It was another struggle for the bulls as Wall Street ended Wednesday’s session with mixed reviews. The President had a lot to do with today’s nervousness as he mapped out the new “rules of the road” for the nation’s financial system. It seems we are going to “update” the rules from the 1930’s which after 80 years is understandable. This left investors wondering about the sweeping changes that could be forthcoming which is why we saw some nervousness today.
The biggest thing I got out of it was that hedge funds will now be required to register with the SEC. What a bomb. I don’t mind the changes but you can bet some of the hedge fund managers are not happy campers with this one.
The final scorecard; the Dow finished at 8,497, down 7 points, the S&P 500 was down a point to 910 while the Nasdaq finished 12 points higher to close at 1,808.
The negative tone has caused some of our trades to slip into the red and this is mainly what I wanted to talk about tonight.
To start, the longer-term options on Ford (F, $5.71, up $0.04) are for December and the entry prices for the December 6 calls (FLI, $1.09,down $0.01) were $1.25. The entry price for the December 7 calls (FLJ, $0.73, up $0.02) was $1.00. I went with the longer-term options because I believe Ford can trade to $8-$10 by the end of the year. If so, these calls will double. The stock is so low you could just buy the stock but a 1,000 shares would cost you $5,700. To CONTROL a 1,000 shares which is 10 options contracts will only cost you $750-$1,000. That folks is the power of leverage. If you buy just 1 contract it would cost you $75-$100 to control 100 shares of stock instead of $575. The point is this is a long-term bet on Ford emerging as America’s top auto company. You could place a stop on the position if Ford falls below $5 but I’m looking for a run to $8.
Cisco Systems (CSCO, $19.20, up $0.12) has suffered from the market’s slide and this was a layered trade. We took profits at $1.30 on the July 19 calls (CYQGA, $0.97, up $0.10) for a 100% return. The July 20 calls (CYQGD, $0.48, up $0.05) were profiled at 75 cents and we had a stop of 40 cents. These calls hit a low of 38 cents today. Since they traded below our stop, this trade is closed although our entry price was 75 cents. Technically, I should have but a stop of 37.5 cents on the trade but I rounded up. I should have rounded down to 35 cents, huh? I though Cisco would hold $19 and I used the options’ delta to figure the exit point out. Sometimes these things happen but some of you may have left them open. If so, use the 38 cent mark as a stop. As far as the October 20 calls (CJQJD, $1.36, up $0.09) our entry price was $1.50 and the stop is set at 75 cents. These calls traded to a high of $1.48 today and do not expire for another 4 months.
Bank of America (BAC, $12.30, down $0.43) is another position based on where I feel the stock will be in November. This trade went out last Friday and I had set a limit price of $1.50 for the November 15 calls (BYOKO, $1.13, down $0.20). Most of you did NOT get filled because the stock had gapped up by the opening bell. I also overshot this entry price by a few pennies but the limit price was printed so I must include the trade. BofA has been flooding the market with their preferred shares which has caused some pressure on the common stock. This trade is also based on the belief that the stock is at $18 by November. Because of the gap, let’s set stops at 55 cents instead of 75 cents from the entry price. This stop should also be used for those of you wanting to start positions at current levels.
Dendreon (DNDN, $25.67, up $0.35) is trying to climb back to its highs. The 52-week high is $27.40 and last week we made a run back over $26. I may have been a week early so let’s check the results. The July 30 calls (UQBGF, $0.46, down $0.04) were profiled at 80 cents and the August 30 calls (UQBHF, $1.40, unchanged) were profiled at $1.50. I have not listed any stops for these positions because this is a pure play on biotech. It’s all or nothing for these trades. As you know, these stocks are worthy of powerful moves and Dendreon has been really, really quiet lately. The analyst upgrades have been slow to come in but there are higher prices in Dendreon’s future.
JDS Uniphase (JDSU, $5.88, down $0.02) is a “lottery” play and we entered the September 7 calls (UQDIJ, $0.20, down $0.05) at 35-40 cents. We have 3 months for this trade to take shape so there is no stop on this position as well.
The last trade I want to talk about is Abercrombie & Fitch (ANF, $26.97, up $1.17). I mentioned this stock before the opening bell this morning and this is one of the important things I want you to take from today’s blog. The first 15-30 minutes of trading is considered a danger zone because the rookies are getting in the market and the seasoned vets are unloading shares. Usually, if you are buying at the open, you will be starting the position off in the red. When there is good news about a stock, it can often gap at the open and all of the novice traders rush in to buy. Same thing with bad news.
I outlined the CURRENT support and resistance levels for Abercrombie an hour after the opening bell and said to use limit orders of $1.00-$1.20 if you wanted to get into the July 25 puts (ZWRSE, $1.00, down $0.35). I had mentioned $1.20 if you couldn’t wait or $1.00 if you wanted to wait and see if the stock was going to test $27 again. Bingo. The stock went on to hit $27.16 during the day. The current bid is 95 cents and the ask is $1.05 and I have mentioned when you see this to use a limit order to split the difference.
The plan for this trade is to take quick profits and to have a quick stop on the trade. Set a stop of 50 cents and a target of $1.30-$1.50. Sometimes, this is how I will trade options to try and capture quick profits. A 10 contract trade would have cost $1,000 and the stop is set at a 50% loss. All we are looking for is a drop back below $26 and then we are out. However, if there is no rebound the next time the stock trades down to $25, we might be able to ride the position for further gains. If the put options trade to $1.25-$1.30, you will make $250-$300 for one or two days worth of work.
There is also tremendous risk in this play because Abercrombie’s rebound came on news it was closing its Ruehl stores. Wall Street liked the news and the stock could trade back to $30. I mentioned the $5 swing on a “360 move” and I had a feeling something was happening in the stock. You get these feelings by making Watch Lists over the years and learning how a stock trades. I had no idea of the announcement because I was doing a write-up on the company at 10am. That is when the story broke. Crazy, huh? So, if the stock continues high on Thursday’s opening bell, we could get stopped out ASAP.
That’s all I have for now and it feels good to be back in the swing of things. Again, all of the trades will be updated in the Blog and I usually post two or three times a day. Once in the morning before the market opens, once in the afternoon and maybe another one at night. There are times where I may miss a session but I do try and write something each and every day.
If you have any questions, you know where to find my email address.
Rick Rouse
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