Dear Momentum Options Subscriber,
Geopolitical concerns caused market ripples on Tuesday, as reports surfaced that Iran had seized a U.S. ship. I mentioned in Monday’s Pre-Market Update that the recent saber-rattling around the globe could cause some uneasiness, and the volatility seen yesterday will likely get worse if the world remains on fire.
The Dow gained 72 points, or 0.4%, to close at 18,110. The blue-chips tested support at 18,000-17,900 following the morning dip to 17,917. The rebound to 18,119 cleared resistance at 18,100, and that level held into the close. A move above 18,200 and the top of the trading range would be bullish for a run to fresh all-time highs.
The S&P 500 climbed nearly 6 points, or 0.3%, to finish at 2,114. The index struggled at the open and tested support at 2,100-2,090 and the 50-day moving average after kissing a low of 2,094. The bulls reclaimed the 2,100 level and made a move towards resistance at 2,115-2,125 after pushing 2,116 during the second half of the action.
The Nasdaq slipped nearly 5 points, or 0.1%, to end at 5,055. Tech opened three points higher at 5,063 before plunging 1% to 5,006 an hour into the session. Near-term support at 5,000 stuck like Chuck before an impressive rally to 5,075. Closes above this level keep 5,100 and all-time highs in play.
The Russell 2000 added 6 points, or 0.5%, to settle at 1,259. The small-caps tried holding the 1,250 level at the start of trading before the bears pushed back-up support at 1,240. The bulls stormed back to reach a peak north of 1,260, but this level failed to hold into the close. If that level is cleared and holds, another trip to 1,275-1,280 could be in the works.
The S&P 500 Volatility Index ($VIX, 12.41, down 0.71) spiked to a high of 13.99 on the U.S./Iran false encounter and settled below both the 13.50 and 12.50 levels. The VIX started to deflate once the market learned that it was a vessel detained from the Marshall Islands and not owned by the United States. The bulls were sniffing 12.50 into the closing bell, and I mentioned that a finish below this level could lead to possible higher highs.
I have updated our current trades, so let’s go check on the action.
From desk to press, futures look like this: Dow (-27); S&P 500 (-3); Nasdaq 100 (-11).
Momentum Options Play List
Closed Momentum Options Trades for 2015: 44-13-1 (76%). 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 8:30 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.
Krispy Kreme Doughnuts (KKD, $19.22, up $0.09)
KKD June 17 puts (KKD150619P00017000, $0.40, flat)
Entry Price: $0.35 (4/28/2015)
Exit Target: $0.70-$1.05
Return: 14%
Stop Target: None
Action: I haven’t added too many put positions to the portfolio this year, as this is just my fourth “short” recommendation. I’m 2-1 on put option trades this year, with one of them being a 47% winner on KKD.
Krispy Kreme Doughnuts has been a stock that I have been bearish on in recent years. It’s not that I don’t like their morning delights or the company’s concept; I just think they have too many stores with scattered success.
I believe they need to start a delivery service, which is why I don’t like shorting the stock for long periods of time. If and when the company starts thinking about becoming the Domino’s of doughnuts and offers delivery, I can then see a longer-term investment. A dozen hot-glazed doughnuts delivered at midnight or 8 a.m. — Sign me up!
Management has done lousy when it comes to meeting Wall Street’s expectations. Over the past four quarters, Krispy Kreme has matched twice and missed estimates by $0.03 and $0.01.
The company’s last quarter matched the $0.17 a share profit that analysts were looking for, but I mentioned that they might miss on revenue. They did after KKD reported $125.4 million versus the $126.8 million that was penciled in.
Shares were above $20 in early March, which is when I suggested using put options, as I expected a 5%-10% drop on a possible earnings miss and lowered guidance. The stock traded to a low of $18.50 a couple of days later, and I suggested that we lock in profits.
While I was hoping for a triple-digit return, the put options made us 47%. I wanted to get us out of the trade because I said Wall Street has a love affair with the stock. Sure enough, a few days afterwards, shares were back above $20, which is where they stayed for the much of the rest of March.
While I have said that earnings trades can be tricky, I have followed KKD off and on since its IPO debut in 2001.
The next earnings release is scheduled for early June, and forecasts are calling for $0.22 a share on sales of $1.36 million. For 2015, Krispy Kreme Doughnuts backed forecasts for $0.69-$0.74 a share versus $0.72 a share.
Management also provided guidance for fiscal year 2016 in the last earnings call and said that earnings would come in between $0.79-$0.85 a share.
This sounded good in the conference call, but it doesn’t look as pretty on paper, as the suits-and-ties were looking for $0.84 a share. The company’s forecast provided a penny of upside surprise, but a nickel of downside was also built in. For 2015, there is two cents of upside surprise and three cents of downside factored in.
I always talk about revenue being the better driver of a stock price, and I have a feeling KKD’s current quarter won’t match expectations.
The best part of going short or buying put options on a move below $18.50 is that we do not have to worry about the earnings announcement until early June. This means that the headline risk is lessened, and shares should trade more on their fundamentals and technicals, which are lousy.
The recent backtest to the 200-day moving average is currently holding. There is additional risk to $17.50-$17 on a close below $18.50. The mid-April low reached $18.47. Resistance is at $19.50-$20.
iShares Russell 2000 (IWM, $125.16, up $0.69)
IWM May 127 calls (IWM150515C00127000, $0.70, up $0.20)
Entry Price: $0.70 (4/28/2015)
Exit Target: $1.40
Return: 0%
Stop Target: None
Action: I mentioned that I could go “short” if the Russell fell below 1,245-1,240 and, with yesterday’s low checking-in at 1,242, I’m looking for support to hold. I also wanted to confirm a move past 1,250 and $125 on IWM to get into a bullish trade.
I’m looking for a run to $127-$128 over the near term and would like to be out of the trade by next Friday. There is risk to $124, but I like the trade as long as $123.50 holds.
Opko Health (OPK, $14.53, up $0.14)
OPK June 16 calls (OPK150619C00016000, $0.55, up $0.05)
Entry Price: $0.50 (4/27/2015)
Exit Target: $1.00
Return: 10%
Stop Target: None
Action: OPK made a nasty backtest to $14.20 shortly after Tuesday’s open before rebounding to push a high of $14.70.
Support is at $14.50-$14.25 and the 50-day moving average. The 52-week high is at $15.23, and a close above $15-$15.25 should lead to a run at $16-$17 over the near term. Earnings are due out the second week of May.
Freeport-McMoRan (FCX, $22.68, up $0.86)
FCX June 23 calls (FCX150619C00023000, $1.10, up $0.30)
Entry Price: $0.55 (4/27/2015)
Exit Target: $1.60 (closed first half at $1.10 on 4/28/2015)
Return: 100%
Stop Target: $0.90 (Stop Limit)
Action: Shares traded to a high of $22.82 yesterday, with the options reaching a peak of $1.23. The low was $0.97.
Near-term resistance is at $23-$24. Fresh support will try to hold at $22.
TiVo (TIVO, $11.31, up $0.02)
TIVO June 12 calls (TIVO150619C00012000, $0.40, flat)
Entry Price: $0.30 (4/24/2015)
Exit Target: $0.90
Return: 33%
Stop Target: None
Action: Tuesday’s low touched $11.18 following a run to $11.40 on the open. Support is at $11-$11.25 and the 50-day moving average. The next layers of resistance are at $11.50-$12, followed by the 200-day moving average.
You can read my full update on TiVo in the April 27 Pre-Market Update. Earnings are due out in late May.
SunPower (SPWR, $33.80, up $0.14)
SPWR June 38 calls (SPWR150619C00038000, $0.75, flat)
Entry Price: $0.95 (4/22/2015)
Exit Target: $1.90
Return: -21%
Stop Target: None
Action: Near-term resistance is at $36. Support is at $34-$33.75.
Earnings are due out tomorrow, April 30, and I covered what to expect in the April 27 Pre-Market Update. This trade will likely make a major move, and I plan to ride the storm out through June. The company’s partnership with Apple (AAPL) is something worth keeping an eye on.
Dot Hill Systems (HILL, $6.61, up $0.10)
HILL September 7.50 calls (HILL150918C00007500, $0.60, up $0.05)
Entry Price: $0.45 (4/20/2015)
Exit Target: $1.35-$1.80
Return: 33%
Stop Target: None
Action: Yesterday’s high reached $6.67 following a first-half test to $6.46.
Resistance is at $6.50-$6.75, and a close above the latter would be bullish for a run at $7. Near-term support is at $6.25 on dips below $6.50. Earnings are due out on May 7, and I will cover the company’s numbers next week.
Jabil Circuit (JBL, $23.32, down $0.33)
JBL May 24 calls (JBL150515C00024000, $0.25, down $0.15)
Entry Price: $0.60 (4/10/2015)
Exit Target: $1.20
Return: -58%
Stop Target: None
Action: Near-term support is at $23 and the 50-day moving average. Resistance is at $23.50, followed by $24 and the 52-week high at $24.11.
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.
BlackBerry (BBRY) June 13 calls (from March 2015) — This is a speculation trade from early March on BBRY receiving a takeover offer of $14 or better by mid-June — Continue to hold.
Trade on!
Rick Rouse
Editor and Chief Options Strategist
Momentum Options