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More on General Motors – Update at 1:30pm

Friday, May 29th, 2009

1:30pm (EST)

Just wanted to add something to the blog below. The GM June 1 puts (GMVR, $0.61, up $0.07) have traded nearly 100,000 contracts as open interest has swelled to over 425,000 contracts. The put options opened at 57 cents today. The action is amazing and it remains to be seen what the outcome of a GM bankruptcy will mean for the market. Monday could be nasty for the market once the news is official.

12:50pm (EST)

General Motors (GM, $0.88, down $0.24) is under a buck and the writing on the wall will now be read by all on Wall Street. Two things I want to talk about. One is DO NOT buy the stock. Some people seem to believe that if they buy the stock and own it now, they own it when GM comes out of bankruptcy. That is not the case.

I remember years ago when I wrote about Kmart. The discount retailer entered Chapter 11 in 2002 and emerged from bankruptcy protection in 2003 with new stock. Kmart was a victim of Wal-Mart (WMT, $49.30, down $0.25) and Target’s (TGT, $38.65, down $0.49) success and GM failed to change when it should have changed 10 years ago. Some people wrote me asking why their old Kmart stock that had traded to zero wasn’t worth what the new stock was trading for.

This is actually a pretty common event when companies enter bankruptcy protection but when they reemerge, the new stock replaces the old stock and you have no ownership. As an owner of the stock right now, you will be the last in line for any “remaining assets” in case of a default or other business failure.

The other point I want to make is who will replace GM in the Dow? Names being mentioned are Aetna (AET, $26.79, down $0.01), Cisco Systems (CSCO, $18.24, down $0.27) or Goldman Sachs (GS, $143.22, down $1.43). There is also a push to add a transportation name like FedEx (FDX, $54.38, up $0.80) or United Parcel Service (UPS, $50.21, up $1.20).

My bet is Goldman as they will be one of the first, if not first, large bank to hand back TARP money, and will benefit from the increased capital markets activity. Whoever it is, there will be a sweet option trade on it that’s for sure. Once GM is dropped, brokerage houses, mutual funds and pension plans will be active in whoever replaces GM.

I also wanted to mention the move Freeport McMoRan (FCX, $53.73, up $1.52) has made over the last three days. The stock hit a low of $46 on Wednesday but has challenged double nickles today (high $54.45). I had mentioned a few call options on May 20th that have now turned positive. That was one of the last trades I covered before announcing our new trading service.

There was a slew of action this week and there were numerous trades that I wanted to talk about. We are still going to get some amazing price swings and stories in the stock market for the rest of the year. Our goal is to teach you what to look for and how to get a feel for the market so that you will be able to find your own trades.

We are going to be offering quite a few different strategies in our new trading service. There will be ultra-safe trades that aim to make you 5%-10% a month and the more riskier trades that can double or triple your investment. I had one reader email me today and said he invested $280 in Dendreon (DNDN, $22.28, up $0.28) call options and it turned into $7,700.

The best part though is that I will be showing you what to look for the next time Dendreon makes the list for an option trade. There will be some more action in Dendreon down the road and you will want to be there. You can by subscribing to the new service.

That’s it for today, but I really encourage you to send me an email over the weekend if you are interested in the program.

Rick Rouse
Rick@OptionsMentoring.com

Tags: Aetna, Cisco Systems, Dendreon, FedEx, Freeport-McMoRan, General Motors, Goldman Sachs, Kmart, options blog, Target, Wal-Mart
Posted in Commodities, Market Analysis, Option Trades, Strategies | No Comments »

GM Bankruptcy Immenent/ Market Opens Higher

Friday, May 29th, 2009

9:50am (EST)

The Commerce Department’s reported first-quarter gross domestic product showed the economy contracted by 5.7% which was an improvement over the fourth-quarter’s decline of 6.3% As a result, futures we strong all morning as the Dow Jones futures were up 41 points before the bell, while the Nasdaq futures we up nearly 4 points just before the bell rang.

The big news swirling today is General Motors (GM, $1.08, down $0.04) which may file for bankruptcy as early as Monday. Nobody wants to confirm this just yet but those in the know said it is “probable” that the company would file for Chapter 11 bankruptcy protection. It is not official, yet, because talks are ongoing with the U.S. and Canadian governments.

Geez, can you believe the mayhem we have witnessed over the last two years? I mean, how many big names companies have fallen by the wayside? Honestly, I have lost count.

Apple (AAPL, $134.67, down $0.40) and Research in Motion (RIMM, $80.38, up $0.08) have had super week’s as the smart phones wars heat up. Palm (PALM, $11.66, up $0.20) had a nice 9% jump yesterday and will launch its Pre on June 5th. The unique thing is that the Pre will be able to run Apple’s iTunes software and download music though third-party software.

There were some great option trades on these stocks this week and many of you saw triple digits returns if you got in early on Tuesday. I’m not sure how much gas is left in the tank but RIMM is acting like it wants to go to par ($100). If that were the case, then I can see Apple going to $200. However, I think they rest before hitting those levels…

The response for our new trading service has been overwhelming and I will be providing more details over the weekend. If you are interested send me an email in case we cap the number of subscriptions. If you have already sent me one, thanks, you are on the list. And one more favor. If you have had any success with any of the trades from the blog (especially you Dendreon heads) we are asking for testimonials. We won’t include your last name but we would like to share your stories. As I close, the Dow is unchanged 20 minutes into trading.

Rick Rouse
Rick@OptionsMentoring.com

Tags: Apple, General Motors, RIMM
Posted in Apple, Company Commentary | No Comments »

Weekly Wrap for 4/5/09

Sunday, April 5th, 2009

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

Tags: Alcoa, Amazon.com, Celgene, Dendreon, General Motors, Las Vegas Sands, Research in Motion, Ruby Tuesday
Posted in Market Analysis, Option Trades, Rick's Account, Sectors, Stock Earnings, Strategies, Watch Lists, Weekly Wrap | No Comments »

Futures Pointing Towards Lower Open

Monday, March 30th, 2009

The Dow futures are down 174 points which means we are headed towards a sharply lower open. News that General Motors (GM, $3.62, up $0.21) may be headed for bankruptcy is weighing heavily on the market. The stock has a bid of $2.87 which is looking like a 30% haircut for GM. The S&P 500 futures are lower by 19 and the Nasdaq futures are down 21.

I had talked about the possibility of the bears making an appearance this week but this was slightly unexpected. Perhaps the GM news sends a clear message and if that is the case then a bankruptcy of one of the auto makers would set the market back.

Many of the positions we opened Friday should be managed carefully. We only started “half” positions on some of our trades and this was why. The stops I mentioned in last night’s Weekly Wrap should protect us.

We should still be able to get out of Family Dollar (FDO, $33.63, up $0.45) trade with a 100% return but hold off on the solar plays and avoid adding new positions to the other trades we have open.

We will have to see how the market reacts to the news concerning GM but it appears we are easily headed for a triple-digit loss on the Dow to start the day.

Rick Rouse
Rick@OptionsMentoring.com

Tags: General Futures, General Motors
Posted in Market Analysis | No Comments »

Weekly Wrap for 3/8/09

Sunday, March 8th, 2009

1. Commentary
2. Bounce or No Bounce?
3. Apollo Group Heads Lower
4. Earnings
5. Current Trades
6. Monday Morning Playbook (Take-Two)
7. Closing Thoughts

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1. Commentary

The market took another pounding for the week as all three indexes lost between 6%-7%. There was a flurry of expected and unexpected events but the entire mood on Wall Street was down. We didn’t see any “panic selling” from investors. Instead, we got a slow drip that continues to take the market to new lows but nobody seems to care.

There has been so much bad news that people are giving up investing and trading altogether. Many people have seen their 401K’s slashed to 201K’s and are afraid to open their statements. Some go months without even opening their monthly statements from there brokerage accounts.

The financial stocks are a mess and there seems to be no end in sight. AIG (AIG, $0.35, unchanged) and HSBC (HBC, $25.50, down $1.12) reported a steep drop in earnings but that was expected. Well, maybe AIG losing $60 billion in a quarter was unexpected which now puts the losses in one year for AIG at $100 billion. And guess what? For such a fine performance, the government tossed them an additional $30 billion in aid. HSBC plans to raise capital in a stock offering and will cut over 6,000 jobs along with its dividend.

Elsewhere, U.S. Bancorp (USB, $8.82, down $0.19) dropped nearly 40% for the week and Wells Fargo (WFC, $8.61, up $0.49) fell over 30%. These two banks are considered by those on Wall Street as among the “better run banks” but shareholders weren’t too happy when the companies slashed their dividends by roughly 85% to 5 cents a share.

Bernanke and Geithner testified before House and Senate finance panels on Tuesday and Wednesday and that failed to rally the financial sector as Bernanke basically said “we” will through as much money needed to save AIG. Oh boy…

Tech broke down after showing signs of life. There are some good stories out there but a lot of the solid names are getting crushed once again. Google (GOOG, $308.57, up $2.93) has dropped $50 in six trading sessions and briefly fell below $300 on Friday before rebounding.

General Electric (GE, $7.06, up $0.40) fell below $6 at one point on capital concerns and joined the growing trend of companies that has slashed its dividend. However, GE was doing some damage control after more chatter on the health of its finance arm — which accounts for over 80% of GE’s assets — made the market nervous. Several big wigs came in and tried to show their support by buying shares in the open market but don’t let that fool you. They nibbled but they surely didn’t go all-in. The stock ended the week with a 17% loss but it was much worse than that.

Ford Motor (F, $1.70, down $0.11) and General Motors (GM, $1.45, down $0.41) said February sales sank nearly 50%, basically, and it only fueled the fire on concerns regarding a GM bankruptcy. It is looking more and more like these two companies are racing to $0 instead of the finish line.

There was no good news really for bulls to stage a rally and as a result, all three indexes finished at fresh lows. The Dow dropped 435 points, or 6.2%, and closed at 6,626. The Nasdaq fell 84 points, or 6.1%, to settle at 1,293 while the S&P 500 plummeted 7%, or 51 points, to finish at 683.

**************************************************

2. Bounce or No Bounce?

It’s hard to believe in some ways that the market is down another 25% on average for 2009 and 20% since we got a new President. The continued drop in the stock market has flushed out the wishy-washy investors as many of them closed up shop and liquidated their funds. Many of them figured they better save what they had left and bailed on the market.

Yeah, it’s scary but only scary if you don’t know how to short the market. I’ve been cautious of any rallies and we have seen the signs that the market was giving us that it was headed lower. I’m still getting those vibes but am now cautious of the snap-back rally that many have been expecting. Of course, no one knows when it will come but my best guess is that it will be this week or next.

March is normally a pretty bullish month for the market so I buy into the logic of a bounce which is why I initiated half positions in a few stocks. However, we are also looking at the possibility of a bounce and then another retest of the lows. The fact that the volatility readings didn’t spike markedly higher is one of the reasons why I can picture a bounce and another reason I see us going lower.

With the Dow failing 7,000, the Nasdaq not being able to hold 1,300, and the fact that the S&P 500 broke below 700 was not a good sign. When things like this happen it’s important to do a little research to see where the market could be headed.

From the look of things, the support levels that were broken now become resistance. Even if we get a bounce, does anyone believe it will sustainable with unemployment at 8.1%? People are hoarding money and they are scared of losing their job. I don’t think that is going to entice America to rush out and buy new cars and houses.

If we take another 10% off we get Dow 6,000, Nasdaq 1,080 and the S&P 500 would be at 600. What is scary about the charts is that the Dow could sink as low as 5,500. I don’t think the gloom and doom is that bad but never say never with the market. What has been working should continue to work and that is short rades for quick profits. Until we get some solid catalysts, we are stuck with a lower trending market.

**************************************************

3. Apollo Group Heads Lower

I wanted to run Apollo’s story once again for those who may have missed it in the blog. So far we have been right on with trade and I’m hoping for a continued fall but we have already done well. Do not start new postions as the March puts that are mentioned have already reached their target. Quotes are from Thursday’s close:

“I know we have a lot going on but there is one stock that I have been watching this week that really looks ready to fold like a cheap lawn chair. Many of you have probably heard of the company before and I’m sure you have seen the commercials for online education popping up like mad lately. I’m also sure that many of you have heard about the proposed $150 billion education stimulus package.

Obama’s budget means that most of the nation’s nearly $90 billion in student lending will run through the direct-loan program run by the U.S. Education Department. Stocks of “non-profit” and “for-profit” education providers slipped on the news. Many of these stocks have fallen dramatically since the news but some have held up better than others.

For instance, Sallie Mae (SLM, $3.38, down $0.60) which is a “non-profit” entity has dropped over 50% in less than two weeks, falling from a high of $8.89 to nearly $3. The one stock I am targeting is Apollo Group (APOL, $66.79, up $0.28) which is a “for-profit” business and runs numerous educational programs and services at high school, college, and graduate levels. Perhaps you have heard of The University of Phoenix, Inc.?

What has been interesting with Apollo’s stock is that it held up pretty well until yesterday when shares broke below $70. That is when my “Watch List” alerted me of the stock. I’m not sure if the “for-profit” stocks are supposed to benefit from the package at the expense of the “non-profit” businesses but what really got me interested in shorting Apollo was the shady business practices and lawsuits I have been reading about. Type in “Apollo Group Lawsuits” in a search engine and you will some interesting stories.

Student lenders were embarrassed by a scandal in 2007 that revealed some had given money and gifts to college financial aid officers to A-B-C (Always Be Closing…) business and these stocks were punished back then. As for Apollo, there are allegations of misconduct and “boiler room” practices which are locked up in lawsuits.

In fact, there was a lawsuit that was re-filed back in January that portrays this unmistakable “boiler room” work environment. The former employee claims that he was harassed because he would not commit “unlawful acts” in recruiting students. The suit also confirms that his salary was based on enrollment goals. Apollo Group has said they do not pay their enrollment counselors incentive compensation for performance.

What is really a red flag is the amount of insider selling that Apollo’s management has dumped over the past 3 years. Sales are in the hundreds of millions of dollars while at the same time, the company continues to delay the inevitable court cases that are on its agenda. This could get messy.

The U.S. Education Department is set to assess the value of $2.5 billion of government guaranteed student loans being funneled through Apollo and that could also get interesting. Given the current crackdown environment that the government had bestowed on Wall Street, this could really get interesting if some of the company’s officers are found guilty of engaging in unethical practices.

I could go on and on but after doing some chart work, I’m convinced that Apollo Group could be headed for a major sell-off. The stock recently broke through its 100-day moving average and is poised to bust below its 200-day. Where there is smoke, there is usually fire and I’m getting that feeling with Apollo.

If the stock breaks through this level, there is very little support at $60 which could lead to the low $50’s. That is asking a lot but check out the chart and you will see what I’m talking about. If you need help, email me and I’ll send you the link…

The March 55 puts (OAQOK, $0.70, down $0.25) are a possibility but they expire in two weeks. There were 3,300 contracts that traded hands on Thursday and the high was $1.25. If the stock can get to the low $60’s today or by early next week, these options could easily double.

The April 55 puts (OAQPK, $2.80, down $0.30) traded 750 contracts and were at $3.40 when the stock fell below $65. They lost a little mustard but they have a longer expiration period. I’m targeting the low $50’s for the shares by then and if this holds true these put options could also double.

Both contracts are risky, especially the March 55’s which, if you did enter a position, would have a short time frame for a trade. Maybe buy them on Friday and get out by next week. The one thing I should point out is that there are a slew of analysts who love the stock and bulls like it as a counter-recession play. You could use the March 75 calls (OAQCO, $1.10, down $0.05) for protection as a 1-to-2 cover ratio.

The April put options give us 7 weeks for some action. Also realize that holding any options over the weekend is sketchy so you will have to confirm the stock’s direction throughout the day. Try and get in the March puts for under a $1, the April puts under $3, and make sure the stock is in a downtrend.

Of course, these trades are time and news driven but I’m not sure if we need any news to make this stock head lower. It’s already in the process.” -

**************************************************

4. Earnings

We are at the bottom of the barrel with earnings as we get ready for the start of first quarter earnings which will begin to flood the market in April. There are a couple of notable names reporting this week but nothing to get excited about.

Monday: AeroVironment (AVAV, $31.78, down $0.43), Casey’s General Stores (CASY, $18.81, up $0.42), Comtech Telecommunications (CMTL, $36.03, up $0.83), ResCare (RSCR, $12.48, up $0.20) and Safety Insurance Group (SAFT, $29.16, up $0.63).

Tuesday: Boston Beer Company (SAM, $21.77, down $0.71), Clayton Williams Energy (CWEI, $20.26, down $0.77), Ferrellgas Partners (FGP, $11.84, down $0.63), J. Crew Group (JCG, $9.28, down $0.68), Kroger (KR, $19.85, down $0.29) and Take-Two Interactive Software (TTWO, $6.21, up $0.53).

Wednesday: American Eagle Outfitters (AEO, $8.91, down $0.22), Diamond Foods (DMND, $21.11, down $0.34), Elbit Systems (ESLT, $40.90, up $0.40), Men’s Wearhouse (MW, $9.73, up $0.21), Quiksilver (ZQK, $0.99, up $0.01), Speedway Motorsports (TRK, $10.74, up $0.13) and Staples (SPLS, $14.81, up $0.09).

Thursday: Aeropostale (ARO, $22.52, down $0.57), Hibbett Sports (HIBB, $14.08, up $0.22), IMAX (IMAX, $4.10, up $0.03) and Smith & Wesson Holding Corporation (SWHC, $4.43, up $0.64).

Friday: Not worth mentioning…

Note: Notice the surge in Smith and Wesson? The March 5 calls (UWJCA, $0.35, up $0.20) traded over 1,000 contracts on Friday. In February, the company announced it plans to nearly double its annual revenue and improve margins and market share over the next few years. Option traders are trying to push this stock over $5 and the shares are already up 80% for the year. I’m not saying this is a good trade or not but the 52-week high for Smith and Wesson is $7.77. Is there a hidden message here?

**************************************************

5. Current Trades

Amgen (AMGN, $46.38, down $0.82)

April 55 calls (YAADK, $0.50, down $0.10)

Entry Price: 90 cents (2/27/09)
Exit Target: $2.00 (Open)
Return: -44%

March 47.50 puts (AMQOW, $2.40, up $0.45)

Entry Price: $1.25 (2/27/09)
Exit Price: $2.50 (3/6/09)
Return: 100%

Amgen continued its slide last week and the stock got removed from Goldman’s “conviction buy list” on Friday. The shares fell 4% for the week but we were prepared for that. We bought the March 47.50 puts as insurance and I had mentioned if Amgen kept falling that the puts could double. The profit in the puts have now totally covered the call side of the trade which means we have 6 weeks for a rebound. If you wanted, you could close out the calls and walk away with a great total return or wait and see how the call options trade this week.

Apollo Group (APOL, $64.69, down $2.10)

March 55 puts (OAQOK, $0.70, down $0.25)

Entry Price: $0.70 (3/6/09)
Exit Price: $1.40 (3/6/09)
Return: 100%

The April 55 puts (OAQPK, $3.50, up $0.70)

Entry Price: $2.95 (3/6/09)
Exit Price: $4.50, then $6.00 (Open)
Return: 19%

I felt really good about this trade when I was researching it Thursday night. I wanted to make sure I finished the blog in time before the market opened on Friday to get these trades in. The March 55′s were risky but the put options opened at 70 cents and traded as high as $1.40 which is where our target was.

With the March profits already in the book it makes it easy to manage the April position. We can set an early stop of $2.00-$2.50 for these and I hope we don’t get stopped out. Apollo made a nice move lower on Friday and lets hope it continues into this week.

Celgene (CELG, $41.16, up $1.21)

March 40 puts (LQHOH, $1.35, up $0.55)

Entry Price: 95 cents (3/2/09)
Exit Target: $2.00 (3/6/09)
Return: 122%

I mentioned this stock for “Monday Morning’s Playbook” in last week’s Weekly Wrap. Monday morning the stock opened below it’s close of $44.73 and the puts could have been entered at 95 cents. Our initial target was $2 for the put options and I said if Celgene failed to hold $40 we were golden. The stock finished higher on Friday but not before hitting a low of $39.32. Once we got below $40, all you had to do is set your stop to take you out of the trade. The puts traded as high as $2.10 before falling back. Once again, by having our stops and exits in place, we were able to take advantage of the market’s gift.

Exxon Mobil (XOM, $64.03, up $1.81)

April 70 calls (XOMDN, $1.58, up $0.39)

Entry Price: $1.25 (3/5/09)
Exit Target: $2.00
Return: 26%

We entered the calls last Thursday when Exxon was on the way down and I figured we would find support in the stock where we went long at. The shares traded as high as $64.59 and the calls traded up to $1.67. This trade is off to a good start and I’m hoping Exxon can rebound like it did last November when it was down at these levels.

Genentech (DNA, $90.86, up $9.22)

March 95 calls (DWNCS, $0.25, up $0.05)

Entry Price: 95 cents (1/12/09)
Exit Target: $2.00
Return: -83%

Well, it’s about freakin’ time Roche raised its bid for Genentech but it did us absolutely no good. I was stubborn on this one I’ll have to admit but I have been watching this soap opera for nearly two months. Roche came out with a higher bid all right but it was another slap in the face. The company raised its bid to $93 a share in a tender offer to shareholders until March 20. That likely puts a ceiling on the shares and the 95 calls only jumped a nickle following the news on Friday. We’ve come this far and I doubt Genentech can reach $96-$97 in two weeks which is where the stock would need to be for us to breakeven. There was no stop on this trade but I’m done with it and will close it Monday. I still say Genentech trades over $100…

IBM (IBM, $85.81, down $1.67)

April 95 calls (IBMDS, $1.50, down $0.45)

Entry Price: $1.20 (3/6/09)
Exit Target: $2.40
Return: 25%

We either went bottom fishing on Friday or we are about to catch a falling knife. I send out a quick update on Friday saying to start half positions when the stock was at $84.44. The calls were trading for $1.20 at the time of the blog and closed slightly higher as IBM bounced off its lows.

CBOE Market Volatility Index (^VIX, 49.33, down 0.84)

VIX March 70 calls (VIXCP, $0.40, down $0.10)

Entry Price: 80 cents (3/2/09)
Exit Price: 40 cents (3/6/09)
Return: -50%

The VIX is telling us a rally is store because the index actually went down in a week the market fell 7%. This is a “fear” index and back in November, the VIX was up in the 70′s. That is what I was banking on because I felt like the market was going to set new lows last week and it did. However, the VIX let us down which means people were more nervous back in November than they are today. Go figure. Anyway, the 50% stop was hit on Friday.

Potash (POT, $66.31, down $3.18)

April 100 calls (PYPDT, $1.40, down $0.20)

Entry Price: $1.70 (3/4/09)
Exit Price: $3.40
Return: -29%

When I wrote “we could probably do a straddle option trade with the March 75 strike prices” on Wednesday, that should have been my clue to leave these calls alone. We are in but we weren’t hit too bad. The stock’s plunge has been swift and hopefully we get a bounce next week. If not, set stops at 85 cents.

**************************************************

6. Monday Morning Playbook (Take-Two)

We have quite a few positions open so I’m not going to recommend anything new. However, that doesn’t mean I’m not watching stuff.

I think there could be something in the works with Take-Two Interactive Software. The stock took a huge hit back in December when the company lowered its guidance and fell 25% from $12 to under $9. Of course, that drop pales in comparison if you account for its 52-week high of $28.

Take-Two turned down Electronic Arts (ERTS, $15.31, up $0.02) hostile takeover offer of $27 a share and told its shareholders that the company would be better off if it remained independent. The deal never went through but Take-Two is trying to show us why they wanted to stay single.

Take-Two just released its first add-on to its blockbuster Grand Theft Auto series and it can be purchased only through Microsoft’s (MSFT, $15.28, up $0.01) Xbox 360 live marketplace. I think this could help the company in the long run as they look to cut costs and use the internet to push new titles.

We are going to see some consolidation in the industry and Take-Two could still be an acquisition target. I don’t expect earnings to impress anybody on Wall Street and hopefully this has already been factored into the stock price. There is a chance the stock heads back to $5 but I think the June 10 calls (TUOFB, $0.25, up $0.05) are worth a look. They are cheap “out-of-the-money” options and would be worth $1.00 if the stock can make it to $11. If the shares can make it to $10.50, it would still be a double.

For $500, you could buy 20 contracts and take a chance on the stock market recovering and Take-Two making it back to double-digits. Your investment would be worth $2,000 if the stock is at $11, $1,000 if the shares are at $10.50 by June 19th.

The company reports earnings on Tuesday so there should be some movement in the stock. I’ve already mentioned the company has guided lower so there is a slim chance the stock goes up if numbers come in better-than-expected. There is also the chance that the stock makes a fresh 52-week low if they come out with some cruddy numbers.

I’m going to do some more research but I’m leaning towards buying at least 10 contracts sometime on Monday with a limit order of 30 cents.

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7. Closing Thoughts

Futures are up as I prepare to send this out. The Dow futures are higher by 7, Nasdaq futures are up 6.5 while the S&P 500 futures are showing a 0.3 pop. If the market can’t get a rally this week or next then we will head into 1Q earnings season with plenty of question marks.

First quarter earnings start in April and Wall Street will be gauging that as to how well the rest of 2009 is shaping up. The biggest thing to watch for is unemployment because if that gets worse, we could really start to see wallets clamming up.

The market needs some catalysts but many of those won’t factor in until 2010 or beyond. The unemployment rate hasn’t reached the 10.8% level reported back in November 1982, but this recession is not over and that is what the market is dealing with.

Rick Rouse
Rick@OptionsMentoring.com

Tags: AIG, Amgen, Apollo Group, Ford Motor, General Electric, General Motors, Google, HSBC, U.S. Bancorp, Wells Fargo
Posted in Company Commentary, Earnings, Market Analysis, Option Trades | No Comments »

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Rick & Team, GREAT Call on NKE for my two trading accounts:
1) Entry at .65, out at 1.45, 1.55 Profit = $415
2) Entry at .60, out at 1.75, 1.50 Profit = $485

LAWRENCE O.
Hey Rick! Here is an update on what your picks have done in my accounts.

1) Great call on the JoyG March 55. I bought when you said, then bought again on one of the dips. Booked 80+% profit. Made enough to pay for your service for years to come.

2) Also booked profits on your Berk Feb 74 (80%) and threw a major chunk of change at the March 75’s (190+%). I would have never known that Buffet's stock had split if it weren’t for your service. Bought the shares also for the long haul. Won’t look at them for another 20 years. Great job on getting us in before the indexes did.

3) Took profit on your Imax March 12.5. 20 cent trailing stop at 1.90 yesterday. Not sure what the profit on that was, but profit is profit.

I see that you took a loss on some of these. It’s all good. I look to trade your “ideas” not your exact calls. I THANK YOU! For your ideas and commentary. Keep up the good work. And keep those ideas coming.

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Loving this subscription so far! I got into the BRK feb 76 calls the day you talked about right before the split...now up over 300% (0.70 to 2.475)! Keep the good picks coming and let's see some OSIS and EMC upside soon! Just wanted to share my positive enthusiasm on your newsletter...it gives us individual investors great ideas on not only the options market, but also the broader equity market! Case in point is BRK...I can't always read the breaking business news but its easy to read your twice daily updates on my smartphone...helped me get some BRK shares immediately after the split which I will hold for the long haul! Thanks again!

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Aloha Rick - Thank you so much for the great CL pick. I am not sure if there was buy-out/merger news or what but at 3PM today Colgate-Palmolive absolutely EXPLODED to the upside, and my calls turned into green candy when they went from 1.40 to 3.8 in a matter of seconds! I even sold a few for over 4.0! Much thanks and keep the solid picks up my friend, honestly. Only a fool would scoff at 267% gains... Peace!

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I got into the Nike 60 Call at 1.85, sold at 5.00, also bought a 55 put at 1.05, but got stopped out at .35. What a ride! $2830.00 in the black even with the put. It's right at 100% return. I hope earnings season coming up is going to look like this trade.

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“Rick – Wow what a day! I got in at the Dendreon calls at $2.25. Thanks to for your advice. I appreciate that. This company has a lock on this type of therapy and no one else in the world is close. Kind of reminds me of the type of companies that Peter Lynch and Warren Buffet suggest that investments be made in. Companies that can build a moat around their business model, that allows them to charge a premium for their product or service. In other words - a monopoly.”

KEN
“Hi Rick, Thank you so much for the Dendreon trade, I made almost $10,000 with that trade with a little over $2,000 investment. You have shown me the power of options trading. Again, thank you so much for all your inputs.”

GARETT
“Hi Rick, thanks for the encouragement to play the dendreon calls! did freaking great! Got in the first lot at $1.44 on 3-24-09, sold at $2.45, 70% not bad. Bought it back at $2.30 on 4-7-09 closed out on 4-14-09 for 454% gain! Wow! I love it when that happens. So, thanks the encouragement to get back in when others were saying sell, sell, sell. Keep up the good work.”

TERENCE
“Rick – Thanks for Dendreon – it has made all the headlines today! I missed on RIMM earlier, but I’ve been holding onto DNDN calls since 3rd week March. Of course today it all paid off today, as DNDN rocketed up.”

Posts Tagged ‘General Motors’

More on General Motors – Update at 1:30pm

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Weekly Wrap for 4/5/09

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Weekly Wrap for 3/8/09