1:15pm (EST)
With 4Q earnings season winding down, we mentioned the number of possible option trades would be dwindling as Wall Street prepares for a new season and 1Q earnings in April.
There were, however, a number of put and call option trades we have targeted but not all of them meet our criteria to make the risk worth the reward.
One trade we are eager to see play out is a possible long, short, or strangle option trade on Caesars Entertainment (CZR, $25.85, up $0.31).
The company will confess to their numbers after today’s close and we are expecting at least a 10% move, possibly 15%-20%. This means there could be an option trade that benefits us no matter which way shares move.
The suit-and-ties are expecting a loss of $1.17-$1.73 a share. This is a very wide range and will factor in the move as a number better than a loss of $1.17 might be bullish, providing revenues come in better-than-expected.
Analysts seem to agree the company will report revenues north of $2 billion so anything below this would be bearish.
Caesars’ has a great brand name but the knuckleheads running the company have been running in the red for the past 4 quarters with heavy losses. They losses have been way GREATER than analysts expectations and is apparent of a company with a heavy debt load.
This could be the quarter the company throws in the kitchen sink and we are not sure how shares will react. If Caesars’ starts to shed assets to pay down debt then maybe a turnaround is in play but this takes several quarters if not years to do and we doubt current management can get the job done.
The company become public just 2 years ago and traded in a range of $9 to nearly $18 on its first day of trading before closing at $15. The IPO was overpriced then and we believe shares are over-priced now.
As a pure play on a test to $23-$22.50, we could use the March 22.50 puts (CZR140322P00022500, $0.30, down $0.05) to play a 10% pullback. Of course, with the options expiring next week, we would consider it a lottery trade as shares would need to trade down to $22.20, technically, for us to break even. With some premium built-in these options will double on a drop below $22.
The flip side of the trade, if we were bullish, would have us looking at the March 30 calls (CZR140322C00030000, $0.10, up $0.05) but shares would need to move 16% and kiss $30.10 for the trade to break even.
The aforementioned call and put options could also be used as a strangle option trade and the premiums together would be 40 cents, or $40 to buy both contracts. Ten contracts of each would cost $400 and shares would need to trade under $22 or above $30.40 to start making profits.
We like the odds of a downside play more than the other two trades but we will likely sit on the sidelines either way. The casino stocks have been hot this year so there is a chance for upside risk despite what kind of numbers or outlook Caesars Entertainment gives.
We have said we will be in perfect shape to play the market’s next major move or trend so we don’t have to trade just to trade. We are having a tremendous first quarter with our option trading as we have been pinpoint accurate in calling the market’s run to new all-time highs.
There is still room for 1%-2% more fluff to the upside but our chart work showed all of the indexes at or near their upper price channels. A possible breakout could occur and we have listed upside targets to watch to confirm the rally. Until then, we have mentioned the action could get choppy and sloppy with risk to the downside so continue to be patient.
As we head into the second half of trading, the Dow is down 49 points to 16,369 while the S&P 500 is declining a 6-pack to 1,871. The Nasdaq is lower by 10 points to 4,324 and the Russell 2000 is slipping a 6-pack as well and was last seen at 1,194. A close below 1,200 would suggest further weakness ahead.
Closed Trades for 2014: 26-8 – the Weekly Wrap is 11-2 for 2014 (96-9, or 91% win rate, since 2011) and is designed for traders that want to use options with less risk.
Do not risk more than 5% of your trading account on any one trade but do try to take ALL of the trades. Please remember, ALL “Exit Targets” and “Stop Targets” are targets. You should not have any “Hard Stops” entered to close any tradesor “Exit Orders” in your brokerage account unless we list one. We will send out a “Profit Alert” or “New Trade” if we want you to close a position OR if a new trade comes out. Otherwise, follow instructions at all times in the 9am and 1pm updates. Also, we will usually give you a heads-up if we think we are going to send an email outside of these time frames.
Verizon (VZ, $46.44, down $0.59
April 45 puts (VZ140419P00045000, $0.65, up $0.15)
Entry Price: $0.62 (3/10/2014)
Exit Target: $1.30
Return: 5%
Stop Target: None
Action: We believe shares could test $40 over the longer-term and fall below $45 over the near-term. Resistance is at $48.
Aruba Networks (ARUN, $21.26, down $0.79)
April 23 calls (ARUN140419C00023000, $0.65, down $0.15)
Entry Price: $0.65 (3/5/2014)
Exit Target: $1.30
Return: 0%
Stop Target: 65 cents (Stop Limit)
Action: There were two analysts that made recommendations on Aruba yesterday. One firm rated shares a “Buy” with a price target of $27 while another came out after the close and initiated coverage with an “Underperform” with a price target of $14. That sounds more like a “Sell” to us with the battle has taking us out of the action for a scratch. The options opened at 65 cents and right at our Stop Limit and traded to 66 cents and falling to a low of 60 cents. Given the difference of opinions, we may look at a strangle option trade over the next day or two and why we went through our Caesars’ overview in today’s commentary. At any rate, we are out for now.
Opko Health (OPK, $9.18, down $0.06)
April 10 calls (OPK140419C00010000, $0.50, flat)
Entry Price: $0.65 (3/4/2014)
Exit Target: $1.30
Return: -23%
Stop Target: None
Action: Resistance remains at $9.50-$10 and a close above the latter would be super bullish for a run to $12-$13 on short covering. Support is at $9-$8.75.
Discovery Laboratories (DSCO, $2.69, up $0.10)
April 2 calls (DSCO140419C00002000, $0.75, flat)
Entry Price: $0.65 (2/24/2014)
Exit Target: $1.00-$1.30
Return: 15%
Stop Target: 65 cents (Hard Stop)
Action: A close above $2.70 would be bullish. Support is at $2.50 and a dip below this level will likely force us out of the trade.
World Wrestling Federation (WWE, $29.65, down $0.44)
March 30 calls (WWE140322C00030000, $1.70, down $0.30)
Entry Price: $0.40 (2/18/2014)
Exit Target: Limit Order set $3 to exit remaining quarter (3/5/14 closed half @ $0.80, 3/6/14 closed a quarter at $1.80)
Return: 219%
Stop Target: $1.45 (Hard Stop on remaining quarter)
Action: Near-term support is at $28 and we will likely get stopped out of the remaining quarter position on a drop below this level. The options have traded to a low of $1.60.
Kodiak Oil & Gas (KOG, $11.40, down $0.41)
June 13 calls (KOG140621C00013000, $0.50, down $0.10)
Entry Price: $0.70 (2/13/2014)
Exit Target: $1.40
Return: -17%
Stop Target: 30 cents
Action: We believe the company is a takeover candidate that could get a bid north of $15. Resistance is at $12.50. Support is at $11.75 on a close below $12.
Exact Sciences (EXAS, $13.69, down $0.10)
April 19 calls (EXAS140419C00019000, $0.50, flat)
Entry Price: $0.88 (1/22/2014)
Exit Target: $1.75
Return: -43%
Stop Target: None
Action: Support is at $13. Resistance is at $14.50 and a move above this level should get us back near even.
The company should get some FDA news in March on its Cologuard drug. These are April options with 2 months until expiration and we plan to hold through the volatility because we want to be in when the March news is released. We do not have a Stop Limit listed.
Other 2014 Portfolio OPEN positions (6): These are trades that are still open in the portfolio but are down over 50%. They have longer expiration dates and are on “hold” but are not worth mentioning until they turn around. This means we would not open any new positions. We are still keeping track of the trades and we will record the results mkh jb√ accordingly, when we close them or if the options expire. Click on the 2013Portfolio link in the Members Area to view ALL open/ closed trades.
Sony April 20 calls (from January 2014) – continue to HOLD
General Electric March 28 calls (from January 2014) – continue to HOLD
Ariad Pharmaceuticals March 10 calls (from January 3014)
May 11 calls (from January 3014)
Caterpillar March 85 puts (from January 2014) – continue to HOLD
McDonald’s March 90 puts (from February 2014) – continue to HOLD
Apollo Education Group March 29 puts (from February 2014) – continue to HOLD
WATCH LIST SECTION
These trades are NOT recommendations. They are trades that we like but have not added to the portfolio as an official recommendation because of market conditions or because we are waiting for better entry prices. We try not to have more than 12-15 open trades at any one time and why we have a Watch List. We will not list entry prices because these stocks are on the verge of breaking out or they could sell off but these are the trades we are watching as new candidates.
We will update this section in the morning.
