Schaeffer's Midday Options Update Features Kraft Foods, Hewlett-Packard, Goodyear Tire & Rubber, Valero Energy, and Sepracor.

CINCINNATI -- Today's Schaeffer's Midday Options Update features Kraft Foods (NYSE:KFT), Hewlett-Packard (NYSE:HPQ), Goodyear Tire & Rubber (NYSE:GT), Valero Energy (NYSE:VLO), and Sepracor (NASDAQ:SEPR). The Midday Options Update contains a brief commentary on the day's most notable activity and a table listing the most-active calls and puts for the day. The Midday Options Update is published every day at www.SchaeffersResearch.com - the home of Bernie Schaeffer and Schaeffer's Investment Research. For additional information about this report or to have it delivered to you free via email every day click on the following link. http://www.schaeffersresearch.com/redirect.aspx?CODE=PRMOU12M&PAGE=1 .

Options Update: Trading Options on Sepracor

The major indices did not move very far yesterday, but this morning they were clearly down as traders prepared themselves for news from this afternoon's FOMC meeting and the President's State of the Union address this evening.

In economic news, the Chicago Purchasing Managers' Index tumbled to 58.5 in January from December's reading of 60.8, but matched the consensus estimate on the Street. The prices paid index fell to 75.3 from 81.1. The new orders index fell to 63.7 from 65.7.

Elsewhere, the Conference Board reported that the consumer confidence index rose to 106.3 in January from a revised 103.8 in December. This reading is the highest level since June 2002. Economists had predicted an increase to 104.6 in January.

Kraft Work

Yesterday's edition of Options Update featured Kraft Foods (NYSE:KFT), and the company made the news again today, after announcing that it will close an additional 20 plants and cut as many as 8,000 jobs by the end of 2008. The reduction in the workforce amounts to eight percent. The stock was down 2.4 percent at last check, at 29.29.

Another Change at the Top of HP

The Wall Street Journal reports that Hewlett-Packard's (NYSE:HPQ) Chief Financial Officer Robert Wayman is likely to retire soon. Mr Wayman joined the company in 1969, and was appointed as CFO in 1984. Those ubiquitous "people familiar with the matter" suggest that Mr. Wayman's departure was delayed by the departure of former head Carly Fiorino and the arrival of Mark Hurd.

A Bad Quarter, Goodyear

Goodyear Tire & Rubber (NYSE:GT) announced today that it expects fourth-quarter operating income to come in at about $238 million, below the Wall Street consensus estimate. The company blamed raw materials costs, which rose by 13 percent. Deutsche Bank downgraded the stock today, to "sell" from "hold," but I have not seen any other response from brokers. The earnings announcement is scheduled for February 16. At last check, GT was down 16.4 percent at 15.70.

All-Time Highs at Valero

Valero Energy (NYSE:VLO) today reported fourth-quarter results. Net income was $1.3 billion, or $2.06 per share, compared to $489 million, or 88 cents per share, for the year-ago period. This was the firm's tenth consecutive quarter of record earnings. Revenue showed a 68-percent jump to $25.89 billion. In intraday trading, the stock hit another all-time high, and stood at 62.61 at last check, down 0.9 percent on the day.

Most-Active Options Update

At 1:40 p.m. eastern time, the Dow Jones Industrial Average (DJIA - 10,884.6) has fallen 0.14 percent. The S&P 500 Index (SPX - 1,280.30) has dropped 0.38 percent, and the Nasdaq Composite (COMP - 2,299.8) has shed 0.30 percent. At 1:40 p.m. Eastern time, 2,373,692 calls have changed hands compared to 1,622,539 puts, equaling a single-day put/call volume ratio of 0.68. The CBOE's equity put/call volume ratio weighed in at 0.60.

Sepracor

Sepracor (NASDAQ:SEPR), which makes the Lunesta sleep treatment, reported fourth-quarter results today that beat the Street consensus estimate. The company also issued 2006 guidance that provided a positive surprise, and the stock gapped up this morning.

In the options pits, the stock's February 55 call (ERU BK) is doing brisk business today. After the close yesterday, this option had open interest of 4,999 contracts, but 12,406 had traded today by the time we grabbed our figures. I did not notice many big blocks cross the tape. Shortly after 10 a.m. Eastern time, a block of 1,179 contracts crossed on the Chicago Board Options Exchange. Two blocks of 500 contracts crossed a few seconds before 10:58 a.m., one on the American Stock Exchange and one on the International Securities Exchange (the electronic trading exchange). Other than that, it was small fry.

For the past few months, the stock has struggled, and it has been in an overall downtrend. However, this morning's good news caused it to gap up, taking out the overhead resistance of its 10-day and 20-day trendlines.

I'm going to return to the technical picture at the end of this analysis, but let's take a look at the sentiment first. Regular readers of this space know that we employ an Expectational Analysis(R) investment approach that seeks out equities that have sound fundamental and technical backdrops but still have pessimism present in their sentiment background.

From Zacks I see that analysts award:

--6 "strong buys"

--3 "buys"

--3 "holds"

--1 "sell"

--0 "strong sells"

With nine out of 13 brokerages rating the stock at "buy" or better, this leaves room for downgrades. Those "strong buy" ratings are supposed to be rare, but for SEPR, they comprise more than half the total ratings.

Short interest for the stock amounts to more than 10.5 percent of the float, and it would take nearly 5.5 days to buy back all those shorted shares. We monitor short interest because sometimes good news comes along and pushes a stock's price up sharply. This might shake out some of the short sellers, who suddenly see that it will cost more money to buy their stocks back than they tucked under the mattress when they originally sold the positions. If these turncoat short sellers suddenly transform into buyers, they can push the stock price yet higher and perhaps provoke further short covering. There's a chance of short-covering support for SEPR just now.

The stock's Schaeffer's put/call open interest ratio (SOIR) of 0.73 indicates that calls are more popular than puts in the February, March and April series of options. In the February series, there's a peak of 11,347 calls at the 50 strike. Remember that calls, if present in sufficiently large numbers, can lend options-related resistance if the stock price is below the strike price of the call. Thus, these February 50 calls might have troubled the stock. However, this morning's gap pushed the stock to the 55 region, clear through any potential resistance at 50.

Returning to the technicals, there's something very interesting happening today. As I mentioned, the stock gapped higher this morning, but it stopped exactly at one of the key Fibonacci retracement levels. The levels that are most frequently examined are 38.2 percent, 50 percent, and 61.8 percent, and it was the 38.2-percent retracement level that grabbed the spotlight today. From the July 2000 high of $140 to the September 2002 low of $3.90 I calculate that the 38.2-percent level is located at 55.89. That was the stock's intraday high today. Today's gains were capped by this resistance level, exactly to the penny.

On our Schaeffer's Equity Scorecard, SEPR earns itself a rather poor 3.0 out of 10 indicating that the path of least resistance might lead to the downside. But I think today's closing price will tell us a lot about the stock's current strength. A break above 55.89 would be good to see.

Click the following link to see a Monthly Chart of SEPR Since April 2000 With Fibonacci retracement levels, and an option configuration chart for SEPR for February: http://www.schaeffersresearch.com/wire?ID=15138 .

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About Schaeffer's Investment Research (www.SchaeffersResearch.com)

Schaeffer's Investment Research, founded by Bernie Schaeffer in 1981, is a financial information and trading resources company. It publishes Bernie Schaeffer's Option Advisor, the nation's leading options subscription newsletter. The firm's contrarian approach focuses on stocks with technical and fundamental trends that run counter to investor expectations. The firm's website, http://www.SchaeffersResearch.com , is recognized as one of the leading information sources for stock and options traders and was cited as the top options website by both Forbes and Barron's. Click here for more details about Schaeffer's trading methodology: http://www.SchaeffersResearch.com/method .