My name is Jason Seagraves – welcome to the first of what will be many of my Big Deal Newsletter market commentaries. Over the next several weeks, months, and beyond, I’ll be providing analysis and actionable options trades twice a week: every Monday and Thursday at 12pm ET. These trades are intended to generate a minimum of $167 in monthly income, net of fees, to pay annual subscription costs of $2,000 (enough for all DividendLab services). There will be winners and there will be losers, but our goals are modest. I’d rather under-promise and over-deliver than the reverse!
We’ll be working with position sizes of approximately $2,000 and typically gunning for 20% gains. I’ll be picking a lot of call and put spreads, both credit and debit, depending on the attractiveness of option premiums and my read on the broad market. We’ll estimate fees at $20 “roundtrip” or about 1% of our trade, just to make things consistent for subscribers using different brokers with varying fee schedules.
I’ve been covering the markets, trading options, and providing winning picks to newsletter publishers since 2008, and between July 1 and November 22, 2014, I picked 14 consecutive winners for DividendLab with average gains of 22.9% and an average holding period of less than five days. I’ve included a list of these picks and their results at the end of this report, along with a short bio for myself. Now let’s get down to business.
First quarter earnings season is almost over, and although results were better than expected, earnings were hurt by the strength of the greenback, which gained against other currencies the entire second half of 2014, but peaked (for the time-being at least) in March.
Below is a one-year chart using weekly candlesticks for the PowerShares DB US Dollar Bullish ETF (ticker: UUP), which measures the dollar against a basket of other currencies:
More recently, the euro has roared against the dollar, after the German bund market rolled over, sending yields higher and making the euro look more attractive. Below, a three-month chart for the CurrencyShares Euro ETF (FXE):
As you can see, FXE had a bearish “hanging man” candlestick on Thursday – the third-to-last candlestick on the chart above. The euro plunged at Friday’s opening, but recovered to close higher. As of 10:53am ET on Monday, FXE is down 0.86% – perhaps the “hanging man” is rearing his ugly head, after all.
Oil’s massive surge from its March lows has also weighed on the greenback, thereby adding to the euro’s relative strength. Geopolitical tensions in the Middle East threaten to send oil prices higher, but what else is new? On the other side of things, U.S. shale producers have become more efficient, and even the offline drillers are poised to come back online if oil prices stay or go higher. OPEC is committed to keeping production levels high, and the EU is lobbying for an end to the U.S.’s ban on oil exports. Add in the possibility of Iran oil coming back onto international markets, and I think the intermediate-term outlook for oil is quite bearish.
Below, a three-month chart for “USO,” the United States oil ETF, which tracks the price of WTI crude:
But now let’s look at XLE, the Energy Select Sector ETF, typically a leading indicator for energy prices:
As you can see, XLE has given back more of its gains than USO has, which leads me to anticipate a further pull-back in oil prices. This will be bullish for the dollar and bearish for other currencies, since oil is priced in dollars.
On top of all this, the Fed is meeting this week, and I highly doubt the central bank will say anything to lift stock prices when it issues a statement on Wednesday, since the last time Chairwoman Janet Yellen opined on stocks, she said they were overvalued. Contrary to what a lot of market watchers believe, I think the Fed desperately wants to raise interest rates to put the potential rate-cut back in its arsenal, and Ms. Yellen and her fellow planners are looking for excuses to justify a hike in September – if not sooner.
One last chart before we get into our option play. Here’s the three-month chart of the S&P 500 index:
Stocks closed at a record high on Friday, but the rally has clearly lost its steam. One great indicator of this is the fact that Apple, Facebook, and Disney all reported blowout earnings and saw their share prices fall in response. This, to me, shows the market is priced for better than perfection and will have few catalysts to take it higher until after interest-rate policy becomes more certain. What’s more, the market closed with a “doji” on Friday, at the end of an uptrend. A reversal appears imminent.
Puts on the S&P 500 ETF (SPY), FXE, or XLE could be big winners this week, but I prefer a single play that sort of encapsulates all three. Phillip Morris International (PM) is a global tobacco powerhouse, with a huge share of the global market excluding China and the U.S. This means the stock is very sensitive to currency issues, and the dollar’s sudden reversal in March is one of the reasons shares of Phillip Morris have rocketed higher recently:
I’ve added Bollinger bands (blue) and 50-day (red) and 200-day (green) moving averages to the three-month chart above. The stock closed above its upper Bollinger band in a “hanging man” on Friday, and as you can see, it’s already begun its reversal in early trading on Monday. Philip Morris’s earlier breakout was in near-perfect harmony with the dollar’s decline, as 25% of the firm’s inputs are priced in dollars, while virtually 100% of its revenues are from other currencies – including emerging-market currencies that are too small to meaningfully hedge against.
The stock market in general is at record highs and at the top of its recent trading range. The broad market is due for a pull-back, if not a correction. Phillip Morris is likely to underperform the broad market, especially if the dollar regains strength, as I expect it to. That’s why I’m recommending a debit put spread on Phillip Morris as today’s play.
- We’ll buy PM’s $82.50-strike September puts.
- We’ll sell PM’s $80-strike September puts.
The logic behind buying PM’s $82.50-strike September puts is that we think Phillip Morris is due for a pull-back or worse. By extending our time horizon out to September, we give ourselves more time for the thesis to play out. We don’t have to worry much about the added premium of time value, since we’re capturing some of that premium by selling the $80-strike September puts.
The logic behind selling PM’s $80-strike September puts is that we’ll collect some income, thereby reducing our trading cost. We’re not giving up much by doing this, although we are limiting our maximum gains to $2.50 – the distance between the strike prices. That’s a small opportunity cost for cutting our initial outlay by approximately half.
As of this writing (11:30am ET), PM’s $82.50-strike September puts have a $2.07 ask and the $80-strike September puts have a $1.10 bid, for a net cost of $0.97, or $97 per 100-share contract. This means, assuming a $2,000 position, we can buy 20 contracts. It’s vitally important that the number of contracts purchased and sold are equal. Our goal will be to close out this trade for a 20% gain.
Jason Seagraves is a 37-year old writer, options trader, entrepreneur, homeschool dad, and evangelist for free-market economics. He launched a successful dot-com business while still in college in the late 90’s, and then went back to school to graduate with a degree in Business, concentration in Finance, from Siena Heights University in 2006. That year, he also earned a Series 7 stockbroker’s license, but opted to pursue a career in freelance writing. From 2008 through 2013, he worked as a “ghostwriter” for a popular stock and options trading newsletter, before joining up with DividendLab for a stint in 2014. Now he’s back providing market commentary and actionable options trades for the Big Deal Newsletter, and happy to be here!
Sample of Past Results
From May through November of 2014, I wrote a weekly option newsletter for DividendLab simply titled Option Weekly. Selections #7 through #21 were all winners, averaging gains of 22.9% with a holding period of just 4.14 days. Here is the record:
#7) LVS $75-strike calls with September 20, 2014 expiration
Opening Date and Price: $4.60 on 7/1
Action: Sold at $5.65 on 7/2 for one-day gains of 22.8%!
#8) XLE $100-strike calls with September 20, 2014 expiration
Opening Date and Price: $2.07 on 7/8
Action: Sold at $2.50 on 7/24 for gains of 20.8%.
#9) *GE $27-strike straddle with August 16, 2014 expiration
Opening Date and Price: $1.00 on 7/15
Action: Sold at $1.20 or higher on 7/21 for gains of 20% or more!
#10) HYG $94-strike puts with September 20, 2014 expiration
Opening Date and Price: $1.83 on 7/22
Action: Sold at $2.20 or higher on 7/23 for +20% gains!
#11) XLF $23-strike puts with September 20, 2014 expiration
Opening Date and Price: $0.51 on 7/29
Action: Sold at $0.64 or higher on 7/31 for gains of 25% or more!
#12) SPY $193-strike puts with September 20, 2014 expiration
Opening Date and Price: $3.80 on 8/5
Current Price: $3.31 bid
Action: Sold ½ position at $4.95 on 8/5 for 30.2% gains; sold ½ at $3.85 on 8/8 for total net gains of 15.8%
#13) PM $82.50-strike calls with September 20, 2014 expiration
Opening Date and Price: $2.67 on 8/12
Action: Sold at $3.25 on 8/21 for 21.7% gains!
#14) XLK $39-strike calls with September 20, 2014 expiration
Opening Date and Price: $0.90 on 8/19
Action: Sold at $1.10 on 8/20 for one-day gains of 22.2%!
#15) VXX $26-strike calls with September 20, 2014 expiration
Opening Date and Price: $2.11 on 8/26
Action: Sold at
$2.87 on 8/28 for two-day gains of 36%!
#16) JNJ $103-strike calls with September 20, 2014 expiration
Opening Date and Price: $1.45 on 9/2
Action: Sold at $1.75 on 9/8 for gains of 20.7%.
#17) XOM $100-strike puts with October 18, 2014 expiration
Opening Date and Price: $3.00 on 9/9
Action: Sold at $3.60 or higher on 9/10 for one-day gains of at least 20%.
#18) VXX $30-strike calls with October 18, 2014 expiration
Opening Date and Price: ½ at $2.05 on 9/16; ½ at $1.43 on 9/23; avg: $1.74
Action: Sold at $2.10 or higher on 9/25 for net gains of at least 20.7%!
#19) YHOO $35-strike calls with October 18, 2014 expiration
Opening Date and Price: $3.37 on 9/23
Action: Sold at $4.05 or higher on 9/23 for same-day gains of 20.1% or more!!!
#20) SPY $200-strike puts with November 22, 2014 expiration
Opening Date and Price: $5.00 on 9/30
Action: Sold at $6.75 or higher on 10/1 for gains of 35% or more!
This document is also available to our LaunchDL members to provide an example of our work.