1. Commentary
2. “Covering” General Electric
3. Earnings
4. Closed Trades
5. Current Trades
6. Monday Morning Playbook
7. Closing Thoughts
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1. Commentary
The market is at a crossroad and after a week that saw the Dow bend but not break, we could get a clear direction this week. The Dow managed to trade near 7,500 on Monday but tested 7,000 by the end of the day. That negative sentiment carried over into Tuesday but the market bounced off support and was gaining momentum before Citigroup (C, $1.50, dow $0.96) and the government crashed the party.
The $25 billion stake that the government took in Citigroup diluted shareholder value and “we”, meaning America, now own 36% of the company. Citigroup’s common stock tanked 40% on the news but the company’s “preferred shares” were up about a third as investors were dumping the common stock and snapping up the preferred.
Preferred stock holders get paid dividends before common shareholders and are the first to get paid in case there is a liquidation. Citigroup did announce that it would stop paying dividends on all preferred shares except “trust preferred securities” but the deal includes a slew of provisions. The main one is that Citigroup can’t “exercise voting rights” on common shares which suggests the government is clearly not interested in owning the common stock.
The deal was hardly a secret as news came out on Wednesday that the government would be willing to purchase common shares in large banks that they deem to need more cash. Citigroup expects to exchange all preferred shares to common stock at $3.25 per share.
The most amazing thing about this story was the volume in the stock reached nearly 2 billion shares on Friday.
Still, despite the havoc this caused in the marketplace, the Dow managed to hold its own. It’s clear the government is having a tremendous effect on Wall Street right now and the waters are still murky. The bulls appear to making a stand but the bears are threatening to take the market even lower. We could also get another stalemate again this week if the Dow holds 7,000 without a snap-back rally and even those have been limited to 300 or 400 points.
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2. “Covering” General Electric
General Electric (GE, $8.51, down $0.59) spent another week making headlines and most of them were negative. The only thing you need to know if you are a shareholder is the stock made another 52-week low on Friday and the company cut its dividend.
Brutal.
So is the glass half-full or half-empty for GE?
I don’t buy stocks so it is really hard for me to say if the stock is a good value down at these levels. I will put things in perspective though. GE cut its dividend from 31 cents per share a quarter to 10 cents. So if you held 1,000 shares of the stock, instead of getting $1,240 for 2009, you are going to get $100. The previous dividend yield represented a 15% return on your money assuming GE held $9 all year and paid this out.
So, instead of the shareholders getting rewarded for their good faith by holding the stock for years and years, GE will save $9 billion instead of paying it out. Angry investors were dumping their stock on Friday while the die-hard’s held on believing GE needed to make the move.
Some circles on Wall Street believed GE had to make the move because Moody’s (MCO, $17.95, down $0.06) was reviewing its ratings for the stock and was set to issue a possible downgrade. I’ve never valued Moody’s opinion anyway and everyone on Wall Street seems to be forgetting the fiasco from last May. Moody’s stock dropped 20% in one day, falling from $44 to $37, after saying a “computer error” was the reason behind the company giving out improper credit ratings. Fast forward to now and Moody’s is another 50% lower.
I guess the bright side is GE could have cut the dividend altogether and look for many other companies to follow this rapidly growing trend, but they didn’t. At current levels, the dividend still yields 4.5%. If GE continues lower, then that number will rise.
Another way to generate income if you start accumulating the stock is to sell call options against your position. This is known as covered call writing and it’s a way to get a little extra cash. The downside is that the stock could get “called” away from you.
For instance, if you bought 1000 shares Monday morning for $8,500, you could sell 10 April 9 calls (GEWDD, $1.15, down $0.25) and collect $1,150 in premium. This would lower your cost basis in the stock to $7,350.
If the stock falls to $7.50 like many believe it will, then it would have been better off waiting. However, if the stock holds these levels and rallies past $10, the option will likely be exercised meaning you would have to sell it at $9. That would still be a profit of $1,650 or over 20%.
We were successful in playing GE’s volatility last week as you will see in the “Closed Trades” section and it remains to be seen what happens over the long-term. Short-term, there are still risks but there are ways to offset that risk if you really believe in the stock.
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3. Earnings
Monday: American International Group (AIG, $0.42, down $0.10), DISH Network (DISH, $11.25, up $0.17), Eagle Bulk Shipping (EGLE, $3.76, down $0.18), Hospitality Properties Trust (HPT, $11.40, down $0.25) and Wendy’s / Arby’s Group (WEN, $4.53, down $0.36).
Note: HPT paid a 77 cent quarterly dividend last week to shareholders that was declared back in January. Folks, that is $3.08 annually which equates to a yield of 27% if you own HPT stock. The company declared the dividend when the shares were at $15 but be leery.
Tuesday: AutoZone (AZO, $142.23, up $1.15), Bank Of Montreal (BMO, $22.13, down $0.64), Jackson Hewitt Tax Service (JTX, $7.48, down $0.55) and Tech Data (TECD, $17.29, down $0.01).
Wednesday: Big Lots (BIG, $15.51, up $0.46), BJ’s Wholesale Club (BJ, $29.88, up $1.71), Foot Locker (FL, $8.31, down $0.38), Joy Global (JOYG, $17.46, up $0.22), PetSmart (PETM, $20.04,up $0.56) and Weight Watchers International (WTW, $18.10, down $0.08).
Thursday: Anheuser-Busch InBev (ABI.BR, $21.80, up $0.91), Fuel Systems Solutions (FSYS, $19.81, up $0.68), K-Swis (KSWS, $9.96, down $0.01) and Urban Outfitters (URBN, $16.64, up $0.09).
Friday: AnnTaylor Stores (ANN, $6.58, up $0.27) and Perficient (PRFT, $3.52, down $0.02) are a couple of names as we wind down 4Q earning reports. April is right around the corner which is when 1Q earnings come out.
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4. Closed Trades
Bank Of America (BAC, $3.95, down $1.37)
I should have known the left hook BofA delivered on Friday was coming. The March 6 calls (BYOCF, $0.24, down $0.27) and the March 7 calls (BYOCG, $0.12, down $0.15) got absolutely crushed on Friday. It was an omen as I wrote this in Thursday’s blog:
“The March 6 calls traded to a high of 80 cents and the March 7 call options traded to a high of 45 cents. This represented a loss of 10% and 33%.
It looks like I was a week early on the recommendations and maybe they should have been sold today for a small loss. Remember what I have been telling you. If you can limit your losses to 25%-50% on options trades while making 100% then you will do fine. I don’t mind taking a small loss on the trades and will probably close them on Friday. There are better opportunities out there for us to make some money.” -
These puts were closed on Friday at the open for 35 and 20 cents, respectively. The losses were about 60% which is higher than our standard 50% stop. We were crushed when the Citigroup (C, $1.50, down $0.96) news came out Friday morning.
Dow Jones Industrial Average Index (DJX, $70.63, down $1.19)
This trade was closed on Tuesday, 2/24. The March 75 puts (DJXOW, $5.20, up $0.75) were profiled on 2/18 and closed out at $4.50 when the Dow rallied 250 points on Tuesday. The March 74 puts (DJXOV, $4.10, up $0.25) could have been bought for $2.75 and sold for $4.00.
I said the Dow could slip below 7,300 and we got that on Monday when the Dow dipped below 7,100. Tuesday, we got a bounce off the lows but that only proved to be technical for the time being. Both trades returned 45% before Friday’s rebound and although the puts are higher than where they were closed out, the risk of holding them was too great when we bounced off the lows. I’m sure we will be back in the trade…either long or short.
International Business Machines (IBM, $92.03, up $3.06)
This was a tough one to close. On Friday at noon, the March 95 calls (IBMCS, $2.20, up $1.10) were trading at $2.10 and I provided an update:
“International Business Machines (IBM, $92.03, up $3.06) is on fire this morning and I said last night this is a strong stock in a weak market. The March 95 calls (IBMCS, $2.10, up $1.00) have doubled with today’s big move. These calls were profiled at 70 cents yesterday morning and some of you may have gotten in at higher prices. That’s okay because even if you got in late, they are still rocking. It’s a tough call to leave these open and you will have to see how the market is acting before the closing bell. If it looks like the Dow is headed below 7,000, you may want to get out.” -
The calls traded as high as $2.55 when IBM hit a high of $93.28 a couple of hours later. The fade back down was enough for me to get out. I really didn’t want to get out of the position but we opened a couple of others on Friday. Once the calls hit over a 200% return, a stop of $2.25 locked in profits of 220%. I’m sure we will be playing IBM again in the future.
General Electric (GE, $8.51, down $0.59 )
The market volatility did bring us a quick trade in GE. On Tuesday morning, I had this to say about the stock at 11:30AM (stock and option quotes are from 2/24)…
“General Electric (GE, $8.90, down $0.48) continues to set new 52-week lows after falling below $10 last week. Wow. It is really hard to believe this stock is in the single digits. The stock is getting so cheap to where it can be actually be traded but option traders are still loading up on the puts.
The March 7.50 puts (GEWOU, $0.55, up $0.10) have been pretty active as over 28,000 contracts have traded so far this morning. The put options opened at 30 cents, down 14 cents from Friday’s close as GE’s share price was higher to start the day. However, that has all changed as the Dow has given back all of its gains and is currently down about 80 points to 7,284.
You could buy the puts at current prices and look to exit them at 75 cents with a stop of 25 cents. Very high risk/ high reward trade.” -
The puts traded up to 72 cents which was close enough and could have been sold there or at 70 cents. The trade made 27%. GE went on a roller-coaster ride on Friday after announcing a dividend cut.
The March 7.50 puts closed at 53 cents on Friday.
Research in Motion (RIMM, $39.94, up $0.40)
The stock rebounded sharply with the market on Tuesday and closed above $40 that day. That was enough to crush options traders who stayed in the position too long. We had stops in place to protect our profits when the stock hit a low of $37. Greedy traders hoping the stock would test its 52-week low of $35 got left holding the bag.
The March 40 puts (RUPOH, $2.65, down $0.40) were profiled on 2/18 at $2.15. We got out of these calls on Monday, 2/23, at $4.50 for over a 100% return.
The March 35 puts (RUPOG, $0.90, down $0.10) were recommended at 85 cents and could have been closed at $2.10 and higher. This trade hit nearly a 150% return.
Once again, you can see the importance of holding open positions for too long. I only bring this up to keep the importance of having stops in place to protect your profits on your mind.
Safeway (SWY, $18.50, up $0.13)
This was strictly an earnings play which made it a lottery trade….The stock was at $21.13 and I said to wait right before the close to buy the puts. You could have gotten into the puts at 65 cents on Wednesday before the closing bell. On Thursday, I had this to say:
“We closed the Safeway (SWY, $18.37, down $2.75) trade this morning.
The March 20 puts (SWYOD, $1.95, up $1.25) were profiled at 70 cents on Wednesday and you could have bought them before the market closed at 65 cents. I said to sell them this morning at $1.80 and yes, they finished higher but after hitting a high of $1.90, the puts traded back to $1.40. That was the difference between 150% and a 100% trade.
The put options still closed higher than where we sold them at but our trade parameters were already meet. New options traders will hold onto these positions instead of taking what the market gives them. That is the main reason between having winning and losing option trades. Safeway could continue lower but when our goals are meet, ring the register and move on to the next trade.” -
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5. Current Trades
Amgen (AMGN, $48.93, down $2.30)
Amgen had a tough couple of days and saw its share price fall from $55 to below $49 in the blink of an eye. I had talked about buying the April 55 calls (YAADK, $0.90, down $0.70) on Friday and with the market heading lower, it was a tough call to buy them before the close.
I jumped on the April 55 calls (YAADK, $0.90, down $0.70) faster than a pit bull on a pork chop but failed to mention the March 47.50 puts (AMQOW, $1.45, up $0.60) as insurance. The puts were trading for $1.25 at the time of the blog. Friday was a busy day but I wanted to point this out in case Amgen continues its spiral. If you did a 2-to-1 ratio and the stock continues to fall then the March puts might make enough to give you a free trade in Amgen until April.
AutoZone (AZO, $142.23, up $1.15)
We entered this trade on Tuesday, 2/24. The stock was at $143 at the time and the March 160 calls (AZOCL, $1.70, up $0.20) were going for $2.30 while the March 130 puts (AZOOF, $3.50, down $0.20) were going for $3.90.
A very astute reader asked why I didn’t wait until Friday to buy this position and I could see where he was coming from. I was hoping from AutoZone to drop below $140 after we got into the trade which would have made enough for us to close the put options side of the trade to cover the call option. Basically, I was hoping for a free ride on the calls because AutoZone has a chance to explode if their numbers rock the Street.
The company reports earnings on Tuesday morning so Monday there will a battle going on as to which strike price we settle at going into earnings.
Freeport-McMoran (FCX, $30.42, up $0.33)
I mentioned the March 35 calls (FCXCG, $0.85, up $0.03) on Friday when they were trading slightly higher and the call options moved from $1.00 to $1.20 shortly afterwards. I only plan on keeping this trade open for a week due to the March option contract. They don’t expire for another three weeks but it’s time we start thinking about April contracts.
Genentech (DNA, $85.55, down $1.93)
Shares of Genentech made it a high of $89 last Wednesday.
The March 95 calls (DWNCS, $0.25, down $0.05) were mentioned back on 1/12 at $1.50 and came to life on Wednesday, albeit, if only for a brief time. Getting a deal done between Roche and Genentech has been like watching paint dry.
Roche reportedly has issued bonds to help finance the deal of getting Genentech at $86.50. Expect that to get formally rejected within the next week or so. Genentech still wants over a $100/ share bid and we have been punished by Roche pulling the lowball offer.
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6. Monday Morning Playbook
Here’s what I’m watching this week. Obviously, many of you don’t have the luxury of watching your positions all day long or follow the blog. Having said that, I thought it might be helpful to show you what I’m looking at.
IBM (IBM, $92.03, up $3.06) is giving all the signs that it wants to go to $100 and if the market can get some legs, that is a real good possibility. However, that is when the trade will get crowded unless IBM breaks through that level with conviction.
In the meantime, watch the March 95 calls (IBMCS, $2.10, up $1.10) and the March 100 calls (IBMCT, $0.80, up $0.50) and confirm momentum before jumping in. For those of you who kept the March 95 calls open from last week, set stops at $1.50.
Potash (POT, $83.97, up $0.13) also is looking like a “par” stock as it too appears ready to make a run at $100. At least that is what the bulls think. The sector is heating up so anything is possible. I’m not sure about $100 but the March 100 calls (PYPCT, $1.75, down $0.05) could make a run to $3-$3.50 if the stock makes it to $90. Mosaic (MOS, $43.05, up $3.39) is another name and the March 50 calls (MOSCJ, $1.80, up $1.15) were hot on Friday. The March 55 calls (MOSCK, $1.00, up $0.75) might be a reach. Again, confirm market conditions and direction of these two before jumping in.
Oil has been getting interesting and is in the same boat as the Dow. A couple of oil plays are the Exxon Mobile (XOM, $67.90, down $3.05) March 70 calls (XOMCN, $1.85, down $1.34) and the ConocoPhillips (COP, $37.35, down $1.10) March 40 calls (COPCH, $0.85, down $0.40). These options may get cheaper but there will be a rebound.
Celgene (CELG, $44.73, down $4.01) could get hurt if HealthCare stocks continue to suffer. Shares made a fresh 52-week low Friday. The March 40 puts (LQHOH, $0.80, up $0.60) will be getting more attention if Celgen fails to hold the $40′s. If the stock starts off Monday lower, these calls could pop 50% or more.
Retail was hot last week, especially on Friday but you can only trust a handful of these names. One name that popped back on the Watch List Friday was Dollar Tree (DLTR, $38.82, up $1.76) which could be making a run back over $40. The stock was crushed at the beginning of February, falling from $44 to $35 after the company said earnings would be above the middle of the $1.07 to $1.15 a share range they gave.
The selling was too excessive and bulls have pushed the stock higher after the company reported that it earned $1.15 a share last week. Wall Street had been expecting $1.13 a share. Dollar Tree is gaining market share and sells most everything for a dollar. Plus, more of their stores are taking food stamps given the current economic conditions which is also helping steal market share. Keep the March 40 calls (DQOCH, $1.05, up $0.55) on your radar.
We did a Family Dollar Stores (FDO, $27.44, up $0.35) trade back in January that was good for 25% and this one looks like it could copy those results.
Again, confirm market direction, stock direction and entry prices before jumping in any of these positions.
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7. Closing Thoughts
There seems to be a lack of interest in the market right now as Wall Street continues to viewed as the bad guy by the general public. Yeah, greed and shady practices have popped up and bonuses may have been excessive but Wall Street is no different than some of the fat cats who run the government. It’s almost as if this is the new battle developing but lets not get carried away.
The market needs clarity and until we get it the market will remain nervous. The art of business should have been left alone by the government and the bailouts to some degree but it certainly feels like the cold shoulder is being thrown.
It is what it is and we have to deal with it. The point I want to make is that smart investors are still making money in this market and they will continue to do so. You can see from the aforementioned trades that there is plenty of opportunity to make money going both long and short the market.
If you are still new to options or just getting started, take this time to watch how the market works. There is so many moving parts that it can be overwhelming but take the time to make Watch Lists and learn the trading patterns of some of your favorite stocks. Watch which sectors are hot and which ones are turning cold. HealthCare is a good example of how quickly the tide can turn.
Once again, we are headed towards a busy week and earnings will be notable but light. The longer we stay in this range the bigger the breakout to the upside or downside will be. There will be some economic reports that impact the market but if the Dow fails to hold 7,000 or 6,800 then we are going to see investors running for the hills.
Rick Rouse
Rick@OptionsMentoring.com
Editor’s Note: The 2008 and 2009 portfolios should be posted soon. What is neat about them is that you can look up the date on a certain recommendation and follow it in the blog. They should be posted in the next week or so. Other than that, keep the emails coming and feel free to share any success stories you may have!
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Weekly Market Wrap for 3/29/09
Monday, March 30th, 2009
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
Tags: Amazon.com, Family Dollar, First Solar, GM, Mosaic, Research in Motion
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