The market is repeating a familiar pattern as the Dow is down nearly 151 points to 10,084. Geez, it looks like we are going below 10,000 as the bulls are nowhere to be found. That’s okay. We LOVE the thought of a correction and would welcome it with open arms.
After a decent open, stocks are selling off on some disappointing economic news.
Unemployment benefits fell modestly, dropping to 470,000 last week. Wall Street was hoping for much more and had been expecting a bigger drop to 450,000 new unemployment filings.
The durable goods report also is weighing on the market. Orders to U.S. factories rose less than expected in December, increasing just 0.3%. The market was expecting a 2% increase in orders.
We wanted to do a follow-up to the Netflix (NFLX, $61.68, up $10.71) trade from this morning. The response we got to adding these trades to your arsenal in just the first 4 hours has been an overwhelming “yes” which was not surprising once you see the results.
The trade is known as a “strangle” option play and they provide protection on a fast moving stock. The beauty of the trade is that you can be wrong on direction and still double your money but there are other features that are cool.
The February 55 calls (QNQBK, $7.15, up $5.70) which closed at $1.35 yesterday are up a whopping 400%. The February 45 puts (QNQNI, $0.05, down $0.90) are down 95%.
It would have cost you $2300 to buy 10 contracts of each yesterday before the closing bell and if you sold the calls right now you would have $7,150 in your account. Folks that is a return of over 200%!
This looks good on paper but please realize if the stock would have stayed flat or only moved 2%-3% then the trade probably would have lost money today. You also have to watch the price you pay for premiums.
Since the call options have been closed all you would need to do is let the put options expire worthless. However, they are still active so what happens if Netflix retreats from these levels?
Well, we don’t think that it’s likely the stock falls below $45 by the time these options expire because the Wall Street robots are out in droves upgrading the stock. There have been 7 UPGRADES from the brokerage houses this morning when most of the same knuckleheads had a “hold’ or “sell” rating on the shares.
If by some rare event Netflix does fall to $40 then your puts would be worth $5 and you have another $5,000 in your account. This can happen and some of the BEST strangle (and straddle) option trades are on Drug stocks.
We mentioned in November that we felt Netflix had a shot at $80 by June. We recommended a trade in the June 80 calls (QNQFP, $1.30, up $1.15) at $1.65 back then. We were stopped out at $1.25 because we saw the market punishing the stock for no reason. Wall Street started downgrading the stock right after we got in.
It’s amazing to see that the June 80’s closed at 15 cents yesterday and are up over 750% today! Wow…
We wanted to show you all of this stuff because often times Wall Street is too quick to fall in-and-out love with a sector or stock. This is where we make our money by staying one step ahead of them. They may have shaken us out for a small loss but we think there are going to plenty of new trades down the road for Netflix as well.
Since our response was so overwhelming we thought we would profile another strangle option trade to show you how it plays out. However, this is not an official recommendation because we haven’t done the leg work and we are winging it.
The premiums are probably overpriced or super rich for Amazon.com (AMZN, $123.19, up $0.44) which is why we won’t play this one but the ideal place to try and do this trade would be at the $125 level.
The February 135 calls (QZNBG, $2.90, down $0.05) and the February 115 puts (QZNNC, $3.80, flat) would cost $6.70 or $670 for just one contract of each which is why we said the premiums are rich and we are NOT doing the trade.
We will leave it there and do a follow-up in the morning. Amazon reports after the bell.
Toyota Motor (TM, $76.95, down $2.82) continues to get pounded after another massive recall concerning their gas pedals. Shares dropped $7 yesterday and could be headed to $75 where there is support. If that level is broken, the stock could be headed back to the ‘60’s.]]>