9:00am (EST)

It is amazing the price swings stocks and options can go through.  The best part about being an option trader is that there is always a trade out there.  With so many sectors and ways to use options, the possibilities are endless as sectors get hold or cold and investors rotate money around.  That is all there is to it, folks. 

The key of course is figuring out where the money is going before the rest of the crowd…

We knew the start of 2010 would be a make or break month for the market and after a big pop on Monday, we have been flat for two days.  The Dow finished Wednesday with a 2 point gain and closed at 10,573 while the S&P 500 added 1 point to settle at 1,137.  The Nasdaq finished with a 7 point decline and went to bed at 2,301.

Despite the “lack of action” in the overall market there are several stocks making new highs and interesting stories developing in others.  We keep a lot of notes and sometimes we find trades that look good on paper but don’t start off quite the way we would like.

For instance, we profiled a U.S Steel (X, $60.40, up $2.47) option trade back on September 28, 2009 when the stock was at $46 and when of our first sentences were “There are conflicting reports on just how strong demand is for steel but August showed steel output actually increased.”

We were trying to get a jump on an option trade because we felt U.S. Steel would set new highs by January 2010.  However, we knew the road would be rocky. 

The trade was slightly profitable but we shut it down because of Goldman Sachs came out and downgraded the sector the very next day.  U.S. Steel was pushing $47.  Here is what we told our subscribers in our Members Area:  

“Folks, we got bit by the Goldman Sachs whammy as they downgraded the steel sector on Monday.  I did not see the news until late in the afternoon.  It was just a few weeks ago Goldman loved U.S. Steel and had a price target of $50 for the stock which was hit last week several times.  It seems although production was up like I had mentioned, prices are falling.  

I am normally not this quick to pull the trigger on a trade but Goldman’s words carry weight and that could send the stock back under $45.  As such, raise the stop and lower the exit target.  We may not reach $3 and if you can get out with a small gain or break even, CLOSE the trade.  If the call options get cheaper, we may revisit the story.” (END)

A week later the stock was at $40 so we made the right call by getting out of the trade.  It got even worse for U.S. Steel as the stock dropped to a low of $33 by the first week of November. 

At the time, we profiled the January 55 calls (XAK, $5.85, up $2.30) which were at $2.55 but soared a whopping 70% yesterday as the stock set a new 52-week high.  The options were probably under 50 cents and left for dead back in November but as you can see, options can and do go on wild price swings over the life of their expiration.

Steel got hot, then cold, and now it’s white hot again.  Wall Street will take us out of some great trades from time to time but if you know how the system works then you can use it to you advantage.  By that we mean sectors are always falling in and out of favor with the Street and the analyst’s upgrades and downgrades do move them.  Sometimes these ratings help your trades and sometimes they don’t.  We may have missed a double on our option trade but it just proves our “thesis” was right on.

Another stock waking up from the dead is JDS Uniphase (JDSU, $8.92, up $0.43) which also set a 52-week high yesterday.  The company makes communications equipment and testing instruments, as well as optical components for machines such as photocopiers and scanners. 

Ten years ago this stock would hit hit triple-digits and split like clockwork.  Well, we don’t think it will hit triple-digits anytime soon but we do see double-digits.  We are looking at a possible option trade for JDSU this morning but we want to do some more research before jumping in. 

We already have quite a few open trades in our 2010 portfolio that are doing well but we don’t want to lose sight of a possible good trade…

A couple of drug stock making some noise this morning…Vivus (VVUS, $9.23, down $0.09) is up nearly 7% in pre-market trading to $9.90 and Dendreon (DNDN, $29.41, up $1.27) is over $30 again.

Dendreon’s 52-week high is $30.42 which has been hit twice meaning the “double-top” that has formed over the past six-months could be broken.  The stock has traded between $25-$30 since April, after exploding from $4, and is due another breakout.

We have been mentioning the drug candidates for Vivus and we said this stock could hit double-digits quickly based on its strong pipeline.  That could happen today. 

Retailers will also be on the move as retail sales came in better-than-expected.

As we head to press, Dow futures are lower by 22 points to 10,494.  Current subscribers, check the Members Area for today’s important trade updates.

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