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

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