Options Expiration Pins for May 20th

Options Expiration Strike Pegs:

AMZN Max Pain $190 - Looking for $200 Pin - $195/$200 1X2 Call Spread an Option

GOOG Max Pain $535 - Selling the $530 Straddle an Option

BIDU Max Pain is $135 - May $130/$135/$140 Butterfly Spread an Option

POT Max Pain at $55 - June $55 Calls at $1.50 Cheap

CAT Max Pain $105 - May $105 Straddle Sale an Option

PCLN Max Pain at $515 (Shares at $522) - May $525/$515 1X2 Ratio Put Spread an Option

AAPL Max Pain $340 - May $340 Straddle Sale an Option

NFLX Max Pain at $240 - May $245/$240/$235 Put Butterfly an Option at $1.75

FSLR Max Pain at $135

GS Max Pain at $150

OXY Max Pain at $100

BA Max Pain at $77.50

IBM Max Pain at $170

CRM: The Force is Strong with this One

Salesforce.com (CRM) is trading 7.9% higher after hours to $146.50 ahead of the CEO on Cramer, and the Company beat by a penny on EPS but beat big on revenues, and along with raising its guidance, it showed new customer adds, the real key to its report as it continues to show itself as the leader in cloud computing, which is still fairly early in the growth stage. In this case it is best to throw away traditional measures of valuation and use a more common sense approach, realizing that cloud computing is going to be the future for every Company and the transition is in the early stages.

I previewed the quarter for subscribers last Sunday:


Earnings Focus
Details: Salesforce.com (CRM), $134.91, Technology - Application Software, Earnings May 19th After Market Close

Earnings Expectations and Keys to the Report: Analysts are expecting $0.27 EPS and $482.45M in Revenues for the Quarter and $1.27 EPS and $2.11B for FY12 estimates. Estimates are factoring in 28% growth this year in revenues. Last quarter subscription revenues grew 31% Y/Y and 5,100 new customers were added in Q4 to a total of 92,300. Analysts and Traders will focus on subscription revenue growth and new customer adds. Also, the launch, and early read on the success of Chatter will be eyed on the Conference Call. Salesforce's $326M acquisition of Radian6 should be a positive moving forward for social media channels, and acquisition costs will cause a discrepancy in the headline Non GAAP and GAAP numbers.

Previous Reports and Reactions: Shares jumped on the report/outlook last quarter, but faded quickly, sinking that day and for a few weeks following the report. In 3 of the past 7 quarters, Salesforce has made a 15% or greater move, while the other 4 quarters the move only averaged 3.5%. The quarter before last resulted in a strong gap up, followed by strong buying to close the day at highs, and then continuation to all time highs.

Technical Analysis: Salesforce shares are making a series of lower highs in a channel down pattern since reaching all time highs in December 2010, recent resistance at $140, and the channel bottom extends to $115, a potential target as it would also fill the November 2010 gap. If shares were to break $140 on earnings a move to $150 would likely be quite easy, and potentially as high as $165/$170. MACD and ADX are showing early signs of turning bullish and RSI is trending higher. Bollinger Bands are tight, and a big move looks imminent. Shares found the 200 day EMA as support in March, and that is currently at $122.50.

Fundamental Analysis: Salesforce shares are undoubtedly rich on valuation at 73X forward earnings, 10.9X sales, and 200X free cash flow, and although that has not mattered in the past, being priced for perfection is a dangerous game, and could result in sharp sell-offs on any negative outlooks concerning growth potential. However, smart acquisitions and customer adds, along with cloud computing still in the early stages leave Salesforce as a leader in the industry that is likely to remain at a valuation premium.

Analysts: Of the 31 Analysts covering Salesforce the average target price is $160, a high of $200. FBR raised shares to Outperform on April 7th with a $170 price target.

Sympathy Movers: VMW, FFIV, CTXS, ORCL

Options Activity, Open Interest Analysis and Volatility Analysis: Salesforce May IV at 65.9% compares to June at 45.27%, so front month volatility is definitely pricing in a move, the straddle pricing in a 7.5% move on earnings, although we have seen many of the high flying Tech names make much less than priced in moves on earnings in recent weeks. The IV Skew has a minor bullish smile for May options and is fairly flat going out to later dated months. Salesforce has not seen a lot of large option trades in recent weeks, notable buying of the May $130/$135 call spreads for 2,500 contracts on May 4th. I feel the straddle is fairly cheap here and expect more than a 7.5% move in shares on earnings considering the recent tight trading range, and historical movements.


Now, on May 17th, just 2 days ahead of earnings there was very bullish options action in Salesforce ahead of the quarter, and I put out the following note to subscribers:

OPTIONS RADAR: Salesforce Call Spreads Active Ahead of Earnings

Ticker/Price: CRM ($129.20)

"Salesforce (CRM) June $140/$155 call spreads with 2,000 bought at $2.50, earnings May 18th, and then another 6,000+ were bought as call volume jumps to 26,500, or 3X daily average with opening bullish buyers, and not seeing any short stock with the spreads. Also, similar bullish action seen yesterday with these spreads and plenty of May $130/$135 call spreads still sitting in open interest. Shares rebounded a bit off support today and are set to close in the green. The larger picture channel down has resistance at $140 and support at $115. Shares of the cloud computing leader trade 69.7X earnings, 9.3 PEG and 10.4X sales, and the recent launch of Chatter could get investors excited this quarter as the Company continues to win new clients. Morgan Stanley noted this morning that it expects a solid print, but remains Equal Weight. "

The action continued today right up until the report, including a buyer of 1,000 May $145/$150 call spreads at 3:28pm, and the 345/350 May ratio 1X2 call spreads also traded in size.

All of my signals were bullish into the quarter, so the spread I recommended late in the day was the May 140/150/155 unbalanced butterfly call spread at $1.75. If shares hold around where they are trading after hours, a big IF as anything can change, the spread should work out very well. For the more neutral traders looking for a safe trade I recommended the May/June $150/$120 Double Calendar Spread, which should also work out very well.



Looking at the chart, shares broke trend resistance late today after a great support bounce at $127.25 two days ago, and on the break of this pattern of lower highs at $140, shares should hit $150 easily, and be well on its way to $175.



Disclosure: Long Calls and Spread Noted Above

Sherwin Williams (SHW): Painting a Bullish Picture

Sherwin Williams is a name catching my eye, a great ascending triangle has setup above the prior resistance, now support at $79. If shares can push through $86.30 on volume it would measure a move to above $90. ADX is climbing after a bullish crossover and RSI is rising, although a bit overbought. Shares have topped out here previously and I do see a Red 13 on DeMark, but the 3rd attempt is usually the breakout move, so definitely one to watch in coming days.




As for the fundamentals, Sherwin Williams has a $9.1B market cap and trades 14.65X earnings, 1.13X sales and 23.6X cash flow, fairly valued for a Company with modest sales growth. The Company would benefit from the recent action in commodity prices, lowering raw material costs, and increasing margins and profits, the Raw Material Cost Index currently at 10 year highs. Home Depot and Lowe's both recently reported earnings, and the results were not spectacular as the housing cycle remains near the bottom, and no clear signs of a recovery, but as we enter the Summer, projects should pick-up and homeowners looking to increase the value/attractiveness of their homes could go for a new paint job. Home Depot noted on it's Conference Call that it expects more maintenance and repair than major renovations and is beefing up its paint offerings.

BofA-Merrill recently reiterated a Neutral rating and $92 price target after the Company's Annual Meeting. The Company is now targeting a younger demographic via HGTV and Digital Media and is also set to raised prices on coating by 7 to 9% on June 6th.

One trade to consider is the June $85/$90 1X2 Ratio Call Spread for a $1.40 Debit


A simple June $85 Call at $2 or Better Looks Fine As Well

S&P 500: Current Technical Outlook

The S&P traded in a choppy narrow range last week and closed the week slightly lower than where it opened, and is flirting with a technical breakdown. Shares have formed a descending triangle above the 50 day EMA and prior support at 1,330, along with a 50% Fibonacci Retracement of the 1,290 to 1,370 range.. A break past 1,350 is needed to break the short term trend lower and make a push to new highs around 1,375 in a bigger picture rising wedge. If we can break to 1,375/1,380, the 1,400 target may not be achieved initially, and we could see a push back towards 1,300/1,250 in seasonally weak months of trading, possibly with resistance at 1,400, the next Fibonacci extension. In the near term of a break of 1,330 we would lose a long term trend from last August, and 1,300 is the initial target with the April lows and 100 day EMA, while 1,280 is a Fibonacci support level, and the 200 day EMA at 1,250 is major support, also the March lows. I also see 1,312 as a minor support level as a gap fill from April 20th, and a Fibonacci level. A buy signal near term would confirm with a break past 1,350 and the RSI breaking above 50. The 50,100 and 200 day EMAs are all rising with a bullish slope, while the 20 day EMA is flattening and a potential bearish cross of the 20 day EMA with the 10 day EMA from above is worth watching as a bearish signal.

Conclusion: Buy Above 1,350 with RSI > 50 with 1,380 Target; Fade a 1,400 Target with Stop at 1,410 and Target to 1,350/1,325/1,300/1,250; Sell Below 1,330 with 1,300 Target; If 1,250 is Seen, Load Up Aggressively!

Apple (AAPL): Prepping for Explosive Move - Traders Get Long Volatility into Developers Conf.

Apple (AAPL) traded a large spread on the PHLX May 12th that I am trying to drill down on, between 3:15 and 3:25pm. All in all it appears that at 3:17pm a trader bought 4,000 May $350/$355 call spreads at $1.29 and 4,000 May $335/$330 put spreads at $0.36. After that the trader looked to June and bought 4,000 June $370/$375 call spreads at $0.60 and 4,000 June $335/$330 put spreads at $1.20. I am going to operate under the assumption the trader is closing a May short Iron Condor that worked nicely, and now going long a June Iron Condor.

Apple has been in a tight range and is due to breakout or breakdown, which is what these trades are looking for, and comes after Goldman recommended earlier this week to be long Apple volatility into the June 6th Developers Conference where the Company is expected to discuss its cloud initiative. The event averages a 5.4% move in shares and Implied Volatility is at all-time lows. Goldman recommended the June $350 straddles at $19.40.

Apple Bollinger Bands are not really squeezed too tight, but shares have traded in the $340 to $355 range for 3 weeks. Shares are basically consolidating along the trend line that it broke out past, and that was a descending triangle breakout with a measured move to around $385, all time highs. If shares were to breakdown below $340 there is not much support and another test of $325 would be likely, and I doubt it would hold again, so the 200 day EMA at $315 would be a downside target. The last time Apple's ATR Wilder was this low was in February, where shares topped, and made an explosive move lower. This is not to say that the next move for Apple is lower, but more a sign that an explosive move is nearing. Either way, the $19.50 straddle seems like a smart play, but let's take a look at today's trade. The trader paid $1.80 for the June Condor and a potential return of $5, $3.20 in profits, or nearly 180% gains, if shares were to close June expiration either above $375 or below $330.




I also like to look at valuation and Analyst estimates to get a feel for the range shares of a certain stock can trade. OpCo recently started shares Outperform with a $450 target, Argus raised its target to $415, ISI group raised its target to $425, Wedbush raised its target to $445, Citi raised its target to $435, UBS raised its target to $495, Jefferies raised its target to $500, Goldman raised its target to $470, and Barclay's raised its target to $465. Basically, it's a safe assumption that Apple shares can easily trade North of $400. As for the downside potential I do not see any way shares can trade less than 10X forward earnings, so $285 is the maximum downside.

In my view, Apple has greater upside than it does downside, so a bullish strategy, the risk reversal trade, would involve selling the June $315 puts and buying the June $365 calls for a $0.25 Net Credit.

Your worst case scenario is that Apple shares fall and you are put shares at a $314.75 cost basis, which is much better than just buying shares now and hoping for the best, and is why option strategies are almost always better than being long stock.

Polaris (PII) - Ratio Put Spread Looks for Slow Slide, Gap Fill

Polaris (PII) recently reported a blowout quarter, and now shares have consolidated in a tight range. The growth story is intact here, and on any significant fall I would be a buyer of this stock, but one trader is looking for a slide in shares:

Polaris (PII) traded 4,675 puts on the day, more than 20X the daily put volume. The action was in September where the September $95/$85 ratio put spread traded 1,500X3,000 contracts at $0.17, a small debit for a bet on a slide in shares, and also a bearish bet on volatility as the spread will become profitable if shares fail to make new highs and trend sideways the next few months, a positive Theta and negative Vega trade structure. The trade is profitable in the $75.15 to $94.85 range, shares currently at $103.43. Maximum Profits are made if shares end at $85 on September expiration, where each $17 spread would be worth $983, a massive percentage gain.



Looking at the chart you can see shares gapped up last quarter on earnings from $92.50 resistance all the way to $105, and clear gap support at $102.50. A slow gap fill move back towards $92.50 would make this spread work perfectly over time.

Shares of the $3.5B maker of recreational vehicles trade 15.4X forward earnings, 1.63X sales and 19.9X cash flow, fairly valued, but sales are elastic to oil prices and consumer discretionary spending. There is a 10.1% short float, 7.2 days to cover.

Wells Fargo recently raised 2012 earnings estimates to $7, and a P/E of 15, its historical average would put shares at $95, so one could argue shares are over-valued. Shares are trading at 5 year highs on Price/Sales and Price/Earnings. However, earnings growth and margins are also making 5 year highs. RW Baird cut shares to Neutral from Outperform, but raised its target to $125 from $90 recently, which seems unusual as a stock with 20% upside is generally at least an Outperform.

Disclosure: No Current Position, Set Alerts for $102.50 Breakdown

PSS World Medical (PSSI): Stealth Options Action of the Day

PSS World Medical (PSSI) traded 50X daily call volume as 1,000 June $30 calls were bought on the CBOE at $0.625, with the bid-ask at $0.55/$0.80, so not an aggressive purchase, but appears to have been a buyer based on the IV movement. Earnings are May 12th before the open and shares are at all time highs, and have jumped on earnings the last 2 quarters. The $1.6B Medical Equipment Co. trades 19.5X earnings, 0.8X sales, and 17.5X cash flow. There is a 14.95% short float, 16.35 days to cover, so a short squeeze is a real possibility. If earnings turn out not to be the catalyst there is also the Jefferies, Goldman and William Blair Conferences in June where the Company will be presenting. Last quarter the Company guided FY11 above the Street. PSS World Medical is a supplier that is a direct play on the aging baby boomers as it supplies to alternate site physician practices and elder care businesses. Credit Suisse has an Outperform rating on shares.

Archer Daniels (ADM): Option Trader Sees Further Downside with Ratio Put Spread

Archer Daniels (ADM) shares continue to slide post-earnings, and one bearish trader sees more downside potential for the grains Company. The trader traded the June $34/$32 ratio put spread for 2,500X5,000 contracts at $0.27 debit, looking for a fall to $32, and seeing limited upside despite the valuation. The trader's profit zone is from $30.27 to $33.73 (See Below), and with the trade also Vega Negative, the trader can close this trade for a profit if shares stay below $35 in coming weeks.



Put volume was 3X daily average.


Shares could see further downside as farm subsidies are argued in Government. The $32 level is a major support level, and shares recently lost $34.50 support, now with a gap fill to $33, and a measured move to $31.50 on the most recent breakdown. The chart below highlights this trades' profit zone in orange.

6 Speculative Option Trades on Small Caps Reporting Earnings this Week

Every week I look to the week ahead and screen for small caps that report earnings and then filter them out by looking at fundamentals and the charts using FinViz to find some names that others are likely not watching, but could trade strong post-earnings. Although the options tend to be illiquid, I will provide a few speculative ideas here, although I often just buy the stock in front of earnings.

1) ION Geophysical (IO): Shares of the $2B Seismic Technology Co. with strong ties to Oil & Gas CAPEX, which is strong in FY11, trade 18.3X earnings and 4.4X sales with 30.8% quarterly sales growth. Shares have been consolidating since the last earnings jump and are in a tight triangle, ready to break higher.

Trade: Long the IO May $13 Calls at $0.50 or Better (May 5th Earnings AMC)



2) TTM Tech (TTMI) is a $1.55B maker of printed circuit boards, similar to Jabil (JBL) which posted strong results recently. Shares trade 9.4X forward earnings, PEG of 1, 1.3X sales and 2.1X book with a 7.9% short float. Shares are trading in an ascending triangle with $19.50 the breakout level for a measured move to $23.50.

Trade: Long the TTMI June $20 Calls at $0.90 or Better (May 5th Earnings AMC)



3) CSG Systems (CSGS) is a $734.35M provider of customer care and billing solutions for the cable industry, which has seen strong results. Shares of the software Co. trade 8.5X forward earnings, 1.34X sales and 7.2X cash flow, a good value. There is also a 5.85% short float, 7 days to cover. Shares are trading in an ascending triangle pattern with $21.30 the breakout level for a measured move to $25.

The Trade: Long CSGS June $22.50 Calls at $0.30 or Better (Earnings May 3rd AMC)



4) Ares Capital (ARCC) is a $3.6B Diversified Investments Co. trading 11X earnings, 0.54 PEG, and 1.2X book value. Shares recently broke out at $17.60 to new highs.

The Trade: Long ARCC June $18 Calls at $0.30 or Better (Earnings May 3rd BMO)



5) Atlas Air (AAWW) is a $1.8B provider of air cargo solutions and trades 10.15X earnings, 1.34X sales and 7.1X cash flow. Shares just broke out of a symmetrical triangle after consolidating from a strong move on last quarter's results.

The Trade: Liquidity is a Problem Here, but Long the AAWW June $70 Calls at $3 or Better (Earnings May 4th BMO)



6) PolyOne (POL) is a $1.37B maker of specialty chemicals that trades 12.8X earnings, 0.8 PEG, 0.5X sales and 13.5X cash flow. Shares are in a $12.50 to $14.80 channel, and a breakout past $15 could target a move towards $17.50.

The Trade: Long POL September $15 Calls at $1.05 or Better (Earnings May 4th BMO)



Bonus: Silicon Graphics (SGI) is a $557M provider of high performance computing and storage with high growth rates, 88.6% sales growth Q/Q and coming off a big move on earnings. Shares have consolidated tightly and look ready for another surge.

The Trade: Long SGI June $20 Calls at $0.95 or Better (Earnings May 3rd AMC)



Disclosure: No Position in Above Mentioned as I Just Came Up with these Ideas. These are for speculation only, so only trade what you can afford to lose.