1. Market Summary
2. Web.com Group (WWWW) Surges in a Down Week
3. J. C. Penney (JCP) Earnings Preview
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 – All Over but the Crying?
Whew. What a week.
Wall Street went down again in dramatic fashion following continued global concerns as the bears pounded the bulls into one of their worst beatings in a couple of years. Volatility exploded, fear and panic set in, and blood was in the streets…but we loved the action.
The bulls came into the week trying to hold key support levels and were clinging to hope the jobs reports would come in better-than-expected. However, the first bit of news wouldn’t hit until Wednesday on that front and they still faced the wrangling in Washington over the debt deal. After an initial pop on an agreement over the weekend, the bears took advantage of the waffling to get the bill signed and pushed the market lower by 1%. The session ended slightly lower as the both sides of the House approved the bill and Obama signed it before Wall Street’s closing bell. Monday session included a 300-point swing on the Dow and it was a warning sign.
Tuesday’s session was crucial as the bulls needed to hold the first wave of support or face further downside risk. These levels were tested quickly as the market “sold the news” and instead focused on the possible prospect of a U.S. debt rating downgrade. It was a day which saw the Nasdaq fall below its 200-day moving average so we knew the selling wasn’t over.
The bulls got some relief on Wednesday on better-than-expected ADP Employment numbers and the Challenger Jobs Cuts reports. However, the bears were able to crack the second layer of support although the market did finish positive for the day.
Thursday was the jailbreak as the bears punished the indexes for 4%-5% losses and took out not only the June lows, but the March lows as well.
The volatility continued into Friday’s session, but stocks finished mixed which only left more head scratching. Futures were improving from a predicted 1% drop and turned positive after hearing the unemployment rate fell to 9.1%, down from the 9.2% rate that had been penciled-in.
As far as the specifics, Non-farm payrolls for July increased by 117,000, which was higher than the expected increase of 84,000. The bulls got a bonus after the prior month payrolls were also adjusted upward. Private Payrolls came in at 154,000, which was well above the forecast for a 100,000 increase.
The Dow started off with a 170-point pop that quickly faded as the indexes failed to clear short-term resistance which had been prior support. In fact, the selling pressure was so intense, all 3 major indexes hit fresh lows and the VIX chart we drew up on a napkin Friday morning played out like we expected. More on this in a minute.
The Dow added 60 points on Friday to finish at 11,444. The index traded to a low of 11,139 while the high was 11,555 – nearly a 400-point swing. The chart below shows the next wave of support at 11,000 (top black line, blue circles) while resistance is at 11,600 (orange line). However, serious technical damage is being done which is threatening the bull market that has been strong (red line) for so long. If the 11,000 level fails then there is a chance 10,750-10,500 comes into play but we would be prepared for a test down to 10,000 (bottom black line, blue circles). If the bulls can rebound above 11,600 watch 11,800 and then 12,000 for a continued rally. For the week the blue-chips lost nearly 700 points, or 5.8%, and the Dow is now down 1.1% for 2011.
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 (top black line, blue circles). 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 (bottom black line, blue circles) just in case. While a break above resistance at 1,225, first, then 1,250 (orange line) seems like a long shot, it would restore some faith for the bulls. The S&P fell 93 points, or 7.2%, for the week and is off 4.6% YTD.
The Nasdaq also finished lower by dropping 24 points to settle at 2,554. Tech continues to look like a train wreck and dipped to a low of 2,464 on Friday once the 2,500 level was pinched. We mentioned the possibly of 2,400 coming into play (top black line, blue circles) and further support lies at 2,350 but the bears could target 2,200 (bottom black line, blue circles) if things gets ugly this week. The Nasdaq faces strong headwinds on its fight to get back to 2,600 (orange line) but if it can, and then 2,700 – the bulls would be back in business. Tech gave back 224 points, or 8.1%, last week and is down 4.5% for the year.
The S&P Volatility Index (^VIX, 32, up 0.34) spiked up to 39 on Friday and here is Friday’s chart we gave you before the open.
Here is what it looks like after Friday:
The VIX could go parabolic like it did a few years ago as shown by the 5-year chart below if there is a correction. If it does, there will be a lot of money to be made to the downside.
Oil has also been moving lower after closing at $86.25 a barrel on Friday, down $0.38. This should help drop the national average for gas to $3.25 a gallon which should help consumers.
Some of the strength from Friday can be attributed to news that the European Central Bank was ready to provide support to Spain and Italy by buying their bonds. The two troubled countries would have to commit to specific reforms but this helped the market bounce after being down 2% on Friday. On Sunday night, we will need to see China come in and buy the bonds.
Speaking of troubles, there was news after the closing bell that we are sure many of you have heard by now. America lost its triple AAA credit rating Friday night. Yep, that’s right. Standard & Poor cut the long-term U.S. credit rating by a notch to AA+ over concerns on the nation’s bloated budget deficit and rising debt burdens. To dummy it down, what this means is that all of us, including the government and corporate America, will be paying higher interest rates.
The futures market opens tonight at 6pm.
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2. Web.com Group (WWWW) Surges in a Down Week
Web.com Group (WWWW, $11.94, up $1.57) was one of the few stocks that rose last week, surging almost 50%, while the major indexes lost nearly 5%. Is this a stock to invest in or a trap?
The company just released 2nd quarter earnings last Wednesday, August 3rd. Excluding special items and one-time costs, Web.com reported earnings of $0.26 a share on $42 million in revenue. Analysts were expecting earnings of $0.23 a share on $44 million in revenue. The company missed on revenues by $2.2 million to be exact but beat on earnings by $0.03. Revenue was up over 70% compared to $24.8 million in the 2nd quarter of 2010.
Shareholders also got good news when Web.com said it was purchasing competitor Networking Solutions for $405 million in cash and 18 million shares. Based on the Wednesday closing price, the acquisition is worth about $561 million. One analyst said the purchase of Networking Solutions could push the company’s 2012 earnings up significantly, to as much as $1.50 per share, higher than the $1.22 analysts are expecting for next year.
Web.com hopes the purchase of Network Solutions will allow it to compete better against market leader GoDaddy.com. Both companies provide domain registration, e-commerce, search engine optimization, hosting, and email to small businesses. Web.com also offers free website and Facebook page design, and provides professional services for a subscription fee. After adding Network Solutions’ 2 million retail customers and hundreds of thousands of wholesale customers, the combined company will have about 3 million paying subscribers and more than 9 million domains. Non-GAAP revenue is expected to grow to the mid-$450 million range for 2011.
But Web.com only has a market value of $326 million and enterprise value of $404 million. The enterprise value of Network Solutions is $756 million. Thus, the combined company will have an enterprise value of $1.16 billion. This is the rare occasion where the smaller company buys the larger company. Where is it going to get the extra cash? And are analysts’ estimates overly confidant? Further, are the share reasonably priced?
The table below compares Web.com with its top competitors. Numbers are from Yahoo Finance and MSN Money. Bridgeline Digital (BLIN, $1.03, down $0.02); Industry – Internet Information Providers
| Price/Sales | Price/Book | PEG | Debit-to-Equity | ROE | Gross Margin | |
| WWWW | 2.01 | 0.61 | 0.76 | 0.93 | -11.09% | 55.12% |
| BLIN | 0.50 | 0.61 | — | 0.27 | -5.29% | 50.58% |
| Industry | 1.83 | — | 1.05 | — | — | 58.02% |
Web.com has a lot of debt to start with and is going to take on more debt. The only numbers that look positive are the price to book of 0.61 and the PEG of 0.76. The PEG is less than one, a positive sign, and less than the industry average. Also, the forward PE ratio, not shown, is 9.95, very low for a tech company. The bad news is that the current ratio is 0.68, meaning that the company does not have enough current assets to cover its current liabilities.
Analysts have been bullish on the stock. At $11.94, the stock is not even above its low target of $13.00 made by the 7 analysts recorded by Thomson/First Call. Mean target is $15.86; median target is $16.00; and high target is $18.00. Using a scale of 1.0 as a strong buy and 5.0 as a sell, the average rating of the stock was 1.9, unchanged from a week ago.
| Current Month | Last Month | Two Months Ago | Three Months Ago | ||
| Strong Buy | 3 | 3 | 3 | 3 | |
| Buy | 2 | 2 | 2 | 2 | |
| Hold | 2 | 2 | 2 | 2 | |
| Underperform | 0 | 0 | 0 | 0 | |
| Sell | 0 | 0 | 0 | 0 | |
But analysts could be overly bullish on the stock. The graphs below show that revenue has surged recently. The last two points in each graph are the revenue and earnings estimate for the 3rd and 4th quarters. Analysts see revenue growth falling from the 3rd quarter to 4th quarter.
These estimates don’t seem overly bullish based on past results, but the 3rd quarter revenue estimate seems high, and thus warrants a possible downgrade, which will likely take the stock lower.
Adding the 1st and 2nd quarter results to 3rd and 4th quarter estimates yields revenue and earnings estimates of $176 million and $1.04 respectively for 2011.
And the one-year graph shown below predicts it will move lower, despite that the Stochastic %K and %D and the RSI are near oversold levels. The moving averages form a bearish cross, where the 50-day moving average crossing below the 200-day moving average. The W%R is at overbought levels, and the MFI is nearing overbought levels. There could be continued strength on short-covering or momentum but we think shares are headed back to $8 or under.
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3. J. C. Penney (JCP) Earnings Preview
All eyes will be on retail giant J. C. Penney (JCP, $28.35, down $0.32) this Friday as it reports quarterly earnings. If sales turn out good or better than expected, this could be the one bright spot in what looks like a gloomy week.
The company has beaten estimates four straight quarters and analysts are expecting $0.06 in earnings on $3.9 billion in revenue. For the 3rd quarter, analysts are expecting $0.25 in earnings on $4.2 billion in revenue. From the graphs below, these numbers fit the pattern and the company can easily meet them, if not beat them. The last two points in each graph are the analysts’ estimate for the 3rd and 4th quarters.
Investors will also be watching how former Apple executive Ron Johnson will fit in. It was a big recruitment for Penny’s and Mr. Johnson, who is the creator of the Apple Store, is considered a retail genius. He joined the company’s board of directors earlier this year and is expected to become CEO in 2012. We, however, don’t think he will have much effect on sales at first but he will down the road. The Apple Store thrives because of the products and the design of the stores are top-notch. His creativity should play a big part of the company’s future but it remains if consumers will get “excited” over penny’s products.
The table below compares JCP with its top competitors. Numbers are from Yahoo Finance and MSN Money. KSS = Kohl’s M = Macy’s SHLD = Sears Industry = Department Stores
| Trailing PE | Price/Sales | PEG | Debit-to-Equity | ROE | Gross Margin | |
| JCP | 16.98 | 0.34 | 0.93 | 0.65 | 7.94% | 38.96% |
| KSS | 12.60 | 0.72 | 0.83 | 0.23 | 14.15% | 38.24% |
| M | 11.92 | 0.44 | 2.33 | 1.25 | 18.32% | 40.63% |
| SHLD | — | 0.17 | -0.90 | 0.44 | -0.47% | 27.13% |
| Industry | 16.98 | 0.58 | 1.44 | — | — | 36.54% |
JCP has one of the lowest price-to-sales ratios when compared to its top competitors and its industry. PEG and debit-to-equity are also one of the lowest, all positive signs.
Analysts have been somewhat bullish on the stock. At $28.35, the stock is near its low target of $28.00 set by the 9 analysts recorded by Thomson/First Call. Mean target is $34.11; median target is $33.00; and high target is $41.00. 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.
| Current Month | Last Month | Two Months Ago | Three Months Ago | |
| Strong Buy | 3 | 3 | 3 | 3 |
| Buy | 1 | 1 | 0 | 0 |
| Hold | 6 | 6 | 8 | 8 |
| Underperform | 2 | 2 | 2 | 2 |
| Sell | 0 | 0 | 0 | 0 |
The one-year and longterm graphs shown below predict that the stock will rise but expect volatility. All the technicals are near or at oversold levels. The price has crossed the support line, and either it will continue falling or bounce back above support. We believe shares can bounce back, and the earnings will be the catalyst. Plus, the last time the price and the technicals were at similar positions (vertical orange line), the price rose sharply.
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, 8/5/11).= = = = = = = = = = = = = = =
4. Earnings
MONDAY
99 Cents Only Stores (NDN, $18.00, Flat), American States Water (AWR, $33.38, down $0.69), Black Diamond (BDE, $8.74, up $0.64), Carmike Cinemas (CKEC, $5.99, down $0.12), Clean Energy Fuels (CLNE, $14.03, up $0.27), Digital Power (DPW, $1.40, down $0.10), Dynegy (DYN, $4.90, down $0.29), Fuel Tech (FTEK, $4.96, down $0.63), Giant Interactive Group (GA, $7.66, up $0.38), Hawthorn Bancshares (HWBK, $7.02, Flat), Lifetime Brands (LCUT, $10.30, down $0.34), Limelight Networks (LLNW, $3.85, down $0.08), MGM Resorts International (MGM, $12.66, Flat), Nautilus (NLS, $1.88, up $0.03), Noah Education Holdings (NED, $1.95, down $0.10), Paragon Shipping (PRGN, $1.41, down $0.01), Silver Wheaton (SLW, $34.15, down $0.92), Take Two Interactive Software (TTWO, $12.14, down $0.14), Telik (TELK, $0.48, down $0.01), Tyson Foods (TSN, $16.31, up $0.06)
TUESDAY
Acorn Energy (ACFN, $5.03, up $0.13), Affymax (AFFY, $5.19, down $0.48), AOL, $AOL, $16.11, down $0.08), Arena Pharmaceuticals (ARNA, $1.38, up $0.03), Beazer Homes USA (BZH, $2.15, down $0.28), Capstone Turbine (CPST, $1.28, up $0.03), Cree (CREE, $28.98, down $1.49), Dish Network (DISH, $25.12, down $1.60), Echostar (SATS, $28.08, down $1.14), Fossil (FOSL, $110.56, down $3.31), Hecla Mining (HL, $7.16, down $0.26), James River Coal (JRCC, $14.94, down $0.50), Liberty Media (LINTA, $13.91, down $0.40), Michael Baker (BKR, $19.85, up $0.18), Orbit International (ORBT, $4.39, down $0.16), Rick’s Cabaret International (RICK, $7.56, down $0.12), Sciclone Pharmaceuticals (SCLN, $5.92, down $0.22), Scripps Networks Interactive (SNI, $40.52, up $0.12), United Security Bancshares (USBI, $6.98, up $0.24), Vista Gold (VGZ, $2.80, down $0.10), Wave Systems (WAVX, $2.18, down $0.14), Zoltek Companies (ZOLT, $8.76, down $0.06)
WEDNESDAY
Acadia Pharmaceuticals (ACAD, $1.34, down $0.16), Advance Auto Parts (AAP, $52.94, up $0.20), Cisco Systems (CSCO, $14.94, up $0.12), Dillard’s (DDS, $52.39, down $1.45), Flotek Industries (FTK, $7.02, down $0.41), Heelys (HLYS, $2.16, down $0.05), interCLICK (ICLK, $6.19, down $0.19), Jack In The Box (JACK, $20.61, down $0.80), Kid Brands (KID, $4.50, down $0.09), Macy’s (M, $26.54, up $0.41), News Corp (NWSA, $14.67, up $0.11), Pan American Silver (PAAS, $28.68, down $0.85), Polo Ralph Lauren (RL, $124.52, up $4.25), Psychemedics (PMD, $8.29, down $0.25), Star Bulk Carriers (SBLK, $1.39, down $0.05), Virnetx Holding (VHC, $22.16, down $0.81), Zogenix (ZGNX, $4.72, down $0.18)
THURSDAY
21st Century Holding (TCHC, $2.50, down $0.01), Anheuser Busch Inbev (BUD, $54.32, up $1.15), Biofuel Energy (BIOF, $0.35, Flat), Briggs & Stratton (BGG, $16.40, up $0.29), China Natural Resources (CHNR, $8.85, up $0.33), Clean Diesel Technologies (CDTI, $4.69, down $0.10), Darling International (DAR, $15.53, up $0.37), Endocyte (ECYT, $10.82, down $0.21), Hoku (HOKU, $1.50, down $0.03), Kohl’s (KSS, $47.30, down $0.37), Molycorp (MCP, $54.15, down $1.62), Nordstrom (JWN, $44.31, up $1.16), O’Charleys(CHUX, $5.83, down $0.40), Progressive (PGR, $18.48, down $0.11), Renren (RENN, $7.62, down $0.43), Sara Lee (SLE, $18.48, up $0.20, Teekay (TK, $24.39, down $0.17), Uranium Resources (URRE, $1.16, down $0.13), Wendys (WEN, $4.89, down $0.01),
FRIDAY
General Employment Enterprises (JOB, $0.21, down $0.02), Global Tech Advanced Innovations (GAI, $3.98, Flat), Hemispherx Biopharma (HEB, $0.31, down $0.02), Icagen (ICGN, $5.99, up $0.03), J C Penney (JCP, $28.35, down $0.32), Mentor Graphics (MENT, $9.58, down $0.18), Nexxus Lighting (NEXS, $2.09, down $0.09), Primeenergy (PNRG, $20.97, down $1.85), Servidyne (SERV, $3.45, Flat), Tootsie Roll Industries (TR, $26.71, down $0.13), Zoo Entertainment (ZOOG, $1.81, down $0.18), Zoom Technologies (ZOOM, $2.14, down $0.01)
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5. Weekly Wrap Covered Call Portfolio Update (Closing prices as of 8/5/11)
WEEKLY WRAP CLOSED TRADES for 2011: DNDN +9%, PCX +13%, SGEN +26%, TIVO +34%, REDF +11%, PCX +7
Possible NEW TRADES! We may send out Trade Alerts to start positions in MGM, FVE, and CLNE this week but we may be able to get these stocks cheaper. If there is a sell-off, we won’t know where the absolute bottom is but we can start planning. We may have to add to positions in a month or two if they fall even further from our entry prices to average down but these stocks are getting cheap and attractive.
Newpark Resources (NR, $7.62, down $0.39)
August 10 calls (NR110820C00010000, $0.10, flat)
Original Entry Price: $9.45 (7/27/11)
Lowered Price from Selling Options: $8.95
Exit Target: $12+
Return: -15%
Stop Target: None
Action: There was strong support at $8.50 but we said shares could slip to $8 (black line, red circles) which also didn’t hold. Further support is at $7 (green line, blue circles) but shares could trade below $6.50 (red line, black circles) if this level is penetrated.
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.
If shares are called away at $10 by mid-August the trade will make 12%.
Rambus (RMBS, $11.58, down $0.65)
September 17 calls (RMBS110917C00017000, $0.15, flat)
Original Entry Price: $15.60 (7/22/11)
Lowered Price from Selling Options: $14.95
Exit Target: $20+
Return: -23%
Stop Target: None
Action: The break below $14 (red line, blue circles) wasn’t healthy and although it doesn’t help this position, we used put options in our Daily to play the move to $10 (black line, green circles). There is also further weakness to $8-$7 if $10 doesn’t hold.
That is the technical picture for Rambus. If the company can get a legal victory in their ongoing litigation, or a settlement, then shares should trade up to $20. They are also turning their books around.
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.
If shares are called away at $17 in mid-September the trade will make 14%.
Symantec (SYMC, $17.10, down $0.02)
August 20 calls (SYMC110820C00020000, $0.02, down $0.01)
Original Entry Price: $18.77 (6/8/11)
Lowered Price from Selling Options: $18.17
Exit Target: $20+
Return: -4%
Stop Target: None
Action: Multi-year support at $18 (black line, blue circles) failed to hold and the next wave of support is at $16.25 (red line). However, we are prepared for a test to $14 (green line, orange circles) if the $16 area doesn’t hold. If that were to happen, we would back the truck up. We love this company for the security options it offers and over the next 12-24 months we think somebody will step up to the plate and buy Symantec.
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.
If shares are called away by mid-August at $19 the trades makes 13%.
Rare Element Resources (REE, $9.02, down $0.43)
Original Entry Price: $12.38 (5/31/11)
Lowered Price from Selling Options: $11.23
Exit Target: $10+
Return: -20%
Stop Target: None
Action: Strong support at $10 wasn’t so strong given the current market conditions and there is a chance if $8 falls (red line, blue circle), shares test $6. Support there is weak (red line, blue circle) which could lead to a trip down to $4 (green line, blue, circle), worst-case scenario.
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.
Vivus (VVUS, $6.78, up $0.08)
August 9 calls (VVUS110820C00009000, $0.05, flat)
Original Entry Price: $7.93 (5/11/11)
Lowered Price from Selling Options: $7.13
Exit Target: $10+
Return: -5%
Stop Target: None
Action: The break below $8 wasn’t good (green line, black circles) and had been holding as short-term support. There is now a chance shares test $6 (black line, red circles) which is the next wave of support.
Vivus may have a winner with Qnexa on two other fronts besides trying to gain approval of the drug for weight loss. The company is currently running clinical trials to gain approval for treatment on diabetes and obstructive sleep apnea using Qnexa as well. Vivus recently had its “good wood” drug approved and is on its way to developing a nice pipeline. Expect some news in the coming weeks and months.
We recommended buying the stock at $7.93 on 5/11/11 and for every 100 shares to sell the June 8 calls for 50 cents. This lowered the cost basis to $7.43.
On 7/1/11 we recommended selling the August 9 call option for $0.30 which lowered the cost basis to $7.13.
If shares are called away by mid-August the trade makes 26%.
AKS Steel Holding (AKS, $9.12, down $0.09)
August 16 calls (AKS110820C00016000, $0.00)
Original Entry Price: $15.93 (5/2/11)
Lowered Price from Selling Options: $14.58
Exit Target: $20+
Return: -37%
Stop Target: None
Action: AKS continues to get pounded after failing to hold $12 (green line, red circles). Shares are also on the brink of another collapse if current levels don’t hold (black line, blue circles) and could kiss $6 (orange line, black circles). If shares drop this low, we might add another 100 shares to average down our cost.
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. If shares are called away by mid-August the trade makes 10%.
American Capital (ACAS, $8.49, down $0.28)
August 10 calls (ACAS110820C00010000, $0.05, down $0.03)
Original Entry Price: $9.73 (4/19/11)
Lowered Price from Selling Options: $8.68
Exit Target: $15+
Return: -2%
Stop Target: None
Action: We thought there was a chance the $9 level would hold (black line, blue circles) but further support at $8 has now come into play (red line, green circles). A break below $8 would bring $7 into play (orange line, black circle).
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. If shares are called away by mid-August the trade makes 15%.
Cisco Systems (CSCO, $14.94, up $0.12)
August 17 call (CSCO110820C00017000, $0.25, flat)
Original Entry Price: $17.14 (3/17/11)
Lowered Price from Selling Options: $16.28
Exit Target: $20+
Return: -8%
Stop Target: None
Action: Cisco is also at crucial levels (black line, red circles, first chart) and it requires two charts. The first chart shows strong support at it March 2009 low of $13.61. The second shows a major sell-off could lead to $10 (green line) after shares broke multi-years of support (black line, red circles).
The worst case scenerio?
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 7/22/11 we recommended selling the August 17 calls for 30 cents which lowered the cost basis to $16.28. If shares are called away by mid-August the trade makes 4%.
Spreadtrum Communications (SPRD, $14.48, up $1.25)
Entry Price: $23.45 (2/7/11)
Lowered Price from Selling Options: $21.48
Exit Target: $30
Return: -33%
Stop Target: None
Action: Spreadtrum reported a good quarter and shares are holding current long-term support just above $12 (red line, green circles). However, if Tech continues to correct it could drag shares down to $11 (orange line, black circles).
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.
DryShips (DRYS, $2.89, down $0.25)
January 2012 7.50 call (DRYS120121C00007500, $0.07, flat)
Entry Price: $5.25 (1/03/11)
Lowered Price from Selling Options: $4.60
Exit Target: $8
Return: -37%
Stop Target: None
Action: Shares are at all-time lows (black line, red circles) but the company is spinning off its drillship operations which will pay off in the long run.
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
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