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STOCK RE-CAP OPTION RE-CAP

www.SchaeffersResearch.com

Serving option investors worldwide since 1981 Bernie SchaefferSenior Editor

A publication ofschaeffers investment research

*MINIMUM ENTRYMAXIMUM STRADDLE/STRANGLE PRICE.

BernieSchaeffers

THE

MARKET

April 2013 Volume 33, Issue 4

(Continued on page 6

Cree 53.99 B CREE June 48 C 8.60 9.20 100% 5/21 7

Expedia 61.93 B EXPE July 54.48 C 9.60 10.30 100% 6/11 7

Freeport-McMoRan 32.99 B FCX June 35 P 3.30 3.60 100% 5/21 7

Potash Corp. 39.55 B POT June 42 P 3.45 3.80 100% 5/21 7

United Continental 32.30 B UAL June 27 C 6.05 6.50 100% 5/21 7

Yahoo 22.86 B YHOO June 20 C 3.25 3.60 100% 5/21 7

PUT SELL

AOL 35.58 S AOL April 34 P 0.65 0.55* 9% 4/19 1

Best Buy 22.46 S BBY April 21 P 0.54 0.45* 12.9% 4/19 1

KB Home 22.10 S KBH April 21 P 0.50 0.40* 10.8% 4/19 1

PAIRS TRADE

Valero Energy 44.02 B VLO June 40 C 5.45 5.80 50% 5/14 6

Occidental Petroleum 78.36 B OXY May 85 P 7.15 7.60 50% 5/14 6

B e r n i e S c h a e f f e r

THESE RECOMMENDATIONS WERE MADE AVAILABLE ON THE THURSDAY EVENING PRIOR TO PUBLICATION AND SHOULD BE ENTERED NO LATER THANMARCH 29, 2013.CONSULT OUR SUBSCRIBER-ONLY HOTLINE FOR THE LATEST INFORMATION REGARDING CLOSEOUT CHANGES, EXIT INSTRUCTIONS,

AND NEW RECOMMENDATIONS. SEE TABLE ON PAGE 6 FOR COMPLETE HOTLINE INFORMATION.CURRENT ALLOCATIONS: AGGRESSIVE (68.80% CASH; 31.20% OPEN), PUT SELLING (81.80% CASH; 18.20% OPEN).

3/21

3/21

If youve been heeding the widely disseminatedadvice over the past decade to invest only inquality, large-cap, blue chip stocks -- often

reluctantly offered by equity bears at heart who arenevertheless paid to produce actionable ideas for stock market investors-- youve generally suffered the investing equivalent of being pecked todeath by ducks in the short-term while at the same time bleeding out lostopportunity over the long-term. Witness the cumulative gains (excludingdividends) below for the S&P 500 Index (using the SPDR S&P 500 ETF(SPY) as a proxy) and the Russell 2000 Index (with a proxy of the iSharesRussell 2000 Index ETF (IWM)).

2013 (YTD) 5-years 10-years

S&P 500 +8.84% +17.37% +72.87%

Russell 2000 +11.71% +39.57% +151.94%

And blue chip investors also endured a period of 20 consecutive trading days earlier this year during which the Dow Industmeandered just above (and just below) the 14,000 level before a victory of sorts was declared over this hurdle. And they are currebearing witness (as displayed in the accompanying 10-minute intraday chart of the S&P) to 8 trading days and counting during wthe S&P has random walked around the 1,550 level while failing at any point to trade above 1,569 (which would represent a 10% yeadate gain).

There is an alternative to enduring the tortuous ways of the large-cap space, beyond the simple, but effective advice offered in this s

time and again over the years to focus away from the blue chip indices and instead concentrate in the small and mid-caps. Because an approach can yield some spectacular results if applied beyond the market index world to industry sectors and to individual equit


2/6

A g g r e s s i v e PORTFOLIO

2 Bernie Schaeffers

DAILY CHART OF CREE SINCE JAN. 2013

CREE - EXPECTATIONAL ANALYSIS: CREE is sporting an impressive

year-to-date gain of 59%, thanks in no small part to an earnings-induced surgein late January. More recently, the stocks uptrend has been given an assist froma slew of analyst upgrades and price-target hikes. In fact, the equity rallied to atwo-year peak of $55.53 on March 21 on the heels of an upbeat brokerage note.Going forward, the LED specialist could encounter some contrarian tailwinds,should any of the remaining holdouts capitulate to CREEs positive price action.Among analysts, more than half maintain hold or worse suggestions. Plus, theconsensus 12-month price target of $46.45 is a discount to CREEs currentperch, leaving the door wide open for a re-evaluation of ratings. CREE couldalso see some short-covering activity in its near future, as short interest accountsfor 13.4% of the stocks available float, representing nearly eight sessions ofpent-up buying demand.RECOMMENDATION: Buy the June 22, 2013 48-strike call.

FREEPORT-MCMORAN - EXPECTATIONAL ANALYSIS: FCX is inthe midst of a multi-billion-dollar buyout of two other companies that went overlike a lead balloon on the Street. The mining concern is down 3.5% this yearand roughly 15% as compared with this same time last year. A recent advancehas been met with resistance by both the year-to-date breakeven point and theequitys 80-day moving average. Also, options for FCX are relativelyinexpensive, as the stocks 30-day implied volatility is in the 10th percentile, ascompared with similar readings over the last 52 weeks. From a contrarian pointof view, option traders could be overly bullish on the stock as well. FCXs10-day call/put volume ratio on the International Securities Exchange (ISE),

Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX(PHLX) stands at 3.18, which is in the top 8% of readings taken in the last year.A continued struggle by FCX could force the hand of the bulls and causedownward pressure on the shares.RECOMMENDATION: Buy the June 22, 2013 35-strike put.

EXPEDIA - EXPECTATIONAL ANALYSIS: Online travel agent EXPE hasbeen charting a steady path higher, with the shares up 84% year-over-year. Afterhitting a record peak of $68.09 on Feb. 5, the stock pulled back to its 100-daymoving average -- which coincides with a 100% mark-up to its 52-week low.These two technical layers have previously served as support for EXPE, makingnow an opportune time to enter a bullish play. Plus, the equity could be poisedfor a contrarian-related boost, considering the low expectations surrounding theoutperformer. For starters, short interest rose by more than 13% during the lasttwo reporting periods, and now accounts for nearly 10% of the stocks availablefloat. It would take almost a week to cover these shorted shares, leaving an ampleamount of sideline cash available to fuel EXPEs fire. Elsewhere, 11 analystsmaintain a hold recommendation toward the stock, allowing plenty of room for

a round of upgrades from the skeptics.RECOMMENDATION: Buy the July 20, 2013 54.48-strike call.

DAILY CHART OF FCX SINCE SEPT. 2012

WITH 80-DAY MOVING AVERAGE

DAILY CHART OF EXPE SINCE MARCH 2012


Looking for even more information on options?Check out the Options CenteratSchaeffersResearch.com.

Youll ind tools and ilters, education, and a variety of options strategies...All in one convenient location!
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3/6

A g g r e s s i v e PORTFOLIO

3 Bernie Schaeffers

POTASH CORP. - EXPECTATIONAL ANALYSIS: POT has been one of

the most widely traded stocks among option players recently, but has beenrelatively sleepy, price-wise, for more than a year. POT is now trading at half ofits all-time high of $80.54, reached in June 2008, and has underperformed theS&P 500 Index (SPX) by more than 8 percentage points over the last 40 tradingdays. Also, the stocks 80-month moving average, which has provided consistentsupport since November, could wind up being resistance if the downward trendcontinues. This long-term trendline has not been violated on a monthly closingbasis in nearly 10 years. In addition, short interest spiked by more than 40% in thelast month, further pressuring POT downward. On the options front, the 20-daycall/put volume ratio on the ISE/CBOE/PHLX stands at 1.45, meaning long callshave trumped long puts by a nearly 3-to-2 margin during the past month. Shouldcall buyers feel pressured to exit their positions, POT could experience additionalselling demand.RECOMMENDATION: Buy the June 22, 2013 42-strike put.

UNITED CONTINENTAL - EXPECTATIONAL ANALYSIS: UAL hasbeen a technical standout in 2013, yet the airline issue has been flying under thebullish radar. The stock is up roughly 38% in 2013, has doubled since its mid-2011low, and just touched a five-year high of $32.95 on March 20. Nevertheless, thebears continue to pile on, with short interest now representing more than a weeksworth of pent-up buying demand, at UALs average daily volume. As the skepticsrush to cover, a short-squeeze situation could amplify UALs uptrend. In the samevein, the stocks 10-day ISE/CBOE/PHLX put/call volume ratio of 2.28 ranks inthe 84th percentile of its annual range, pointing to a healthier-than-usual appetitefor long puts of late. Furthermore, the equitys Schaeffers put/call open interestratio (SOIR) of 2.39 sits just 1 percentage point from a 52-week peak, suggestingnear-term traders have rarely been more put-heavy during the past year. Asentiment shift among the options crowd could also translate into a contrariantailwind.RECOMMENDATION: Buy the June 22, 2013 27-strike call.

YAHOO - EXPECTATIONAL ANALYSIS: YHOO has rallied more than50% over the past year, tagging a four-year acme of $23.09 on March 6. Sincethen, the equity has taken a breather atop support in the $22 area, which marksdouble its 2011 low and is roughly 50% above its 52-week nadir. As such, andconsidering the pessimism still plaguing the stock, now looks like an opportunetime to jump in on the longer-term uptrend. Regardless of YHOOs stellarperformance on the charts, just one-third of analysts deem the security worthyof a buy or better rating, leaving the door wide open for future upgrades topush the stock even higher. In similar fashion, the consensus 12-month pricetarget among the brokerage bunch rests at a meager $22.76, representing a

discount to YHOOs closing price of $22.86 on March 21. A flood of upwardprice-target adjustments could also lure more buyers to the table. Finally, shortinterest soared nearly 62% during the past month, pointing to ample sidelinecash to fuel additional upside.RECOMMENDATION: Buy the June 22, 2013 20-strike call.

MONTHLY CHART OF POT SINCE AUG. 2008

WITH 80-MONTH MOVING AVERAGE

WEEKLY CHART OF YHOO SINCE SEPT. 2012

WITH 10-WEEK MOVING AVERAGE

DAILY CHART OF UAL SINCE AUG. 2012

Dont miss the latest issue of SentimentBernie Schaeffers exclusive options magazine.

Its freeand available right now!VisitSchaeffersResearch.com/Sentimentfor details.
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4/6

4 Bernie Schaeffers

P u t S e l l i n g PORTFOLIOAOL - EXPECTATIONAL ANALYSIS: Shares of online media specialist

AOL pulled back recently, but found support in the $34 neighborhood.This area roughly coincides with the site of the stocks earnings-relatedbullish gap on Feb. 8, and its also home to AOLs r ising 50-day movingaverage. During the near term, this region could continue to serve as atechnical floor. Meanwhile, with the equity up more than 20% year-to-date, skeptics are starting to throw in the towel. Short interest on AOLdeflated by 17.6% during the most recent reporting period, but stillaccounts for a substantial 14% of its float. In fact, at the stocks averagedaily volume, it would take more than six days for all of these shortedshares to be repurchased. As AOL bounces from support , another wave ofshort-covering could keep the shares aloft.RECOMMENDATION: Sell the April 20, 2013 34-strike put.

BEST BUY - EXPECTATIONAL ANALYSIS

: Big-box retailer BBY has been ona tear lately, with the stock nearly doubling in value since the beginning of 2013. However

traders have met this breakout rally with skepticism. BBYs SOIR of 1.50 indicates that

puts easily outnumber calls among options set to expire within three months, and this ratio

arrives in the 100th percentile of its annual range -- revealing that short-term speculators

are more put-heavy now than at any other time over the past year. Traders have shown an

overwhelming preference for out-of-the-money puts in the April series, and the unwinding

of hedges related to these bets could provide a tailwind as expiration approaches. Plus

short interest accounts for nearly 11% of the stocks float, which means BBY could benefit

from short covering as the positive price action continues.

RECOMMENDATION: Sell the April 20, 2013 21-strike put.

KB HOME - EXPECTATIONAL ANALYSIS: Homebuilders have been apocket of strength since the fall of 2011, and KBH is among the best-performingnames in the sector. Up nearly 40% in 2013 alone, the stock tagged a new multi-year high of $22.38 on March 21, on the heels of better-than-expected earnings. Infact, the shares have outperformed the SPX by 31 percentage points in the pastthree months. Skepticism still blankets the stock, however. The equitys SOIR of1.98 shows that puts nearly double calls among options expiring in the next threemonths. Also, the stocks 50-day ISE/CBOE/PHLX put/call volume ratio is nearan annual peak, as puts continue to be bought to open at a rapid pace. Finally, shortinterest accounts for more than 27% of the stocks available float. Should bearishtraders begin to change their tune, it could result in more upside for KBH shares.RECOMMENDATION: Sell the April 20, 2013 21-strike put.

VALERO ENERGY and OCCIDENTAL PETROLEUM -EXPECTATIONAL ANALYSIS: VLO and OXY are both in the oil game,

but their relative performance on the charts is far from similar. While VLO hasoutperformed the SPX by 20 percentage points in the past three months, OXY

has lagged the broader market by 8 percentage points over the same time frame

Meanwhile, as VLO tests the support of its 10-week moving average, OXYstares at the underside of this trendline. Whats more, option speculators are

more bearishly aligned toward VLO, as the stocks 20-day ISE/CBOE/PHLXput/call volume ratio stands at 1.01 (with long puts and long calls near parity)

For OXY, meanwhile, this ratio is currently docked at 0.64, as calls are being

bought to open at a greater clip.RECOMMENDATION: Buy the Valero Energy June 22, 2013 40-strike call

and the Occidental Petroleum May 18, 2013 85-strike put.

DAILY CHART OF AOL SINCE OCT. 2012


DAILY CHART OF BBY SINCE JAN. 2013

DAILY CHART OF KBH SINCE MAY 2012

WEEKLY CHART OF OXY SINCE NOV. 2012

WITH 10-WEEK MOVING AVERAGE


5/6

O p t i o nS t r a t e g i e s &

CONCEPTS

P r i o rRECOMMENDATIONS

5 Bernie Schaeffers

At Schaeffers, we place a great deal of importance on accurately measuring investor expectations. A propergrasp of current market sentiment can offer an important trading edge. Why? High expectations create anenvironment of vulnerability, while opportunity is associated with low expectations. More specifically, we look

to buy strong stocks with low expectations and to short weaker stocks for which expectations are high. As such, we

consider ourselves contrarian, but not in what might be considered the conventional sense.There are many analysts and investors who believe themselves to be contrarians who

would not pass what we call the Humphrey Neill test. We consider NeillsThe Art of ContraryThinkingto be the classic work on the topic, and it is the basis for our contrarian approach tothe stock market. Neill defines contrarianism as simply a way of thinking and he goes on toexplain very clearly how a market contrarian should think. To best illustrate Neills approach,lets focus on three investment approaches that are mistakenly viewed as contrarian.

The first is conventionalism masquerading as contrarianism -- stubbornly clinging to a conventional position after it has been proved wroby the market. Such an approach not only violates the principles of sound trading, but more importantly, it is conceived in conventional, croworiented thinking.

The second approach is value investing. A contrarian is not a value investor in drag. Value investors generally specialize in buying beatedown stocks they perceive as cheap. But the key to a successful contrarian approach is to buy low expectations, not low prices. In fact, hiexpectations often accompany stock prices that are considered cheap, and low expectations often accompany stock prices that many considto be expensive. A skeptical outlook on powerful sectors or stocks can be a bullish cue for contrarians, as it is an indicator of relatively loexpectations and thus high potential.

The third approach is anti-trend following perceived as contrarian. A common view is that contrarians are cantankerous curmudgeowho automatically adopt the opposite viewpoint from that of the consensus. But this is not our conception of a proper contrarian approach, nis it Humphrey Neills. Mindless contrarianism is just as dangerous as mindless trend following. Mindless trend followers get hurt badly at toa point at which they are most likely to be fully invested. Mindless contrarians put themselves in the untenable position of trying to call tops abottoms, and stepping in front of the freight train on stocks and sectors whose powerful trends -- either up or down -- continue, despite tstrong affirming beliefs of the crowd.

As Neill states, the crowd is right during the trends but wrong at both ends. If you always go against the crowd, youll be bloodied durithese trends. True contrarianism, according to Neill, is a synthesis of the popular opinion (the prevailing thesis) and the contrary opini(antithesis) to develop a conclusion.

Through a regular thought process, the true contrarian allows for the fact that the crowd is sometimes partially or even totally right. Wbelieve the crowd is most likely to be right when it is supportive of the current price trend and is most likely to be wrong when it rejects the curreprice trend. So it is critical for the contrarian trader to always consider the current price action of the stock or sector under analysis. This approais evident in our Option Advisor trade commentaries.

OPEN AGGRESSIVE POSITIONS

Baidu - April 95P, PulteGroup - April 16C, Union Pacific - May 130Ca, United States Steel - April 24P

CLOSED AGGRESSIVE POSITIONSFedEx - March 95Cbc, General Motors - April 29Pd, LinkedIn - April 145Ce, Research In Motion - May 12Cc

PUT SELLING

AOL - March 36Pfg, Toll Brothers - April 31Ph

PAIRS TRADING

Activision Blizzard - May 12Chand GameStop Corp. - April 27Ph

Charles Schwab- March 14Ccand Interactive Brokers- March 15Pc

VeriSign - April 43C and Akamai Technologies- April 40P

KEY TO COMMENTS

a-Opened per 2/27 hotline, b-Time-stop extended per 2/25 hotline, c-Closed per 2/27 hotline, d-Closed per 3/11 hotlinee-Achieved target profit on 3/6, f-Expired in the money upon 3/15 expiration, g-Closed per 3/18 hotline, h-Closed per 3/21 hotline


6/6

6 Bernie Schaeffers

Bernie Schaeffers Option Advisoris published monthly (plus Special Bulletins) by Schaeffers Investment Research, 5151Pfeiffer Rd., Blue Ash, OH 45242. E-mail: [email protected]. Bernie Schaeffer, Senior Editor; Todd Salamone, SeniorAnalyst; Elizabeth Harrow, Editor. Subscription rate: $149 per year. To subscribe, call 1-800-327-8833 or visit our websitewww.SchaeffersResearch.com. Schaeffers Investment Research also publishes a variety of real-time investment services,available via e-mail and the Internet. This newsletter may not be reproduced in whole or in part without explicit permissionfrom a duly authorized officer of Schaeffers Investment Research, except by established newspapers that wish to quote briefpassages for purpose of review. We advise all readers to recognize that they should not assume that future recommendationswill be profitable or will equal the performance of any of the recommendations in this issue. The information presented hereinhas been obtained from sources believed to be reliable, but there is no guarantee of accuracy. This publication should beused only by sophisticated investors who are aware of the risks in forecasting and in options trading. It is recommended thatsubscribers carefully read the brochure prepared by the The Options Clearing Corporation and restrict commitments to fundsthat can be lost without undue financial hardship. The security portfolio of our employees, officers andaffiliated companies may, in some instances, include securities mentioned in this issue. Member: TheNewsletter & Electronic Publishers Association and The Market Technicians Association, Inc. Founding Member:Financial Newsletters International. Any enclosed third-party promotional materials should be considered apaid advertisement and do not constitute an endorsement of these products or services by Schaeffers

Investment Research, Inc.

ON THEMONEY

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Update:

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publication at 10 p.m. PLUS Special Updates at noon on

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For example, I was shocked by the weak returns so far this year in the large-cap REITs that dominate capitalization sensitive ETFs like theiShares Dow Jones US Real Estate ETF (IYR), and I proceeded to divide the REIT space into companies with market capitalization of $10billion or more and those with less than $10 billion (but more than $2 billion) in market cap. The eye opening results are summarized in thetable below:

REITs 2013 return # companies

$10 billion cap (or more) +3.73% 14

$10 billion < cap < $2 billion +12.35% 49

You may not have any interest in REITs, but perhaps as an options or futures trader you are excited by companies like CBOE Holdings(CBOE) in the options world and CME Group (CME) in futures. These are each great companies, and CME definitely has the edge in size (a$20 billion market cap, compared to just under $5 billion for CBOE). But CBOE has posted a 24% gain over the past year, compared to 3%for CME. Might this relative performance have been coincidental? After all, the CME has posted a 600% gain since its IPO in 2002. Perhaps,but my sense is the opportunities for growth (and thus for price appreciation) are greater for the small and mid-cap companies, plus they arenot as subject to the entropy that can engulf the large-cap world (take another look at the accompanying S&P chart). And in all fairness, notethat back in late-2002, CMEs market cap was on the order of about $3 billion.

Perhaps you are enamored of internet content providers. If so, you may have purchased Yahoo! (YHOO) shares a year ago and after a fewmonths of stagnation enjoyed the ride as the shares began to respond to the initiatives of new CEO Marissa Meyer and have gone on toappreciate by about 48%. But if you had instead purchased shares in AOL , with a market cap of less than 10% that of YHOO, your one-year

gain would have been an even healthier 102%.And finally, here is the one-year share performance for a trio of companies arguably in similar businesses (though I can see some

aficionados of each company strongly disagreeing). In any event, check out the market caps and the relative stock price performance.

Market Cap 1-year stock gain

Krispy Kreme Donuts (KKD) $0.9B +108.23%

Dunkin Donuts (DNKN) $3.9B +19.46%

Starbucks (SBUX) $43B +4.36%

Are my examples of smaller vs. larger cap stock performance too facile? Or perhaps this just represented a unique period in the market?Maybe, though I dont believe this to be the case. In fact, I continue to admonish that the large caps, which have proven themselves to be farfrom immune to the ravages of the various crisis-led market plunges over the past decade or so, simply do not pay you enough in potential

upside to be worth the risk.

(Continued fromTHEMARKETon page 1...)

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