Dear Momentum Options Subscriber,
Shares of McDonald’s (MCD, $97.45, up $0.01) are on the verge of a major move, as earnings are due to be released on April 22. This could be the catalyst that drives shares to fresh 52-week peaks north of $103 or pushes MCD lower towards $90.
On a technical level, a “symmetrical triangle” has formed, which usually indicates that a major move is forthcoming. At current levels, I’m pricing in a possible $5-$6 move in the stock, and this would get the aforementioned price targets of $103 or $90 in play. These types of pattern setups usually follow through with the current trend, which has me leaning towards a run past triple-digits for the stock.
The company is well known for its “golden arches,” but another bullish development is the formation of the “golden crosses” on the chart. These occur when either the 50-day or 100-day moving average crosses above the 200-day moving average.
As you can see, this setup transpired in mid-March in the $93.50-$94 area, with shares making a run at $100 shortly afterwards. The 50-day moving average is also in a rising uptrend and has held since early February, which is another bullish sign.
Sentiment is bearish on the stock, as the company is shuffling in a new CEO, Steve Easterbrook, and a menu shakeup. Trust and ingredients are in focus these days, and McDonald’s has much to prove and change with the younger generation.
Analysts are expecting McDonald’s to earn $1.07 a share on revenue of $6 billion, with most leaning towards an earnings shortfall. The company has missed Wall Street’s estimates in the past four quarters, so it’s hard to blame them. This will also be the quarter of “transition,” so the new CEO could “kitchen sink” the numbers and set a really low bar for the rest of 2015.
With so many knuckleheads leaning to one side of the boat, any upside surprise will quickly have them running back to the bullish side. I have looked at the MCD May 100 calls (MCD150515C00100000, $1.05, down $0.10) as a possible countertrend trade, but I have usually played MCD to the downside over the years.
As a trader, the technical setup looks promising, but the fundamentals are deteriorating. If shares do challenge $103 and fresh 52-week peaks, the aforementioned call options will easily double.
On the flip side, I also peeked at the MCD May 95 puts (MCD150515P00095000, $1.20, up $0.05) as a possible way to play a pending breakdown to the low $90s. If shares of MCD trade down to $92.70 or lower by mid-May, these options would also double from current levels.
The MCD May 100 calls and the MCD May 95 puts together would also create a strangle option trade, otherwise known as a “chicken trade.” Option traders use these types of strategies because they don’t know where shares could trade after earnings are released, but they are still expecting a major move.
Both options together would cost roughly $2.25. The trade would make a profit if shares of MCD are above $102.25, technically, or below $92.75 by mid-May.
Given both option premiums are above $1.00, I will likely sit on the sidelines when MCD announces its numbers. Although I’m more bullish than bearish on the shares, the risk/reward isn’t there for me to risk this much premium. I usually like to trade earnings with options that cost less than $1.00 and on better setups in which both the fundamentals and chart work align.
I will track these possible option trades into MCD’s earnings to see how things go, but there will be better setups than betting on the burger wars.
Heading into the second half of trading, the market is mixed and could remain choppy into the close. The Dow is up 85 points to 18,062, while the S&P 500 is adding 4 points to 2,097. The Nasdaq is lower by 10 points to 4,978, and the Russell 2000 is gaining 2 points to 1,267.
I have three more Profit Alerts today, so let’s go check the action.
Momentum Options Play List
Closed Momentum Options Trades for 2015: 35-11-1 (74%). 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 12:45 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.
Rambus (RMBS, $13.34, down $0.34)
RMBS May 14 calls (RMBS150515C00014000, $0.35, down $0.15)
Entry Price: $0.38 (4/10/2015)
Exit Target: $1.00
Return: 5%
Stop Target: $0.40 (Stop Limit)
RMBS August 15 calls (RMBS150821C00015000, $0.55, down $0.10)
Entry Price: $0.53 (4/10/2015)
Exit Target: $1.25
Return: 4%
Stop Target: $0.55 (Stop Limit)
Action: The Stop Limit at $0.40 on the RMBS May 14 calls has triggered. The Stop Limit at $0.55 on the RMBS August 15 calls has also triggered on today’s pullback, and we are now out of both positions.
PowerShares QQQ Trust (QQQ, $107.07, down $0.41)
QQQ May 110 calls (QQQ150515C00110000, $0.50, down $0.15)
Entry Price: $0.57 (4/10/2015)
Exit Target: $1.15 (closed first half at $0.83 on 4/13/2015)
Return: 23%
Stop Target: $0.57 (Stop Limit)
Action: The Stop Limit of $0.57 has triggered on today’s pullback, and we are now out of the trade. I will keep the QQQs on my Watch List for another possible re-entry point.
iShares Russell 2000 (IWM, $125.96, up $0.26)
IWM May 128 calls (IWM150515C00128000, $1.05, down $0.05)
Entry Price: $0.90 (4/10/2015)
Exit Target: $1.80 (closed first half at $1.20 on 4/13/2015)
Return: 19%
Stop Target: $0.95 (Stop Limit)
Action: The Stop Limit of $0.95 tripped on today’s dip to $124.78, and we are now out of the trade.
Jabil Circuit (JBL, $23.91, up $0.25)
JBL May 24 calls (JBL150515C00024000, $0.60, up $0.05)
Entry Price: $0.60 (4/10/2015)
Exit Target: $1.20
Return: 0%
Stop Target: None
Action: Continued closes above $24 would be bullish for a run to $26-$28. Near-term support is at $23.50, followed by $23.
Sony (SNE, $31.00, up $0.63)
SNE May 31 calls (SNE150515C00031000, $1.25, up $0.30)
Entry Price: $0.70 (4/6/2015)
Exit Target: $1.40
Return: 79%
Stop Target: $0.80 (Stop Limit)
Action: My near-term target is $32, with a shot at $35. Support is at $30, followed by $29. Earnings are due out on April 30. You can read my full update on what to expect in the April 7 Mid-Market Update.
Rigel Pharmaceuticals (RIGL, $4.09, down $0.02)
RIGL June 5 calls (RIGL150619C00005000, $0.40, flat)
Entry Price: $0.25 (3/31/2015)
Exit Target: $0.75-$1.00
Return: 60%
Stop Target: None
Action: Resistance is at $4.20, which represents the 52-week high. Today’s peak has reached $4.20. A close above this level would be bullish for a possible run to $4.50-$5. Support is at $3.80-$3.60.
Trades on Hold — other 2015 Portfolio Open positions (3): 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.
Marvell Technology (MRVL) May 18 calls (from February 2015) — Bullish traders are expecting a run to fresh 52-week highs by mid-May, as call-buying was heavy on Monday in higher strike prices. Shares are still holding their 100-day moving average and are trying to build strength to challenge the 50-day moving average. This sector could see heated M&A activity this year, and MRVL tends to move on takeover chatter — Continue to hold.
BlackBerry (BBRY) June 13 calls (from March 2015) — This is a speculation trade that BBRY will receive a takeover offer of $14 or better by mid-June — Continue to hold.
Cypress Semiconductor (CY) June 16 calls (from March 2015) — Earnings are due out on Thursday — Continue to hold.
Trade on!
Rick Rouse
Editor and Chief Options Strategist
Momentum Options