Dear Momentum Options Subscriber,
Earnings season always results in big moves in various stocks, either to the upside or the downside. I mentioned a couple of stocks in this morning’s Pre-Market Update that got crushed after announcing their numbers, and there are a number of other wild price swings happening elsewhere in the market as well.
I actively follow Dunkin’ Brands Group (DNKN, $47.75, down $0.10), and the company is set to announce its latest earnings before Thursday’s opening bell. Shares have been in a tight trading range since peaking at $49.59 earlier this month, and they look poised to make a big move.
A “golden cross” also formed this month, with the 50-day moving average crossing above the 200-day moving average. However, both moving averages are headed in opposite directions. The 50-day moving average is in an uptrend, while the 200-day moving average is in a downtrend.
Wall Street is expecting Dunkin’ to earn $0.43 a share on revenue of $188 million. The company has topped estimates for four-straight quarters by $0.02 twice, $0.01 and $0.05. Revenues have also topped expectations over the past year, but analysts are still mixed-to-bearish on the stock.
One brokerage firm reiterated its “Outperform” rating on the stock this week and raised its price target from $47 to $52. Last week, another brokerage firm issued a “Neutral” rating on the stock with a $46 price target.
Dunkin’ Brands was also downgraded to “Outperform” from “Buy” earlier this month by another brokerage firm. The analyst believes that a competitive environment for breakfast along with traffic pressure in the morning could hurt shares when the numbers are reported. And, finally, another firm came out at the beginning of the month with a “Sell” rating.
Although I’m slightly bullish on the stock, I do share some of the analysts’ concerns, especially considering the way McDonald’s (MCD) has performed with its all-day breakfast menu.
Bullish traders could target the DNKN May 50 calls (DNKN160520C00050000, $0.85, up $0.10), but volume has been thin today. Open interest is above 1,500 contracts. These options would likely double from current levels if shares make a strong run past $50-$51 on Friday. If shares trade to $51.70 technically, by mid-May, a 100% return in the options would be achieved from current levels.
Bearish traders could target the DNKN May 45 puts (DNKN160520P00045000, $0.65, down $0.05) for an earnings miss and a possible drop below $45. These options would double from current levels if shares are below $43.70 by mid-May.
Both aforementioned call and put options could be used together to create a “strangle” option trade, but the breakeven points do not make the trade worth the risk. The premium for both options purchased together would be $1.50, with the breakeven prices at $51.50 and $43.50. A double would occur if shares are above $53 or below $42 by mid-May.
Given the research I’ve done, it might be best to wait until after the earnings announcement to take a possible trade in DNKN.
Turning our attention to the market, we knew that this morning’s open would be rough, and backup support on the Nasdaq has been tested. The rebound off of the lows has been encouraging, however, and the Fed announcement that is due out shortly could help or hinder the bulls’ efforts.
The Dow is up 32 points to 18,022, while the S&P 500 is slipping a point to 2,090. The Nasdaq is lower by 39 points to 4,849, and the Russell 2000 is up fractionally and holding 1,150.
I have updated our current trades below, so let’s go check the action. I also issued a Trade Alert earlier this afternoon for our previous position in Halozyme Therapeutics (HALO), so be sure to check that out now if you haven’t already.
Momentum Options Play List
Closed Momentum Options Trades for 2016: 42-8 (84%). 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 12:25 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.
Whole Foods Market (WFM, $29.70, down $0.12)
WFM May 33 calls (WFM160520C00033000, $0.31, flat)
Entry Price: $0.48 (4/18/2016)
Exit Target: $0.75-$1.00
Stop Target: None
Action: Support is at $29.50-$29. Resistance is at $31.25-$31.50 and the 50- and 100-day moving averages.
You can read my original write-up on WFM in the Feb. 9 Pre-Market Update.
Inovio Pharmaceuticals (INO, $10.86, up $0.39)
INO May 10 calls (INO160520C00010000, $1.05, up $0.15)
Entry Price: $0.60 (4/13/2016)
Exit Target: $1.20
Stop Target: $0.70 (Stop Limit)
Action: Shares have traded up to $10.92 today. A blue-sky breakout could be coming on further strength, which could carry shares past $13. Support is at $10.50-$10.
You can read my extended write-up on INO in the April 4 Pre-Market Update.
Wal-Mart Stores (WMT, $69.60, up $0.30)
WMT May 65 puts (WMT160520P00065000, $0.28, down $0.07)
Entry Price: $0.73 (4/12/2016)
Exit Target: $1.50
Stop Target: $0.25 (Stop Limit on first half)
Action: Resistance is at $69.50-$70. Support is at $68-$67.50 and the 50-day moving average.
Oracle (ORCL, $40.84, up $0.19)
ORCL May 42 calls (ORCL160520C00042000, $0.25, up $0.06)
Entry Price: $0.55 (3/29/2016)
Exit Target: $1.10 (closed first half at $0.20 on 4/25/16)
Stop Target: $0.15 (Stop Limit on second half)
Action: Resistance is at $41, followed by $42.50-$43. Support is at $40.75-$40.50.
Editor and Chief Options Strategist