Dear Momentum Options Subscriber,
Shares of Keurig Green Mountain (GMCR, $53.10, down $21.88) are getting roasted today following a dismal earnings report. The company reported a profit of $0.73 a share on revenue of $969.5 million. Wall Street was looking for $0.79 a share on revenue of $1.04 billion.
The biggest concerns for the company stem from year-over-year pod sales that were down for the first time ever and a 26% drop in sales of its brewing machines and accessories.
Keurig also announced a $1 billion stock buyback program, but they should probably use the cash for research and development.
I previewed Keurig’s earnings announcement on Tuesday’s Mid-Market Update and profiled a possible strangle option trade. The premiums were too rich to play a possible 10% earnings shortfall, but, with shares down nearly 30%, the options I mentioned have exploded.
The GMCR August 70 puts (GMCR150821P00070000, $17.10, up $15.01) were at $1.80 at the time and have soared over 700% today. They have reached a high of $17.49.
I mentioned that the strangle option trade would also require the purchase of the GMCR August 80 calls (GMCR150821C00080000, $0.01, down $2.29) to protect against the chance of a blowout quarter. Although they have lost nearly 100% of their value, the return on the puts would have easily offset the losses.
The cost of the strangle option trade would have been under $5.00 and, with the puts clearing $17, the gains would be pushing 250%.
I haven’t taken any strangle option trades this year, but I do see potential opportunities ahead. I wanted to give this example to show you how they work and how lucrative they can be despite one side of the trade going against you. The key with these types of trades is that you need a rather large price movement, and that usually occurs around earnings.
Turning to the market, it has been an antsy wait, but the breakdown we have been looking for is finally taking shape.
The Dow is currently down 148 points to 17,391, while the S&P 500 is lower by 21 points to 2,078. The Nasdaq is declining 97 points to 5,042, and the Russell 2000 is plummeting 23 points to 1,208.
I have a couple of Profit Alerts on our current trades, so let’s go ring the register.
Momentum Options Play List
Closed Momentum Options Trades for 2015: 76-25-2 (74%). 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 1:25 p.m. EST.
I hereby disclose that I will be participating in the following trade(s). Every 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 portfolio.
SPDR S&P 500 ETF (SPY, $207.98, down $2.09)
SPY August 205 puts (SPY150821P00205000, $1.30, up $0.78)
Entry Price: $0.90 (8/3/2015)
Exit Target: $1.80 (Limit Order on second half)
Stop Target: None
Action: Take profits and sell to close the first half the SPY August 205 puts at current levels.
The Limit Order to close the first half of the trade at $1.35 came close to triggering, but it hasn’t done so yet. I’m not too worried about the extra nickel, which is why I have elected to close half of the trade into today’s weakness.
Support at $208 has been breached, and I would like to see this level hold as resistance into the close. There is a Limit Order to close the second half of the trade at $1.80. If you still have the original $1.35 Limit Order in place, cancel it at this time and take profits in the first half of the position at current levels.
PowerShares QQQ Trust (QQQ, $110.27, down $1.98)
QQQ August 110 puts (QQQ150821P00110000, $1.32, up $0.67)
Entry Price: $0.72 (7/30/2015)
Exit Target: $1.45
Stop Target: None
Action: Take profits and sell to close the first half of the QQQ August 110 puts at current levels.
I would love to see a close below $110 today.
SPDR Gold Trust ETF (GLD, $104.54, up $0.61)
GLD September 98 puts (GLD150918P00098000, $0.53, down $0.17)
Entry Price: $0.82 (7/28/2015)
Exit Target: $1.65
Stop Target: None
Action: A move below $104-$103.50 should get $100 and below in play. Resistance is at $104-$104.50.
United Parcel Service (UPS, $102.67, down $0.27)
UPS October 110 calls (UPS151018C00110000, $0.39, down $0.07)
Entry Price: $0.70 (6/11/2015)
Exit Target: $0.70+
Stop Target: $0.35 (Stop Limit)
Action: Resistance is at $103-$105. Support is at $102-$101 and the 200-day moving average. A close below the latter will likely trip our Stop Limit.
Trades on Hold — other 2015 Portfolio Open positions (1): 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.
Rigel Pharmaceuticals (RIGL) September 5 calls (from 6/4/15) — Continue to hold.
Editor and Chief Options Strategist