Dear Momentum Options Subscriber,
I’ve mentioned previously that shorting a strong stock is hard to do. However, when a Wall Street darling falls out of favor on weaker fundamentals and the technical picture starts to look weak, it gets me excited.
Most of the suits-and-ties will tell you not to “trade” Apple (AAPL, $93.22, up $0.43). Instead, they will tell you to hold the stock for years. Perhaps the dividend is being taken into consideration, but Apple is currently only paying $2.28 a year for a dividend yield of 2.46%. The company could certainly pay more, but it is still hoarding cash while making subtle acquisitions.
Apple’s most recent quarter in April was a disaster across the board, and the company reported a $0.10 earnings miss. Revenues of $50.55 billion also fell shy of forecasts for a reading of just under $52 billion.
The company also lowered its current-quarter revenue guidance to $41-$43 billion versus estimates for $47.3 billion. Gross margins between 37.5%-38% are still impressive, but Apple needs growth in new areas to offset declines in others.
I mentioned above that the technical outlook for Apple was looking weak, as all of the major moving averages are in a downtrend. The two-year chart also shows that a break below $92-$91.50 would be a bearish development, and there is the possibility that the mid-$80 range could come into play.
While there is a good chance that shares could rally back to $94-$96, the $98 level represents a much tougher hurdle, as it marks the “gap down” from previous support near $105. Analysts have been giddy on the pullback from the 52-week high just south of $133, as they are still recommending the stock.
On Monday, RBC Capital said that Apple was oversold and that the company’s gross margins were “poised” to increase. I’m not sure if they read the fine print, but I just mentioned that Apple’s gross margins would come in around 38% for the current quarter. RBC kept its “Outperform” rating and $120 price target on the stock.
Another brokerage firm kept its “Outperform” rating on the stock as well even though it said that Apple’s share-buybacks were below average in March.
I would like to see Apple trade a little higher over the next week or two to see if resistance levels hold. If so, put options will become cheaper, and I’ve listed the ones I’m targeting below. I could also use these options if Apple shares have peaked and a move below $91.50 comes over the near term.
The AAPL June 90 puts (AAPL160617P00090000, $1.40, down $0.20) are my first choice to play a breakdown on a move below $91.50. These options have over a month of time premium to allow the trade to play out. If shares fall below $87.20, technically, by mid-June, these options would double from current levels.
The AAPL July 87.50 puts (AAPL160715P00087500, $1.50, down $0.10) would give the trade over two months to play out. These options would double from current levels if shares are below $84.50, technically, by mid-July.
In the meantime, we can continue to watch Apple while looking for a great entry price to possibly go “short” with put options.
Shares are getting a lift today, and the overall market is chugging higher. The Dow is up 192 points to 17,898, while the S&P 500 is adding 20 points to 2,078. The Nasdaq is higher by 47 points to 4,797, and the Russell 2000 is gaining 8 points to 1,126.
I have updated our current trades below, and I could have a New Trade for the portfolio later this afternoon. I’m also looking at Mylan (MYL, $40.87, up $0.10) as a possible “short” play, but I’m still doing the homework for the trade.
Momentum Options Play List
Closed Momentum Options Trades for 2016: 44-10 (81%). All trades are dated 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 1:05 p.m. EST.
I hereby disclose that I will be participating in the following trade(s).
Potash (POT, $16.12, up $0.51)
POT June 15 puts (POT160617P00015000, $0.38, down $0.13)
Entry Price: $0.51 (5/9/2016)
Exit Target: $1.05
Stop Target: None
Action: Resistance is at $16-$16.25. Support is at $15.50.
Microsoft (MSFT, $50.84, up $0.77)
MSFT June 47 puts (MSFT160617P00047000, $0.34, down $0.14)
Entry Price: $0.62 (5/3/2016)
Exit Target: $1.25
Stop Target: None
Action: Resistance is at $50.50-$51. Near-term support is at $49.50-$49.25.
You can read a more detailed write-up on MSFT and view the chart in the May 4 Pre-Market Update.
Bank of America (BAC, $14.29, up $0.30)
BAC June 15 calls (BAC160617C00015000, $0.20, up $0.05)
Entry Price: $0.58 (4/28/2016)
Exit Target: $1.20
Stop Target: None
Action: Short-term support is at $14-$13.75. Resistance is at $14.75-$15.
Editor and Chief Options Strategist