September 2009 | Members

11:10am (EST)
 
I wanted to post a little early because I got a late jump this morning.
 
The market is up again today and the bulls are putting in a solid week.  The Dow is up 38 points to 9,722.  Hello 10,000?
 
One stock I have been watching all morning is Apple (AAPL, $179.15, up $3.99).  Well, actually I have been watching it for years and we have had great success trading Apple when it has been profiled in the blog (hope I didn’t jinx us).  The stock passed $150 in late July which was a sign that $200 could be on the horizon.  However, it would depend on the market.
 
Well, I have mentioned the bulls are determined to take this market higher and although it doesn’t make sense to a lot of people, you have to trade the tape folks.
 
Apple is monster and currently owns less than 5% of the smartphone market.  Plus there is an accounting change that could be forthcoming which will allow Apple to book its revenues ASAP instead of the over a two-year period as is the case with the iPhone.  
 
The Apple October 200 calls (APVJT, $0.85, up $0.47) opened this morning at 50 cents and have been on fire.  I like positions here with a limit price of up to $1.
 
This is a high risk/ high reward trade.
 

          

 
 
 
 
Citigroup (C, $4.12, down $0.40)
 
January 7.50 calls (CAQ, $0.11, down $0.40)
 
Entry Price: $0.32 (8/28/09)
Exit Target: $0.64
Return: -66%
Stop:  None  
 
January (2011) 10 calls (VRNAB, $0.37, down $0.05)
 
Entry Price: $0.60 (8/28/08) 
Exit Target: $1.20
Return: -38%
Stop: None
 
Action:  Citigroup has closed lower on 7 out of the last 11 trading sessions and yesterday’s drop of 9% was unexpected.  There were rumors floating that the U.S. Treasury Department and Citigroup were/ are in talks about how the government is going to sell its newly acquired 7.7 million common shares of the company. 

Citigroup’s CEO confirmed that the U.S. government could sell their newly issued 7.7 billion common shares at “any time.” Naturally, that spooked the market and Citigroup went down holding three fingers up. 

 
These options are cheap -out-of-the-money plays that have no stop and I’ve explained this numerous times.  It is possible for an option trade to lose 70%-80% of its value before rebounding and normally our stops are set at 50%.  However, these type of trades are different.
 
I’m not making excuses because I did get the direction wrong short-term.  That also doesn’t make them a buy right now either.  Citigroup will need to work its way back to $5 before these call options make any noise. 
 
Dendreon (DNDN, $26.41, down $1.02)
 
November 45 calls (UQBKO, $0.51, down $0.04)
 
Entry Price: $0.30 (8/31/09) 
Exit Target: $0.60 (closed half at 50 cents on 9/15)
Return: 67%
Stop: None
 
Action:  Dendreon opened at $27.16 and briefly made it into positive territory shortly after the open.  The high of $27.66 was almost tested in the afternoon but shares faded into the closing bell.  The options held up well despite the 4% drop in the stock which shows you that the options are trading at a premium.
 
Disney (DIS, $28.08, down $0.34)
 
October 27.50 calls (DISJY, $1.40, down $0.22)
 
Entry Price: $0.80 (9/10/09) 
Exit Target: $1.60 (closed half @ $1.50 on 9/11/09, closed 1/2 on 9/15)
Return: 72%
Stop: CLOSED
 
Action:  Our stop of $1.25 on the other half of the position was hit yesterday when the stock fell below $28.  The call options traded to a low of $1.20.
 
The first half of the trade returned 88% while the other half returned 56%.  Together, the trade returned 72%.  I have noted this on our Portfolio Track Record to reflect this.  Remember, you can view the 2008 and 2009 portfolios in a PDF located in the Members Area.  
 
Freeport McMoRan (FCX, $71.32, up $0.70)
 
October 80 calls (FHZJP, $1.27, up $0.17)
 
Entry Price: $1.00 (9/14/09) 
Exit Target: $1.50-$2.00
Return: 27%
Stop: $0.50, raise to 90 cents
 
Action:  Freeport is looking strong right now and I had mentioned if we could get a close above $70 on Monday we should be in good shape.  The calls hit a high of $1.35.  Here is the difference I wanted to explain real quick because we do have a lot of new people.
 
For options over $1.00, I normally buy 10 or 20 contracts.  If I “buy to open” 20 contracts at $1.00 it will cost me $2,000.  At current prices, it is a $540 profit on paper.  To buy 10 contracts of the Citigroup January 7.50’s as mentioned above would have cost $320.  
 
The key to staying ahead in this game is to keep things consistent.  In other words, you would be really feeling the pain if you would have bought 100 or even 50 of those contracts for Citigroup.  Of course, each situation is different but you will see how I use cheap-out-of-the-money options in the spreadsheet versus other trades.
 
Keep an eye on the exit targets and remember to sell half if Freeport struggles at $72-$73.  Copper is trading at $2.85 a pound and Freeport stands to have a blowout quarter if prices remain up here.  I believe the company’s earnings come out AFTER these options expire.  It would nice to see a positive “pre-announcement” from the company this week or next.
 
Imax (IMAX, $9.82, flat)
 
March 2010 12.50 calls (IMQCV, $0.45, down $0.05)
 
Entry Price: $0.45 (8/10/09)
Exit Target: $1.00+
Return: 0%
Stop: None
 
Action:  SpiderMan 4 will be released May 5th, 2011.  That news got the stock near $10 on Tuesday but that was right after the open and investors “sold the news’ the rest of the day.  No worries.  Imax is building a solid base at these levels which only provides a springboard of better things to come.  If Imax can report back-to-back solid quarters then we could start to see some institutional buying.
 
Sirius XM (SIRI, $0.67, down $0.02) 
 
December 1 calls (QXOLA, $0.10, flat) 
 
Entry Price: $0.15 (8/21/09)
Exit Target: $0.30
Return: -33%
Stop: None
 
Action:  Continue to hold.