Yesterday morning I mentioned the option activity in AutoZone (AZO, $100.48, down $6.68) from Monday’s trading session. The stock closed at $107 on Tuesday which allowed us to get into a couple of November and December put option plays at lower prices.

Today’s 6% drop in the stock can be attributed to the testimony of the auto makers which has not been going smooth. There has been talk that if Congress approves the $25 billion bailout package will the auto makers be willing to share that money with some of their partners. That is telling us the fallout from the auto industry will spread to many other sectors. AutoZone could suffer as well.

The November 95 puts (AZOWS, $1.50, up $0.75) were profiled at 90 cents and closed yesterday at 75 cents. They have doubled today. I have mentioned that the November options expire this Friday so you will have to watch these carefully. If you got into the puts at 90 cents you could set stops at $1.35 to ensure a 50% profit. If you got in at 75 cents you could set stops at $1.25.

The December 95 puts (AZOXS, $7.90, up $1.60) were profiled at $5.40 and have also done well today. However, I was pounding the table on the December 75 puts (AZOXU, $2.90, up $0.90) which were going for $1.80. I said to buy them up to $2.00 and if you got into this trade, you are up 50% right out of the gate.

We are targeting a drop below $100 for AutoZone but it would be prudent to place stops on the December puts as well. Any good news out of Washington today could help AutoZone recover.

Rick Rouse
Rick@OptionsMentoring.com

The big news today is the testimony of America’s car industry as CEO’s of General Motors (GM, $2.60, down $0.49), Ford (F, $1.45, down $0.23) and Chrysler are pleading their case for a $25 billion bailout before the House Financial Services Committee.

The testimony is endearing and heated at the same time but the market is acting like the support is not there. GM and Ford shares are at fresh 52-week lows. GM says it could need $10-$12 billion but its CEO was squirming like a kid in church when directly asked exactly how much they will need to survive until March 31, 2009.

These companies are asking for a bridge loan but a lot of people in Congress are asking what exactly is on the other side of that bridge? The general consensus is that even if the bailout is approved, these companies are just delaying the inevitable which is bankruptcy.

While these companies may have been aggressively cutting costs, scaling back production, and putting in pay freezes, the bottom line is that they are simply running out of time. They may be reducing engine sizes and making smaller cars but they are not environmentally friendly. Until that happens, the auto makers are fighting a losing battle.

The big picture here is that if this bailout doesn’t go through and GM and Ford have to declare bankruptcy, it will not be good for the stock market. There are whispers the Dow could fall to 6,000 if that were the case but no one really knows.

This market can change direction on a dime which is why this is becoming one of the best environments ever to be trading options. The volatility could increase as the day progresses.

Rick Rouse
Rick@OptionsMentoring.com

Let’s see how this one turns out.

Citigroup (C, $8.89, down $0.63), whose stock has been in shambles recently, initiated coverage of AutoZone (AZO, $104.59, down $1.17) yesterday with a “Buy” rating on the stock. Citigroup blew its chance to close a deal for Wachovia (WB, $5.27, down $0.22) and when that fell through, its stock started collapsing. The nearly 50% drop in Citi since then has pushed the stock below $10 thus limiting our downside potential.

Here’s where it gets interesting.

Although Citigroup theoretically only has about $9 to go before it reaches $0, AutoZone has way more potential than a $9 move because it is a $100 stock. Now we have to determine if we are bullish or bearish.

The bulls will argue that AutoZone will benefit from a slowdown in the car industry because people will be fixing up there cars instead of buying new ones.

The bears will argue that AutoZone will fall just like many other retailers because of declining same-store sales. There’s even been “whispers” on Wall Street that some of the auto industries’ partners are looking for a “bailout bonus” and that could mean quite a few things.

The important thing to focus on is the chart for AutoZone. The stock made a run from $80 to $140 from mid-2006 to mid-2007. Since then it has bounced between $110 and $140 and even tested its all-time high this past summer.

It’s been a slow drip since the start of November as the stock has fallen over $20 a share and has broken major support levels. The $100 level will be the first major battle ground that the bears will try and overtake. If successful, they could take the bulls all the way down to $80.

The November 95 puts (AZOWS, $0.90, up $0.05) saw a few darts thrown their way but options traders really went after the December put options. Although the November 95’s had decent volume (300 contracts traded), traders weren’t really placing huge bets on strike prices below this level.

By contrast, the December 95 puts (AZOXS, $5.40, up $0.60) and the December 75 puts (AZOXU, $1.80, up $0.75) each had volume of nearly 3,000 contracts. There was scattered buying in the strike prices between 75 and 95 but these were the two that were getting smothered and covered. And it happens to coincide with what the chart is telling us.

Another morsel to munch on is the fact that the company will be reporting earnings on December 9. The December options expire 10 days later. Lottery option players may wish to gamble on the December 75 puts with an entry price of up to $2.00-$2.10.

If we can get a drop to $90 this week in AutoZone’s stock then these calls should double.

Rick Rouse
Rick@OptionsMentoring.com

Baidu.com (BIDU, $134.09, down $44.80) took a pounding today as the China-based Internet search engine company saw its shares decline 25%. A report that Baidu sold paid listing links to unlicensed medical sites with unproven claims for their products weighed heavy on the stock.

The news crippled an already weak stock to begin with and the fact that China has been hit by scandals related to contaminated food and drugs was a one-two punch that floored Baidu. The reaction may have been extreme but when Baidu fell below $200 last week, the damage was done. The news just accelerated Baidu’s quick ascent to what now appears like a test of the $100 level.

The break below the $200 level was big for Baidu and today’s test of the $130 level was the last line of support for Baidu until $100. Just how serious is a threat of $100 a share? Considering there was plenty of action in the November 100 puts (BDQWT, $2.50, up $2.45) there are some option traders who say the chances are pretty good. Believe it or not, these put options were up an astounding 4,900% as over 7,000 contracts traded hands. Open interest stood at less than 1,000 contracts for these contracts before today. The puts opened for less than a quarter…

The December 100 puts (BDQXT, $8.75, up $7.15) also had a monster day as they opened at $2.60 and were up 450% from Friday’s close of $1.60. Both options are a little expensive now as you would imagine and there may be a snap-back rally in the stock before it tests the $100 level. Then again, the stock could hold support here and never test $100.

Either way, the easy money has already been made with Baidu but there may be another opportunity for us down the road. Let’s stay on the sidelines for this one until we get a clearer picture.

Rick Rouse
Rick@OptionsMentoring.com

Abercrombie & Fitch (ANF, $15.99, down $1.80) is trading lower again this morning following Friday’s disappointing earnings report. The company missed Wall Street’s expectations and offered a bleak outlook on holiday sales as it cut its fiscal-year numbers and sees results for the current quarter well below expectations.

I mentioned the stock Friday morning when it was trading at just under $20 and said that it had a good chance of testing $17 and then $10. I’m not interested in riding Abercrombie down to $10 because the first level of support I had mentioned for the stock has been broken.

There is some nervousness that ANF’s CEO might not be brought back to run the company and if he isn’t then there is a good possibility that the stock heads below $15. If you entered any of the trades from Friday’s blog, take advantage of the breakdown and close the November puts today or at least half of them.

The Abercrombie November 22.50 puts (ZWRWX, $6.00, up $1.60) were profiled at $3.30 but I was high on the December 17.50 puts (ZWRXW, $3.00, up $0.80) which were trading for $1.70 at the time. I mentioned if we got the drop to $17 then these calls would double. Well, we are not exactly at a double because the weekend knocked some time premium out of the trade but either way we got some nice gains.

You can set stops on the December puts at $2.50-$2.60 or even sell half of them today at current prices. The selling could increase as the day progresses and if there is a rebound in the stock, the stops will protect your profits.

Rick Rouse
Rick@OptionsMentoring.com

If today’s earning reports are any indication for the retail sector’s Christmas shopping season then they are in t-r-o-u-b-l-e. Don’t shoot the messenger but Abercrombie & Fitch (ANF, $19.61, down $2.83) and JC Penney (JCP, $17.40, down $1.88) are getting walloped this morning after reporting disappointing earnings.

Abercrombie profits fell 45% to $64 million, or $0.72 a share, from $118 million, or $1.29 a share, a year earlier. Stores sales are falling as the company reported an overall 8% drop to $896 million. Wall Street was expecting a profit of $0.71 cents per share on revenue of $909 million.

It was worse at JC Penney’s as the company saw its quarterly profit fall over 50% to $124 million, or $0.55 cents a share, from $261 million, or $1.17 a share, a year earlier. Sales fell 9% to $4.3 billion, while same-store sales decreased 10%. Wall Street was looking for $0.53 cents a share in the third quarter and $1.32 for the fourth quarter.

Wall Street’s estimates were already trimmed for these two retailers and the fact that they reported a mixed bag is not good news. We got a retail sales report this morning that October was the worst decline ever recorded as sales fell by 2.8% last month. That was a much larger decline than the 2.65% drop in November 2001 which was right after the terrorist attacks.

Abercrombie is down from a high of $84.54 while JCP is down from a high of $51.42. Wow. There has been heavy activity in the options on both of these stocks. The Abercrombie November 22.50 puts (ZWRWX, $3.30, up $1.50) are up 83% today while the JC Penny November 17.50 puts (JCPWV, $1.05, up $0.20) are up over 20%. If you got into these plays yesterday before these two companies reported earnings then you have done well today.

I mentioned Abercrombie here in the blog back in August when the stock was at $50. I said at the time it could be headed much lower before it returns to its glory days and some of you may have gotten into the September put options I recommended. They did well but probably not as well if we had bought a November put option instead. Abercrombie has fallen 30 points since then and we certainly left some money on the table.

Ambercrombie could test $17 and if that level fails it could be headed to $10. If this is the case then the December 17.50 puts (ZWRXW, $1.70, up $0.45) could double.

Rick Rouse
Rick@OptionsMentoring.com

Nah, Nah, Nah, Nah…Hey, Hey…Goodbye!

It’s in the books. Shareholders of Anheuser-Busch (BUD, $66.33, down $0.51) approved the $52 billion sale of its beer business to Belgium-based InBev today. The two companies will create the world’s largest brewer.

The was the last step needed step to form the company that will be now be known as Anheuser-Busch InBev. Yeah, its sucks to loose an American icon but the shareholders got a great deal. Not to mention the beer list the company touts. Bud/ Bud Light, Stella Artois and Beck’s. Gee, I wonder if they will create a variety pack.

I’ve been mentioning this deal for months and we actually went long on some Anheuser-Busch option calls when the rumor was floating around. I also mentioned in late October when the stock was in the upper $50’s that you should consider a stock trade because the deal was expected to close by the end of the year. Although the merger is subject to regulatory approval in the U.S., Britain and China, the buyout offer is $70 a share.

The gains from making that trade were about 20% but the key was that it was a safe trade in a volatile market. As option traders, yeah, we like to trade options but there are times where you have a situation like this one and you have to buy the stock instead of trading options. True, it would have tied up a lot more capital - buying 100 shares would have cost $5,700 - but the return was pretty much guaranteed with the buyout priced at $70. When the stock was at $57 you should have realized that there was still $13 to go which gives you a 23% return.

The stock may have been down today but eventually it will get to $69-$70 a share. Even at today’s closing price there is still 8% to go. It’s what is know as arbitrage on Wall Street, a risk-free profit. Although I always prefer options over stocks this is one time where the stock was a better bet.

Rick Rouse
Rick@OptionsMentoring.com

Las Vegas Sands (LVS, $6.65, down $1.35) still hasn’t “officially” opened this morning for trading although it was down 17% in premarket activity. The stock has been halted as the market prepares for the company’s public offering of 182 million shares of stock that will be hitting the floor when trading gets underway. The company priced the shares at $5.50 so look for a much lower open.

LVS is trying to raise $1 billion in cash and the company’s president is either gonna hit it big or go broke trying to save the struggling casino operator. The company warned last week that it was in danger of violating loan agreements and, as I mentioned earlier, the company suspended construction in Macau.

The only problem I have with this is that LVS gets two-thirds of its revenue from its China joints so why wouldn’t you finish them first? Not only are they diluting shareholder value, they aren’t even concentrating on where their biggest profits come from. Geez.

Las Vegas Sands is scrambling to raise cash and is in trouble of defaulting on $5 billion worth of debt. The November 7.50 puts (LJJWU, $1.90) I mentioned earlier will likely open a lot higher than $2.00. Be careful with them. If they are higher than $2.00, stay away until the stock rebounds. If you can get into the puts for under $2.00 after the stock opens than we could get a quick ride to $3.00.

The fall from grace has been swift for LVS as its stock traded as high as $150 a little more than a year ago. The market may except the offering wth open arms and who knows if this band-aid is gonna work. At least LVS is trying to raise cash instead of going to the government.

Rick Rouse
Rick@OptionsMentoring.com

The futures are pointing towards a lower openening this morning as the market is struggling with a number of issues. There are several stocks in the news that I have been covering lately so let’s get to it.

American Express (AXP, $23.98) started the week of lower but got some good news this morning after the company received regulatory approval to change its structure to a bank holding company. Wheather this leads to a higher open this morning remains to be seen but it paves the way for the company to accept deposits and permanently access financing from the Federal Reserve.

Las Vegas Sands (LVS, $8.00) is taking a hit this morning in premarket trading after the market caught wind that the company has halted construction of two projects planned in Macao (China) to focus on other projects in Singapore and Pennsylvania. I told you the company would be in the news again but I didn’t think it would be this quick. Las Vegas Sands did say construction would resume in Macao “at an appropriate time in the future” basically when it has enough money. No need to sugar-coat it. Keep an eye on the November 7.50 puts (LJJWU, $1.90). They could do well this week if LVS heads to $5.

Wynn Resorts (WYNN, $46.82) could add to Monday’s gains after it was announced that the stock would be added to the S&P 500. I mentioned yesterday that Wynn was my favorite stock out of the group and this is normally a bullish sign. At least for a few days. The reason being that when a stock is added to the S&P 500, fund managers have to come in and buy the stock for their mutual funds and pension plans. We had set an “alert” on the January 2010 40 calls (YPWAH, $16.80) at $10 after getting into them for the same price and riding them all the way up to $20-$23. Don’t chase them.

The key to getting back into some of our trades will be to buy calls when the market is going down and to buy puts on any rallies. When the casino stocks were getting hammered, we went long by buying the November and January call options. They peaked, we sold, and now we are waiting again.

General Motors (GM, $3.36) and Ford Motor ($1.93) are doomed for death by a thousand cuts and housing, retail, autos, and banks…you name an industry and it seems they are all ready to buckle. There is still a ton of opportunities in this market but you have to be careful and you have to know what is going on. The short-term outlook remains bearish as the market doesn’t really have any catalysts to build any momentum on.

Rick Rouse
Rick@OptionsMentoring.com

With a half-hour left to go in today’s trading session, the Dow is down 400 points to 9,225 but there are some pockets of strength in certain sectors. Chesapeake Energy (CHK, $26.10, up $3.15) is having a monster day as Wall Street seems to believe that Chesapeake and other natural gas producers will thrive because of Barack Obama’s historic victory.

The theory is that a Democrat-led Congress will lead to huge tax breaks for petroleum producers and that Obama will likely push for use of compressed natural gas (CNG) in automobiles. How long and how fast it takes for CNG stations to start popping up around the country remains to be seen but they are coming.

Companies that are in this field will likely see incentives to install CNG pumps at stations which should encourage Americans to buy CNG-powered cars. CNG is an exceptionally efficient fuel for return-to-base fleets, as analysts believe it produces 50% to 70% fewer pollutants and saves $5,000 to $20,000 in fuel costs annually per vehicle than diesel, the fuel most commonly used today.

There are a couple of pure-plays on this sector like Clean Energy Fuels (CLNE, $7.35, down $1.74) and Sinoenergy (SNEN, $3.22, down $0.13) but they are both trading lower today after California voters struck down Proposition 10, which would have paid rebates for fuel-efficient cars and cars that run on natural gas. T. Boone Pickens, the company’s founder, is obviously not having a good day. Not only is the stock taking a hit, he is the one who paid for nearly all of Proposition 10’s $22.5 million campaign fund.

Meanwhile, Chesapeake is getting some action despite the weakness in the energy sector today, amid reports that it could be a takeover target. I mentioned the stock back in October and at the time it was good for a quick trade as it made a run from $20 to $24ish.

The November 25 calls (CHKKE, $2.75, up $1.90) were trading for $2.10 at the time of the blog and I said the stock had a chance of getting to the $24-$27 range quickly. It did and faded but now the stock is gaining momentum again. The November calls have hit a high of $3.60 today and I encouraged many of you to keep holding them.

The January 25 calls (CHKAE, $3.90, up $1.15) which were profiled at $3.70 and they are only slightly higher than where they were profiled at. They hit a high of $5.00 when Chesapeake shares hit a high of $26.95 earlier in the day. It’s hard to say just how serious the takeover talks are but it does show that others think this stock is cheap.

Rick Rouse
Rick@OptionsMentoring.com