November 2009 | Members






9:00am (EST)

NEW TRADE!!! (Quotes from Tuesday’s close)


KB Home (KBH, $13.73, down $0.28)

Buy to Open January 15 calls (KBHAC, $0.65, down $0.20)

Time to dip our toes in the housing market

The Commerce Department will report on October new home sales at 10am EST this morning and the forecast is calling for a 2% increase to 410,000, from 402,000 in September.

The S&P/Case-Shiller Home Price Index reported some encouraging news about the home market on Tuesday but most of the Homebuilding stocks couldn’t catch a break. 

KB Home fell 2% and there is downside risk to the $11 area.  However, there is MAJOR support here at $13.50-$13.75.

Shares were at $20 in September and the sector is giving us mixed signals.  We aren’t sure if the housing market has really bottomed and it’s pretty tough to call a “bottom” in any sector.  Regardless, we feel this area of support will hold and we would like to take advantage of any “surprise” in today’s numbers.

Look for the market to tip its hand at the open so if we head lower try to get the call options below yesterday’s closing price of 65 cents by setting limit prices of 55-60 cents.  If the calls open higher, try to get them for 75-80 cents or under.  If the calls open higher than 80 cents, let the trade go. 

If you cannot watch the open, set limit prices at 75 cents.  If the calls open lower you should get filled.

Again, DO NOT open positions if the call options are higher than 80 cents…

This is a high risk/ high reward position but we are going out to the January options to provide some protection.  We may get some choppy trading the rest of the week as the market is closed Thursday and only open a half day on Friday.

As such, you could wait until next week if you don’t like the action or start half positions.  


Hewlett-Packard (HPQ, $50.19, down $0.83)

December 55 calls (HPQLK, $0.08, down $0.23)

Entry Price:  $0.24 (11/23/09)
Exit Target: $0.50

Return: -67%

Stop Limit:  NO STOP

Action:  Don’t shoot the messenger…

We went from a 30% gain as of Monday to a 67% loss on Tuesday.  We may have got sucked into the euphoria that HP was going to beat earnings by a penny and they reported in-line with Wall Street’s estimates.  They did surprise on the revenue side even after pre-announcing earnings a few weeks ago. 

The call options opened at 15 cents and maybe we should have cut losses there but we aren’t trying to get too fancy.  This was a really “cheap” option trade.  Any option trade we profile under 50 cents is considered cheap and they are usually all-or-nothing trades.

We don’t go overboard with this strategy but these types of trades can hit homeruns of 200%-300% but as you can see they can turn on you quickly especially with an earnings trade.

We think HP would have held up if the market would not have gotten hit with the China news.  It really soured the market mood and Monday’s momentum but you have to love the way the bulls fought back. 

We deploy the same strategy with all of our trades by usually recommending 10 contracts for each trade.  If the options are under 50 cents then sometimes we might recommend 20.  The point is we do not go overboard on any one trade because we do not want these types of trades to hurt us.  If we had bought 100 contracts then the damage would have been worse.

Also, for trades under 50 cents we usually don’t carry stops and for speculative plays we sometimes do not carry stops.  For this trade, we could have used a 50% stop and everyone could have gotten out at the open.  But we saw some strength in HP’s shares before the market opened and we decided to stick with it.

The fact the stock held $50 was a good sign and the bid/ask is still above a nickel is another.  A 20 contract trade cost $480 and is now at $160.  There is a chance HP can make a run at its 52-week high of $51.43 by December 18th which is when these options expire. 

I like the stock’s chances, especially if w can get a blow-off the top type of rally.  We are still pushing for Dow 10,850 and if we get there HP is sure to go along for the ride.  Let the rest ride or close the position if you don’t feel a recovery is in sight.


Microsoft (MSFT, $29.91, down $0.03) 

December 30 calls (MSQLF, $0.57, down $0.08) 

Entry Price:  $0.65 (11/16/09)
Exit Target: $1.30
Return: -12%

Stop Limit:  30 cents 

Action:  Another day, another kiss at $30.  Only this time there was no tongue as the stock only managed to hit a high of $29.99.  Like a high school kid on prom night we are anxious for a solid move ABOVE $30 but the resistance is heavy.  Imagine that…

Netflix (NFLX, $59.67, down $0.71)

December 65 calls (QNQLM, $0.50, down $0.25)

Entry Price:  $0.80 (11/13/09)
Exit Target: $1.60+
Return: -38%
Stop Limit:  NO STOP

2010 June 80 calls (QNQFP, $1.80, down $0.25)

Entry Price:  $1.65 (11/13/09)
Exit Target: $3.30++
Return: 9%

Stop Limit: NO STOP

Action:  Netflix got hit with a downgrade yesterday and shares hit a low of $58.10.  Some knucklehead out of Wedbush Morgan downgraded the shares to what was the equivalent to a sell rating but maintained a $50 price target.

The “Underperform,” rating “reflects investor expectations for growth well above what can reasonably be expected,” was what the research note said…

We try not to get too emotional with our trades but we honestly felt, if anything, the dude should have followed the advice from the analyst out of  Collins Stewart.  We think they got it right when they initiated coverage of the stock with a “Buy” rating and $73 price target last week.

That genius went on to say, “In our view, NFLX has developed an unparalleled competitive advantage in the DVD rental biz by crafting a well through-out strategy based on operational excellence, cost advantage, maintaining complex relationships with studios, staying focused on DVD rentals and lately enhancing its core offering by adding streaming,” and that the core DVD rental business “is improving and not fully appreciated.”

As you can see, there are two sides to every story and hopefully by next summer we can put Wedbush on our Top 10 List of “What Were They Thinking”…

We still believe Netflix hits triple-digits next summer.

The December 65 calls hit a low of 30 cents which would have taken us out of the position had we had a 50% stop in.  The December options carry more risk and will expire in a month so we will need to see the shares bounce back over $60 to avoid further losses this week.