Eaton (ETN, $96.68, up $2.42) continues to roll. The stock gained another 2.5% today and is up nearly $8 for the week. I had mentioned the activity building in the June 95 calls (ETNFS, $3.40, up $1.30) when they were trading for $1.80. Trading volume was strong and the stock made higher highs throughout the week. This sets up well for next week as Eaton continues its assualt on $100. If Eaton can get to $100 then the June 95 calls will be worth at least $5.00.

Apple (AAPL, $188.75, up $2.06) traded higher every day this week ahead of its June 9 release of the 3G iPhone launch next month. Although the impact won’t be seen in its upcoming quarter many expect Apple will crush their estimated 10 million iPhone target well before the end of the year.

Options traders are targeting the June 200 calls (APVFT, $2.91, up $0.16) and the longer-term July 200 calls (APVGT, $6.85, up $0.35).

Before closing, I also wanted to mention the American Society of Clinical Oncology’s (ASCO) annual meeting which is being held over the weekend. Imclone (IMCL, $43.58, up $0.58) and Bristol-Myers Squibb (BMY, $22.79 up $0.31) could see some action come Monday. The companies are expected to give an update on Erbitux that could help lift these stocks higher. Imclone saw plenty of action today in the June 45 calls (QCIFI, $1.55, Up $0.28) as 11,000 contracts traded hands. The July 50 calls (QCIGJ, $0.80, up $0.10) aslo experienced some brisk trading as over 2,000 contracts traded hands.

I’ll give you an update on Monday.

Rick Rouse
Rick@OptionsMentoring.com

Dell (DELL, $21.81, up $0.12) reported earnings last night and investors loved what they heard. The numbers came in four cents above expectations on strong international sales and from cutting costs and slashing its workforce. For the quarter, Dell earned $784 million, or $0.38 a share versus $756 million, or $0.34 a share, a year earlier. Revenue came in at a little over $16 billion, about $400 million above estimates. In after-hours trading Dell was up $2.16 to $23.97.

I profiled the June options and mentioned that option traders were favoring a good report. Let’s take a look at those options and see where they might open this morning and what kind of scenarios might play out.

If you were totally bullish on Dell and just bought the June 22 calls (DLQFV, $0.74, up $0.03) right before the close, your total cost would have been $75 a contract. If you bought 10 of them you are looking at $750. Now, assuming Dell opens at $24 and holds last night’s after-hour gains then the calls will be worth at least $2.00 and you more than doubled your money overnight. Your $750 is now worth $2,000. Good bet.

If you were totally bearish and you thought Dell was going to go down and you bought 10 June 20 puts (DLYRD, $0.22, down $0.04) then you are in “the house of pain” right now and you probably didn’t sleep too well last night. Your $225 is history. Not a good bet.

Now, what if you had bought 10 calls and 10 puts (known as a strangle option trade)? Your total cost would have been $1,000. The calls would still be worth $2.00 and you still would have made a 100% return even if the puts expire worthless. By “hedging” your Dell option trade you were protected either way unless the stock stayed flat. But I told you Dell could move 5-10% and last night’s 9.9% after the close was right on the money. Great bet.

However, as I also mention time-and-time again, after-hour trades do not mean realized profits. The stock and options actually have to open at 9:30 EST before you can book a gain or loss. Sometimes a 10% move in after-hour trading translates into a 5% gain or even a 5% loss in the stock price by the time the opening bell rings.

Hats off to Dell and to those option traders brave enough to play the earnings!

Rick Rouse
Rick@OptionsMentoring.com

It wasn’t suppose to go this way for Micheal Dell, CEO of Dell (DELL, $21.69, up $0.20). Since returning to the company he founded, Mr. Dell has seen the stock price fall from $31 to a low of $18 in April.

Despite expanding dealer outlets for its computers with deals like Best Buy (BBY, $44.00, up $0.75), Dell appears to be fading in the race to get in the consumer’s face. Not only is Dell losing market share to Apple (AAPL, $187.01, up $0.58) and Hewlett-Packard (HPQ, $46.52, up $0.82) but it recently got hit with some nasty news. Just this week a judge ruled against the company saying it engaged in “fraud, false advertising, deceptive business and abusive debt collection practices.”

Dell is expected to report earnings after the bell today and Wall Street is not looking for much out of the company. Although sales may show an increase of about a billion from roughly $15 to $16 billion for the quarter when compared to last year’s first quarter, analysts are expecting $0.34 a share which would only match the year-ago quarter.

Again, the thing that will most likely move Dell is what guidance it gives. If Dell’s sales and earnings guidance are weak and they show they are losing market share then it could be an ugly open come Friday. Even if Dell surprises and woos Wall Street, I think we get a 5-10% move either way.

Playing earnings is a risky game but a lot of option traders do it. Trading in the June 22 calls (DLQFV, $0.78, up $0.07) is brisk with over 9,000 contracts traded. The June 20 puts (DLYRD, $0.24, down $0.02)have traded nearly 5,000 contracts. Judging by the call/ put ratio, traders are expecting a good report. If you take a look at Dell’s option chain you will notice the options are available in $1 increment strike prices. Not unusual but rare.

I’ll revisit Dell on Friday and we will see how these options fared.

Rick Rouse
Rick@OptonsMentoring.com

More bad news from the Financial stocks. It what can compared to catching a falling knife, shares of Wachovia (WB, $23.80, down $0.59) fell another 2.4% yesterday and hit a fresh 52-week low of $23.13 in the process. I’ve been beating the drum on how risky Financial stocks are right now and who knows when and where the next tidal wave is coming from?

You know it gets scary when Moody’s (MCO, $36.20, up $1.33) drops 20% in one day, falling from $44 to $37, after saying a “computer error” was the reason behind the company giving out improper credit ratings. I didn’t blog on the matter because I think I’m still in shock. Moody’s has always been well respected in what it does but this was a shocker to say the least.

Wachovia is a mess and even at 52-week lows, the stock doesn’t appear to be headed for a recovery anytime soon. The company has taken massive write-downs to the tune of $4 billion, slashed its dividend, and is diluting the value of its stock. The dividend was cut from 64 to 37.5 cents a share and Wachovia raised $8 billion in new common and preferred stock. A billion here, a billion there in losses…just what the heck is going on here Wachovia?

I still don’t trust Financial sector and there will be a time when these stocks will appear to be dirt cheap. Maybe they are right now but I would wait for two consecutive quarters of good earnings before even thinking about buying a bank stock right now. I will be keeping an eye on the Financial Select Sector (XLF, $24.64, down $0.14) for any signs of a turnaround. This exchange traded fund is a safer way to play the Financial’s instead of finding a true bottom for a particular stock.

Rick Rouse
Rick@OptionsMentoring.com

Every now and then a company adapts to the environment and is able to see the road ahead. Eaton (ETN, $93.27, up $4.02) has done just that and now it is rewarding its shareholders. The company has slowly switched its focus from auto engines to “developing “green” engines for mass transit. Eaton is supplying the hybrid power system for the 500 hybrid electric vehicles that United Parcel Service (UPS,$70.54, up $2.14) recently ordered.

Eaton’s has grown internationally through acquisitions (11 in 2007) that is helping fuel its growth. In April, the company reported earnings of $247 million, or $1.64/ share. If you exclude charges, they actually hit the high end of their guidance of $1.70. Eaton also raised estimates for 2008 by a nickel to $7.80 to $8.30 a share.

The stock took a big hit from late December when it was at $100 to its $78 bottom in late February. Since then, Eaton has slowly proved to Wall Street that the synergies from these acquisitions are starting to pay off and investors are rewarding the stock. Want even more proof? Eaton’s CEO said he expects top line growth of 25% and nearly 20% of that will come from these acquisitions.

Was yesterday’s big move the one that kick-starts Eaton’s run towards a new 52-week high of $104? As much hype as this stock is getting you would think its Big Brown going for the Triple Crown (that would be June 7 my friends). And since I just mentioned June, I might as well tell you about the June 95 calls (ETNFS, $1.80, up $1.22) for Eaton. They were up 210% yesterday. They are still out-of-the-money but that will change if Eaton starts to race towards $100. Place your bets!

Rick Rouse
Rick@OptionsMentoring.com

First Bud, now Hershey. It seems America’s favorite chocolate maker, Hershey (HSY, $38.84, down $1.09), is the latest company joining the rounds as possible takeover targets. On Tuesday, Hershey’s stock gained nearly 10% on speculation the company may be considering a joint venture to help lift slumping sales.

The short list for possible partners include Cadbury, Nestle and Kraft Foods (KFT, $32.17, up $0.17). The future of Hershey has been a hot topic lately, especially after the Mars/ Wrigley (WWY, $76.86, down $0.41) merger. Hershey has a lot at stake if it doesn’t do something quick because the new Mars-Wrigley combo is gunning for Hershey’s business in the U.S. and globally. Cadbury and Hershey have talked before and things haven’t worked out…yet. Some analysts believe Cadbury now has the leverage to get Hershey at a discount and close the deal under much better terms.

Either way, the put/call ratio for Hershey options has swung heavily towards the call side. In other words, option traders are trying to bid Hershey higher. There was considerable action today in the 40 calls. The June 40 calls (HSYFH, $0.90, down $0.90) traded nearly 2,000 contracts while the July 40 calls (HSYGH, $1.65, down $0.70) traded close to 5,000 contracts.

Both option contracts took a big hit today as Hershey traded lower. However, today may have provided a good entry point for those of you who are bullish on the stock and think a takeover is imminent. The July 40 calls do not expire until the 18th so they would provide you with more time.

Hershey’s stock is just below $39 and a 10% move would put the stock right around $43. If Hershey were to trade to $43 by July 18 then the July 40 calls would be worth at least $3.00 which would represent nearly a 100% return from current levels. For the June 40 calls; if Hershey was trading at $43 by June 20 then they would also be worth $3.00 and your return would be a little over 200%. The June calls still have three weeks before they expire and the stock would only have to be at $41 for you to break even.

A 10% jump might be asking a bit too much from this stock but there’s a good chance a buyer will emerge. Hershey simply cannot afford to sit around and watch Mars take market share away from it. Yes, there is plenty of risk buying the June or July 40 calls straight up as sometimes this type of news is purely speculation. And that is what this is. Often times these things come true but they take longer than expected. Keep this in mind as options are time sensitive.

Note: Share of Anheuser-Busch (BUD, $55.13, down $1.62) slipped 3% today.

Rick Rouse
Rick@OptionsMentoring.com

Kaydon Corporation (KDN, $60.47, up $1.36) is doing well today and is in “blue-sky territory.” If you are unfamiliar with the term “blue-sky territory” it is something I say when a stock breaks above all previous resistance points and is at new all-time highs. I’ve been talking about “Wind Power” plays for a while now and these stocks are moving.

Granted, sometimes stocks go through fads and they are either undervalued then get overvalued or they are overvalued and everybody sells them. Kaydon is no different. The company is a supplier of wind-turbine bearings and other products and recently reported earnings that matched Wall Street’s estimates. Some analysts believe Kaydon is “pricey” at these levels but some of them may not truly understand Kaydon’s business.

The company is taking steps to take full advantage of the wind energy market and could surprise those same analysts in the upcoming quarters. Only time will tell just how good their earnings will or will not be but some options traders have been buying calls in hopes of a higher stock price.

The June 60 calls (KDNFL, $2.30, up $0.65) are up nearly 40% on Kaydon’s 2% move today. Some options traders are even buying longer-term contracts in hopes of a continued breakout. The October 60 calls (KDNJL, $5.70, up $1.90) are up 50% and the January 60 calls ($4.90,up $0.80) have advanced 20% today.

Rick Rouse
Rick@OptionsMentoring.com

Last Friday Black Box (BBOX, $29.31, up $1.30) fell nearly 15% after reporting earnings. Yesterday, the stock recovered about 5% of that loss but will it be short lived? The company’s numbers were decent but were below what one analyst had penciled in. In other words, although Black Box said it expects its fiscal 2009 profit to rise 46% and anticipates profits between $3.25 to $3.40 a share, sales were seen to be flat year-over-year.

Compare this to the $3.36-$3.60 a share Wall Street had expected the company to earn and you can see why the stock fell. Black Box also had its price target cut to $46 from $59 which reflected the lowered forecast.

The options for BBOX were active on Friday but had cooled down by the end of Tuesday’s trading session. However, there was noticeable volume in the June 30 calls (QBXFF, $0.80, up $0.25) and the June 25 puts (QBXRE, $0.20, unchanged) before the final bell sounded.

From a technical standpoint, the stock broke below many of its moving averages and could be filling in some gaps before it starts another leg down. Either way, it would be a stock I would avoid because the average daily volume is barely over 100,000 shares traded and the fills on your option orders may have a wider bid and ask because it is not as liquid as other stocks in the same sector.

Rick Rouse
Rick@OptionsMentoring.com

I’ve been fielding a lot of questions on Chipotle Mexican Grill (CMG, $85.07, down $1.03) lately and I thought I would provide an update on what has happened since my last post on the company a couple of weeks ago. Restaurant stocks have taken a beating lately and in that time frame Chipotle has quickly fallen from $95 to $85. That is a small drop if you consider the stock has a 52-week high of $155.

One of the major uncertainties hurting Chipotle and Restaurant stocks in general is the effect of higher food costs. We have all heard about the supposed “rice shortage” and other commodities like corn and meat and veggies could continue higher for the foreseeable future. All of this will no doubt weigh on margins and eateries may have to increase menu prices just to keep up.

In April, when Chipotle was at $110 I talked about how active the May 105 puts were and that the bears could be ready to come out of hibernation. Those same May put options ended up going from $4.50 to over $9.50. I also said it appeared that traders were also rolling out their positions into the June 95 puts (CMGRS, $11.70, up $1.00) which were trading at $5 on 5/16. They have also more than doubled.

I point these things out because it is important to notice trends and what other factors can influence your holdings wheather you are bullish or bearish on a stock. When Chipotle fell below $90 I said momentum could take it to the lows $80’s and we got there Friday when the stock hit a low of $83 and change. Even if you don’t trade options and you were bullish on the stock, you would have saved yourself a lot of money by noticing Chipotle had broken key support levels.

The stock is just a trading day away from setting a 52-week low and usually in these circumstances new lows are made. If $78 is broken then the next level of support could be in the $60’s. Ouch! However, the stock has been hammered and the remaining Chipotle bulls might make a stand at current levels and save it from going below $80.

Rick Rouse
Rick@OptionsMentoring.com

It has been a tough road for Ford (F, $6.87, down $0.29) and General Motors (GM, $17.60, down $0.83) lately. Both stocks have taken big hits; GM has fallen from $23 to $17 while Ford has dipped from $8.50 to just below $7 since the start of May.

The race to “Go Green” has taken center stage with the price of oil unlikely to fall below $100 a barrel anytime soon. That may be an understatement in 6-12 months but it is apparent that consumers are doing anything they can do reduce their fuel bill. With the average commuter spending anywhere from $500 to $1,000 a month on a 120 mile round-trip drive to and from work, the auto-makers are scrambling to bring electric cars to the market.

This is where GM and Ford have really been slacking as both companies have always been a step behind the “Go Green” revolution. GM has a planned plug-in hybrid, the Volt, expecting to hit the U.S. market in 2010 but Toyota has the Prius which is selling well over in Japan and will also hit the U.S. market in 2010. Ford is working on the Escape but no date has been announced for its release.

Ford and GM have accelerated the development of the hybrids in the wake of the announced cutbacks in production. GM is also dealing with the strike settlements that will cost the company $2 billion for the current quarter. Ford announced an incredible first quarter last month when it posted a profit of 20 cents versus expectations for a loss of 16 cents. At the time, Ford also predicted a return to profitability in 2009 but you can kiss that promise goodbye as the company announced last week that ain’t gonna happen.

In a what’s hot and what’s not world, SUV’s and utility trucks are out while more fuel efficiency vehicles are in.

Rick Rouse
Rick@OptionsMentoring.com