Sunday, December 11, 2011

CGNX, COHR, FEIC - I Asked for Sharks with Frikin Lasers Attached to Heads

3 Awesome Set-Ups with Scientific Instruments, often considered the "Laser Plays"

Cognex (CGNX), FEI Co. (FEIC), and Coherent (COHR).

All 3 with strong growth outlooks, high short floats and fairly cheap valuation.

All 3 charts breaking out, and setting up for a move higher.

Friday, November 18, 2011

Earnings Snapshot Trades Review

This weeks Earnings Snapshots sent Sunday night to subscribers:

Earnings Snapshots for the Week

AutoDesk (ADSK) will report earnings Tuesday after the close, and shares have traded down 3 of the last 4 reports, including an 11.7% fall last report. Shares are forming a bullish flag under its 200 day SMA at $36.85. The $7.83B software Co. trades 31.4X trailing earnings, 2.2 PEG, 3.76X sales and 16.3X cash flow, fairly rich for less than 15% EPS growth going forward. UBS reiterated a Buy with a reduced $42 target on 11-2, and BofA cut to Neutral from Buy on 11-9. November IV is bid higher to 65.5% with December at 49.4%, options pricing in around a 7% move on earnings. On 10-27 more than 5,000 April $40 calls were sold to open, likely part of a buy write position, and on 10-7 the November $32/$27 bullish risk reversal traded 5,000X at $0.23, the calls still in Open Interest. ON 10-24 a block of 5,000 April $36 calls was bought at $2.72 to open.

Trade to Consider: Sell the ADSK November 35/32 Strangle at a $1.40 Credit

Result: Shares Closed $33.50 Friday, Keeping the Full $1.40 Credit

Covidien (COV) is set to report earnings Tuesday before the open and shares have gained each of the last 4 reports on results. Covidien shares are setup with an ascending triangle, $48.50 the breakout point and $45 the breakdown point, but longer term in a channel down pattern with $40 the next lower low. Covidien is a $23.5B leader in medical instruments and trades 11.1X earnings, 1.2 PEG, 2.1X sales and 15.66X cash flow, also yielding 1.89%. Credit Agricole started shares a Buy back in early October, but not much Analyst action recently. Becton Dickinson (BDX) shares were recently hit hard on earnings, a close peer. November IV at 41.7% compares to December at 34.44%. Back on 10-26 there was unusual put action in April $45 puts bought 2,900X at $3.90/$4.

Trade to Consider: Long the COV November/December $45 Calendar Put Spread at $0.75

Result: COV closed Friday $45.61, December Puts Worth $1.55, +100%

NetApp (NTAP) will report earnings Wednesday after the close, and it has been a volatile mover on earnings, last report falling as much as 20% and closing 14% lower. Before last report 4 of the prior 5 were strong moves higher on results, but numbers have been disappointing lately. NTAP shares have been trending higher and could make a run to $46 to test a prior breakdown and just below the 200 day SMA. The $15.55B storage Co. trades 15.2X earnings, 2.86X sales and 13.75X cash flow, a fairly cheap Tech large cap growth play. Piper lowered its target to $53 on 11-7, but sees 3 new product cycles driving a new wave of growth, and easy y/y comps. ISI Group started Buy with $48 target on 10-14. NetApp November IV is extremely high at 81.7% compared to December at 49.1%, and options pricing in a 9% move on earnings. NetApp had been the focus of a lot of bullish risk reversals in recent months with Institutional size, but many have been closed now, but will review the recent trading. On 8-15 the January 46 and 48 calls were bought in size, and still open, on 8-16 7,500 March 35 puts were sold to open, on 8-23 7,000 March 45/30 bull risk reversals traded, a contract that appears to have over 20,000 open now that accumulated in the days following. More recently on 10-27 6,900 November $35 puts were sold and 5,000 January 2013 $40 puts were sold to open, while 5,400 November $42 calls were bought and 2,500 March 2012 $45 calls at $2.46 offer. On 11-7 5,000 November $39 puts were sold to open, and last week there was a slight bearish bias in November options, but longer term NTAP seen as a winner, so a buy on weakness play.

Trade to Consider: Long the NTAP November/December $45/$39 Double Calendar Spread at $1.15 or Better

Result: NTAP moved much more than anticipated, depending on how the trade was manged it is likely a losing trading here.

Aruba Networks (ARUN) will report results Thursday after the close, and is a stock that has traded higher in 7 of the last 8 reports, May being a 17% fall, while last quarter shares jumped more than 22% at a point. Shares have trended higher since early August and held trend support, showing relative strength during weak markets, but recently relative weakness in strong markets. Shares look likely to leave the $23/$25 range this week. Aruba is a $2.5B networking play with its hands in cloud computing, a major growth play, and potential acquisition target. Shares trade at a premium, 30.85X earnings, 1.76 PEG, 6.3X sales and 52X cash flow, also a big 20.65% short float that fuels the large swings on earnings. Brigantine cut shares to Hold from Buy on 11-10, while JMP started Outperform with a $30 target on 11-2. Deutsche Bank started Hold on 11-1 with a $27 target, noted as the leading provider of wireless equipment for campus environments. November IV at 124% and December at 79.7%, options pricing in an 11.5% move on earnings. There is notable open interest in November 26 calls, over 9,000, and 7,600+ in November 24 calls.

Trade to Consider: Long the ARUN November 24/27 Call Spread at $0.95 and Sell the November $20 Puts at $0.55 for $0.40 Net Debit

Result: This trade could have put put on for a net credit as ARUN as down 8% the day into earnings, and did hold $20, also opened near $24 so the calls could have been sold off as well for a nice profit.

Intuit (INTU) reports earnings 11/17 after the close, and shares have gained 5 of the last 7 reports, a strong 12% move higher last report, closing 8.3% higher, but shares have traded lower the past 2 November reports, a potential seasonal factor. Intuit shares are near all time highs with major resistance overhead at $55, major support down at $50. The $16.25B tax software Co. trades 26.75X trailing earnings, 16.4X forward earnings, PEG 2, 4.2X sales and 20.7X cash flow. UBs reiterated a Buy and raised its target to $60 on 11-8. Intuit recently announced a collaboration with AT&T to offer small business easy credit card processing on mobile devices, so it is entering a new growth market. Deutsche Bank raised its target to $68 on 10-31, a very bullish call. November IV at 49.1% compares to December at 35.3% and options pricing in around a 5% move. There is not a lot of notable Open Interest in November options, the November $55 calls traded 589 Friday against OI 2,294 with mostly offer side buys, and another 1,100 were bought on 11-9, also 100 Nov. 52.5/55 call spreads.

Trade to Consider: Sell the INTU November $55/$52.50 Strangle at $3 Credit

Result: INTU Closed $52.04, Buying Back the Puts at $0.45, a Solid $2.55 Kept ont he $3 Credit

Marvell Tech (MRVL) will report earnings 11/17 after the close and has traded higher 8 of the last 9 reports, including max moves of more than 12% the last 3 reports, generally a large mover. MRVL is forming a great looking inverse head and shoulders pattern with $15.70 the key breakout point, and $13 shoulder support. A move above $15.20 would break shares above its 200 day SMA for the first time since February 2011. The $9B chip Co. trades 10.6X earnings, 0.7 PEG, 1.8X book, and 9.6X cash flow. RBC started Outperform with a $21 target on 10-12, and Cowen started Outperform 10-14. November IV at 66.14% compares to December at 45%, options pricing in a 7% move, cheap to historical moves. There has been notable accumulation in November, December and January calls in recent months, a ton of open interest.

Trade to Consider: Long the MRVL January 2012 $15 Calls at $1.05 and Sell the January 2012 $12.50 Puts at $0.35, Net $0.70 Debit

Result: MRVL reported strong and looks poised to move higher, and no reason to exit this one.

Wednesday, November 16, 2011

Most Annoying Twitter Habits

Recently I am finding Twitter to be more distracting than useful, and here are some of the things I see that are annoying throughout the day and jumble up the stream:

1) Asking for Re-Tweets of a Blog Post - If it is good, people will re-tweet, stop looking desperate

2) Re-Tweeting a Compliment from a Follower - How About Just Responding to that Person with a Thank You, No Need to Show Off to the World How Awesome You Are

3) Typing Out Sound Effects (Bang, Boom, Pow, Bam, etc.) on a Stock that Moves a Few Cents...Let's Keep the Celebrations for 10%+ Moves, Anything Less is Not Worth Cheering

4) Adding $ Symbol to a Ticker and Providing a Link to a Member-Only Area of a Website - Happens all the time although I though this was supposed to be banned

5) Responding with vague questions - As someone that may tweet 5 times in 2 hours, I need to know what tweet you are referencing in your question, no time to by a twitter sleuth

6) Twitter Muscles - Do Not Act All Tough Behind a Keyboard - Refrain from Saying Anything You Would Not Say Face to Face

Friday, November 11, 2011

Earnings Snapshot Trades Review

To start, you often hear that "Trading Earnings is a Gamble" or "Do Not Trade During Earnings" but option traders know that this is the best time to trade, and the most opportunity for big gains. I use fundamental, technical, and options flow analysis, sometimes for directional trades, and other times you can be a net buyer/seller of volatility, so always a lot of flexibility when trading options.

Each week I send out a quick snapshot of the primary reports, the stocks that move, and a trade to consider into earnings.

Here is a review of this past week's with the result:

7 Earnings Snapshots for the Week of November 7th (PCLN) will report earnings Monday after the close, and shares have jumped more than 8% on earnings 4 of the last 5 reports, including a 22% climb in Aug. 2010, while May 2011 was the only negative reaction, just a 2.8% loss, so a positive history of earnings reactions. Priceline shares have a lot of support at the $450 level and resistance at $552, currently consolidating in the $480 to $525 range. Both MACD and RSI are in downtrends since the July highs. The $25.55B online travel Co. trades 17.6X forward earnings, 1.4 PEG and 26.77X cash flow, considered one of the top growth plays, but a weak EU economy could hamper results. Wedbush started shares Outperform in September with a $675 target. Piper expects a slight beat and In-Line guidance, Overweight with a $640 target. Jefferies initiated Buy with a $580 target on 10-12. International Bookings growth has been the key for PCLN and the reason it deserves to trade at a premium. Priceline does trade weekly options and recently has seen a strong bullish bias with call premium purchased surpassing $1M a few days last week. The November weekly 525/550 1X2 call spread traded at $1 on Friday 315X630 contracts.

Trade to Consider: Sell the PCLN November $460 Puts at $10.50 and Buy the November $530/$550 Call Spread at $7.30 for $3.20 Net Credit (Risk = Willing to be Long Stock at $456.80 Cost Basis)

Result: This $3.20 Net Credit Trade Ends the Week at around $8.20, a huge winner

Rackspace Hosting (RAX) will report earnings Monday night after the close, and shares closed 2.23% lower last report, although were 14.75% higher intraday, and also closed higher the prior 4 reports. The chart is healthy, a recent break out at $38 that measured to $45 and shares closing last week at multi-month highs, under accumulation. The $5.57B cloud computing Co. is often considered a takeover target and trades at a hefty premium, 54X earnings, 3 PEG and 55X cash flow. BofA reiterated Buy and a $45 target ahead of the report, seeing Q3 acceleration and a modest beat. Option traders were recently busy on 11-3 with 5,000+ November $41 puts sold to open.

Trade to Consider: Sell the RAX November $42 Straddle at $4 (8 Straight Reports with Sub-10% Moves on the Close)

Result: RAX closes this week at $42.39 and this straddle could be bought back at $2.15, a strong gainer, or can allow more decay into next week

Fossil (FOSL) will report earnings Tuesday before the open, and shares have moved big on earnings recently, a 25.9% max move lower last report, closing 12.5% lower, and the prior quarter a 12.7% gain on the report. The $6B apparel Co. trades 17.55X earnings, 1.25 PEG, 2.65X sales, and 37.85X cash flow. Brean Murray cut shares to Hold on 10-31, and Benchmark cut to Hold on 10-28. On the chart shares failed to sustain a breakout past $105, and now sit above its 50 day EMA at $95, near a trend break that would send shares to $85 or lower. On 11-3 a trader sold 4,000 November $85 puts to open at $2, a willing long.

Trade to Consider: Long the FOSL November $95/$85 1X2 Put Spread at $1 Debit

Result: FOSL trade can be closed around $3 for a 200% gain, or hold another week and realize even more. Also, could close without buying back short puts as it is unlikely to see $85 next week and then the $4 close price is a 300% gain.

Sina Corp (SINA) will report earnings Tuesday after the close, and shares gained 3.55% last report, but fell more than 5.5% the prior 2 reports, averaging just above a 5% move on earnings the last 8 reports. The $5.5B Chinese Internet stock has spent the last quarter with concerns on increased Chinese regulations, and trades 50.7X earnings and 4X book, expensive, but a major growth name with Weibo, the Chinese Social media play. There is 10.9% of the float short. Maxim initiated shares a Sell with a $72 target on 10-17, while others see shares worth $140 or more if it spins off Weibo. On the chart shares have been making lower highs and lower lows, overall a bearish pattern and currently stuck below its 200 day EMA and declining 50 day EMA. The December 100 calls have been under accumulation in recent weeks with over 15,000 in Open Interest. Sina IV looks fairly rich considering the moves in recent reports, currently pricing in a 12.5% move on earnings with the weekly options.

Trade to Consider: Sell the SINA November $95/$72.50 Strangle at $4.90 Credit

Result: SINA strangle can be bought back at $1.20, but best to let expire and see the max profit as that range looks fair through next week

Weight Watchers (WTW) will report earnings Tuesday after the close, and shares have been volatile, tanking 22.8% last report at a point, and 10.3% the prior, also a 47.4% gain 3 quarters ago. The $5.55B Co. trades 16.75X earnings, 1.58 PEG, and 32.3X sales, also a 20.5% short float, 6.5 days to cover. Shares based along $55 for weeks, and recently have taken off back near highs. Auriga started shares Buy on 9-28 with a $71 target, a nice call, shares already trading well above most Street targets. On Friday traders purchased more than 3,600 November $70 puts around $2.60/$2.70 to open into earnings, and yet to see much action on the call side, options pricing in 12% movement for shares.

Trade to Consider: Long the WTW November 80/85 Call Spread and 72.5/67.5 Put Spread for $2.80

Result: WTW trade can be closed around $3.35 now, but was potential to close closer to $4 after earnings, a solid gain

Ralph Lauren (RL) will report earnings Wednesday 11-9 before the open, and shares have averaged max earnings moves intraday of more than 9%, and 5 of the last 6 positive moves. Shares of the $14.55B retailer trade 20X earnings, 2.4X sales and 34X cash flow, rich on valuation in my view. Macquarie started shares Neutral with a $148 target on 10-18. Shares of RL put in a shooting star top, closing deeply red after a break to all time highs last week, but riding its 20 day EMA higher, shares likely to stay in a $140 to $170 range near term. On 10-24 the November $140 puts were sold to open for 6,000+, some of which closed now, while November 165/170 call 1X2 spread bought 1,290X2,580 for a net credit.

Trade to Consider: Long the RL November 155/145/135 Put Butterfly at $1.65 Debit

Result: Shares moved lower to $147 and the spread was a strong gainer, and closed the week at $2, overall a nice winner

Nordstrom (JWN) will report earnings Thursday after the close, and shares have traded lower 4 of its last 6 reports, and last week fell on disappointing same store sales, but quickly rebounded off the 50 day EMA. Shares outperformed during the weak market tape in October, but have put in a rounded top pattern and the recent top showed bearish divergence on MACD and RSI. Shares trade 14X earnings, 1.05X sales and 19.23X cash flow. Macquarie started shares Outperform with a $60 target in October. Nordstrom open interest is high in November 50, 52.50 and 55 calls, including one large holder of 4,000 November 52.50 calls that rolled to that strike from October before expiration.

Trade to Consider: Long the JWN November 52.50 Calls at $0.85 or Better

Result: JWN disappointed, so the calls only worth about $0.10 here, still some time, or could roll out to December, a loser so far

Overall 6 winners and 1 loser, not a bad ratio!

Sunday, September 25, 2011

Speculating on Earnings with Options in a Separate Account - Educational

Although many misunderstand options trading and consider it too "risky", it is actually a way to trade smarter, defining your risk and utilizing strategies to win in markets trending higher, lower, or sideways. The flexibility of options allows for larger gains, better risk management, and can supplement any equity portfolio, even if just looking to go 20% into option positions.

However, I feel that there is a time and place for pure speculation, especially when it comes to earnings.

Understand, anyone that tells you that he/she can predict where a stock is going after earnings by looking at the chart and/or analyzing the fundamentals is selling you a lie, as there is no certainty to earnings. Many also rely on Sell-Side research, which tends to be way behind the curve, when deciding on earnings trades.

Options can be utilized to create high probability earnings trades, and often look to trade the magnitude of the move (volatility), more than the direction.

With that said, there is a way to give yourself an edge when trading options into earnings, and I will lay out some of the key factors to analyze when making a directional options trade into earnings:

1- Options Flow - Analyzing options flow is one of the key factors I look at when making a directional options trade for earnings. You are basically following in high dollar trades who are assumed to have much better information heading into earnings. Obviously we can not all be experts on every company, but those that do focus time consuming research are willing to bet big, so let them do the work for you and ride-along for the profits. Services such as mine at constantly is looking for unusual and high impact options trades into earnings, and I often consider the action 5,4, and 3 days ahead of earnings more important than the action seen just ahead of the report, because those that spend the time doing the research will get in ahead of the Institutional money moving the equity in a pre-earnings run-up or run-down.

2- Fundamentals and Short Float - I prefer to be involved long in names are fair or cheap valuation and short in names at rich valuation, although you have to consider earnings momentum more than the metrics themselves. Look for companies with 20% or greater EPS growth forecasted for the following year, and building momentum in Q/Q sales growth. Also, I prefer companies with operating margins on the rise, and will also observe seasonal stock trends. I will read into the Sell-Side research just to get a better in depth view of how the channel checks are looking, and other important trends in key metrics. A stock with a high short float can result in much bigger moves, always key for options trades.

3 - Technical Analysis - I will gave the chart a thorough look for signs of accumulation or distribution, also mainly use technical analysis for target levels, stop levels, projected moves, etc. rather than a buy/sell signal. The chart enhances the first two factors and can determine the strike prices and/or strategy to use.

All this aside, even if the options flow is very bullish/bearish, there could be some inside info or thorough research that is spot-on, but a stock's reaction can even be more uncertain than the numbers. Many stocks will post what look to be fantastic results, but trade lower, whether it is from profit taking, or a lack of new interested buyers if the numbers are not eye-popping, and the same goes for earnings misses, where a stock could trade higher because it is simply too cheap, or expectations were low. Expectations into results play a key role in the stock's reaction.

Sometimes making a call into earnings is very tough, so only take the one's where all the analysis points to the same outcome, and follow your gut when it really comes down to it.

Side Note: You do not always need to trade earnings before the results, and can wait for the numbers. If you have positive signals from all the above factors and wait on the actual numbers to confirm, you can participate after hours in stock, or wait until the next trading session to play options, basing your expected move on the options flow and technical analysis already performed.

Now, with the speculating part of this means that it is best to set up a separate account, strictly for this type of trading. This account should be an amount that you can afford to lose while note taking a large hit to your overall portfolio. If you set aside $20,000 and make $8,000 in a quarter, book those profits and reset the portfolio back to $20,000 for the next quarter. Keep it small, around $2,500 per play and build it out as you hopefully make profits.

Last quarter I did this with a $10,000 account and closed Q2 with $51,057, a 400% return.

Some of the big winners included:

* Fed-Ex (FDX) October $75 Puts for +$4,650 on 10 Contracts (+150%)

* Research in Motion (RIMM) September $30 Puts for +$7,035 on 15 Contracts (+213%)

* Ulta Salon (ULTA) September $60 Calls for +$4,740 on 12 Contracts (+155%)

* Aruba Networks (ARUN) September $20 Calls for +$3,600 on 30 Contracts (+160%)

* Green Mountain (GMCR) September $100 Calls for +$4,571 on 7 Contracts (+220%)

* Silicon Labs (SLAB) August $40 Puts for +$6,800 on 20 Contracts (+425%)

Overall there were about 50 trades, fair share of losers and small winners as well, but as long as you catch a few monster wins, you should come out ahead, and if not, it will hopefully prove to be a learning experience and can take another shot with a separate account down the road.

Tuesday, September 6, 2011

Caterpillar (CAT): Playing the Breakdown Re-Test and a Look into My Trading Process

One of the most common technical moves comes via the "re-test", whether it is a stock in an uptrend that breaks out of consolidation and then eventually comes back down and re-tests that level, or a stock that breaks key support, but then sees a bounce back to test that level. These generally come on lighter volume than was seen during the breakout/breakdown move.

A recent example that Options Hawk members capitalized on was with Caterpillar (CAT). Shares broke key support at $95 in early August and fell all the way to $80, which happened to be a re-test of the November 2010 breakout, a suitable support level for a bounce. Shares then bounced on decreasing volume over a few days and ran back up to $92.80, nearly a re-test before fading once again. I missed entry on that move, but then shares came back to $80 and proceeded to bounce on light volume to $93.80, just below the 50 day EMA which recently had a bearish cross of the 200 EMA, a Death Cross, so the intermediate trend was bearish and favored a move lower from that level.

I also felt better about this set-up by following the options action. On August 26th I pointed out a buyer of 5,600 October $87.50 puts on the $8.30 offer to subscribers in our members only chat room, a large bearish bet.

I track the high impact option trades and sentiment for all stocks I am watching on various spreadsheets I created for members, so when I saw this move in CAT I knew it was an opportunity to get those puts at a price well below where the Institutional Trader put on the position, which is what I often look for, either a break of a key price level to follow the smart-money or via a spreadsheet I created that tracks current option prices versus the price where a big block traded in recent days or weeks.

We added the CAT Oct. 87.50 puts at $3.60 on August 30th and took profits this morning at $8.50, a sweet 136% gain for a position we only had on for 2 trading days!

I track unusual and large options action for idea generation, always having a list of bullish/bearish sentiment names to look at depending on how the market is acting, and where I see it going. I also use this along-side basic Technical Analysis with price patterns, EMAs, and momentum indicators for the directional trades. I also put some weight into the fundamental view, and recent earnings from Joy Global (JOYG) were unimpressive in my view, despite the initial 6% pop in shares (later faded hard), and although CAT is a clear value and great Company, the outlook has been based on strong China growth, which is softening.

CAT Chart Below with Key Levels:

Sunday, August 28, 2011

5 Bullish Set-Ups into the Week

The reversal move by the markets Friday left some strong looking charts, and although the market remains submerged under its falling 20 day EMA, certain charts are starting to set-up bullish, and many relative strength names still have rising 10, 20, 50, and 200 day moving averages and are either above, or near breaking above these key resistance levels. It should be a quiet week of trading into the 3 day weekend, and despite key economic data like ISM and the Employment Report, the weeks where many of the large institutional accounts are on vacation tend to favor melt-ups.

I only scan names that average 1,500 or more option contracts a day, and my 5 favorite bullish set-ups are the following:

1) Crocs (CROX): Shares are in a falling wedge in a longer term uptrend which can result in a powerful breakout move, resistance at $28 as the key level. MACD and RSI are trending in a bullish manner, and the uptrend is in the early stages. More than 8% of the float is short, and a PEG of 0.9 with the growth story accelerating.

2) Baidu (BIDU): Shares were weak in recent weeks with some bad press, but with that being put behind it, shares did find great support at its 200 day EMA, and now face trend resistance along with the 50 day EMA converging at $140, the key breakout level. RSI is rising and MACD made a bullish crossover on Friday. Baidu is the dominant way to play Chinese Internet growth and continues to report consistently strong earnings.

3) Jazz Pharmaceuticals (JAZZ): Shares of JAZZ have formed a small triangle with a break above $38.50 likely to result in a surge to $40, follow back a run at $42. MACD is crossing over bullish and RSI is breaking above the 50 mark. JAZZ trades just 8.75X forward earnings and a PEG of 0.99, one of the cheapest growth plays in Biotech.

4) CVR Energy (CVI): Shares broke past trend resistance and have recovered quickly froma touch of its 200 day EMA, which is still rising, shares now above all major EMAs. The $2.35B refiner trades 8.16X earnings, PEG 0.6, and 0.49X sales.

5) Cabot Oil & Gas (COG): Shares held trend support after a recent test of its rising 100 day EMA, a strong name among the shale plays and near a break of trend resistance around $72.50. MACD is turning bullish and RSI is trending higher, while ADX nears a bullish crossover.

Thursday, August 18, 2011

Reviewing this Week's Earnings Snapshots Option Trades

Throughout earnings season I send these to subscribers each Sunday night, and for the bigger names I do In Depth Earnings Focus Stories, examples at:

I wanted to review them:

Earnings Snapshots for the Week of August 15th-19th

Agilent (A) reports earnings Monday after the close and shares have been under pressure the last few weeks on a fall from $55 to below $35. The $12.6B maker of life sciences instruments trades 11X earnings, 0.88 PEG, 2X sales and 15.66X cash flow, and has beaten Analyst estimates the last 4 quarters, averaging a 4.5% move the past 6 reports. Jefferies recently reiterated a Buy and $65 target, noting it is underweight government/academic end-markets. Shares are oversold and could form a higher base near $32.50, trend from November 2009 and August 2010 lows. Agilent options are fairly liquid with $1 strikes, and recent trading highlights are 3,600 August $42 calls bought on August 2nd, and Friday August 12tht he August $33 puts bought 1,288X while August $37 calls also with buyers for 1,784 contracts.

Trade to Consider: Sell the A August $37 Straddle at $3.05

Result: Agilent (A) stuck right near that $37 level following earnings and the straddle could be closed at $1.85

Home Depot (HD) will report results Tuesday before the open and shares recently completed a measured move of a breakdown after a major top made at $38. Shares of the $48.7B home improvement retailer trade 11.6X earnings, 0.7X sales and 2.7X book, fairly cheap on a historic basis and a nice 3.27% yield, but the weak Housing Market and lack of consumer spend likely will limit the upside to the report. Jefferies cut shares to Hold from Buy August 10th and moved the price target to $33 from $44. Options are actively traded and 30,000 September $32 puts were sold on August 11th, after a trader rolled 25,000 September $36 puts to the $32 strike on August 4th. Traders bought 5,000 August $29/$30 call spreads for $0.56 to open on August 8th and 5,000 August $31/$33 call spreads at $0.34 on August 8th. Lowe's reports Monday morning and if HD trades lower in sympathy it may be a good opportunity to pick up cheap upside calls as the bad would likely be priced in before the report.

Trade to Consider: Long the HD November $30 Calls at $2.25 or Better

Result: Home Dept shares jumped big and the calls jumped to $4, solid winner.

Perrigo (PRGO) reports earnings Tuesday before the open and shares recently bounced on its 200 day EMA, and a trader bought 2,000 August 85/95 call spreads that remain in OI. The maker of generic brands for OTC drugs benefits from consumers looking for deals, and should continue to report strong results. Shares have moved more than 9.5% 3 of the last 6 quarters, and beat Analyst estimates by more than 10% the past 3 reports. Shares trade 19.4X earnings, 3X sales and 37X cash flow, fairly rich on valuation. Short Interest in PRGO fell 13% in the latest report, and UBS has shares Buy rated with a $100 target, expecting 2H 2011 momentum to pick-up.

Trade to Consider: Long PRGO Shares at $88 and Sell the November $100 Calls at $3.30

Result: Shares sold off early but recovered and actually closed above $90, a winning trade, but one to stay in for the long haul.

Dick's Sporting Goods (DKS) will report results Tuesday before the open and shares recently re-tested a major breakout level from November 2010 and bounced, support now near $29. The $3.87B sports retailer trades 14.2X earnings, 0.78X sales and 19.56X cash flow, a fairly good value, raised to Buy with a $45 target by Needham in May and $50 target at OpCo. Sterne Agee is negative the name with a Sell rating, but $32 target, not liking the open stock model footwear service, 20% of revenues. Dick's has beaten estimates the last 4 quarters and averaged 6.5% moves the past 3. Option traders have been actively positioning the week into earnings, an interesting spread Friday with 1,500 August $31 puts bought and the September $28/$26 ratio put spread traded 1,000X2,000, while 1,000 August $30 puts were bought to open on August 11th.

Trade to Consider: Long the DKS August $33/$31 Strangle at $1.45 or Better

Result: Dick's did not see the volatile move I was looking for, but the spread could still be closed around $1.75, a small gain.

Analog Devices (ADI) will report earnings Tuesday after the close and shares are -resting a major breakout level from last November, also at support of an extension of a channel down pattern. ADI reported a fantastic quarter last time and shares are cheat at 10.46X earnings, 0.96 PEG, and 2.75X cash value with a 3.2% dividend yield, attractive despite potential 2H 2011 headwinds for Semiconductors, much of which seems to be priced in at this point. Sterne Agee cut to Neutral from Buy on August 4th and Morgan Keegan reduced estimates last week, although noted ADI's broad exposure helps mitigate downside. Traders bought 2,200 August $31 puts at $0.45 on August 4th, while September $33 puts were sold to open 2,00X a few weeks ago. ADI's largest earnings move came last report with a 5.9% move higher, while the prior two were down less than 1%, and previously averaged around 4%.

Trade to Consider: Long the ADI August/September $33 Calendar Call Spread at $0.50

Result: We actually took this trade and closed at $0.65 for a 30% gain the next day as shares were up despite poor results, so it felt right to get out.

Abercrombie (ANF) reports earnings Wednesday before the open and shares have held up better than the market, recently testing its 200 day EMA and prior breakout and bouncing, putting the $60 to $77 range in play. Same store sales have been strong in recent months, and shares are trading 15X earnings, 1.7X sales and 37.4X cash flow with 8.58% of the float short. BofA reiterated a Buy and $90 target last week, and Wedbush previewed the quarter noting the stock already expects upside Q2 with fewer promotions, lean inventory and strong International momentum. Options are active in ANF and on August 2nd a trader bought 2,500 September $75 calls at $3.10, while another trader sold 1,800 September $77.50/$60 strangles along with 1,200 September $70 calls bought. The following day a trader bought 1,500 September $77.50 calls to open. On August 10th the November $60/$75 ratio call spread was bought 1,300X2,600. ANF has averaged just 4% moves the past 6 quarters, the downside moves the larger magnitude moves.

Trade to Consider: Sell the ANF August $75 Call at $1 and Buy the September $75/$80 Call Spread at $1.40

Result: ANF shares are down and the Aug. call will expire worthless, but still stuck with a September call spread, currently a losing position. (NTES) is set to report results Wednesday after the close and shares were strong last week with 4 strong consecutive days. The Chinese Internet Co. trades very cheap at 12.5X earnings, 0.84 PEG, and 14.6X cash flow. NTES has beaten estimates 3 straight quarters and shares have averaged 6% moves the past 4. Traders started to accumulate some August $50 calls late last week with 974 trading Friday. Shares are currently in a channel down with lower highs being made, currently back near the middle of the range and RSI and MACD Neutral. CLSA expects a blowout Q2 and strong Q3 driven by WoW and its new game GHOST.

Trade to Consider: Long the NTES September $50/$55/$60 Butterfly Call Spread at $0.85

Result: NTES reported very strong results, but caught up in the market weakness and closed down 9.35%, and butterfly spread currently pricing at $0.50.

JDS Uniphase (JDSU) will report results Wednesday after the close and shares have been in a strong trend lower, off 60% from February highs as the optics sector has been under pressure. Shares now trade 10.5X earnings, 42.7X trailing, 1.54X sales and 4X cash value. JDSU has beaten estimates the last 4 quarters, and has made 2 20%+ moves in the last 5 quarters on earnings, although the other 3 only average 4.5%. On August 12th Morgan Stanley previewed the quarter, saying to expect soft results with weak T&M spending, and maintained Equal Weight. Traders bought 9,000 August $11 calls to open on August 11th in big size. Call OI at 184,337 compares to Put OI at 116,846, elevated towards calls due to multiple takeover chatter reports. Shares have major support near $9.50 and resistance at $14. Aug. IV at 117.6% compares to September at 86.88%, a major disparity.

Trade to Consider: Long the JDSU August/September $14/$10 Double Calendar Spread at $0.65 Debit

Result: JDSU looks set to close right near $10 on options expiration, so the September puts can be closed around $1 for a nice gain, or can be held for more downside.

Dollar Tree (DLTR) will report earnings Thursday before the open and is one of the few names to maintain its longer term uptrend with the recent bounce at $60. Dollar Tree has beaten estimates the last 4 reports and 4% average earnings moves. Shares trade 15X earnings, 1.34X sales and 18.3X cash flow, and if we are heading for another recession, a name that tends to outperform. It is one of the few names Jefferies kept a Buy rating on last week, $72 target, and Piper raised to Overweight with an $87 target on July 27th. Shares have clear resistance at $70 and support at $60 and $57.50. Options action jumped on August 11th as the September $65/$70 put ratio spread traded 2,00X4,000 along with 1,000 September $70 calls sold, potentially a hedge. On July 5th more than 4,000 August $67.50 puts were bought at $1.85 and more than 2,900 remain in OI.

Trade to Consider: Long the DLTR August/September $62.50 Put Calendar Spread at $0.80

Result: September puts can be closed around $1.80 with August to expire, a big win.

GameStop (GME) reports earnings Thursday before the open and shares have fallen hard the past few weeks, but still a value at 6.5X earnings, 0.3X sales, 0.98X book and 5.7X cash flow, often seen as a value trap due to the troubles in brick-and-mortar retail and also weak video game sales numbers. GME tends to report In-Line quarters and only averaged 2% moves the past 4 quarters. Pac Crest cut to Underperform in July. July US video game sales fell 26%, the worst since 2006. GME used to be actively trading, but not a lot of Open Interest in August/September options. There has not been any unusual options action in recent weeks.

Trade to Consider: Long the GME August $21 Puts at $0.85 or Better

Result: The puts got above $2.50, a great win, and an easy profit take. Shares eventually rallied, but the anyone in their right mind takes a 200% gain.

Foot Locker (FL) will report earnings Thursday after the close and shares recently pulled back to fill a gap at prior major resistance, now support near $17, also holding a trend off the prior 2 lows. BMO started shares Outperform with a $25 target in July, and judging from recent earnings from the footwear names (UA, NKE, CROX, DECK), earnings should be fairly strong. FL has beaten EPS estimates may 30% or more in 3 of the last 4 reports, and traded higher by 12.8% and 11.6% in 2 of those. August IV of 82.9% compares to September at 58.9%, a wide margin, and August IV skew has a bullish look. The $2.9B retailer trades just 10.6X earnings, 0.56X sales, and 3.6X cash with a 3.5% dividend, very attractive from the perspective. Traders sold 4,000 September $25 calls to open on July 29th, and bought 4,000 August $20 puts. On August 9th more than 4,900 August $20 calls traded, but look to have been sold to open.

Trade to Consider: Long the FL August/September $20 Call Calendar at $0.40 or Better

Result: FL indicated higher on strong results, looks like it should be a winning trade.

Intuit (INTU) will report earnings Thursday after the close and shares are 25% off recent highs, but still fairly rich at 20.7X earnings, 1.47 PEG, 3.4X sales and 15.7X cash flow. The $12.9B maker of tax software was raised to Buy at UBS with a $57 target in late July. The recent return to $40 filled an August 2010 gap, also Fibonacci support from October 2009 lows to recent highs. Goldman's options team see's INTU options as cheap for directional views. Intuit has beaten estimates the last 4 quarters, and although just a 1.65% move last report, the prior 5 averaged 8%. Friday saw a notable trade with an adjustment to 4,000 January $46/$37.50 bullish risk reversals, a strong directional play.

Trade to Consider: Long the INTU August $42 Straddle at $2.55 or Better

Result: Depends on the move tomorrow, but could be a loser.

Autodesk (ADSK) will report earnings Thursday after the close and shares are trading near 1 year lows and extremely oversold, off more than 30% this year. Shares now trade 14.6X earnings, 3.36X sales and 13.9X cash flow, fairly cheap for a growth Software names, buts its exposure to engineering and construction is likely to hamper results. RBC reiterated Perform on 8-12 and lowered its target to $35 from $46, while Jefferies raised to Buy with a $44 target on 7-22. ADSK has beaten Analyst estimates by a narrow margin the last 3 quarters, and averaged 6% earnings moves. A move higher likely sees resistance at $32, while $28 is support. On August 9th the August $27, $26 and $25 puts saw aggressive buying, and July 27th a buyer of 2,000 August $33 puts and 1,700 August $31 puts.

Trade to Consider: Long the ADSK August $29 Puts at $1 or Better

Result: The Tech sell-off hit shares before earnings and the puts were worth $2.75, and always take profits ahead of earnings if you already have a nice gain, no need to risk it.

Overall, another solid week of winning trade ideas for earnings!

Wednesday, August 3, 2011

Riverbed (RVBD) and Akamai (AKAM): Option Strategists Buying the Blood, Long-Term

Riverbed Tech (RVBD) and Akamai Tech (AKAM) are two former high flying growth Tech stocks that have both been crushed on earnings this quarter, with Riverbed now 35% off highs and Akamai 47% off highs.

Riverbed now has just a $4.47B market cap and down to 25.1X forward earnings, while Akamai has a $4.41B market cap, and trades at 13.7X forward earnings. Both names appear ripe for takeover offers, now trading at a major discount to 2011 highs, and both still in growth stages that would make a nice addition to some of the larger Tech companies. Akamai and Riverbed have both been rumored as takeover targets for years, but at this point it actually makes sense.

One way to play for an eventual comeback in shares, whether via M&A or just a turnaround story, is with longer dated options. A strategy known as a "Covered Risk Reversal" is a way to leverage for an upside move, while also willing to buy stock at a discount if shares were to fall much further.

In the past week I have seen a trader in both AKAM and RVBD utilize risk reversals in January 2013 options, the Riverbed one straight, while the Akamai one was covered.

On July 28th I noted to clients:
"Riverbed Tech (RVBD) trades 5,000 January 2013 $45/$20 bull risk reversals at a $0.40 debit, playing a long road recovery for the shares that were knocked down more than 25% in the past week. Shares are moving off lows today and above its 100 week EMA, also the 2007 highs were $26.40, so a potential re-test bounce. There is a gap from October from $22.50 to just above $25, so that is also likely support. The strategy is a good one, a willing long of 500,000 shares if it continues lower, willing to get in at $20, at which point its an obvious value. Shares are now 27X earnings, 7.34X sales and 8.85X cash, still fairly rich. Analysts have missed the boat and most have $40 targets for shares. With a sub $5B market cap, Riverbed becomes a viable buyout play, which in that case this spread would pay off in a big way."

On August 3rd I noted to clients:
" Akamai (AKAM) with a large January 2013 bullish spread, similar to what was seen in Riverbed (RVBD) last week, trying to call a near bottom. The trader sold 5,000 $20 puts at $3 to buy 5,000 $25/$40 call spreads at $3.45, opening professional trade for a $0.45 debit. Shares have re-tested a key 2009 breakout level and are closing the session today at highs, also remains a potential buyout target, so a good looking trade."

Both stocks are showing early signs of bouncing at multi-year support levels, and it would not surprise me to see this strategy used in Juniper (JNPR) soon as well.

I like both of the trades noted above, but only for professionals that realize the risk involved, and are willing to get long stock.

Thursday, July 28, 2011

Inside Look: Earnings Snapshots from this Week

Earnings season is like Christmas for option traders, and it comes 4 times a year. We do a lot of earnings trades with my service and I have posted on my website many of the "Earnings Focus" stories for the major reports where I do a thorough analysis into earnings and provide directional and non-directional options trading strategies.

They can be found at this Link

I also have been putting together a nightly Earnings Snapshot email to subscribers with a more brief overview of the key upcoming earnings, and the best option strategy I am seeing to trade them, some directional, and others volatility strategies.

Here are the ones from this past week, a fairly good win rate:

Wednesday Night Report:

Decker's (DECK) closed down 4.75% on heavy volume with shares rejected at $97.50, a double top, with the potential to re-visit the double bottom at $77.50. Under Armour (UA) beat and raised in apparel and shares still sold off, so it will be an uphill battle for Deckers to react positively, coming off a weak report last quarter when shares were hit hard. The $3.54B footwear Co. is definitely a name to buy for the long term on weakness, shares valued fairly at 17X earnings, 0.97 PEG and 3.37X sales. There is also a 10.3% short float, 3.7 days to cover. Piper recently raised its target to $100, and Analysts are expecting strong International growth. There has not been a lot of notable options action, on July 13th 1,250 August $90 puts were bought at $2.85 that remain in OI.

Trade to Consider: Buy the DECK Aug. 90/85 Put Spread at $1.80 or Better

Expedia (EXPE) shares are in a strong trend and are flagging in a tight $29.50 to $30.70 range, not far from $32.50 and $35 resistance for all time highs. Shares are trading 14X earnings, 2.36X sales and 12.9X cash flow with a 10% short float, the top value in online travel stocks and a name people want to own to be part of the TripAdvisor spin-off later this year. Expedia has beaten Analyst estimates by an average of 13% the past 4 quarters. Benchmark raised its target to $34 this morning, seeing 15% y/y bookings growth, but does note costs rising. Expedia was alerted today with unusual options as more than 2,000 October $31 calls were bought at $1.55.

Trade to Consider: Long the EXPE Aug. 30 Straddle at $2.45 or Better (With 15 Days of Trading Remaining Shares Average 15% of Movement During these Expiration Cycles and the Straddle is Only at 8%)

Veeco Instruments (VECO) is a great value name at 10.27X earnings, 0.47 PEG, 1.55X sales and 2.3X cash value, so downside would appear limited but with orders likely being pushed into 2012 shares could get hit on guidance, and then be a great long term buy. There is a 25.78% short float or 7.4 days to cover, and shares have been sliding, currently with a bear flag set-up, and on a breakdown could target $32.50. JPM lowered its target and estimates on the increased risk of shipment delays to China, cutting target to $60 from $75, so still seeing value. VECO options have been very active including a purchase of 10,000 August $42 puts at $2.25 to open yesterday and 5,000 August $45 puts on July 5th. The options action has been bearish and the IV skew is steep. VECO has not been too wild post-earnings with less than 7% moves the past 5 quarters, although it often extends moves through the rest of the month.

Trade to Consider: Long the VECO Aug. 40/35 Put Spread at $1.75 or Better

KLA Tencor (KLAC) shares have been hanging fairly strong while other Semi's have crashed and will be down tomorrow due to LRCX's report. KLAC is one of the top values among large cap Semi's at 9.6X earnings, 0.69 PEG, 2.47X sales and 3.8X cash value. UBS raised to Buy with a $49.50 target on July 7th. LAM's (LRCX) outlook for chip equipment spending was weak and should impact KLAC's results. KLAC has only averaged around a 3.5% movement on earnings the last 8 quarters. Most of the Open Interest in KLAC is on the call side from buyers in August and September a few weeks ago. On Monday a trader sold 6,600 Dec. 50 calls to open at $1.45.

Trade to Consider: Sell the KLAC Aug. $45/$38 Strangle at $1.10 or Better

VeriSign (VRSN) is a name that hit my screen today as an overvalued Tech stock that could get hit on earnings. Shares of the $5.5B Co. trade 18X earnings, PEG 4.5, 8X sales and 43X cash flow, although cash rich trading 2.8X cash value. Shares have formed a Head and Shoulders topping pattern and a break of $32 would target a move to $27. July 22nd saw the most notable action with 700 of the Aug. 33 and 32 puts each bought offer side.

Trade to Consider: Long the VRSN Aug. $33 Puts at $1.20 or Better (Technicals and Fundamentals Point to Bearish View)

Other volatile movers include ACOM, NTGR, NETL, ARBA, CERN, N, and NXPI.

Tuesday Night Report:
Akamai (AKAM) reports Wednesday night and is coming off of 2 consecutive large gap down moves on earnings as its costs and competition rise, slowing earnings growth, and causing a re-valuation shares. Going back to March of 2010 shares broke out at $27.30 which is a level I see now as support, currently a falling wedge pattern with a double bottom at $29 that looks fairly clean and MACD and ADX with bullish crossovers this week. Shares have upside to $35 gap resistance, and downside to $27.50 in my view. At 17.45X forward earnings, PEG of 2, 5.4X sales and 28.6X cash flow, I would still consider shares rich on valuation with just 12.8% EPS growth seen next year, favoring a further pullback in shares. With narrow EPS beats the prior 2 quarters, Akamai could be set for a headline miss. Akamai shares have moved more than 13% in 6 of the last 8 reports. There are risks to guidance and results are likely to come in near the low end with a slowdown in media traffic for Q2, although another big move lower would immediately make it an attractive buyout target. Order flow has been mostly bullish in the calls the past week and there is a ton of open interest in both puts and calls. The largest trade recently was 1,000 August/November $26 calendar call spreads that traded at $0.98 yesterday, bearish as it looks for shares to head to $26. However, back on June 30th, 3,000 August $35/$28 bull risk reversals traded at a 10 cent credit.

Trade to Consider: Long the AKAM Aug. $31 Straddle at $3.30

Citrix Systems (CTXS) reports Wednesday night and shares are in a channel down pattern that eventually leads to $65, but shares are showing strong support at $72.50, just above its 200 day EMA and a re-test of the breakout move from April. Shares have downside to $65 while a move higher would likely find resistance at $80. Its closest peer in the virtualization market is VMware (VMW) which reported a strong quarter recently. Citrix trades 27.3X earnings, 7.2X sales and PEG of 3.17, another richly valued Tech Co. with a $14B market cap. Morgan Stanley was out with a note this morning that comparisons are tough but Q2 should be solid, but does see conservative guidance. Goldman also previewed the quarter this morning and did not see much reason to own shares into results. Citrix generally moves 6 to 10% on earnings, but last July shares moved 21.9%. There were sellers in the Aug. 75 puts today with 1,496 trading, and a buyer of 80 75/80 call spreads. In late June Aug. 80 puts were active with buyers as more than 4,000 accumulated, but now less than 3,000 in OI so some have taken profits. There was unusual buying in September 70/60 puts last week and Monday a trader bought 500 August 75/65 put spreads at $3.15.

Trade to Consider: Sell the August $80/$70 Strangle at a $3.25 Credit

Cliffs Natural (CLF) reports Wednesday night and the $14B Iron Ore Co. is the best value among all the metals stocks trading 6.5X earnings, 2.7X sales, 3X book, 6X cash and a PEG of 0.47. Shares recently triple topped at $102.50 of a 20 point horizontal channel, but have since pulled back to its 20 day EMA near $95. UBS started shares a Buy with a $122 target earlier this month. Cliffs has averaged around a 6.5% earnings move the past 6 quarters. On June 16th 1500 October 92.5/70 bull put spreads traded, and 1,000 October $100/$97.50 bull risk reversals traded July 7th. A big buyer stepped in today on weakness for more than 1,500 August $95 calls on the $3.75 offer, large bullish buyer.

Trade to Consider: Sell the August $100 Straddle at $8.65 (Bullish Bias Straddle) or Long the August/September $100 Calendar Put Spread at $1.55

Green Mountain Coffee (GMCR) reports Wednesday after the close and has made more than a 10% earnings move the last 7 quarters, and averaging a 21% move the past two. Shares are hanging near all time highs, consolidating above its 20 day EMA. Stifel had a note out recently cautious on K-Cup share losses to partners. Shares of the $13.84B Co. trade at an obscene 42X earnings, PEG of 3, 12.5X book and 7.25X sales. There is a 15.55% short float, 7.1 days to cover. On July 5th a trader bought 1,800 Aug. 80 puts, but went long stock, and July 6th saw sizable buying of 2,500 September $100 calls. A trader bought 900 September $110 calls at $2.30 on July 11th. Another 2,000 September $100 calls were bought July 18th. A trader bought 1,000 August $87.50/$82.50 put spreads at $1.14 on July 21st. Shares could see 75 on weakness or above 105 on strength.

Trade to Consider: August/September $110/$75 Double Calendar Spread at $1.80

Visa (V) will report Wednesday after the close and shares have consolidated under $80 since the big run-up on the debit card fee legislation. Now the company will be forced to deliver on earnings, and with growth slowing and costs rising shares are tough to add after the recent run. Shares trade 15.65X earnings, 8.6X sales and 2.83X book and we have recently seen large blocks of calls being sold with profit taking ahead of results. Some long term thinkers bought 950 March 2012 92.50 calls at $6.10 Monday. Street Analysts have been raising price targets, most near the $100 level.

Trade to Consider: Long the V July/Aug. $85 Calendar Put Spread at $1

Potash (POT) will report earnings Thursday before the open and will look to continue momentum seen in fertilizer stocks since Mosaic's (MOS) strong report. Shares are back near year highs and at resistance under $62.50. Shares have had less than 3.6% moves 3 of the last 4 quarters. Shares trade 15.4X earnings, 7.44X sales and 7.3X book, not a top value name in its industry and getting a bit rich. POT is a name that has been registering high on the call premium leader board the last couple weeks, bullish flow in the options. Today, more than 2,800 of the July 62.50 weekly calls were bought to open while 13,727 August $60 calls sit in Open Interest. On July 10th more than 2,500 December $62.50 calls were bought to open, so the longer term outlook has a bullish bias also. Potash looks to be starting a fresh trend higher after a recent breakout of a descending triangle, and may make a run up to those 2008 highs just under $80 by year end, although a short term pullback to $58.50 to form a cup and handle would be welcomed.

Trade to Consider: Ratio Calendar Spread: Sell 2X August $65 Calls at $0.74 to Buy 1X September $62.50 Call at $2.40, Net Debit $0.92

Sunday, July 24, 2011

10 Small Cap Earnings of Interest this Coming Week

3D Systems (DDD): The $1.35B Software Co. has been on fire since triggering a breakout buy signal at $20 earlier this month. This is a high growth name projecting 25.56% EPS Growth Next Year and Seeing 51.44% Q/Q Sales Growth. It is highly shorted and trades 23.8X earnings, 7.65X sales and 6.8X book value. The Company improves costs for customers via 3D building systems and modelers. Ford, Hasbro, Mattel, Precision Castparts, Tupperware, and Xerox are a few of its customers. Earnings are July 28th before the market opens.

Barnes (B): The $1.35B Industrial components maker trades 14.8X earnings, PEG 0.99, 1.15X sales and 1.78X book, a good value. Shares have formed a bullish cup and handle and look set to break out. The Company sees FY12 EPS growth above 23%. Earnings are July 29th before the market opens. Barnes beats revenue and earnings estimates 63% of the time and raising guidance 16% of the time.

ACI Worldwide (ACIW): The $1.2B Software Co. is a play on electronic payments with its software, and projects 26% EPS growth next year. Shares trade 23.1X earnings, 2.75X sales and 4.5X book value, currently consolidating with a bullish flag near a breakout. Earnings are July 26th before the market opens.

iRobot (IRBT):The $975M maker of robots is becoming more than just a niche consumer play with its robots now being used for other purposes. Shares trade 27.4X earnings, 1.5 PEG, 2.37X sales and 41.3X cash flow with 8.38% of the float short, which has come down quite a bit. Shares are also in a cup and handle pattern and could project a move to $45 on a strong report. iRobot sees next year's EPS growth at 28.85%. Earnings are July 26th after the market closes. The Company beats EPS estimates 73% of the time and raises guidance 27% of the time.

MarketAxess (MKTX): The $972.4M provider of an electronic trading platform for CDS, Bonds, and more is a name I recently featured in a small cap research report. The Company is seeing great growth in transactions on its platforms and trades just 21.4X earnings and 3.45X book. Shares are forming a bullish consolidation flag and would breakout on a move through $26 and target past $30. Earnings are July 27th before the market opens. MKTX beats EPS estimates 52% of the time.

TriMas (TRS): The $863.5M diversified Industrial has been a hot name with 225% EPS growth this year and projecting 20.5% for next year. Shares trade cheap at 13X earnings, PEG of 1.04, and 0.87X sales. Shares are in consolidation mode into earnings and look to be ready for a move to $30. Earnings are July 28th before market opens.

Viad (VVI): The $455.66M provider of exhibition, event and retail marketing services is a lesser know play on an improving economy where businesses increase spending with Corporate Events. Shares trade 22.9X earnings, 0.5X sales, 1.19X book and 14.15X free cash flow with 61.3% EPS growth seen for next year, an impressive growth name. Shares are nearing a breakout at $23 for a run at $27 highs. Earnings are Friday July 29th before the open.

Tennant Co. (TNC): The $915M maker of cleaning machinery for industrial Companies such as scrubbers, floor washers, advanced sweepers, and also cleaning chemical solutions does not receive a lot of recognition, but shares are hanging out under major resistance at $43 and could target new highs, and with shares at 18.5X earnings, 1.13 PEG, 1.18X sales and 3.6X book value with 27% EPS growth seen for next year and a 1.6% dividend yield, shares are cheap. The niche machinery Co. also makes a lot of sense as a buyout target for a larger Industrial seeking a new industry with a strong growth name that has consistent earnings. Earnings are July 28th before the open. It beats EPS estimates 63% of the time and raises guidance 13% of the time.

Altisource Portfolio Solutions (ASPS): The $937.6M provider of real estate and mortgage portfolio management trades 12.7X earnings, PEG of 0.83, 2.85X sales and 23X cash flow with 45.4% sales growth Q/Q. Shares are consolidating near new highs and have a strong uptrend. Earnings are July 28th before the market opens.

Materion (MTRN): The $841M maker of high performance materials for alternative energy applications is a name I picked up on in the low $30's, and shares are now nearing new highs. Shares trade cheap at 13.75X earnings, 0.6X sales, PEG 1.38, and 2.11X book value, projecting 15% EPS growth next year and seeing 27% sales growth Q/Q. Earnings are July 29th before the market opens.

Thursday, July 14, 2011

Petrohawk Energy (HK) $12.1B Buyout: A Game Changer for Natural Gas Stocks

After the close tonight it was announced that BHP Billiton (BHP) made a $12.1B All Cash Deal for Petrohawk Energy (HK) at $38.75/Share, a 65% premium!

I posted on twitter earlier the detail of a June 27th options trade where a trader sold 30,000 January 2012 $21 puts and bought 30,000 January 2012 $25 calls. The $1M trade will be worth more than $40M on the open tomorrow. This same trade was followed up twice in the past week, each time for 5,000 contracts, and is a trend I have seen in the options market since April. Needless to say, a lot of smart money was betting on Petrohawk being acquired, but I doubt they expected it to come at such a lucrative premium.

At the time of the deal Petrohawk shares were trading 14X earnings, 4.3X sales, 2X book and 14.35 EV/EBITDA, some numbers to keep in mind as we explore other names later in the post.

I see this deal as a game-changer for the Natural Gas stocks, specifically the ones with shale exposure. The hefty premium in an all-cash deal will revalue the acreage across all the shales and the stocks should gain on expectations of future deals. North America is seen as the "Saudi-Arabia of Natural Gas", and there have been a few deals in the last year, but now I think the race is on and there will be plenty of acquisitions moving forward. Foreign Oil Companies have a lot of cash to spend and are looking to enter the US Shale market, and are willing to pay up. The only concern remains environmental, as well as recent questions raised in the Times about companies overstating the productivity of their wells and size of reserves.

Some of the top shale assets in the US include Marcellus Shale, Bakken Shale, Barnett and Woodford, Fayetteville, Eagle Ford Shale, Horn River, Green River Basin, and Haynesville.

A few of the stocks that will be "in-play" tomorrow because of this deal, and should remain strong for the future outlook in the industry are as follows:

Apache (APA), Devon Energy (DVN), Anadarko (APC), EOG Resoources (EOG), Chesapeake (CHK), and Southwestern Energy (SWN) should trade well tomorrow and enjoy the valuation expansion, but are all trading with $15B+ market caps, and I want to focus on the next potential large acquisition candidates, also excluding the small caps.

Newfield Exploration (NFX, $66.90: The $9B Oil & Gas producer trades 10.8X earnings, 4.57X sales 9.5 EV/EBITDA and 2.7X book. Newfield has over 100 potential locations in the Woodford Shale with 6 wells On-Line and 172,000 net acres. It also has 30-35 wells in the Eagle Ford Shale. Stifel raised shares to Buy on July 8th with an $80 target.

Range Resources (RRC, $55.10): The $8.85B Oil & Gas producer trades 35X earnings, 9.55X sales 22.4 EV.EBITDA and 4X book value. On those metrics, shares are pricey to peers, but it owns some valuable assets. Range has assets in the Marcellus Shale, Wolfcamp, Bone Springs, Woodford, and Utica shales. It is the lowest cost producer among the 33 gas companies. Production with a CAGR of 12% and Reserves at 32% in 2010. 86% of its capital budget is focused on the Marcellus Shale, seen by many as the best opportunity. Goldman started shares Neutral with a $63 target in June.

Cimarex Energy (XEC, $83.54) is a $7.15B Oil & Gas producer that trades 9.9X earnings, 4.5X sales, 6.88 EV/EBITDA and 2.65X book value. I have long considered Cimarez to be the best value among gas producers. Cimarex is 67% Natural Gas with 77% proved developed, and production of 590 MMcfe/d. The breakdown for production is 45% Mid Continent, 25% Gulf Coast and 30% Permian. It has assets in Western Oklahoma with the Cana-Woodford Shale and in the Permian Basin it has 125,000 acres at Wolfcamp, 160,000 at Avalon and 60,000 at Cisco/Canyon, all shale targets. Stifel raised to Buy on July 8th with a $105 target.

Ultra Petroleum (UPL, $44.86): Ultra Petro is a $6.86B Oil & Gas Producer trading 15.6X earnings, 7.12X sales, 5.65X book value and 10.12 EV/EBITDA. Ultra Petro grew production 19% in 2010 and is an emerging Marcellus Shale play. The Company targets 50% production growth from 2010 to 2013. Capital One SouthCoast raised shares to Add with a $58 target on June 3rd.

Cabot Oil & Gas (COG, $62.60): Cabot is a $6.55B Oil & Gas Co. that has been on a strong run in recent weeks, and trades 28.55X earnings, 7.8X sales, 3.5X book value and 15.22 EV/EBITDA. Cabot is at a record growth pace with 31% reserves growth and 27% production growth. Cabot has a lot of Oil assets, but its major gas asset is in the Marcellus Shale, and one of the best acreages out there. Howard Weil raised its target to $75 on June 28th, and Canaccord raised its target to $85 with a Buy rating in early June.

Plains Exploration (PXP, $37.29): Plains Exploration is a $5.26B Oil & Gas Co. trading 12.56X earnings, 3.3X sales, 1.5X book and 10X EV/EBITDA. Plains has assets in the Wind River Basin, California, Eagle Ford, and Haynesville. Goldman raised its target to $52 on June 10th with a Conviction List Buy. PXP plans to sell 20% of its deepwater Gulf of Mexico assets in Q3. Its drilling activity in the Eagle Ford Shale looks to be driving growth to the upper end of forecasts.

SM Energy Co (SM, $72.14): SM Energy is a $4.59B Oil & Gas Co trading 21.3X earnings, 4.4X sales, 3.8X book and 11.77 EV/EBITDA. Jefferies has a $73 target, while Canaccord set a Buy and $101 target in June. 66% of revenues are from Oil, while 65% of proved reserves are in Gas (640 Bcf). Its focus is in the Eagle Ford Shale, Bakken, and Granite Wash. It sees 20%+ production growth in 2011.

One smaller Oil&Gas name that is worth a look is $1.6B Swift Energy (SFY) with 119,000 Eagle Ford Shale Acres

A few smaller shale plays like PVA, CRZO, REXX, MHR, and GST could be some big percentage movers, as the speculative names tend to runs after deals like this.

The analysis would be better using industry specific ratios, looking at proven and unproven reserves, etc., but in the essence of time I kept it fairly simple. As far as options activity I have seen the most bullish in COG, SM and PXP of the above mentioned names.

I would last mention that Consol Energy (CNX) has been seeing a massive amount of bullish options activity in September and October, using call spreads and bullish risk rerversals, and is a name I have long seen as likely to sell its valuable Marcellus Shale assets.

A graphic that breaks down many of the Co's is:

Wednesday, July 13, 2011

Open Table (OPEN) Options: Having a Great Plan and Not Executing

Open Table (OPEN) is a name that was soaring to start last week, and although it was on minimal volume and right back to resistance, I saw a lot of people playing this one long, or at least via the virtual Twitter trading account.

What I saw was that shares remained in a downtrend since very disappointing earnings last Quarter. You will see this a lot with shares attempting to take a run at the earnings gap, failing, and proceeding to new lows. The move was nothing more than a relief rally in a bloated stock, so that the smart money could short it at a higher price ahead of next quarter's results.

My thoughts were confirmed on July 5th, the day shares were up big, when I saw the options market making large bearish bets. I put out the following note to clients on July 5th:

OPTIONS RADAR: Bears Making Reservations at Open Table

Ticker/Price: OPEN ($87.20)

"Open Table (OPEN) with 1000 Aug. 80 puts bought here at $4.40, more than $580,000 in put premium on the day purchased, and then another 1000 bought at the $4 offer on the PHLX, now total of nearly $1M in put premium purchased versus $300,000 on call premium, buyers of volatility today with earnings set for early August, and a downward bias today. Shares are up 6.5% today, trading at its upper Acceleration and Bollinger Band, very overbought on RSI and Williams %R. Shares were hit hard last Quarter on earnings and valuation is very questionable at 49.2X earnings, 17.5X sales and 65.77X cash flow. There is a 20% short float in shares, and the momentum name may be forming the right shoulder of a head and shoulders pattern which could lead to a big move below $75. BofA reiterated a Buy and $120 target on May 11th, and OpCo raised to Outperform and a $115 target in May as well. The next resistance for optimal short entry may be at $90, the 38.2% Fibonacci."

Each day I put together around 10 of these Option Radar stories to focus on, the action I see as most unusual or significant in the options market. Along with the analysis I provide the trading strategy, if there is one. For Open Table (OPEN) I noted the following on that day:

Trading Strategy: I think shares could definitely see pressure into results with concerns from last Q, so if it gets to $90, the Aug. 80 puts are a nice trade in my view.

Open Table (OPEN) shares hit $90 that day and also the next two days, printing a high of $90.89 on July 7th, and the puts were pricing around $3.50.

As of today's close the puts are priced at above $7, so a 100% move in just less than a week.

A great move, but I failed to ever put in the order, so only a lesson, no hard cash to show for the great plan. Luckily, a few of my subscribers followed the trading strategy, which for me, is the number one priority!

At this juncture I do not want to chase the move, although I see it highly likely shares test $75 support in the coming days, and I could even see a move to $65 post-earnings, as competition is heating up, and International growth is lagging expectations.

Collins Stewart set a Buy and $108 target on July 8th, but I have seen some negative Analyst notes as well come out recently.

Friday, July 8, 2011

Options Flow Case Study: Yea BEBE! Bebe Stores Jumps 33% in 5 Days

Understanding where options traders are positioned into key events, such as earnings, always gives you an edge up on figuring out the directional bias.

With options activity I look at two types that are important. You have the "High Impact" trades, which are clear signs of Institutional positioning in the options markets, large lots of contracts and flow into a specific strike or spread.

However, I have often found more value in studying how unusual options action is, not always necessarily a giant block of contracts, but an anomaly. The reasoning behind this is that you can not expect to be an expert on every stock, and certain individuals, not just institutions, have better information into events regarding specific companies than you do, and they will position accordingly. Whether this is from insider information, or due diligence with channel checks and such, that is not important, just the outcome is.

Such was the case with Bebe Stores (BEBE), a much maligned retailer that has not done much good for the last few years. On June 2nd, more than 2,000 September $7 calls were bought to open at $0.30, pushing Implied Vol. higher, and running at a rate of more than 10X the average day in call volume for BEBE. Wedbush had raised shares to Outperform on May 5th with an $8 target. I noted the action live that day, as I always do, to my subscribers in the chat room, but that was not the only chance here. Seeing that same store sales were set to be announced, I noted on Wednesday to clients that Bebe Stores (BEBE) shares were acting strong, and still had more than 3,000 September $7 calls in open interest sitting out there, so there was a bullish bias for shares in the options, and the Sep. 7 calls were still trading at that $0.30 price.

Bebe Stores (BEBE) shares jumped more than 15% yesterday after reporting results, and most of the call buyers are sitting with more than a 200% gain.

Knowing how options players are positioned can set you up for quick gains, and although not 100% accurate, which is impossible to expect, it will give you a leg up and point you in the right direction. It also puts you onto the trail of stocks you normally would not give a second look to. I never would have thought twice about BEBE if I had not remembered the unusual call buying just 1 month earlier.

Thursday, July 7, 2011

M&A: DST Systems (DST) a Potential Deal Stock

Short post today, but an interesting trade I saw today, and shares are on a 9 day run and look to be trading like a deal stock:

DST Systems (DST) received buyout interest back in June and shares touched just below $60, but then pulled back to $50, and are now back on the move higher. Shares remain a great value at 8.8X earnings, 0.88 PEG and 7X cash flow, so an offer could come at any time. Options volume surged to more than 15X daily average as one trader sold 1,000 July $55 puts to buy 1,000 August $55/$60 call spreads for a net debit of $1.50.

Wednesday, June 22, 2011

Ariad Pharma (ARIA): Bullish Option Spread Targets 2H 2011 Catalysts

This was an interesting spread I came across after hours, and after some research it looks like a very nice trade...

Ariad Pharma (ARIA) call volume jumped to 3X daily average as the August $11 / January 2012 $11 calendar call spread traded 2,500 contracts at $1.20 to open, the trader trying to time the Biotech for a move, looking for shares to stay near the $11 area through August expiration, and then potentially close the spread or let the January calls ride if the outlook is bullish. The spread is show below based on August expiration:

The spread traded as shares hit 5 year highs, although closing modestly lower, and overbought. Shares have tripled since last November, and volume has been strong lately with heavy accumulation. Ariad is a $1.35B Biotech that trades 7.6X sales and has a 10.65% short float. Ariad is in a strong trend, as seen below:

On June 20th, Oppenheimer raised its target to $13 from $11. Lazard reiterated a Buy with a $10 target on June 7th, and shares moved 25% and reached the target already. Lazard noted it expects Ariad to file for approval in the US and EU in 2H11, and forecast approval in the first half of 2012 for Ridaforlimus which has shown strong results, a 28% reduction in risk of progression in sarcoma and endometrial cancer. Lazard also notes that Pantinib in resistance CML is the most promising opportunity for Ariad, and data expected at ASH in December.

It is fairly clear from these event dates why this calendar call spread strategy is well designed, and has the potential to be very profitable as Implied Volatility jumps later this year in anticipation of the events.

The August/January $10 calendar call spread also makes for a solid trade if you see less near term upside, as the IV Skew has the $10 August calls bid up quite a bit. If more bullish, you could try the $12 strike, but regardless, the spread is set up well.

If you prefer not to take directional trades, you could look at the August/January Double Calendar or Diagonal Spread as more of a play on the likelihood of increased volatility later this year.

Philip Morris (PM): Option Trade Looks for Flame to Burn Out

I do a lot of work after hours scanning for any action in the options market I may have missed during the day, and this spread in Philip Morris really caught my eye as a large trade that makes a lot of sense with the current Technical and Fundamental outlook.

Philip Morris (PM) with a large spread in August as the $65/$60 ratio put spread traded 3,000X6,000 on the ISE at a debit of $0.42 to open. The spread profits with shares in the $55.42 to $64.38 range (Shown Below)

The spread comes as shares sold off on heavy volume and broke back below its 50 day EMA. Shares also broke through the neckline of a head and shoulders pattern that would target the 200 day EMA just below $62. Today's breakdown was the start of a new trend, according to DeMark and the ADX Crossover. The chart below shows the Head and Shoulders Breakdown:

The $118.5B cigarette maker has been on a major run and is finally showing weakness, and shares now trade 16.3X earnings, 1.73X sales and 25.5X cash flow, and the yield is now only 3.84%, so shares do look over-valued. The trade also comes as the FDA released new grisly warning labels to try and deter smoking, a potential impact to profits moving forward.

BofA raised its target to $78 in early June, noting strong pricing power. However, the Japan and Spain markets could see weakness due to recent events, and with the economy struggling, the spending on cigarettes could become more discretionary.

Ratio put spreads are often used as protection, and the small outlay here can yield a big return if shares head towards $60, while the risk is limited , because shares are not heading back below $55 due to value/yield buyers.

Sunday, June 19, 2011

Smart Money Positioning for Late Summer Commodity Rally

Discovering trends in options activity often leads to the highest probability trades, and the recent trend has been large opening positions in commodity names, mainly the metals.

The S&P has corrected more than 8% in the last 2 months, while Metals (XME) have corrected more than 19% in the same time period, notable weakness in Coal, Steel, Iron Ore, Gold, Copper, and Steel stocks, with many of the individual stocks down more than 30%.

Commodities are considered a risky-asset, tied more closely to global economic growth than other industries, and a heavy reliance on China, India, and other growth markets. However, the group does appear to be over-shooting to the downside, especially if the 2H 2011 improves from 1H 2011.

The recent data also supports a bullish fundamental view on the metals, with China showing strong demand for Coal, Steel, and Iron Ore, while Japan is also seeing a demand surge as the rebuild begins.

Some of the leading Wall Street Research shops are also starting to make bullish calls, Credit Suisse out with a very bullish Copper forecast last week, and Steel Market Intelligence making a positive Steel call, flipping from a bearish call that was spot-on.

In the last two weeks I have seen large institutional buying in upside call options across most of the metal groups, and will highlight that action below. Alcoa (AA) earnings will kick off Q2 earnings season, and is a potential catalyst for a resurgence in the metals, although aluminum fundamentals are not looking quite as positive as the other metals.

Arcelor Mittal (MT)September $35 calls were active the last 4 days of last week, with open interest starting the week at 207 contracts, and on Friday 5,013 contracts traded against open interest of 30,228 that accumulated in the contract throughout the week, and the implied volatility of the contract rose more than 15%. Arcelor has held up much better than its peers and have been basing above $31. The $39.2B Steel giant is trading 7.1X forward earnings, 0.85 PEG, 0.59X sales, and 0.8X book value, making it one of the cheapest names in the industry, and also a Company interested in acquisitions. Option traders are positioning for shares to gain more than 13% in the next 3 months.

Freeport Mcmoran (FCX)shares have held well above the $46 double bottom from earlier in 2011, and face resistance with a descending trend line at the $50 level. It has outperformed most of the names in the metals sector, and Copper, often seen as a leading indicator for economic growth, has held the $4 level very strong since rebounding sharply off $3.90 lows in early May, a bullish divergence versus other metals. On Friday, a large holder in call options extended his/her play out another month, rolling 25,000 June $42 calls to the July $43 strike, and another rolled 12,000 June $47 calls to 12,000 July $46 calls. Freeport is another value name at 7.66X earnings, 2.23X sales, 3.3X book and 11.3X free cash flow. Deutsche Bank noted last week that the Company is likely to return money to shareholders via special dividends and has a Hold and $65 target. Morgan Stanley also recently reiterated an Overweight, noting improving Copper fundamentals.

Iron Ore
Vale SA (VALE)is a $155.87B mining giant, often focusing on its Iron Ore business, but also a major player in other metals, and becoming a force in the fertilizer space as well. Shares trade very cheap at 5.8X earnings, 0.45 PEG, 3X sales and 2X book value. Goldman reiterated a Buy in April with a $45 target, citing a strong upcoming Iron Ore cycle, and the new CEO should lift the uncertainty. Recent speculation is the Company could announce a healthy dividend. Recent data out of China and Japan bodes well for Iron ore. Shares have been trying to base and remain in a channel down since January, current resistance at $32 and support at $28, while $29 remains major support from May lows and the September breakout level, so reward/risk is compelling. VALE August $32 calls were extremely active with buyers on June 16th, more than 30,000 traded including one block of 8,300 at $0.80 on the CBOE, and open interest in that contract doubled, now sitting at 61,376.

Arch Coal (ACI) shares have been under pressure since announcing the acquisition of International Coal (ICO), a longer term positive as metallurgical coal is the hottest coal group. Shares have fallen more than 30% off April highs. Arch Coal is trading 6.4X forward earnings, 0.42 PEG, 1.58X sales and 1.78X book value. On May 12th, Standpoint raised to Buy with a $37 target. Arch Coal was the focus of bullish option traders on three occasions last week. On June 14th, more than 10,400 July $26 calls were bought to open, while on June 16th 4,600 July $27 calls were bought to open, and finally on June 17th more than 11,600 July $25 calls were bought to open as $1.2 million in call premium was purchased. 30 day implied volatility in Arch Coal jumped 15% last week.

Barrick Gold (ABX)shares are trading 21% off a recent double top at $56, at August 2010 lows, while Gold prices are barely off all-time highs, a major disconnect. Barrick shares trade 9.4X earnings, 3.77X sales, and 2.1X book value. Stifel raised shares to Buy with a $70 target in late April. Barrick Gold saw a few large bullish option positions last week. On Friday, more than 2,500 October $43/$47 call spreads were bought at $1.53, a nice reward/risk trade. On June 16th, more than 11,350 July $45 calls were bought to open, looking for a nice run in shares in the coming month.

There are likely a few names I am not mentioning, but all of these took place within the last week, so the trend is noteworthy. If the market shows signs of bottoming this week, I would concentrate on being long metals for the reversal move.

Thursday, June 16, 2011

Cisco (CSCO) - Long Term Option Strategy Beats Buying Stock

As a lead in I have always felt that there really is no sense ever buying an equity where the options are liquid with tight spreads, because if you are confident in your view, the use of leverage allows you to better position for larger gains, whether you want to use deep in-the-money calls/puts or play the upside with out-of-the-money options. Also, if you are a long term investor willing to buy a stock at a certain level, why not just sell a cash secured put where you improve your cost basis due to the premium. If your fear is missing a big upside move, you can go long a call along with short a put for a risk reversal, a strategy that can amass huge gains if you catch a trend, or use a synthetic.

Anyway, I wanted to take a look at Cisco (CSCO), the $82.8B much-maligned former Tech leader. For months I have seen "value-gurus" trying to call the bottom and get long this Company, first on the move down to $18 on earnings, and more recently around the $16 level. Cisco is cheap on all metrics, trading 8.85X forward earnings, 1.9X sales and 8.95X cash flow, and also with around $40B in cash, or nearly half the market cap. One would question why management is not actively making acquisitions to drive growth, or returning money to shareholders in the form of a dividend, or even a special one time payment. Either of these actions would result in shares heading higher in my opinion, just anything to change the current sentiment, or maybe even a shakeup in management.

I'd rather not get too deep into the Cisco situation, as my goal is to lay out a strategy that is a much better play than simply trying to catch shares in this sharp trend lower. Shares are nearing the $14 level, which would be a 50% haircut from the early 2010 highs, and also a spot for a potential double bottom with the 2008 lows.

Most of the Street maintains $20+ targets on shares, seeing the longer term value.

The trade that caught my eye today was 10,000 January 2013 $20/$10 bullish risk reversals at a $0.23 Net Debit, buying the $20 calls and partially funding via selling the $10 puts.

The $230,000 outlay is a 41 Delta position, or equivalent to being long 410,000 shares of Cisco stock.

Through this strategy you are leveraged to being long Cisco, and if shares head higher the value of the calls increases, while the value of the puts decrease, and as that spread widens, a relatively small move higher in the stock can quickly double, triple, or more your $0.23 basis on the spread. I would note that the spread requires margin, so you would want to do this at a size where you are willing to be long Cisco (CSCO) at $10, so if you want $25,000 of Cisco, you can put on 25 of these spreads (note cost basis is actually $10.23 due to the debit, adjust accordingly).

The beauty of this strategy is that for a small outlay you limit your risk, but can participate in more of an upside move. If shares were to somehow tank below $10, making Cisco (CSCO) the greatest value buy of all time, you are willing to be long stock at $10.23, and did not just lose 33% on your equity position. If shares of Cisco have a resurgence and reach $25 by 2013, the spread is worth $5, roughly 20X your investment.

I would also note, if you see even less downside potential in Cisco, you could put on the January 2013 $17.50/$12.50 bullish risk reversal for less than $0.10.

These type of spreads are often done at a net credit, my preference, so you have zero outlay, willing to be long at a certain level, but able to participate in an upside move with maximum leverage.

These risk reversals are risky for growth stocks and high Beta stocks, but when you are looking at a beaten up value name with a limited downside view, it can really accelerate your returns.

Good Luck!

Monday, June 13, 2011

Could Rio Tinto (RTP) Acquire the Rest of Ivanhoe Mines (IVN)?

Ivanhoe Mines (IVN) is a $14.5B miner that is trading 3.88X book value. It's principal property is the Oyu Tolgoi copper & gold mine development project in southern Mongolia. The Company announced on June 9th that construction is ahead of schedule, currently 23% complete.

Ivanhoe is partnered with Rio Tinto (RIO), a $129B miner with nearly $10B of cash on hand, and always willing to make deals. Global mining M&A should be strong moving forward for cost efficiency, and most every CEO, whether it be for Gold, Silver, Copper, or other metals, has shown confidence that metal prices are only going higher.

Ivanhoe owns 66% of the project, with Mongolia's government owning the rest, and Rio Tinto owns 42.1% of Ivanhoe, and can raise its stake to 49%. Ivanhoe's CEO also owns 15.5% of the Company, a positive sign.

Ivanhoe's chart is not a thing of beauty to say the least, breaking support o a $6 horizontal channel at $23 that would measure a move to $17, while $19 is major support as a re-test of a big breakout level from September 2010.

Ivanhoe Mines has caught my eye lately due to the options action, the January 2012 $25 calls which traded 5,585 contracts today, and buyers paying $2.20 on a $2/$2.25 bid-ask, aggressive bullish trades, and these contracts have been seeing action for more than a month.

Ivanhoe typically trades just 1,790 calls a day, but has been running well above that pace lately. The January $25 calls had open interest of 21,594 contracts going into today, and likely to increase with the volume seen today. On May 13th there were only 521 contracts in open interest and then:

1) May 16th: 3,670 contracts bought
2) May 17th: 5,411 contracts bought
3) May 20th: 1,072 contracts bought
4) June 3rd: 7,926 contracts bought
5) June 6th: 2,535 contracts bought
6) June 7th: 1,645 contracts bought
7) June 8th, 1,170 contracts bought

On May 18th a trader bought 210,000 shares of Ivanhoe, along with 15,000 January $17.50 puts in a hedged play, betting on increased volatility.

The implied volatility (IV) of that contract has jumped from 42% to 47.3% over the course of that time as well, and the September IV Skew is exhibiting a bullish smile, while January s surprisingly normal.

Logically it would make sense for Rio Tinto to acquire the rest of the Company as the Mongolian asset is seen as a crown jewel, so better to make an offer before the mine is actually producing and Ivanhoe's shares are re-valued higher.

Ivanhoe also owns part of Ivanhoe Nickel & Platinum which made majro Tier 1 copper discoveries in South Africa back in February.