Dear Momentum Options Subscriber,
This morning, shares of Electronic Arts (EA, $75.99, up $0.72) cleared the previous 52-week and all-time high of $75.76 that was set in early August. Shares are up over 60% this year after coming into 2015 just north of $47. The Aug. 24 low reached $59.47, and the company is scheduled to release its latest earnings report after Thursday’s close.
The chart alone is suggesting that a huge move could be coming, as shares are breaking out into blue-sky territory. The 50-day moving average recently broke below the upward-sloping 100-day moving average, but it is now leveling out. The 200-day moving average is also in an uptrend, and shares are holding steady into the earnings announcement.
When stocks are on the verge of a blue-sky breakout ahead of earnings, it usually means that there could be volatility associated with the report. Bullish traders are betting on a breakout on an earnings beat with raised guidance. Short sellers are playing a possible “double top” and the potential for an earnings miss that would likely send shares lower.
As far as the numbers, the suits-and-ties expect EA to earn $0.45 a share on revenue of $1.1 billion. The company has topped estimates over the past four quarters by $0.12, $0.14, $0.30 and $0.20, respectively. More importantly, revenues have topped expectations in each quarter as well.
In late July, Wall Street snubbed the company’s fabulous results, as shares fell $0.75 following the announcement. The stock closed July at $71.55 before making a run to the 52-week peak three trading sessions later.
In early May, shares made a move from $59.16 to $60.93 following earnings and tested $63.46 three sessions later. In late January, shares surged from $48.41 to $54.61 after earnings and were pushing $57 by the first week of February.
In October of 2014, EA shares jumped from $37.48 to $38.91 following the beat-and-raise quarter. I think the October magic could continue this year, which is why I’m looking at going “long” with call options ahead of Thursday’s news.
The EA November 80 calls (EA151120C00080000, $1.80, up $0.20) could be used by bullish traders that are expecting a run past $80. Shares would need to be at $81.80, technically, by late November, for the trade to break even. If shares push $83.60, these options will double from current levels.
There are weekly options available to trade on EA as well, but the aforementioned regular November monthly options would give the trade more time to play out.
With that said, the EA October 30th 70 weekly puts (EA151030P00070000, $0.70, down $0.10) could be used to create a strangle option trade, but they are super expensive. These options expire this Friday and could be used as protection in case shares stumble and fall below $70.
The premium for both the EA November 80 monthly calls and the EA October 70 weekly puts would be $2.50. The breakeven points would be $82.50 by mid-November or $67.50 by this Friday. A double would occur if shares push $65 by Friday’s close or $85 by Nov. 20.
I’m more bullish on the stock than bearish, as I think the company is on track for another fantastic quarter. While it is not an official trade at this time, if I had to place a bet, I would likely go for the calls without the put protection or a strangle trade with a 2:1 call/put ratio.
Shares of Apple (AAPL, $117.62, up $3.07) are giving the market a slight lift today, as they are trending higher after last night’s earnings announcement. Today’s Fed news could also add some excitement into the close.
The Dow is currently up 115 points to 17,697, while the S&P 500 is gaining 15 points to 2,080. The Nasdaq is climbing 35 points to 5,065, and the Russell 2000 is zooming 24 points to 1,169.
If I take action on EA today or tomorrow, I will send out a New Trade Alert. For now, however, let’s go check on our current positions.
Momentum Options Play List
Closed Momentum Options Trades for 2015: 89-34-2 (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 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.
Motorola Solutions (MSI, $70.11, up $0.15)
MSI November 75 calls (MSI151120C00075000, $0.65, up $0.09)
Entry Price: $0.70 (10/22/2015)
Exit Target: $1.40
Stop Target: None
Action: Support is at $69-68, followed by $67 and the 50-day moving average. Multi-year resistance is at $72.50.
You can read my full update on MSI in the Oct. 23 Pre-Market Update.
Kohl’s (KSS, $45.90, up $0.14)
KSS November 42.50 puts (KSS151120P00042500, $0.65, flat)
Entry Price: $0.95 (10/7/2015)
Exit Target: $1.90
Stop Target: None
Action: Resistance is at $46. Support is at $45-$44.
You can read my detailed write-up in the Oct. 7 Mid-Market Update. Earnings are due out Nov. 12.
PayPal Holdings (PYPL, $36.53, up $0.59)
PYPL January (2016) 40 calls (PYPL160115C00040000, $1.25, up $0.11)
Entry Price: $1.05 (9/14/2015)
Exit Target: $2.10 (Limit Order on first half)
Stop Target: None
Action: Resistance is at $37. Support is at $36-$35.
Earnings are due out after today’s close. Goldman Sachs upgraded the stock earlier this week to a “Conviction Buy” from “Buy” and kept its $45 price target in place. I will be happy with a run at $40, as that should be enough to double our money.
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.
Financial Select Sector SPDR (XLF) November 22 puts (from 9/24/2015) — Continue to hold.
Starbucks (SBUX) November 50 puts (from 9/28/2015) — Earnings are due to be released this Thursday after the market closes — Continue to hold.
Corning (GLW) November 19 calls (from 9/16/15) — Continue to hold.
Editor and Chief Options Strategist