1:25pm (EST)
The market is following yesterday’s pattern of opening lower despite good news and is trying to bounce back as we head into the second half of trading. Surprisingly, Tech is leading the way and is in positive territory while the Dow and S&P 500 are playing catch-up and are still slightly negative.
As far as economic news, it has been super although the talking heads are questioning some of the figures.
The Challenger Jobs Cuts came in at 42,000 while the ADP Employment Change report showed the private sector added 325,000 jobs in December, which was way higher than the expected increase for 178,000 jobs. Initial Claims fell 15,000 to 372,000 while Continuing Claims dropped 22,000 to 3.6 million. Both numbers beat expectations.
The ISM non-manufacturing report had a reading of 52.6 which was slightly below estimates of 53 but still showed expansion.
A couple of stocks we wanted to cover could be racing to $100 and we aren’t sure which one gets there first, if at all, but we wanted to show you how option premiums work.
We were spot on in calling Netflix’s (NFLX, $77.62, down $2.83) fall from grace and here was the chart we profiled back in September 2011 and our target of $75 (blue line).
We aren’t sure if a bottom is in but shares could be on the verge of breaking out of a trading range (blue box) in the chart below. Yesterday’s close above $80 was bullish for a run into the $90’s (black line) which is where the next patch of resistance lies. If shares can clear this level there is a chance for a run back to triple-digits ($100-$120) believe it or not.
The options for Netflix have also carried higher premiums because of the volatility and the large price movement shares can make but we took a peak at some call options in case there is a mini-breakout coming.
This is not an official trade by any means put we wanted to show you how expensive the premiums are. The June 100 calls (NFLX120616C00100000, $7.50, down $1.10) do not expire for 6 months but are trading for the price of what a good six-pack would cost.
By comparison, let’s take a look at Philip Morris (PM, $78.34, down $0.11) which is currently trading near $80 and all-time highs. The strong uptrend (green line, purple circles) has been in place for a few years and the breakout above $70 was super bullish. The Philip Morris June 100 calls (PM120616C00100000, $0.05) are trading at 5 cents. The June 95’s are a dime.
So, when you hear us say “high beta” stocks this is what we mean when we say premiums are expensive as far as the options go. We are pretty sure people are going to watch videos, especially over the internet, and we are pretty sure people are going to continue to smoke but both trades are risky.
Netflix could have another misstep or PR blunder while Philip Morris is a cough away from a negative litigation case at some point in time.
The breakeven points would be $109 for Netflix and $100.05 for Philip Morris if you bought the call options and held until expiration which is mid-June. This is not a lot of help because both stocks need hit $100, technically, to have a chance for a profit.
If we were in Vegas we would bet on Netflix but put insurance on Philip.
As far as our current trades, we are getting off to a great start for 2012 so let’s go check on them. As we head to press, the Dow is down 16 points to 12,402 while the S&P 500 just turned positive by a couple of points to 1,279. The Nasdaq is advancing 14 points to 2,662. Bingo!
Our Microsoft (MSFT, $27.55, up $0.15) has hit a 100% return! Subscribers, check the Members Area for the updates and we will be back in the morning with some fresh ideas.
