Believe it or not, AutoZone (AZO, $135.68, down $3.52) has been testing its 52-week high in recent days and has been unsuccesful in its bid to take out $143. Today’s decline could should be watched closely if the stock is unable to rebound.

We were recently successful in an AutoZone put option trade on November 19 when shares were at $100. We rode the stock all the way down to $85 a few days later. The December 75 puts went from $1.80 to over $6.00 and we got out when the stock started to rebound.

Since then, the stock has added 50 points. I’m not convinced the stock has the strength to make it to new highs and I’m looking at the February 115 puts (AZONC, $3.00, up $0.70) as a possible short-term play. I like positions here with a stop of $2.00 and an exit target of $4.00.

Rick Rouse
Rick@OptionsMentoring.com

The market returned to its “normal” ways after a see-saw week in which the Dow had three up days and two down. Normal meaning volatility. After a solid winning streak to close November above 8,800, the Dow struggled to hold 8,000 and finished Friday at 8,635. All things considered it was a pretty impressive feat considering the number of crappy economic news reports we got.

The Manufacturing report on Monday was a dozy, dropping the Dow nearly 9% from 8,829 to 8,149. Prior to that, the Dow had a six-session winning streak that saw the index rally from 7,400 to a high of 8,840. For the week the Dow lost 2.2%.

The Nasdaq finished at 1,509, or -1.7%, while the S&P 500 closed at 876, or 2.3% lower.

The Dow is facing near-term resistance at 9,000 and a break below 8,000 is what we’re watching. The Nasdaq’s struggle will be to hit 1,600 and stay above that while a break below 1,400 could lead to another run lower. As for the S&P 500, a rally to 1,000 certainly appears unlikely which would be bullish and a break below 800 would bring the bears out in force.

We could get some clarification this week on what the government plans to do for Ford (F, $2.72, up $0.06) and General Motors (GM, $4.09, down $0.03). There are still talks of a GM-Chrysler merger but more importantly Washington will throw the dogs a few bones. Auto sales were dismal in November, highlighted by a 41% decline in GM’s sales and things aren’t going to get any better. I don’t see how any bailout money is going to help or save either of these companies because buying cars is not on the top of anyone’s list.

Despite the uncertainty that still clouds the market, we did really well with a few of our trades.

Chesapeake Energy (CHK, $11.32, down $0.52) dropped every day of the week, starting at $17 and falling to a low of $9.84 on Friday. The December 17.50 puts (CHKXW, $6.45, up $0.25) are technically still open as our $5.75 stop was never hit on Friday. However, when the stock fell below $10, the options traded to a high of $7.70 and that was the signal to get out. I profiled these puts at $1.65 and we sure had the tiger-by-the-tail. If you are still in the trade, raise stops to $6.20.

Potash (POT, $53.39, up $3.79) rebounded sharply and was another position that I had said to keep tight stops on. The December 50 puts (PVZXJ, $2.65, down $1.95) traded to a high of $5.40 which represented nearly a 100% gain with entry prices averaging $2.75. The December 40 puts (PVZXH, $0.55, down $0.65) made a run to $1.50 and most of you got in for 75 cents. This trade was also a double.

The Exxon Mobil (XOM, $76.60, up $0.33) December 75 puts (XOMXO, $2.50, down $0.70) made a high of $4.95 before falling back as the Dow rallied. The volatility was intense but nimble traders still made 50% as these options were profiled at $3.25 last Thursday.

There are a few familiar names reporting earnings this week. H&R Block (HRB, $20.18, up $0.39) kicks things off on Monday.

We were recently successful in an AutoZone (AZO, $121.48, up $7.10) put option trade which announces earnings on Tuesday. We rode the stock down on November 19 when it was at $100, all the way to $85 a few days later. Since then, the stock has added 35 points. The December 75 puts (AZOXU, $0.40, down $0.20) went from $1.80 to over $6.00 and we got out when the stock started to rebound. It’s too risky to enter a trade before earnings but if AutoZone disappoints, the December 100 puts (AZOXT, $1.65, down $1.65) could be a homerun. For what it’s worth, Pep Boys (PBY, $4.53, up $0.16) also reports on Tuesday.

Wednesday we get CKE Restaurants (CKR, $8.01, up $0.30) and FuelCell Energy (FCEL, $3.93, up $0.15) while Thursday will be a big day for Costco Wholesale (COST, $55.58, up $2.83). Krispy Kreme Doughnut (KKD, $2.50, up $0.01) and Lululemon Athletica (LULU, $10.79, up $1.22) will also be in the mix.

The volatility has made one thing clear. Any “aggressive” positions you take in the market should only be expected to last a week and sometimes less than two days or 24 hours. Of course, we’ve known this for quite some time and like a chameleon, we’ve adapted.

Rick Rouse
Rick@OptionsMentoring.com

The market is so amazing. There are so many moving parts and subplots happening at the same time that is making this market so incredible to trade right now. There are people losing their shirts and there are the others making a killing. It’s that simple.

The Dow managed a furious comeback in the final hour of trading as the cat got let out of the bag on who President elect Obama would likely nominate for treasury secretary. His name is Timothy Geithner and he was responsible for the 500 point pop in the Dow. Wall Street cheered the New Yorker’s current role and pushed the Dow above 8k to 8,046. The Nasdaq jumped 68 points to finish at 1,384 while the S&P 500 surged 47 points to close at 800 on the button.

The one story I want to jump right into is Citigroup (C, $3.77, down $0.94). Remember on Tuesday when I said “let’s see how this one turns out”? Citigroup had just issued a “Buy” rating on AutoZone (AZO, $92.41, up $3.32) which hit a low of $84.66 today when the stock was at $104.

I questioned the “analyst upgrade” because Citigroup was a $9 stock and had been sinking like the Titantic yet AutoZone was at a serious technical breakdown. Yeap, we made some dough with the AutoZone put options but the real deal has been Citigroup. There was a fortune being made this week as Citigroup dropped from $9 to $3 in just three days. Think about that for a second. Citigroup was a $20 stock just six weeks ago.

So here is the dilemma with Citigroup. Can you trust it? My take is that Citigroup will survive because it is part of the “good ‘ol buddy” system. Citigroup was one of the nine initial banks to sell preferred stock and warrants to the government last month. They also received $25 billion in the process which happens to be more than the company’s current market value right now. How crazy is this getting?

Here’s the kicker. The November options expired today but there was plenty of trading in the December contracts. The December 5 calls (CLP, $0.94, down $0.31) saw 100,000 contracts trade hands. That is phenomenal. Period.

If you bought 10 of these call options today then basically you have entered into a lottery ticket. Ten contracts would have cost under a $1,000 although the calls did trade to a low of 60 cents when the stock hit $3. So let’s say $600 if you had bought at the low.

Now, if Citigroup can rally, which to be quite honest could, then the calls could see some super-duper returns. The contracts expire on December 19 and if the stock can rally to $6 then the calls would be worth $1. If you got in at 60 cents that’s a 67% return. If you got in around a buck, you break even.

But what if Citigroup can get back to $7 or $8? At $7, you got a double on your investment, at $8 your return is 200% if you’re in at $1. If the stock is under $5, you lose your entire investment. Of course the returns or losses could come quicker depending on the outcome but that is how playing these call options will shake out.

You can bet I’ll be following this one.

Rick Rouse
Rick@OptionsMentoring.com

Here are some updates on the trades we are following.

AutoZone (AZO, $86.93, down $7.32)

November 95 puts (AZOWS, $8.60, up $4.80) were profiled at 90 cents and traded as low as 75 cents on Tuesday. Sell them right now. If you were brave enough to roll with these November put options your return is up over 800%. Close them today as the contracts expire on Friday.

December 95 puts (AZOXS, $14.70, up $3.30) were profiled at $5.40. Sell 75% of your position today and let the other 25% ride. The return is 175%.

December 75 puts (AZOXU, $6.20, up $1.70) were going for $1.80. I said to buy them up to $2.00 and if you got into this trade, you can bank the 250% return. Close 75%, keep the other 25% open.

Baidu.com (BIDU, $106.05, down $5.69)

November 100 puts (BDQWT, $5.40, up $1.90) were going for $2.50. Close the trade.
December 100 puts (BDQXT, $16.70, up $2.00) are up from $8.75. Close the trade.

Although we were on the sidelines with Baidu, some of you may have rolled the dice on this one. Take your profits and run to the hills.

Abercrombie & Fitch (ANF, $14.75, up $0.20)

The stock made another fresh 52-week low yesterday and this trade is pretty close to reaching max potential.

November 22.50 puts (ZWRWX, $7.80, up $0.30) were profiled at $3.30. Close the entire position today.

December 17.50 puts (ZWRXW, $4.00, up $0.30) are up from $1.70. These put options were our main focus and we have done well with them. We are up 135%. You could set stops at $3.40 but you would be giving up profits if ANF reverses course.

Apple (AAPL, $80.00, down $6.29)

I mentioned Apple last Thursday and although it has taken a little longer than expected, the stock is breaking down like a rented mule. The December 80 puts (QAAXP, $8.00, up $2.40) are up 57% from our entry price of $5.10. Set atops at $7.65 to ensure a 50% return.

Google (GOOG, $270.00, down $10.18)

On November 12, I had mentioned the November 280 puts (GGDWP, $16.00, up $7.40) at $6.00 and they traded above $12. We had set stops at $11.00 and we were stopped out of the trade earlier this week.

The December 240 puts (GOUXH, $15.00, up $3.70) were trading at $6.60 and we had set a stop of $9.00 for the position. Raise the stop to $12-$13 and sell 75% of the position if these levels are hit today.

The market looks like it is going to test its low as the Dow is down over 100 points to 7,820. The thing to watch for here is a bounce off the October 10 low of 7,773. If we don’t get a convincing bounce then we could be setting up for a faded rally. If we test the low, bounce, and come right back down then we can expect more weakness.

The market is at a pivital point and we should get a clear direction of which way we are heading by Friday’s close.

Rick Rouse
Rick@OptionsMentoring.com

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

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