Dear Momentum Options Subscriber,
Wednesday’s action in the S&P 500 Volatility Index ($VIX, 13.96, up 1.45) gave me a funny, but good, feeling that we would be locking in profits on some of our current trades as we headed into Thursday’s session. Although the market showed some strength on the open, the bears took over and pushed the second layers of support shortly afterwards.
The Dow tumbled 120 points, or 0.7%, to end at 17,419. The blue-chips kissed 17,572 at the start of trading but fell short of resistance at 17,600. The move lower to 17,362 split near-term support at 17,400-17,350, which is an area of support that I have mentioned. A close below the latter could lead to 17,200-17,000.
The S&P 500 stumbled 16 points, or 0.8%, to finish 2,083. The index made a run past resistance at 2,100 to 2,103 before breaking down like a rented mule. The bears pushed a low of 2,075 to test support at 2,075-2,070. A close below the latter would be a bearish development that could lead to 2,060-2,050.
The Nasdaq tanked 83 points, or 1.6%, to close at 5,056. Tech tested a high of 5,149 and missed clearing resistance at 5,150 by a point. It was a great clue that things might get ugly, as the low checked in at 5,035. The 100-day moving average held on a dime, but there is further risk to 5,000-4,950 on a drop below 5,025. Resistance is at 5,075-5,100.
The Russell 2000 sank 16 points, or 1.3%, to settle at 1,215. The small-caps made a one-point run into positive territory to 1,232 on the open, with resistance at 1,235-1,240 easily holding. The freefall to 1,207 cracked support at 1,225-1,220, but the 200-day moving-average held.
The S&P 500 Volatility Index ($VIX) traded down to 12.16 before zooming to a high of 14.25. The bulls held 15 but gave up the 13.50 level, and a close below 12.50 ahead of the weekend would be a slightly bullish sign. A move above 15 will likely lead to another run to 17.50-20.
While we have taken advantage of August’s historical weakness and the present the VIX gave us, it might be time to get bullish considering that Wall Street is so bearish. Today’s action, starting with the nonfarm payrolls report, should give us great clues on how next week and possibly the rest of the month will shake out.
From desk to press, futures look like this: Dow (-48); S&P 500 (-5); Nasdaq 100 (-13); Russell (-4).
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 8:00 a.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.
Krispy Kreme Doughnuts (KKD, $17.64, down $0.69)
KKD November 16 puts (KKD151120P00016000, $0.70, up $0.25)
Entry Price: $0.60 (8/6/2015)
Exit Target: $1.20
Stop Target: None
Action: Near-term support is at $17.50. A close below this level will likely get $17-$16.75 in play. Resistance is at $18, followed by $18.50-$18.75.
I have talked about the company’s continued revenue misses all year, and earnings aren’t due out until the first week of September. In the meantime, I like the technical setup as long as $19 holds. I went with the longer-term options, as they were the most active and provide plenty of time for the story to play out.
As far as the revenue misses, KKD has missed in the past three quarters, but they got a kitchen pass from Wall Street following a $0.02 top-line beat in June. Analysts have KKD earning $0.18 a share for the current quarter on revenue north of $131 million.
I have also talked about the cat-and-mouse game the company plays with analysts and said they would please the suits-and-ties last time around with an “earnings beat.” I also said they would miss on revenue but that a run to $20 could follow based on the headline beat.
Shares were at $17.40 and traded to a high of $20.38 following the earnings announcement. However, they closed below $20 and languished near this level into mid-July. Yesterday’s drop below $18 got me excited, as this level served as prior resistance heading into the earnings announcement.
SPDR S&P 500 ETF (SPY, $208.35, down $1.32)
SPY August 205 puts (SPY150821P00205000, $1.05, up $0.53)
Entry Price: $0.90 (8/3/2015)
Exit Target: $1.80 (Limit Order on second half) (closed first half at $1.30 on 8/6/15)
Stop Target: $0.85 (Stop Limit)
Action: Set a Stop Limit at $0.85 on the second half of the trade.
There is a Limit Order to close the second half of the trade at $1.80. The puts traded to a high of $1.33 and were struggling to trip $1.35, which is why I decided to lock in half-profits yesterday.
While I could raise the limit order on the second half, I also don’t want to get greedy, as these options expire in two weeks. I also set the parameters of the trade after we got in based on where the S&P would be and made sure this would be an unemotional trade.
These put options are also “out of the money,” and this means that all of the current price is made up of just premium. If these options expired today, technically, they would be worth nothing. Time premium will start to decay rapidly into next week, which is why it is imperative to take profits when we can.
Often times, new traders will not close positions in halves, looking to hit the home run, and those situations often turn winning trades into losing ones.
I may take the rest of the profits today, even if the $1.80 Limit Order doesn’t trigger, and this should help explain the method to my madness. The Stop Limit could also trigger on a good jobs number this morning.
Additionally, I could also “roll” the trade over, if I do close this one out, by going with September options. I have been doing the chart work this morning, but I’m still working on the math to find the best option trade for a continued pullback or a snapback rebound.
I wanted to take this chance to explain a bit more about my trading style, as I know we have some new subscribers coming on board.
Support at $208 held following Thursday’s test to $207.65. There is additional support at $206-$205 on a drop below $207.50. Resistance is at $210.
PowerShares QQQ Trust (QQQ, $110.45, down $1.80)
QQQ August 110 puts (QQQ150821P00110000, $1.20, up $0.55)
Entry Price: $0.72 (7/30/2015)
Exit Target: $1.45, raise to $2.00 (Limit Order on second half) (closed first half at $1.32 on 8/6/15)
Stop Target: $1.00 (Stop Limit)
Action: Raise the Exit Target on the second half of the trade from $1.45 to $2.00 and make it a Limit Order. Set a Stop Limit at $1.00 to protect profits.
The QQQs traded to a low of $109.95 on Thursday, with the puts reaching $1.40. We nearly got a 100% return on the first half, but I locked in profits after the struggle to reach $1.45. At current levels, these puts are still $0.45 “out of the money.”
These options would be worth $1.00, technically, by Aug. 21, if the QQQs closed at $109. I’m still hoping for a test to $108, which is why I raised the Exit Target to $2.00 and made it a Limit Order. I could also use September call or put options to play a rebound or continued weakness in a rollover trade once we close this one.
SPDR Gold Trust ETF (GLD, $104.39, up $0.46)
GLD September 98 puts (GLD150918P00098000, $0.59, down $0.11)
Entry Price: $0.82 (7/28/2015)
Exit Target: $1.65
Stop Target: None
Action: GLD tested a high of $104.86 on Thursday, and resistance at $105 held. A move below $104-$103.50 should get $100 and below in play.
United Parcel Service (UPS, $102.43, down $0.51)
UPS October 110 calls (UPS151018C00110000, $0.36, down $0.11)
Entry Price: $0.70 (6/11/2015)
Exit Target: $0.70+
Stop Target: $0.35, lower to $0.30 (Stop Limit)
Action: Lower the Stop Limit from $0.35 to $0.30.
This is one of two remaining bullish trades from June. While I have held up hopes of getting back to even, another backtest to support will likely stop us out. I gave us a nickel of additional wiggle room this morning, but, after being down nearly 80% and getting some that premium back, it’s almost time to move on. We may come back to this name at a later date if UPS clears $104-$105.
Resistance is at $103-$105. Support is at $102-$101 and the 200-day moving average.
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