EOT Position Update – April 22, 2009

| April 22, 2009

April 22, 2009

Market Snapshot

We’re still hanging around that 8,000 mark on the Dow.  It’s interesting that with all the earnings announcements, we haven’t seen more volatility in the markets.  I’m going to be watching for the next few days.  If we can hold up, I think the March lows may have been the bottom in the markets!

The big news this week…

The markets were surprised by Oracle’s trumping bid to buy Sun Microsystems.  I guess IBM was moving just a bit too slow.  The deal value is expected to be around $7.4 billion.

GE beat analyst expectations and the stock is up!  Great news for our options… see more details below.

The banks have put on an impressive earnings show as well this week.  Citigroup, Bank of America, and Goldman Sachs all beat analyst estimates.  I guess it’s not too hard with expectations dramatically slashed.

This week also marked a first for Rosetta Stone… the language software company went public and watched its stock pop more than 40%.

Procter & Gamble increased their dividend payout by 10%… that puts their payout at $0.44… not bad in this kind of market.

Now for the trade updates.

Position Updates

Just a quick note:  Remember, we won’t update every open position every week.  I try to focus on the positions that have some significant news or price movement.

  JPM June 2009 $37.50 CALLS (JPMFU)
This trade went out last Friday.  Everyone should have had the opportunity to get a position at a great price.  Resistance will be at $37.50 and $42.  Support is at $28 and $25.

  SPLS June 2009 $20 PUTS (PLQRD)
This trade is getting very frustrating.  The stock should be moving lower because of the poor economic environment and a fall off in small business spending.  Apparently that’s not enough… in about a month the company will be announcing earnings. Hopefully that catalyst will inject some reality into the stock.  Resistance is $24 and $26.  Support is $16 and $14.

  GE June 2009 $11 CALLS (GEWFI)
Late last week the stock traded up to $12.75.  We’re still in the money on this option. Aggressive traders hold tight, the next resistance level is $13.75.  Support levels will be at $8.25 and $7.

  ORCL June 2009 $19 CALLS (ORQFT )
The news about Oracle buying Sun was a short-term knock on the stock.  The market seemed to quickly shake that off, and we eventually climbed close to $20 a share. We’re still “in-the-money” on this option.  Aggressive traders hold tight, we still have some time on this option.

Parting Shots…

Subscriber Question:

This week I received a question from Rodney.  Among his many questions were the following:

How does one decide which option symbol to buy?  What is the science behind it?  I only know that some options carry more risk than others, and you want to limit and manage your risk, while securing the potential for a nice return, but when there are 20 or more different option symbols for a given stock, how does one decide?

Well Rodney, your question is a good one… and while it might seem easy to answer, it’s actually a very difficult question.  The selection of a specific option is based on a number of factors… one of which is experience, plain and simple.  Not quite the answer you were looking for, so let me give you a few other comments on how we select options.

Remember, every option has a few different parts.  The two most important are the strike price and the expiration date.

Typically if you are expecting a violent move in a stock… for example, because of an earnings announcement, you might select a short term option with a close strike price. That way you move quickly from out of the money to in the money.  Since you know what date the announcement is taking place, you can also avoid paying up for time premium by purchasing short term options.

If you’re expecting a long, gradual build up of a stock price, you might look for a longer term option farther out of the money.  You’ll pay less because the option is further out.  But remember, the added time value gives you a better chance for your underlying stock to move.

One other piece of the puzzle is option price.  This to me is the biggest factor. Sometimes you can find options trading at a discount.  When you’re able to pick up options that are relatively inexpensive, you improve your risk reward ratio every time.

I hope this helps you better understand some of the thinking that goes into our options selection process.

Category: EOT Update

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