Dear Momentum Options Subscriber,
I wanted to provide another update to my previous take on Alibaba (BABA, $114.44, up $2.87), as there has been intense action since shares went public back in September when nearly everyone was calling for a market top.
I mentioned that there would be an opportunity to make some serious profits once the options listed in early October. With shares continuing to trip fresh highs this week, I wanted to update the LEAP trade I profiled.
The options on Alibaba continue to trade at premium prices but with great bid/ask spreads and liquidity. In early October, I said predicting where shares would be in three weeks or three months would be useless on a technical level due to the limited chart history but that headline news would move the shares.
When the market was trying to find a bottom a few weeks later, I started taking action and was getting excited about a possible entry point for Alibaba. I eventually recommended a call option trade on Oct. 21 with shares near $90, as “support” seemed to be holding on the stock along with the broader market. Two days later, I suggested closing half of the trade to lock in profits, as shares made a run to $95. A week later, with shares near $100, the stop limit on the other half of the BABA November 95 calls (BABA141122C00095000, $19.70, up $3.50) triggered and, unfortunately, I was stopped out early.
The call options were recommended at $2.30 and, due to the premium of the options, I kept tighter stops to protect profits. The average closing price on the trade was $4.90, but, as you can see, I left a lot on the table.
The trade made nearly 120%, which shows how powerful options can be. To achieve the same gain in the stock from where shares were when I recommended the options, I would still be waiting for Alibaba to trade to $180.
In the same issue, I also profiled a strangle option trade that wasn’t an official recommendation, but I wanted to provide an update on that as well, as we have received a lot of emails asking for a follow-up.
The BABA January 2015 100 calls (BABA150117C00100000, $17.40, up $2.80) and the BABA January 2015 80 puts (BABA150117P00100000, $0.25, down $0.05) were going for a little over $3 apiece for the strangle option trade in early October.
These options were roughly $10 out-of-the-money when shares were at $90. I said that Alibaba needed to be above $106 or below $74 for this strangle option trade to break even, technically, by mid-January.
I also mentioned that if shares were above $110 or below $70, this trade would come close to making a triple-digit profit, as either the call or put option would be worth at least $10.
As you can see, the BABA January 100 calls continue to shine, as they are approaching a 500% return, while the BABA January 80 puts are down over 90%. If both options were closed at current levels the premiums would be $17.65 for both the calls and puts. From an entry price of $6.00, this is a return of nearly 200%.
This is the beauty of strangle option trades, which are also known as “chicken trades.”
I was a little hesitant to pay $6.00 in premiums, as I prefer to trade options for $1.50 or less. I had to twist my own arm to pay $2.30 for the call options that reaped a 120% return. However, with sentiment low and “blood in the streets,” the opportunity was too good to pass up.
There will be another opportunity next week, next month, or next year to play Alibaba, as the technical chart analysis is improving. Shares have only traded for 35 sessions, and I said that headline events (and earnings) would drive the stock higher or lower for the rest of the year.
When the time comes to trade Alibaba again, the risk/reward could be even better, as technical and fundamental analysis can be used to help figure where shares could trade in 2015.
As far as the market, it’s another day with new all-time highs for the bulls.
The Dow is up 13 points to 17,567, while the S&P 500 is higher by a point to 2,032. The Nasdaq is down 10 points to 4,628, and the Russell 2000 is off by half of a point to 1,171.
I could have a Profit Alert ahead of the close, but, for now, let’s go check on our current trades. If you don’t hear from me, have a great weekend, and I will be back on Monday morning with a full report.
Momentum Options Play List
Closed Momentum Options Trades for 2014: 84-54 (61%). All trades are dated and time stamped so new subscribers can look at the past history to see how the trades have played out.
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 trades or “Exit Orders” in your brokerage account unless I list one. I will send out a “Profit Alert” or “New Trade” if I want you to close a position or if a new trade comes out. Otherwise, follow instructions at all times in the 9 a.m. and 12 p.m. – 1 p.m. updates. Also, I will usually give you a heads-up if I think I’m going to send an email outside of these time frames.
All prices given in this update are current as of 1:10 p.m. EST.
Every new Momentum Options recommendation is listed with the price at which I entered my own position. If the price is slightly different than my recommended entry or exit price when you receive the alert, don’t let that keep you from getting into or out of a trade. Occasionally, you might even get a better “fill” price than what is posted in the Open Trades and Closed Trades.
Starbucks (SBUX, $77.92, up $0.47)
SBUX December 80 calls (SBUX141220C00080000, $0.85, up $0.08)
Entry Price: $0.70 (11/6/2014)
Exit Target: $1.40
Stop Target: None
SBUX December 77.50 calls (SBUX141220C00077500, $1.90, up $0.20)
Entry Price: $1.05 (11/3/2014)
Exit Target: $2.10 (Limit Order on half)
Stop Target: $1.15 (Stop Limit)
Action: Set Limit Orders to close half of the SBUX December 77.50 calls at $2.10, good till cancelled. They have traded to a high of $2.01 today.
A close above $78 should get $80 in play next week. Near-term support is at $75.50 and the 50-day moving average. I like the trade as long as $74 holds.
You can read my previous comments on SBUX in the Nov. 5 Pre-Market Update.
JPMorgan Chase (JPM, $60.34, up $0.11)
JPM December 62.50 calls (JPM141220C00062500, $0.80, flat)
Entry Price: $0.65 (11/5/2014)
Exit Target: $1.30
Stop Target: None
Action: Near-term resistance is at $61.50, but shares could push $63-$65 on continued strength over the next six weeks. I like the trade as long as $59 and the 50-days moving average holds on any weakness.
PowerShares QQQ (QQQ, $101.52, down $0.17)
QQQ December 103 calls (QQQ141205C00103000, $0.80, down $0.10)
Entry Price: $0.85 (11/4/2014)
Exit Target: $1.70
Stop Target: None
Action: A close above $102 would be bullish for a run to $104-$105. I like the trade as long as $100 holds on a pullback.
Flextronics (FLEX, $10.84, down $0.04)
FLEX January 11 calls (FLEX150117C00011000, $0.50, flat)
Entry Price: $0.68 (9/5/2014)
Exit Target: $1.25
Stop Target: None
Action: There are several clusters of resistance from $11-$11.50, but a move above the latter should lead to a run past $12. The options will be worth at least $1.00 if shares do trade to $12 by mid-January.
Rubicon (RBCN, $4.23, up $0.22)
RBCN December 8 calls (RBCN141222C00008000, $0.20, flat)
Entry Price: $0.35 (8/25/2014)
Exit Target: $0.70 (Limit Order)
Stop Target: None
Action: The trading range between $4 and $5 will likely continue.
Trades on Hold — other 2014 Portfolio Open positions (4): 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 I would not open any new positions. I’m still keeping track of the trades and will record the results accordingly when the trade closes or if the options expire. Click on the Open Trades and Closed Trades pages to see all open and closed positions.
Staples December 14 calls (from September) — Shares have been in a nice uptrend, and I will likely bring back daily coverage of the trade on a close above $13. The calls are currently at $0.25 — Continue to hold.
AKS Steel Holding January 13 calls (from August 2014) — Continue to hold.
Twitter January 67.50 calls (from October 2014) — Continue to hold.
Fortinet December 29 calls (from September) — Shares were trading at $27 in extended trading last night — Continue to hold.
Editor and Chief Options Strategist