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What a Week!

January 24, 2007

Dear Fellow Options Trader,

As I write this, I am getting ready to get on a plane to New York to participate in the CNBC program "Fast Money." The folks at CNBC were bold enough to ask me to sit in for Tim Strazini tomorrow (Thursday) night, as he's taking a well-deserved break. I'm not nervous about the gig -- in fact, I'm rather excited, as I love the pacing and personalities on the show.

On the outside chance you haven't seen "Fast Money," it airs nightly at 8 p.m. Eastern for one hour and features host Dylan Ratigan and four men who have earned their livings not as journalists, but as stock, options or futures traders. In addition to Strazini, who is a managing director at Pali Capital, there is fund manager Jeff Macke, New York Mercantile Exchange oil trader Eric Bolling and CIBC World Markets trader Guy Adami.

I can honestly say that the energy and idea level of this show is both palpable and rare on any television show, network or cable and it is a thrill to be part of it.

THE MORE THINGS CHANGE …

As options traders, we tend get into the mindset of getting into (and out of) positions without giving much consideration to the underlying companies. Just as long as the shares to be moving in the "right" direction (up for bullish plays, down for bearish ones), the name doesn't matter as much as the performance. However, it's the headlines that are usually responsible for the movement (or lack thereof) in the shares, and here are a few tidbits that could affect how these companies' options trade in the coming week.

Home Depot -- Just weeks after Home Depot was in the news for forcing out CEO Bob Nardelli for HD's lack of performance, and Nardelli was the talk of the town for being guilty of taking what the board was willing to throw at him, the company has found a new leader. The newly named CEO, Frank Blake, could earn as much as $8.9 million in total compensation this year -- which is only about one-third of Nardelli's $25.7 million annual take. Additionally, Mr. Blake has taken the bold step of opting out of the lavish $210 million severance package that got his predecessor into such hot water.

Ford Motor Co. -- The automaker could post the worst annual loss in its 103-year history tomorrow (Thursday, Jan. 25), perhaps breaking the $8 billion mark. Its own previous record loss was $7.39 billion in 1992. Odds do favor Ford surpassing that abysmal figure, because through three-quarters of this year, the company had already lost $7 billion!

eBay -- The online-auction site reported tonight that its quarterly profit rose 24%. Fourth-quarter revenue rose 29%, as demand for hard-to-find Sony and Nintendo gaming consoles and strengthening business in international markets were major contributors. Our HeatSeeker shows shares of EBAY trading up more than 14% in the aftermath of this stellar report on turnover in the after-hours session of some 22 million shares!

Volatility (Risk) -- The Chicago Board Options Exchange's measure for risk in the S&P 500, known as the Volatility Index (VIX), dropped below 10 for the first time since Dec. 18. Despite a number of high-profile earnings "oopsies" -- such as Intel, Apple and IBM -- the money flows have not stopped, much to the bears' chagrin. It has been impressive to see the markets trade off leadership on a daily basis, much like a flock of migratory birds, with the former leaders falling back and providing a lift to stronger stocks.

OPEN POSITIONS UPDATE

Market activity has been somewhat erratic lately, to say the least, with a number of companies reporting great earnings and then seeing their shares drop -- some reward for good results. And then other companies and sectors are rising on nothing more than speculation and rumors.

This kind of unpredictability can test the nerves of the most-confident trader, and I'd like to take this opportunity to address some of your questions about some of our recommendations and about how to best position yourself for trading success in general.

PACIFIC ETHANOL

Last week, we recommended buying the Pacific Ethanol (PEIX) Feb 17.50 Calls (PFQBW) for 50 cents. It opened at 70 cents on Monday and didn't pull back to our 50-cent price but it did come back to 60 cents for part of the day, where I know a number of you bought in.

However, I understand that a few of you might have sat this one out. We talked last week about how sometimes, in the flurry of massive buying activity on the part of the "smart money," the price of the options may go above our recommended entry price but that the price might pull back within a couple of days.

In this case, if you didn't jump in, I don't recommend doing so now. Oftentimes when we see frenetic big-money buying action, we don't know the catalyst. But as we suspected with Pacific Ethanol, the catalyst was likely last night's State of the Union address, as the feeding frenzy seems to have passed.

If you did buy in on Monday, you were on the rocket ride that took the options up to $1.40 apiece in the first 15 minutes of today's trading. Even if you got in at 70 cents, that's still a double.

I oftentimes stress the need to not "chase" a price. For example, if we determine that 50 cents is a good entry price, then we wouldn't recommend getting into a play at $1. But if you're willing to take on some additional risk and want to add a nickel or a dime or so to a buy-in price, that could be the ticket to getting into a trade before it takes off.

I hear the question a lot about why we don't set target prices for our option trades. The reason is simple. Just like we can't predict when "in-the-know," big-money traders are going to be privy to information that causes them to want to grab as many options contracts as they can in advance of a move in the stock, we are placing our bets solely on their greed leading us to the proverbial pot of gold at the end of the rainbow. We just don't always know whether there's going to be a treasure trove or a mirage at the end of the journey, but because we're placing our bets alongside people who have a pretty good idea of the final score before the game is even played, we can be participants in the game and not just spectators.

Sometimes the catalyst, or the event that only the "insiders" knew about, comes and it doesn't bring the spike that the big boys were expecting. Or maybe an unexpected, negative event occurs, and it gets in the way of a perfectly good opportunity. That's why I wouldn't give my blessing at spending $1 on a trade that is a bargain in the 50-cent area. However, because we're expecting big gains -- double-digit and maybe even triple-digit ones sometimes -- spending an extra dime here or there may be worth it to be onboard for a big upward move.

In any event, if you've been patient and waited for a pullback to the 50-cent area, it came today, but because the catalyst has passed, I recommend letting this one go and waiting for this week's trading opportunity instead.

NEKTAR

Speaking of unexpected events impacting trading opportunities, our Nektar (NKTR) Feb 15 Calls (QNXBC) went through our 45-cent sell stop Tuesday and haven't shown any signs of life, so we're officially out of this position. The stock is trading below $13.50 after dropping more than a point in less than two days.

Nektar is the maker of an inhalable-insulin device to serve as an alternative to needle delivery of insulin for people with diabetes. And this week, analysts lowered their expectations for its sales, which took down the stock and, unfortunately, the options.

This play speaks to what we discussed in the Pacific Ethanol trade -- paying a few extra cents to initiate a position doesn't matter so much when the position becomes extremely profitable, but for those trades that don't make a huge splash in your portfolio or they go in the wrong direction -- down -- losing a little "extra" money can hurt a lot.

We like Nektar's prospects, and the product sales numbers in question might not be as bad as Wall Street believes they might be. However, this is a trade for us and not an investment, so we're not going to worry too much about that. But if Nektar options start coming across the HeatSeeker again, that's when we'll know the time is right to get back into a position again. Until then, there are many more opportunities that we will be able to take advantage of, and I look forward to discovering and sharing them!


Jon "Doctor J" Najarian
Editor
ChangeWave Options Trader


P.S. If you're interested in refining your investment and trading skills, then be sure to reserve your free tickets to next month's World Money Show and New York Traders Expo. These are two great opportunities to meet the ChangeWave advisers and get expert advice on how to move the odds in your favor! Click on the links below to sign up:

World Money Show, Orlando, Fla.

New York Traders Expo, Manhattan