The Financial stocks continued their rally in the morning session on Monday but faded by the time the closing bell sounded. Some of the positions went on to double in price and that is really when they should have been sold, regardless of a stop. Sometimes you have to work your trades a little harder but for those of you who don’t have access to the market during business hours, stops are a beautiful thing.

Citigroup (C, $19.69, up $0.34) hit a high of $20.40 within the first hour of trading and the January 20 calls (CAD, $2.30, down $0.05) got to $2.60 before closing lower. They were profiled at $1.25 so stops should have been raised along the way. If you didn’t get out at higher prices then the $1.90 stop should still be in place.

Goldman Sachs (GS, $180.78, down $2.06) made it to $184 and change before fading. The January 260 calls (GPYAC, $1.05, down $0.20) opened at $1.18 and were automatically stopped out. The trade netted a 15% return, not bad for a few days of work.

Merrill Lynch (MER, $30.58, down $0.33) looked strong out of the gate but fell below $30 by the time the market was winding down. The January 35 calls (MERAG, $2.48, down $0.37) opened at $2.69, which fell between the two stop targets of $2.65-$2.75, made a run to $3.35, and hit both targets on the way back down. These calls were profiled at $1.90.

Wachovia (WB, $13.18, up $0.21) opened higher and was really strong but suffered the same fate as the others after hitting $14.66. The January 15 calls (WBAC, $2.15, up $0.22) still managed to close slightly higher but traded to a high of $2.90. They were profiled at $1.30 and $2.60 was the 100% exit point, especially with the company reporting earnings this morning before the opening bell. Wall Street is expecting a loss of $0.78 per share.

Rick Rouse
Rick@OptionsMentoring.com

Genentech (DNA, $93.88, up $12.06) rallied 15% on news that Swiss pharmaceutical giant Roche announced a $44 billion bid to buy the remaining 45% of the company that it does not own. The offer is for $89.00 a share but the market is clearly pricing in a higher bid. Here’s another developing story of an American company quite possibly getting acquired because of the weaker dollar. It would cost $1.59 to buy one euro with today’s exchange rate so it’s easy to see why Roche is making a play for Genentech.

We’ve been down this road before and it’s likely the offer will get raised. Genentech just reported outstanding earnings and the sales potential for its cancer treatment Avastin is enormous. For the quarter, the company reported a profit of $782 million, or $0.73 a share on revenue of $3.2 billion. Avastin made up $650 million of those sales which topped Wall Street’s expectations.

Avastin sales are burning up the track because of the increased use to treat breast cancer. The drug is also beng used to treat various stages of colon and lung cancer as well. If the company can expand on the approval for additional therapies then the stock will look super cheap at these levels and Roche knows it.

The two sides are having an “informal” meeting today and the early word is Roche will have to offer a higher price between $90 and $95 per share. I say Genentech is worth a least $125 but a deal will likely come in around $100. At least I would hope so. Genentech is sitting at all-time highs on the announcement but the stock was clearly headed for greener pastures without Roche’s full support or buyout offer.

The call option chains don’t list many calls over a 100 strike price but there was plenty of action in the pits. The August 95 calls (DWNHS, $1.50, up $1.25) soared 500% while the September 100 calls (DWNIT, $0.65, up $0.45) jumped 225%. It may be too late to get into any trades because the unknown will be what price Roche is really willing to pay. A $100 price would be nice and the August 95 could have a little juice left in them if that were the case. However, the options expire in three weeks and the trade does not give us good odds.

Rick Rouse
Rick@OptionsMentoring.com

Apple (AAPL, $162.93, down $2.22) reports earnings after the closing bell. Wall Street is expecting $1.08 a share. Mac sales are strong and this will likely be the key to where Apple trades on Tuesday. iPods will be steady and the new iPhone won’t add be adding anything to the bottom line in the quarterly numbers so what Apple says about the Mac could determine the direction of the stock.

Bank of America (BAC, $29.70, up $2.21) is helping keep the Financial sector rally alive for another day. The company reported earnings of $0.72 a share which blew the doors off Wall Street’s estimates of $0.53 a share.

Merck (MRK, $36.00, down $1.68) is expecting to report earnings of $0.83 a share after the bell today. There’s chatter at the water cooler that Merck could surprise Wall Street with a number of $0.86 a share. However, there’s a camp that believes Merck could come in at $0.79 a share. Either way, Merck is trading lower after delaying its numbers until after the bell. The company was going to report earning before the bell but delayed results so European researchers can present some data from a study of the company’s cholesterol drug Vytorin. The news is due out at 1PM EST.

Option traders were scooping up the August 37.50 calls (MRKHU, $1.00, down $0.50) and the August 40 calls (MRKHH, $0.35, down $0.15) on Friday as the July contracts were expiring but they are trading lower today. The August 35 puts (MRKTG, $0.85, up $0.35) are the most active in the August put chain.

Merck has been known to disappoint in the past and just last week the company settled a $4.85 billion agreement that will end 50,000 lawsuits from the Vioxx fiasco. Those who are bullish are taking on added risk with other storm clouds hanging over Merck but stranger things have happened. Too rich for my blood.

Rick Rouse
Rick@OptionsMentoring.com

I’ve been warming the bus up for Imax (IMAX, $7.76, up $0.40) and Friday Wall Street finally jumped on board. The stock had a huge day, up 5%, with the release of The Dark Knight as strong ticket sales propelled the stock to a new 52-week high of $8.28 earlier in the session.

Just how strong were ticket sales? Strong enough to break box-office records. The Dark Knight destroyed the weekend record set by “Spider-Man 3″ last year, selling an estimated $155.3 million worth of tickets during its first three days of release. Spidey did $151 million. Imax has nearly 100 venues and quite a few of them were sold out before the weekend even started. I don’t have any numbers on what Imax made but they should announce something on Monday.

Imax’s stock experienced heavy volume on Friday as 1.5 million shares changed hands or more than 7x average daily volume. The September 7.50 calls (IMQIU, $1.00, up $0.35) which were going for 75 cents in my original write-up back in March had a monster day, rising 54%. I also profiled these options back in May here in the blog and they were going for $1.00 back then. The call options did hit a high of $1.20 on Friday and I’m hoping they continue higher this week.

I was pretty bullish on the company back then and I still am. When we put this trade together, I was predicting Imax could be sitting at new 52-week highs by the time summer gets here. I only mention this because it is important to stick to your trading plan and so far everything has worked out as planned. When the calls traded up to $1.20 it would have been okay to close out at least half of the position and set stops on the rest of your position at $0.75.

The Setember calls still have plenty of time left before they expire but for those of you looking at longer-term plays there aren’t many available. Unfortunately, Imax does not have any LEAP options listed as the furthest out we can go would be the December contracts. The December 7.50 calls (IMQLU, $1.30, up $0.35) and the December 10 calls (IMQLB, $0.50, up $0.20) were active as both had pretty decent volume.

Rick Rouse
Rick@OptionsMentoring.com

Let’s go over the report card for the Financial sector and see where we stand as far as it concerns some of our LEAP options. Wells Fargo (WFC, $27.86, up $0.03) started things off by beating Wall Street’s expectations and actually reported pretty decent numbers. The stock was at $21 on Monday. JPMorgan Chase (JPM, $40.02, down $0.78) is back over $40 again after starting the week at $31.

Merrill Lynch (MER, $30.91, up $0.18) rallied $5 for the week despite posting a $5 billion loss. This was a bigger-than-expected loss of $4.7 billion but nonetheless Merrill pretty much made out okay don’t you think?

Citigroup (C, $19.35, up $1.38) posted a second quarter loss of $2.5 billion but the loss was considerably lower than what the Street was expecting. Goldman Sachs (GS, $182.84, up $1.60) also made a nice $30 recovery after touching $152 on Tuesday. Fannie Mae (FNM, $13.40, up $2.47) and Freddie Mac (FRE, $9.18, up $0.85) also had big weeks as both DOUBLED off the lows they hit Tuesday.

Here is an update on the 2009 LEAP call options we looked at. While these options don’t expire for another six months, we would be foolish not to ensure at least a profit of 50%. Notice the stops put in place.

The Citigroup January 20 calls (CAD, $2.35, up $0.60) were at $1.25. These calls are almost in-the-money and if the stock can get over $20 the options should trade hand in hand with the stock. Set stops at $1.90.

Goldman is the one stock I want to trust but it would be a push for the stock to test its 52-week high of $250 anytime soon. The Goldman Sachs January 260 calls (GPYAC, $1.28, down $0.44) were at $1.07 but fell 25+% Friday although the stock was slightly up. These calls really should have been sold already as they are way out-of-the-money but even a stop of $1.25 gets a 20% return.

Like a tide that lifts all boats, the Merrill Lynch January 35 calls (MERAG, $2.85, up $0.12),which were at $1.90, benefitted from the rally. Merrill is doing its best to shore up its balance sheet and the calls are up exactly 50%. Set stops at in the $2.65-$2.75 area.

Wachovia (WB, $12.97, down $0.47) lost a little momentum Friday after hitting a high of $14.36 but the January 15 calls (WBAC, $1.93, down $0.47) are still up about 50% from a $1.30 entry price. Stops should be set at $1.75.

It would be nice to see these gains extended but if we don’t you shouldn’t let it bother you. It’s nice to hit a few singles instead of hoping for the homerun. The homer may still come but at least if we are stopped out we score some respectable gains.

Rick Rouse
Rick@OptionsMentoring.com

The market put on a fantastic show last week as the Dow fell to a low of 10,731 by Tuesday as the Financial stocks lost a whopping 6% on Monday, then another 3% the following day. That all changed by Wednesday as the sector exploded 12% higher and the rally continued for the remainder of the week.

I mentioned we may be getting close to a bottom and by Wednesday the “Blue Light Special” was on. Many of the Banking stocks posted tremendous gains which I’ll update later despite reporting horrible numbers. Yes, some beat earnings but they were for losses. These stocks got rewarded because Wall Street was expecting even bigger losses.

Meanwhile, Google (GOOG, $481.32, down $52.12) and Microsoft (MSFT, $25.86, down $1.66) got punished for missing Wall Street estimates but at least they reported huge profits. The Financial stocks were due for a rebound and the huge bounce was expected but it’s still up in the air if the rally will hold up.

For the week, the Dow gained nearly 400 points and finished at 11,496, or 3.6% higher. The Nasdaq gained 44 points to close at 2,282, up 2%. The S&P 500 chipped in with a 21 point gain and settled at 1,260, up 1.7%.

I guess we can consider last week a “summer rally” or the start of one. Summer rallies are traditional this time of year on Wall Street and through the gloom and doom of things we may get one if the market can get off on the right foot again on Monday. Some of last week’s gains can be attributed to short-covering and it helped that the price of oil went south falling from $146 on Monday to about $129 by Friday.

Nothing changed overnight with the economy and we certainly aren’t out of the woods yet. We get another slew of earnings this week and depending on how rational or irrational the market wants to be is where we will end up.

Rick Rouse
Rick@OptionsMentoring.com

It could be a bad day for Tech stocks. After a few days of companies beating lowered Wall Street expectations, Microsoft (MSFT, $27.52, up $0.26) reported earnings that missed by a penny. The company reported profits of $4.3 billion, or $0.46 a share, up from a profit of $3.04 billion, or $0.31 a share, in the year earlier period. Although revenue rose 18% to $15.84 billion and topped analysts forecast of $15.65, the penny miss was a big deal.

To make matters worse, Microsoft also said earnings for its next quarter would fall short of expectations. The company said earnings per share would come in at $0.47 or $0.48 on revenue between $14.7 billion and $14.9 billion. Wall Street was looking for earnings of $0.50/ $15.06 billion. The company also lowered full-year guidance but you get the drift.

The stock was down $1.65 to $25.87 in after-hours trading which will probably carry over when the opening bell rings. It’s too early to buy call options on Microsoft right now but for those of you who prefer to buy stock, Microsoft should be at two-year lows when trading begins this morning.

Rick Rouse
Rick@OptionsMentoring.com

Google (GOOG, $535.60, up $19.51) reports 2Q earnings today after the market closes and it will be interesting once again to see where Google will trade at in after-hours and where it will open on Friday. We can expect Google to comment on a lot of things and its different types of businesses but there is one segment of their business that I’m really anxious to hear about.

The acquisition of DoubleClick and YouTube will be closely followed. Google acquired DoubleClick for $3.2 billion in March so this will be the first quarter that DoubleClick will figure into the equation. However it won’t be adding to the bottom line this quarter. Early estimates say that DoubleClick will cost Google $35 million as DoubleClick only contributed $65 million in revenue while incurring $100 million in expenses. These intergrations take time so the market may overlook this hiccup. YouTube is doing okay but is well short of getting the $300 million in video advertising this year that Google had planned for.

The big update I’m waiting to hear more on is the smart-phone market. Smart-phones get search, maps, mail, and YouTube on their device which means more revenue from ads delivered on those mobile handsets. Android is Google’s baby and will be the software that allows users to access even more of Google’s products. Google also plans on entering the handset market with a phone of its own and there is a rumor that Google is experiencing delays to its supposed fourth quarter launch. That could hurt the stock but Wall Street may choose to focus on the billions of dollars that Google expects to earn from the mobile market.

Here’s where it gets juicy. Back in April when Google last reported earnings the stock zoomed $86 the next day. The nearly 20% gain took the stock from $450 to $536. So what happens if Google can get another 20% gain? This would put the stock at $640.

Believe it or not, the July 600 calls (GOOGT, $1.85, up $0.65) were heavily traded. These calls expire on Friday so it would certainly be an all-or-nothing trade. If Google moves 10% then these calls expire worthless because it puts the stock at $588. If Google moves 15%, then it puts the stock at $615 and these calls would be worth at least $15. In other words, a $200 investment would be worth $1,500 if it plays out that way.

The August 600 calls (GOOHT, $8.00, up $3.00) were up 60% yesterday and had some pretty decent volume. This would clearly be the safer play but Google has shown in the past that we may not have seen the best of the company quite yet.

There is serious risk to the downside if Google fails to impress Wall Street, ones I’ve outlined, but ones that might also be overlooked. If Wells Fargo can jump 33% on its earnings why not Google?

Rick Rouse
Rick@OptionsMentoring.com

The market went on a tremendous run yesterday as the Financial stocks had a banner day after a good earnings report from Wells Fargo (WFC, $27.23, up $6.72). Many of the financial stocks that have been getting trounced came back strong as many investors are starting (or hoping) to believe the sector may have hit a bottom. The Dow ended the day up 276 points to 11,239, or 2.5%. The S&P 500 mirrored the Dow’s percentage gain as it closed 30 points higher to finish at 1,245. The Nasdaq posted the biggest gain, 3.1%, and closed at 2,284, up 69 points.

The turnaround in the market is amazing considering the Dow touched a low of 10,731 on Tuesday and has bounced 500 points off that low. The volatility has been so strong that you could have made a mint by buying some cheap calls on hopes that when Bernanke spoke the Financials would listen. And they did with the help of Wells Fargo.

We were stopped out of the Merrill Lynch (MER, $28.00, up $3.31) July 32.50 puts (MERSA, $4.75, down $2.85) as our $7.00 stop was hit. The puts were set to expire on Friday and by having our stop in place, it automatically took us out of the trade. The puts were profiled at an entry price of $2.15 so by having this stop in place you can see how we were protected.

Elsewhere, Wachovia (WB, $10.54, up $1.46) powered higher by 16%, Citigroup (C, $16.47, up $1.91) added 13%, while Fannie Mae (FNM, $9.25, up $2.18) and Freddie Mac (FRE, $6.83, up $1.57) each gained 30%. Goldman Sachs (GS, $172.86, up $15.06) also made a nice move after touching $152 on Tuesday. U.S. Bancorp (USB, $26.74, up $4.04) also rallied 18% despite reporting a bigger-than-expected drop in its earnings on Tuesday, as it tripled its provisions for loan losses. It’s hard to imagine after reporting such a lousy quarter the market would take USB that much higher but it did.

Let’s see how this plays out as Merrill Lynch and Citigroup are expected to report another quarterly loss today and Friday respectively. I believe we are at a point to where the Financial stocks are cheap but it could be two or three years before their earnings improve significantly.

As lottery plays you could keep these 2009 LEAP call options on your trading radar.

Citigroup January 20 call (CAD, $1.25, up $0.47)
Goldman Sachs January 260 calls (GPYAC, $1.07, up $0.28)
Merrill Lynch January 35 call (MERAG, $1.90, up $0.60)
Wachovia January 15 call (WBAC, $1.30, up $0.45)

We could see some banks get bought out and I think Wachovia could be the first to go. Again, these calls may get lower in price if the Financials do another U-turn and head south but with an average cost of about $125 per contract these calls will be a steal in six months if the Financials catch fire. Buy half now and if they go lower maybe buy the other half later.

Rick Rouse
Rick@OptionsMentoring.com

eBay (EBAY, $27.90, up $1.01) is set to report earnings after the market closes today and is trading higher as we head towards the closing bell. The company is expecting earnings in the range of $0.39-$0.41 on revenue between $2.1 billion and $2.15 billion. Wall Street has them pegged at $0.41 a share on revenue of $2.17 billion.

eBay has been making headlines lately, some good, some bad. The company’s new CEO, John Donahoe, took over the company on March 31 and has implemented a few changes. The biggest change is the new fee structure that charges sellers less to list their items but more if they close the deal. That did go over too well with many of eBay’s loyal auctioneers but listings in the second quarter are actually higher than they were during the same period last year according to one analyst.

Then there’s the legal front. Earlier this week a judge ruled in eBay’s favor in a lawsuit brought on by Tiffany & Co. (TIF, $39.00, up $1.70) that accused eBay of not doing enough to stop sales of counterfeit items. A negative ruling would have hurt eBay’s ability to offer name-brand goods on its bargain shopping site. It was a huge win for eBay and the court said it’s Tiffany’s responsibility to protect its trademark which goes for other companies as well. To credit eBay though, they said they quickly removed listings that were known to be counterfeit and suspended the seller’s service.

Having said all that, there are whispers eBay could beat estimates but they would have to knock the cover off the ball to get this market excited about a business that has already matured.

Rick Rouse
Rick@OptionsMentoring.com