1. Commentary
2. Research In Motion Highlights
3. Dendreon – Between the Lines
4. Earnings
5. Current Trades
6. Monday Morning Playbook (Alcoa)
7. Closing Thoughts

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1. Commentary

For the fourth week in a row, the market posted a gain but things didn’t look good to start the week. On Monday, the Dow faked everyone out and dropped over 250 points after rallying 6% the week before.

The drop was understandable and was provoked by news that General Motors (GM, $2.10, up $0.01) will probably go bankrupt. After billions and billions of wasted tax paying dollars that provided a lifejacket for the struggling company, it all came to a head after the U.S. government’s auto task force gave the company’s CEO, Rick Wagoner, his walking papers. Chrysler is also in the hot seat and was given 30 days to cut a deal with Fiat, the Italian auto maker that they have a tentative alliance with.

Despite Monday’s downturn, the Dow dusted itself off and resumed its uptrend that has lasted for a month and broke 8,000. The bears tried to throw some more punches with an onslaught of bad economic news but the bulls shrugged off much of them and battled higher. By Friday, the Dow had enjoyed a 450-point gain but looming was the unemployment number.

It was a haymaker for the bears as U.S. employers shed 663,000 jobs in March and the jobless rate jumped to 8.5%. The news kept the Dow on its back for most of the session but, by the afternoon, the Dow was back for more and won the round with a 40-point gain for the day.

For the week, the Dow gained 241 points to finish at 8,017, up 3.1%. As far as the other indexes, the Nasdaq added 76 points, or 5%, and finished at 1,621 while the S&P 500 was up 3.3%, or 26 points, and closed at 842.

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2. Research In Motion Highlights

Last week I profiled quite a few ways to play Research In Motion (RIMM, $59.29, up $10.20) going into its earnings report and gave updates in the blog throughout the week. RIMM had averaged a 12% move after reporting earnings and I was awed that we got a 20% move. The one thing that scared me was that RIMM would miss their numbers and although I had read that their margins had improved, I was still leery.

In Thursday morning’s blog I said “the April 60 calls (RFYDL, $0.22, up $0.10) should be active”. The call options had closed at 22 cents on Wednesday and were at 10 cents on Tuesday. RIMM was rolling and the bulls were buying.

By 1pm, this update went out:

“Research In Motion (RIMM, $49.28, up $3.66) is nearing $50 and oh what a trade it has been for the April 60 calls (RFYDL, $0.58, up $0.36). I mentioned them last night and again this morning and they have been a windfall for those of you brave enough to swim with the sharks. The April 60’s opened this morning at 34 cents and dipped to 30 cents and have now nearly doubled just three hours later. If you had bought just 20 contracts this morning it would have cost $600-$650. You are now looking at profits of nearly $700.

The option currently has a “delta” of 0.1 which means for every dollar that the stock goes up, the option would move up 10 cents. This means that if the stock is up $10 in after-hours trading, then the April 60 option should gain a $1.00 right off the bat if the gains hold when the market opens at 9:30am.

So, if you bought 10 contracts at 60 cents before the market closed, then you should show a $1,000 profit as the option would be valued at $1.60. I got that by adding the closing price of the option (60 cents) by adding the $1 from the “delta” and the additional $10 move in the stock. From 60 cents to $1.60 is a 167% return.

Here is where it gets really, really interesting though. At-the-money calls usually carry a delta of .50-.60 and since the stock is at $60 and the option’s strike price is at $60, any gains the stock makes over $60 will be gravy. So if RIMM hits $61, the April 60’s should be at $2.10 which gives you a 250% return. At $62, the options should be at $2.60 which would be a 333% return. Wow” –

Well, those numbers were at the low-end range, obviously, because the delta has now changed from .1 to .48 and the April 60 calls (RFYDL, $2.53, up $1.87) actually zoomed from 60 cents to a high of $3.90 on Friday. At the open, the bids were ranging from $3.25 to $3.50 and jumped to $3.90 before finishing the day at $2.50. A move from 60 cents to $3.75 is a 1,150% return, folks. In other words, if you had picked up 50 of these call options at 30 cents and sold at $3.75, you could have turned $1,500 into $18,750. Yes, it was a gamble but people make dumber bets with more money at a craps table in Vegas.

That is the power of options.

The other trade I mentioned was a strangle play using the April 50 calls (RFYDJ, $9.70, up $6.44) and the April 40 puts (RUPPH, $0.04, down $0.82). The April 50’s were at $1.60 and the April 40’s were at $1.25 on Thursday morning which meant you would have needed $285 to buy one of each contract. On Friday morning, you could have sold the calls at a high of $11.25. Even if you sold them at $10.00, you still made 250%, or a $1,000, and we left the put option position open.

If you are the buyer of an option, you do not have to close a worthless option. You can let it expire worthless. However, if you are a seller of an option, you can be exercised if the option is in-the-money even if they are only in-the-money by a few pennies.

I doubt RIMM drifts back down into the $40’s by the time these options expire but I will keep you updated on what to do with the put options if the shares do tumble.

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3. Dendreon – Between the Lines

Dendreon (DNDN, $5.99, up $1.65) was making noise on Friday which is where I left you hanging in the last blog update. Shortly after noon, while I was posting, my “Alert” was flashing for Dendreon as the stock price started inching higher.

You have heard me talk about Watch Lists and Alerts before and I had set an alert for my brokerage account to show me when Dendreon broke $4.75. Sure enough, as soon as I started my last entry for the day, the stock started zooming and the last stock quote I gave in the blog was $5.14 when the stock was up 80 cents.

There wasn’t any news available until a few hours later and over the weekend I found a bunch more juicy tidbits that I’ll share. To start, the stock started moving once the market got wind that the company could be speaking at the American Urological Association meeting which is slated for the end of the month. Evidently, the “late-breaker” presentation was taken as a sign that Provenge, Dendreon’s Phase 3 cancer drug, would be approved. That is not the case.

These medical meetings usually involve high-profile studies, or ones of particular interest to healthcare professionals, and Dendreon has repeatedly said that it will release those results this month. However, just because the company may be speaking isn’t an indication whether the data will be positive or negative. We still have to wait for the news.

The shares went on to hit a high of $6.60 for the day and the options I profiled back on March 19th are now profitable. Here were the options I listed and their prices at the time:

May 5 call (UKOEA, $2.22, up $0.22) Bid: $2, Ask: $2.22
May 7.5 call (UKOEU, $1.66, up $0.09) Bid: $1.55, Ask: $1.70
May 10 call (UKOEB, $1.30, up $0.10) Bid: $1.25, Ask: $1.30
May 12.50 call (UKOEV, $1.00, up $0.01) Bid: $0.95, Ask: $1.07
May 20 call (UKOED, $0.50, up $0.05) Bid: $0.40, Ask: $0.50

– On March 20, I bought (7) contracts of the Dendreon April 10 calls (UKODB, $0.55, up $0.28) at 40 cents and the (5) of the May 7.50 calls (OKOEU, $2.05, up $0.59) for $1.50 each. With commissions, the trades cost me a total of $1,060. These quotes are from Friday, April 3rd.

At one point on Friday, the April 10 call options hit a high of $1.05 while the May 7.50′s topped out at $2.80. So at one point, my $1,000 “investment” was up to $2,100 which means I briefly doubled my money for a moment. As of now, I’m up 35%.

It’s not often I talk about my portfolio but what I’m trying to show you is the thought process behind some of my trades.

I knew going into the trade that I was risking $1,000 to make $10,000 or even $15,000 if, and that is still a big if, the stock can make it $15, $20 or even higher. I always talk about taking the “safe” money when it comes to banking profits and that means when you are up 100% on a trade, you can always take half off and let the rest ride. Or you can close the trade entirely and book the 100% return. Each trade is different and you will struggle with this decision at times but if remember why you got in the trade and stick to your guns, it takes all of the emotion out of the trade.

Sometimes you make the right call and close the position for the max profits. Sometimes you will close a trade for a 100% return or take half off only to see the stock soar the next day (See RIMM article). And sometimes you are handed a 100% return and you stand there like a deer in headlights.

Well, I wasn’t a deer in headlights and I knew I had doubled my money but this is one of those trades that I mentioned only comes around a few times a year. This is one of them. I was thinking of closing the April side of the trade but I’m still holding out that the Provenge news comes out before April 17th which is when the April option contracts expire.

I still run the risk of the drug not getting approval and the risk on the April call options expiring before the news comes. I may have been a little early with the April call options as they were profiled at 40 cents back on March 20th and had lost nearly half of their value before Friday’s rebound but I didn’t want to miss something like this happening. I mentioned that there we no stops for this trade and it remains an all or nothing gig. However, if we get another pop in the April calls, you may want to consider selling some of them or even all to be on the safe side.

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4. Earnings

Monday: Apogee Enterprises (APOG, $11.84, down $0.01) and Immucor (BLUD, $24.54, up $0.12).

Tuesday: Alcoa (AA, $8.17, down $0.01), Bed Bath & Beyond (BBBY, $27.62, up $0.97), International Speedway (ISCA, $24.74, up $0.75), Mosaic (MOS, $45.64, up $1.77), Pier 1 Imports (PIR, $0.64, down $0.03) and Ruby Tuesday (RT, $4.07, up $0.46).

Wednesday: Family Dollar (FDO, $31.90, down $0.23), Global Crossing (GLBC, $7.51, up $0.21), Shaw Group (SGR, $29.51, down $0.05) and WD-40 (WDFC, $26.55, up $1.06).

Thursday: Chevron (CVX, $70.48, up $0.17), Jos. A. Bank Clothiers (JOSB, $30.42, up $0.72), Northfield Labs (NFLD, $0.41, down $0.02) and Pep Boys (PBY, $5.23, up $0.12).

Friday: Market closed.

Ruby Tuesday was trading for under $1 at the beginning of March and is down from a 52-week high of $9.25. There was no way I was going to announce an option trade on a $1 stock but I have watched the move from $1 to $4 because I eat lunch there some of the time. The options that trade on the stock are not that liquid and the easy money was already made. I’m not sure this one goes higher but people have been buying it ahead of earnings. It was up another 13% on Friday but I wouldn’t chase.

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5. Current Trades (Friday’s closing price)

Amazon.com (AMZN, $78.17, up $1.83)

April 80 calls (ZQNDP, $2.35, up $0.48)

Entry Price: $0.90 (3/27/09)
Exit Price: $2.35 (half closed on 4/3/09, half open)
Return: 160%

Amazon made an $8 move for the week despite a downgrade but could run into resistance at $80. There are two things that should happen, obviously, when you hit resistance. A stock will test and breakthrough, or test and fall back. The chart shows decent resistance but if broken, Amazon could make a run at $90. With the weekend coming up and with the position showing a 160% profit, we closed half of the position on Friday and have an open stop of $1.50 on the other half. Go ahead and raise the stop to $1.90.

Celgene (CELG, $42.15, up $1.38)

April 40 calls (LGHDH, $2.80, up $0.80)

Entry Price: $0.80 (4/1/09)
Exit Price: $2.80 (half closed on 4/3/09, half open)
Return: 250%

May 40 calls (LGHEH, $4.20, up $0.75)

Entry Price: $2.00 (4/1/09)
Exit Price: $4.20 (half closed on 4/3/09, half open)
Return: 110%

I also mentioned to close half of these positions on Friday as well. The new stop for the April 40’s was $1.75 but raise it to $2.25-$2.50. The May 40 stop is set at $3.00 and that can be bumped to $3.50.

Las Vegas Sands (LVS, $4.48, up $0.08)

April 5 calls (LJJDA, $0.30, up $0.05)

Entry Price: $0.25 (4/3/09)
Exit Price: $0.50+
Return: 20%

The April 5 call options were at 25 cents in Friday Morning’s Notes and opened at 30 cents and traded as high as 50 cents shortly after the bell opened. They fell back to Thursday’s closing price shortly after 10:30am which was a nice entry price. The action was heavy as 31,000 contracts traded hands.

May 5 calls (LJJEA, $0.85, up $0.20)
Entry Price: $0.65
Exit Price: $1.30+
Return: 31%

We had a target of 60 cents for the May 5’s and they opened at 85 cents, up 20 cents, but they also came back down to 65 cents, just a nickel outside our target. When it’s this close, pull the trigger just like we do when we get near our exit target sometimes.

Las Vegas Sands traded to a high of $4.98 and I said if the stock makes a run over $5 these trades would be golden. They are high risk plays and I’m not really placing a stop on them. Usually we do a 50% stop and cut losses but these options will probably be volatile again this week.

Dendreon (DNDN, $5.99, up $1.65)

April 10 calls (UKODB, $0.55, up $0.28)

Entry Price: $0.40 (3/20/09)
Exit Price: $5+ (Open)
Return: 38%

May 7.50 calls (UKOEU, $2.05, up $0.59)

Entry Price: $1.50 (3/20/09)
Exit Price: $10+ (Open)
Return: 37%

Volume was off the charts as the stock only averages 2 million shares a day. Friday, the stock traded over 22 million shares. Shares hit a high of $6.60 on news that the company’s potential blockbuster drug, Provenge, was on the verge of getting approved. The April 10 call options traded as high as $1.05 which was represented a 163% return from our entry price while the May 7.50’s traded as high as $2.80, or 87% from our entry price. We closed off those highs but hold tight, we could get some more action again this week as momentum starts to build ahead of the Provenge announcement.

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6. Monday Morning Playbook (Alcoa)

Alcoa (AA, $8.17, down $0.01) will be the first of the 30 Dow components to report earnings and both the stock and options trading pits will be active. The stock is coming off a 52-week low of $4.97 which was set on March 6th, so it will be interesting to see which direction we go from here.

The company’s earnings are going to be terrible; we already know that. Alcoa is expected to post a loss of $0.57 a share according to most Wall Street analysts. A year ago, the aluminum maker reported a profit of $0.44 and its stock price was near $40.

From $40 to $5. It’s has been amazing to see stocks like this, industry leaders no doubt, trading in the single digits. We all know aluminum is used for a ton of things in the industrial world and in the consumption market and in a “buy and hold” world, Alcoa is a screaming “Buy” at these levels if you are looking long-term. I would think. However, we are interested in the options and a way to make money now.

To start, Alcoa won’t be reporting until after the market closes on Tuesday. Trading will be heavy on Tuesday and even heavier when the opening bell rings on Wednesday morning. Even at these low levels, I think the stock moves at least a $1 which would be a little more than 12% from its current levels.

If there are “whispers” that earnings may come in better-than-expected, then we could see buying ahead of the announcement. The April 9 calls (AADK, $0.32, down $0.02) traded 5,000 contracts on Friday while the April 7.50 puts (AAPS, $0.39, down $0.04) traded 10,000 contracts. There is a lot of different ways option traders are using these call and put options; some are going long, others are going short, and some traders are using a combination of both options to create a debit spread.

If Alcoa’s numbers beat, then we could see the shares run to $10. If they come in-line or worse, then we could get a sell-off and the stock could retreat back to its 52-week lows. The two aforementioned options are the nearest out-of-the-money plays but I’m watching the May 7.50 calls (AAES, $1.42, unchanged).

Instead of trying to play the actual announcement, our plan is to wait until after the news is out on Wednesday. The hope is that Alcoa sells-off on the news and does actually trade lower (like Celgene did). If we get a 10% drop in the stock, then these options could fall below a $1. This is where I would start a half position. I say “half” meaning if you normally buy 10 contracts at a time, which is what I usually recommend unless they are speculative plays, then only buy 5 contracts, which is the “minimum”. Anything less then 5 contracts, is just eaten up by commissions.

We are only doing half positions because it may take a little longer for Alcoa to rebound off its lows like it has recently done if we do head down. Of course, if the stock DOES NOT sell-off then we missed the boat. If the market accepts Alcoa’s numbers then the April 9 call options could double.

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7. Closing Thoughts

We only have a four-day work week as the market is closed on Good Friday. That is a good thing as we get to enjoy Easter weekend and quite frankly, everybody could use a three-day weekend, right?

The bulk of the market’s move will come form the earning reports I talked about earlier. The will be other moving parts but the bulls are still targeting 8,500 for the Dow, 900 for the S&P 500 and 1,750 for the Nasdaq. Everybody keeps saying we need a break in order for the market to go higher. Truth is, they don’t know and neither do we. In fact, the market is always looking ahead and I wouldn’t be surprised if we hit those lofty goals in April and fade away in May.

Then again, the bears might not be ready for hibernation and will use earnings season to wage one last battle. As usual, be sure to check the blog for updates. You can usually catch me two or three times a day on there and all you have to do is add us to your favorites: Blog.OptionsMentoring.com.

The manual is going well and I want to thank everybody for the emails. Some of the questions I am getting is helping me understand what you guys/ gals are looking for and what you need help understanding. Keep them coming. We should have something ready in May and I’m eager to get it out to all of you. If you want to be put on our list for advance copies at a discounted price, send me an email.

It should be another interesting week as the “drive for five” gets underway Monday morning.

Rick Rouse
Rick@OptionsMentoring.com