12:40pm (EST)
The market is up but the bulls are struggling to hold onto their gains. Futures were pointing towards a higher open but the momentum from yesterday hit a roadblock once the Philly Fed numbers came out.
The Philadelphia Fed Index fell off a cliff in April after coming in at 18.5 after a reading of 43.4 in March. Wall Street was looking for a print of 33.0.
The Dow sprinted to a high of 12,491 but has failed to kiss our 12,500 target today. The index is currently up 29 points to 12,483 as we head into the second half of trading.
The S&P 500 is higher by 6 points to 1,336 and has broken through the 1,334 level after touching 1,337. The index hit 1,344 back on Feb 18 so we still haven’t hit 52-week highs, yet.
The Nasdaq is up 15 points to 2,818 and has reached 2,820. The mid-February high was 2,840 and are upper-end target has been 2,850 since January.
It remains to see how we end today’s session but it feels like we could continue to stay in this trading range. Although there has been a nice push back to the top of the range, the talking heads are so excited that many are forgetting we also tested the bottom of the range as well on Monday. It just means volatility is picking up and we are about to see a huge breakout or breakdown in the market over the next several weeks.
While it feels like the bulls are on the verge on a breakout, it also feels like the bears could attack at a moment’s notice on any bad headline news. One thing is certain, this market is fragile.
Before we leave, we wanted to take time today to promote our Weekly Wrap which comes out every Sunday. Our goal for this publication is quite simple and we are off to some powerful returns in just 4 months. All 10 of our recommendations are up with many of them showing double-digit gains. Our recommendations are based on stocks that are strong companies that are either stuck in a trading range or they are ready to break out.
We lower our cost basis in these recommendations by selling monthly options. Our first recommendation was profiled in our Daily newsletter so we thought we would give everyone an update.
The stock is no stranger to our portfolio over the years and its one we think that can still DOUBLE from current prices. This is how our write-up looked this past Sunday (stock and option quotes are from 4/15/2011):
Dendreon (DNDN, $42.40, up $0.83)
May 43 calls (DNDN110521C00043000, $1.90, up $0.10)
Entry Price: $41.96 (9/13/10)
Exit Target: $45
Return: 16%
Stop Target: None
Action: Shares of Dendreon made a strong move above $40 on Thursday and we knew once they did there would be some fluff. Hopefully we don’t get called away from this one either but if we do, the trade banks nearly 20%.
Dendreon opened at $41.96 and you could have sold the October 45 call option for $1.30 on 9/13/10. This lowered the cost basis to $40.66.
On 11/11/10 we sold the December 40 call option for $1.75 which lowered our cost basis to $38.91.
On 12/20/10 we sold the February 39 call option for $1.50 which lowered our cost basis to $37.41.
On 4/11/11 we recommended selling the May 43 call options for 80 cents. This lowered the cost basis to $36.61.
We also use the Weekly Wrap to profile two stocks a week that are on the verge of breaking out or breaking down. Lately, we have been profiling strangle option trades on these stocks and we will probably be making official recommendations on them in the weeks and months ahead.
Baidu (BIDU, $149.68, up $0.37) was profiled on Sunday and here were our thoughts (quotes are from 4/15/2011 close):
“Baidu also trades WEEKLY options so let’s look at a few ways we could play this one.
The stock is at $146 and near 52-week highs. The April 150 calls (BIDU110421C00150000, $1.25, down $0.75) fell over 35% on Friday and could be used on a break above $149-$150. If shares do fall from current levels to “fill in some gaps” then option traders should target the April 140 puts (BIDU110421P00140000, $0.45, down $0.45, down $0.41).” (END)
The April 150 calls traded to a high of $3.34 yesterday and on Monday the puts nearly doubled after they opened. The April puts opened Monday morning at 71 cents and traded up to $1.80 and would have been closed after they doubled. Either way, the calls were up enough yesterday to cover both sides of the trade to still make a 100% return.
Strangle option trades are also known as “chicken trades” because you aren’t sure which way the stock is going. The strategy is best used on momentum stocks or high beta stocks. The goal is simple. Make enough on one side of the trade (call or put) to offset the other side of the trade. The goal is to make 10%-20% overall, by closing one side of the trade once it makes 100% or more.
Usually, when a stock moves just 5%, the right option will move 100% or more and this is our goal. We have profiled a dozen of these types of trades in our Members Area over the past few months and have had a pretty high success rate with them. Although we have yet to make any of them “official” recommendations, our subscribers and option trading course members love them and have been banking profits with them. We can tell by our email inbox.
The bottom line is that our Weekly Wrap is quickly becoming a fast-growing publication and we have done some specials to promote it. However, we also realize we have been under-pricing as we get the word out. The good news is that we aren’t changing the price anytime soon although down the road we will.
If you have further questions about this service, please feel free to email us.
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