Merrill Lynch (MER, $36.46, down $1.23) is under heavy selling pressure amid rumors of an impending profit-warning and further write-downs. The company has gone on record and is not preparing to issue a profit warning today it said in a statement. The stock hit a low of $35.38, just 22 cents away from its 52-week low, thirty minutes into the trading session.

Water cooler rumors spread after wire services quoted traders who said there was talk that Merrill would announce a write-down tied to mortgage loan losses. Merrill is the world’s largest brokerage and is due to announce 2Q results next month.

Given the poor quarterly results posted by Lehman Brothers (LEH, $23.88, down $0.58) and Morgan Stanley (MS, $39.01, down $1.18) this week, the bears have now focused their attention towards Merrill Lynch’s earnings. Analysts have been reducing their estimates for Merrill Lynch and short-sellers are trying to throw more gas on the fire.

I’ve been mentioning Lehman more often than Merrill but all of the brokerage firms are in the same boat. The story is the same with all three companies, meaning the market just doesn’t know what the fair value for these stocks are. They are down anywhere from 50%-75% from their highs and although they may seem “cheap”, investors are worried there may be more skeletons in the closet that we don’t know about.

It the past two weeks, Lehman has traded from $34 to $21 back to $28 and is now back below $24. Yeah, that’s volatility and it’s offering the chance to make a lot of money and lose a lot of money at the same time. Merrill hasn’t traded in as wild of a range, instead it has gone straight down for a month. The stock was at $50 on 5/19.

Merrill could continue lower as traders load up on the July 35 puts (MERSG, $2.50, up $0.65) and the July 32.50 puts (MERSA, $1.72, up $0.60).

Rick Rouse
Rick@OptionsMentoring.com

Anheuser-Busch (BUD, $61.18, up $0.13) is expected to have its board meeting within the next day or two to discuss InBev’s $46 billion takeover bid. The company isn’t giving an exact time on when the meeting will be held but the board will meet to consider a variety of options.

It doesn’t take a Harvard lawyer to figure out that the King of Beers will likely reject the offer by saying it’s too low. The wild card will be Warren Buffet. He owns more than 35 million shares, or nearly 5%, which is worth $2 billion give or take a few hundred million depending on the share price. Here is what one of the Busch family members said about Buffet’s stake:.

“Mr. Buffett, who holds a 5 percent stake in Anheuser-Busch has a notable reputation for assisting in matters where family ownership is at stake. His participation in the recent merger of Wrigley and Mars Inc. is evidence of his integrity. Should Mr. Buffett see this merger as a positive action for all shareholders involved, the likelihood of a deal will increase enormously.”

I hope BUD rejects the offer and says it’s too low because InBev is under-bidding despite the fact the company’s CEO saying $65 a share is fair and that’s as high as they go. Give me a break. This was no “holler at the moon” offer given BUD’s iconic nature and penetration into the U.S. market.

Another interesting development is the news that Grupo Modelo’s CEO, Carlos Fernandez, resigned from BUD’s board today. Mexican brewer Modelo and BUD have also been exploring a possible deal together. InBev has told BUD that its bid for them would be affected if BUD made any significant deal with Modelo.

Since I don’t have any stock or option positions in BUD, here’s to a rejection and a possible play for a Mexican brewer.

Rick Rouse
Rick@OptionsMentoring.com

Sonic (SONC, $16.40, down $0.60) is trading lower this morning on a downgrade by Credit Suisse to “Neutral” from “Outperform,” citing weaker demand and higher costs could cause the company to miss its same-store sales targets. Cheesecake Factory (CAKE, $17.00, down $0.27) also got the exact same downgrade.

The stock had been in a long-term uptrend over the past decade and had consolidated between $18-$24 over the past few years. However, that trend was broken when Sonic recently lowered its full-year earnings outlook due to lower-than-expected 3Q results. They announce earnings 6/24.

The company now anticipates growth of 9%-12%, down from its prior 15%-17% growth forecast. This equates to a 2008 profit of $1.06 a share while Wall Street had expected full-year earnings of $1.11. The stock fell 10% that day and closed below $20.

Sonic was doing great and looked poised to challenge its 52-week high of $26 despite tough economic conditions. The problem was that Sonic gave a rosy forecast in a prior quarter and simply overestimated its own growth. Maybe Sonic failed to factor in the rising commodity and labor costs or they did and underestimated those numbers. Either way, the stock is now sitting at multi-year lows.

Usually when a stock follows a trend of events that favors a lower stock price, there’s no need to get excited about it over the near-term. But longer-term, Sonic should bounce back. It is a “regional play” with many of its drive-in restaurants located in the south central part of the U.S. Some question the drive-in stratedgy concept but Sonic really is a growth story that could do well in a saturated fast-food market.

Let’s wait for the dust to settle on this one before looking at a long position. I like the company too much to short the stock or to buy puts. When things get back on track with the stock and we start to see some real growth then maybe there’s a chance to buy longer-term calls. I don’t see any listed call LEAP options on Sonic and the furthest out are the December contracts right now. There is slight volume on the December 20 calls (ZSQLD, $0.70, down $0.25) as we speak but let’s see how Sonic reacts over the next few quarters before going long.

Rick Rouse
Rick@OptionsMentoring.com

***Coal has been on quite a roll lately and you may have noticed that many of the stocks on our Watch List jumped again yesterday.

Arch Coal (ACI, $75.40, up $3.79). Profiled at $68.30. The June 70 calls (ACIFN, $5.52, up $3.17) are now up 125%. The July 70 calls (ACIGN, $8.20 up $2.60) were profiled at $5.10, they are up 60%.

Massey Energy (MEE, $90.32, up $4.64). Profiled at $69.00. The June 70 calls (MEEFN, $19.90, up $4.00). were trading at $3.30 and are up a whopping 475%! The July 70 calls (MEEGN, $21.00, up $3.90) were going for $6.00, up 250% since.

Patriot Coal (PCX, $161.39, up $8.10). This stock has moved 40 points since we added it to our Watch List. The June 125 calls (PCXFU, $36.00, up $8.50) were at $7.10, they have returned 400%. The July 125 calls (PCXGU, $38.00, up $4.50) have returned over 200% from an entry price of $12.

Peabody Energy (BTU, $83.06, up $4.09). Profiled at $75.28. The June 80 calls (BTUFP, $0.75, down $0.35) just got in-the-money and made a solid 220% gain yesterday. The July 80 calls (BTUGP, $6.50, up $2.20) gained 50%.

This sector is white-hot and will eventually cool. What makes this run so special is that there are stocks going up with the market going down. Think about that for a minute. The Dow fell below 12,000 yesterday and has lost over 600 points in a little over two weeks. Meanwhile, the aforementioned stocks gained 20 and 40 points! Sell your June options today and 1/2 your July options if you got in early…

***Remember the Barron’s article on General Motors (GM, $14.89, down $0.93)? The stock made a nice jump in the days following the story to $18 but is now coming under heavy selling pressure. I mentioned GM was not out of the woods and short sellers seem to be having their way right now. Barron’s predicted a double for the stock or a big loss in 12-18 months. Maybe they meant a big loss for the stock followed by a double off its lows. The January 2009 25 calls (VGNAE, $0.52, down $0.13) were at $1.37 and have lost half their value. Stay away from this one until things improve…

***Another scary stock that should have you shaking like a kid in a graveyard on Halloween night is Wachovia (WB, $16.88, down $0.28). On 5/29 this one was at $24. I didn’t profile any puts with the blog because I just don’t trust the Financials. One minute they are rallying, the next minute they are getting crushed. Any straight up call or put positions can be a roll of the dice with the regional banks…

***Potash (POT, $237.74, down $1.76) keeps going higher than a crowd at a Cypress Hill concert. On 6/11, I mentioned Potash wasn’t done “peaking”. The company’s CEO gave us the best clue ever that the stock was headed higher, way higher, that day. At the time he said, “we have a lot of pricing power” and “we’re nowhere near peak pricing.”

On 6/5, the June 220 calls (PJNFD, $17.80, down $2.21) were trading at $7.00. They hit a high of $21.62 yesterday. The July 240 calls (PJNGH, $12.50, down $1.40) were going for $6.17 and hit a high of $14.90. Ridiculous profits in a ridiculous market. Again, sell your June options today and 1/2 your July options…

***I have said before, sometimes the market will just give you clues on how a stock is going to react. Lehman Brothers Holdings (LEH, $24.78, down $0.36) gave us clues it was going lower. Watching Google (GOOG, $562.38, down $7.08) go up at Microsoft (MSFT, $28.46, down $0.34) and Yahoo’s (YHOO, $22.91, down $0.34) expense was an easy one to figure out. FedEx (FDX, $82.60, down $1.73) coming in below Wall Street’s numbers? Tough. InBev buying Anheuser-Busch (BUD, $61.90, up $0.70)? That was a given. The clues are there. It’s up to us to read between the lines…

Hey, do us a favor and leave us a comment on how you like the blog. Also, if you have any questions or stocks you would like covered, send them to me. Thanks!

Rick Rouse
Rick@OptionsMentoring.com

If you had been “thinking outside the box” you would have seen this one coming. CarMax (KMX, $15.97, down $2.37) is getting hammered today after reporting a 55% drop in quarterly profits. The company reported earnings of $29.6 million, or $0.13 a share, down from $65.4 million, or $0.30 a share, versus the year-ago period.

It all makes sense. Consumers are trading in their gas guzzling SUV’s at CarMax because they are having trouble selling them outright. CarMax is buying them at discount prices but because prices are falling on SUV’s, CarMax can’t get rid of them. To make matters worse, the company suspended their guidance for the rest of the year. In other words, things are so bad CarMax can’t even predict where next quarter’s earnings will be. That’s scary if you own the stock.

Today’s 13% drop has sent the shares to a 52-week low. The July 17.50 puts (KMXSW, $2.00, up $1.05) and the July 15 puts (KMXSC, $0.65, up $0.35) have more than doubled with both strike prices trading more than 2,800 contracts thus far.

Rick Rouse
Rick@OptionsMentoring.com

I wish I had an “easy button” for all option trades like FedEx (FDX, $81.56, down $2.77). Yesterday morning I previewed FedEx’s earnings and at the time the stock was trading at $85.74. Sentiment grew weaker throughout the day and the stock fell even further. I had mentioned nothing good could come out of the company’s earnings and it didn’t.

FedEx reported earnings of $1.45 a share which was two cents below Wall Street’s expectations. They not only missed earnings for the quarter but also lowered full-year guidance. The company now expects 2009 earnings of $4.75 to $5.25 per share while analysts had forecast earnings of $5.98. According to their CEO, “record-high fuel prices and the weak US economy dampened volume growth and substantially affected our bottom line.” That pretty much sums things up.

The June 90 puts (FDXRR, $8.00, up $2.39) were profiled at $4.80 and traded as high as $8.70 this morning. The July 80 puts (FDXSP, $2.30, up $0.55) were going for $1.59 yesterday and have also provided some nice gains. Remember the June option contracts expire this Friday and its better to close a trade today with big profits instead of trying to squeeze out a few more percentage points. Anything can happen in this crazy market…

Rick Rouse
Rick@OptionsMentoring.com

Apple (AAPL, $181.43) shares were upgraded this morning ahead of the bell by Morgan Stanley (MS, $40.59). Morgan raised its price target on Apple to $210 from $185 saying they expect iPhone sales to double in 2009 with the lowered $199 selling price.

The stock had a huge run in April from $140 to $180 but has been stuck in the $180s since then. When Apple announced the details of pricing and availability for the iPhone, the stock fell $13 in the following days afterward. Even news that Mac unit sales grew 50% on a year-over-year basis in May hasn’t help. So, despite analysts tripping over themselves to raise Apple’s price target (RBC Capital also upgraded Apple to Outperform and a $220 target), nothing has been able to power the stock beyond $190.

Apple may have been “overvalued” when it first hit $200 but that is not the case now. The big blow for the stock came in January when Apple provided lower earnings guidance. The stock started the year at $200 and hit a low of $117 by the first week of February.

In the big scheme of things, Apple has done well to recover from those lows. What investors are forgetting is that the same analysts who upgraded the stock were the ones who downgraded the stock back then and revised their price targets lower to the $150-175 range. Price targets are usually for 12 months but this is why I ignore them. As option traders we aren’t interested in the “buy-and-hold for years” stocks. We are interested in volatility and price action.

Apple is certainly volatile and is one of my favorite option chains to trade. However, the upgrade on Apple from Morgan was a way to take the focus off of Morgan’s own earnings which blew wind this morning.

Rick Rouse
Rick@OptionsMentoring.com

FedEx (FDX, $85.74, down $0.29) will report earnings Wednesday morning and I thought I would take a look at how things are shaping up in the June and July option contracts heading into the call. The stock has been punished by rising fuel costs falling from nearly a $100 in May to its current level. Wow. Wall Street expects the company to deliver earnings of $1.47 a share on revenue of $9.6 billion.

Due to the continued rise in oil, FedEx recently lowered earnings estimates from an average of $1.70 to the current $1.47 level. It seems like all of the bad news has been priced into the stock but with it sitting near 52-week lows, investors should be careful of catching a falling knife. Too many things can go wrong when earnings are announced and option traders are leaning more toward the put side of FedEx.

The June 90 puts (FDXRR, $4.79, down $0.01) are holding steady and are the most heavily traded puts at the moment for the June contracts. Volume is also picking up in the July 80 puts (FDXSP, $1.59, up $0.04) which are out-of-the-money. There has been no decline in oil since FedEx warned and that has me worried.

FedEx may be too risky to play right now but is beginning to look attractive if oil ever comes back down to reasonable levels.

Rick Rouse
Rick@OptionsMentoring.com

Rambus (RMBS, $20.10, up $0.55) is a stock known for its volatility and legal battles with other chip companies accusing the company of “obtaining an illegal monopoly” in the 1990s. I have followed Rambus for a few years now and although the stock doesn’t quite make the dramatic moves it once did, it can still move 10%-20% in a month. And that’s just enough for a pretty decent return if you play it the right way.

A number one rule for many option traders is that they never play options on a company involved in legal disputes over patents, royalities, and other types of frivilous lawsuits. Which I can agree with…it’s a good rule. But sometimes the option market will give us a clue on what traders are thinking.

Rambus recently won a huge battle when a court ruled that the Federal Trade Commision (FTC) failed to prove its “allegation of monopolization” and expressed doubt that the FTC produced “substantial evidence that Rambus engaged in deceptive conduct at all.” This was back in April and the stock zoomed from $18 to $26 on the news.

The victory was another step toward monster paydays which will come when Rambus is able to collect royalties on its technologies. However, as is much the case with Rambus, the ruling returns to the FTC for a possible retrial. Rambus has been involved in patent disputes with Samsung, Hynix Semi and Micron Technology and the amount of money Rambus spends on its defense team is what has really kept the lid on this stock over the years.

Rambus must continue to spend heavily to defend its case because hundreds of millions of dollars in royalties are at stake. If and when the saga ever ends, Rambus can then collect those royalties from its memory chip technologies and the legal fees will be chump change.

I’m not sure what’s around the corner for Rambus but option traders made some bets on the November 20 calls (BNQKD, $4.00, up $0.90) yesterday. Volume checked in at 5,200 contracts or 20x open interest. Perhaps this is an indication that many traders are betting Rambus stock could break its 52-week high of $26.42 by the time November rolls around. This would represent at least a 50% return based on the calls being $6+ in-the-money by expiration.

Rick Rouse
Rick@OptionsMentoring.com

Coal stocks were mixed today as some traded higher while others suffered modest losses. A couple of weeks ago I highlighted a few stocks and options that would benefit from a continuing uptrend. All of them are trading higher from where they were profiled but some of them have exploded and continue to set 52-week highs.

Arch Coal (ACI, $70.61, down $0.89). Profiled at $68.30.

June 70 call (ACIFN, $2.15, down $0.85). The calls are still in-the-money but took a hit today. June contracts expire this Friday.

July 70 call (ACIGN, $5.40, down $0.70). Profiled at $5.10, these calls may still have room to run.

Massey Energy (MEE, $84.67, up $2.83). Profiled at $69.00. This stock has made a nice 15-point move and the calls are now deep in-the-money.

June 70 call (MEEFN, $14.50, up $2.70). Profiled at $3.30. What a run. Set stops at $13.20 which gives you a profit of 300%.

July 70 call (MEEGN, $16.32, up $2.12). Profiled at $6.00. These calls will trade nearly dollar for dollar as long as they stay deep-in-the-money. Set stops at $12.00 to capture a 100% return.

Patriot Coal (PCX, $154.36, up $5.67). Profiled at $122.17. How about this $30 move? Looks like we have a tiger by the tail with this one.

June 125 call (PCXFU, $30.10, up $10.54). Profiled at $7.10. Set stops at $25.00.

July 125 call (PCXGU, $34.90, up $10.50). Profiled at $12.10. Set stops at $25.00 as well.

Peabody Energy (BTU, $77.30, down $0.29). Profiled at $75.28

June 80 call (BTUFP, $0.75, down $0.35). These calls are out-of-the-money are likely to remain that way.

July 80 call (BTUGP, $3.90, down $0.20). Profiled at $4.00. Peabody just isn’t showing the strength that PCX and MEE are.

Joy Global (JOYG, $84.49, up $1.32). Profiled at $84.49.

June 85 call (JQYFQ, $1.60, down $0.55). The 85 strike sems to be the battle line.

July 85 call (JQYGQ, $4.49, down $0.31). Profiled at $4.70. Slightly profitable until today.

Remember, the June options expire this Friday. The July options do not expire until 7/18.

Rick Rouse
Rick@OptionsMentoring.com