Dear Momentum Options Subscriber,
I mentioned previously that the financial stocks and earnings would be in focus this week. I previewed Citigroup (C)’s numbers ahead of its report on Friday in yesterday’s Pre-Market Update, and I’m still watching C for a possible bullish, bearish or strangle option trade ahead of Thursday’s close.
In the meantime, the other major companies reporting earnings this week include JPMorgan (JPM) ahead of Thursday’s open as well as PNC Bank (PNC) and Wells Fargo (WFC) on Friday morning.
The charts for all of the aforementioned stocks are in bearish trends, and “death crosses” are either in play or in the process of forming. Today, I want to take a look at JPM in particular because shares could make the most dramatic move out of all the financial companies mentioned above.
The chart for JPMorgan (JPM, $58.20, down $0.76) shows the break below the major moving averages at the start of the year. Shares had been in a tight trading range between $64 and $68 since the start of November, and the breakdown out of this range was a very bearish development.
The 50-day moving average has been in a sharp decline following a two-month rise, and it is on track to fall below the 200-day moving average. This would confirm that a death cross is in play.
Shares have been holding multi-month support at $58 since late September, but notice that shares dropped below $50 during the late-August flash crash. If JPM misses Wall Street’s estimates when it announces or lowers its outlook, shares will likely fall to somewhere between $55 and $50. In other words, shares could drop in the neighborhood of 10%-12% on a lousy quarter.
Although I don’t expect as much upside potential on an earnings surprise and raised guidance, the stock could jump 5%-10% as it makes a backtest to resistance and the major moving averages.
The company has topped estimates during the past three quarters by $0.31, $0.10 and $0.05, respectively. In the year-ago period, JPM missed expectations by $0.12.
With shares near $60, bullish traders could target the JPM February 62.50 calls (JPM160219C00062500, $0.50, down $0.20) for a possible rebound towards $63-$65. These contracts traded over 1,500 contracts on Tuesday and would double if JPM shares are pushing $63.50, technically, by mid-February.
Bearish traders could target the JPM February 55 puts (JPM160219P00055000, $1.00, up $0.20) for a possible drop to the mid- to lower-$50s. These put options would double if JPM shares are below $53, technically, by mid-February.
These two aforementioned options, purchased together, would create a strangle option trade with a combined price of $1.50. Shares would need to be above $64 or below $53.50 to break even. A double would occur if shares are above $65.50 or below $52, technically, by mid-February.
Although I’m more bearish than bullish on JPM, the strangle option trade would provide more protection than a directional trade. However, when doing these types of trades, keep in mind that shares usually have to make a double-digit percentage move by the time the options expire for them to pay off.
Turning to the market, the opening rally has faded, but support is holding. The Dow is down 126 points to 16,390, while the S&P 500 is off 17 points to 1,921. The Nasdaq is lower by 62 points to 4,623, and the Russell 2000 is sinking 18 points to 1,025.
Now let’s go check on our current trades.
Momentum Options Play List
Closed Momentum Options Trades for 2016: 6-0 (100%). 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 1:20 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.
Garmin (GRMN, $32.90, down $0.25)
GRMN February 30 puts (GRMN160219P00030000, $0.78, up $0.09)
Entry Price: $0.70 (1/11/2016)
Exit Target: $1.40
Stop Target: None
Action: A close below support at $33-$32.75 should lead to a continued backtest to $30. The mid-October 52-week low reached $30.89. Resistance is at $34-$34.50.
You can read my detailed write-up on GRMN in the Jan. 12 Pre-Market Update.
General Motors (GM, $30.53, up $0.23)
GM February 28 puts (GM160219P00028000, $0.47, down $0.21)
Entry Price: $0.69 (1/11/2016)
Exit Target: $1.30
Stop Target: None
Action: Resistance at $32 held following this morning’s news that the company raised its guidance and dividend payout and would buy back stock. Shares are off from their high of $31.90, and I would like to see a close below $30.25 today. Support is at $30-$29.50.
You can read my detailed write-up on GM in the Jan. 12 Pre-Market Update.
Wal-Mart Stores (WMT, $62.42, down $1.20)
WMT February 60 puts (WMT160219P00060000, $0.91, up $0.25)
Entry Price: $0.73 (1/11/2016)
Exit Target: $1.45
Stop Target: None
Action: Support is at $63-$62. Resistance is at $64-$65.
You can read my detailed write-up on WMT in the Jan. 12 Pre-Market Update.
Nike (NKE, $59.95, up $0.01)
NKE February 55 puts (NKE160219P00055000, $0.53, down $0.04)
Entry Price: $0.77 (1/11/2016)
Exit Target: $1.50
Stop Target: None
Action: Near-term resistance is at $60, followed by $61.75-$62. Support is at $58.
You can read my detailed write-up on NKE in the Jan. 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.
General Electric (GE) February 32 calls — Continue to hold.
3D Systems (DDD) February 11 calls — Continue to hold.
Editor and Chief Options Strategist