Dear Momentum Options Subscriber,
Shares of Valeant Pharmaceuticals (VRX, $34.51, down $34.53) have been volatile in recent weeks and months after the company fell under scrutiny with investors.
The stock is tanking 50% today after the company announced its earnings ahead of this morning’s opening bell. Although sales were higher, Valeant missed earnings by $0.11, coming in at $2.50 a share versus estimates for $2.61 a share. Revenue came in at $2.8 billion, which was above expectations for $2.75 billion.
However, what caused worry and concern among investors was that the company slashed its 2016 full-year guidance to $9.50-$10.50 a share. The suits-and-ties were expecting $13.25-$13.75 a share for the year.
Cost-cuts, a weak outlook, lower growth, possible bond defaults and a massive short position can all be dangerous for any high-flying stock. Shares have folded like a cheap lawn chair, and they are down from a 52-week high of $263.81.
I have been following the stock since last year and became interested in the story after hearing that hedge-fund manager Bill Ackman had a huge stake in the company. He is certainly an “interesting man,” and he could end up doing beer commercials if he doesn’t cut his losses. However, like most know-it-all fund managers, he hates to admit when he is wrong and is putting his career on the line.
To make matters worse, it was reported in early February that Ackman increased his stake — and that of investors in his fund — after adding nearly 1 million shares in January. This increased the portfolio’s exposure to the company from 8.5% to 9%. The stake also included call options that will now likely expire worthless.
The reckless abandon to buy more shares of volatile stock in a questionable company came on top of an apology to investors. In late January, Ackman said it was a mistake not to sell Valeant last summer when shares were above $200. Well, if he knew it was a mistake not to sell, why would he compound his problems by buying more stock and options in Valeant?
I often talk about the risks of throwing good money after bad money once a trade goes south, which is why I NEVER practice this method when trading options or stocks. Once a stock’s story changes or a cloud of suspicion starts to emerge, it is normally best to cut ones losses.
Ackman’s Pershing Square Capital hedge fund had its worst year in the company’s history last year as fund holders lost a whopping 20% on their investments. Valeant Pharmaceuticals is a name Ackman is paying for dearly.
As far as the options, I thought about taking an earnings trade on VRX, as I knew the company was reporting this week. I do like taking these kinds of speculative trades from time to time, but the VRX options are highly volatile. Due to the high beta of the stock, the options can be very expensive.
I usually like to keep my trades to under $2, as that helps to reduce risk. Buying an option above $2 would be kind of like opening three different options trades at $0.70 each. However, sometimes you have to pay a little more if you truly believe a catalyst is playing out.
When shares of Valeant dropped below $100, I should have looked at LEAP (Long-Term Equity Anticipation) options. Before earnings were released, I should have swung the bat on some near-term options, but, again, they were expensive.
For example, the VRX March 65 put options (VRX160318P00065000, $31.00, up $28.28) were at $2.72 going into Monday’s close. As you can see, they have zoomed a whopping 1,040% today.
The VRX March 70 puts (VRX160318P00070000, $36.00, up $31.15) were “in the money” by a dollar heading into earnings and were going for $4.85 ahead of Monday’s closing bell. These options are up 640% today.
The two aforementioned put options also expire this Friday, so both would have been “all-or-nothing” trades.
It is too early to catch this falling knife, and I haven’t done the in-depth technical analysis or chart work on the stock to know when shares may look “cheap.” However, the time to buy will likely come in a few weeks or months after Ackman starts liquidating his position. If not, he could run his company, and his reputation, into the ground.
As far as the market goes today, the bears are back on the prowl, which was to be somewhat expected with the Fed on deck for tomorrow. The bulls just need to hold near-term support to keep current momentum.
The Dow is slipping 3 points to 17,226, while the S&P 500 is declining 6 points to 2,012. The Nasdaq is lower 21 points to 4,728, and the Russell 2000 is down a 12-pack to 1,068. I would like to see the small-caps hold 1,070 into the close.
I have updated our current trades below, so let’s go check the tape. Additionally, stay locked and loaded into the close in case I take action on another New Trade.
Momentum Options Play List
Closed Momentum Options Trades for 2016: 29-4 (88%). 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 2:45 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.
Energous (WATT, $8.21, up $0.30)
WATT May 10 calls (WATT160520C00010000, $1.15, up $0.43)
Entry Price: $0.80 (3/15/2016)
Exit Target: $1.60-$2.40
Stop Target: None
Action: The call options opened at $0.80 today, which was below our Limit Order of $0.90. I mentioned that a close above $8 would be a very bullish development, and the move has led to explosive action in these call options.
The 52-week high for WATT is at $11.18, and I’m expecting a run to blue-sky territory by mid-May. Today’s surge past $8 looks great as long as this level holds into the close.
For those of you that may have missed this trade, take a look at the WATT August 12.50 calls (WATT160819C00012500, $1.20, up $0.30). These calls are longer-term LEAP options that can be used to play a possible run towards $15 by the end of the summer. Of course, these won’t be included or tracked with today’s trade, but LEAPs are a great way to play a developing story.
This trade is based more on fundamentals, but there is a story to tell as well considering the company’s relationship with Apple (AAPL). I will cover the rest of the story on WATT in tomorrow’s Pre-Market Update.
American Express (AXP, $59.12, down $0.45)
AXP April 62.50 calls (AXP160415C00062500, $0.40, down $0.20)
Entry Price: $0.60 (3/11/2016)
Exit Target: $1.20
Stop Target: None
Action: Support is at $58.50-$58 and the 50-day moving average. Near-term resistance is at $60- $62.50.
You can read my original write-up and view a chart in the March 14 Pre-Market Update.
Mylan (MYL, $46.14, down $1.73)
MYL April 45 puts (MYL160415P00045000, $1.32, up $0.43)
Entry Price: $1.10 (3/10/2016)
Exit Target: $2.20
Stop Target: None
Action: Support is at $46.50. Resistance is at $47.50 following today’s drop below this level.
You can read my original write-up in the March 11 Pre-Market Update.
Intel (INTC, $31.55, up $0.12)
INTC April 29 puts (INTC160415P00029000, $0.28, flat)
Entry Price: $0.38 (3/7/2016)
Exit Target: $0.80
Stop Target: None
Action: Support is at $31.50-$31.25. Short-term resistance is at $32 and the 100-day moving average.
You can view a chart for INTC and read my write-up in the March 7 New Trade Alert.
Editor and Chief Options Strategist