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9:05am (EST)
The market managed to edge out a slight gain yesterday after spending most of the session in the red. Things changed after the Federal Open Market Committee (FOMC) announced to keep interest rates at their current levels for an extended period of time. The bulls liked the news and the market started moving higher gaining momentum into the close.
The Dow finished the day with a 43 point win and closed at 10,236. The S&P 500 closed with an increase of 5 points and settled at 1,095 while the Nasdaq tacked on 17 points and stands at 2,221. All three indexes are holding key support levels and we have mentioned all week that we expected the market to go up on Thursday and Friday.
Of course, it is an “educated guess” on our part but we know the bulls like to end January on a positive note because it often sets the tone for the entire year of trading. The theory goes that whatever the Dow does in January usually translates either a gain or a loss for the year.
We mentioned yesterday the bulls needed 200 points to get back to even on the year for the Dow and that movement started right after the Fed announcement.
Watch the Education stocks. Obama is pushing for a $10,000 college tax credit and a 20-year student debt relief program. We often mention Apollo Group (APOL, $64.15, up $2.27) in a negative light and our favorite way to play the stock is usually with put options. Shares touched a low of $53 in December after another investigation was planned and dropped and a lawsuit was settled.
We aren’t ready to play this one yet but there will be a trade down the road with this one again.
One stock that should see a HUGE open this morning is Netflix (NFLX, $50.97, up $1.02) which was up $9 in after-hours last night and was kissing $60. Folks, we love this company and should have known history might repeat itself.
Every weekend, we look for trades and find about 10 or 15 trades that look like possible candidates. Out of them, we try to find one or two trades a week that look like the best ones and when we were doing the Weekly Wrap we wrote down some Netflix put and call options. These quotes are from Friday’s close but here were our thoughts:
“Watch Netflix this week, stock has been in a downtrend but the company has its fingers in a lot of pies. They announce earnings Wednesday. February 55 calls (QNQBK, $1.40) and February 45 puts (QNQNI, $1.00).”
This is known as a strangle trade and they are easy to do. We don’t recommend these kinds of trades because most options traders can’t understand the concept. Basically it means you are hoping for a BIG price move in the stock so that one side offsets the other side. Yesterday in our 1pm update we said the market was pricing in a 10% move for the stock. Folks, we got a 20% move if it holds and here is what how this trade works.
If you would have bought 10 contracts of each position it would have cost $2,400. Or, if you would have bought just one contract of each option on Monday morning then it would have been $240.
Now, if Netflix opens at $60 the Feb 55 call options will be worth at least $5 because they are that much “in-the-money”. The Feb 45 put options will probably fall to a “bid” of zero with an “ask” of 5 cents. In other words worthless. However, if you can sell the calls for $5 then you have doubled your money. Your $2,400 is now at $5,000 or your $240 is now at $500.
Of course, there was risk in this trade but at this exact time last year we recommended some Netflix March call options that returned our readers 50% and 100%, respectively. We tried again in November because we really felt like the stock was going to $80. Then the downgrades came.
Wall Street is a game and we do a lot of research here. Out point is our trading manual is almost ready and we talk about straddles and strangles trades because they are not that hard to do. Given the current market conditions, we may have to start using them. Our website says, “nothing fancy, just simple calls and puts” but again, these trades are just like buying a call or put option only you are buying both.
If the demand is there, we will start offering these trades as part of our service at no extra charge. Please send a simple “yes” or “no” in the subject line if you would like us to cover more of these trades to our support team.
The Members Area is also packed full of information today so we want to get our current subscribers in there before the opening bell. As we head to press, the rally we have been counting on could come to fruition…Dow futures are up 26 while the S&P 500 futures are up 3. Nasdaq futures are lower by 3 points.
Amazon.com On Deck, Toyota Tanks Again
Thursday, January 28th, 2010
12:45pm (EST)
The market is repeating a familiar pattern as the Dow is down nearly 151 points to 10,084. Geez, it looks like we are going below 10,000 as the bulls are nowhere to be found. That’s okay. We LOVE the thought of a correction and would welcome it with open arms.
After a decent open, stocks are selling off on some disappointing economic news.
Unemployment benefits fell modestly, dropping to 470,000 last week. Wall Street was hoping for much more and had been expecting a bigger drop to 450,000 new unemployment filings.
The durable goods report also is weighing on the market. Orders to U.S. factories rose less than expected in December, increasing just 0.3%. The market was expecting a 2% increase in orders.
We wanted to do a follow-up to the Netflix (NFLX, $61.68, up $10.71) trade from this morning. The response we got to adding these trades to your arsenal in just the first 4 hours has been an overwhelming “yes” which was not surprising once you see the results.
The trade is known as a “strangle” option play and they provide protection on a fast moving stock. The beauty of the trade is that you can be wrong on direction and still double your money but there are other features that are cool.
The February 55 calls (QNQBK, $7.15, up $5.70) which closed at $1.35 yesterday are up a whopping 400%. The February 45 puts (QNQNI, $0.05, down $0.90) are down 95%.
It would have cost you $2300 to buy 10 contracts of each yesterday before the closing bell and if you sold the calls right now you would have $7,150 in your account. Folks that is a return of over 200%!
This looks good on paper but please realize if the stock would have stayed flat or only moved 2%-3% then the trade probably would have lost money today. You also have to watch the price you pay for premiums.
Since the call options have been closed all you would need to do is let the put options expire worthless. However, they are still active so what happens if Netflix retreats from these levels?
Well, we don’t think that it’s likely the stock falls below $45 by the time these options expire because the Wall Street robots are out in droves upgrading the stock. There have been 7 UPGRADES from the brokerage houses this morning when most of the same knuckleheads had a “hold’ or “sell” rating on the shares.
If by some rare event Netflix does fall to $40 then your puts would be worth $5 and you have another $5,000 in your account. This can happen and some of the BEST strangle (and straddle) option trades are on Drug stocks.
We mentioned in November that we felt Netflix had a shot at $80 by June. We recommended a trade in the June 80 calls (QNQFP, $1.30, up $1.15) at $1.65 back then. We were stopped out at $1.25 because we saw the market punishing the stock for no reason. Wall Street started downgrading the stock right after we got in.
It’s amazing to see that the June 80’s closed at 15 cents yesterday and are up over 750% today! Wow…
We wanted to show you all of this stuff because often times Wall Street is too quick to fall in-and-out love with a sector or stock. This is where we make our money by staying one step ahead of them. They may have shaken us out for a small loss but we think there are going to plenty of new trades down the road for Netflix as well.
Since our response was so overwhelming we thought we would profile another strangle option trade to show you how it plays out. However, this is not an official recommendation because we haven’t done the leg work and we are winging it.
The premiums are probably overpriced or super rich for Amazon.com (AMZN, $123.19, up $0.44) which is why we won’t play this one but the ideal place to try and do this trade would be at the $125 level.
The February 135 calls (QZNBG, $2.90, down $0.05) and the February 115 puts (QZNNC, $3.80, flat) would cost $6.70 or $670 for just one contract of each which is why we said the premiums are rich and we are NOT doing the trade.
We will leave it there and do a follow-up in the morning. Amazon reports after the bell.
Toyota Motor (TM, $76.95, down $2.82) continues to get pounded after another massive recall concerning their gas pedals. Shares dropped $7 yesterday and could be headed to $75 where there is support. If that level is broken, the stock could be headed back to the ‘60’s.
Tags: Netflix earnings, option picks, option signals, options alerts, stock options trading, Toyota Tanks
Posted in Company Commentary, Earnings, Hot Stocks, Market Commentary, Option Trades | Comments Off