Dear Momentum Options Subscriber,
Translated from Spanish, “loco” means crazy, or mad, and it also happens to be the ticker symbol for El Pollo Loco Holdings (LOCO, $17.72, down $0.21). The company announces earnings after Thursday’s close and, on a technical level, one would have to be crazy to buy the stock.
All of the major moving averages are trending lower, and a mini “death-cross” formed in early June, with the 50-day moving average falling below the 100-day moving average.
The company previously lowered its 2015 outlook following weaker-than-expected comparable quarterly sales that showed slowing growth. These were the culprits that dropped the stock from $29 to below $25 in mid-May, despite the company posting an earnings beat.
Since then, shares have continued to languish, so this will be an important quarter for the company. The suits-and-ties are looking for LOCO to earn $0.18 a share on revenue of just under $93 million.
Obviously, the company will need a blowout quarter and a change of heart on its previous full-year guidance before a rebound can occur. LOCO has exceeded estimates in the past two quarters by $0.01 and $0.02 and, in the two previous quarters, it matched expectations. Moreover, revenues have come in higher in the past four quarters ever since shares went public.
This is a slightly bullish setup that could send shares pushing $20 on top- and bottom-line beats. However, an earnings or revenue miss could send shares falling to the low-teens.
There are several ways to trade LOCO, as there are weekly and regular monthly options that can be traded on the stock. At current levels, I’m banking on a $2+ move, up or down, but I’m on the fence as far as possibly taking an earnings trade.
The LOCO August 19 calls (LOCO150821C00019000, $0.45, down $0.05) will easily double from current levels if shares clear $20 following earnings, as they would be $1 “in the money.”
The LOCO August 17 puts (LOCO150821P00017000, $0.55, up $0.05) look tempting as well, as they would double if shares push $16 following the announcement.
Given the company’s solid track record, it would be hard to bet against LOCO, but its lowered outlook for 2015 has also created a little mistrust.
Together, the aforementioned call and put options would create a strangle option trade. The premium for both options would be around $1. The breakeven levels for this trade would be $20 and $16. However, a 100% return could be achieved if shares are pushing $21 or $15 after earnings or by next Friday.
This would require roughly a 20% move in the stock, which is possible given the current market volatility and the importance of the quarter. For now, however, I am not recommending any positions in LOCO.
Turning to the market, the Dow is down 236 points to 17,166, while the S&P 500 is stumbling 26 points to 2,057. The Nasdaq is declining 70 points to 4,966, and the Russell 2000 is tumbling 18 points to 1,192.
Today’s swoon is exactly what I wanted to see. I have talked about continued weakness going into Thursday, so we just need to be patient and see if these lower levels of support hold.
I have updated our current trades below, but I could have a New Trade alert before the close, depending on the action.
Momentum Options Play List
Closed Momentum Options Trades for 2015: 79-26-2 (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 12:20 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.
JPMorgan Chase (JPM, $66.22, down $2.01)
JPM September 70 calls (JPM150918C00070000, $0.36, down $0.39)
Entry Price: $0.80 (8/10/2015)
Exit Target: $1.60
Stop Target: None
Action: Support is at $66 and the 100-day moving average. Resistance is at $68 and the 50-day moving average.
KB Home (KBH, $14.81, down $0.55)
KBH October 16 calls (KBH151016C00016000, $0.50, down $0.11)
Entry Price: $0.52 (8/10/2015)
Exit Target: $1.05
Stop Target: None
Action: Support is at $15-$14.50. Resistance is at $15-$15.25, followed by $15.50-$15.75 and the 50- and 100-day moving averages.
You can read my detailed write-up on KBH in this morning’s Pre-Market Update.
SPDR Gold Trust ETF (GLD, $107.67, up $1.41)
GLD September 98 puts (GLD150918P00098000, $0.24, down $0.07)
Entry Price: $0.82 (7/28/2015)
Exit Target: $1.65
Stop Target: None
Action: Resistance is at $108. Support is at $106-$105.
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