12:30pm (EST)
Although 1Q earnings season is officially over, there are a number of high-profile companies reporting their numbers that are on a different fiscal year but worth watching over the next few weeks.
Michael Kors (KORS, $96.38, up $0.64) reported their 4Q numbers ahead of this morning’s open and has made explosive moves since becoming a publicly traded company.
The company has been a Wall Street darling for 3+ years after opening at $25 in December 2011 (price adjusted for stock splits) and trading near all-times.
The options on KORS trade for a premium and going long ahead of their earnings has been a popular trade. However, despite a the beat, shares fell to a low of $91.80 on concerns their margins have peaked.
Michael Kors reported a profit of $0.78 a share on revenue of $917.5 million. Analysts were expecting $0.68 a share on sales of $815 million.
The June 100 calls (KORS140621C00100000, $1.10, down $1.55) closed at $2.65 ahead of Tuesday’s close while the June 90 puts (KORS140621P00090000, $1.08, down $1.05) closed at $2.13 but had a wide bid/ask of $2.05-$2.30 going into the close.
These options as a strangle trade would have cost nearly $5 and shares needed to clear $105 or fall below $85, technically, for the position to break even. As you can see, both options were cut in half after shares failed to make the move traders were expecting.
Knowing when an option price is inflated and the break even points of a trade are crucial. Although I had no intentions in a directional trade for KORS, I wanted to point this out because these types of setups exploit rookie option traders.
Another strategy would have been to sell both options and cover today but this would have created a “naked” position with more risk.
Earnings trades are fun but it is crucial not to overpay on the options.
As far as the market, the bulls are taking a breather as the indexes are slightly lower.
The Dow is down 25 points to 16,650 and the S&P 500 is off a point to 1,910. The Nasdaq is declining 7 points to 4,230 while the Russell 2000 is lower by 5 points to 1,137.
Closed Trades for 2014: 48-28 – the Weekly Wrap is 14-3 for 2014 (99-10, or 91% win rate, since 2011) and is designed for traders that want to use options with less risk. All trades are dated and time stamped so new subscribers can look at our 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 we list one. We will send out a “Profit Alert” or “New Trade” if we want you to close a position OR if a new trade comes out. Otherwise, follow instructions at all times in the 9am and 12pm-1pm updates. Also, we will usually give you a heads-up if we think we are going to send an email outside of these time frames.
CVS Caremark (CVS, $77.50, up $0.33)
July 80 calls (CVS140719C00080000, $0.55, up $0.05)
Entry Price: $0.52 (5/28/2014)
Exit Target: $1.10
Return: 5%
Stop Target: None
Action: The options opened at 52 cents this morning and have traded up to 57 cents. Shares have traded to a 52-week high of $77.68 today and I’m expecting a run past $80 over the next 2 months. If shares reach $81 these options will be worth at least $1-$1.05, for a 100% return.
Apollo Group (APOL, $27.57, up $0.08)
June 25 puts (APOL140621P00025000, $0.45, flat)
Entry Price: $0.55 (4/28/2014)
Exit Target: $1.10 (limit order to close half)
Return: -18%
Stop Target: None
August 23 puts (APOL140816P00023000, $0.65, flat)
Entry Price: $0.70 (4/28/2014)
Exit Target: $1.40 (limit order to close half)
Return: -7%
Stop Target: None
Action: There is risk to $28 and then $30 on a back test. I would like to see a close below $27 by Friday.
Kirkland’s (KIRK, $17.62, down $0.63)
June 15 puts (KIRK140621P00015000, $0.15, flat)
Entry Price: $0.45 (5/20/2014)
Exit Target: $0.90
Return: -67%
Stop Target: None
Action: There is risk to $20. A close below $17.50 should lead to a test to $15. The longer-term chart shows a test to the low teens.
Bed, Bath & Beyond (BBBY, $61.05, down $0.40)
June 60 puts (BBBY140621P00060000, $0.60, up $0.05)
Entry Price: $0.60 (5/14/2014)
Exit Target: $1.20
Return: 0%
Stop Target: None
August 55 puts (BBBY140816P00055000, $0.65, up $0.05)
Entry Price: $0.63 (5/14/2014)
Exit Target: $1.25
Return: 3%
Stop Target: None
Action: Support is at $60 and a break below this level will likely lead to $57.50-$55. Resistance is at $61.50-$62.50.
Twitter (TWTR, $32.29, up $1.78)
January 50 calls 2015 (TWTR150117C00050000, $1.05, up $0.15) LEAP option
Entry Price: $1.75 (5/8/2014)
Exit Target: $3.50-$5
Return: -37%
Stop Target: None
Action: Near-term resistance is at $32 and a move above this level would be bullish. Support is at $30. This is a longer-term option that gives the trade until next January for this story to play out. An analyst upgrade today should give shares a nice pop at the open.
McDonald’s (MCD, $101.33, down $1.03)
July 95 puts (MCD140719P00095000, $0.30, up $0.05)
Entry Price: $0.70 (5/6/2014)
Exit Target: $1.40
Return: -57%
Stop Target: None
Action: Shares are dancing with the uptrend line and a break below $101.50 would be beàrish. There is risk to $105. These options have 2 months before they expire so there is plenty of time for the trade to play out.
Other 2014 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 we would not open any new positions. We are still keeping track of the trades and we will record the results accordingly, when we close them or if the options expire. Click on the 2014 Portfolio link in the Members Area to view ALL open/ closed trades.
iShares Russell 2000 June 103 puts (from May 2014)