1:10pm (EST)
Paul Simon said it best when “you know the nearer your destination the more you’re slip slidin’ away”.
We normally crank out the office tunes on Friday to lighten the air and we try to start our morning by picking a song that best describes the market’s mood for the week. We are a day early as we continue to see sloppy-choppy action with the bulls still attempting one more push at new highs.
The morning pops have been met with afternoon drops but Wednesday’s close looked bullish on some fronts. However, today’s action has played out much the same way with the current drop being more powerful as the bears push weekly lows.
The bulls need to hold the next wave of support or there could be a moment this week when Wall Street flinches.
From the “We Blew it Department”…
We have recommended magicJack VocalTec (CALL, $20.60, up $3.07) trades in the past and it has usually been a great stock to trade around the company’s earnings announcements. Shares tend to make huge 10%-20% moves on the news and today is no different.
We listed the company this week in our Earnings section of the Weekly Wrap but failed to look at the options ahead of the announcement. We knew the company would be reporting after Wednesday’s close and there was a great opportunity to go long before the close and to cash out at this morning’s open.
The March option chains were a little riskier than the April calls and puts because they expire next week. The April premiums are a little more expensive but they offer more time for a trade to play out in case there is a pullback and a little less risk. However, an earnings miss or lowered guidance and a lower stock price can crush call options.
Near-term options can lose 80%-100% of their value if you are on the wrong side of the trade. The longer-term options usually take hits of 50%-75%.
There are additional ways to offset risks by using puts but like we said, we have always been pretty bullish on magicJack.
We like to play call options when the company reports their numbers as they tend to beat the suit-and-ties’ forecasts. Shares easily cleared $20 last night after they beat estimates by 13 cents a share. Revenue also came in above expectations and guidance was raised.
In other words, magicJack scored a hat trick as shares are zooming 17% and have reached a peak of $22.90.
The March 20 calls (CALL140322C00020000, $1.25, up $0.80) are currently up 178% after closing Wednesday at 45 cents. The options opened at $1.95 and traded to a high of $2.90 and represented a 544% return at the peak.
The April 20 calls (CALL140419C00020000, $2.05, up $1.20) are up 141% and could have been picked up for 85 cents ahead of Wednesday’s close. These calls opened at $2.46 and have traded to a high of $3.40. This would have been a 300% return if cashed out at the top.
Obviously, we aren’t chasing at the stock or options at these levels as there will likely be some slippage from here but remember this in another 3 months when the company updates Wall Street again.
The bears are growling as we make the turn. The Dow is down 200 points to 16,149 while the S&P 500 is lower by 21 points to 1,847. The Nasdaq is declining 67 points to 4,255 and the Russell 2000 is off 12 points to 1,178. The S&P 500 Volatility Index ($VIX, 15.54, up 1.07) is up 7% and back above 15. Remember, we don’t flinch until 17.50 triggers.
Stay locked-and-loaded into the close as we could have a New Trade coming.
Fridays have been bullish in recent weeks, especially in Tech, so today and tomorrow’s close will be important clues on how next week plays out. The bears are right at the second waves of support and the bulls will need to hold.
Closed Trades for 2014: 28-8 – the Weekly Wrap is 11-2 for 2014 (96-9, or 91% win rate, since 2011) and is designed for traders that want to use options with less risk.
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 tradesor “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 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.
Zynga (ZNGA, $5.51, down $0.28)
April 5.50 calls (ZNGA140419C00005500, $0.40, down $0.16)
Entry Price: $0.55 (3/12/2014)
Exit Target: $1.10
Return: -27%
Stop Target: None
Action: We would like to see $5.50 hold into the close. If shares can reach $6.50 by mid-April these option will double. Of course, we are aiming for a much higher return if shares can push $8 but we would be happy with $6.50 and a double.
Verizon (VZ, $46.09, down $0.27)
April 45 puts (VZ140419P00045000, $0.70, up $0.05)
Entry Price: $0.62 (3/10/2014)
Exit Target: $1.30
Return: 13%
Stop Target: None
Action: We believe shares could test $40 over the longer-term and fall below $45 over the near-term. Resistance is at $48.
Opko Health (OPK, $9.35, down $0.06)
April 10 calls (OPK140419C00010000, $0.50, flat)
Entry Price: $0.65 (3/4/2014)
Exit Target: $1.30
Return: -23%
Stop Target: None
Action: Resistance remains at $9.50-$10 and a close above the latter would be super bullish for a run to $12-$13 on short covering. Support is at $9-$8.75.
Discovery Laboratories (DSCO, $2.36, down $0.24)
April 2 calls (DSCO140419C00002000, $0.50, down $0.25)
Entry Price: $0.65 (2/24/2014)
Exit Target: $1.00-$1.30
Return: -8%
Stop Target: 65 cents (Hard Stop)
Action: We have been feeling like we would get stopped out of this trade all week and today was the day. The options opened at 60 cents and we were stopped out for a slight loss.
Kodiak Oil & Gas (KOG, $11.32, down $0.07)
June 13 calls (KOG140621C00013000, $0.45, flat)
Entry Price: $0.70 (2/13/2014)
Exit Target: $1.40
Return: -43%
Stop Target: None
Action: We believe the company is a takeover candidate that could get a bid north of $15. Support is at $11. Resistance is at $11.75.
Exact Sciences (EXAS, $13.52, down $0.24)
April 19 calls (EXAS140419C00019000, $0.50, flat)
Entry Price: $0.88 (1/22/2014)
Exit Target: $1.75
Return: -43%
Stop Target: None
Action: Support is at $13. Resistance is at $14.50 and a move above this level should get us back near even.
The company should get some FDA news in March on its Cologuard drug. These are April options with 2 months until expiration and we plan to hold through the volatility because we want to be in when the March news is released. We do not have a Stop Limit listed.
Other 2014 Portfolio OPEN positions (6): 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 mkh jb√ accordingly, when we close them or if the options expire. Click on the 2013Portfolio link in the Members Area to view ALL open/ closed trades.
Sony April 20 calls (from January 2014) – continue to HOLD
General Electric March 28 calls (from January 2014) – continue to HOLD
Ariad Pharmaceuticals March 10 calls (from January 3014)
May 11 calls (from January 3014)
Caterpillar March 85 puts (from January 2014) – continue to HOLD
McDonald’s March 90 puts (from February 2014) – continue to HOLD
Apollo Education Group March 29 puts (from February 2014) – continue to HOLD
WATCH LIST SECTION
These trades are NOT recommendations. They are trades that we like but have not added to the portfolio as an official recommendation because of market conditions or because we are waiting for better entry prices. We try not to have more than 12-15 open trades at any one time and why we have a Watch List. We will not list entry prices because these stocks are on the verge of breaking out or they could sell off but these are the trades we are watching as new candidates.
We will update this section in the morning.