This weekend saw the first Triple Crown winner since 1978, as American Pharoah won the Belmont Stakes, following previous wins at the Kentucky Derby and Preakness. In honor of Pharoah’s achievement, our investment theses scored a horseplayer’s trifecta, as (1) the U.S. jobs report was bullish, (2) Greece failed to make its payment to the IMF, and (3) OPEC kept production quotas unchanged. This resulted in big gains for most of our outstanding option plays and allowed us to take profits and close out positions on Phillip Morris (ticker: PM) and the United States Oil Fund ETF (USO) – see today’s Follow-up for more.
I’ve long believed the Fed will raise interest rates in September, and the rest of the world is finally waking up to that reality. My themes of a stronger dollar and a weaker euro, alongside falling dollar-denominated oil prices, remain strong. Bond yields are rising and will continue to go higher, and this will put pressure on high-yielding stocks, which have benefitted from low bond yields. Going forward, stocks with high levels of exposure to the euro, the yen, and other foreign currencies will suffer, while small-cap and other dollar-centric stocks – such as financials – will outperform.
In Big Deal #6, I reiterated my dollar/ oil theses and explained how my outlook had inspired all of the Big Deal Newsletter’s trades up to that point. I reasoned it may be unwise to pile a fifth open position into the same theme, so I looked for an uncorrelated play and selected Apple‘s (AAPL) short-term calls. With the stock pulling back against its Bollinger midpoint on Thursday, I said it looked like an “opportune” time to enter a bullish play – it turns out I was wrong, and AAPL shares have fallen since.
However, the play was designed as a partial hedge, since losses in AAPL would likely result in losses for the Nasdaq 100 ETF (QQQ), on which we have a bear call spread. This has worked out pretty well for us, since the roughly 48% loss on AAPL‘s calls has been offset by roughly 52% gains on our QQQ play – we received a $1.36 credit for entering the QQQ credit spread, and we could close it out now (as of 11:55am ET) for $0.51.
AAPL‘s WWDC (Worldwide Developers Conference) is taking place all this week. The company isn’t expected to unveil any new hardware, but it will highlight its progress across a number of long-term initiatives, including a streaming music service. The stock could soar if CEO Tim Cook jawbones it higher, although that’s unlikely to be the great man’s intent. Investors may react to Mr. Cook’s promotion of AAPL‘s superior data-security features, relative to Google’s Android, and given several recent high-profile hacking attacks, that could be bullish for AAPL‘s share price and our calls.
It seems improbable that AAPL could collapse without ensuring QQQ closes next Friday (June 19) below $110. Thus, I still think we have an asymmetrical-risk proposition on this pair, as we should be able to salvage something on our AAPL calls, even if the stock turns against us; while that would likely mean keeping the full credit on QQQ for an 83% gain ($1,632 on $1,968 risked). Alternatively, if AAPL were to shoot higher, allowing us to take profits, our QQQ play would still likely be in the black and may still even close July 17 below $110.
I think we should remain in both plays, however, more risk-averse subscribers might want to consider closing them out for slight gains (in the aggregate) rather than holding on for the potential of more. However, I with our AAPL calls down 44% from our entry, I’m revising our price target to a breakeven of $1.53 – there’s no sense being greedy on a play that’s already gone against us, but there is cause for staying in the play when we have the bear call spread on QQQ as a hedge.
Now, for this week’s play:
I’m not done with my strong dollar theme. It played a part in the profits we’ve taken on PM and McDonald’s (MCD), and I think the market still hasn’t properly priced in the reality of rising rates and the high-probability of a Greek default. I think oil’s fundamental weakness will also be bullish for the U.S. greenback.
How do you play a bullish dollar bet? You could buy puts on the currencies you think will weaken against the buck, but the CurrencyShares Euro ETF (FXE) has weak options volume. A better way to do it is to buy calls on the PowerShares DB US Dollar Bullish ETF (UUP), which measures the dollar against a basket of foreign currencies, similar to the Dow Jones Dollar Index.
Look how UUP surged in heavy volume on Friday, breaking above its 50-day moving average (red line) in intraday trading only to close below it – but up 0.88% for the day. On Monday, UUP fell back to its Bollinger midpoint (dotted blue line), where it previously staged a bigger rebound earlier this month. I think this is a great time to get into the dollar on the long side, and I especially like UUP‘s $25-strike September calls – which won’t expire until the day after the Fed meets in September.
We’ll buy (buy-to-open) UUP’s $25-strike September calls. As of 11:55am ET, the calls had a bid/ask of $0.55/$0.58, with more than 1,050 contracts having changed hands for the young day, and more than 10,000 in open interest. These are nicely liquid longer-term options.
Price Target: We’ll shoot for 20% gains, based on our actual entry price. Assuming an entry of around $0.60, this would give us a price target of $0.72.
Position Size and Risk: We’ll buy 32 contracts at around $0.60 per share, for a total risk less than $2,000.
#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
Total Risked: $1,940
Closed: Sold at $1.19 on 6/5/05 (10:43am ET)
Profit/ Loss: +22.7% ($440 profit)
This was a frustrating play for most of our holding period, given the wide spread between the bid and ask prices of our long and short puts. But PM‘s determination to tank was enough to overcome a poor entry at $0.97, and since most Big Deal subscribers should have been able to enter at a much lower initial price, their gains should have been even greater.
Subscribers who haven’t taken profits yet should consider closing out their positions. As of 11:43am ET, the bid price on this spread was $1.20. I won’t be following up on this play in future newsletters, although we could always end up entering PM again, if the opportunity presents itself.
#2) MCD $95/$100 June debit put spread
Entry price and date: $2.15 on 5/21/15
Position Size: 9 contracts per leg.
Total Risked: $1,935
Closed: Sold at $2.60 or higher on 5/28.
Profit/ Loss: +20.9% ($405 profit)
#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
Total Risked: $1,775
Current bid/ask: $0.98/$1.12 (11:55am ET)
Target: $0.71 ask
Twice now, Boeing (BA) has attempted to surge above our key level of $145, and twice the aerospace firm has been grounded. We’ll get to keep the full $1.45 we received on this bear call spread if BA finishes below $145 on July 17, and it’s looking more and more like that’s likely to be the case. However, if the ask on our spread falls to $0.71 before this date, we could close out the position for 20% gains on the $1,775 we risked – and that’s my recommendation.
#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
Total Risked: $1,968
Current bid/ask: $0.49/$0.51 (11:55am ET)
Target: Hold until expiration for 100% of $1.36 credit received (83% gains).
As discussed in the opening section of this newsletter, we’re up a great deal on this play, which also serves as a hedge against losses in our AAPL play. I recommend continuing to hold this spread, however, if AAPL‘s losses have you worried, I’d recommend taking profits on the QQQ spread at the same time you close out AAPL.
#5) USO $21-strike July puts
Entry price and date: $1.48 on 6/1/15
Position Size: 12 contracts
Total Risked: $1,776
Closed: Sold at $1.96 on 6/5/15 (9:33am ET)
Profit/ Loss: +32.4% ($576 profit)
When it comes to options trading, time is of the essence. In the immediate minutes following the opening bell on Friday, oil prices tanked on news that OPEC would not be reducing its production quotas – after there were actually murmurs about production increases. Oil sold off sending the bid price on our USO $21-strike July puts to $1.96 and allowing us to capture profits of 32.4% on our patriotic $1,776 investment.
Within minutes, however, the price of oil had reversed into negative territory, knocking the bid on our puts below my revised $1.80 target. If you haven’t taken profits yet, I’d consider holding on for a return to $1.70, for gains of around 15%. I suspect oil will be trending lower over the next several weeks and months, but the time value on these July puts is rapidly eroding. Use caution.
#6) AAPL $131-strike June calls
Entry price and date: $1.53 on 6/4/15
Position Size: 13 contracts
Total Risked: $1,989
Current bid/ask: $0.79/ $0.80 (11:55am ET)
New Target: $1.53 (breakeven)
As stated in the main section of this newsletter, AAPL is conducting its WWDC this week, and that could be a catalyst for the stock. Of course, AAPL could suffer losses – but if it does, it’s likely to keep QQQ from closing above $110, and that would allow us to take big gains on our QQQ bear call spread. For now, I view AAPL and QQQ as a pair trade, and even though we’re down substantially on AAPL, I think holding the pair together continues to make sense. More risk-averse subscribers should consider de-risking by selling these calls for a loss and covering the QQQ spread for a gain – but I expect both of these positions to look better by Thursday.
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 Big Deal Newsletter, and he’s happy to be here!