Dear Momentum Options Subscriber,
Shares of Microsoft (MSFT, $47.65, up $0.03) have made a strong move this month ahead of Thursday’s earnings announcement. The move from $44 to roughly $48 has bullish traders betting on a push past $50, but we know what happens when too many people lean to one side of the boat.
The 52-week high for MSFT is at $50.05. Shares made a run towards this level in early August and in late April before fading lower again. The same type of setup could be in the works if the company misses earnings expectations. If it tops estimates on both the top and bottom line and raises its current-quarter outlook, shares have a good chance of clearing $50 and setting fresh highs.
Wall Street is expecting $0.59 a share on revenue of $20.97 billion. A beat by a penny or two with sales north of $21 billion would be a nice headline. Anything less than the aforementioned forecast could lead to a backtest to $46-$44 and the major moving averages.
Microsoft has matched or beaten estimates during the past four quarters by $0.04, $0.10, $0.00 and $0.05. This quarter’s results will depend on how well its Windows 10 operating system was received, as the upgrade was released in late July in 190 countries.
The MSFT November 50 calls (MSFT151120C00050000, $0.49, up $0.09) look “cheap” at current levels and have been active today, with over 1,300 contracts changing hands. These calls would double if shares trade to $51 by mid-November. However, these calls will likely expire worthless if shares fade to the mid-$40s on an earnings miss.
The MSFT November 45 puts (MSFT151120P00045000, $0.65, up $0.03) are being targeted by bearish traders, but they look slightly expensive. Shares would need to trade down to $43.70, technically, by mid-November for the trade to double.
These options together would create a strangle option trade with a combined premium of roughly $1.15. The breakeven prices would $51.15 or $43.85, and a double would occur if shares clear $52.30 or fall below $42.70 by mid-November.
There are weekly options that trade on Microsoft, but the premiums are also slightly inflated heading into the earnings announcement. Given the risk/reward setup, I will likely stay on the sidelines until after the news is released. Once the dust settles, there could be a trade in MSFT based on what the company says and its technical picture afterwards.
As far as the market goes today, it’s been another session of choppy trading within a tight range. The Dow is down 22 points to 17,208, while the S&P 500 is slipping 5 points to 2,027. The Nasdaq is off 35 points to 4,870, and the Russell 2000 is lower by 4 points to 1,160.
Per the earlier Profit Alert, we are now out of our previous position in the PowerShares QQQ Trust (QQQ) November 110 calls, as the trade hit its Stop Limit during today’s session.
Now let’s go check on our current positions.
Momentum Options Play List
Closed Momentum Options Trades for 2015: 88-34-2 (71%). 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 2:00 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.
General Motors (GM, $33.44, up $0.20)
GM November 34 calls (GM151120C00034000, $0.70, up $0.05)
Entry Price: $0.83 (10/15/2015)
Exit Target: $1.65
Stop Target: None
Action: Resistance is at $33.50 and the 200-day moving average, followed by $34. Support is at $33, with backup at $32-$31.75 and the 100-day moving average.
You can read my full update on GM in the Oct. 16 Pre-Market Update. Earnings are scheduled to be released on Wednesday.
Kohl’s (KSS, $46.06, up $0.40)
KSS November 42.50 puts (KSS151120P00042500, $0.70, down $0.05)
Entry Price: $0.95 (10/7/2015)
Exit Target: $1.90
Stop Target: None
Action: Resistance is at $46-$46.25. Support is at $45. A close below $45-$44 should lead to the low $40s. The 52-week low is at $44.04.
You can read my detailed write-up in the Oct. 7 Mid-Market Update. Earnings are due out Nov. 12.
PayPal Holdings (PYPL, $34.76, down $0.08)
PYPL January (2016) 40 calls (PYPL160115C00040000, $0.80, flat)
Entry Price: $1.05 (9/14/2015)
Exit Target: $2.10
Stop Target: None
Action: Resistance is at $35-$36. Support is at $34-$33.50.
You can read my detailed write-up on PYPL in the Sept. 15 Pre-Market Update.
Trades on Hold — other 2015 Portfolio Open positions (3): 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.
Starbucks (SBUX) November 50 puts (from 9/28/2015) — Continue to hold.
Corning (GLW) November 19 calls (from 9/16/15) — Continue to hold.
Financial Select Sector SPDR (XLF) November 22 puts (from 9/24/2015) — Continue to hold.
Editor and Chief Options Strategist