling to 7,500.

I’m watching 850 for the S&P 500 and 1,600 for the Nasdaq. We have gotten a 30% rally since March and there could still be further gains in the cards but it looks like we are in transition right now.

The retail report we got showed consumers are still saving money and watching their spending habits. This week we get Housing Starts/Building Permits on Tuesday and the FOMC Minutes on Wednesday.

The market will be closed next Monday, May 23rd for Memorial Day but there will still be a Weekly Wrap for next week.

Rick Rouse
Rick@OptionsMentoring.com