Bears See Green/ Profit Alert (IR)!!!
Futures were showing a flat open throughout the night and into this morning’s open and it remains to be seen if yesterday’s surge past resistance was a false breakout or the real deal. The bears gave it the old college try as they pushed support that served as prior resistance on the open but they have faded as the bulls are trying to nail down new support levels.
We have been ringing the register on the way up as we continue to favor call options over put options but we are still be very selective with new trades. We have added a new play today for our Weekly Wrap on a stock that has a dollar of downside risk but $3 to the upside. The talking heads are mimicking what we said in December about this being a stock picker’s market and that has been true for the most past as most fund managers are showing losses for the year due to the volatility. Not us.
The Weekly Wrap is 9-2 for 2014 Weekly Wrap is 9-2 for 2014 (94-9, or 91% win rate, since 2011) and is designed for traders that want to use options with less risk. The Daily is up 130%. Overall, we are 19-8 the year for all of our trades for a success rate of 70%.
Shares of Rosetta Stone (RST, $11.51, down $0.52) are down 4% after announcing their earnings numbers ahead of this morning’s opening bell. We have often been more bearish than bullish on the stock but we thought there might be a turnaround story brewing with the company’s recent acquisitions. Not so much.
The company reported a loss of $0.18 a share on revenue of $77.7 million. The suit-and-ties were looking for a profit of $0.11 a shares on revenue north of $82 million. Estimates ranged between a profit of $0.06-$0.15 a share with a revenue range of $78.3-$84.6 million. Those pros weren’t even close on their homework.
We had a good feeling shares might move 10% or more on the earnings announcement and we listed a possible straddle trade to take advantage of the move. However, the options only traded in 2.50 increments and shares needed to make a move of 10+% or else the trade might not have made a profit. The option premiums were a little pricey and we were worried the option would have deflated if the stock had moved less than 5%.
Shares did move 10% at the start of trading this morning as they opened at $10.95 and traded down to $10.57 – a fresh 52-week low.
The March 12.50 calls (RST140322C00012500, 0.10, down $0.40) were at 50 cents going into Monday’s close and are down 80%.
The March 12.50 puts (RST140322P00012500, $1.20, up $0.35) were at 95 cents ahead of Monday’s closing bell and opened at $1.55.
Here were our thoughts in Sunday’s Weekly Wrap Earnings section:
“Thoughts: This could be a great straddle trade as shares could make a push towards $15 or flop to $10 based on earnings. A 10% move would get shares near $14 or $11 and would likely be enough to make a nice double-digit return.”
We could have thrown the dice on this trade as we felt lucky but the window of opportunity was small and we didn’t like the setup. However, Rosetta Stone is now a solid short candidate for a drop below $10 and we can play the possible move to single-digits with April or May put options.
There will be other opportunities to trade these types of option earnings plays in the coming weeks but again, we didn’t like the setup and why we stayed on the sidelines. With 1Q earnings starting in April, these trades will be in abundance going forward.
We are all about capital management and we like to start the year off with a good cushion before opening up the playbook. We have traded “cheap” options for the better part of 3 months because there was a trading range that developed following the run to new highs in January. By “cheap” options, we mean options that trade for under $1.
We have been waiting for the next big TREND to develop and this is when we like to trade higher priced options up to $2 as we feel more comfortable opening up the playbook.
We explain more of our strategies in our option trading course, How to Trade Options on Momentum Stocks, but we wanted to give new subscribers a quick update.
We have consistently shown how “cheap” options can make triple-digit returns of up to 817% (see our GALE call option trade from earlier this year) but the real money is made when you have 10-15 open positions and the market is trending. We have shown incredible win streaks in past years when there is a clear trend and we have done well trading the choppiness in 2014 as we are sporting a 19-8 track record.
One of our newest subscribers wrote us and said they left an option trading service that was 8-43 for the year on their option trades.
Of course, the option newsletter that has this paltry 16% win rate doesn’t have a Track Record posted for 2014 or prior years. We didn’t ask the name of the newsletter but we believe it is important to have a Track Record and why we continue to outperform the slick talking pros.
On that note, we have another Profit Alert.
As we head into the second half of trading, the Dow is up 34 points to 16,241 while the S&P 500 is higher by 3 points to 1,850. The Nasdaq is advancing 4 points to 4,297.
Subscribers, check the Members Area for the updates and stay locked-and-loaded into the close