Dear Momentum Options Subscriber,

Deere & Company (DE, $81.30, up $1.49) will report their quarterly numbers ahead of Friday’s open with shares usually making a large price movement afterward. Wall Street is expecting a profit of $0.70 a share, on average, with revenues coming in at $4.96 billion.

The high estimates have Deere earning $0.86 a share on revenue of $5.55 billion. The low estimates are pegged at $0.51 a share on sales of $4.41 billion. This means the headline could read up to a 16-cent beat, or a possible 19-cent miss.

Analysts have been quiet on the stock as far as ratings with only one upgrade this year to “Neutral” from “Sell.” However, it was revealed yesterday, that Berkshire Hathaway had increased its holdings in Deere last quarter. Although Mr. Buffett’s price wasn’t mentioned in the update, shares of Deere traded in a $72 to$80 range  from October through December 2015. An average price would be $76 based on this range.

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The company has smashed estimates over the past four quarters by 33, 9, 48, and 29 cents, respectively. Revenues have also come in higher each quarter with net sales included. In early January, the CEO repeated 2016 guidance despite saying Construction & Forestry sales were off 5%.

The technical picture has improved since shares bottomed near $70 in mid-January. The recent push past and hold of the 50/100-day moving averages is a bullish signal as they are also leveling out. The 200-day moving average is also in a downtrend but is trying to straighten out as well.

The major moving averages could start to curl high on better-than-expected numbers and raised guidance. An earnings miss and lowered outlook could bend them like Beckham.

Shares gained 4.8%, or nearly $4, last November to close at $80 after announcing earnings that day. In August 2015, shares sank $7 from north of $90 to $83 and change following earnings. Last May, shares jumped nearly $4 from $89.46 to $93.35 after the company’s numbers came out. And finally, last February, with shares in the low $90s, the move higher was less than $1 after earnings were reported.

The regular February options expire this Friday, and with earnings due out that morning, it makes trading them a very risky endeavor. However, we can use them to figure out what kind of percentage move the options market is pricing in for the stock.

With shares near $80, the DE February 80 calls (DE160219C00080000, $2.50, up $0.60) and the DE February 80 puts (DE160219P00080000, $1.50, down $0.60) are pricing in a 5%, or $4, move in the stock. These options together would create a straddle option trade with a price of $4. The break-even points would materialize if shares are trading at $84 or $76 by Friday’s closing bell. A 25% profit would be made if DE shares are trading at $85 or $75 as the call or put options would be $5 “in-the-money”.

The DE March 85 calls (DE160318C00085000, $1.40, up $0.30) can be used by bullish traders expecting a run past $87. Bearish traders can target the March 75 puts (DE160318P00075000, $1.25, down $0.40). These options can also be sold to collect the premiums if you believe shares will stay between $85 and $75 by mid-March. This is also a very risky bet just to collect $3.70, or $370, in premium with $8,000 on an “uncovered” stock position.

Given the history of the stock’s performance over the past four earnings announcements, I will likely be sitting on the sidelines when DE reports. In comparison, shares of Caterpillar (CAT, $67.43, up $2.22) jumped 3% yesterday to clear its 50-day moving average and is up another 2% today. The move above the 100-day moving is bullish and could get $70-$72 in play.

Shares of CAT will likely trade in tandem with DE this week and into earnings. There might be a little more “safety” in trading CAT instead of DE due to earnings but the risks are the same if you are on the wrong side of the trade.

The CAT March 67.50 calls (CAT160318C00067500, $2.33, up $0.90) gained nearly 40% on Tuesday after opening at $1.05 and are up over 60% today. The CAT March 70 calls (CAT160318C00070000, $1.15, up $0.48) gained 42% yesterday on decent volume and are up over 70% today. The aforementioned options are too expensive to chase but there could be an upcoming short play if shares fail to clear $73 and hold the 200-day moving average.

Turning to the market, the bulls have are on a roll. The Dow is advancing 234 points to 16,431 while the S&P 500 is higher by 29 points to 1,924. The Nasdaq is gaining 85 points to 4,520 and the Russell 2000 is up 16 points to 1,011.

I have updated our current trades so let’s go check on the action.

Momentum Options Play List

Closed Momentum Options Trades for 2016: 17-3 (85%). 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 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.

 

Microsoft (MSFT, $52.36, up $1.25)

MSFT March 52.50 calls (MSFT160318C00052500, $1.45, up $0.38)

Entry Price: $1.15 (2/16/2016)

Exit Target: $2.40

Return: 26%

Stop Target: None

Action: The call options opened at $1.15 and below our Limit Order at $1.20. If you haven’t entered the trade, do so now. My Exit Target for the calls is at $2.40.

Resistance is at $52.50-$53. Support is at $50.50-$50.

 

Emerson Electric (EMR, $47.93, up $1.31)

EMR March 49 calls (EMR160318C00049000, $0.90, up $0.30)

Entry Price: $0.60 (2/16/2016)

Exit Target: $1.20 (closed half at $0.90 on 2/17/16)

Return: 50%

Stop Target: None

Action: Resistance is at $47.50-$48. A move above the latter gets $50 in play. Support is at $46 and the 100-day moving average.

 

Intel (INTC, $29.42, up $0.64)

INTC March 30 calls (INTC160318C00030000, $0.60, up $0.19)

Entry Price: $0.40 (2/16/2016)

Exit Target: $0.80 (closed half at $0.60 on 2/17/16)

Return: 3%

Stop Target: None

Action: Short-term resistance is at $29.25-$29.50. Support is at $28.50-$28.25.

 

Bank of America (BAC, $12.60, up $0.35)

BAC March 13 calls (BAC160318C00013000, $0.36, up $0.06)

Entry Price: $0.40 (2/9/2016)

Exit Target: $0.80

Return: -10%

Stop Target: None

 

BAC April 14 calls (BAC160415C00014000, $0.22, down $0.05)

Entry Price: $0.30 (2/9/2016)

Exit Target: $0.60

Return: -13%

Stop Target: None

Action: Resistance $12.50-$12.75. Short-term support is at $12.25-$12.

 

Rambus (RMBS, $12.50, up $0.23)

RMBS March 13 calls (RMBS160318C00013000, $0.26, up $0.04)

Entry Price: $0.35 (2/2/2016)

Exit Target: $0.70

Return: -26%

Stop Target: None

Action: Resistance is at $12.50-$12.75. Support is at $12.25-$12.

You can read my detailed writeup in the Feb. 2 Pre-Market Update.

 

Opko Health (OPK, $8.98, up $0.99)

OPK March 7 puts (OPK160318P00007000, $0.13, down $0.13)

Entry Price: $0.35 (1/25/2016)

Exit Target: $0.70

Return: -63%

Stop Target: None

Action: Resistance is at $9. Support is at $8.

Trade on!

Rick Rouse
Editor and Chief Options Strategist
Momentum Options