Market Commentary
It was a choppy week of trading as the bulls battled the bears to keep the Dow over 10,000. The market got some solid earnings reports but it wasn’t enough to muster any kind of momentum for the bulls as the lost the battle on Friday. The Dow lost 109 points and ended the week down 24 points to settle at 9,972.
The Nasdaq fell 2 points for the week and closed at 2,154 while the S&P 500 closed at 1,079, down 8 points. The bears didn’t do any real damage but there were a couple of days last week that selling was heavy into the close. That suggests Wall Street is getting nervous and we should get a clear picture on things going forward with another heavy round of corporate earnings this week.
In the earnings section below, we have a number of companies in BOLD and those are the ones that we are watching for clues on the economy. Others are in bold because they will likely move significantly, up or down, when they announce earnings.
We outlined some near-term targets for the market in last week’s Weekly Wrap (Dow, 10,400; Nasdaq 2,275; S&P 500 1,175) but the better-than-expected earnings results have not translated to any big gains for the market. Companies are still doing a great job of cutting costs but by trimming their workforce it continues to weigh on unemployment which in turn hurts consumer spending.
These factors alone have weighed on the market but companies are saying good things. However, the bulls appear tired and we could continue to have choppy trading if the bears take advantage of them resting. This was pretty clear a few days last week when the market plunged in the final hour of trading.
Either way, it should be another interesting week.
Before we get into the list of companies reporting earnings this week, we wanted to talk about Microsoft (MSFT, $28.02, up $1.43) again. In our 1pm update on Friday we talked about playing earnings and we took a look at what would have happened if you had placed your bets on Microsoft before the company announced earnings on Friday.
If you were bullish you got paid. The November 27 calls (MSQKB, $1.40, up $0.75) closed with a 115% gain on Friday and traded as high as $2.40. They closed at 65 cents on Thursday. This is why you SELL into strength the next day after a company announces earnings. If you bought 10 contracts, you gave back $1,000 if you didn’t get out at the high which was achieved in the first 10 minutes of trading.
If you were bearish, they you got your lunch money stolen. The November 26 puts (MSQWA, $0.17, down $0.50) fell 75%.
Now, with Microsoft at $26.50 on Thursday before the closing bell, you could have bought BOTH contracts which is known as a strangle option trade. A straddle is when you buy both a call and put option with the same strike price.
To maximize your returns on the strangle trade you would have had to close the calls at the open and sold the puts at the close, OR, you could have left the puts open in hopes of the stock falling back down over the next few weeks. The put options do not expire until November 20th.
So what would the return have been you ask? Well, the call options were going for 65 cents and the put options were going for 67 cents on Thursday. Together, you were looking at $1.40 for both options or $1,400 for 10 contracts of each.
If you could have managed to get out of the calls at $2.35 and if you would have sold the puts at 15 cents, you would have netted $2.50, or $2,500. That would have been a return of nearly 80% by playing it safe. Of course, for strangle option trades to work you usually need a 5%-10% move or more in the stock AND you have to make sure the option prices aren’t inflated. As you can see, there are numerous ways to trade earnings and we wanted to show you other ways to use options in your portfolio.
We will be back in the morning with the 9am update. The current trades will be covered as well and don’t forget RadioShack (RHS, $15.66, up $0.12) reports before the bell. For those of you who are not current subscribers, you can sign up anytime between now and 8am Monday morning to get the trade updates and any new trades in the comings days, weeks, and months…
EARNINGS for the week (quotes are from Friday’s close):
Monday: Arch Capital Group (ACGL, $68.88, down $0.17), Atlas Air (AAWW, $35.47, down $0.76), Cabot Oil & Gas (COG, $38.90, down $0.85), Corning (GLW, $15.65, up $0.05), Dollar Thrifty Automotive (DTG, $24.81, down $0.83), Flextronics (FLEX, $7.24, down $0.27), Lacrosse (BOOT, $14.75, up $2.00), National Oilwell Varco (NOV, $46.89, down $1.71), PrePaid Legal (PPD, $41.68, down $1.87), RadioShack (RSH, $15.66, up $0.12), Rent-A-Center (RCII, $20.63, down $0.04), SOHU.com (SOHU, $71.35, up $2.61), Verizon (VZ, $28.85, down $0.17) and Winn-Dixie Stores (WINN, $13.55, down $0.09).
Tuesday: Apollo Group (APOL, $74.03, down $0.78), Baidu (BIDU, $435.31, up $19.71), Black Box Network Services (BBOX, $27.59, down $0.06), Buffalo Wild Wings (BWLD, $40.51, down $0.80), Cephalon (CEPH, $53.92, down $0.82), DeVry (DV, $55.50, down $0.19), DreamWorks Animation (DWA, $31.90, down $0.66), Franklin Resources (BEN, $112.93, up $0.69), Group 1 Automotive (GPI, $32.84, down $1.63), Harris (HRS, $39.45, down $0.93), Massey Energy (MEE, $31.64, down $1.08), McKesson (MCK, $60.31, down $0.46), NutriSystem (NTRI, $19.54, up $0.39), Open Text (OTEX, $39.28, down $0.55), Panera Bread (PNRA, $55.95, up $0.36), Rayonier (RYN, $42.86, down $0.40), Under Armour (UA, $31.51, up $0.23), United States Steel (X, $40.87, down $0.76), ValueClick (VCLK, $12.85, down $0.17), Visa (V, $74.12, down $1.57) and Wynn Resorts (WYNN, $62.46, down $0.92).
Wednesday: Akamai Technologies (AKAM, $21.50, down $0.10), Cerner (CERN, $82.02, down $1.33), Churchill Downs (CHDN, $36.92, down $1.42), ConocoPhillips (COP, $51.97, down $0.96), Express Scripts (ESRX, $80.70, down $0.78), First Solar (FSLR, $152.39, down $3.69), Flowserve (FLS, $105.15, down $1.04), GlaxoSmithKline (GSK, $40.24, down $1.30), Goodyear Tire & Rubber (GT, $17.75, up $0.02), Hanesbrands (HBI, $23.20, up $0.08), International Paper (IP, $23.72, down $0.66), Jones Apparel Group (JNY, $18.55, down $0.72), Lazard (LAZ, $40.37, down $0.22), O’Reilly Automotive (ORLY, $35.02, down $0.79), Owens Corning (OC, $23.18, down $0.70), Praxair (PX, $82.68, down $1.81), Ryland Group (RYL, $20.99, down $1.14), StellarOne (STEL, $11.92, down $0.33) and WellPoint (WLP, $46.03, up $0.01).
Thursday: Allergan (AGN, $56.73, down $0.76), Apache (APA, $99.39, down $2.69), Barrick Gold (ABX, $37.57, down $0.36), Chicago Mercantile Exchange Holdings (CME, $319.96, up $2.44), Dynamic Materials (BOOM, $19.48, down $0.71), Expedia (EXPE, $26.36, up $0.48), ExxonMobil (XOM, $73.57, down $0.87), Genworth Financial (GEN, $10.40, down $0.64), Kellogg (K, $50.20, down $0.44), MetLife (MET, $36.95, down $1.14), Mohawk Industries (MHK, $48.02, up $0.42), Moody’s Corporation (MCO, $25.03, down $0.55), OfficeMax (OMX, $11.70, down $1.23), Procter & Gamble (PG, $57.64, down $0.49), Shaw Group (SHAW, $28.86, down $0.50), Stanley (SXE, $25.75, down $0.87), Strayer Education (STRA, $220.95, down $1.05), Timberland (TBL, $14.40, down $0.34) and Waste Management (WM, $30.93, down $0.55).
Friday: Alliant Energy (LNT, $27.47, down $0.42), Black Hills (BKH, $25.29, down $0.40), Chevron (CVX, $76.68, down $0.61), Coventry Health Care (CVH, $18.70, up $0.06), Dominion Resources (D, $35.17, down $0.32), Penske Automotive Group (PAG, $18.35, down $0.42), Regency Centers (REG, $36.05, down $0.19), Sony (SNE, $28.91, down $0.35) and Washington Post (WPO, $467.10, down $9.00).
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Dow Having Trouble Holding 10,000
Friday, October 23rd, 2009
12:55pm (EST)
Despite some solid earnings report, the market is struggling to end the week on a high note.
We are at the heart of earnings season and this week has been full of good news and good trades if you picked the right options. It’s no secret that earnings can move stocks but picking the right stock and the right option is an art. The great thing about option investing and taking these types of trades is that you don’t have to risk a lot of money to make an incredible return. In fact, a 5% move in the STOCK can easily return over a 100% on an OPTION. Of course, these types of trades are all-or-nothing because if you are on the wrong side you can lose a major portion of your investment.
Not only that, a company can report great earnings and give tempered guidance which sometimes sends the stock reeling. For the current quarter, we said weeks ago the key would be revenue growth and the good news is we are seeing that. Although we didn’t take this trade, we thought we would show an you an example of just how powerful an earnings announcement is and how much of a return or loss you can expect if you trade these types of events. We profiled a Nike (NKE, $63.69, down $1.49) earnings trade a few weeks ago in the Members Area that returned our subscribers up to 175% but we didn’t see this one coming from Microsoft (MSFT, $28.39, up $1.80).
We mentioned Microsoft’s earnings this morning and yesterday in the 1pm update but didn’t recommend a trade because the stock has not traded well the past few quarters after the earnings announcements. This stopped us from buying any call options. However, it certainly wasn’t a stock we felt comfortable shorting or buying puts because the stock has been in an uptrend albeit a slow one and we didn’t think there was any money there either way.
Well, as you know, Microsoft crushed it and its stock is up 7% today. Not bad, but let’s look at how the options did. Remember, I told you a 5% move in the stock gets you a 100% return or a 90% loss with the right and wrong options. Well, wait until you see what a 7% move in a stock does…
Microsoft shares closed at $26.59 yesterday so at 3:30pm (EST) you could have bought options based on which way you thought the stock was going to move. You did your research on the company and figured they were going to have a blowout quarter and you knew XBox could be a key catalyst to an earnings and revenue surprise. You figured the stock could move 5% so you go long or buy call options.
Folks, the MSFT November 27 calls (MSQKB, $1.62, up $0.97) are up 150% today. These were the closest call options that were “out-of-the-money” and you could have picked them up for 65 cents yesterday. A 10 lot trade would have cost you $650 yesterday and as of today you would have over $1,600. That is $1,000 in less than 24 hours.
Now, let’s look at the other shoe…
Let’s say you thought Microsoft was going to report a lousy quarter or say some negative things and you thought the stock was going to drop. You could have went slightly out-of-the-money and found some cheap put options for about the same price as the call options you were looking at.
The November 26 puts (MSQWA, $0.12, down $0.55) closed at 67 cents yesterday so your $670 is now worth $120. That is a loss of 82%. Now, you could still hold onto to these put options but they will probably go to zero because the stock is unlikely to trade back down to $26 by November 20th which is when the options expire. But they could…the stock would have to get to $25.35 for you to break even, if not, your options are worthless and you lost 100% of your investment.
Earnings trades are bets but just like most things in life you can put the odds in your favor by doing some research. Again, things may not go your way on all of these types of trades but often times you can find the companies that are going to wow Wall Street and make a sweet return.
We do play earnings and there are probably a few trades that we will be looking at next week. Most of our trades are profiled BEFORE or AFTER earnings as we try to eliminate a little of that risk and the emotion of one-day trades. However, we see some really good opportunities on a few companies that could provide for some excellent trades for next week.
Having said that, there is TWO trades that we are playing today and current subscribers can check the Members Area RIGHT NOW for the trade. One is a speculative play, the other is an earnings play. The company reports earnings on Monday BEFORE the bell and traders are building positions before the weekend.
We will talk about them more in the Weekly Wrap and in the Members Area on Monday morning. If you are not a current subscriber you can signup NOW to get instant access or over the weekend to get the Weekly Wrap and Monday morning’s Current Trade updates…
As we head to press, the Dow is down 72 points to 10,008…
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Posted in Company Commentary, Earnings, Hot Stocks, Market Commentary, Option Trades, Sectors, Strategies, Trading Psychology, Trading Tips, Yahoo / Microsoft | Comments Off