MomentumOptionsTrading.com Midday Update for 1/22/2014
IBM Slides, Weighs on Blue-Chips/ 3 New Trades (BBRY, EXAS, QQQ)!!!
We mentioned this would be a big week for earnings as Wall Street prepared for the flood coming its way. The snow storm kept us from doing all of our research for possible plays but we are catching up as we see a few possible candidates over the next few days and into next week.
The recent trading range has also kept us on the sidelines as the indexes enter their 5th-straight week inside a trading range. Trading ranges can be hard to manage as an option trader because you need movement. If a stock or an index remains range bound, premiums slowly evaporate and losses mount.
We have been well prepared for the trading range as we have been very selective in recommending new trades. Our last “batch” of trades from November and December have done super swell as we have started 2014 with an 11-1 Track Record. We don’t need be careless or rush trades that will give profits back profits by buying higher-priced options and why we have used “cheaper” options to make money.
One trade we did like and spent a lot of time researching over the weekend was a short idea on IBM (IBM, $181.90, down $7).
We had a good feeling shares would move 5%-10% today after the company announced earnings and while be predicted a push to $180, we mentioned the close above $190 made us nervous.
We were very specific when we said Wall Street would be watching their earnings numbers, especially revenues. We said IBM would miss in this department but the options we wanted to trade were over a buck ($1) and were $15 “out-of-the-money.
Here were our thoughts in this morning’s update (quotes are from Tuesday’s close):
International Business Machines (IBM, $188.43, down $1.66)
February 175 puts (IBM140222P00175000, $1.10, down $0.10)
Action: The company beat Wall Street’s estimates by 14 cents after posting a print of $6.13 a share versus estimates for $5.99 a share. We said revenues will be the major number we will be watching and they came up short at $27.7 billion. The suit-and-ties were looking for a number north of $28 billion.
We wanted to take this trade but the break above the 200-day MA (moving average) and $190 on Friday moved us to the sideline.
Shares made an initial pop to $191+ after the news was released but finished last night’s extended trading at $183.55, down $4.88. Of course, this wasn’t an official close but there has been no rebound ahead of this morning’s open.
IBM is currently at $180.63 (down $7.80) ahead of the opening bell and these put options have a chance to double today. Although this wasn’t an “official” trade, we fielded a ton of emails last night asking our thoughts.
For those of you that are in like Flynn, set limit orders to close half the trade at $2 or better and let the rest ride with a tight stop starting at $1.50. (END)
As expected, the February 175 puts (IBM140222P00175000, $1.15, up $0.05) zoomed to a high of $1.92 after IBM shares kissed $179.68 on the open but have since recovered above $1.80.
As you can see, there was a chance to make a sweet return playing IBM into yesterday’s close and into this morning’s open but because the premiums were show juiced, the trade would be flat if you are still holding the call options.
This is why we suggested the exit and stop loss into the opening bell this morning if you were in the trade.
We like to trade options in the 50-75 cent range during a tight trading market and these option trades also need a lot of research to ensure you aren’t overpaying.
IBM decline has accounted for roughly 50 negative Dow points and it weren’t for today’s pullback in the stock the index would be higher as we. Head into the second half of trading.
The blue-chips are down 34 points to 16,380 while the S&P 500 is lower by a point to 1,845. The Nasdaq is up 17 points to 4,242 and the Russell 2000 is advancing 3 points to 1,179.
We are chomping at the bit to open our next “batch” of trades and while we continue to wait for a clear breakout or breakdown, we do have 3 New Trades we like over the short-term.
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