Archive for the ‘strangle option trades’ Category

Nike (NKE) Keeps on Doing It, Call Options Zoom Nearly 2,000%!

Friday, March 22nd, 2013

12:40pm (EST)

There were a couple of earnings trades we were watching this week and while one was on a company we have never traded options on, the other was an old favorite.

Scholastic (SCHL, $30.65, down $0.34) came into the week just above $30 and was reporting earnings after the close on Wednesday. Shares ended the session at $31 ahead of the announcement and we had a feeling there would be a test to $25 after our weekend homework and how the chart was looking.

Needless to say, the company reported a quarterly loss that nearly doubled after weaker-than-expected demand for the publisher’s “Hunger Games” series. Scholastic reported a loss of $20 million, or $0.63 a share, versus a loss of $10 million, or $0.33 cents a share, in the year-ago quarter. The buzz just wasn’t there as book sales dropped 60%.

We looked at the April 25 puts (SCHL130420P00025000, $0.65, up $0.10) on Sunday night and they were at 45 cents. The biggest problems we had with recommending these options as an official trade is they are thinly traded and the bid/ask, or spread, was too wide to get a good fill. Even though the options are up over 20% the bid/ask is 55 cents by 80 cents. Volume for the day is 10 and open interest is at 31.

We like to trade more liquid options with tighter spreads so we passed on this trade. Perhaps, we should have shorted the stock and called it a day.

The other stock we were watching this week was Nike (NKE, $59.73, up $6.13) which has been a favorite earnings trade for us over the years. If you look through our past year option recommendations you will see numerous times where we have made our subscribers triple-digit profits. We normally play call options on Nike but yesterday’s market action and recent worries on how well, or not so well, the company’s quarter was going seemed mixed. We weren’t so sure because we recently purchased the Nike Fuel Band for our office staff and they love it. We aren’t sure of the sales yet because we haven’t listened to the conference call but Nike’s brand name has been showing up everywhere.

The bonus package with Nike is that margins improved for the first time in 8 quarters and they beat the Street’s estimates by 6 pennies. Revenue matched expectations for the most part but there were some suit-and-ties who expected more.

Still, like a deer in headlights, we sat on the sidelines and missed a monster trade.

Shares closed at $53.60 on Thursday and we figured in an 8% move for the stock, or $4-$5. We looked at the April 57.50 calls (NKE130420C00057500, $3.00, up $2.60) that closed at 40 cents yesterday and are up over 625% today – and the April 50 puts (NKE130420P00050000, $0.05, down $0.55) which closed at 60 cents and are down 95%. Together, these options would have created a sweet strangle option trade and the premiums together for both the calls and puts would have been $1. A 10-contract trade on both options would have cost $1,000.

Although the puts will likely expire worthless, the calls would have easily offset the losses to where this trade would have returned 200% if the calls are closed at current levels. These strangle option trades are also known as “chicken trades” and we should have taken it because we were a little nervous on which way the stock was headed.

Keep these types of trades in mind if you feel a super-sized move in a stock is coming but you aren’t sure of direction. These types of option strategies sound complicated but they are easy to do in your trading account and they can provide some juicy returns.

Nike also trades WEEKLY options and as a lottery play we also looked at the March 57.50 calls (NKE130322C00057500, $2.50, up $2.38) that closed at 12 cents yesterday and are up a whopping 1,983%. A 20-contract trade would have cost $250 and would be worth a cool $5,000 at current levels. Should’ve, would’ve, could’ve – right?  Here is the option quote from Yahoo Finance:

The flip side of the Weekly options is shares could have stayed below $57.50 and the March options expire today which means these calls could have expired worthless. However, the risk/ reward on these types of earnings trades are compelling and we will do a better job of profiling them on our Watch List.

April earnings season is just 3 weeks away so get ready for some hot recommendations as the market could get really interesting from here on out. We have some last minute updates for our current trades before the weekend hits so let’s go check the tape.

Before we roll, here is how the indexes look – the Dow is up 73 points to 14,494 while the S&P 500 is higher by 8 points to 1,554. The Nasdaq is bouncing 15 points to 3,237.

Subscribers, check the Members Area for the updates and if we take any late day action we will send out a Trade or Profit Alert. We will be back Sunday with the Weekly Wrap and on Monday morning with our Daily report. Until then, have a great weekend everyone!

First Solar (FSLR) Sinks 15%/ New Trade!!!

Wednesday, February 27th, 2013

1:00pm (EST)

The bulls are pushing resistance again today as the Dow is looking for its third triple-digit gain in the past four sessions.  Of course, thrown in the mix was Monday’s steep 216-point drop.  Today’s pop has the bulls pushing resistance with less than 48 hours to go before the sequester cuts are due to kick in.

We will skip the zombie talk for the most part and although there are reports the knuckleheads are working on “something” to avoid the latest political gridlock but with the president on the road and with Congress taking last week off, it appears Cinderella is going to turn into a pumpkin.

One stock we want to mention today is First Solar (FSLR, $26.63, down $4.73) as shares are down 15% after disappointing earnings.  We love playing the options on this stock as the calls and puts can easily make 100% or more depending on the trend.

Shares were left for dead last summer when they bottomed at $11.43 but First Solar starting gaining momentum on better solar panel pricing.  Shares recently hit a 52-week high of $36.98 on the turnaround story but solar prices have been in a decline due to oversupply and weaker demand.

First Solar beat on earnings as they reported $2.04 a share versus estimates for $1.75 a share.  Revenue came in at $1.1 billion but the suit-and-ties were looking for sales north of $1.3 billion.  Lowered guidance for the first quarter is calling for sales of $650-$750 million and earnings of $0.70-$0.90 per share.

As you can see, it would have been a risky earnings trade as a directional play but there was sa little money to be made with a strangle option trade.

With shares just above $31 going into yesterday’s close, a 10% swing would have placed shares at  $34+ or $28 or worse.

The March 28 puts (FSLR130316P00028000, $2.31, up $1.09) could have been picked up before yesterday’s close for $1.22 and they are up a snazzy 89% and have traded up to $3.05.  The March 35 calls (FSLR130316C00035000, $0.08, down $0.99) were at $1.07 going into Tuesday’s close and are down over 90%.

A 10 contract trade for each options would have cost $2.29, or $2,290, and the present value of the strangle option trade is at $2.39, or $2,390, despite the big loss on the call options.  If you would have cashed the puts out shortly after the open the trade could have made nearly 50%.

We didn’t like the risk reward the options offered as the premiums were a little juiced with First Solar being a high beta name.

The market has erased Monday’s losses and is showing strong gains as we head into the second half of trading.  The Dow is higher by 128 points to 14,028 while the S&P 500 is up 16 points to 1,512.  The Nasdaq is advancing 37 points to 3,166.

We have a NEW TRADE we are getting into se we have to roll.  The trade was on our Watch List and with today’s pop, we believe we are getting a great entry price on the options we are recommending.  Subscribers, check the Members Area for the latest updates and use limit orders to get the best fills.

Sketchers (SKX) Surges 11%

Thursday, February 14th, 2013

1:15pm (EST)

Sketchers USA (SKX, $21.81, up $2.24) shares are approaching their 52-week high of $22.37 as they have traded up to $22.15 today.  We have played this name in the past and shares always seem to make a huge move after they report earnings so keep this in mind down the road.

We recently revised and sent out our trading manual, How to Trade Options on Momentum Stocks, so for all of those who ordered the 1-year deal back in December, you should have your copy as they shipped last week.  If you haven’t, email our support team.

We wanted to cover Sketchers because we profiled a strangle option trade on our Watch List this week that did really well today.  These options trading strategies can be hard to understand but we have simplified it in our option manual and will try to do so here in this space.

With February options expiring todmorrow, we could have used “cheap” options to play this move in Sketchers.  Now, trades like this will need a move of 10% or more or otherwise the options premiums will get deflated as both options could expire worthless if shares would have stayed flat or moved less than 5%.

Sketchers went into yesterday’s close at $19.57 so a 10% move would mean they needed to trade up to $21.50 or fall below $17.50 for this trade to have a good chance of hitting a triple-digit return.  Here is how it would have played out.

The February 20 calls (SKX130216C00020000, $2.00, up $1.50) were going for 50 cents into Wednesday’s close and are up nearly 300% on the news.

The February 19 puts (SKX130216P00019000, $0.05, down $0.35) were at 40 cents going into yesterday’s close and will likely expire worthless tomorrow.

A 10 contract trade in each option would have been $900.  Ten contracts of the call options would have cost $500 and they could be closed at $2.00.  This would net $2,000 into your account.  The puts cost $400 for 10 contracts and they will likely expire worthless tomorrow.

The $900 you invested is now worth $2,000 and you would be out of the trade after the puts expire.  The return is a little more than 100%.

These type of trades are also know as “chicken trades” because you are unsure which direction shares will move after the earnings announcement.  We may use these types of strangle option trades in the future as they can pay 100% or more in a matter of a day or two as you can see but you have to be careful.

As far as the market today, the bears are growling but support is holding as better-than-expected economic news has shielded Wall Street from the worse-than-expected GDP numbers from around the world.

The Dow is down 10 points to 13,973 while the S&P 500 is up a point to 1,521.  The Nasdaq is higher by 3 points to 3,200.  Subscribers, check the Members Area for the latest updates and we will be back in the morning with a full report.

Apple’s (AAPL) Stunning Quarter

Wednesday, January 25th, 2012

9:00am (EST)

Oh, baby do you know what that’s worth? ($100 billion)

Oh, Heaven is a place on Earth.

They say in Heaven, love comes first

We’ll make Heaven a place on Earth.

Steve Jobs is certainly smiling from up above and it feels as though he never left us. We thought today’s blast from the past was the perfect song to start our morning as we look ahead to the opening bell…

The market made a nice rebound off yesterday’s lows and remained in a tight range for the rest of the day as Wall Street awaited Apple’s (AAPL, $420.41, down $7.00) quarterly results. Despite the nervousness of an Apple letdown, Tech had a strong day compared to other sectors which helped the major averages hold support as the market ended mixed.

The Dow fell 33 points, or 0.3%, to close at 12,675 while the S&P slipped a point to finish at 1,315. The Nasdaq added 2 points to settle at 2,786 but failed to crack 2,800 but this shouldn’t be an issue today.

As far as Apple’s numbers, needless to say, the suit-and-ties were divided heading into the report as half the analysts seemed to be giddy while the other half said there was a chance for an earnings miss – but none of them seemed sure or wanted to bet the ranch. Shares were halted until 4:50pm (EST) in extended trading last night which was a little unusual and goes to show how the much Wall Street weight the company had on its shoulders.

There were over 125 Apple articles within 3 hours after the close on Yahoo’s (YHOO, $15.69, up $0.01) Finance page yesterday talking about Apple’s mind-boggling results.

The company reported a profit of $13 billion, or $13.87 a share, on revenue of $46 billion. The pencil-pushers were looking for earnings of $10 billion on $39 billion in sales. A quick rundown on the record 3 months: 37 million iPhones sold during the quarter, over 15 million iPads, and 5 million Macs. To put things in perspective, the number of iPhones and iPads sold were over 100% increases from the prior quarter. We didn’t even mention the iPods sold for the quarter and the fact its iTunes store is approaching $2 billion sales. By the end of this year, iTunes alone could be a double-digit billion dollar business!

Apple added another $16 billion to its coffers and now has nearly $100 billion in its war chest. Yes, the company ended the quarter with $97.5 billion in cash and marketable securities on its books. Wow.

Once again, we were hoping for a stock-split of 4-for-1 which would have gotten shares down to $100 or so but Apple hasn’t split its stock since 2005 when it did a 2-for-1 deal.

The options on a $400 stock can be expensive and we looked at the Apple February 370 puts (AAPL120218P00370000, $1.80, up $0.35) and the February 470 calls (AAPL120218C00470000, $1.20, down $0.80) yesterday as a possible strangle option trade after our update which represented a $50 move in the stock. We were calculating a 10% swing either way which would get shares to $380 or $460 based on the price at the time. The 10% move wasn’t enough to get the stock past these strike prices which made us nervous because we want shares to move enough to cover the cost of the trade.

Apple shares were up $30 to $450 in after-hours trading last night once they opened and did hit a high of $470 before chilling. This morning they are at $454, up $34. The puts will take a huge hit while the calls should get a nice pop at the open.

As you can see, the option premiums are rich on triple-digit stocks and you need a massive move in the stock to hopefully make a decent return. We would rather play options on stocks on under $100 where a 5% move would double your money or make you 100+% with the right option.

Apple is one of the few triple-digit stocks we wish we could play options on but the risks outweigh the rewards, especially when selling these types of options. No worries. There are hundreds of other stocks we follow under $100 that trade options and we have no problem letting the big boys trade Apple while we focus on Microsoft (MSFT, $29.34, down $0.39), Aflac (AFL, $49.07, up $1.02) and MGM Resorts (MGM, $13.16, up $0.02).

Our subscribers have banked 125% on Microsoft calls, 127% on Aflac call options, and 131% and 114% on 2 MGM call option trades this month alone. Our Seagate Technology (STX, $19.75, up $0.07) also made 100%. That’s 5 triple-digit call option trade winners on stocks that have moved $1-$3 in the last 3 weeks.

With futures up this morning thanks to Apple, we are hoping our other call option trades get some nice pin action.

Futures are mixed as we head to press and look like this: Dow futures are down 35 points to 12,591 while the S&P futures are off by 3 points to 1,308. The Nasdaq futures are showing a 18 point pop and are at 2,445.

Subscribers, check the Members Area for the updates and stay on your toes for possible Trade Alerts. With the Fed speaking at noon, we could be in for a wild ride today as we near the July and April 2011 market highs.

Can Google (GOOG) Deliver Again?

Thursday, January 19th, 2012

1:10pm (EST)

The bulls got a bevy of good news before the bell this morning which led to a good start for the market as the major averages continue to push the July 2011 highs. Bank of America (BAC, $7.11, up $0.31) is giving the Financial stocks a lift after beating Wall Street’s revenue expectations. The suit-and-ties were floored when the company posted a profit of 15 cents a share on revenue of $25.1 billion which beat their projection of $24 billion in revenues. We have been pounding the table on the stock when shares were at $5 back in December as it is a current member of our Weekly Wrap Covered Call portfolio which could start January at 10-0.

Economic news was fantastic as Initial Claims fell to 352,000 versus expectations for 384,000 while Continuing Claims were 3.43 million versus forecasts for 3.6 million. Elsewhere, Consumer Prices were unchanged which was below calls for an increase of 0.1%. The core reading, excluding food and energy, matched the hype and was up 0.1%. And finally, from the crib, Housing Starts dropped for the month of December, coming in at 657,000 versus expectations for 680,000 while Building Permits matched forecasts.

Google (GOOG, $636.00, up $3.09) will confess their quarterly numbers after the bell and shares have a history of making huge moves after they announce earnings. Of course, this is option expiration week and the January options are still play so let’s take a look at the stock and some of the options.

The last time the company reported their quarterly results (mid-October 2011), shares surged $32-and change from $559 to $591, on better-than-expected numbers. The high that day was $599. In July 20011, Google also beat estimates and zoomed from $529 to $597 and kissed a high of $600.

A 10% move in Google would equate to a 63-point move in the stock and we could see that on an earnings miss to the downside. However, the upside may not be quite as huge if it is not a blowout quarter and could only be 5% or less which is still $30 but is it enough to create a possible strangle option trade?

The Google January 700 calls (GOOG120121C00700000, $1.10, down $0.20) and the January 575 puts (GOOG120121P00575000, $0.90, down $0.70) would cost $2 together and are a possibility but the stock would need to be at $702 or $573 for us to break even. At $704, or $571, the trade would double but again, the options expire tomorrow.

This is NOT an official option trade recommendation but we wanted to show you how strangle option trades work since we have a ton of new subscribers. The risk/ reward on this trade doesn’t look great and it may be better off to SELL these options but that is another strategy altogether and one we certainly don’t recommend on a $600+ stock.

We will take a look at these options again on Friday to see where they are at and we would like to see a blowout quarter which would help the Tech sector keep its momentum.

As we head to press, the Dow is up 14 points to 12,593 while the S&P 500 is higher by 5 points to 1,313. The Nasdaq is showing a pop of 20 points to 2,790.

As usual, we have a number of open trades and there is a lot to talk about so let’s go see where we are at. Microsoft and IBM and Intel also report after the bell so tomorrow could be explosive for either the bulls or bears depending how things go. Subscribers, check the Members Area for the updates.

Market Dips, First Solar (FSLR) Gets Ripped

Wednesday, October 26th, 2011

8:45am (EST)

Tuesday’s action showed nervousness by the bulls as they fretted over growing sentiment on Wall Street that the finance leaders of the European Union (EU) are having difficulty on agreeing what is the best course of action to deal with the debt crisis.  Meanwhile, there were a number of disappointing corporate earnings announcements and economic news was less than stellar which weighed on the indexes.  As a result, the bulls took a breather yesterday as Europe’s timetable to come up with a plan to deal was pushed back once again.   

We expected some choppiness as the indexes battled their 200-day moving averages which can be hard to clear if momentum fades but the market held support for the most part.  There will still be an EU meeting today (their 14th!) but there will be no official game plan in place by today’s close unless a miracle happens.

The Dow fell 207 points, or 1.7%, to settle at 11,706.  The index opened in the red and hit a low of 11,682 as it slipped below the 11,800 level which will now serve as short-term resistance.  The next area of support for the blue-chips is at 11,600 and then 11,350 if there is further selling pressure.

The S&P 500 gave back 25 points, or 2%, to finish at 1,229.  The index slipped to a low of 1,226 which was still above support at 1,225.  Should this level fall, the next test could be down to 1,200 while 1,250 remains resistance.

The Nasdaq dropped 61 points, or 2.3%, to close at 2,638.  We were looking for 2,650 to hold but the low came in at 2,633.  There is further risk down to 2,600 and then 2,550 if Tech weakens from here.  The bulls are still shooting for a close above 2,700.

We have covered some interesting trades over the past month and although we are working on a 20-trade winning streak, we missed another great opportunity yesterday even though shares were on our Watch List a few weeks ago.  As we have seen, and we will see again today, when momentum stocks lose their luster they can get pummeled.   

First Solar (FSLR, $43.27, down $14.68) shares got canned for a 25% loss on Tuesday following the abrupt change in CEO’s.  There was no specific reason given for the switch as the company said the move was effective immediately.  Usually when something of this magnitude happens, other skeletons come out of the closet but we have noticed the weakness in shares.

We had listed another possible strangle option trade for First Solar, Friday before last, when shares were at $55 but we didn’t think another 30% down move was possible before the options expired.  Wrong.

The November 40 puts (FSLR111119P00040000, $4.75, up $4.20) were at $1.15 when we profiled the trade along with the November 70 calls (FSLR111119C00070000, $0.40, down $0.90) which were at $1.75.  Although we didn’t feel like shares would run to $70, we looked at the calls as insurance because we had penciled in a higher market for the rest of October. 

Needles to say, the puts were up a whopping 780% yesterday while the calls dropped 70%.  It was another round-trip trade that would have cost $2.90 to get into but the return would have been fat despite the call options taking a dive. 

These types of strangle trades are also called “chicken trades” because you know a big move is coming but you aren’t sure which way the stock is going to go.

This morning, (AMZN, $227.15, down $10.46) is being taken to the woodshed after they missed Wall Street’s estimates.  The company reported earnings after yesterday’s close and missed forecasts by 10 cents after occurring higher sales costs for the third-straight quarter.

Shares are at $200 in pre-market trading, down $27, and kissed the low $180’s in after-hours trading last night.

As far as futures, they are pointing towards a higher open despite the high-profile miss.  Dow futures are up 71 points to 11,733 while the S&P 500 futures are higher by 8 points to 1,233.  The Nasdaq 100 future are showing a 14 point pop and are at 2,336.

We have added 6 NEW TRADES to our Watch List and some of the names had heavy option trading in them yesterday.  We have added a few put trades in the mix but we have listed a some more call options as we look for the bulls to hold support and push the 200-day MA’s.  If we decide to make one (or more) of them official trades, we will send out a Trade Alert before 11am so stay locked and loaded.  Subscribers, check the Members Area for the updates. Weekly Wrap for 9/6/10

Monday, September 6th, 2010

11:45pm (EST)

1. Market Summary

2. An Introduction to LEAPs          

3. What’s Wrong With CBOE?           

4. Strangle Trade Update   

5. Earnings  

= = = = = = = = = = = = = = =  

1. Market Summary

It was another classic battle last week as the bulls and bears pushed the action with Wall Street on vacation.  As the summer grinds down, a lot of traders like to take the last week of August off which usually brings extra volatility and chaos.  The market certainly got that and then some.  The trend had been down heading into the week, but the bulls started a major rally off the lows on Tuesday and powered the market past key resistance levels by Friday.

Of course, both sides were nervous taking positions ahead of Friday’s unemployment update but the bears were sideswiped when the market got “good news” as the total number of new jobs added came in at of 67,000 while the jobless rate rose to 9.6% from 9.5% in July.  We all know the labor market is struggling, and the fact that jobs opportunities are not keeping up with demand doesn’t help matters, but the bulls used the positive number to push the bears into a corner.

Last week we told you there was a chance we could test the upper end of the current trading range so let’s see where we are at.

The Dow surged 128 points, or 1.2%, to close at 10,447.  For the week, the index added 297 points, or 2.9%, and snapped a 3-week losing streak in the process.  The bears were trying to hold the 10,400 level and we said that sometimes resistance gets stretched but the bulls are now pushing for 10,600-10,800.

The S&P added 14 points, or 1.3% to finish at 1,104 and for the five days, the index popped 40 points, 3.8%.  We had a feeling the 1,100 level would come into play and the bulls have to feel good about taking out this number.  The next stop appears to be 1,125 with a run to 1,150 if the momentum continues.

The Nasdaq jumped 34 points, or 1.5%, and settled at 2,233.  Tech had a huge week as it rallied 80 points, or 3.7%.  Our target for the Nasdaq had been 2,200 with a possible push to 2,250.  If the bulls continue with their momentum, it is possible they make a run at 2,300-2,350.

We mentioned last Thursday the bulls could test resistance and the fact that the major indexes closed above these levels is impressive.  We also told our subscribers that Friday would bring a triple-digit move in the Dow and the day after Labor Day is usually pretty bullish as the Dow has rallied 12 out of the last 15 years. 

So what does this all mean?  Are we at the start of another bull market?  Or are the bears setting a classic bull trap?  We should know this week…

= = = = = = = = = = = = = = = 

2.  An Introduction to LEAPs 

We wanted to take some time this week to talk about Long-Term Equity Anticipation or LEAP options.  LEAPs are simply call or put options where the original term can go as far out as two years from the issue date of the contract.  We have profiled some of these types of options in the past and wanted to discuss how you can use them when looking to add them in your investment portfolio.

One of the great advantages of LEAPs is because the term of the option contract is so long, these types of options can be great for protection to hedge against a large stock position.  For instance, let’s say you believe in Bank of America (BAC, $13.50, up $0.22) and feel the stock is cheap (like we told you a few weeks ago) at current levels.  Just last Tuesday, shares touched a 52-week low of $12.18 and it would have been hard to buy at the lows but let’s say you agreed with us and believed in the company’s long-term prospects.

We have been following the January 17.50 (2012) calls (BAC120121C000175000, $1.20, up $0.08) for a few weeks now and you could use these options as was way to lower your cost basis in the stock. 

If you went to the market and bought 1,000 shares of BAC it would cost you $13,500 if we use Friday’s closing price.  You can then sell the aforementioned call options (10 contracts) and collect $1,200 into your account which lowers your basis to $12,300. 

By doing this, you also limit your upside potential because the stock might get “called” away from you if shares are trading above $17.50 by January 21, 2012, or 16 months away.  However, because your cost basis was $12,300 instead of $13,500, your return is 42% instead of 30% had you just bought shares.

Of course, you could also buy the call options straight up without buying the stock and shelling out $1,200 for 10 contracts.  The beauty of this trade would be if shares are at $20 in 16 months.  The options would be worth a minimum of $2.50, or a 100% return from current levels.

This is one way to use LEAPs if you are bullish on a company. 

If you are bearish on BAC then you could use LEAP put options.  

If you believe BAC is a ticking time bomb waiting to explode and shares are headed below $10 then you could use the January 10 (2012) puts (BAC120121P00010000, $1.15, down $0.05).  If shares are at $7.50 in 16 months then these puts would also double.

LEAPs are also useful when you believe an event will dramatically move a stock but the exact timing is unknown.  A great example is a takeover target.  If you believe a company is going to catch a bid from another but you are not sure of the timing AND you believe the stock will command a heavy premium, call LEAPs could be used. 

-OR -

If the company has a dying business model (Blockbuster Video) or is losing market share and you think shares are going to get a 50% haircut then you could use put LEAPs.

One of the drawbacks of LEAPs is that they are so far out in terms of time frame, if you don’t get a decent move in the stock, you may not have the LEAP move enough to justify the trade.  Generally, you are not going to be making an 1,000% return with LEAPs even if you do get the event you are looking for but we have seen some LEAPs soar in the past.

If Bank of America is at $25 in 16 months, your return would be 525%.

= = = = = = = = = = = = = = = 

3.  What’s Wrong With CBOE?

The Chicago Board Options Exchange (CBOE, $22.17, up $0.50) is a recent initial public offering (IPO) we briefly highlighted in mid-June and a stock we have kept on our Watch List.  The IPO priced at $29, hit a high of $33.75, and closed at $32.49 on its first day of trading. 

We mentioned at the time there were some litigation issues facing the company and those were resolved in early July after the company won a huge high-stakes legal battle to maintain its exclusive rights to trade index-based options contracts.  Shares were trading near $30 when the good news came out but have since hit a 52-week low of $20.25 before rebounding nearly 10% last week.

The 50% haircut (before the bounce) had peaked our curiosity so we did a little more digging.  As you can imagine from its name, the company is basically an option exchange, with businesses in futures contracts and cash equities.  As far as volume, the exchange averaged 4.5 million contracts on trading days in 2009, although recently that volume has been lower.  CBOE is projected to do $440 million in revenue this year.

Despite the recent legal win, one of the reasons for the drift down has been the anemic volume the market has experienced for much of the summer.  Although the overall trend for options over the last few years has been higher as more and more people use them in the portfolio, the summer months usually bring lower volume.  All of the exchanges make money on volume, and the recent dip in the lack of participation on stocks has hurt the option markets, CBOE included.

This could all change soon no matter which way the market heads from here as we are almost certain to see higher volume in September and October.  These are typically volatile months for the market and volatility typically means more trading volume.  In addition, many Wall Street traders will be back at their desks on Tuesday after taking last week off.  The bond market has been just as volatile and could be crumbling if there really is an asset switch going on.

This stock is also a takeover target, so keep an ear out for rumors.  Shares are reasonably valued at this point, and as we mentioned, the long term trend in option volume is upward.

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4.  Strangle Trade Update  

We are usually pretty good with deadlines and we told you we had a great example to show you on how sweet strangle option trades can be.  We did not get the article out in time for our Weekly Wrap but we ran this in our Monday Morning update at 9am, before the market opened (quotes from that day):

“We wanted to take some time to talk about a strangle option trade this morning that we were going to cover over the weekend but didn’t.  The stock we were going to cover is a good candidate because we are expecting shares to move at least 10% or more over the next few weeks.

To find an attractive candidate, you need volatility and Freeport-McMoRan (FCX, $70.36, down $0.84) fits the bill.  The strangle option trade can be used for a stock that you feel will be making a big move but you are unsure of the direction. 

If you look at a chart for FCX, you will notice shares are easily capable of moving $10 in a week and that is the action we are looking for.  The company is mainly a Copper ETF but has some exposure to gold and although we are in a downtrend, we would use call options to protect us if the stock moved higher. 

September options expiration is only 18 days away, so you could use the September 65 puts (FCX100918P00065000, $0.81, up $0.08) and the September 75 calls (FCX100918C00075000, $0.95, down $0.25) as a way to play a big move in the stock.  If we let this trade run down to the wire we would need shares of FCX to be under $64 or over $76 for us to make a decent return.  The goal would be to make enough on one side of the trade to offset the other side of the trade. 

If the stock makes a quick 5% move either way, the calls or puts would double and hopefully give you an overall gain of 10% or more.  Then you would have the other side of the trade to wait for a rebound and possibly get out of the other side with a profit.  That is not often the case but it does happen.

These trades are also known as “chicken trades” or you can use the 70 strike price and make the trade a “straddle” option trade.  This trade is not an official recommendation because we don’t like the risk/ reward setup for this one but we will track it to show you why it did work or didn’t.  This trade is for educational purposes only.” (END)

Well, we explained how the market rebounded this past week and shares of Freeport CLOSED at $78.55 (up $1.59) on Friday.  The trade was up 25% by our Monday afternoon update buy let’s check where the options closed at:

September 75 calls (FCX100918C00075000, $4.40, up $0.95)

September 65 puts (FCX100918P00065000, $0.13, down $0.04) 

These call options opened at 80 cents last Monday while the puts opened at 87 cents.  The calls are now up 450% while the puts are down 85%.  The overall return would be 171% at current prices.

Now, what happens if the market tanks this week and Freeport suddenly drops to $64.  The puts would be worth a buck and it would be added gravy to a nice return.

Although we did not participate in this trade, the good news is that there will be more strangle option trades coming that we will be making official recommendations on!

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5.  Earnings   

TUESDAY – Caseys General Stores (CASY, $38.90, up $0.20), Energy XXI (EXXI, $20.90, up $0.38), Pep Boys-Manny, Moe & Jack (PBY, $10.05, up $0.11) and Phillips-Van Heusen (PVH, $51.10, up $0.77).

WEDNESDAY – Men’s Wearhouse (MW, $21.36, up $1.09), Navistar International (NAV, $46.05, up $1.04), Smithfield Foods (SFD, $16.72, up $0.35), Shanda Interactive Entertainment (SNDA, $41.79, up $0.23) and United Natural Foods (UNFI, $36.09, up $0.49)

THURSDAY – National Beverage (FIZZ, $14.99, up $0.09), Hooker Furniture (HOFT, $10.76, up $0.33) and National Semiconductor (NSM, $13.26, up $0.07).

FRIDAY – Brady Corp. (BRC, $26.51, up $0.20) and Lululemon Athletica (LULU, $35.11, up $0.75).

We will be back Tuesday morning at 9am with our next update! Weekly Wrap for 3/28/10

Sunday, March 28th, 2010

7:15pm (EST) 

All things considered, Friday’s close wasn’t too bad…

We were hoping the bulls would post a strong showing going into the closing bell but the market settled near even after spending much of the session marching higher.

Of course, Wall Street’s eyes were on Greece and there was a sense of relief after the European leaders agreed to bail out the debt-laden country, with help from the International Monetary Fund, if conditions get significantly worse.

The safety net for Greece took pressure off the euro, sending it up slightly against the dollar but that will most likely be short-lived.  Expect the euro to get weaker. 

We also had some geopolitical concerns over North and South Korea that made the market nervous and sparked the afternoon sell-off but those reports were overblown.  All-in-all it was another solid weekly victory for the bulls – their fourth in a row - as many analysts continue to doubt the rally.

The Dow ended the day with a 9 point gain to close at 10,850 after hitting a high of 10,934.  For the week, the index was up 108 points, or 1%, and still looks poised to break 11,000.  As many of you know, we were hoping for a break above 10,800 which had been the first wave of resistance before we could set our site on 11,000.  Mission accomplished.  On Thursday, the Dow reached a high of 10,985.

The S&P 500 added a point to settle at 1,166 and for the week the index added nearly 7 points, or 0.6%.  On Thursday, the S&P hit a high of 1,180 and all week it toyed with 1,175.  We would like to see a close ABOVE this level which could then carry us to 1,200.

As far as the Nasdaq, we were a little disappointed to see the index finish in the red as it lost 2 points and closed at 2,395.  For the week, Tech was up 20 points, or 0.9%, and traded above 2,400 each day.  We are looking for a close above this level to clear way for us to test 2,500.

Unless the wheels fall off the wagon, it looks like the major indexes are poised to post solid quarterly gains going into the final week of trading for the first quarter.  The Dow is up 4%, the S&P is up 4.6%, and the Nasdaq is up 5.6%.

As we near the top of our trading ranges, we remain bullish but we also know the current environment won’t last forever.  We think the market can rally into April but at some point the talking heads will get their pullback and they will be the first to tell you we are in correction mode. 

The S&P hasn’t seen a 1% correction in over a month so sooner or later the law of averages will catch up with the bulls but for now the trend is our friend.

One sector that continues to see new life is the IPO market.  This has been a bullish sign as companies become public at their offering prices and the good ones are also getting a pop.  Many IPOs so far this year had been cut, postponed or canceled as investors shied away from risk but that is changing.

MaxLinear (MXL, $18.62, up $0.58) went public on Wednesday as shares opened at $17.95, nearly 30% higher than its IPO price, and later rose to $18.70, on its first day of trading.

The company sold 6.4 million shares for $14 each, and pocketed a little over $90 million.  MaxLinear makes chips that are used mainly in mobile handsets but its products can also be found in cable boxes, digital televisions and PCs. 

China Lodging (HTHT, $13.92, up $1.67) went public Friday and priced its IPO of 9 million shares at $12.25.  The company, which operates a chain of budget hotels in China, raised about $110 million.

Neither of these IPO’s trade options, yet, but they will over the next few weeks.  MaxLinear will be the one we are more likely to trade down the road but we still have to wait for momentum to develop.

In other IPO news, Baltic Trading (BALT, $13.48, down $0.02) and Crude Carriers (CRU, $16.95, flat) are two new offerings and are newly formed bulk shippers.  Baltic Trading plans to conduct a shipping business focused on the dry-bulk industry spot market while Crude Carriers plans to go after a shipping business focused on the crude tanker industry.  We aren’t too crazy about this sector right now and would stay away from both of them.

AVEO Pharmaceuticals (AVEO, $8.81, up $0.26) popped its cherry but closed below its IPO price on their first day of trading.

There were also two other pricings that struggled to make their debut.  Another dry shipping company, Alma Maritime, postponed its IPO due to market conditions, while Chinese ad firm Redgate Media failed to price after lowering its expected range. 

As far as earnings news, we will update this topic in the morning but the only company we are interested in playing this week is Research In Motion (RIMM, $75.06, up $1.63).  The company reports earnings on Wednesday after the bell.

We are going to show our subscribers several ways to play this event in detail inside our Members Area on Monday morning but here is the breakdown. 

The straddle option trade (or chicken trade) is pricing in a 10% move in the stock and here is the math.  If you do the straddle trade we profile, RIMM will need to be at $82+ or below $68.  This trade could yield 10% or more depending on how the stock reacts or it could lose money if shares stay flat. 

As far as a strangle option trade, the odds favor an even better return as we can play some out-of-the-money options in anticipation of a huge price move for the stock.  At current prices, we would need RIMM to trade above $83 or below $67 before we can start ringing the register.

These two types of trades provide protection because we would be using both call and put options.  It’s a safety net and we would need a huge move in the stock after earnings and into April.  The beauty of these trades is that it’s possible to make money on BOTH the calls and puts if the stock pops and then drops or drops and then pops. 

Of course, we can also play RIMM with no protection in hopes of doubling our money.  The calls we would use are priced right under $2 and we would use those if we expect RIMM to trade above $79.  If the stock made it to $82 they will likely return 100%.

There is also the chance that RIMM misses their numbers or disappoints Wall Street and the stock tanks.  We could use the put options which are priced near $1.50.  In this case, we would need RIMM to trade below $70 to make triple-digits.

We are still doing the research (pun intended) on this one but we might be pulling the trigger on a possible option trade in the morning. 

There is also another interesting trade we are putting the finishing touches on that we think has a good chance of doubling quickly or by the summertime.  The stock was approaching its 52-week high of $45 last week but fell 10% over Thursday and Friday.  We smell a “BUY”.

As we head to press, Dow futures are up 21 points while the S&P futures are up 2.5 points.  Nasdaq 100 futures are higher by 3.5 points.  It looks like the bulls are up doing their homework with us and unless something changes we should be starting higher on Monday.  We will be back at 9am (EST) sharp!