Category Archives: terrystips
Two Option Trades of the Week – GE and SCHW
October 31, 2023
Dear [[firstname]],
Happy Halloween!
I haven’t written in a couple of weeks since credits weren’t close enough to my target entry prices when I initially sent the trades to my subscribers. However, the credit for last week’s trade on Charles Schwab (SCHW) has come back and now exceeds my initial target.
So, I figured why not send it now since I still like the setup. I’m not changing the initial write-up that I sent to my Saturday Report subscribers on October 21, so it may sound a bit outdated. But the trade is still a good play.
Moreover, this week’s trade credit is a little above my entry level, so it’s good to go as well. So, you’re getting a first this week – two trades. Both bearish call credit spreads on stocks after they reported earnings.
Before I get to the trades, I want to let you know that our Terry’s Tips portfolios have caught fire in the past couple of weeks. We’re up 7% for the past two weeks while the S&P 500 fell nearly 5%. Our recent surge has pushed our overall return to more than triple that of the S&P this year.
I’m also happy to highlight our Microsoft (MSFT) portfolio, which gained 14% just last week alone and 40% over the past four weeks. It’s now up 65% for the year and is challenging our QQQ portfolio, which is up more than 70%!
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I look forward to having you join in the fun and profits! Now on to the trades, starting with the previous week’s trade …
Avast Ye Schwabs
Two call spreads in Estee Lauder (EL) and the SPDR Healthcare ETF (XLV) expired worthless yesterday for gains of 25% apiece. To be fair, our bullish spread on Lululemon Athletica (LULU) expired in the money a week earlier for a larger loss. But the LULU misstep interrupted a string of seven straight winners. A large part of this success has been due to taking a more bearish stance toward the market. In fact, today’s trade marks the fifth straight bearish call spread and eighth of the past 11. And with good reason, as our only losses of the past two months have been bullish positions. We’re on a solid roll. I hope you’re banking some winners.
With earnings season hitting full stride this week, there’s no end to the trade possibilities. Of course, there were the spotlight names, such as Tesla (TSLA) and Netflix (NFLX), whose large post-earnings moves grabbed headlines. But I prefer stocks that have smaller, off-the-radar moves that have a lower likelihood of reversing. One such stock is Charles Schwab (SCHW), which is no stranger to these pages (you may recall I had a few issues with the TD transition in September).
SCHW reported before the open on Monday, so we had a whole week’s worth of post-earnings price action to digest. The numbers were mixed, with net income coming in slightly ahead of expectations while revenue fell a bit short. However, both numbers fell far short of last year’s figures. I won’t bore you by parsing through all the individual data points (bank deposits, net interest revenue, TD migration, new brokerage accounts, etc.). Analysts seem to feel that SCHW still faces several short-term hurdles that have buffeted it all year, though the longer-term prospects are encouraging.
Speaking of analysts, their reaction was much like SCHW’s earnings … mixed. There were no ratings changes while target price changes went both ways. But analysts are clearly bullish on SCHW, giving it a solid buy rating on average. The average target price is near $70, which is around 35% above Friday’s close. This fits into the struggle now, prosper later narrative I mentioned above. But since we’re looking ahead only a few weeks, the bearish case makes more sense.
On the chart, the stock reacted positively to earnings, popping 6% in Monday’s trading before settling for a 4.7% gain. But that was the high close of the week, as the shares tumbled more than 5% after Monday. It’s notable that the 20-day moving average provided staunch resistance throughout the week, containing the initial Monday burst and then sending the stock lower through the week’s end. The 20-day has done a solid job keeping the current decline intact since it rolled over in May. I’ll also note that the stock enjoyed a massive 12.6% spike after its previous earnings report in July, only to give it all back during the subsequent month.
If you agree that the stock will continue its downtrend based on the resistance from its 20-day moving average, consider the following credit spread trade that relies on SCHW staying below $53 through expiration in 6 weeks:
Buy to Open the SCHW 1 Dec 56 call (SCHW231201C56)
Sell to Open the SCHW 1 Dec 53 call (SCHW231201C53) for a credit of $0.75 (selling a vertical)
This credit is $0.09 less than the mid-point price of the spread at Friday’s $50.87 close. Note that I’m giving a little extra room on the entry credit. Unless SCHW falls sharply at the open on Monday, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $73.70. This trade reduces your buying power by $300, making your net investment $226.30 per spread ($300 – $73.70). If SCHW closes below $53 on Dec. 1, the options will expire worthless and your return on the spread would be 33% ($73.70/$226.30).
Here’s this week’s trade …
Low Voltage
We had another spread expire worthless on Friday, but it made us sweat. Adobe (ADBE) was looking great, which was saying something as our only open bullish position. It hit an annual high on Oct. 12, putting the short put nearly 15% out of the money. Then the falling market tide grabbed the stock and pulled it down to within eight points of the short strike at Friday’s close. Another day and it might have moved into the money. But it didn’t and we bagged a gain of over 30% for our eighth winner of the past nine closeouts. That leaves us with five open positions, all bearish call spreads.
I’d love to add a put spread this week, but I can’t make a case for fighting the bearish tape. Maybe next week. For this week, I had way too many earnings plays to choose from, as this was the busiest week of the season. Frankly, I stopped looking after an hour, realizing that I could have spent all day analyzing dozens and dozens of top names.
I settled on General Electric (GE), which may seem like an odd choice given that it had a blowout report and had its best post-earnings day in years. The company easily beat earnings and revenue estimates and raised earnings and revenue growth guidance for 2023. The stock responded with a 6.5% pop on Tuesday, its largest gain after earnings since Jan. 2020. What’s not to like, right?
Well, analysts didn’t seem overly excited. In fact, only two weighed in with target price increases of $1 and $2. That’s it. The average target sits near $126, which is around 19% above Friday’s close. I’ll also point out the last time GE saw $126 was six years ago. There were no ratings changes, which were already heavily slanted toward the buy level. This does not seem like a hearty endorsement of a stock that just had as good an earnings report as you’ll see.
While the shares enjoyed a big gain on Tuesday, the rest of the week didn’t go well. In fact, the stock closed out the week below the pre-earnings close. The dual resistance of the 20-day and 50-day moving averages were in play, as the stock closed the week below both. These trendlines have rolled over into declines, a bad sign given that the stock doesn’t stray far from either. Another factor to note: GE had a big pop of more than 6% after the previous earnings release, but the stock drifted lower after that first day and has never closed a day higher since.
It seems that the earnings effect lasted all of one day and the stock has resumed its downtrend that’s been in place for six weeks. This trade is a bet that the trend will continue, especially in light of the broader market’s weakness. Note that the short call strike sits above Tuesday’s close and the mid-October peak.
If you agree that the stock will continue its downtrend based on the resistance from its 20-day (blue line) and 50-day (red line) moving averages, consider the following credit spread trade that relies on GE staying below $114 (green line) through expiration in 6 weeks:
Buy to Open the GE 8 Dec 116 call (GE231208C116)
Sell to Open the GE 8 Dec 114 call (GE231208C114) for a credit of $0.40 (selling a vertical)
This credit is $0.05 less than the mid-point price of the spread at Friday’s $106.35 close. Note that I’m giving a little extra room on the entry credit. Unless GE falls sharply at the open on Monday, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $38.70. This trade reduces your buying power by $200, making your net investment $161.30 per spread ($200 – $38.70). If GE closes below $114 on Dec. 8, the options will expire worthless and your return on the spread would be 24% ($38.70/$161.30).
Good luck with these trades,
Remember to click here, select Sign Up Now and use Coupon Code D21M to start a monthly subscription to Terry’s Tips for half off.
Any questions? Email Jon@terrystips.com. Thank you again for being a part of the Terry’s Tips newsletter.
Happy trading,
Jon
Option Trade of the Week – Where’s the Beef?
October 10, 2023
With earnings reports virtually dried up this week and wanting to stay on the bearish side, I had to go back a few weeks to find reports that failed to impress the Street. One name that popped up was a stock that we successfully played (28% profit) for a bullish winner back in March – Darden Restaurants (DRI), the sit-down restaurant chain conglomerate that includes Olive Garden, LongHorn Steakhouse, Capital Grille, and the recently acquired Ruth’s Chris Steak House.
DRI reported earnings a couple of weeks ago. The numbers were solid, as the company beat estimates on both the top and bottom lines. Same-restaurant sales also handily beat expectations. Moreover, sales and profits were higher than a year earlier. The only negatives were slowing growth in its fine-dining holdings and some concern over its aggressive expansion plans amid a potential recessionary environment.
Analysts seemed unmoved by the seemingly positive news. The report was met with a mix of target price upgrades and more numerous downgrades. This left the average target in the $160-170 range, well above Friday’s $137 close. With no ratings changes, analysts remain firmly in the buy/outperform camp.
Perhaps analysts should take closer note of DRI’s stock chart and post-earnings performance. After hitting an all-time high in late July, the stock is down 21% and logged its lowest close in nearly a year on Friday. I’ll point out that the S&P 500 is down just 5% over the same time frame. This slump has been perfectly guided by the 20-day moving average, a trendline the stock hasn’t closed above in more than two months. Also, for technical wonks, the 50-day moving average is crossing below the 200-day moving average, also known as the “death cross.”
This bearish trade is based on the stock’s continued slump even after the good earnings results. With analysts perhaps too optimistic, it’s reasonable to expect some target price reductions, if not some ratings downgrades that could further pressure the share price.
Finally, the 20-day resistance is hard to ignore, which is why we’re playing a call spread with the short call strike sitting just above this trendline. Note that this trade has a smaller return than most because I wanted the short strike to be above the 20-day. Thus, we have a larger cushion of safety and greater probability of profit.
If you agree that the stock will continue its downtrend based on the resistance from its 20-day moving average (blue line), consider the following credit spread trade that relies on DRI staying below $145 (red line) through expiration in 6 weeks:
Buy to Open the DRI 17 Nov 150 call (DRI231117C150)
Sell to Open the DRI 17 Nov 145 call (DRI231117C145) for a credit of $0.85 (selling a vertical)
This credit is $0.02 less than the mid-point price of the spread at Friday’s $136.94 close. Unless DRI falls sharply at the open on Monday, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $83.70. This trade reduces your buying power by $500, making your net investment $416.30 per spread ($500 – $83.70). If DRI closes below $145 on Nov. 17, the options will expire worthless and your return on the spread would be 20% ($83.70/$416.30).
Happy trading,
Jon L
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Option Trade of the Week – Cold and Soggy
September 25, 2023
Cold and Soggy
There were a few interesting earnings announcements this week, even though we’re in the quiet period for earnings reports (things start to ramp up again in three weeks). In fact, I had three bearish plays to choose from. That’s a good thing since we currently have three bullish and three bearish trades open, and I feel like the bears need a little more weight after the past week’s Fed-infected price action.
The trade this week is on prepared-food giant General Mills (GIS), which owns several iconic cereal brands along with such names as Betty Crocker, Blue Buffalo, Pillsbury, Progresso, Green Giant and Yoplait. GIS reported earnings numbers on Wednesday before the open that were filled with a lot of “buts.” Sales increased 4% due to higher prices, but volume was lower. Net income beat the consensus expectation but fell 18% from a year ago. GIS executives are bullish on their pet food segment but sales for the quarter were flat. Moreover, some analysts feel that consumers are reaching their limit on rising food costs. And GIS’s CFO said that the company’s operating profit margin will not improve this year.
All in all, it was not a great report, which is perhaps why the stock was hit with a few price target cuts. At least there were no ratings downgrades. Analysts on the whole are neutral toward the stock, while the average target price is in the $70-75 range compared to Friday’s close near $65.
Perhaps analysts would be a bit more skeptical if they took a quick glance at GIS’s chart, which shows the stock plunging 30% in the past four months. This descent has been expertly guided by the 20-day moving average, a trendline the stock has closed above just four times since mid-May. This resistance was evident the two days after earnings this week, when the shares failed to pierce the 20-day with early rallies. Note that the short call strike of our spread sits above this trendline.
If you agree that the stock will continue its downtrend after an uninspiring earnings report and remain below its 20-day moving average (blue line), consider the following credit spread trade that relies on GIS staying below $67.50 (red line) through expiration in 8 weeks:
Buy to Open the GIS 17 Nov 70 call (GIS231117C70)
Sell to Open the GIS 17 Nov 67.5 call (GIS231117C67.5) for a credit of $0.45 (selling a vertical)
This credit is $0.05 less than the mid-point price of the spread at Friday’s $64.82 close. Unless GIS falls sharply at the open on Monday, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $43.70. This trade reduces your buying power by $200, making your net investment $156.30 per spread ($200 – $43.70). If GIS closes below $67.50 on Nov. 17, the options will expire worthless and your return on the spread would be 28% ($43.70/$156.30).
Option Trade of the Week – Health Bear … Sort Of
September 12, 2023
Health Bear … Sort Of
With no notable earnings reports this week, we’re turning to an ETF that’s done little of late. It’s the SPDR Health Care ETF (XLV), which holds such heavyweights as UnitedHealth Group (UNH), Eli Lilly (LLY), Merck (MRK), Johnson & Johnson (JNJ) and Amgen (AMGN) among its top 10 holdings. This trade is a bearish credit spread, though I’m not particularly bearish on the sector. I’m not bullish, either. But that’s the beauty of credit spreads. You can be more neutral than directional and still collect a maximum profit so long as the short strike remains out of the money. It’s a forgiving strategy that caters to those who don’t have a strong directional bias.
I’m using a bearish call spread for this trade because the overhead 135 level has proven difficult for XLV to overcome throughout most of 2023. In fact, the ETF has closed above this mark only a handful of times since January. Recent attempts to take out 135 were rejected in April, August and July.
Although XLV currently sits below all its major moving averages, it hasn’t respected these trendlines for support or resistance for much of the year. So, even though the 20-day, 50-day and 200-day moving averages lie between the current XLV price and the 135 level, I’m not relying on their potential for resistance. This is more about the 135 level acting as a top in recent months.
Note that this trade extends into the start of the next earnings season. In fact, four of XLV’s top 10 holdings, including UNH and JNJ, report before the spread expires on Oct. 20. However, given XLV’s performance this year (down around 3%) and the fact that it’s gone nowhere for seven months, I’m not expecting earnings from a few XLV names to give the ETF a huge shot in the arm prior to expiration.
If you agree that XLV will continue its “meh” performance, consider the following credit spread trade that relies on XLV staying below $135 (blue line) through expiration in 6 weeks:
Buy to Open the XLV 20 Oct 137 call (XLV231020C137)
Sell to Open the XLV 20 Oct 135 call (XLV231020C135) for a credit of $0.40 (selling a vertical)
This credit is $0.04 less than the mid-point price of the spread at Friday’s $132.06 close. Unless XLV sinks sharply at the open on Monday, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $38.70. This trade reduces your buying power by $200, making your net investment $161.30 per spread ($200 – $38.70). If XLV closes below $135 on Oct. 20, the options will expire worthless and your return on the spread would be 24% ($38.70/$161.30).
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Option Trade of the Week – This Stock is No Stretch
September 5, 2023
With the market throwing off bullish vibes this week, we’re going with another bullish trade on one of the few notable names that reported earnings this week: athletic apparel maker Lululemon Athletica (LULU). The company reported solid numbers after the bell on Thursday, including an 18% revenue jump that surpassed the analyst estimate. Earnings also handily beat expectations. To complete the trifecta, full-year revenue and earnings guidance came in above the analyst estimate.
Analysts were seemingly thrilled with the numbers, as a slew of price target increases poured in. But many raised the price by only a few dollars, which is meaningless for a $400 stock. After the flurry, the new average target price stands only around 3% above Friday’s close. And there were no ratings changes, leaving the current consensus in the buy/outperform category.
So, while analysts appear bullish, nobody seems willing to bet the mortgage payment on LULU. I’m fine with that, however, as I hesitate to jump on a bandwagon that’s already full. I like to see some room for upgrades and target price increases.
Traders apparently thought differently, pushing LULU up 6% on Friday to an 18-month high. It also propelled the stock above a trading range that has captured most of the price moves of the past five months. Note in the chart how the 20-day and 50-day moving averages have combined forces near the 380 level. I expect these trendlines to rise above the top of the range around $385 within the next week or two. That should provide a multi-layered tier of support to keep the short put of our spread out of the money.
The other technical driver of this trade is the fact that LULU tends to stay flat for several weeks after earnings. That is, the stock doesn’t tend to stray too far from its initial post-earnings move. Given that we have around a 5% cushion combined with the trading range and potential trendline support, I like the odds of LULU staying above the key $385 mark through expiration.
If you agree that the stock will respect the top of its trading range, consider the following credit spread trade that relies on LULU staying above $385 (green line) through expiration in 6 weeks:
Buy to Open the LULU 13 Oct 380 put (LULU231013P380)
Sell to Open the LULU 13 Oct 385 put (LULU231013P385) for a credit of $1.05 (selling a vertical)
This credit is $0.02 less than the mid-point price of the spread at Friday’s $404.19 close. Unless LULU surges at the open on Tuesday, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $103.70. This trade reduces your buying power by $500, making your net investment $396.30 per spread ($500 – $103.70). If LULU closes above $385 on Oct. 13, the options will expire worthless and your return on the spread would be 26% ($103.70/$396.30).
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Option Trade of the Week – Room to Run
August 7, 2023
Room to Run
Although this was the busiest week of earnings season – loaded with big tech names – we’re going to wade into calmer waters with Marriott International (MAR). The company runs the gamut of hotel offerings, operating under 30 brand names in 138 countries. The company reported on Tuesday before the open, beating estimates on both revenue and earnings. The hotelier also raised its Q3 and FY 23 earnings projections, which also are above expectations. MAR’s CFO noted that domestic travel demand continues to grow while international markets are starting to heat up. Business and group travel is also improving.
Analysts were less than ebullient toward the news, however. While the stock received several target price increases, there were no ratings changes. In fact, MAR’s average analyst rating sits between a buy and hold. The average target price ranges from $203 (right on its current price) down to $177, depending on the data source. And this is after the target increases. Either way, this is at best a sluggish endorsement of the stock, which is consistent with the ratings.
In contrast, MAR’s chart tells a more bullish story. The stock traded slightly higher after earnings through Friday amid a lower market. But the shares are up 36% in 2023, putting it on par with MSFT. Since late June, MAR has been on a solid rally covering 19% that included an all-time high on Wednesday. Currently, the stock has been trading well above its 20-day moving average, a trendline the stock has stayed close to throughout the runup. Note that the short strike of our put spread is at 195, a mark the 20-day just moved through.
This trade is based on MAR’s positive outlook, support from the 20-day moving average and analysts (hopefully) realizing that they have been too cautious toward the stock. MAR’s performance this year deserves better than what analysts have grudgingly offered.
If you agree that the stock will continue to respect its trendline support (blue line), consider the following credit spread trade that relies on MAR staying above $195 (red line) through expiration in 6 weeks:
Buy to Open the MAR 15 Sep 190 put (MAR230915P190)
Sell to Open the MAR 15 Sep 195 put (MAR230915P195) for a credit of $1.05 (selling a vertical)
This credit is $0.02 less than the mid-point price of the spread at Friday’s $202.98 close. Unless MAR surges at the open on Monday, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $103.70. This trade reduces your buying power by $500, making your net investment $396.30 per spread ($500 – $103.70). If MAR closes above $195 on Sep. 15, the options will expire worthless and your return on the spread would be 26% ($103.70/$396.30).
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Option Trade of the Week – We Want Profits, NOW!
August 1, 2023
With earnings season now at its peak, there were plenty of opportunities this week. I wanted to return to the bullish side with a stock that posted solid results that were not reflected in the price action. The best candidate I found was cloud platform provider ServiceNow (NOW). NOW reported after the bell on Wednesday, and there was nothing to complain about. Earnings and revenue were up sharply, and both beat estimates. The company raised its quarterly and full-year subscription revenue forecasts above the Street consensus. Moreover, NOW unveiled two major additions to its suite of AI software.
Analysts were clearly impressed with the news, as there was a flurry of target price increases. Despite these raises, the consensus target price is only 5-10% above Friday’s close, which is not much for a tech name. There were no ratings upgrades, probably because most analysts are already in the “buy” camp.
Despite the impressive results and news, the stock slumped on Thursday, falling 3%. That pulled the stock down to the support of its 50-day moving average, a trendline NOW last closed below in early May. The 50-day has guided the stock higher throughout 2023, helping it to a 47% gain for the year. This trade is based on the 50-day support holding through the next several weeks. Accordingly, the short put strike of our credit spread sits just below the trendline.
If you agree that the stock will continue to respect its trendline support (blue line), consider the following credit spread trade that relies on NOW staying above $550 (red line) through expiration in 6 weeks:
Buy to Open the NOW 8 Sep 545 put (NOW230908P545)
Sell to Open the NOW 8 Sep 550 put (NOW230908P550) for a credit of $1.40 (selling a vertical)
This credit is $0.05 less than the mid-point price of the spread at Friday’s $569.54 close. Unless NOW surges at the open on Monday, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $138.70. This trade reduces your buying power by $500, making your net investment $361.30 per spread ($500 – $138.70). If NOW closes above $550 on Sep. 8, the options will expire worthless and your return on the spread would be 38% ($138.70/$361.30).
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Option Trade of the Week – Smoking Not
July 26, 2023
We’re a bit heavy on the bullish side of the ledger with our open positions. In fact, we have four open put spreads and one neutral iron condor on the books. So, with earnings season in full swing, I was on the hunt for a post-earnings bearish play. It wasn’t easy, though, as most stocks did well after reporting even though they were obscured by the blinding bearish light of NFLX and TSLA.
The pick for this week is Philip Morris International (PM), the tobacco giant that, according to its website, is “building our future on replacing cigarettes with smoke-free products …” These include heated tobacco, e-vapor and oral smokeless products. PM reported earnings on Thursday before the bell that beat estimates for profit and revenue. Smokeless product revenue increased 34% from a year ago. But the full-year earnings outlook fell short of the analyst estimate. Currency exchange rates are also expected to take an 8% to 9.5% chunk out of earnings.
Analysts were oddly silent on PM’s report. In fact, I couldn’t find a single rating mention or price target adjustment for the $150 billion market-cap company (the last one was nearly a month ago). The current view toward PM is firmly bullish, however, while the average price target is around 15% above Friday’s closing price.
With no help from analysts, we turn to the charts. In the two days after earnings, the stock drifted lower by a little more than 1%. For the past year, the shares have done little, netting a gain of less than 2%. The key to this trade is the 100 level, which put a lid on a six-week rally that covered about 13%. This level marked tops in March and April as well. Before that, it served as support from December through mid-February. Based on this history, we’re going with a call spread with the short strike at the 100 level.
If you agree that PM will continue to struggle with this resistance, consider the following credit spread trade that relies on the stock staying below $100 (blue line) through expiration in 6 weeks:
Buy to Open the PM 1 Sep 103 call (PM230901C103)
Sell to Open the PM 1 Sep 100 call (PM230901C100) for a credit of $0.65 (selling a vertical)
This credit is $0.05 less than the mid-point price of the spread at Friday’s $97.52 close. Unless PM falls sharply at the open on Monday, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $63.70. This trade reduces your buying power by $300, making your net investment $236.30 per spread ($300 – $63.70). If PM closes below $100 on Sep. 1, the options will expire worthless and your return on the spread would be 27% ($63.70/$236.30).
**The second half started out well for Insider members, as our four portfolios have combined to return subscribers more than 20% for 2023. And our QQQ portfolio is leading the way, up over 70%. Don’t miss out on the profits … now you can save more than 50% on a monthly subscription to Terry’s Tips. Just Click Here, select Sign Up Now and use Coupon Code D21M to start a monthly subscription to Terry’s Tips for half off.**
Option Trade of the Week – Trading Pal
July 17, 2023
Before getting into this week’s trade, did you see what happened to the Chewy (CHWY) call spread from early June? Despite my bearish leanings, the stock took off, gaining as much as 15% at one point. That put the entire spread into the money and the trade in the red. The stock pulled back a bit but stayed close to the short 38 call strike. On Friday (expiration day), CHWY rallied to hit a high of 38.95. But luck was on our side, as the stock closed at 37.99, a mere penny out of the money. But it might as well have been 10 dollars, because the spread expired worthless either way, resulting in a max win of around 29%. That’s 13 winners among the past 15 expired positions. I hope you’ve been taking part in this hot streak.
As for today’s trade, I wasn’t feeling the love from the few bank stocks that kicked off earnings season this week. So, I’m going with a stock that reports on Aug.7, which means this trade will be live through earnings. It’s on Palantir Technologies (PLTR), which was founded by a group of heavy hitters, including Stephen Cohen and Peter Thiel, who named the company after the magical “seeing stones” from Lord of the Rings. PLTR has an aura of mystery surrounding it, as it provides AI-based software infrastructure to the federal intelligence community. More recently, it’s expanded into state and local governments as well as private companies in the healthcare and financial sectors.
Since its last earnings report in early May, PLTR has gained more than 110%. But that comes after the stock lost nearly 90% in two years, bottoming out in January of this year. Thus, there is plenty of upside room before hitting any key price levels. Analysts are neutral toward PLTR, though price target changes have recently been to the upside. That said, the current average price target is 30-40% (depending on the source) below PLTR’s current price. That’s not something you see very often, especially for a stock that’s doubled in three months. I like the sentiment setup for this trade, as PLTR should benefit from upgrades and target price increases that are more in line with the stock’s recent price action.
This trade is a bet that PLTR will get a boost after earnings, which should reflect the company’s expanded customer base. We’re choosing a short put strike that is below the 20-day moving average, which the stock has respected throughout its recent rally. That said, this is an aggressive trade that is being held though earnings. So, size your position appropriately.
If you agree that PLTR will continue to respect the 20-day moving average (blue line), consider the following credit spread trade that relies on the stock staying above $15 (red line) through expiration in 5 weeks:
Buy to Open the PLTR 18 Aug 13 put (PLTR230818P13)
Sell to Open the PLTR 18 Aug 15 put (PLTR230818P15) for a credit of $0.50 (selling a vertical)
This credit is $0.04 less than the mid-point price of the spread at Friday’s $16.40 close. Unless PLTR surges sharply at the open on Monday, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $48.70. This trade reduces your buying power by $200, making your net investment $151.30 per spread ($200 – $48.70). If PLTR closes above $15 on Aug. 18, the options will expire worthless and your return on the spread would be 32% ($48.70/$151.30).
**The second half started out well for Insider members, as our four portfolios combined to return subscribers more than 20% for 2023. And our QQQ portfolio had a huge week and is now up a whopping 74%. Don’t miss out on the profits … now you can save more than 50% on a monthly subscription to Terry’s Tips. Just Click Here, select Sign Up Now and use Coupon Code D21M to start a monthly subscription to Terry’s Tips for half off.**
Option Trade of the Week – Holding on By More Than a Thread
July 11, 2023
No earnings plays this week, as this was the dead week before the new season kicks off. So, I’m turning to one of the prettiest charts there is, one that was boosted by a major product announcement this week. Facebook Meta Platforms (META) launched their version of Twitter, called Threads, to deepen the divide between Mark Zuckerberg and Elon Musk. The Zuck seems to have landed a solid punch with Threads, which he claimed had signed up more than 70 million by Friday morning. The cage match will no doubt continue with accusations and lawsuits, which will make it all the more fun to watch.
The stock reacted by jumping 3% on Wednesday, though it gave back half those gains by week’s end. A wider view shows that META has been on a consistently impressive run since November. The key has been consistency: the largest drawdown during this stretch was a mere 10% in February. The rally has been guided almost perfectly by the 20-day moving average, which has allowed just eight daily closes below it this year (that’s remarkable for a short-term moving average). Moreover, the 50-day moving average hasn’t been challenged since it started moving higher in late December.
We know that all rallies (and declines) end at some point. META’s will, too. But when? This trade is a bet that it won’t be within the next couple of months. The options market agrees, as out-of-the-money (OTM) calls are priced higher than equidistant OTM puts. I will note that this trade extends through META’s earnings, which are scheduled for July 26. The stock has reacted violently to earnings in recent quarters, with moves averaging 21% the day after the past six earnings reports (three higher and three lower). So, there will likely be some excitement with this trade.
Despite META’s bullish trend, I am exercising some caution with this trade. I could go the aggressive route, choosing a short put strike that is just beneath the 20-day moving average (red line) at the 280 level. That’s about 3.5% below the current stock price and provides a max return of 55-60% for a 5-point spread. But I’m choosing to add a larger cushion of safety by going down to the 260 strike, which is the site of the 50-day moving average (blue line) and 10% below META’s price. The return is about half that of the aggressive trade, but I want to play it safer. The choice of strikes is of course up to you.
If you agree that META will continue to respect its moving averages, consider the following credit spread trade that relies on the stock staying above $260 (green line) through expiration in 6 weeks:
Buy to Open the META 18 Aug 255 put (META230818P255)
Sell to Open the META 18 Aug 260 put (META230818P260) for a credit of $1.05 (selling a vertical)
This credit is $0.05 less than the mid-point price of the spread at Friday’s $290.53 close. Unless META surges sharply at the open on Monday, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $103.70. This trade reduces your buying power by $500, making your net investment $396.30 per spread ($500 – $103.7). If META closes above $260 on Aug. 18, the options will expire worthless and your return on the spread would be 26% ($103.70/$396.30).
**The second half started out well for Insider members, as our four portfolios have now combined to return subscribers more than 20% for 2023. And our QQQ portfolio had a huge week and is now up a whopping 74%. Don’t miss out on the profits … now you can save more than 50% on a monthly subscription to Terry’s Tips. Just Click Here, select Sign Up Now and use Coupon Code D21M to start a monthly subscription to Terry’s Tips for half off.**
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