Yesterday morning I mentioned the option activity in AutoZone (AZO, $100.48, down $6.68) from Monday’s trading session. The stock closed at $107 on Tuesday which allowed us to get into a couple of November and December put option plays at lower prices.

Today’s 6% drop in the stock can be attributed to the testimony of the auto makers which has not been going smooth. There has been talk that if Congress approves the $25 billion bailout package will the auto makers be willing to share that money with some of their partners. That is telling us the fallout from the auto industry will spread to many other sectors. AutoZone could suffer as well.

The November 95 puts (AZOWS, $1.50, up $0.75) were profiled at 90 cents and closed yesterday at 75 cents. They have doubled today. I have mentioned that the November options expire this Friday so you will have to watch these carefully. If you got into the puts at 90 cents you could set stops at $1.35 to ensure a 50% profit. If you got in at 75 cents you could set stops at $1.25.

The December 95 puts (AZOXS, $7.90, up $1.60) were profiled at $5.40 and have also done well today. However, I was pounding the table on the December 75 puts (AZOXU, $2.90, up $0.90) which were going for $1.80. I said to buy them up to $2.00 and if you got into this trade, you are up 50% right out of the gate.

We are targeting a drop below $100 for AutoZone but it would be prudent to place stops on the December puts as well. Any good news out of Washington today could help AutoZone recover.

Rick Rouse