Dear Momentum Options Subscriber,
Shares of Dot Hill Systems (HILL, $9.68, up $4.50) are surging 87% today following the news that the company will be acquired by Seagate Technology (STX, $50.50, down $1.55).
The all-cash takeover offer is valued at $9.75 a share, which values the merger near $700 million. It is a bitter-sweet deal to us, as we were long call options in March, April, May and into June, and shares have remained on my Watch List.
I should have stayed with another longer-term option trade throughout the summer, as I mentioned that the company might be a takeover target:
From the May 22 Pre-Market Update:
“The storage space is competitive, but Dot Hill’s storage options are more real-time solutions. This gives them a leg up on their competitors EMC (EMC), NetApp (NTAP) and Nimble Storage (NMBL).
NetApp shares tumbled 10% yesterday following an earnings miss, so there is risk to the sector. Analysts were quick to downgrade the stock, but I’m looking for HILL to emerge as the best of breed and for momentum to hold.
For 2015, the amount of storage data is expected to reach over five zettabytes. This is double the number from three years ago, and demand is expected to double about every two years afterwards.
Even more compelling is the fact that 90% of the planet’s data is considered “unstructured.” The explosion in mobile devices and the “internet of everything” will continue to grow and will only add to the increasing need for storage. As the world becomes more connected, mobile data traffic will continue to fuel the need for stored solutions.
Mergers and acquisitions could also come into play if the industry consolidates, as synergies between bigger companies and the space look compelling.”
We were long the HILL September 7.50 calls (HILL150918C00007500, $2.20, up $2.15) and the HILL December 7.50 calls (HILL151218C00007500, $4.70, up $3.85) off and on, but the whipsaw action forced us out of those positions.
The aforementioned call options are up 4,300% and 453%, respectively, which shows why options trading remains one of the most lucrative investment strategies on the planet.
Resistance at $7 and the fade to $5 made it hard to go long again on HILL. I was hoping for $6 to clear as a sign that shares had recovered from the June backslide, which lasted into July and reached a low of $5.07 earlier this month.
Although we missed today’s big payday, I have highlighted other companies throughout the year as possible takeover candidates. This should never be a reason to buy a stock or trade an option, of course, but if the fundamentals and the technical outlook are great in a hot market, takeover rumors are an added bonus even if they don’t come to fruition.
As a side note, shares of NetApp (NTAP, $29.69, down $0.59) are down 2% despite the buyout offer for Dot Hill. Sometimes, other companies in the sector trade higher as speculation moves to the next buyout candidate. I’m not saying that NetApp would make a good marriage or not, but the company is reporting earnings after the close.
Wall Street is looking for a profit of $0.23 a share on revenue of $1.32 billion. The company has missed estimates in the past two quarters $0.07 and $0.02, respectively. The major moving averages are all trending lower, and shares have traded to a low of $29.90 today.
The five-year chart is showing risk to $27.50-$27 on an earnings miss, and the NTAP September 28 puts (NTAP150918P00028000, $0.55, up $0.11) look tempting to a trade, with open interest of over 3,000 contracts. Bearish traders could target these puts for a possible double if shares test $27, as these options will be worth at least $1. At $26, these options would be worth $2.
To offset some of the risk of an upside move, the NTAP August 31 calls (NTAP150821C00031000, $0.40, down $0.19) could be used to play a possible run to $32-$33 on better-than-expected numbers.
I will likely sit on the sidelines with NTAP, but the potential strangle option trade looks like a good risk/reward setup for super-aggressive traders.
As far as the market today, the bears are testing prior support levels. The action could intensify when the Fed minutes are released later this afternoon.
The Dow is currently down 190 points to 17,320, while the S&P 500 is stumbling 22 points to 2,074. The Nasdaq is down 55 points to 5,003, and the Russell 2000 is tumbling 16 points to 1,198. The VIX has cleared 15 and is up 1.97 at 15.76.
I have updated our current trades below, and I also have another Profit Alert. I could take additional action if the market rebounds or takes another turn for the worse, so stay locked and loaded into the close.
Momentum Options Play List
Closed Momentum Options Trades for 2015: 81-26-2 (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 12:15 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.
Hertz Global Holdings (HTZ, $18.86, up $0.05)
HTZ September 19 calls (HTZ150918C00019000, $0.80, down $0.08)
Entry Price: $0.70 (8/17/2015)
Exit Target: $1.40
Stop Target: $0.75 (Stop Limit)
Action: The Stop Limit at $0.75 has triggered, and we are now out of the position. The puts traded down to $0.70 on the stock’s slide to $18.59. I could come back to HTZ if shares can clear and hold $19 in the coming weeks.
Bank of America (BAC, $17.51, down $0.18)
BAC September 18 calls (BAC150918C00018000, $0.20, down $0.11)
Entry Price: $0.28 (8/17/2015)
Exit Target: $0.60-$0.90
Stop Target: None
Action: Support is at $17.50 and the 50-day moving average, with backup at $17.25-$17. Resistance is at $18.
You can read my full write-up on BAC in Monday’s Pre-Market Update.
PowerShares QQQ Trust (QQQ, $109.72, down $1.14)
QQQ September 112 Weekly calls (QQQ150904C00112000, $0.44, down $0.32)
Entry Price: $0.95 (8/13/2015)
Exit Target: $1.90
Stop Target: $0.50, lower to $0.35
Action: Lower the Stop Target to $0.35.
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, $67.63, down $0.58)
JPM September 70 calls (JPM150918C00070000, $0.44, down $0.11)
Entry Price: $0.80 (8/10/2015)
Exit Target: $1.60
Stop Target: None
Action: Support is at $68, followed by $66-$65.75 and the 100-day moving average. Resistance is at $70.
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) — GLD is still below $108 — Continue to hold.
Editor and Chief Options Strategist