Dear Momentum Options Subscriber,
Fourth-quarter earnings season is slowly winding down as we head into the middle of March. A “quiet” period usually ensues in late March and into the first week of April as companies prepare Wall Street for first-quarter earnings.
Although the Hollywood and red-carpet names have already announced their numbers, there are other notable companies worth watching between now and then.
The recent debacle in Lumber Liquidators (LL, $31.13, up $3.18) is a prime example of an earnings trade that has made the volatility in the market look tame.
The trouble started after shares fell from $68.78 to $50.63 following an earnings miss and a lowered 2015 guidance range in late February. The company also mentioned that the show “60 Minutes” would be letting some skeletons out of the closet concerning LL’s laminating processes.
Analysts still came out and defended LL, and one brokerage firm raised its price target from $65 to $68 the day after the news. A second brokerage firm lowered its Buy rating to a Hold. And, finally, a third brokerage house lowered its rating to Neutral from Outperform and reduced its price target from $80 to $55.
Shares finished just south of $52 at the end of February and ahead of the 60 minutes special airing that weekend. For the knucklehead suit-and-ties that didn’t issue a “Sell” rating on the news back then, shame on them. Lumber Liquidators warned you.
I’m not a stock broker, but, if I was, my phone call to my clients would have been “Hello, yeah. Look, shares of LL could be timber if I don’t get you out of this stock today. The company reported less-than-stellar earnings and has had a shaky accounting history. 60 Minutes is airing a negative report on them Sunday night. Let’s cut losses (or take gains) and roll into something safer.”
The current whacking is becoming worthy of an Enron encore, but shares are up 10% today.
The news has worsened for Lumber Liquidators all month long and, while there were some heroes then, I wouldn’t try to be one now by catching this falling knife.
While there could be opportunities to trade this name, the easy money has been made. However, there has been a public call by one hedge-fund manager who says shares are going to zero.
We’ve heard a similar story with Herbalife (HLF, $32.84, down $0.22), but shares and the company are still doing business. Either way, these two stocks have too much controversy surrounding them to be long-term investments, and the wild price swings make them difficult to short. Not to mention, the premiums in their options are expensive to trade.
As far as the market, Wall Street is in panic mode, as the bears are making a run at the 50-day moving averages. There is a little damage being done, so today’s close will be important to watch.
The Dow is down 253 points to 17,742, while the S&P 500 is lower by 27 points to 2,051. The Nasdaq is declining 69 points to 4,873, and the Russell 2000 is off 13 points to 1,209.
I have a New Trade today along with additional Profit/Trade Alerts, so let’s get to it.
Momentum Options Play List
Closed Momentum Options Trades for 2015: 20-4-1 (80%). 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 1:25 p.m. EST.
Every new 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 Open Trades and Closed Trades.
New Trade
Krispy Kreme Doughnuts (KKD, $20.49, down $0.29)
Buy to open the KKD April 20 puts (KKD150417P00020000, $0.95, up $0.17) at current levels.
I like these put options to play a possible drop below $20. Earnings are due out on Wednesday, so there is added risk to this trade.
You can read all of my comments from last Friday’s Mid-Market Update on what to expect from tomorrow’s earnings announcement.
Current Trades
Atmel (ATML, $8.66, down $0.17)
ATML May 9 calls (ATML150515C00009000, $0.55, down $0.05)
Entry Price: $0.40 (3/4/2015)
Exit Target: $1.00 (closed 1/3 at $0.65 on 3/5/2015)
Return: 46%
Stop Target: $0.50 (Stop Limit)
Sell to close the remaining two-thirds of the ATML May 9 calls at current levels.
It appears as though the $0.50 Stop Limit could come into play on further weakness, so let’s exit the trade before that level is reached.
Yahoo! (YHOO, $42.73, down $0.25)
YHOO April 47 calls (YHOO150417C00047000, $0.35, down $0.05)
Entry Price: $0.80 (2/26/2015)
Exit Target: $1.60
Return: -56%
Stop Target: None
Action: Support is at $43-$42 and the 200-day moving average. A close below the latter could get $40 into play. Resistance at $43.50-$45.
Western Union (WU, $19.36, down $0.22)
WU April 20 calls (WU150417C00020000, $0.30, down $0.05)
Entry Price: $0.36 (2/25/2015)
Exit Target: $0.75
Return: -17%
Stop Target: None
Action: Support is at $19.25-$19 if $19.50 fails to hold. Resistance is at $19.50-$19.75.
American Express (AXP, $79.26, down $1.25)
AXP April 87.50 calls (AXP150417C00087500, $0.15, down $0.05)
Entry Price: $0.56 (2/25/2015)
Exit Target: $1.15
Return: -73%
Stop Target: None
Action: Resistance is at $81.50-$82. Support is at $80, and a close below this level could lead to $78.
Flextronics (FLEX, $11.37, down $0.28)
FLEX April 12 calls (FLEX150417C00012000, $0.20, down $0.05)
Entry Price: $0.67 (2/24/2015)
Exit Target: $1.35
Return: -70%
Stop Target: None
Action: Support is at $11.50 and the 50-day moving average. A move below this level would be bearish. Resistance is at $11.75-$12.
Marvell Technology (MRVL, $16.41, down $0.09)
MRVL May 18 calls (MRVL150515C00018000, $0.40, down $0.05)
Entry Price: $0.50 (2/18/2015)
Exit Target: $1.00
Return: -20%
Stop Target: None
Action: Resistance is at $16.75-$17. Near-term support is at $16.25-$16 on a backtest. A close below the latter could lead to $15.75 and the 50-day moving average. I believe a run to $20 is coming by mid-May once $17 is cleared.
JDS Uniphase (JDSU, $13.63, down $0.26)
JDSU March 14 calls (JDSU150320C00014000, $0.15, down $0.15)
Entry Price: $0.78 (1/8/2015)
Exit Target: $1.00
Return: -81%
Stop Target: None
Action: Sell to close the JDSU March 14 calls at current levels.
Today’s pullback was not good news for the March calls, as they expire next week.
Trades on Hold — other 2015 Portfolio Open positions (2): These are trades that are still open in the portfolio but are down over 50%. They have longer expiration dates and are on “hold” but are not worth mentioning until they turn around. This means I would not open any new positions. I’m still keeping track of the trades and will record the results accordingly when the trade closes or if the options expire. Click on the Open Trades and Closed Trades pages to see all open and closed positions.
Philip Morris (PM) March 75 puts (From January 2015) — Keep the Limit Order to sell to close the position at $0.95 in place –Continue to hold.
BlackBerry (BBRY) June 13 calls (from March 2015) — Continue to hold.
Trade on!
Rick Rouse
Editor and Chief Options Strategist
Momentum Options