Trade Alert: A 50% Gain … and Inside the Mailbag

Today, I’m digging into the mailbag to answer some of your questions, but first, let’s start with a couple of updates…

First off, this morning, our position in Best Buy (NYSE: BBY) surged, triggering our orders to sell half the calls for a 50% gain in just three days. As part of our profit-managing strategy, we’re going to place a stop-loss order to secure at least 10% on the second half of the position.

If your orders to sell half your position at a 50% gain haven’t been filled for any reason, go ahead and sell half your position at the market. Then you can manage the remaining half with the 10% stop-loss.

Remember that the trade directions below are based on our official entry price of $2.60. So be sure to place your stop-loss order at whatever price nets you a 10% gain based on your individual entry price. For the portfolio, 10% would be roughly $2.85.

Here’s your action to take:

Action to Take
Sell Action to Take
Stock: Best Buy (BBY)
Option Type: Call Option
Expiration: Jan-20-2017
Strike Price: $44.04
Option Symbol: BBY170120C00044040
Action: Stop-Loss Order
Order Type: GTC (Good ‘Til Canceled)
Limit Price: $2.85
Trade Deadline: Keep this order open until it is filled or canceled.

Elsewhere in our holdings … our new trade on Tyson Foods (NYSE: TSN) is officially in the portfolio since it traded under my limit price of $4.30 yesterday and this morning. In fact, we’re now up 20% in this position in just a day.

As you likely know by now, our official entry price is pulled from the average of the price right after the alert broadcasts and the price an hour later. So our official entry price is $4.18, meaning our limit order price to sell half the position for a 50% gain is set at $6.30. Make sure to set yours at whatever nets you a 50% gain based on your own entry price.

As always, I need your feedback when entering a trade so that I know how everything is going with the trading process. Please let me know how this one went for you by filling out the brief survey below.

I appreciate the time you are all taking to reach out about the service.

Before we get to your questions, I have one more update.

As I mentioned a couple weeks ago, Monster Beverage (Nasdaq: MNST) was splitting its shares, and I expected that to mean good things for us in the long run. That’s why we decided to hang on to our calls even though shares were dipping. Now Monster has surged about 9% in the past two days, and our calls have gone from a loss of 85% to a loss of about 10% — a significant turnaround. And I expect that momentum to continue.

I’ll be sure to keep you updated.
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Now for the mailbag…

Your Questions Answered

I’ve been receiving a lot of great feedback and responses from you. Here’s what some of you have been asking:

Jim B. asks: “Why not buy before the earnings are released?”

Jim, we can’t trade before the earnings release because the degree to which earnings miss or beat estimates is one of the two parameters that defines whether we trade or not. This service is based on post-earnings drift. So we have to see what the earnings do before we can determine if a company meets our trade parameters.

Trading before the earnings is just guessing.

Jen O. asks: “I’m very happy for the service. It seems that it’s the only one out there that’s bringing in some big money. However, I’m doing trades a little differently. Instead of setting a stop-loss, I’m using trailing stops. I figure if a stock is still going up, I don’t want to sell it for a 50% gain if I can get more than that. Am I wrong to be doing it this way?”

Jen, you’re not doing it wrong. I understand your logic, and it’s not a bad logic. I might even consider it for the service when I roll it out fully next year. It makes a lot of sense. Once our option is up a certain percent, we’d just put in an initial trailing stop at, say, 25%, just in case. And then we’d just adjust the trailing stop higher as the price moved higher.

The only real downside is that you don’t lock in assured gains of at least 50% (as we’ve been doing). We could be in a position where we put in a 25% trailing stop when the options are up 50%, and then the price declines and we’re stopped out at a lower gain.

That’s the trade-off.

But I will open this up to the whole gang: To all the other beta testers out there, what’s your take on this?

Would you rather lock in a 50% gain on half the position, as we do now, and then use trailing stops on the other half to follow the price higher, assuming it goes higher?

Or would you rather I set a 25% trailing stop when the options are up 50% and continue to let the entire position ride, knowing that we could get stopped out of the entire position at a 25% gain?

I’d like some feedback on this so that I can better shape this service. You can reach me at earningsdrift@sovereignsociety.com.

Dale L. asks: “Is it possible to include your eportfolio for Earnings Drift Alert on our subscription page if we are a member? Or should we just keep track of the trades on our own?”

My answer: We have the eportfolio up on the Earnings Drift Alert beta test website. You can find the link at the top left and bottom of every dispatch. For the direct link to the portfolio, you can go here: http://sovereignsociety.com/earnings-drift-alert-2/earnings-drift-alert-eportfolio/.

It’s available 24 hours a day, seven days a week.

Gordon W. writes: “I read and note your comments about calls outperforming when bears dominate and vice versa in your backtesting. However, because of concern about the state of the economy and some people’s view of a likely crash in the near future, I ask, were such an event to occur, how would you expect any call positions to be affected? Is the answer as simple as that we would simply take a maximum 75% loss?”

So there are a couple ways I see this, depending on how a crash plays out. If the market plunges and we’re looking at days and days of downward pressure on stock prices, then we’d likely see a lot of 75% losses. However, depending on what I see going on, I might cut bait early and reduce the stop-loss to, say, 25% or 50% to limit capital loss.

On winning positions, we would be stopped out at a minimum of 10% and probably higher on others, since we might use trailing stops on positions that reach 100% gains.

The other answer is that we could still see a post-earnings drift trend continue to push some of our positions higher — even in a down market. And by “down,” I mean a market that is meandering lower so that it reaches a fairer value. (Today’s market is clearly overvalued.) This is a scenario that isn’t quite a crash, just a meaningful revaluation to lower levels, and in that scenario not all stocks will be hit at once.

Randall W. writes: “Do we anticipate a maximum number of positions at one time? This would be helpful in allocating per trade dollars and portfolio size. So far, so good on the service.”

Randall, no, we don’t. All the trades are predicated on what the underlying companies report for their earnings, and Wall Street’s initial reaction. We could, in theory, go through an entire earnings season and not have a single trade to make … or, in theory, we could go through an entire earnings season and every single stock in our database (something in the neighborhood of 70) could signal a trade.

All I can tell you is that in our backtesting, we’ve typically seen between nine and 15 companies meet the parameters necessary for a trade. So far this season, we’ve initiated 14 trades, and we still have two companies in our database that will report earnings.

I also saw more requests for an SMS service while I was rooting through the inbox, and unfortunately, we can’t provide that for the beta test at this time. But I will be sure to have that texting service available when this trading service fully launches next year. In the meantime, please keep an eye on your inbox for my dispatches labeled “Trade Alert.” That’s how you’ll know they’re timely.

That’s all for this week unless another trade gets triggered tomorrow. If I don’t talk to you again, I want to wish you and your loved ones a wonderful Thanksgiving.

Until next time, good trading…

Jeff Opdyke
Editor, Earnings Drift Alert