Dear Momentum Options Subscriber,

It was crucial that fresh support held on this morning’s backtest, as futures were showing some early-morning weakness. Although the indexes are still in the red, I’m looking for the recent market pattern of afternoon strength to play out again today.

Retail stocks are in focus today following earnings results from Walmart Stores (WMT, $69.75, down $2.16) and Home Depot (HD, $122.53, up $2.83).

Home Depot reported a profit of $1.72 a share, which matched Wall Street’s estimate, while revenue of $24.83 billion topped forecasts for $24.69 billion. The company also raised its full-year guidance, as July same-store sales were up over 8%. Shares have traded to an all-time high of $123 today.

Walmart missed estimates by $0.04 after reporting a profit of $1.08 a share. However, revenues of $120.2 billion topped estimates for $119.7 billion. Although the bottom line beat was impressive, the company lowered its current-quarter earnings to $0.93-$1.05 a share and its 2016 outlook to $4.40-$4.70 a share. Analysts were looking for $1.08 a share in the current quarter and $4.77 a share in 2016.

The one company I’m watching this week, as far as earnings go, is Hewlett-Packard (HPQ, $28.54, down $0.07). I mentioned in yesterday’s Mid-Market Update that the company will report earnings after Thursday’s close, and its results will likely help or hinder any Tech rally into the weekend.

The suits-and-ties are looking for a profit of $0.85 a share on revenue of $25.53 billion. The high estimate is at $0.87 a share, with the low estimate at $0.80 a share. In other words, the headline could read as a $0.02 beat or a $0.05 miss.

HPQ topped forecasts by a penny in the two previous quarters and matched estimates in the two prior quarters. However, revenues have fallen short of estimates in the past three quarters, although there was a beat in the year-ago quarter. This makes judging the recently ended quarter a little tough, as back-to-school sales could have helped its results.

The technical picture for HPQ is showing continued weakness, however, with shares hitting a fresh 52-week low of $28.21 today. The major moving averages are sloping lower, and it appears that there is risk to $27-$25 on an earnings miss or lowered outlook. A blowout quarter could lead to a rebound to $30 or higher and a test to the 50-day moving average, but most of the research so far is showing that put options might be the way to trade HPQ.

HPQ

The weekly and regular August option chains are available to trade, but they expire relatively soon. While the weekly September options are also available, the regular monthly options would provide more time for a trade to play out.

The HPQ September 27 puts (HPQ150918P00027000, $0.65, up $0.05) could be used by bearish traders to play continued weakness and a test to the mid-$20s. To break even, technically, shares would need to be at $26.35 by mid-September. A move to $26-$25.75 would double these options, depending how fast that happens.

Bullish traders could target the HPQ September 30 calls (HPQ150918C00030000, $0.50, down $0.05) for a rebound to $30 or better. To break even, technically, shares would need to be at $30.50 by mid-September. A push past $31 would double these options, depending on the pace of the action.

The two aforementioned options together would create a strangle option trade with a cost of $1.15. The setup would require shares to be below $25.85 or above $31.15 by mid-September to break even. This would require a 10% move in the stock from current levels.

Shares moved less than $1 higher after May’s results, but they tanked nearly $4 from $38.49 to $34.67 following February’s update. Last November, shares moved from $37.63 to $39.16 and, in August of 2014, the stock jumped from $35.12 to $37 following earnings.

With the option premiums a little rich, the better trade might be to sell the call and put option to collect the premium. This is a more complex option strategy and requires more cash to cover the stock and brokerage approval to execute the trade. If shares are above $30 or below $27 by mid-September, one would have to sell shares that they don’t own at $30 or have them put to them at $27. This is what selling naked options looks like.

I don’t like any of the risk/reward setups on HPQ going into earnings, so I will likely remain on the sidelines.

As far as the market goes today, the Dow is dipping 17 points to 17,527, while the S&P 500 is down 4 points to 2,098. The Nasdaq is off 19 points to 5,072, and the Russell 2000 is slipping 6 points to 1,218.

I have another Profit Alert listed below, so let’s go check the current action. I could also have a New Trade later this afternoon, so stay locked and loaded into the closing bell.

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 12:40 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.

 

iShares Russell 2000 (IWM, $121.12, down $0.51)

IWM September 123 Weekly calls (IWM150904C00123000, $0.57, down $0.25)

Entry Price: $0.52 (8/14/2015)

Exit Target: $1.05 (Limit Order on first half)

Return: 10%

Stop Target: $0.57 (Stop Limit)

Action: The options have traded to a low of $0.56, and our Stop Limit of $0.57 was triggered in the process. I could be back to trade these calls or longer-term options if $121 holds, but, for now, we are out of the trade.

 

Hertz Global Holdings (HTZ, $19.01, up $0.20)

HTZ September 19 calls (HTZ150918C00019000, $0.95, flat)

Entry Price: $0.70 (8/17/2015)

Exit Target: $1.40

Return: 36%

Stop Target: None

Action: Resistance is at $19-$20. Support is at $18.75-$18.50 on a pullback. A close below $18 would indicate a possible false breakout.

 

Bank of America (BAC, $17.80, up $0.03)

BAC September 18 calls (BAC150918C00018000, $0.28, down $0.03)

Entry Price: $0.28 (8/17/2015)

Exit Target: $0.60-$0.90

Return: 0%

Stop Target: None

Action: Short-term resistance is at $18. Support is at $17.50 and the 50-day moving average, with backup at $17.25-$17.

You can read my full write-up on BAC in yesterday’s Pre-Market Update.

 

PowerShares QQQ Trust (QQQ, $111.14, down $0.29)

QQQ September 112 Weekly calls (QQQ150904C00112000, $0.81, down $0.22)

Entry Price: $0.95 (8/13/2015)

Exit Target: $1.90

Return: -15%

Stop Target: $0.50

Action: Support is at $110 and the 50-day moving average. Backup support is at $109 and the 100-day moving average. Resistance is at $111.50-$112.

 

JPMorgan Chase (JPM, $68.14, up $0.07)

JPM September 70 calls (JPM150918C00070000, $0.55, flat)

Entry Price: $0.80 (8/10/2015)

Exit Target: $1.60

Return: -31%

Stop Target: None

Action: Resistance is at $70. Support is at $68, followed by $66-$65.75 and the 100-day moving average.

 

KB Home (KBH, $16.57, up $0.42)

KBH October 16 calls (KBH151016C00016000, $1.30, up $0.30)

Entry Price: $0.52 (8/10/2015)

Exit Target: $1.50 (closed first half at $1.00 on 8/17/2015)

Return: 121%

Stop Target: $0.85, raise to $1.00 (Stop Limit)

Action: Raise the Stop Limit from $0.85 to $1.00. Shares are making a run at $16.75-$17, and the low on the options today has been $1.05.

You can read my detailed write-up on KBH in the Aug. 12 Pre-Market Update.

 

Trades on Hold — other 2015 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.

Rigel Pharmaceuticals (RIGL) September 5 calls (from 6/4/15) — Continue to hold.

SPDR Gold Trust ETF (GLD) September 98 puts (from 7/28/15) — Continue to hold.

Trade on!

Rick Rouse
Editor and Chief Options Strategist
Momentum Options