1. Commentary
2. Take-Two Interactive Back in Play?
3. Banking on Bank of America Pays Off
4. Earnings
5. Current Trades
6. Monday Morning Playbook
7. Closing Thoughts


1. Commentary

Down but not out, the bulls staged a furious rally last Thursday that sent the bears a message that they aren’t done buying stocks. Left for dead, the bank stocks soared after Wells Fargo (WFC, $19.61, up $4.72) announced first-quarter earnings early. The company said it expects to earn 55 cents a share versus Wall Street’s expectations of 24 cents. As a result, the Dow added nearly 250 points to close at 8,083, up 3.1% for the day.

It was a surprise that Wells Fargo released part of its earnings report because the company was scheduled to announce on April 22nd. The unexpected announcement caught many option traders off guard (this one included) who were chomping at the bit to get into the financials before Goldman Sachs (GS, $124.33, up $9.58) reported earnings on Tuesday. The writing has been on the wall that the financial companies would be reporting good earnings and there was a flurry of activity in the sector. There was one trade that was profiled back in March which you will read about in the section 3 that benefited from the news but there are so many more to talk about.

That was one of the big stories I was working for this weekend’s newsletter but the cat is out of the bag now. This news was a game changer by all means and the bulls are “all aboard”. You see, many of the “analysts” on Wall Street have no clue on what the financial companies are going to report for earnings and the bar is so low that we kind of knew these companies were going to smash earnings. The plan was to buy some cheap out-of-the-money calls on a few of the big names next week, and we still might, but many traders started building positions on Thursday. More on this in the “Monday Morning Playbook”.

The move on Thursday erased all of the losses for the week as the Dow extended its winning streak to five straight. For the week, the Dow gained 66 points to finish at 8,083. As far as the other indexes, the Nasdaq added 30 points and finished at 1,652 while the S&P 500 was up 14 points, and closed at 856. All three indexes gained less than 1% but it was impressive to see the bulls battle back and win the week.


2. Take-Two Interactive Back in Play?

Action in Take-Two Interactive Software (TTWO, $8.40, up $0.42) is heating up again. To make a long story short, here was the original write-up in the blog back on March 9th:

“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 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 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.” — (end)

The June 10 calls are now at 65 cents, up 20 cents on Thursday, and we got out of them on March 23rd at 80 cents. So we made the right choice back then.

However, the April 10 calls (TUODB, $0.10, down $0.04) traded 3,500 contracts while the May 10 calls (TUOEB, $0.40, up $0.19) traded over 2,000. I like the May and June calls at these levels and would avoid the April calls. Take-Two could be getting ready for another offer and this time I doubt their shareholders take “no” for an answer.


3. Banking on Bank of America Pays Off

On March 11th, I did a write-up on Bank of America (BAC, $9.55, up $2.49) that was intended to take all of the drama out when playing the financial stocks. The blog was titled “Banking on Bank of America” and the point I want to make is that we planned this trade and we took ourselves out of the daily and weekly surroundings that accompany the sector. I mapped out a trade based on where we thought the stock could be in 2 or 3 months. Since it was the month of March at the time, I went out and looked at the May and July options for the stock and here are some of the highlights of what I talked about. (Quotes are also from March 11th) –

“I’m not a big fan of Bank of America (BAC, $4.79, up $1.04) because of its toxic assets which nobody knows what they are worth. However, there is some incredible option activity worth noting.

Instead of trying to figure out where BAC is going to finish the week or month, let’s go out until May. There are circles in Wall Street that firmly believe this is a double-digit stock but are you willing to pay $5 a share on the unknown? I’m not but I do think the sell-off has been severe and many of these stocks are due for a bounce.

If the talk of BAC is that it is going to $10 or higher, well, lets go under that and say the stock has a shot at $8. The stock was at $7.81 in January and above $7 in February. So $8 is possible especially considering the stock was at $14 to start the year.

The May 6 calls (BYOEF, $0.97, up $0.42) opened at 75 cents and traded nearly 24,000 contracts.

If you buy these call options they will be impacted by Thursday’s news, first quarter earnings and all of the other verbiage that comes out of Wall Street. Now, if you really believe Bank of America will be at $8 by May 15, 2009, the good news is that these options will double. And the quicker BAC moves higher, the quicker these calls will be “in-the-money”.

If we take it a step further, if the stock is at $10 by the middle of May, these calls would be worth at least $4 or 300% higher from current levels. To get that same return from the stock, BAC would have to be at $20. That, my friends, is the power of leverage and the power of options.

The July 10 calls (JLWGB, $0.30, up $0.08) traded over a 1,000 contracts. If the stock is at $12 by July 17th, 2009, these options would be at $2. That means for every $30 you invest right now COULD be worth $200 by July. If you “bet” $300, you could “win” $2,000.

If BAC is at $14 then the July 10 calls would be worth $4 and for every $30 you invest now…it would be worth $400! If you bet $300, you could win $4,000. Wow…

These are the facts and this is the simplest way to look at things. I’ve gotten a slew of emails concerning financial stocks over the past few days and BAC’s name keeps popping up. I would go with the stronger names if I were doing an option trade but this is a very nice risk/ reward trade that even Charles Barkley would be happy with. The downside is that BAC stays below $5 and you end up with a big loss.” — (end)

A week later, here was the update I gave. (Quotes from March 18th)

“Bank of America (BAC, $7.67, up $1.40) had another fantastic outing as the stock added another 22% today. Talk about having a tiger by the tail. The stock started higher right out of the gate and continued its upswing throughout the session after the company’s CEO said BofA could repay the $45 billion government TARP loan by late 2009 or early 2010, depending on the economy.

BofA closed above $7 for the first time since late January and got an added lift after the Federal Reserve announced plans to buy up to $300 billion of long-term Treasury notes. By doing so, the Fed is showing its commitment to pump money into the financial system and encourage lending.

After the Fed news, the stock continued its rally and closed at its high. In after-hours trading as I type, the stock is up another 28 cents to $7.95.

Now for the best part.

The May 6 calls (BYOEF, $2.75, up $1.10) were entered at 75 cents on 3/11/09 and as of today’s close that represents a return of 267%! I have been talking about protecting your profits with this one all week and it would be prudent to set stops at $2.50 RIGHT NOW if you haven’t done so already.

The July 10 calls (JLWGB, $0.95, up $0.42) surged 80% today and we had an exit target of 60 cents. With today’s huge gain, you should now raise the exit target/ stop to 80-85 cents. The total return for this trade is 217% and a stop of 90 cents gets you a 200% return.

If the stock holds it gains in after-hours trading then these call options could continue to do well. Just remember, if you sell half of the position at 200% it means you made a 100% on your original investment and you could let the rest ride until May and July which is when these options expire. The May 6 call options are now in-the-money by $1.67 (stock price minus the 6 strike price) so they should move nearly dollar for dollar if BofA continues up.” — (end)

Half of the trade was closed at the above prices and some of you may have closed the entire position. If you kept the other half open here are the current prices. The May 6 calls (BYOEF, $4.00, up $2.15) which were profiled at 75 cents are up 433% from those entry prices.

If you had bought 20 contracts at 75 cents, the position would have cost you $1,500. If you sold 10 contracts at $2.75 and have 10 contracts open at $4.00, your return so far is 350% and you have managed to turn $1,500 into $6,750 in just over a month. I know this article was long-winded but I wanted to show you how some of our strategies work and the advantages of taking the emotion out of your trading.

The July 10 calls (JLWGB, $1.30, up $0.70) also made a huge move when the stock jumped and they were profiled at 30 cents.

Things are suddenly looking a whole better for the financials and they could continue to run higher from here.


4. Earnings

Monday: Bank of the Ozarks (OZRK, $22.41, up $1.36) and Talbots (TLB, $3.91, up $0.43).

Tuesday: Commerce Bancshares (CBSH, $38.67, up $2.91), CSX Corp. (CSX, $29.75, up $1.16), Fastenal (FAST, $38.43, up $2.12), Goldman Sachs (GS, $124.33, up $9.58), Intel (INTC, $15.98, up $0.71), Johnson & Johnson (JNJ, $51.41, down $0.04), Linear Technology (LLTC, $22.73, up $0.57) and W.W. Grainger (GWW, $77.00, up $4.36).

Wednesday: Abbot (ABT, $44.03, up $0.36), AptarGroup (ATR, $33.50, up $1.04), Crown Holdings (CCK, $22.20, down $0.01), Infosys Technologies (INFY, $29.72, up $0.81), Landstar System (LSTR, $36.29, up $1.99), Lufkin Industries (LUFK, $39.06, up $1.42), Peabody Energy, (BTU, $28.39, up $1.66), Piper Jaffray (PJC, $28.86, up $3.24) and Union Bankshares (UNB, $16.00, up $0.10).

Thursday: Baxter International (BAX, $49.23, up $0.03), Biogen Idec (BIIB, $52.96, down $0.68), Briggs & Stratton (BGG, $17.51, up $0.96), Gannett (GCI, $3.75, up $1.06), Genuine Parts (GPC, $32.10, up $1.33), Google (GOOG, $372.50, up $10.50), Harley-Davidson (HOG, $18.02, up $1.76), Intuitive Surgical (ISRG, $112.24, up $10.77), JPMorgan Chase (JPM, $32.75, up $5.32), Nokia (NOK, $13.80, up $0.54), Parker Hannifin (PH, $39.13, up $2.55) and Sherwin Williams (SHW, $53.55, up $1.06).

Friday: BB&T Corp. (BBT, $20.31, up $3.61), Citigroup (C, $3.04, up $0.34), General Electric (GE, $11.33, up $0.69), Mattel (MAT, $13.35, up $0.59) and Student Loan (STU, $52.48, up $4.95).


5. Current Trades (Thursday’s closing price)

Bank of America (BAC, $9.55, up $2.49)

May 6 calls (BYOEF, $4.00, up $2.15)

Entry Price: $0.75 (3/11/09)
Exit Price: $3.00 (half closed on 3/18/09 @ $2.75)
Return: 433%

July 10 calls (JLWGB, $1.30, up $0.70)

Entry Price: $0.30 (3/11/09)
Exit Price: $0.90 (half closed on 3/18/09 @ $0.95)
Return: 333%

Set stops at $3.00 for the May 6 calls and $0.95 for the July calls.

Dendreon (DNDN, $6.30, down $0.07)

April 10 calls (UKODB, $0.21, down $0.04)

Entry Price: $0.40 (3/20/09)
Exit Price: $0.25 (4/9/09)
Return: -38%

May 7.50 calls (UKOEU, $2.10, down $0.22)

Entry Price: $1.50 (3/20/09)
Exit Price: $2.25 (4/9/09)
Return: 50%

On Friday, I told you to sell the April calls and what once looked like a sweet trade is now getting put on the backburner. I did not provide another update once the market opened but I decided to sell ALL of my position in Dendreon. Two things I said on Friday: One was that if I sold both the April and May options; the position would be profitable for me. It was. The other was the August 10 calls (UKOHB, $2.00, down $0.15). I decided that the best thing would be to take my profits and maybe roll some over into the August calls.

I said we may pick up some this week and we might…but there are other trades I like and we should have plenty of time to get into the August options before the news hits by the end of the month. For those still in, the May calls are up 50% and you should be able to close the rest of your position for a decent gain or you can hold on and set stops at your entry prices.

ValueClick (VCLK, $10.07, up $0.63)

May 10 calls (QCSEB, $0.95, up $0.25)

Entry Price: $0.75 (4/9/09)
Exit Price: $1.50 (open)
Return: 27%

September 12.50 calls (QCSIV, $0.90, up $0.10)

Entry Price: $0.80 (4/9/09)
Exit Price: $1.60 (open)
Return: 13%

ValueClick opened at $9.57 on Thursday morning which was only 7 cents higher than the previous day’s close. These were the entry prices about 30 minutes after the market opened. I’m just adding the May and September plays to the portfolio but I also mentioned the April 10 calls (QCSDB, $0.35, up $0.20) which opened at 20 cents and nearly doubled for the day. Set stops at half your entry prices or a nickel below them.

NetApp (NTAP, $16.96, up $0.33)

May 17.50 calls (NULEW, $1.10, down $0.07)

Entry Price: $1.10 (4/9/09)
Exit Price: $2.20 (open)
Return: 0%

May 20 calls (NULED, $0.40, down $0.10)

Entry Price: $0.40 (4/9/09)
Exit Price: $0.80 (open)
Return: 0%

NetApp opened lower on Thursday and traded down to $16.23 before ending the day slightly higher. This provided great entry points as the May 17.50’s traded at $1.00 while the May 20’s traded to a low of 35 cents. If we can get a run to $20 over the next couple of weeks then we should do well with these trades.


6. Monday Morning Playbook

I’m going to toss out a lot of plays this week because I want to show you how explosive the last week of options expiration can be. This coming week, the April options expire this Friday so there will be really “cheap” plays out there. These options trades won’t cost a lot of money because there isn’t much time premium left in the options. We do, however, need the stock to move.

These trades are called “earnings plays” and this is the best time to play them because the options are so cheap. I’ll comment on each one and it’s up to you to take your research further but here is a list to start with.

Goldman Sachs (GS, $124.33, up $9.58) and Intel (INTC, $15.98, up $0.71) report Tuesday. Goldman reports Tuesday morning before the bell, Intel, after the bell.

Monday, watch the Goldman Sachs April 140 calls (GSDH, $0.92, up $0.66) and try to get in them at $1.00 or less. If the stock gains 15% this week that would get the stock to $143 and these calls would be worth $3.00, or a 200% profit if it plays out that way. Expect Goldman to put up some impressive numbers but there is talk they may do a stock offering to raise money. That has the potential to weigh on the shares but Goldman should trade higher.

Intel reports after the bell on Tuesday. The April 17 calls (NQDS, $0.16, up $0.09) doubled on Thursday but could have more juice left in them if Intel can say something good about its earnings. They are expected to report $0.02 a share, down some 90% from last year’s quarter but it’s Intel’s guidance that could take the stock past $17. Intel doesn’t move much more than 10% after earnings so we will go with 8%. That would get the stock to $17.30-ish which would make the calls worth 30 cents or a double from current levels.

Piper Jaffray (PJC, $28.86, up $3.24) reports on Wednesday but I’d rather go with Goldman. However, for those interested, watch the April 30 calls (PJCDF, $0.85, up $0.60).

Google (GOOG, $372.50, up $10.50) reports on Thursday and the April 420 calls (GOPDD, $1.45, up $0.57) could do well. The April 400 calls (GOPDT, $4.42, up $1.67) are a little more expensive and also watch the May 450 calls (GOPEJ, $2.10, up $0.70). Google could make a super-size move of 20% either way which would be a $70 point move. Google has a chance to shine this week but if it disappoints, the stock could be headed much lower.

JPMorgan Chase also reports on Thursday and options traders were buying the April 35 calls (JPMD, $0.77, up $0.73) last week. They jumped an astounding 1,825% from Wednesday to Thursday. Incredible.

Citigroup (C, $3.04, up $0.34) reports Friday and will probably ride the wings of JPMorgan and Goldman this week. The April 3 calls (CDV, $0.25, up $0.11) traded 122,000 contracts last Thursday while the April 4 calls (CDW, $0.07, up $0.03) traded 45,000 contracts. The May 3 calls (CEV, $0.39, up $0.12) traded 77,000 while the May 4 calls (CEW, $0.20, up $0.06) saw 21,000 contracts trade hands. Citigroup scares me.

That should be enough to get you started and I will try and update these plays as the week progresses. Remember, these options are extremely risky and should only be traded with money you can afford to lose. Also, all of the options listed are call options which means not only do you have to have a great move in the shares, you also have to get the direction right.

These types of events only happen four times a year so get ready for some fireworks. I will not include these results in the portfolio I use for the blog because these trades are for show-and-tell only.


7. Closing Thoughts

Everyone has been telling us that the market is due for a break and there are a lot of talking heads that have been calling for a pullback. Guess what? That was 500 points ago. I try not to listen to the TV because no one really knows where the market is headed on a day-to-day basis. If you listen to the commentators, they don’t tell you exactly when we are having a pullback, they just tell you we are.

Just like when we were at 6,500 on the Dow, everyone was calling for a rally or a bear market bounce. Technically, when we get a bounce of more than 20%, which is what we have gotten, we are in a bull market. The point I’m trying to make is that you shouldn’t get caught up in listening to where they think the market is going, concentrate on what is working. I never go out on a limb and predict where I think the market will be in a month because I have no idea.

However, I do think it is possible to get a good feel for the market on a day-to-day basis and sometimes even a weekly basis. Other than that, it’s impossible to say where the Dow will be at in a month. The main reason is volatility and that, my friends, is one of the keys to making money in options. Having said all of that, I do think if we rally for a few more weeks then the old Wall Street adage “Sell in May and go away” could come into play.

So instead of trying to figure out where the market will be next week or next month, play the trend. Right now, the trend is bullish. Things can change very quickly but for now concentrate on earnings and look for the companies that could surprise and the ones that are going to disappoint. If things do start to fall apart, and we do retreat, watch support for the Dow at 7,600 and 800 for the S&P 500. A move below those levels with weak earnings could put the bears back in charge. There are going to be quite a few outstanding trades in the marketplace over the next couple of weeks so get ready for some action.

Rick Rouse