As we wrap up today’s trading, the major indexes have been relatively flat. That’s not bad, considering futures were down after word from Japan that its economy is technically in a recession. Investors have generally shaken that off, and the market has firmed up a bit. I’m sure investors will continue to keep an eye on Japan, although I suspect Europe is a bigger concern as everyone wonders if things could get worse there or if its quantitative easing (QE) program will help. The bright spot is the U.S., which is doing well right now, although we’ll need to watch to see if any weakness abroad is felt in the U.S., especially among the multination companies.

More importantly for us as options traders, I expect fund managers to continue playing catch-up, jumping into momentum stocks to try to boost their underwhelming performance this year. This means the strongest stocks are likely to stay the strongest stocks, so if I had to pick a theme for this week, I would say it’s looking for opportunities to buy calls on the best performing stocks on weakness to profit from the resumption of strength.

We did that with Alibaba (BABA) this morning. If you missed the initial Trade Alert, you can read it here.

Another potential candidate is Amazon.com (AMZN). It is down today, and if it dips some more, we may get a chance to go get in for a bounce from fund managers as well as regaining momentum heading toward Black Friday.

Baidu (BIDU) also remains on my watch list, as it continues to trade well and looks as if it will through the end of the year. Apple (AAPL) is another candidate to buy on weakness.

One company that has gotten more interesting from our perspective here in High Octane Trader is Wal-Mart (WMT). It’s a big blue chip that you don’t necessarily think of when it comes to trading, but even those can generate good opportunities once in a while. My interest was piqued last Thursday when the stock popped nearly 5% to a multi-year high on strong volume after solid third-quarter earnings results. I got even more interested the next day when it held those gains – barely moving, in fact – even after being downgraded by BMO Capital Markets. In addition, Warren Buffet’s company looks as if it’s continuing to buy WMT, according to Berkshire Hathaway’s latest 13F filing with the SEC. The stage looks set for continued money flow into WMT, and I’m watching to see if we get a nice entry point on a pullback. The beauty of calls is that we won’t need a dramatic move in the stock to make good money

I also want to mention Omnicare (OCR). As you probably saw, I just sent you a Trade Alert recommending you cancel the buy order for the calls. This stock is a good example of something I watch for, which is unusual trading activity in the options themselves. Not only was there large volume on OCR calls, but I could see traders buying calls still well out of the money. There was a lot of buying of the $70 calls and even the $75 calls with the stock below $70. When there’s that much volume at a strike price that far out of the money, it often is a tip-off that something is up, and we can often profit from the unusual trading.

In this particular case, the calls kept moving as we tried to buy them, and failed to fall back to our $2.40 buy limit. Things change quickly in trading, so I don’t like to leave orders open for too long, so the smart move for us was to cancel the order and re-evaluate later.

Review of Our Current Position

I sent out a Sell Alert for the Facebook November $73 calls this morning, although the options quickly pulled back after briefly hitting our $3.05 limit, as the stock seems to be facing resistance around $75.50. Maintain the order to sell on a move to $3.05 or higher. As always, if we need to make any adjustments, I will be in touch right away. (Make sure to check the Update Center as well, since that’s where I’ll post updates on all our trades!)

Bank of America (BAC) is getting caught up in the crosscurrents surrounding the financials. The question for financials remains when interest rates will go higher. Rates are in limbo at the moment, hence the back-and-forth action. With BAC, the stock hit a six-month high last Monday morning and has since moved down. With expiration on Friday, we’ll be looking to exit soon. The stock has bounced off $17 a few times today, so continue to hold the BAC November $16 calls (@BAC 141122C00016000) for now, but keep an eye out for a Trade Alert for the next steps.

Sincerely,

Hilary Kramer
Editor, High Octane Trader