Bernie's Bets: The Long and Short of It

02/14/2003 12:00 am EST

Focus:

Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Bernie Schaeffer remains very cautious on the market's outlook and, as such, he is able to find stocks for those betting on the downside. Despite this bearishness, he also finds select issues with upside potential. Here, the editor of The Option Advisor offers two "long" and one "short" trading opportunities.

"Apache Corp. (APA NYSE) is an independent energy company that explores for, develops, and produces natural gas, crude oil, and natural gas liquids. This is a play on the short- and intermediate-term price action of natural gas prices, which APA has surely benefited from. The price of natural gas has nearly tripled in the past. In addition, gas storage supplies are below normal and there are no immediate plans to raise supply. From a contrarian view, it's intriguing that energy traders are not alarmed by this development and options speculators haven's been very active lately. The shares also sport some bullish technical trends. APA recently broke out above resistance at the 60 level. Traders should target a move to 68.30 with a stop-loss on a close below 59.50.

"IBM (IBM NYSE) is currently sitting near the 76 mark on its 20-week moving average, which has been supporting the stock for the past 17 weeks. The 75-to-77 region has marked areas of buying strength for Big Blue since November. We believe this could once again act as an area of support, since options players expect further weakness from IBM. This sentiment is expressed by the large concentration of puts at the February 75 strike. The 34,406 contracts here dwarf any other option in the February series. Traders should target a move to 84.80 with a stop-loss on a close below 75.50.

"We also reiterate our bearish posture on Goldman Sachs (GS NYSE). The stock recently closed at its lowest close since mid-October. Despite the continued technical deterioration in the shares, optimism from the options crowd remains near extreme levels. GS's Schaeffer's put/call open interest ratio stands at 0.61, which is lower than 93% of all readings taken during the past year. The combination of high expectations and a technical trend lower leads us to believe that the path of least resistance for the stock remains lower. Traders should continue to target a move to 61.80 with a stop-loss on a close above 72."

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