11:45pm (EST)

1.  Market Summary

2.  Pepsico (PEP) – Sleeping Giant Waiting to Erupt

3. Trading Course Video Review

4.  Earnings

5.  Weekly Wrap Portfolio Update

6.  Week Ahead

(To view the charts, please log into the Members Area and go to the Weekly Wrap Premium section)

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1.  Market Summary

October got off to a rough start for the bulls as they went into the week on the brink of disaster.  The major indexes were testing key support levels and our possible bear market targets from August and we had a feeling they would be tested.  What we didn’t know is that they would be tested so quickly.

On Monday, the bears were anxious to get the week started as they immediately went after our first set of downside targets.  No need to tell you that Greece was the word as the Wall Street fretted over the country’s fate as a key October deadline approached.

Tuesday is when the wind hit the fan and we knew the market has a chance at testing our bear market targets we listed back in August.  Following Monday’s 2% loss, futures were pointing towards a nasty open and we couldn’t have been happier as we had a half-dozen open put options.

Here were our thoughts on August 7th with the S&P 500 just below 1,200:

“The S&P 500 slipped less than a point but finished below the 1,200 mark at 1,199.  The index traded to a low of 1,168 which was halfway near our 1,150 target.  The bulls made a run back to a high of 1,218 but we knew when 1,225 didn’t print at the open the rally could fizzle.  There is further risk down to 1,100 if the selling pressure continues but we have penciled in 1,050 just in case.” (END)

The S&P 500 traded to a low of 1,075 on Tuesday before closing with a gain of 25 points, or 2.3%, and settled at 1,124.

We took advantage of the test to new 2011 lows and nailed a number of triple-digit winners but more importantly, we called for a “dead cat bounce” and we rang the register at the perfect time as all three major indexes finished in the green.

On Wednesday, the “bounce” continued as Wall Street rallied nearly 2% on word that Europe wants to recapitalize their financial institutions.  The market also got a positive ADP payroll report which provided some early morning momentum.

The bulls made a key move back above prior support on Thursday after jobless claims came in pretty much on target.  The Dow surged 1.7% to close above 11,000 while the S&P 500 zoomed 1.8% to end back above 1,150.

The bulls were going for their fourth-straight on Friday after the Nonfarm Payroll report came in at +103,000 while the Unemployment Rate stayed the same at 9.1% from the prior month.  Although these numbers were –line with estimates, the bulls had trouble at the next wave of resistance as Moody’s downgraded 12 U.K banks before the bell while Fitch slapped fresh downgrades on Italy and Spain when Wall Street went to lunch.


The Dow slipped 20 points, or 0.2%, to settle at 11,103 on Friday.  While the 11,000 level represents short-term support, the close back above 10,800 (black line, green circles) on Tuesday’s selloff was crucial and will be the area the bulls need to hold on any pullback.  The next level of support comes in at 10,500 (blue line, orange circles) which could easily lead to 10,000 (orange line, green circles) level.  To the upside, the Dow will need to clear 11,350 (purple line, brown circles) before the bulls can think about a return to 11,600-11,800.  The blue-chips started the week at 10,913 and managed to gain 190 points, or 1.7%.  However, the Dow is still down about 575 points, or 4.1%, for the year.

We wanted to show this chart to illustrate the ongoing trading range since August.  So, no matter how high or high low the talking heads get or the headline news, wait for a breakdown or breakout of the range (orange box, green circles).  For those of you who watched last night’s video, you would use the calls we went over and on the breakdown the put options.  Notice the 50-day MA (moving average) coming into play.

The S&P 500 fell 9 points, or 0.8%, to finish at 1,155.  The 1,150 (orange line, black circles) level represents short-term support but we will be watching the 1,125-1,120 level more specifically, and if penetrated, could lead to a test back down to 1,100 (green line, purple line) area on any downside weakness.  The next push by the bulls will be to resistance at 1,175 but the 1,200 (blue line, green circles) level will need to be cleared for this rally to have mustard.  The S&P started Monday at 1,131 and added 24 points, or 2.1%, for the week.  For 2011, the index is showing a decline of 102 points, or 8.1%.

The above chart shows the multi-year chart which is important to see but here is the S&P’s trading range (purple box, green circles) we have been mentioning and looks just like the Dow.  For those of you who watched the option trading course and feel safe doing your own trades, wait for the breakout of breakdown to use the options we mentioned in last night’s video.

The Nasdaq gave back 27 points, or 2.6%, to settle at 2,479.  Tech faces short-term resistance at 2,500 (orange line, green circles) and could make a run to 2,600 (black line, blue circles) if momentum sticks.  To the downside, there is risk to 2,400 but a break below 2,350-2,300 (green line, purple circles) would get new lows back into play.  For the week, the Nasdaq advanced 64 points, or 2.6%, but is down 173 points, or 6.5%, YTD.

Here is a look at the range (green box, orange circles).  Course Members, the options we mentioned can be used to play the breakout or breakdown and the top and bottom of the ranges.

The S&P Volatility Index (^VIX, 36.20, down 0.07) started the week at 42.96 after breaking above 40 (green line, black circles) on the previous Friday.  This was also another clue we used in figuring new lows for the market as we have been mentioning a possible test to 50 (black line, orange circles).  On Tuesday’s test to the lows, the VIX traded up to 46.88.  The bulls will try to make another run below 30 (orange line, purple circles) if they can follow-up last week’s momentum.  Note:  The green circle around the “A” for August and the red lines represent the “clue” we got the market could test 2011 lows in September or October.

The VIX has also been in a range (purple box, green circles):

The bear market targets that we mentioned in early August will remain in our review mirror:  Dow 10,248; S&P 1,090; and Nasdaq 2,298.  Although the bulls are sitting comfortably above these levels, we will need to keep these numbers on the board until the market can breakout to the upside.  This could be another run to the top of the trading range but the market is also a step ahead of Wall Street which means there could be a lot of people caught off guard if there is a surge past resistance.

This would lead to short-covering and, along with better-than-expected 3Q earnings which get underway this week, could be a powerful combination.  So, as you can see, with the major indexes resting in the middle of their current trading ranges, we could still go either way.  The market will continue to be volatile but the bulls could be on the verge of something special if support holds.

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2.  Pepsico (PEP) – Sleeping Giant Waiting to Erupt

It is earnings season again.  When beverage and snack giant Pepsico (PEP, $61.02, up $0.45) reports earnings, it is possible it could disappoint investors (according to some analysts on Wall Street) but valuations are attractive and long-term growth seems to be doing fine.

The $100 billion beverage company reports earnings on Wednesday, October 12, 2011.

Analysts estimates call for $1.30 a share on $17.25 billion in revenue for the 3rd quarter and $1.16 on $20.40 billion in the 4th quarter.  Estimates are included in graphs below.

Notice the pattern in the revenue spikes.  It seems like in December (the 4th quarter) of every year, Pepsi experiences a spike in revenue.  Also notice that both earnings and revenue see a seasonal pattern.  For earnings, the peak seems to always be in September (the 3rd quarter).  This seasonality fluctuation in revenue could be due to raw material, commodity costs, as well as consumer consumption.  Sugar prices usually reach a low in May-June months.

Pepsi’s CEO noted in the 2nd quarter conference call that the company experienced greater than expected competition as well as consumer spending pressure due to the current economy in their North American business.  However, worldwide sales growth was enough to offset this.  Worldwide snacks sales volume grew 10% in the 2nd quarter and 7% year to date.  Worldwide beverage sales volume grew 5% in the 2nd quarter and 8% year to date.   In snacks, India grew 22%, China 25%, Turkey 24%, Saudi Arabia 20%, Egypt 20%, South Africa in the high teens, and Brazil in double digits.  In beverage, China grew 13%, India 17%, Turkey 15%, Saudi Arabia 17%, Vietnam 11%, France 12%, and Germany 15%.  In 2010, $20 billion in net revenue came from emerging markets, where operating margins are in the double digits.

The company operates in four divisions: PepsiCo Americas Foods (PAF); PepsiCo Americas Beverages (PAB); PepsiCo Europe; and PepsiCo Asia, Middle East, and Africa (AMEA).  The PAF division offers Lay’s and Ruffles potato chips, Doritos and Tostitos tortilla chips and dips, Cheetos, Fritos corn chips, Quaker Chewy granola bars, and SunChips, Quaker oatmeal, Aunt Jemima mixes and syrups, Cap’n Crunch cereal, Quaker grits, and Life cereal, Rice-A-Roni, Pasta Roni, and Near East side dishes in North America, and various snack foods under Doritos, Marias Gamesa, Cheetos, Ruffles, Emperador, Saladitas, Sabritas, and Lay’s brands in Latin America.

The PAB division provides carbonated soft drinks, beverage concentrates, fountain syrups, and finished goods under Pepsi, Mountain Dew, Gatorade, 7UP, Tropicana Pure Premium, Electropura, Sierra Mist, Epura, and Mirinda brands plus ready-to-drink tea, coffee, and water products through joint ventures with Unilever and Starbucks.  This division also manufactures third-party brands, such as Dr Pepper, Crush, Rock Star, and Muscle Milk.

The PepsiCo Europe division offers Frito Lay Snacks, Pepsi-Cola beverages, Gatorade sports drinks, Tropicana juices, and Quaker foods in Europe.  The AMEA division provides Lay’s, Kurkure, Chipsy, Doritos, Smith’s, Cheetos, Red Rock Deli, and Ruffles snacks; Quaker cereals and snacks; and beverage concentrates, fountain syrups, and finished goods under the Pepsi, Mirinda, 7UP, and Mountain Dew brands.

The company is #1 in savory snacks, #2 in social beverages, and #3 in nutrition. Frito-Lay North America, their largest snacks business and the world’s largest food brand, saw 2% sales volume growth, 3% net revenue growth, and 6% operating profit growth.  Both Pepsi Max and Sierra Mist grew in the 2nd quarter with Pepsi Max sales volume more than doubling compared to the prior year. Tropicana saw sale volume up 40% supported by new packaging and expanding the line into new flavors.  Out of their top-selling snack brands, 2010 sales were $9.4 billion for Lays, $4.0 billion for Doritos, $3.1 billion for Cheetos, $2.6 billion for Ruffles, $1.7 billion for Tostitos, and $1.3 billion for Fritos.  Despite competition, the company has top market share in Argentina, Chile, Turkey, Mexico, South Africa, Australia, the United States, Canada, Brazil, Egypt, Saudi Arabia, and the United Kingdom.

The company is trying to diversify its product mix.  In 2000, snacks made up 63% of total revenue of $20 billion.  In 2010, snacks made 43% of total revenue of $62 billion.  One reason of this shift could be the rising cost of corn and potatoes.  Although sugar costs are also rising, beverages generally have a higher profit margin.

Of the three months ending in June 2011, only 34% of net revenue came outside the Americas.  Thus, the company has plenty of room to grow.  The large jump in net revenue in Europe was partly from the integration of Wimm-Bill-Dann (WBD), the leading dairy and juice company in Russia.  The acquisition, which cost $5.4 billion, added 4% of the 14% reported increase in 2nd quarter net revenue and helped offset higher commodity and operating costs.

Kraft Foods is their primary competitor in the snack foods market.  The table below compares the company’s stock numbers to its top competitors and its industry.

DPS = Dr Pepper Snapple Group KFT = Kraft Foods                        KO = Coca-Cola

NSRGY.PK = Nestle                  Industry = Beverages – Soft Drinks


PEP

DPS

KFT

KO

NSRGY.PK

Industry

Price/Sales

1.54

1.42

1.14

3.56

1.60

1.40

Price/Book

3.99

3.51

1.52

4.27

3.17

Trailing PE

15.52

16.35

19.29

12.28

4.90

16.47

Forward PE

12.93

12.95

13.40

15.58

14.20

PEG

1.54

1.54

1.51

2.12

3.04

1.59

Revenue Growth (%)

13.70

4.10

13.30

46.80

-5.00

14.30

Gross Margin (%)

54.03

59.13

35.76

61.76

56.66

41.82

Total Debt/Revenue

0.438

0.448

0.569

0.622

0.210

Cash Flow/Revenue

0.134

0.263

0.063

0.210

0.093

Current Ratio

0.99

1.09

0.86

1.10

1.00

Market Cap/Revenue

1.547

1.445

1.145

3.588

1.576

0.453

Market Cap/Cash

28.913

14.991

25.370

10.792

23.180

EV/Revenue

1.93

1.79

1.67

3.88

1.72

EV/EBITDA

9.59

8.46

10.34

14.22

10.89

Return on Assets (%)

8.91

7.00

4.54

9.44

7.81

Return on Equity (%)

28.63

21.01

8.51

41.05

18.16

Dividend Yield (%)

3.40

3.40

3.50

2.90

Dividend Change (%)

+0.10

+0.40

0.00

+0.10

-3.50

Source: Numbers calculated from Yahoo Finance

PEP has the third lowest price/sales, and the statistic is slightly higher than the industry average.  Likewise, its price/book is the second highest.  Obviously the shares seem to trade at a slight premium.  The only statistic where it was the best was the forward PE.  PEG, though not the best, is close to the lowest.  Revenue growth is also the second highest.  Gross margin is higher than the industry average.  Debt is about 43% that of revenue.  Though high, the figure is the second lowest.  Cash flow is rather low at 13.4% of revenue, compared to 21% for Coca Cola.  Both these figures may contribute to the low current ratio. The current ratio is only 0.99, meaning current liabilities are greater than current assets.  Thus, it could run into problems in the near-term.  The market cap is only 1.5 times revenue.  However, market cap is over 28 times cash.  The EV/EBITDA is greater than five, often used to find takeover targets, but not too high at 9.59.  Return on assets and return on equity are both the second highest, an indication that the stock might do well.  Dividend yield is also the second highest.

Going forward, share repurchases were approximately $750 million in the first half.  The company has a full-year target of $2.5 billion in share buybacks.  Thus, share repurchase is expected to accelerate in the second half.  Concentrate shipments is expected to be a net negative in the 3rd quarter as bottler inventories near a trough.

At $61.02, the stock is not even above its low target of $65.00 made by the 12 analysts recorded by Thomson/First Call.  Mean target is $72.67; median target is $72.00; and high target is $85.00.  Using a scale of 1.0 as a strong buy and 5.0 as a sell, the average rating of the stock was 2.4, unchanged from a week ago.

Stifel Nicolaus downgraded the firm on September 23rd, cutting ratings from buy to hold and Goldman got into the act last week.

Due to short-term pessimism and market negativity, investors may be wise to snap shares.  Long-term fundamentals seem intact.

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3Trading Course Video Review

We have 2 videos for those of you who have ordered our Trading Course, How to Trade options on Momentum Stocks.

The first video will cover the major averages and provide a closer look at the indexes and the futures market.  We will also show you which options to use on a breakout or breakdown in the major indexes over the next few weeks.

The second will cover upcoming 3Q earnings and how to find trades.  We will also go over a few trades on our Watch List that will come out in the Daily on Monday.  We will also show you a possible LEAP option trade and we will cover WEEKLY options for the companies that are reporting this week.

These videos will be done over the next few hours so they will be coming out really late.  However, they will be ready by 8am on Monday so get up early to watch the show!  To read more about our option course, please click here:

http://momentumoptionstrading.com/momentumoptionstradingcourse.html

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4.  Earnings

The companies in BOLD, we are looking at as possible trades and we may list call or put options on them in our Daily Newsletter.  If they become official recommendations, we sent out Trade Alerts or include them in our 9am and 1pm updates that come out during the week (Quotes are as of Friday’s close, 10/7/11).

MONDAY

American Learning (AMRN, $9.15, down $0.05), API Technologies (ATNY, $3.49, up $0.03), Authentidate Holding (ADAT, $0.70, down $0.13), Bona Film Group (BONA, $4.06, down $0.20), CCA Industries (CAW, $4.39, down $0.19), Citizens And Northern (CZNC, $14.61, down $0.88), Educational Development (EDUC, $5.26, down $0.19), Healthcare Services Group (HCSG, $16.55, down $0.44), Mistras Group (MG, $19.60, down $0.20), Nobility Homes (NOBH, $5.69, up $0.06), Novellus Systems (NVLS, $29.73, up $0.68), Pansoft (PSOF, $1.99, up $0.39), Semileds (LEDS, $3.59, down $0.13), Severn Bancorp (SVBI, $2.45, up $0.04), Weis Markets (WMK, $38.40, down $0.57)

TUESDAY

Alcoa (AA, $9.71, down $0.17), Audiovox (VOXX, $5.65, up $0.06), Bassett Furniture Industries (BSET, $7.03, up $0.13), Century BanCorp (CNBKA, $23.46, up $0.55), Joes Jeans (JOEZ, $0.59, up $0.02), Rocky Mountain Chocolate Factory (RMCF, $8.14, down $0.06), Seven Arts Pictures (SAPX, $0.40, up $0.07), Sutor Technology Group (SUTR, $1.03, up $0.04), Synergetics USA (SURG, $5.76, down $0.04), WD 40 (WDFC, $40.49, down $0.81), WSP Holdings (WH, $370.85, up $1.59)

WEDNESDAY

Adtran (ADTN, $28.23, down $0.84), Alliance Financial (ALNC, $28.80, down $0.50), Bank Of The Ozarks (OZRK, $21.38, down $0.68), Enzo Biochem (ENZ, $2.63, down $0.16), Host Hotels and Resorts (HST, $10.77, down $0.12), Pepsico (PEP, $61.02, up $0.45), Premier Exhibitions (PRXI, $1.79, down $0.01), Universal Forest Products (UFPI, $24.12, down $1.21)

THURSDAY

Cantel Medical (CMN, $21.49, down $0.76), Commerce Bancshares (CBSH, $35.28, down $1.60), Emmis Communications (EMMS, $0.67, up $0.05), Fairchild Semiconductor International (FCS, $12.08, up $0.23), Fastenal (FAST, $33.55, down $0.56), Google (GOOG, $515.12, up $0.41), JPMorgan Chase (JPM, $30.70, down $1.68), KMG Chemicals (KMGB, $13.79, down $0.52), Lindsay (LNN, $53.43, down $1.11), Mission West Properties (MSW, $7.24, down $0.05), National Bankshares (NKSH, $25.30, down $0.64), Safeway (SWY, $17.43, down $0.51), Taylor Devices (TAYD, $7.20, up $0.01), Uranium Energy (UEC, $2.61, down $0.13), Valmont Industries (VMI, $86.85, down $0.07), Video Display (VIDE, $4.24, down $0.01), Winnebago Industries (WGO, $7.08, down $0.49), Zep (ZEP, $16.81, down $0.64)

FRIDAY

Cano Petroleum (CFW, $0.13, up $0.01), Guaranty Federal Bancshares (GFED, $0.75, Flat), J B Hunt Transport Services (JBHT, $37.80, down $0.55), Mattel (MAT, $26.75, up $0.16), Meade Instruments (MEAD, $3.81, up $0.41), Summit Hotel Properties (INN, $6.86, up $0.02), Waccamaw Bankshares (WBNK, $0.18, up $0.04), Webster Financial (WBS, $16.45, down $0.92)

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5. Weekly Wrap Covered Call Portfolio Update (Closing prices as of 10/7/11)

WEEKLY WRAP CLOSED TRADES for 2011: VVUS +18%, DNDN +9%, PCX +13%, SGEN +26%, TIVO +34%, REDF +11%, PCX +7, GE +5%, CLNE +13%


Ford Motor (F, $10.69, down $0.30)

October 11 calls (F111022C00011000, $0.25, down $0.15)

Original Entry Price:  $10.63 (9/20/11)

Lowered Price from Selling Options: $10.28

Exit Target: $15+

Return: 4%

Stop Target: None

Action:  Ford had a week full of good news.  The company reached a deal with the United Auto Workers (UAW) union on a new contract that will smooth production worries as it adds nearly 6,000 jobs to its plants.  Also, Moody’s was rumored to be considering an upgrade of the company’s debt credit rating if everything goes through.

The momentum propelled shares past resistance at $10.50 (blue line, green circles) as Ford traded to a high of $11.20 on Friday before giving back 3%.  These options were at 10 cents last Monday and reached a high of 50 cents for the week.  The next area of resistance comes at $11.50-$12 (orange line, black circle) and we only need shares to break and hold $11 to get called away.  Support is at $10 (black line, purple circles) if volatility stays in check although $9 could be tested if the wheels fall of the wagon which was Tuesday’s low and multi-year support.

We recommended buying the stock at $10.63 on 9/20/11 and for every 100 shares to sell the October 11 calls for 35 cents.  This lowered the cost basis to $10.28.

If shares are called away at $11 in mid-October the trade will make 7%.


Vivus (VVUS, $7.95, down $0.37)

October 9 calls (VVUS111022C00009000, $0.10, down $0.10)

Original Entry Price:  $8.45 (9/9/11)

Lowered Price from Selling Options: $8.05

Exit Target: $10+

Return: -1%

Stop Target: None

Action:  Shares traded to a low of $7.47 on last Monday and closed below $8 for the first time in over a month.  Vivus was back above $8 (green line, blue circles) on Tuesday’s shakeout which has been solid support but fell 4% on Friday.  There is still resistance at $9 (orange line, black circles) and additional support at $7.50 (purple line, orange circles) should shares retreat below $8 again.

We recommended buying the stock at $8.45 on 9/9/11 and for every 100 shares to sell the October 9 calls for 40 cents.  This lowered the cost basis to $8.05.

If shares are called away at $9 in mid-October the trade will make 12%.


MGM Resorts (MGM, $9.29, down $0.64)

October 12 calls (MGM111022C00012000, $0.02, down $0.02)

Original Entry Price:  $11.73 (8/12/11)

Lowered Price from Selling Options: $10.23

Exit Target: $12+

Return: -12%

Stop Target: None

Action:  MGM touched an intraday low of $7.40 last Tuesday and we said there was risk down to $7.50 (orange line, black circles).  However, shares rebounded and tried to make a run back to below multi-year support at $10 (green line, blue circles) which is now short-term resistance.  A close above $10 could get $12 (purple line, pink circles) into play.

We recommended buying the stock at $11.73 on 8/12/11 and for every 100 shares to sell the September 12 calls for 90 cents.  This lowered the cost basis to $10.83.

On 9/20/11 we recommended selling the October 12 call option for $0.60 which lowered the cost basis to $10.23.

If called away in mid-October at $12 the trade makes 17%.


Newpark Resources (NR, $6.30, down $0.25)

December 10 call (NR111217C00010000, $0.30, flat)

Original Entry Price:  $9.45 (7/27/11)

Lowered Price from Selling Options: $8.10

Exit Target: $10+

Return:  -22%

Stop Target: None

Action:  The low last week was $5.19 and we were prepared for a test down to longer-term support at $5.50 (blue line, black circles).  Short-term resistance will be at $6.50 (green line, orange circles) but if cleared on a close, shares could test $7.50 again (purple line, green circles).

We recommended buying the stock at $9.45 on 7/27/11 and for every 100 shares to sell the August 10 calls for 50 cents.  This lowered the cost basis to $8.95.

On 9/15/11 we recommended selling the December 10 call option for $0.85 which lowered the cost basis to $8.10.

If we are called away at $10 in mid-December, the trade makes 23%.


Rambus (RMBS, $14.72, down $0.89)

October 15 calls (RMBS111022C00015000, $1.70, down $1.10)

Original Entry Price:  $15.60 (7/22/11)

Lowered Price from Selling Options: $12.95

Exit Target: $20+

Return: 14%

Stop Target: None

Action:  Rambus had a big week after trading below $14 (blue line, brown circles) to a low of $13.38 but closed above $15 on tricky Tuesday.  Shares made a run at $16 (orange line, purple circles) on Thursday as they reached a high of $15.77 but gave back 6% on Friday.

Another patent litigation case against Nvidia started on Friday and there was some nervousness.  We continue to tell you that an upcoming legal verdict/ settlement against Micron Technology and Hynix could mean a windfall for Rambus and no one on Wall Street seems to be following this story.  We could hear something this week.

We recommended buying the stock at $15.60 on 7/22/11 and for every 100 shares to sell the September 17 calls for 65 cents.  This lowered the cost basis to $14.95.

On 9/20/11 we recommended selling the October 15 call option for $2 which lowered the cost basis to $12.95.

If we are called away, the trade makes 16%.


Symantec (SYMC, $17.10, down $0.02)

October 18 call (SYMC111022C00018000, $0.20, down $0.05)

Original Entry Price:  $18.77 (6/8/11)

Lowered Price from Selling Options: $17.37

Exit Target: $20+

Return: -2%

Stop Target: None

Action:  Symantec fell below short-term support at $16 (green line, black circles) but made a big push right back to resistance at $17.50 (orange line, purple circles).  If shares can clear this area then we can expect to close another winner.  The bottom of the trading range is $15.50 (brown line, orange circle).  The HUGE red circle is the trading range shares have been in since August.

We recommended buying the stock at $18.77 on 6/8/11 and for every 100 shares to sell the July 19 calls for 60 cents.  This lowered the cost basis to $18.17.

On 7/18/11 we recommended selling the August 20 calls for 35 cents which lowered the cost basis to $17.82.

On 9/15/11 we recommended selling the October 18 call option for $0.45 which lowered the cost basis to $17.37.

If we are called away, the trade makes 4%.


Rare Element Resources (REE, $5.18, down $0.01)

Original Entry Price: $12.38 (5/31/11)

Lowered Price from Selling Options: $11.23

Exit Target: $15+

Return: -54%

Stop Target: None

Action:  We wanted to add to this position at $4 (green line, black circles) which was strong support but we wanted to make sure the bounce holds.  We may add to this position if shares look like they can get past $6 (orange line, blue circles).

We recommended buying the stock at $12.38 on 5/31/11 and for every 100 shares to sell the July 12 calls for $1.15.  This lowered the cost basis to $11.23.


AKS Steel Holding (AKS, $6.67, down $0.30)

Original Entry Price:  $15.93 (5/2/11)

Lowered Price from Selling Options: $14.58

Exit Target: $20+

Return: -55%

Stop Target: None

Action:  AKS reached a low of $5.51 (blue line, orange circles) last Tuesday after a break below the $6.50 (green line, black circles) level which is multi-year support.  We would like to see a run back towards $6.50 but we may average our cost down at current prices this week.  Longer-term resistance is at $8 (purple line, green circles).

We recommended buying the stock at $15.93 on 5/2/11 and for every 100 shares to sell the May 16 calls for 50 cents.  This lowered the cost basis to $15.43.

On 7/1/11 we recommended selling the August 16 call option for $0.85 which lowered the cost basis to $14.58.


American Capital (ACAS, $6.51, down $0.32)

October 9 calls (ACAS111022C00009000, $0.02, down $0.01)

Original Entry Price:  $9.73 (4/19/11)

Lowered Price from Selling Options: $8.38

Exit Target: $15+

Return: -22%

Stop Target: None

Action:  Shares sunk to a low of $5.98 last week and we had penciled-in a drop to $6 (orange line, black circles).  This level of support held for the rest of the week as shares now face overhead heat at $8 (green line, purple circles).

We recommended buying the stock at $9.73 on 4/19/11 and for every 100 shares to sell the June 10 call for 50 cents.  This lowered the cost basis to $9.23.

On 7/1/11 we recommended selling the August 10 call option for $0.55 which lowered the cost basis to $8.68.

On 9/13/11 we recommended selling the October 9 call option for $0.30 which lowered the cost basis to $8.38.

If shares are called away at $9 by mid-October the trade will make 7%.


Cisco Systems (CSCO, $16.66, down $0.09)

November 17 calls (CSCO111119C00017000, $0.75, down $0.05)

Original Entry Price:  $17.14 (3/17/11)

Lowered Price from Selling Options (and dividends): $15.51

Exit Target: $20+

Return: 7%

Stop Target: None

Action:  Cisco made a strong run past resistance at $16.50 (green line, black circles) after trading through two layers of support and below $15 (purple line, brown circles) earlier in the week.  If momentum stays strong for another month then it is possible shares can push $17.50 (orange line, green circles) on a close above $17 which easily gets us called away.  A 6 cent quarterly dividend was also paid out which lowered our cost basis a smidge.

We recommended buying the stock at $17.14 on 3/17/11 and for every 100 shares to sell the May 18 call for 56 cents.  This lowered the cost basis to $16.58.

On 7/5/11 the company paid out a 6 cent quarterly dividend.  This lowered the cost basis to $16.52.

On 7/22/11 we recommended selling the August 17 calls for 30 cents which lowered the cost basis to $16.22.

On 9/9/11 we recommended selling the November 17 calls for 65 cents which lowered the cost basis to $15.57.

On 10/4/11 the company paid out a 6 cent quarterly dividend.  This lowered the cost basis to $15.51.

If shares are above $17 by mid-November and we are called away, the trade makes 9%.


Spreadtrum Communications (SPRD, $18.87, down $0.18)

November 25 call (SPRD111119C00025000, $0.40, flat)

Entry Price:  $23.45 (2/7/11)

Lowered Price from Selling Options (and dividends): $20.38

Exit Target: $30

Return: -8%

Stop Target: None

Action:  We were looking for $16 (green line, orange circles) to hold on Tuesday’s selloff and shares traded to a low of $16.52.  However, the bounce was incredible as shares also closed above $19 (purple line, green circles) for the day.  Spreadtrum kissed $20 on Thursday before slipping Friday.  We are looking for a breakout above $22 (orange line, brown circles).

Spreadtrum paid a quarterly dividend last week which lowered the cost basis by 5 cents.

Shares opened at $23.43 on 2/7/11 and the March calls could have been sold for 95 cents.  This lowered the cost basis to $22.48.

On 4/11/11 we recommended selling the May 22.50 call option for $1.00 which lowered the cost basis to $21.48.

On 7/7/11 the company paid out a 5 cent quarterly dividend.  This lowered the cost basis to $21.43.

On 9/15/11 we recommended selling the November 25 call option for $1 which lowered the cost basis to $20.43.  If we are called away, the trade makes 22%.

On 10/6/11 the company paid out a 5 cent quarterly dividend.  This lowered the cost basis to $20.38.


DryShips (DRYS, $2.24. down $0.15)

January 2012 7.50 call (DRYS120121C00007500, $0.05, flat)

Entry Price:  $5.25 (1/03/11)

Lowered Price from Selling Options: $4.60

Exit Target: $8

Return: -51%

Stop Target: None

Action:  $1.75 on Tuesday…..There is further risk down to $2 (green line, orange circles) while short-term resistance at $2.50 (blue line, black circles) will continue to be a factor.

DryShips opened at $5.37 on 1/3/11 and shares were at $5.25 shortly after the bell.  The January call options could have been sold for 65 cents which lowered the cost basis to $4.60.

If shares are over $7.50 by January 2012, the stock will be “called away” and the trade will make over 60%.

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6.  Week Ahead

The bond market is closed on Monday while Wall Street runs a regular session on Columbus Day.  However, there are no economic reports due out.

For Tuesday, the FOMC Minutes will likely sway the market while Wednesday’s MBA Mortgage Index is the only scheduled report on the docket.

Thursday’s Initial Claims and Continuing Claims numbers will be released ahead of the bell.  The weekly update on Crude Inventories will also hit the Street as well as the latest Treasury Budget figures.

Friday will be busy with Retail Sales and Import/ Export Prices ahead of the open.  Shortly after the bell we will get the latest Michigan Sentiment numbers along with the latest Business Inventories report.