Market Outlook
Our indicators continue to give bullish readings, unchanged from last week, as the major indexes attempt to break to new bull market highs. The bullishness is confirmed by all three of our internal indicators as the 200-day Moving Averages Index, Advance/Decline Index and Cumulative Volume Index continue in primary bullish trends. And volatility indexes continue to trend lower.
So why shouldn’t options trading investors like the immediate outlook for stocks? Primarily, the idea that every indicator is lining up perfectly. Nothing that good lasts forever!! Plus, it’s hard to not get the feeling that many traders are still itching to take some profits and at the same time, reduce some risk. As long as the market trend remains bullish no one wants to be the first to pull that trigger. But once some weakness looks like it’s setting in, look out below.
Recommended Fast Options Trade: Alcoa (NYSE: AA)
AA broke above resistance at $17.60 and has moved higher. It should continue to move higher if commodity and metals stocks continue to rally. Here is the best way to play more strength in Alcoa …
Buy the AA Jul 20 Call up to 50 cents ($50 per contract).
After taking the position, enter a good-til-cancelled contingent order to sell this option if the stock hits its target price of $19.40. That should give you an option price of about $1, for a 100% profit.
Close this position and cut losses if the stock closes below $17.40, when the option price should be about 30 cents. The stock is currently trading at $18.12. The computer-simulated probability of this option hitting its target price is 25%.
Recommended Fast Options Trade: Cooper Industries (NYSE: CBE)
CBE broke above resistance at $66 and moved sharply higher. It has pulled back from that spurt but should move higher again if stocks continue to rally. Here is the best way to play more strength in Cooper Industries …
Buy CBE Jul 75 Call up to $1.40 ($140 per contract).
After taking the position, enter a good-til-cancelled contingent order to sell this option if the stock hits its target price of $71.90. That should give you an option price of about $3, for a 114% profit.
Close this position and cut losses if the stock closes below $64.70, when the option price should be about 90 cents. The stock is currently trading at $67.13. The computer-simulated probability of this option hitting its target price is 20%.
** All of our short-term recommendations can be taken for up to three days after they are recommended. Make sure the stock and option prices are close to where they were when we made the recommendation. If after three days you still have not gotten the position filled, cancel the order and wait for our new recommendations, as the profit probabilities may no longer be valid.
Action to Take on Current Position: Medco Health Solutions (NYSE: MHS)
Close the MHS Jul 50 Put. The position reached its maximum three-week holding period Thursday without hitting its target price.
Action to Take on Current Position: Royal Caribbean Cruises (NYSE: RCL)
Lower the stop price on the RCL Jun 38 Put to $41.10. We have allowed this position to run longer than its three-week time frame and it is necessary to continue to tighten the stop price to protect from losing too much time value in the option price.
Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.
