1. Commentary
2. Breaking Down a GE Trade
3. Blackstone Group Revisited
4. Earnings
5. Current Trades
6. Monday Morning Playbook
7. Closing Thoughts

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1. Commentary

Even Alan Parsons would wonder “where do we go from here”…

The market continued it solid uptrend last week after getting off to a good start on Monday. Existing home sales got the ball rolling as sales increased in March for the second consecutive month. That, and the fact that fears over Swine Flu have started to fade also set the tone to start the week.

The bulls took the day off on Tuesday but started pushing the market higher on Wednesday, ahead of the “stress tests” details, which came out Thursday. The test was performed on 19 of the nation’s largest banks and after weeks of hype and build-up it was determined that 10 of the banks needed to raise an additional $75 billion in capital.

This number is what the government figured the banks needed in order to withstand a further deterioration in economic conditions. The good news was the bulls didn’t flinch and appeared to take the news with a grain of salt. All I can say is the financial stocks are still well off their 52-week highs and it seems the bulls are pushing as hard as they can to get them back there.

If the bears were going to make a stand, it was going to be on Friday. At least that is what Wall Street had penciled in. We had the unemployment number comes out and they were terrible. Unemployment is pushing 9%, folks. However, when the Department of Labor reported that employers had shed 539,000 jobs in April, it was less than most expected and the smallest decline in payrolls since last October.

As a result, Friday was the icing on the cake and the market rallied heading into next week. The Dow finished at 8,575, up 4.4% for the week. The S&P 500 had an outstanding five days of trading as it jumped 52 points, or 5.9%, and finished at 929. The Nasdaq, which had been the clear leader for the past 2 months, lagged a little but still managed a 20 point gain, or 1.2%, and closed at 1,739.

The bullish sentiment allowed us to get into some great call option trades which were covered in the blog. Bank of America (BAC, $14.17, up $0.66) made 170% for us in two days, and we squeezed 100% out of Las Vegas Sands (LVS, $10.50, up $1.01). Also, a General Electric (GE, $14.53, up $0.57) trade made us a quick 75%.

I will talk more about the market in the “Closing Thoughts” section but the upswing is still intact. There are a lot of people that still keep calling for “the pullback” and after 8 weeks, it still hasn’t come. This week is options expiration week so we should see some good action as far as trade setups go.

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2. Breaking Down a GE Trade

On Friday morning there were a set of trades that I profiled in the blog. I was looking for quick, cheap, out-of-the-money call options profits and had narrowed my search down to 3. I was hoping for a great (not good) unemployment report which was due out before the market opened and wanted to ride the wave of a possible huge rally. Those hopes were dashed when the numbers came out but I still wanted to swim with the sharks.

The one trade that kept ringing my bell was General Electric (GE, $14.53, up $0.57). At 11am, I had this to say:

“The GE May 15 calls have traded as high as 22 cents after opening at 15 cents and if I pull the trigger, this is the target I might aim for”. They were going for 12 cents at the time.

I also suggested at 1pm, two hours later, to sell them at 20 cents if you pulled the trigger. I did that to protect you from the weekend time decay and because there was a 75% profit that would have been left on the table.

My first goal is to always show you winning trades but sometimes this holds back profits. However, let’s first talk about why GE was looking me in the face and begging me to buy it. Below is a 6-month chart of GE and even if you have never read a chart, hopefully, you will see what I am watching.

First, notice the first dip below $15 that occured in late November. The shares quickly rebounded within a few days and built a solid base between $16 and $18. Once we got into 2009, the stock fell back below $15 and made some “tops” just below at $13. This served as “resistance” as GE eventually tumbled to a low of $5.87 on March 4th. Volume checked in at 750 million that day.

Since then, the stock tested that $13 resistance level in mid-April, dipped for a few days, and then smashed right through it. The chart above shows resistance again at $16-$17 which was formed in early January.

So what does this all mean? Well, I said that GE was “setting higher highs while making lower lows” and the key here is that there is no resistance between $14 and $16.

On Friday, I showed you how to make a small amount of money without a ton of risk. I illustrated how a 25 option contract trade made $200 in a day. Now, lets take it a step further.

The GE May 15 calls (GEWEH, $0.19, up $0.06) closed near the high for the day and the options still have until this Friday before they expire. Here is where it gets interesting.

What if you would have bought 30 contracts right before the close? It would have cost you about $600 and you would have the chance to participate in GE possibily making a run to $16. That is all we want. In fact, what would it mean if GE was trading at $15.75 sometime next week? It would mean that your $600 is now worth $2,250. Not bad, huh?

The reason you would have that much money is because now, those call options are worth at least 75 cents per contract or $75. If you multiply that by 30, you get $2,250. If you would have bought just 5 contracts for $100 before Friday’s close, it would be worth $375 ($75 x 5) if GE gets to $15.75.

It really gets interesting when you start figuring out your profits if GE can hit $16.50. That would mean $600 is worth $4,500. At $17, you got $6,000 in your account. From $600 to $6,000 is 10x your money. Nice.

This is the power of using options during expiration week. But they are risky as all get out. If GE does not make it to $15 and you hold the options until next Friday, you lose your entire investment.

I have been covering more trades like this in the blog but I realize they are not for everybody. I wouldn’t recommend getting involved in them if you are new to trading but I wanted to show you the power of options. If GE can mover 10% next week, that gets the stock to $16.

Full Disclosure: I own 30 contracts of the GE May 15 calls.

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3. Blackstone Group Revisited

I was hot for Blackstone Group (BX, $13.84, up $1.35) on Friday and talked about the June 15 calls (BKFC, $0.95 up $0.45) a couple of times. They did well after they were profiled at 60 cents and I said they looked good at the current price. This was for the new people who may have just started reading the blog but this is really a follow-up on a topic I did back on March 25th, “Blackstone Group Could Hit Teens”. Here is the link:

http://blog.optionsmentoring.com/hot-stocks/blackstone-group-could-hit-teens/

Here were the opening remarks:

“There has been a lot of chatter about the prospects of Blackstone Group (BX, $8.22, up $0.41) this week and judging by the stock’s option activity, shares could be headed above $10 quickly. The company is a private equity firm that that could be a key player on how well the selling of the toxic mortgages off bank balance sheets evolves.

Left for dead since September, this stock closed at $6.30 on Friday and has fallen from a high of $20. The stock added $1.50 on Monday and traded as high as $9.19 on Tuesday. I took a look at the option activity from Tuesday and there was a slew of buying all the way out until January 2010.” (end)

The April trade was a bomb and was the first leg of the trade. In fact, the last thing I said was “These are very high risk/ high reward plays.”

Well, if you kept the faith, you have been well rewarded. At the time of the original blog, I also listed some May and January 2010 call options. You will be pleased to see how well they have done.

The point I’m trying to make in this week’s Weekly Wrap is that there are so many ways to trade options and I talk about examples like these every day the market is open.

As you can see, you can day trade options; you can “layer” option trades; you can buy cheap “out-of-the-money” options and you can buy options that are 9 months, and 1-2 years out.

I talk more about the trades below…

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4. Earnings

Monday: Dish Network, (DISH, $15.31, up $0.73), Fluor (FLR, $45.17, up $3.46), Hospitality Properties Trust (HPT, $14.17, up $1.47), King Pharmaceuticals (KG, $7.71, down $0.01), Priceline.com (PCLN, $104.90, p $4.10), Rosetta Stone (RST, $28.96, up $0.67), South Jersey Industries (SJI, $35.06, up $0.26) and Winn-Dixie Stores (WINN, $11.60, up $0.09).

Tuesday: American Italian Pasta (AIPC, $30.35, down $0.28), Fossil (FOSL, $20.12, up $0.88), O’Charleys (CHUX, $7.31, up $0.18) and Ticketmaster Entertainment (TKTM, $6.85, down $0.32).

Wednesday: CA (CA, $17.53, up $0.36), Dr Pepper Snapple Group (DPS, $20.94, up $0.42), Gammon Gold (GRS, $7.63, up $0.21), Helen of Troy (HELE, $16.97, up $0.77), Jack in the Box (JACK, $23.70, down $0.05), Macy’s (M, $12.83, up $0.01), Stanley (SXE, $26.18, up $1.24) and Whole Foods Market (WFMI, $22.17, down $0.24).

Thursday: Agilent Technologies (A, $19.34, up $0.57), Kohls (KSS, $43.90, down $0.35), Nordstrom (JWN, $23.10, down $0.20), Sony (SNE, $27.94, up $0.69), Urban Outfitters (URBN, $19.07, down $0.23) and Wal-Mart Stores (WMT, $50.14, up $0.25).

Friday: JCPenney (JCP, $30.51, up $0.44), Multi-Color (LABL, $12.08, up $0.83) and Teekay (TK, $16.98, up $1.10).

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5. Current Trades & Closed Trades (Friday’s closing price)

Since we did not do a Weekly Wrap from last week, I thought it would be good to cover some of the events that took place. By the way, if you go to the blog (Blog.OptionsMentoring.com), you will find 2 or 3 posts a day that talk about current trades. It is also where I cover new trading ideas as well.

I usually post at 9am, 11am and sometimes at 1pm (EST times). And if we are really active, I might post one at night. If you can’t follow the market on a full-time basis then you can check out the blog to keep updated.

Blackstone Group (BX, $13.84, up $1.35)

June 15 calls (BKFC, $0.95 up $0.45)

Entry Price: $0.60 (5/8/09)
Exit Price: open
Return: 58%

May 10 calls (BXEB, $3.80, up $0.80)

Entry Price: $0.65 (3/25/09)
Exit Price: open
Return: 500%

January 2010 10 calls (KJLAB, $5.10, up $1.30) 3/25/09 price: $1.75

Entry Price: $1.75 (3/25/09)
Exit Price: open
Return: 200%

Dendreon (DNDN, $19.24, down $0.52)

May 25 calls (UKOEE, $0.10, down $0.05)

Entry Price: $1.25 (4/17/09)
Exit Price: (open) closed half at $3.75 on (4/28/09), closed 1/4 at $2.50 on (4/29/09), 1/4 still open.
Return: 200%, 100%, -92%

August 10 calls (UKOHB, $9.50, down $0.30)

Entry Price: $2.20 (4/13/09)
Exit Price: (open) sold half at $14.60 on (4/28/09)
Return: 564%, other half 330%

The party for Dendreon has been over since the big news of their cancer drug, Provenge, hit the world. Here is what I had to say on Tuesday:

“Dendreon has a bright future ahead of it and it will shine again. We should get some more momentum in the shares down the road and sooner or later the shorts will have to cover. However, Dendreon could be setting up to raise capital to expand the business and cover costs so we could see some more pressure on the stock. Hang tight, Dendreon will be back”.

The first half of Dendreon made us 200% but the other half cancel each other out unless the stock makes a massive recovery. I don’t think we get back to $25, let alone $20, this week as the company is selling 12 million shares to support the launch of Provenge.

MasterCard (MA, $185.08, up $4.30)

May 190 calls (MALER, $1.80, up $0.10)

Entry Price: $1.70 (4/28/09)
Exit Price: sold half at $3.40 on 4/28/09, other half at $5.00 on 4/30/09

From May 6th:

“I suggested closing half positions at $3.40 and the other half before the company reported earnings. MasterCard reached $188 last Thursday and the calls soared much higher than our initial exit points. Once again, this trade was over last Thursday as the stock did a yo-yo after the announcent on Friday. The stock went as low as $163 after opening at $175 before closing at $172. Another wicked move no one could have predicted…”

Marvel Entertainment (MVL, $33.24, up $0.15)

June 30 calls (MVLFF, $3.90, up $0.20)

Entry Price: $1.05 (4/23/09)
Exit Price: $4.00 (5/7/09)
Return: 280%

From Thursday’s Blog:

“We have to say goodbye to Marvel Entertainment (MVL, $32.95, down $0.07) for the time being. I love covering the options on this stock because they have done well for us over the past couple of years since I started here at OptionsMentoring.com. This time around we rode the June 30 calls (MVLFF, $3.80, down $0.20) for monster gains. After selling half at $2.10, we rode this magic carpet for a nice 300% gain and had set stops at $4.00”.

ValueClick (VCLK, $10.28, up $0.23)

May 10 calls (QCSEB, $0.45, up $0.05)

Entry Price: $0.75 (4/9/09)
Exit Price: $1.35 (5/5/09)
Return: 80%

September 12.50 calls (QCSIV, $0.85, up $0.05)

Entry Price: $0.80 (4/9/09)
Exit Price: $1.20 (closed half on 5/5/09)
Return: 50%

Here was the plan from May 5th’s blog:

“It looks like my wish was granted for this trade. ValueClick did manage to hold $10 last week and although I wanted the stock closer to $11, we got that with yesterday’s 5% jump. ValueClick reports earnings TODAY after the bell so close the May call options today. We were targeting $1.50 but lets take the risk out of the earnings announcement. It might also be a good idea to close half of the September calls as well”.

We made out like bandits on this one. We still have half of the September call options open and ValueClick still remains an attractive takeover target. By holding half of the position open, we can get a little action in case my crystal ball comes true.

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6. Monday Morning Playbook

ExxonMobil (XOM, $70.80, up $1.87) was strong Friday as it added 3% but more importantly, the stock could be headed to the mid-$70’s. The close above $70 was key and the next wave of resistance comes at $72. The volume was off the charts in the option pits.

The May 65 calls (XOMEM, $5.60, up $1.70) traded 450,000 contracts.

There was also considerable action in the May 70 calls (XOMEN, $1.20, up $0.65) which traded nearly 23,000 and jumped 115%.

The May 70’s are a lottery play but the June 75 calls (XOMFO, $0.81, up $0.26) are looking attractive.

I would almost take a gamble on American Italian Pasta (AIPC, $30.35, down $0.28) this week but I don’t like the volume. The daily volume only averages about 400,000 shares traded and the option chains are worse. Because they are so thinly traded, the June 35 calls (AQBFG, $1.55, up $0.40) have a “bid” of $1.15, and an “ask” of $1.65. This is where “limit orders” help but the spread is still too wide. I thought there might be a play here but I don’t like the odds. Stay away.

Rosetta Stone (RST, $28.96, up $0.67) could be interesting to watch. The company became public in April after its IPO (initial public offering) raised $113 million. The offering price was $18 and on its first day of trading the stock closed at $25.

The company reports earnings on Tuesday and the problem with IPO’s is there is a lack of visibility for what kind of earnings Wall Street is expecting. Analysts who know the company and the underwriter’s are not allowed to comment on the stock during this “silent period”. This is standard for all companies after they become public so it is difficult to get quality information on the company. The was a lot of buzz when the stock made its debut so we will see how investors react to the company’s earnings.

The same deal here with the bid/ ask.

May 30 calls (RSTEF, $1.15, up $0.25) Bid: 90 cents, Ask: $1.25

May 35 calls (RSTEG, $0.20, unch.) Bid: 5 cents, Ask: 20 cents

June 35 calls (RSTFG, $0.90, up $0.15) Bid: 65 cents, Ask: $1.00

I didn’t list any put options but the bid/ask is just as wide. There is really no risk for the company to “disappoint” Wall Street because this will be their first earnings announcement. I would roll the dice with this one but the premiums are just not worth it. Even if we split the bid/ask and got filled, I think our best trade on Monday morning is Exxon.

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7. Closing Thoughts

It’s been an amazing run for the market and I think we have a little more gas left in the tank. The bulls are running out of bullets but the charts are still showing bullish signals. Although we saw a broad-based rally last week, Tech lagged after leading this market.

Believe it or not, the Dow is still down 2.3% for the year and it would be a shame for the bulls if they at least can’t get us in the green during this powerful “bear market rally”. The Nasdaq is up 10.3% and the S&P 500 is up 2.9%.

For the Dow (8,575) to reach positive levels, we need to push 8,750. The chart shows clear resistance at 9,000 but even a test anywhere near that level would be bullish. The Dow has a floor of support at 8,000 and pockets of strength underneath this level. Perhaps we are setting up for a sideways movement but all signs are pointing towards a run to 9k.

As far as the Nasdaq (1,739), the index touched a low of 1,268 on March 6th and has added nearly 500 points. Folks, that is around a 40% move. The chart for this one is clear as well. Serious resistance lies at 1,800. As far as support, 1,600 serves as a resting area should we pull back.

The Nasdaq’s winning streak of more than eight weeks has only happened on five other occasions since 1985. No wonder it looks tired…

The S&P 500 (929) touched a low of 666 on March 6th and I remember writing about what a spooky number it was. That was also about 40% ago, or 300 points. At currently levels, it is as scary as bouncing off the lows. The 930 level has been long-term resistance and it will be interesting if the index can carry through this level. If so, it clears the way for a run to 1,000.

The big catalysts for the week will be the Intel (INTC, $15.29, down $0.48) shareholder meeting on Tuesday and Wal-Mart’s earnings on Thursday. The Commerce Department’s retail sales report for April are also due out Thursday and expectations are up. If we get a declining number, it could help the bulls. A worse-than-expected reading or disappointing results from a Kohl’s or another big name might give the bears some ammo.

Rick Rouse
Rick@OptionsMentoring.com