Dear Momentum Options Subscriber,
Shares of Shake Shack (SHAK, $32.75, up $0.45) will be on the move in extended trading on Wednesday, as the company is scheduled to announce earnings after the closing bell. Shares recently tested a multi-month low of $30.90 but held the 52-week low of $30 that was set in January of this year. Below is a two-year chart that shows the IPO debut and the subsequent run towards $100 afterwards.
Obviously, this will be an important quarter, as Wall Street wants to see a profitable quarter with growing revenues. On that front, analysts are expecting Shake Shack to earn $0.14 a share on revenue of $69.33 million. The high estimate has earnings at $0.16 on sales of $73 million. The low number has a profit of $0.12 on revenue of $66 million. This could translate into a headline $0.02 beat or miss.
During the past four quarters, the company has topped estimates by a penny two times, in addition to $0.03 and $0.05 beats.
The near-term chart shows support at $32, with risk to $30 or the mid-$20s on an earnings miss and lowered guidance. Resistance is at $33, followed by $33.75-$34 and the downward sloping 50-day moving average. A run to $35.75-$36 could come on blowout earnings and raised guidance. In other words, I’m expecting up to a 10% move in the stock following the earnings announcement.
With the near-term regular November options expiring in 10 days, I’ve looked at some possible trades to play a pending move. However, it is important to note that there are weekly options that trade on SHAK, but the spread on the bid/ask can be wider than the regular monthly options.
The SHAK November 34 calls (SHAK161118C00034000, $1.00, up $0.10) could be targeted by bullish traders seeking a possible move towards $36. If shares trade past this level by next Friday, these call options will easily double from current levels.
The SHAK November 30 puts (SHAK161118P00030000, $0.60, down $0.30) could be targeted by bearish traders looking for a drop below $30. These options would double from current levels if shares fall below $28.80, technically, by Nov. 18.
Both aforementioned call and put options purchased together could be used as a “strangle” option trade. This strategy is also known as a “chicken trade,” and it can be used if you are unsure of which direction a stock is headed after an earnings announcement.
With a combined premium of $1.60 for both options, SHAK shares would need to clear $35.60 or fall below $28.40, technically, for the trade to break even. If shares surge near $37.20 or fall below $26.80 over the next 10 days, the strangle trade would return 100%.
I’m more bearish than bullish on burger stocks and fast-casual food stocks at the present moment and, while there are a number of stocks I like in the sector, Shake Shack still trades at a rich premium. Although price-to-earnings ratios are only the start of breaking down the fundamentals of a stock, the current P/E for SHAK is pushing 80.
I will likely stay on the sidelines heading into the earnings announcement, but there could be a trade afterwards based on upward or downward momentum, so stay tuned.
Heading into the final hours of trading, the Dow is gaining 106 points to 18,366, while the S&P 500 is adding 10 points to 2,142. The Nasdaq is up 34 points to 5,200, and the Russell 2000 is higher by 7 points to 1,199.
With just two months left to go in the year, our portfolio could get a little aggressive to take advantage of a major market move on Wednesday and into the rest of the week. On that note, this week’s action could also shape the rest of the month.
I have updated our current trades below, and I could have a New Trade ahead of the closing bell. If you don’t hear from me by 3:30 p.m. EST, however, I will be back in the morning with a full update. On that note, make sure you get out and vote today!
Momentum Options Play List
Closed Momentum Options Trades for 2016: 77-31 (71%). 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 1:30 p.m. EST.
I hereby disclose that I will be participating in the following trade(s).
Starbucks (SBUX, $54.62, up $0.13)
SBUX January 47.50 puts (SBUX170120P00047500, $0.38, flat)
Entry Price: $0.95 (11/3/2016)
Exit Target: $1.90
Stop Target: None
Action: Resistance is at $54.50-$55. Support is at $54-$53.50.
Microsoft (MSFT, $60.60, up $0.18)
MSFT December 57.50 puts (MSFT161216P00057500, $0.55, down $0.09)
Entry Price: $0.86 (11/1/2016)
Exit Target: $1.75
Stop Target: None
Action: Resistance is at $60-$60.50. Support is at $60-$59.
You can read my previous comments on MSFT in the Oct. 31 Mid-Market Update.
Lattice Semiconductor (LSCC, $7.71, down $0.15)
LSCC December 7.50 calls (LSCC161216C00007500, $0.15, down $0.30)
Entry Price: $0.30 (10/12/2016)
Exit Target: $0.70 (Limit Order)
Stop Target: None
Action: Support is at $7.50. Resistance is at $7.75-$8.
You can read my previous comments on LSCC and the buyout offer of $8.30 a share in Friday’s Pre-Market Update.
Viavi Solutions (VIAV, $7.57, up $0.07)
VIAV December 8 calls (VIAV161216C00008000, $0.11, flat)
Entry Price: $0.51 (8/19/2016)
Exit Target: $1.05
Stop Target: $0.05 (Stop Limit)
Action: Resistance is at $7.50-$7.60. Support is at $7.40-$7.35.
Editor and Chief Options Strategist