Market Update & Thursday Q&A
Market Update Hello Smart Option Sellers! The markets are still trying to figure out what to do. We have lots of volatility and lots of swings higher and lower. At the moment, it looks as though the odds are on more downside activity. All the indices (Dow, SPX & Nasdaq) are getting very close to long-term support areas on their 200-day moving averages, which are basically the last line of defense for the bulls. Here's the current charts of the Dow, SPX & Nasdaq. You can see on each chart that the indices are getting very close to their 200-day moving average levels of 23,411, 2,589 & 6,741 respectively. If those levels are breached for a few days of trading, then we may see some extreme selling that could take us down very far, very quickly. But, if those levels hold, we could see a major bounce. The tech-heavy Nasadaq has been taking the brunt of the selling of late with Facebook & Amazon shedding billions in value in just the last few days alone. Facebook has been reeling since the Cambridge Analytics story broke wide open last week and Amazon dropped over $100 per share yesterday on the heels of Trump's tweets about it not paying its fair share of taxes. These big moves scare market participants and then things start to snowball on itself. That's how large panic down-moves occur. Sell first, ask questions second. At this point, it makes no sense in trying to get in front of this freight train if we're just going to get steamrolled. I wouldn't put my money or your money at risk like that. It's better to wait for an uptrend to show itself and work with the trend. In the past I've always said that I love when good stocks get hit to the downside as it allows us to open up new put-sell plays. That statement refers to one-off moves when it comes to a rare earnings miss or a rare FDA announcement against a new drug. Quality companies find ways to fight back after the misstep and usually rally back up in short order. What we're seeing now is a potential all-out rout in the market as a whole, and it's just not smart to put your money into bullish plays until the tide has turned back higher. So for now, we'll sit on our hands and wait out this current move until the picture is a little clearer. As for our open positions, we'll continue to hold as-is, but let me address two trades that a few of you have asked about - Big Lots (BIG) & General Mills (GIS). At the moment, our put-sell position in BIG, which expires in three weeks from tomorrow, is sitting about $3 per share above our $40 strike price. At this point, it's a race against the clock to see what will happen first. Either the stock will stay above $40 before expiration day, or it won't. But regardless of what happens until then, the put option will keep shedding value as each day passes. This is known as "time decay", and it really accelerates in these last few weeks of its existence. As a refresher, an option's value is made up of a few different factors, one being the "perceived" value it has because there's "time" left before it expires. This "time" is what gives people hope that the stock might make a large enough move to surpass the strike price in the direction they need it to. In this case, the put option buyer hopes the stock falls below the strike price. As each day passes, and the probability of the stock moving through the strike price diminishes, it gets stripped a little bit more of its value quicker and quicker. At the moment, our BIG $40 put-sell position is worth $.40 per contract. Since the market is closed tomorrow for Good Friday, there will be no trading for three days, and just due to the sheer passage of time, that put option will be worth about $.30 per contract on Monday, as long as the stock stays near where it is now at roughly $43 per share. So, we play the waiting game over the next few weeks. And if the stock keeps dropping, then we will deploy our defensive tactics, which will most likely involve us "rolling" the trade. What is that? Well, we'd buy back our current put-sell position on BIG and re-sell a new position in a further out month and a lower strike price. This not only gives us more downside cushion and a more conservative position, it will most likely allow us to collect an even higher amount of money overall than what we would've made on the original position. Don't worry too much about this tactic now. I will keep everyone in the loop when and if we have to execute it. The second position I wanted to mention - the GIS July $40 put-sell trade, has been moving against us recently. This is because GIS stock is hitting its lowest levels since early 2013 after enduring a huge $5 per share drop back on 3/21 due to its earnings report. That was unfortunate, but at this time, we're not going to take any defensive action. The stock seems to be stabilizing near the $45 level, which it's been at since the earnings drop. Typically after big moves like this, the market re-assesses the damage, cooler heads prevail, and the bottom feeders come back into the market and drive the quality stock back up. That's what I'm hoping to see in the next few weeks to come. Otherwise, the rest of our open positions are either in the black, or very near break-even. Continue to hold. Thursday Q&A Since the markets are closed tomorrow, I'll get to the questions today. Q: Hello Lee, At what point do we start to take defensive action on our puts? What are the defensive actions we can take? A: Hi, thanks for the question. Well, I pretty much answered this question in the body of the alert above, as I discussed our BIG put-sell position and "rolling" it forward. Rolling the trade is our first line of defense, but we can also purchase other put options against the position to hedge any more downside damage. But, you may also wonder what will it take for me to actually put the plan in place? And will I? One of the things I always wanted for this service is for us to actually get assigned on the put options which would allow us to buy the shares at the strike price level. In that case, we could hold the shares and ride the moves back up, giving us much more profit opportunities. As it turns out, a majority of our members were never really that interested in actually buying the shares and gaining the opportunity for those out-sized profits. They just wanted to collect the upfront option premiums and move on to the next one. And so I've kept the system doing just that. But I can't guarantee it will go on forever. At some point, it may be just too hard to pass up buying some of these quality companies at very attractive levels. And once that is done, we can sell covered calls against the new stock position to collect even more upfront cash. Now, getting back to the defensive actions... If we don't let ourselves get assigned on the put options, rolling the trade is our first choice, hedging the trade by buying other put options is our second choice, and our last line of defense is closing the trade out completely if the stock moves 30% below the strike price. I believe that third option only happened to us once in the eight years that I ran Instant Money Trader. And you know what? The stock ended up moving higher to this day. If we had let ourselves get assigned, we could've ran the stock all the way back up. It was on U.S. Steel (X), and we eventually unloaded the position when the stock dropped below $7 back in late 2015. Of course it bottomed right after we sold it and has gone on to rally up to a recent high of $47 per share. I'm still kicking myself on that one. But, you have to follow the plan, because that's what keeps you out of trouble a majority of the time. Anyway, I will always let you know when it's time to take defensive action. And if for any reason you're feeling uncomfortable with any of the positions, by all means take matters into your own hands too. It's your money, you can manage it as you see fit. Q: Lee, thoughts on JCP? A: Well, I don't like to get in the habit of analyzing individual stocks for each member, as I can't give individual advice to any of you (so please try not to email me those requests), but since we take positions in many stocks in the retail sector, I thought I'd give my two cents. J.C. Penney (JCP) has been in a downward spiral since early 2012. The company has changed management a few times since then and has also changed its coupon policies a few times since then. I was a big believer in JCP as a successful retailer for years, and we played it successfully many times in the Instant Money Trader service. But the last time we took a stab was in late 2012 when the writing was really on the wall. It wasn't going to come back successfully from its missteps and Amazon was starting to breathe down everyone's backs. There are certain retailers that unfortunately can't navigate this new frontier of online competition while at the same time competing against other "discount" retailers such as BIG, FIVE, DG, DLTR, etc. Now, companies such as Macy's (M) and Dillards (DDS), which were also caught up in the brick & mortar retail collapse of the last few years, have seem to been able to weather the storm and have actually seen their stock prices bottom out in 2017. But JCP hasn't been able to follow suit. It's currently at $3 and if I had to make a guess, I don't think it's going to make a dramatic comeback any time soon. At the same time, it doesn't have much further to fall, so is it worth selling out if you currently own it? Not sure, really. Up to you. Maybe it'll get bought out. Hope that helps a little. Final Word Well, that's all for this week. The market is closed tomorrow so have a great long weekend (if you're taking it). I will be off next week for spring break with the kids, so I don't plan on sending any alerts out unless all hell breaks loose. I will of course have my computer with me, so if alerts are warranted, I will send them out. Continue to contact me here Regards,
Lee Let's Grab That Cash!
Current Portfolio Continue to work all other trades as instructed and continue to hold all other open positions as-is. See the Current Portfolio below for current prices & instructions. Note on the Current Portfolio - if you are a new subscriber and don't have a position yet on any of our trades, make sure you enter your order at the original recommended sell prices. Do no enter any order unless the current option price is at, or higher, than the official recommendation. If you are unsure or have any questions, please ask us!