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Schaeffer's Midday Options Update Features Pfizer and Gap.

CINCINNATI -- Today's Schaeffer's Midday Options Update features Pfizer (NYSE:PFE) and Gap (NYSE:GPS). 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.

Take advantage of the timely Schaeffer commentaries by signing up for their free e-newsletters -- Opening View, Market Recap and Monday Morning Outlook. Click here to have the Schaeffer's commentaries delivered to you free via email every day and get entered to win an iPod Nano. http://www.schaeffersresearch.com/redirect.aspx?CODE=PRMOU13M&PAGE=1 .

Options Update: Out-of-the-Money Calls Popular at Gap

The Commerce Department reported that the U.S. current account deficit widened to $218.4 billion in the second quarter from a revised $213.2 billion in the first quarter. The current account totaled 6.6 percent of gross domestic product, the same as in the first quarter. The growth in the deficit in the second quarter was largely accounted for by increases in the deficits on goods and income. Economists had expected a current account of about $213 billion.

Meanwhile, capital flows into the U.S. fell sharply to $32.9 billion in July, marking the smallest inflow since May 2005. The drop was led by a sell-off of Treasury bonds and notes by private investors. Foreign central banks actually increased their purchases of Treasury bonds and notes and government agency bonds in July. Chinese holdings of Treasury securities increased to $332.7 billion in July.

Most-Active Options Update

At 1:43 p.m. Eastern Time, the Dow Jones Industrial Average (DJIA - 11,556.8) is currently down 0.03 percent and the S&P 500 Index (SPX - 1,321.85) has added 0.15. Meanwhile, the Nasdaq Composite (COMP - 2,238.8) has added 0.14 percent. At 1:43 p.m. Eastern Time, 2,894,459 calls have changed hands compared to 2,095,733 puts, equaling a single-day put/call volume ratio of 0.72. The CBOE's equity put/call volume ratio stands at 0.68, while the ISE's ratio comes in at 0.79.

Option Activity Follow-Up

In this column on Friday, Mark Fightmaster looked at some rather mixed sentiment toward Pfizer (NYSE:PFE). Heavy put action on PFE's October 27.50 put (PFE VY) included three large contracts. "It certainly seems that some options players aren't buying into a PFE rally," Mark suggested.

Now, if you have a problem, if no one else can help, and if you can find him, Mark can usually be relied upon to offer up an answer. Nevertheless, when it comes to activity in the options pits, it's hard to know what's really happening until all the transactions are netted up at the end of the day. In retrospect, we find that the PFE VY option began the day with open interest of 24,970 contracts on Friday, and total volume for that contract on the day was 13,630 contracts. It turns out that nearly all of those transactions translated into fresh open interest, because open interest after all was said and done was 37,660 contracts. Bottom line: put open interest at that strike leapt almost 51 percent on Friday.

Gap

Clothing retailer Gap (NYSE:GPS) is an interesting stock to study today. GPS's October 20 call (GPS JD) began the day with open interest of just 58 contracts, but 10,135 contracts had crossed the tape by the time we grabbed our figures for this observation, so open interest is almost certain to change by the end of the day. The stock entered a strong uptrend a few days ago, partially attributable to an upgrade to "overweight" from Lehman Brothers. At last check, GPS was trading at $18.40, so those calls are out of the money, but at the rate GPS is rising, they might not remain out of the money for very long.

The major action took place on the International Securities Exchange, the electronic options exchange. At about 10:25 a.m. Eastern time, a block of 2,425 contracts crossed the tape, closely followed by two more blocks, each of 500 contracts.

The long-term technical picture shows that GPS moved above its 10-month moving average last week, and looks as if it might be set to log further gains. The next challenge is potential overhead resistance at the 20-month moving average.

So, is it time to buy in? Let's look at the sentiment. Of the 17 covering analysts listed on Zacks, 11 keep GPS at a cautious "hold" or worse. This skeptical configuration leaves plenty of room for further upgrades, which could drive the price higher.

Sadly, sentiment in the options pits is more optimistic. The stock earns a Schaeffer's put/call open interest ratio (SOIR) of 0.33, telling us that calls are three times as popular as puts in the front three months of options. This ratio is lower than 99 percent of those taken during the past year, indicating extreme optimism, and warning that sideline money might not be abundant. Furthermore, just 2.2 percent of the stock's float is sold short, so there isn't much fuel for any short-covering rally.

On our Schaeffer's Equity Scorecard, GPS earns a very neutral 5.0 out of 10. So, here's my advice: it isn't time to trade GPS yet, but the technical situation makes it interesting. Add this one to your watch list for this week, and watch for further upgrades. Whoever bought that largest block of October 20 calls, by the way, is already sitting on a 100-percent profit.

Click here to see a Daily Chart for GPS since May 2006 and a Monthly Chart of GPS since April 2002: http://www.schaeffersresearch.com/wire?ID=17359 .

The best way to take advantage of the timely Schaeffer commentaries is to sign up to receive their free e-newsletters -- Opening View, Market Recap and Monday Morning Outlook. Click here to have the Schaeffer's commentaries delivered to you free via email every day and get entered to win an iPod Nano. http://www.schaeffersresearch.com/redirect.aspx?CODE=PRMOU13M&PAGE=1 .

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 .
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Date:Sep 18, 2006
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