EOT Position Update – August 18, 2010

| August 18, 2010

August 18, 2010

Market Snapshot

The dog days of summer are here…

It’s hot outside and the markets have gone into a summer slump.

There’s a lot of noise in the markets right now.  On one hand, economic data is weakening.  But on the other, earnings are strong and companies are sitting on a mountain of cash.

The result?  Markets continue to chop up and down without making any headway.

The good news is, I’m expecting the markets to break out of their funk soon.

For one thing, stocks look cheap.  Last quarter’s strong earnings haven’t driven stock prices higher.  When you combine cheap stocks with companies flush with cash, it’s a recipe for M&A activity.

M&A activity is one way companies can increase profits in a slow growth environment.

We’re already seeing M&A activity increase.  BHP Billiton (BHP) made a hostile takeover bid for Potash Corp. of Saskatchewan (POT) this week.

If M&A activity continues to increase, it could be the spark to get the markets moving again.

Let’s move onto the 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.

  APOL November 2010 $37 Puts
APOL plummeted the day after we sent out the trade.  It sent executives into crisis management mode.  They’ve succeeded in calming investors fears for the moment. The stock has rebounded but volatility remains high.  According to management, they’re fully compliant with DOE standards.  That’s all good and well, but they’re missing the point.  Tougher standards are on the way.  And being the least evil isn’t going to be good enough.  Continue holding for further gains ahead.  Resistance is at $45 and $50.  Support is at $35 and $30.

  BRCM November 2010 $39 Calls
BRCM isn’t getting much love from investors.  Conflicting reports and economic data have investors in a tizzy.  The uncertain outlook has really taken the wind out of tech stocks.  BRCM hit our $32 support level on Monday.  Conservative traders should go ahead and sell this option to conserve capital.  Aggressive traders may want to hold out for a rebound.  Resistance is at $40 and $45.  The next support is at $29.

  SBUX October 2010 $25 Calls 
SBUX was upgraded by an analyst at Piper Jaffray today.  They increased their price target to $34.  That’s great news for our call options.  Clearly SBUX is trading at a huge discount right now.  We still have plenty of time on these options.  Sit tight for now.  Resistance is at $26.25 and $28.  Support is at $23 and $22.10.

  JNJ October 2010 $62.50 Calls
JNJ is building momentum once again.  Warren Buffett increased Berkshire Hathaway’s stake in the company by 73% last quarter.  Clearly the company is undervalued if Buffett is buying.  Hold tight for now.  Resistance is at $62.50 and $65.  Support is at $57.50 and $55.

  ENS September 2010 $22.50 Puts
ENS plummeted after reporting weak quarterly earnings last week, just like we expected.  Unfortunately, some investors are buying into management’s spin.  They’re convinced business is recovering.  I’m not buying it.  But nonetheless, bearish momentum is really subsiding.  Our options will expire in less than a month.  Go ahead and sell these options to conserve capital.

Category: EOT Update

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