The market has just opened and the financial stocks look like they will be trading lower. I’ve been mentioning four trades that we have going and how they should be closed today. If you still believe these stocks may go higher then you could sell half of your positions and hold onto the rest.

The four trades we looked at involved Citigroup (C, $18.86, down $0.22), Wachovia (WB, $15.67, down $0.32), Fannie Mae (FNM, $7.38, down $0.57) and Freddie Mac (FRE, $4.82, down $0.46)

The Citigroup January 20 calls (CAD, $1.95, down $0.10) were at $1.37 and had posted gains of 50% before this morning’s slight decline. The Wachovia January 15 calls (WBAC, $3.80, down $0.20) were recommended at $3.00 and should do well as Wachovia remains a buyout candidate.

The Fannie May January 5 calls (NJWAA, $4.00, down $0.10) were profiled at $2.40 and are have posted gains of 70%+. The Freddie Mac January 5 calls (FREAA, $1.85, down $0.15) were profiled at $1.20 and are showing a 50% gain.

Again, I’d close half of each position ahead of the holiday weekend. The market is closed on Monday so I’ll be back Tuesday with some fresh ideas.

Rick Rouse
Rick@OptionsMentoring.com

It doesn’t look like Dell (DELL, $25.21, down $0.42) is going to have a good Friday. After the bell, the company reported a 17% drop in earnings after lowering prices and taking some restructuring charges for the quarter.

Dell earned $616 million, or $0.31 a share, versus $746 million, or $0.32 a share, in the year ago quarter. Wall Street had forecast a profit of $0.36. Although sales grew over 10% to $16.4 billion (Wall Street expected $15.9 billion) the lower prices for their computers cut into earnings.

The company has done a great job of growing its business in retail stores and the price cuts helped Dell gain a bigger piece of the market share pie. Its laptop shipments grew 44% year-over-year the company reported.

However, Wall Street is taking the stock out to the woodshed in after-hours trading as shares are down nearly $2. The stock could recover a little bit but there’s a good possibility Dell will open Friday’s session lower than today’s closing price. There was whispers that the company would report a blowout quarter but today’s news is another example on why you shouldn’t play earnings with options.

Rick Rouse
Rick@OptionsMentoring.com

Citigroup (C, $18.80, up $0.68) and Wachovia (WB, $15.73, up $1.18) continue to rally today as the Dow is up an impressive 171 points shortly after lunch. There’s no specific news concerning these two companies, they are just along for today’s ride. As we head towards the end of the week it’s good to see that some of our trades are going to be huge winners before the holiday weekend.

We will close either close them on Friday and simply look for more trades next Tuesday or we will sell half of our positions and let the rest ride. It all depends. Don’t forget we get the Personal Income and Outlays and the Consumer Sentiment reports tomorrow and they will either help extend the market gains or stop us out of our trades.

The Citigroup January 20 calls (CAD, $2.00, up $0.30) were at $1.37 and are up 50%. The Wachovia January 15 calls (WBAC, $4.00, up $0.70) were profiled at $3.00 so they are up 33%. Set stops on the Citigroup calls at $1.75. For Wachovia, set stops at $3.50.

These trades would have shown even bigger gains had we played the September or October option calls but the risk would have been much greater had these stocks headed the other way. I’ll provide another update before Friday’s closing bell.

Rick Rouse
Rick@OptionsMentoring.com

Fannie Mae (FNM, $6.48, up $0.86) and Freddie Mac (FRE, $4.75, up $0.78) each gained 15% and 20%, respectively, on Wednesday. After the closing bell, Fannie Mae restructured its management team as traders continue to ride the massive price swings of both stocks. This week alone, Fannie shares are up 30% while Freddie’s stock has zoomed nearly 70%.

The catalyst today were the comments out of Merrill Lynch saying the companies may not need to raise additional capital to stay within levels mandated by regulators. The fact that Freddie was able to sell $2 billion in notes on Monday and Fannie was able to do the same on Wednesday was seen as a positive.

The girations these stocks are making is incredible and there are a lot of people making money from the volatility of both stocks. We’re one of them. The Fannie May January 5 calls (NJWAA, $3.30, up $0.55) were profiled at $2.40 and are up 38%. The Freddie Mac January 5 calls (FREAA, $1.70, up $0.35) were mentioned at $1.20 and are now up over 40% with yesterday’s 22% gain.

There’s also an interesting debate going around that maybe the two companies should merge. I’m not sure how feasable that would be but it doesn’t look the goverment is going to bail either of these companies out anytime soon. In the meantime, I still think we will have more opportunities to keep playing both stocks. Keep an eye on your exit points for the current trade and make sure you are out by Friday either way.

Rick Rouse
Rick@OptionsMentoring.com

Home Depot’s (HD, $27.40, up $0.38) stock has managed to trade higher since the company announced earnings despite a choppy market. The company beat Wall Street’s estimates by 10 cents and the better-than-expected results have seen buyers start to come in.

The stock managed to hold the $25 level and did not trade down to the $20-$21 level like we were hoping for. Even some not-so-great economic news about the housing market hasn’t stopped Home Depot from drifting higher.

I mentioned how we needed to get into Home Depot before the market realized how cheap the stock was getting and we were targeting the January 2010 25 calls (WHDAE, $6.00, up $0.25). These call options are considered LEAPs and don’t expire for another 18 months. After Home Depot’s earnings the calls were trading for $5.00 so they are now up 20%. Although we were hoping to get in at $4, the calls never traded down to this level.

Home Depot has been making changes at the top and recently announced a dividend of 22.5 cents. For you dividend buffs, Home Depot’s is payable September 18 to shareholders of record September 4.

Sometimes entry points don’t work out as we plan and the train ends up leaving us. For those of you who may have boarded early, keep riding the train and set you stops at $5.75.

Rick Rouse
Rick@OptionsMentoring.com

It’’s almost been a couple of weeks since I’ve mentioned NetFlix (NFLX, $30.09, up $0.15) and the last time I talked about the stock it was trading just shy of $32. Neflix shares traded under $30 a week after the 8/14 blog and yesterday’s small gain pushed it back over $30.

On Monday, the company said it was a faulty piece of computer hardware that caused a website breakdown that delayed millions of online DVD shipments to it’s customers. I said at the time that the outage could affect up to a third of Netflix’s customers. I wasn’t looking for a huge breakdown in the stock just enough to make some decent cash on an option trade. The stock has only fallen about $2 since, or 7%, but the options have provided a much better return with much less money.

The September 30 puts (QNQUF, $1.40, down $0.05) were originally profiled at $1.07. These calls were a little higher last week but they are still up nearly 40%. These calls do not expire for another three weeks so there is the possibility of making a few more dollars on the trade. However, a 40% profit is nothing to sneeze at. I would set stop at $1.30 and maybe even sell half of the position when the opening bell rings this morning.

Netflix has a strong brand-name and is a volatile stock. It’s easy to get whip-sawed out of trades in a market like this so it’s prudent to protect your profits. If you don’t you could easily find yourself on the wrong side of the trade.

Rick Rouse
Rick@OptionsMentoring.com

A week ago, we scaled into a few positions in the financial stocks hoping for a quick rebound. In the 8/20 blog I talked about how some of the mid to major financial stocks were getting at their 52-week lows and we could play a quick bounce to the upside.

The danger with trading some of these stocks is that if those 52-week lows are broken they could head even lower. However, we have a pretty good grasp of what’s going on out in the market place and we can now turn our attention to taking some more profits off of the table.

We already closed the Lehman Brothers (LEH, $13.78, up $0.35) trade for a 70% profit in two days and like a tide that lifts all ships, today’s rally has taken our other positions into positive territory as we head to lunch and halfway through the trading session. Fannie Mae (FNM, $5.82, up $0.63) and Freddie Mac (FRE, $4.01, up $0.72) are having another big day, up 11% and 20%, respectively. Here’s our bounce so let’s take advantage of it.

The Fannie May January 5 calls (NJWAA, $3.20, up $0.50) were profiled at $2.40 and are up 33%. The Freddie Mac January 5 calls (FREAA, $1.35, up $0.35) were spotted at $1.20 and are up a little over 10%.

The other two trades we looked at involved Citigroup (C, $17.90, up $0.29) and Wachovia (WB, $14.12, up $0.20).

The Citigroup January 20 calls (CAD, $1.60, up $0.10) were at $1.37 and are showing about a 20% gain. The Wachovia January 15 calls (WBAC, $3.00, up $0.10) are trading exactly where they were profiled at.

How you manage your profits from here is up to you but they should all be closed before Friday regardless of where they are trading at. If you continue to see gains, great. But don’t press your luck with the long holiday weekend coming. The market never dances with the same partner and the risks are too great to expect much more from these plays.

Rick Rouse
Rick@OptionsMentoring.com

The market gave back Friday’s gains yesterday as worries about the financial sector heated up once again. The main culprit these days seems to be American International Group (AIG, $18.78, down $1.09) which hit another 52-week low yesterday. This seemed to ignite fears that the deterioration of the credit markets will bring more losses for financial companies. Duh. Wall Street did a good job of keeping that Gennie in the bottle, huh? I wish I had some good news on the sector but if you’ve been reading the blog you know I still don’t trust the financials but I will play some of the bounces.

The Dow Jones fell 241 points, and ended the day at 11,286. The Nasdaq dropped nearly 50 points and finished at 2,365 while the S&P closed 25 points lower at 1,266. Of the 30 stocks that make up the Dow, AIG was the steepest decliner. A cut on the stock’s price target and the fact that the company may also have its credit rating slashed weighed heavy on AIG. The shares are at their lowest levels in 13 years. AIG accounts for 1.34% of the Dow’s 30 weighted stocks and ranks 28th on how much it accounts for the change in the Dow. By contrast, IBM makes up 8.79% of the index and is 1st.

I have been timid to profile a put trade on AIG because I’ve was expecting a bounce like some of the other financial stocks. However, when the stock touched a low of $19.73 on July 15, we should’ve known that it would be back in the teens before too long. AIG is in real trouble and I wouldn’t rule out a dip below $15 in the near future. The September 18 puts (AIGUS) closed at $1.32 yesterday.

Lehman Brothers Holdings (LEH, $13.45, down $0.96) was one of those “bounces” I played in the sector and we were in and out of a Lehman trade in two days for a 70% gain. Monday’s drop puts the stock back to where our original entry point was. The stock surged Friday following reports that a bid was forthcoming but that quickly got shot down like a skeet target after South Korea’s financial regulator said that it might not be a good idea if the Korean Development Bank made a bid.

What was weird was the enthusiasm in Freddie Mac (FRE, $3.29, up $0.48) after another debt offering. Freddie rose 17% after issuing $2 billion worth of debt. Wow. I can’t believe I just typed that. On a day the Dow was down nearly 250 points, both Freddie and Fannie Mae (FNM, $5.19, up $0.19) were up. Throw in the fact that the Existing Home Sales report painted another bad picture for the housing market makes it a miracle that these stocks managed to trade higher. Normally when a company issues $2 billion in debt the stock goes the other way. Now can you see why the financial stocks can’t be trusted?

Of course, I happen to love the volatility because it provides you the opportunity to make money in up and down markets. Hence our OptionMentoring.com slogan. As far as the current market, we could be setting up for a pretty negative week unless some “good news” miracle happens. There are a lot of economic reports due out this week and Wall Street is looking towards next Monday’s day off as the summer vacations start to wind down. I am expecting light volume and a downtrend at least through the holiday.

Rick Rouse
Rick@OptionsMentoring.com

I’ve been getting a few emails on DryShips (DRYS, $71.18, up $0.09) lately and I though today would be a good time to talk about the stock. The company recently reported 2Q earnings of $300 million, or $7.10 a share, up from $111 million, or $3.12 per share, during the same period a year ago. Impressive results but they fell well short of Wall Street’s estimates.

DryShips results were helped by the sale of the three ships for a $136 million but when that was factored out of estimates along with “valuation of interest rate swaps”, the company really earned $152 million, or $3.60 a share. Wall Street was expecting an adjusted profit of $4.57 per share so they missed by nearly a buck.

The company is continuing with its fleet renewal and expansion plan to replace older ships with newer and larger vessels but the stock has been in a downtrend in recent months. After a rally that saw the stock hit a high of $130 back in October and $116 in May, shares have been hit especially hard on concerns of a slowing global economy and a future glut in the number of vessels potentially leading to lower spot rates.

The concerns are real but may be somewhat overblown as the worldwide boom in the consumption of physical commodities isn’t likely to come to a complete halt. In fact, we should see a pick-up in demand sooner rather than later and now may be a good time to take a look at the dry bulk sector. Other stocks include: Diana Shipping (DSX, $29.00, down $0.15), Eagle Bulk Shipping (EGLE, $25.80, down $0.43), Excel Maritime Carriers (EXM, $32.77, down $0.44) and Navios Maritime Holdings (NM, $9.90, down $0.17).

As far as DryShips, the stock is volatile and it could test $60 before it tests $80 again. The October 80 calls DQRJP ($3.60, up $0.10) and the October 60 puts (DQRVL, $2.60, unchanged) could be used as a strangle to take advantage of the price swings. If one side of the trade doubles, sell, and then you have a risk-free trade on the other side.

Rick Rouse
Rick@OptionsMentoring.com

It’s likely to be another volatile week on Wall Street as a number of key economic reports will certainly have an impact on the market. Although the economy is chugging along, in order for the market to break through key resistance levels, the housing market will need to improve before a rebound in the economy can be considered a success.

The housing market takes center stage on Monday with Existing Home Sales. The key will be the supply numbers for unsold homes. Sales of existing homes in the US went down by 2.04% last month (from May to June), to 4.86 million homes.

New Home Sales come out on Tuesday. Sales of new homes fell less than expected last month but inventory keeps declining which is not a good sign. New home purchases dropped 2% in the South and fell about 1% percent in the West while sales rose a little over 5% in the Northeast and 2.5% in the Midwest. These two reports will likely set the tone of the market for the rest of the week. Consumer Confidence will also be released on Tuesday.

Wednesday brings the Durable Goods report. Durable goods are an indicator of the number of new placed with domestic manufacturers for immediate and future delivery of factory hard goods. This report is an early estimate and is revised a couple of weeks later for a more accurate and complete report. New orders for durable goods were pretty strong last month, as we witnessed a 0.8% jump in June.

Thursday is Gross Domestic Product (GDP) and Jobless Claims. GDP is the best measure of our economic activity and encompasses every sector of the economy. GDP growth is expected to be revised up to 2.7% annual growth from an estimate of 1.9% which would normally mean good news. However, most of the growth is coming from outside the US. Although the job market is improving according to some economists (sly grin), we have gone five straight weeks with claims levels above 400,000. Until we get back under that number there is no improvement.

On Friday we get Personal Income and Outlays, and the Consumer Sentiment report which is directly related to the strength of consumer spending. These two reports will either save the market or add to its misery by the time the long holiday-weekend approaches.

Rick Rouse
Rick@OptionsMentoring.com