Dear Momentum Options Subscriber,
The bulls showed some moxie on Tuesday and regained some of their lost momentum as they pushed the market’s upper resistance levels. Volatility also slid to its lowest level in two weeks, although the bears held support. Lost in the shuffle was that the market could be on the verge of re-entering the upper trading range from early April that has limited upside.
The Dow zoomed 222 points, or 1.3%, to settle at 17,928. The blue-chips opened at 17,726 and traded in positive territory throughout the session. The bulls pushed a late-day high of 17,934. Fresh resistance is at 18,000-18,100, and a close above the latter could possibly lead to a test to 18,350 and all-time highs. Support is at 17,800, with backup at 17,600.
The S&P 500 soared 25 points, or 1.3%, to finish at 2,084. The index opened at 2,062, which was above prior resistance at 2,060. This level is now support if 2,075 fails to hold on a pullback. The run to session highs into the close just below 2,085 gets 2,100 back on the map.
The Nasdaq surged nearly 60 points, or 1.3%, to close just below 4,810. Tech was in a steady uptrend throughout the day and traded to a high of 4,811. The close above 4,800 was super bullish and gets upper resistance at 4,850-4,875 back in play. Support has moved up to 4,800-4,750.
The Russell 2000 jumped 10 points, or 1%, to end at 1,128. The small-caps showed some weakness shortly after the open after fading a point to 1,117. Short-term support at 1,115-1,110 held before the late-day rally to 1,129. The close above 1,125-1,120 was slightly bullish, but I mentioned that 1,130 needed to be cleared before I would start trusting any rebound rally.
The S&P 500 Volatility Index ($VIX, 13.66, down 0.91) dropped 6% after testing a low of 13.55. The bulls came close to breaching support at 13.50-12.50, which are the levels I said needed to be cleared this week. These levels could come into play over the next day or two, and it will be interesting to see if they hold by Friday’s close. Resistance is at 14.50-15.
Walt Disney (DIS, $106.60, up $1.26) shares sank below $100 in after-hours trading last night after the company missed earnings. DIS reported earnings of $1.36 a share on revenue of $12.97 billion. Wall Street was looking for $1.40 a share on revenue of $13.26 billion. Disney is a major Dow component and will weigh on the blue-chips today if the 6% stock loss holds into the open.
From desk to press, futures look like this: Dow (-41); S&P 500 (-3); Nasdaq 100 (-7); Russell (-2).
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 8:00 a.m. EST.
I hereby disclose that I will be participating in the following trade(s).
Potash (POT, $16.15, up $0.54)
POT June 15 puts (POT160617P00015000, $0.34, down $0.17)
Entry Price: $0.51 (5/9/2016)
Exit Target: $1.05
Stop Target: None
Action: The close above $16 gets upper resistance at $16.25-$16.50 in play. Support is at $15.75-$15.50 if $16 fails to hold.
Microsoft (MSFT, $51.02, up $0.95)
MSFT June 47 puts (MSFT160617P00047000, $0.30, down $0.18)
Entry Price: $0.62 (5/3/2016)
Exit Target: $1.25
Stop Target: None
Action: Shares tested a high of $51.10 and held resistance at $51. This opens up risk to $52.50. Support is at $50-$49.50.
Bank of America (BAC, $14.30, up $0.31)
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: Resistance is at $14.75-$15. Short-term support is at $14-$13.75.
Q: Is there a way to tell if the total open interest/volume indicates whether a trader is buying a long call or selling a call? Similarly, for put open interest/volume, is it possible to tell whether it is a buy or a sell of the put? I’m trying to sense the up/down directional movement of stock, especially on the earnings report day. Thank you. — M. N.
A: This is a good question, and I have a great example to show you how option volume, open interest and buying or selling of a call or put option can come into play on earnings.
After last night’s close, Fossil (FOSL, $40.10, up $0.68) missed earnings by $0.03, while revenue also came up short. The company also lowered its current-quarter and full-year guidance. As a result, shares were down nearly 30% in extended trading on Tuesday.
There are weekly and regular monthly options available to trade on Fossil stock, and they were extremely active going into yesterday’s announcement.
For instance, the FOSL May 35 weekly puts (FOSL160513P00035000, $0.90, down $0.30) traded over 4,500 contracts on Tuesday, while the FOSL May 46 weekly calls (FOSL160513C00046000, $0.80, up $0.10) traded over 4,300 contracts. However, open interest in both options was under 100 contracts going into Tuesday’s session.
Clearly, traders were pricing in a 10% move in the stock. These options together would have created a “strangle” trade that will pay off big time today if shares open below $30. The total cost of the trade would have been around $1.70 if both options were bought into the close.
The FOSL May 35 weekly puts will be worth at least $5 if shares open below $30. The FOSL May 46 weekly calls will likely expire worthless by this Friday’s close. However, with a premium of $5 on the puts, the overall return on this trade could approach 200%.
The technical setup was a beauty as well, as the chart showed possible weakness, with all of the major moving averages sloping downward. As you can see on the chart, the stocked gapped up above $38 on prior earnings, which is a level that was trying to hold going into this announcement. While bearish traders will likely make upwards of 500% by purchasing only the put options yesterday, some of them probably bought call options for protection.
I often say that earnings trades generate some of the most rewarding returns you will ever see, but they are also some of the riskier ones if you get them wrong. I have a few other earnings trades I’m watching over the next few weeks that I plan to share as well, so stay tuned.
Editor and Chief Options Strategist