Dear Momentum Options Subscriber,
The Negative Nancy’s were back in force on Monday following the bears’ first Monday blue-chip win in a month. The other indexes struggled as well, with small-caps leading the way lower. The talking heads jumped back off of the bull wagon, but it won’t be long before the train leaves the station for higher highs.
The Dow dropped 51 points, or 0.3%, to finish at 17,776. The blue-chips traded in negative territory throughout the session after bottoming at 17,726 on the open. The bulls came within a point of seeing positive territory while rebounding to 17,827 before the bears reclaimed the 17,800 level. There is further risk to 17,600-17,500, which is where I may add an index option trade. Resistance is at 17,800-17,900.
The S&P 500 sank 14 points, or 0.7%, to settle at 2,053. The index traded down to 2,049 during the first half of trading and briefly below support at 2,050. There is additional help at 2,040-2,025, with resistance remaining at 2,075.
The Nasdaq tanked 64 points, or 1.3%, to end at 4,727. Tech tested near-term support at 4,725 throughout the session, with the low checking-in at 4,724. There is additional support at 4,700-4,675, with wiggle room to 4,650. Resistance is at 4,775-4,800.
The Russell 2000 tumbled 19 points, or 1.6%, to finish at 1,154. I mentioned that a drop below 1,160 could lead to 1,150, and the small-caps ended at session lows. A close below 1,140 would be bearish. Resistance is at 1,160-1,170.
As a side note, the IWM February 120 calls to play the Russell 2000 are at $1.60. If they drop near $1.00, I may make an official play on the small-caps by using the iShares Russell 2000 (IWM, $114.87, down $1.82). The IWM January 117 calls are at $1.75 and, if they get near a buck, I might decide to swing the bat.
The S&P Volatility Index ($VIX, 14.29, up 0.96) cleared 13.50 after reaching a peak of 14.75. The bulls held 15, but there could be an overshoot to 17.50. I wouldn’t flinch until 20 clears. Otherwise, stay bullish.
Monday was super busy, as I took a number of profits in our recent trades and closed a couple that were on hold. The current December trades have less than three weeks before they expire, and I usually talk about this timeframe being the “danger zone.” The trades that are profitable will be protected, and there is still a good chance that a couple of them might break even. The two from August and September could come down to the wire, and I knew at the time I opened them it could come down to the last day of trading.
With the January options, there is still plenty of time premium left to keep them open. I mention all of this because I want everyone to follow along with how I’m setting up the next batch of trades.
I mentioned that this week could belong to the bears, which is why I had a bevy of Stop Limits in place to protect profits ahead of Monday’s open. Additionally, with December options expiring in 18 days, it was also best to lock in gains.
The rest of the week could be choppy, and the goal is to be ready to buy the pullback. The plan is to nibble on one or two trades this week, with the possibility of adding four or five new trades next week.
I will be watching the small-caps for an entry point, as I expect them to bottom by mid-December. From there, the Russell 2000 could rebound into January. Of course, trying to “time” a possible market bottom is always hard, and a rebound or short-covering rally would only be a headline away. However, I have prepared for a possible pullback this week and maybe into next week, and the action should be enough to disinterest Wall Street.
I will be using January and possibly March options. The one concern with buying January options now is that they expire mid-month, and February options have not yet been listed on a lot of stocks. Most February option chains won’t become live until after the December options expire. However, using January options on the index option plays I will profile should be okay.
I wanted to cover all of this for new subscribers and for all members so that you know the game plan. I have room for seven to 10 new trades to finish out the year, and I will be looking to close out the portfolio with huge momentum heading into 2015.
I will be wrapping up my seventh-straight year of profitable trades, and I’m proud to say not many option newsletters (if any) can make that claim. I also couldn’t make this claim without the support of all my subscribers throughout the years. So, to that end, thanks to all of you as well.
Heading from desk to press, futures look like this: Dow (+56); S&P 500 (+6); Nasdaq 100 (+14).
Momentum Options Play List
Closed Momentum Options Trades for 2014: 95-56 (63%). 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 8:30 a.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.
Diamond Foods (DMND, $29.77, down $0.02)
DMND December 32 calls (DMND141220C00032000, $0.70, flat)
Entry Price: $0.87 (11/18/2014)
Exit Target: $1.75
Stop Target: None
Action: Shares traded to a high of $30.21 on Monday before fading. Near-term resistance is at $30.50. Support is at $29. Earnings are due out on Monday, Dec. 8, after the close.
You can read my detailed write-up on DMND in the Nov. 19 Mid-Market Update.
IMAX (IMAX, $31.00, down $0.38)
IMAX December 32 calls (IMAX1220C00032000, $0.50, down $0.10)
Entry Price: $0.35 (11/12/2014)
Exit Target: $0.70 (Limit Order on Half)
Stop Target: None
Action: Support is at $30. Resistance is at $31.50-$32.
International Business Machines (IBM, $161.54, down $0.63)
IBM January 170 calls (IBM150117C00170000, $0.85, down $0.15)
Entry Price: $1.75 (11/10/2014)
Exit Target: $3.50
Stop Target: $0.90, lower to $0.50
Action: Lower the Stop Target from $0.90 to $0.50. This is not a Stop Limit order, but I may make it one if shares fall below $160.
Resistance is at $163.50. Support is at $160.
You can read more about why I like this trade and its risk/reward setup in the Nov. 11 Pre-Market Update.
Flextronics (FLEX, $11.11, up $0.02)
FLEX January 11 calls (FLEX150117C00011000, $0.45, flat)
Entry Price: $0.68 (9/5/2014)
Exit Target: $1.25
Stop Target: None
Action: Resistance is at $11.25-$11.50, and a close above the latter should get the 52-week high of $11.83 in play. Support is at $10.75, with backup at $10.50 and the 100-day moving average.
Trades on Hold — other 2014 Portfolio Open positions (2): 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.
Rubicon December 8 calls (From August 2014) — Continue to hold.
Fortinet December 29 calls (from September 2014) — Continue to hold.
Editor and Chief Options Strategist