1. Commentary
2. Research In Motion Earnings Preview
3. Further Gains For First Solar?
4. Earnings
5. Current Trades
6. Monday Morning Playbook
7. Closing Thoughts

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1. Commentary

Despite Friday’s 148 point drubbing, the Dow had a fantastic week as it gained nearly 500 points to finish at 7,776, up 6.8% for the week. We basically got all of the gains on Monday when the Dow jumped from 7,278 to 7,775 as the next four trading days were a washout.

The market moved higher and held its ground after the Treasury Department gave Wall Street some hope when it revealed its plan to wipe the toxic assets from the balance sheets of banks. The plan is to buy up these assets in a public-private joint venture and the investment funds will be used to buy $500 billion to $1 trillion of these assets. It’s not something that everybody will be able to participate in unless you have a ton of cash and know credit swaps. The government is taking on much of the risk but is soliciting help from the big boys. Bill Gross, all-world bond guru, has said that Pimco plans to participate in the program.

This helped the financial stocks after the news was announced but those trades got crowed pretty quickly which is why I’m shying away from them for now.

The market got another pop on Thursday when a report showed February new home sales increased 4.7%, month-over-month, to 337,000. Economists had expected a 2.9% decline. Yes, the results were better-than-expected but there was some chatter if that number was deceiving because it wasn’t really clear if sales really rose or fell. That came from the Census Bureau. Sales are still down but bulls took the data and ran, believing we may have seen a bottoming in new home sales.

As far as the other indexes, the Nasdaq added 88 points, or 6%, and finished at 1,545 while the S&P 500 jumped 6.2%, or 47 points, to close at 815 for the week.

We had planned for a rally last week and that we got. I’ll talk more on where we may be headed in the “Closing Thoughts” section but the market is still showing signs that we are headed higher. I can buy that but I think upcoming first quarter earnings will have a lot to say about which way we are headed.

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2. Research In Motion Preview

Research In Motion (RIMM, $45.01, down $0.03) will report earnings on Thursday and we can expect a pretty good move in the stock once they do. The question will be if we get a 10% or 20% pop or drop. Last year, RIMM averaged a 12% move after reporting earnings so 10% is a given.

The stock rallied 10% last week and is up over 30% from its March 9th low of $35. I haven’t been bullish on RIMM in a while and now only consider it a trading stock so let’s get that out of the way.

In February, I recommended the March 40 puts when the stock was in a downtrend. The put options were profiled at $2.15 and the stock was at $43 on February 18th when I profiled a trade. The breakdown continued for about a week after the stock broke its 10 and 20-day moving averages but the shares started to rebound once they tested the 50-day moving average. We were stopped out of the trade for 100% profits in less than week on February 24th and since then, the stock has done a good job of holding the $40 level.

The first thing I’m looking at is that the company lowered earnings for the quarter so we already know there is a chance they could actually miss estimates. During the past month there have been a slew of forecasts that have been lowered by the analysts but most of them are figuring the company will report 84 cents a share. However, the bar may have been lowered so low that the company could actually beat earnings.

The other moving parts are that forecasts may be falling but margins might be improving for the company. Another added dimension is the fact that RIMM has missed earnings in 2 of the past 3 quarters. With such a cloudy picture it is easy to see why it would be hard to call which direction the stock could be headed.

There are a lot of ways that option traders are going to play this big event so I’ll try and provide some insight. The first thing I’m looking at is a strangle trade. This is when you buy out-of-the-money call and put options and hope for a huge move in the stock.

The call option allows you to enjoy unlimited profit to the upside if RIMM moves higher than the strike price while the put option will get you a profit to the downside if the stock moves lower than the strike price. I would say “unlimited” profits on the puts but the stock can’t go past $0.

Anyway, RIMM is currently at $45 so we could use strike prices of 40 and 50 or go even wider by using the 35 and 55 strike prices.

If we use the 40 and 50, a 10% move should put the stock right at one of these strike prices. The April 50 calls (RFYDJ, $1.70) and the April 40 puts (RUPPH, $1.50) can be used and would cost $3.20 to put the trade on. If the stock moves 10%, one of the options should move 80%-100% while the other will lose a significant amount. You are hoping the move in one option offsets the decline in the other option to where you have an 8%-10% profit. However, both options will still be out-of-the-money if the stock only moves 10% or less.

If RIMM can move 20% then this is a different story. A 20% pop gets the stock to $54 or $36. If the stock is at $54-$55 then the April 50 calls would be worth at least $5 and if the stock is at $35-$36, the April 40 puts would be worth the same. If you get in at $3.20 and you’re out at $5 then you make 50+%.

A straddle trade would be to buy the April 45 call (RFYDI, $3.50, down $0.05) and the April 45 put (RFYPI, $3.50, unchanged). The total cost for both is $7 and your breakeven points would be $52 or $38. At these levels, the calls would be worth at least $7+ if the stock is at $52 and the puts would be worth $7+ if the stock is at $38. That would require almost a 20% pop in the stock.

If you are bullish and think the stock heads higher than you would just buy the call options. If you are bearish, then you would just buy the puts.

The strangle trade provides you protection with the chance of making a decent return. What is cool about this trade as well is that it’s possible to make money on both sides of the trade. Let’s say RIMM shoots higher, you sell the call but hold onto the puts. After the huge rally, if RIMM falls back in price then it’s possible the put options could gain back some of the losses. And vice-versa if the stock heads lower after reporting earnings and then bounces off its 50-day moving average again.

Personally, if I had to pick one I would go with a strangle trade of some kind but a 20% move is a lot to ask for although I got this funny feeling it could happen. I’ll keep an eye on how the stock trades up until then and I’ll look at some other things in the meantime. If these options get cheaper come Thursday, then we may pull the trigger but I also realize the premiums could get expensive as we head closer to the company’s earnings release.

RIMM announces after the bell so we have until Thursday afternoon to see how the stock trades during the week before making a move.

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3. Further Gains For First Solar?

First Solar (FSLR, $147.36, down $3.03) made a huge move Thursday, moving from $133 to $150 in a blink of an eye. I mentioned how the stock moved once the president said the words “solar energy” but I wasn’t willing to chase it higher that day.

I still don’t think you chase here, but, it is tempting.

There is news out this weekend that the United States won big applause when when we announced we would “make up for lost time” in reaching a global agreement on climate change. The international climate talks are taking place in Germany and this was a big deal because it has been something the Bush administration repeatedly dropped the ball on.

The devil in the details? Obama has set aside $80 billion for an economic stimulus package for green energy and promised another $150 billion for research over 10 years. In addition, he also plans on tightening regulations on auto emissions.

First Solar is perhaps the most followed solar stock but there are others as well.

Energy Conversion Devices (ENER$15.77, down $0.68) and SunPower (SPWRA, $25.30, down $1.38) are a couple of ones to add to your Watch List. You could also add Evergreen Solar (ESLR, $2.33, up $0.29) and GT Solar (SOLR, $6.64, up $0.80) but they trade under $10 and the options chains don’t move as like the larger cap stocks.

You could also add “Chinese Solar” to your Watch List and include China Sunergy (CSUN, $3.35, up $0.10), LDK Solar (LDK, $7.19, down $0.57), Suntech (STP, $11.65, up $0.36), Solarfun (SOLF, $4.67, down $0.39), Trina Solar (TSL, $12.33, up $0.14) ) and Yingli Green Energy (YGE, $6.15, up $0.14).

If you’ll notice, First Solar might get all of the attention but there are some other possible trades in the sector. These trades should be considered all-or-nothing because they carry high risk/ high reward. Just because the weekend news is bullish, these stock could sell-off on the news…buy the rumor, sell the news…but then again if they do, they could resume an uptrend with the announcements of one of two big contracts for these companies.

Option traders are starting to believe First Solar is getting too expensive and they are looking at other plays to get into. Again, these trades are risky and you may have to wait for an entry point after 10am if these stocks pop at the open on Monday.

There were over 2,700 contracts traded on the Evergreen Solar April 2.50 calls (QLUDZ, $0.30, up $0.12) on Friday. There is a big gamble that options traders are making with this one that could pay off. If the stock can rally to $3, then these calls would technically be worth 50 cents. That may not seem like a huge move from 30 cents to 50 cents but it is a 67% profit to the well-trained option trader.

The GT Solar April 5 calls (RLQDA, $1.75, up $0.75) jumped 75% Friday. The April 7.50 calls (RLQDU, $0.63, up $0.43) also had some action but the volume was only in the hundreds which means it may not be as liquid in getting in-and-out of a trade.

The sector still has issues and the main one is that some of these companies aren’t very profitable. Most companies in the solar sector are expected to report losses this year and to maybe break even in 2010. Barron’s made some comments on the sector over the weekend and mentioned that First Solar and Energy Conversion Devices “look vulnerable” as falling silicon prices might make it harder to compete with companies that use more silicon because the price of silicon is coming down. Both companies use less silicon but if prices are falling…

Anyway, I’m not too fond of Barron’s and usually the stock does the exact opposite of what Barron’s says. I don’t have any facts to back that up but that is what it seems like. If you get into these trades you could use stops at half of your entry price but that may get triggerd if these stocks become even more volatile.

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4. Earnings

Monday: Cal-Maine Foods (CALM, $23.00, down $0.71), Full House Resorts (FLL, $1.15, up $0.05), Layne Christensen (LAYN, $19.43, down $2.22) and Oxford Industries (OXM, $7.18, up $0.07).

Tuesday: Aluminum Corporation Of China (ACH, $16.71, down $0.42), Apollo Group (APOL, $76.65, down $1.18), Borders Group (BGP, $0.63, down $0.07), H.B. Fuller Company (FUL, $13.53, down $0.75) and Lennar (LEN, $10.26, down $0.02).

Wednesday: UniFirst (UNF, $28.76, down $1.15) and Worthington Industries (WOR, $9.93, down $0.23)

Thursday: Acuity Brands (AYI, $23.61, down $1.05), CarMax (KMX, $13.26, down $0.23), Monsanto Company (MON, $86.24, down $1.40) and Research In Motion (RIMM, $45.01, down $0.03).

Friday: AZZ Incorporated (AZZ, $28.24, down $0.22). (No, I didn’t make this one up, really).

This is the calm before the storm week as earnings will “officially” start when Alcoa (AA, $7.80, down $0.32) reports on Tuesday, April 7th. Other than that, Apollo Group, Monsanto and, of course, Research In Motion could all make huge moves this week.

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5. Current Trades

Family Dollar (FDO, $33.63, up $0.45)

April 32.50 calls (FDODZ, $2.35, up $0.35)

Entry Price: $1.05 (3/25/09)
Exit Price: $2.00 (Open)
Return: 124%

Family Dollar traded up near $34 on Friday and I felt safe holding it over the weekend. You gotta love the gains given the nasty day the Dow had. If you will notice, the exit target was $2.00 and this trade really should have been closed already. You can keep stops at $2.00 and if we get a lower open on Monday for the stock, hopefully the call options will hold the $2 stop. If we go higher, raise the stop to $2.20-$2.25 and keep a trailing stop to protect your profits.

Blackstone Group (BX, $7.75, down $0.15)

April 7.50 calls (BXDU, $0.85, down $0.05)

Entry Price: $1.00 (3/25/09)
Exit Price: $1.25-$1.50 (Open)
Return: -15%

I was hoping for a bounce after the stock came back down from the $9 level and we could be filling in some gaps here at these levels before we see an uptrend. The financials sold-off in the latter part of the week and Blackstone couldn’t gain traction in a slippery market. The stock held $7.45 for three straight days so this is near-term support. If we break below $7.45 things could get tricky and we might have to close the position for a loss.

Chipotle Mexican Grill (CMG, $68.50, down $2.25)

April 75 calls (CMGDO, $1.10, unchanged)

Entry Price: $1.10 (3/27/09)
Exit Price: $2.00-$2.20 (Open)
Return: 0%

I was hoping the calls would trade down to the 95 cent level but they held steady all day despite a 3% drop in the shares on Friday. I included this one because many of you may have gotten into the trade judging by the emails I received over the weekend.

The restaurant sector has been pretty hot and we may be a little late to the party. Downgrades are starting to come out as analysts believe some of the stocks are now “fairly valued”. Chipotle Mexican Grill was recently cut to “Underperform” so we have to be careful. Set stops at 50 cents in case the stock heads back to the low $60′s.

Amazon.com (AMZN, $70.52, down $3.17)

April 80 calls (ZQNDP, $0.90, down $0.75)

Entry Price: $0.90 (3/27/09)
Exit Price: $1.80 (Open)
Return: 0%

We were hoping to pick these calls up for $1.20 or so and when they opened at $1.25 all we had to do was wait for them to come down even further. Amazon traded lower after Goldman Sachs removed it from its “Conviction List” but kept its “Buy” rating and raised the price target to $81 from $70. It looks confusing and maybe that is why the stock drifted lower but the demand for Kindle is growing daily.

Mosaic (MOS, $47.05, down $1.15)

April 60 calls (MOSDL, $0.60, up $0.05)

Entry Price: $0.60 (3/27/09)
Exit Price: $0.90 (Open)
Return: 0%

These call options were pretty active on Friday as nearly 1,500 contracts traded hands. The calls hit a high of 90 cents which would have given you a 50% profit if you got in and out. I like the trade this week but we may have to keep have to play this one close to the vest. If we can get another bump up to 90 cents then consider taking profits.

Dendreon (DNDN, $4.39, down $0.03)

April 10 calls (OKODB, $0.35, up $0.03)

Entry Price: $0.40 (3/20/09)
Exit Price: $0.80 (Open)
Return: -13%

May 7.50 calls (OKOEU, $1.60, up $0.02)

Entry Price: $1.50 (3/20/09)
Exit Price: $1.60 (Open)
Return: 7%

The April calls could expire before we hear any news but there are now questions concerning Dendreon’s involvement with the study that could endanger the results of Provenge. Dendreon says its actions were cleared by the FDA but declined to make researchers or executives available to provide further explanation so this is a little worrisome.

The concerns are over a press release that went public back in October that said Provenge appeared to cut patients’ death rates by 20%. There are some in the medical circles that now say Dendreon may have compromised the integrity of the trial by putting out that release.

Hold tight. There is still a really good chance the drug gets approved but if this scares you then close out your positions.

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6. Monday Morning Playbook

We have pretty much reached the limit on trades that I like to keep open. In fact, we may have two too many open and we will need to close a few before thinking of adding anymore. I still like the solar plays I mentioned but only if they come down in price a little or stay the same.

Things that could move the market this week: The G-20 meets Thursday, more chatter about tighter regulations for the financial firms, a couple of earnings reports that I have already mentioned, and more economic news like the unemployment report.

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7. Closing Thoughts

It was another big weekend at the White House and most of the news coming out seems to be for the better. Obama has asked that General Motors’ (GM, $3.62, up $0.21) top executive resign and is expected to announce new aid for the company. However, a 60-day deadline to restructure is also being demanded. Also, Chrysler will get up to $6 billion and 30 days to complete its merger with an Italian automaker or else the well could be dry next time it needs money as well.

My indicators are still saying we go higher but we are certainly do for a pause. The current market environment seems to be taking in the bad news as well as it is taking in the good. We are seeing rallies on good news, and small rallies on bad news with no major sell-offs.

I have talked about the Dow and 7,600-7,800 and it now looks as though 7,600 is short-term support. For the S&P 500 I was targeting 800 and we held that level all week which now makes it support as well. For the Nasdaq, the 1,500 level will have to hold.

We haven’t had a significant sell-off but don’t count one out. The major indexes have broken through their 50-day moving averages and held which is normally bullish. In the past, we have tested these levels only to see the market retreat and re-test them so that is in the back of my mind.

However, now that we are above these levels we can target 8,000 for the Dow with the possibility of 8,300 being in the cards. For the S&P 500, we could get a run to 875, and maybe 900 if first quarter numbers are good. The Nasdaq could make a move to 1,650-1,700 if the stars align just right.

If we can get to the first set of numbers I mentioned for each index that would be a good sign for the bulls. They would be pushing the issue on the bears and either the bears start fighting back or they go into hibernation. It’s that simple.

As usual, check the blog for the latest updates…

Rick Rouse
Rick@OptionsMentoring.com