Investors and traders across asset classes and geographic markets are all hanging on a trio of events slated for Friday: (1) The U.S. nonfarm jobs report, (2) Greece’s next repayment to the IMF, and (3) OPEC’s meeting in Vienna. Markets will likely be roiled by any unexpected news related to these events, and with many traders sitting on the sidelines, volatility is likely to spike at the end of this week and into the next one. This is resulting in a jump in the VIX this morning:

As market participants have waited, the euro has been trending higher against the greenback, in a move that doesn’t make much (if any) fundamental sense. After all, European Central Bank President Mario Draghi announced yesterday that the ECB stands on guard, ready to increase its bond-buying QE stimulus plan, while U.S. economic data has been bullish. This means the Fed is more likely to raise rates in September, while the ECB will keep inflating and debasing the Eurozone’s shared security – so why did the euro post big two-day gains on the greenback on Tuesday and Thursday? My assessment is that dollar bulls unwound their bets and took profits, while the dollar bears have stayed in the market waiting to take their next pounding.

Most traders are coming to terms with the likelihood that the Fed will hike interest rates in September, which is why U.S. Treasury bonds have been getting hammered, pushing the yield on the 10-year to its highest level since November. Normally, high yields on U.S. bonds strengthen the dollar, but this hasn’t been the case over the past two days. ECB QE + Fed rate hike should result in a stronger dollar and weaker euro; and since oil is priced in dollars, WTI oil should face headwinds in its attempts to march above $60. Everything’s related.

If Friday’s nonfarm jobs report is better than expected, market participants will read that as a sign that the Fed will hike in September. Indeed, the report could be the final nail in the coffin for the bond bulls and dollar bears. If Greece’s leftist government is unable to come to terms with its army of creditors, then the dollar will be boosted further. And the only surprise that may come out of OPEC’s meeting on Friday is a nominal rise in production quotas – OPEC’s output has been higher than its targets for months, as the cartel tries to kill the flexible and resilient U.S. shale market. It’s not working. Weekly U.S. oil production reached its highest level since 1983 last week.

With earnings season in the rearview, these macroeconomic and currency issues are having a greater impact on stock prices than the underlying fundamentals of individual companies. Since all U.S. stocks are transacted in dollars, the relative value of the dollar is always of concern – but since many large-cap U.S. equities collect a significant portion of their revenues in other currencies, while paying for the majority of their inputs in dollars, currency issues can have a significant impact on their top and bottom lines. Lately, whenever the dollar has fallen against the euro, it has been in short, sharp moves that have quickly reversed – I think we’re about to see another such reversal this week or early next week.

Investment Thesis

We currently have up to four positions outstanding, with nearly $8,000 at risk. I understand that many subscribers were able to get a much better entry price on our Phillips Morris (ticker: PM) debit put spread and have already cashed out that trade for a nice profit, but in an effort to be scrupulously fair, I logged the trade at the worst possible entry of $0.97, and I’m still waiting for a $1.15 bid to take profits.

As I stated earlier, “everything’s related” – and this especially goes for our plays. The strong dollar thesis was behind my bearish plays on PM, McDonald’s (MCD), the Nasdaq (QQQ), and oil (USO) – and while I remain confident in the thesis, there’s never perfect certainty in the world of forecasting. We’ve already taken profits on our MCD trade, but we still have four trades open – adding a fifth based on the same thesis would be foolhardy. That’s why I’m going against the grain with the BigDeaL #6: I like calls on the best stock in the market, Apple (AAPL).

Shares of AAPL spiked when the firm reported what many analysts called the greatest quarter in history, but then immediately tanked. To me, this showed the broad stock market has largely run out of room to go higher, since the best company in the world delivering an earth-shattering quarter couldn’t move the needle. Since then, AAPL has staged a recovery and is now trading between its Bollinger midpoint (dotted blue line) and its upper Bollinger band. With the stock catching support at its Bollinger midpoint today, now looks like an opportune time to get into its calls.

Having some long exposure here makes sense, given our bearish bets on PM, Boeing (BA), QQQ, and USO. It is entirely possible for AAPL to post gains while these other stocks and ETFs fall, since AAPL continues to trade at a below-market multiple, and has plenty of room to grow. In fact, as I explain below, I think entering AAPL provides us with an asymmetrical-risk proposition.

The Play

We’ll buy (buy-to-open) AAPL’s $131-strike June calls (June 19 expiration). These options expire in 15 days and thus will have rapidly depreciating time value. As of 12pm ET, they were trading with a $1.41/$1.43 bid/ask spread. More than 4,700 contracts had already changed hands today, and more than 7,300 remain in open interest. These are highly liquid options.

Logic of the play: AAPL is one of (if not) the most fundamentally sound businesses in the world. While U.S. retailers are unable to spark sales growth, customers still wait in line to get into the Apple Store each morning before it opens. The firm has a mountain of cash its sitting on – $180 billion by most counts – but traders get spooked whenever the Nasdaq hits an all-time new high, catching flashbacks of the dot-com meltdown of 2000. AAPL is no Pets.com, and it is in prime technical position for a short-term buy. Our $131-strike calls are just above the AAPL‘s current trading price, and the stock looks poised to bounce off its Bollinger midpoint and go higher. This play also provides hedging benefits alongside our existing plays, particularly the QQQ June credit call spread.

Risk: At $1.45, we can purchase 13 AAPL $131-strike June calls for around $1,885.We are risking the full purchase price of these options, but our risk is somewhat hedged by our credit call spread on QQQ, expiring the same month. If shares of AAPL fall, then our QQQ spread will likely generate profits to offset the losses on AAPL. Conversely, if QQQ surges, our AAPL play should more than make up for any losses on our QQQ credit play. A third scenario in which AAPL rises enough for us to take profits but QQQ is unable to close above $111.36 at expiration seems much more likely than the reverse, whereby AAPL falls but QQQ rises – thus, we’ve set up an asymmetrical-risk proposition by entering the AAPL calls.

Price Target: Assuming an entry near $1.45, we’ll shoot for 20% gains, or a price target of $1.75.

Sample Ticket:

Follow-up

#1) PM $80/$82.50 September debit put spread

Entry price and date: $0.97 on 5/18/15

Position Size: 20 contracts per leg

Current bid/ask: $0.97/ $1.39 (11:40am ET)

Target: $1.15 bid.

I entered this play at $0.97, but as I understand it, most subscribers got far superior entry prices at around $0.77. These lower entry prices have allowed many readers to already take profits of 25% or more, but today, the spread is finally nearing our official $1.15 price target. Shares of PM are down 0.35% and crashing into the triple support of their 50-day and 200-day moving averages, as well as their bottom Bollinger band.

This could give PM a chance to rebound off of support – or it could mean that the stock is about to plummet. I’m going to continue to hold for the $1.15 target, but if you can already grab profits of 20% or more, I’d recommend that you strongly consider doing so.

#2) MCD $95/$100 June debit put spread

Entry price and date: $2.15 on 5/21/15

Position Size: 9 contracts per leg

CLOSED AT $2.60 or higher on 5/28 for gains of at least 20.9%!

#3) BA $150/145 July credit call spread

Entry price and date: $1.45 credit on 5/26/15

Position Size: 5 contracts per leg

Current bid/ask: $1.27/$1.38 (11:40am ET)

New Target: $0.71 ask

We received a $1.45 credit for selling BA‘s $145-strike July calls, and buying its $150-strike calls for the same month. Our goal is to see the overall value of the spread fall, thereby allowing us to keep more of our credit. We could hold until expiration, at which time we’ll keep 100% of the credit if shares of BA close below $145. In the name of risk-mitigation, however, I’m changing our exit strategy on this play: We’ll cover the spread when the ask falls to $0.71, which would net us $370 in profits on the $1,775 we risked, for gains of more than 20%.

As you can see from the chart above, BA has been behaving roughly as expected, facing resistance at or near the $145 strike level. It continues to have trouble breaking below $140, though, and that’s why we might want to consider taking profits the next time we have the opportunity to grab 20% gains.

#4) QQQ $113/110 June credit call spread

Entry price and date: $1.36 credit on 5/28/15

Position Size: 12 contracts per leg

Current bid/ask: $1.06/$1.08 (11am ET)

Target: Hold until expiration for 100% of $1.36 credit received

The Nasdaq QQQ has been unable to surpass its recent highs, and has faced resistance at or near our short strike of $110. This bodes well for our play, which will be profitable so long as QQQ stays below $111.36. We’re entering a bullish play on AAPL today, which makes up a fair share of QQQ, but AAPL could easily outperform the rest of the index, allowing us to take profits on both plays.

#5) USO $21-strike July puts

Entry price and date: $1.48 on 6/1/15

Position size: 12 contracts

Current bid/ask:$1.73/ $1.79 (11:30 am ET)
New Target: $1.80 bid

As soon as we entered this play at around noon on Monday, crude oil launched into a vicious bull run – but then the market reversed course, and crude has come tumbling back on various macroeconomic and supply concerns. I think oil’s declines will continue, allowing us to take 20%+ profits at my new, reduced price target of $1.80. With so many outstanding positions, it’s a good idea to de-risk and take some profits off the table if they should make themselves available.

Happy trading!

Jason’s Bio

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 Dividend Lab for a stint in 2014. Now he’s back providing market commentary and actionable options trades for the BigDeaL Newsletter, and he’s happy to be here!

 

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