Dear Momentum Options Subscriber,
The market showed bullish strength on Tuesday despite the nervousness and ongoing chaos in the geopolitical environment. Politics here in the United States are also in play following another battle over presidential delegates. First-quarter earnings will also add fuel to the fire in a couple of weeks, and major resistance or support levels could come into play.
The Dow dipped 41 points, or 0.2%, to end at 17,582. The blue-chips opened at 17,602, which was above fresh support at 17,600. The intraday low of 17,540 came shortly afterwards, with backup help at 17,400-17,350 holding. Near-term resistance remains at 17,800 on continued closes above 17,600.
The S&P 500 slipped nearly 2 points, or 0.1%, to close just below 2,050. The index traded down to support at 2,040 on the open before bouncing back to push 2,056. Resistance at 2,060 held, and a move towards 2,075-2,080 is possible if that level is cleared. A breach of 2,040 could lead to 2,025-2,020.
The Nasdaq gained a dozen points, or 0.3%, to settle at 4,821. Tech opened 2 points off of its low of 4,781, with support at 4,775-4,750 holding strong. The losses were quickly erased within the hour, however, as the bulls controlled the action for the rest of the session. The late-day high reached 4,835 but fell shy of clearing resistance at 4,850.
The Russell 2000 fell a point, or 0.1%, to finish at 1,097. The small-caps also tested near-term support at 1,090 on the opening chaos before rebounding to 1,100. There is risk to 1,080-1,075 on a move below 1,090. Near-term resistance remains at 1,100-1,110.
The S&P 500 Volatility Index ($VIX, 14.17, up 0.38) spiked to a high of 14.76 within the first 30 minutes of trading, but the bulls defended the 15 level for the third-straight session. The mid-day low reached 13.75 but fell shy of cracking support at 13.50-12.50.
The portfolio is in excellent shape to play the market’s next major move. This week’s tight trading range has allowed us to take quick profits while keeping our portfolio light. I still favor bullish trades over bearish positions, and I could take additional action today, so stay locked and loaded.
I do have a trade update for our position in Krispy Kreme (KKD), as shares took a hit in extended trading on Tuesday. I would like to save the remaining premium in the trade at this morning’s open, so let’s go check the tape.
From desk to press, futures look like this: Dow (+7); S&P 500 (+2); Nasdaq 100 (+4); Russell (+0.3).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 33-5 (87%). 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 8:00 a.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.
Rambus (RMBS, $13.74, up $0.13)
RMBS May 14 calls (RMBS160520C00014000, $0.65, up $0.12)
Entry Price: $0.47 (3/21/2016)
Exit Target: $1.00
Stop Target: $0.50 (Stop Limit)
Action: Set a Stop Limit at $0.50 to protect profits. Yesterday’s low on the calls was $0.56.
Shares traded to a high of $13.90 yesterday, with the options reaching a peak of $0.69. A close above $14 this week would be a bullish setup going into the three-day weekend.
Near-term resistance is at $13.75-$14. Support is at $13.25-$13.
You can read my thoughts on RMBS in the March 22 Pre-Market Update.
Krispy Kreme (KKD, $15.38, down $0.14)
KKD April 16 calls (KKD160415C00016000, $0.65, down $0.10)
Entry Price: $0.60 (3/21/2016)
Exit Target: $1.20
Stop Target: $0.05 (Stop Limit)
Action: Set a Stop Limit at $0.05. If we aren’t filled this morning, I will update the trade in the Mid-Market Update. If we are, we will be out of the position.
Shares were down 9% in after-hours trading on Tuesday following the company’s earnings release. The company beat estimates by a penny, but revenue fell short, which always seem to be the case with KKD. It also lowered 2017 estimates and increased its share-buyback program by $100 million.
I got this one wrong, folks, by trying to go against my bearish instincts for KKD. The portfolio was 6-0 last year with bearish KKD trades, but I thought the company might be returning to a growth phase. Instead, it’s the same old story, and I paid for it this time around instead of getting paid.
Nucor (NUE, $46.59, up $0.18)
NUE April 48 calls (NUE160415C00048000, $0.45, up $0.04)
Entry Price: $0.55 (3/17/2016)
Exit Target: $1.10
Stop Target: None
Action: NUE shares tested a low of $45.91 before bouncing back to push $46.86.
Support is at $46.25-$46. Resistance is at $47-$47.50.
Q: What sectors are you looking at for new trades? — A.N.
A: I like to focus on all sectors when looking for new trades, but I focus more on individual stocks that are showing momentum, either to the upside or downside. I also like to trade stocks in sectors that may be either hot or cold, as money is always rotating. I mentioned yesterday that airline stocks pulled back after the terrorist attacks, as did some of the cruise/leisure stocks, and I’ve been researching new trades in the sector this week.
I’m also looking at the retail sector, as some stocks in that area seem to be pricey following the recent run off of the February lows. With earnings season coming up in a few weeks, all sectors will be in play. As always, the key to being successful is getting in the right sector or trade with call or put options before the money begins to rotate in or out.
Q: How do you determine what your Exit Target and Stop Target are for each trade? — J.S.
A: Great question, especially for new subscribers. Nearly all of my Exit Targets are set for a 100% return from the recorded entry price. In most cases, we are using slightly out-of-the-money call or put options, usually one or two strikes out. If the stock makes a 5%-10% move over the time frame we are playing, the options usually double in price. I also do the math to make sure our objectives can be reached.
On occasion, I may list two exit targets for a 100%-200% return or a 50%-100% return. These might involve higher-priced options that could be slightly in the money. If I do list an exit target that is higher or lower than the standard 100% return I usually seek, it might be due to a number of other factors, such as unexpected news, possible earnings warnings or where the stock is on a technical basis.
As far as Stop Targets, I usually don’t carry stops on trades under $1.25-$1.50, as a 50% move can happen overnight or in as little as a few hours. Lower-priced options tend to make larger percentage moves based on how the stock trades and having a set 50% stop can take us out of a good trade prematurely. However, I always reassess a trade if it quickly turns against us.
With higher-priced options over $1.50, I usually like to keep a tight stop of 50% because there may be more capital at work. Personally, I like to buy options in 10-contract lots, so a trade priced at $1.50 is the same as two $0.75 trades.
I haven’t traded too many higher-priced options this year, but I could start to do so if premiums on either calls or puts start to get skewed, which usually occurs during market tops or bottoms.
Q: How does your approach to trading differ in a choppy market versus a market that is trending? — C.F.
A: This is a great follow-up question. I have gotten better over the years at identifying choppy markets and trading ranges, and I still try my best to avoid trading them when they occur.
Don’t quote me on this, but, according to the experts, approximately 70% of stocks trade in tandem with the market when it is trending. So, buying calls in a bull market or puts in a bear market when a trend is being established does make trading easier. This is why I spend so much time following the major indices and a number of other technical indicators, as well as charts of individual stocks.
Choppy markets can be good for trading, as long as you are on the right side, while trading ranges hurt option premiums due to time decay. Luckily, we haven’t experienced too may trading ranges this year, although one could be setting up this week.
Editor and Chief Options Strategist