Dear Momentum Options Subscriber,
With all the hype focused on the “then and now” of Nasdaq 5,000, I thought it would be interesting to bring up and track one famous stock that went public during the Nasdaq’s heyday. I will talk more about the ridiculousness of this argument or debate in next Monday’s Pre-Market Update, but one company that has survived the “dot.com” bubble is Krispy Kreme Doughnuts (KKD, $21.35, down $0.30).
I have followed the stock off and on since its IPO, and it’s one that I’m usually bearish on when I decide to trade It. Krispy Kreme Doughnuts made its initial public offering debut in early April of 2000 at $21 a share. The ticker symbol was KREM back then, as shares traded on the Nasdaq. A little over a year later, the company switched to the New York Stock Exchange and the ticker switched to KKD, which is its current symbol.
Shares formed a classic “double-top” north of $40 over the next few years before plunging to the low $2 level by 2008. Needless to say, the run from $2 to $20+ since then has been astounding — a classic 10-bagger by Wall Street’s standards.
The near-term chart shows that shares have formed a solid base at $21-$20.50 and have held their 50-day moving average since early February.
Earnings are due out next Wednesday, March 11, and this will likely either be the straw that breaks the camel’s back or fuels a continued run to multi-year peaks.
Shares recently set a fresh 52-week high of $22.32, and the two-year chart is showing that the next layers of resistance are at $23.50-$24.
If the company were to announce a sweet quarter with raised guidance, shares could easily test the aforementioned hurdles. This would represent a 10%+ move from current levels.
If Krispy Kreme disappoints, shares could test $20-$19.50 on a pullback. This means that a break below the 50-day moving average could lead to a test to the 100-day moving average.
The longer-term chart shows that a “symmetrical triangle” has formed, with shares setting up for a 5%-10% move over the near term.
The major moving averages are also curling higher, so the chart is bullish on a number of different levels. However, I also found some bearish news in my research.
The company has missed Wall Street’s estimates in three of the past four quarters. Two of the misses were by just a penny, while the other was a $0.03 miss. One quarter was a match.
Analysts are currently expecting Krispy Kreme to earn $0.17 a share on revenue just shy of $127 million. Analysts are still bullish on the stock despite the earnings misses over the past year.
One brokerage firm maintained their “Buy” rating and $27 price target last December following an earnings miss. Shares fell from $20 and tested $18 following the announcement.
In early September, shares fell from $17.61 and tested a low of $16.51 before finishing just above $17. This was on the $0.03 miss. Moreover, the company lowered its 2015 guidance on the earnings call to $0.69-$0.74 a share, down from an expected $0.72 a share.
Krispy Kreme tried to be slick in January after the company “reaffirmed” this year’s guidance. However, in the process, they also lowered 2016 full-year guidance to $0.79-$0.85 a share. The suit-and-ties had been expecting $0.87 a share for 2016.
Everyone loves a doughnut now and then, but with society getting more health-conscience, I don’t believe Krispy Kreme is on the weekly repeat list for consumers.
Obviously, Wall Street is giving the company too much credit for its growth plans, despite the warning signs the company has given to try to lower expectations.
The devil on my shoulder is telling me to use the KKD April 20 puts (KKD150417P00020000, $0.60, up $0.05) to go short ahead of Krispy Kreme’s earnings release.
The angel on my other shoulder is telling me to use the KKD April 23 calls (KKD150417C00023000, $0.55, down $0.10) and join the party to higher highs.
Together, these aforementioned options would create a strangle trade, which would cost about $1.15 to play a possible 5%-10% move in the stock. If shares clear $24, or fall below $19, there is a good chance of making a double-digit profit.
Strangle option trades are also called “chicken trades,” and can be used if traders are unsure of what direction a stock is going to move following an earnings announcement. By creating a safety net, the goal is to profit on one side of the trade to offset the losses on the other side.
I may take action ahead of Krispy Kreme’s earnings announcement next Wednesday by using one or both of the aforementioned call or put options. If I do, I will send out a Trade Alert.
As you can see, there is a lot that goes into planning a trade. I use a lot of what I covered above to find setups for trades, but trading earnings announcements are always tricky.
I am bearish on Krispy Kreme, and I will be surprised if they deliver a “beat-and-raise” quarter. However, I’m not willing to make that bet just yet.
As far as the market, the Dow is down 184 points to 17,950, while the S&P 500 is lower by 20 points to 2,080. The Nasdaq is falling 39 points to 4,943, and the Russell 2000 is slipping 13 points to 1,221.
I have updated the current trades, and I am expecting another busy week next week. I will be back on Monday with the charts and a fresh outlook. However, stay locked and loaded into the close in case I see something I like. I may also have additional Trade Alerts.
Momentum Options Play List
Closed Momentum Options Trades for 2015: 19-3-1 (83%). 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 11:50 a.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.
Atmel (ATML, $8.78, down $0.02)
ATML May 9 calls (ATML150515C00009000, $0.60, flat)
Entry Price: $0.40 (3/4/2015)
Exit Target: $1.00 (closed 1/3 at $0.65 on 3/5/2015)
Return: 54%
Stop Target: $0.50 (Stop Limit)
Action: Support is at $8.50-$8.40 on a close below $8.75. Resistance is at $9.
Gogo (GOGO, $20.11, up $0.04)
GOGO May 20 calls (GOGO150515C00020000, $1.60, flat)
Entry Price: $0.85 (3/2/2015)
Exit Target: $2.25 (closed half at $1.85 on 3/5/2015)
Return: 103%
Stop Target: $1.35 (Stop Limit)
Action: Support is at $19.75-$19.50 on a pullback. Resistance is at $20.25-$20.50.
BlackBerry (BBRY, $10.80, down $0.09)
BBRY June 13 calls (BBRY150619C00013000, $0.55, flat)
Entry Price: $0.60 (3/2/2015)
Exit Target: $1.20
Return: -8%
Stop Target: None
Action: Resistance is at $11-$11.25. Support is at $10.75.
Yahoo! (YHOO, $43.85, down $0.31)
YHOO April 47 calls (YHOO150417C00047000, $0.60, down $0.05)
Entry Price: $0.80 (2/26/2015)
Exit Target: $1.60
Return: -25%
Stop Target: None
Action: Resistance is at $45. Support is at $43-$42.
Western Union (WU, $19.52, up $0.03)
WU April 20 calls (WU150417C00020000, $0.30, flat)
Entry Price: $0.36 (2/25/2015)
Exit Target: $0.75
Return: -17%
Stop Target: None
Action: Support is at $19.50, with additional help at $19.25-$19. Resistance is at $19.75-$20.
American Express (AXP, $80.64, down $0.52)
AXP April 87.50 calls (AXP150417C00087500, $0.25, down $0.05)
Entry Price: $0.56 (2/25/2015)
Exit Target: $1.15
Return: -55%
Stop Target: None
Action: Support is at $80, and a close below this level could lead to $78. Resistance is at $81.50-$82.
Flextronics (FLEX, $11.76, down $0.21)
FLEX April 12 calls (FLEX150417C00012000, $0.30, down $0.10)
Entry Price: $0.67 (2/24/2015)
Exit Target: $1.35
Return: -55%
Stop Target: None
Action: Support is at $11.75. Resistance is at $12-$12.25.
Marvell Technology (MRVL, $16.51, flat)
MRVL May 18 calls (MRVL150515C00018000, $0.40, flat)
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 another backtest.
Brocade Communications Systems (BRCD, $12.21, down $0.11)
BRCD March 13 calls (BRCD150320C00013000, $0.05, down $0.03)
Entry Price: $0.24 (2/13/2015)
Exit Target: $0.50-$0.75
Return: -79%
Stop Target: None
Action: Sell to close the BRCD March 13 calls at current levels. Today’s pullback was the nail in the coffin for this trade. Let’s save the nickel premium and close the trade.
JDS Uniphase (JDSU, $13.83, up $0.51)
JDSU March 14 calls (JDSU150320C00014000, $0.30, up $0.15)
Entry Price: $0.78 (1/8/2015)
Exit Target: $1.00
Return: -62%
Stop Target: None
Action: Resistance is at $13.75-$14. Support is at $13.25-$13.
Trades on Hold — other 2015 Portfolio Open positions (1): 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) — Continue to hold.
Trade on!
Rick Rouse
Editor and Chief Options Strategist
Momentum Options