Trade Alert: Managing Our Positions

We’re entering a quiet cycle in between earnings seasons.

We were pretty busy there for a while, with 14 full new trades executed since we launched the service in late September. But now we’re going to take a breather with new trades.

We did have some possible new recommendations on the docket for this week, but the companies failed to meet our parameters — and I never want to force a trade for us just for the sake of trading.

However, I do have two trades for managing our portfolio today (and answers to a few mailbag questions).

We have two open positions, which are underwater: NetApp (Nasdaq: NTAP) and Monster Beverage (Nasdaq: MNST). So, as part of our stop-loss strategy, let’s limit our losses to 75% in both.

Monster is down about 60% at the moment, while NetApp is down about 44%. The share price for each is very near the strike prices that we have — indeed, NetApp’s share price is less than $0.30 from our strike price, so it won’t take much of a move for us to move into positive territory. (Monster, at $44.68, is $2 away, and even that’s not a substantial move for this particular stock.)

In the meantime, let’s set these stop-loss orders to limit our losses to 75%. That will allow us flexibility for the stocks to turn things around.

Here are your actions to take. Just be sure to set your stop-loss orders at whatever nets you a 75% loss based on your individual entry prices.

Action to Take
Sell Action to Take
Stock: NetApp (NTAP)
Option Type: Call Option
Expiration: Jan-20-2017
Strike Price: $37
Option Symbol: NTAP170120C00037000
Action: Sell to Close
Order Type: Stop-Loss Order
Duration: GTC (Good ‘Til Canceled)
Limit Price: Whatever nets you a 75% loss.
Trade Deadline: Keep this order open until it is filled or canceled.

 

Action to Take
Sell Action to Take
Stock: Monster Beverage Corporation (MNST)
Option Type: Call Option
Expiration: Jan-20-2017
Strike Price: $140
Option Symbol: MNST170120C00140000
Action: Sell to Close
Order Type: Stop-Loss Order
Duration: GTC (Good ‘Til Canceled)
Limit Price: Whatever nets you a 75% loss.
Trade Deadline: Keep this order open until it is filled or canceled.

Now, let’s look in the mailbag and answer some questions that you’ve had on your mind.

Inside the Mailbag

Randell W. asks:

So far, so good! It does make me a little nervous that we’ve had such a successful string of winners. Wondering how the system will do in a down market?

My answer: Randell, that is a superb question. And it is one that my research assistant, Chad Shoop, and I thought about in our backtesting. As I told some beta testers at a gathering in our Florida offices last week, the backtest data we collected was quite voluminous: 10 years of quarterly earnings reports for every company in the S&P 500 and the Nasdaq 100. (It’s about 510 companies, excluding the overlaps.)

That period covers up, down and sideways markets. And I can tell you that many of the 75 companies that made our final database still followed their expected post-earnings drift, regardless of the market conditions.

Now, that’s not always the case, for sure. And the intensity of the downdraft clearly has its own external effect that no amount of drift momentum can overpower.

Still, I do have some confidence that the drift will survive your run-of-the-mill stock market weakness.

But that’s the big question: Will we get run-of-the-mill weakness that sees stock prices degrade in a slow burn … or will we get a carpet bombing that explodes the market in an instant? One we can survive. The other will certainly be a struggle.

Mina M. asks:

I am very new to options trading, and it has been fun getting to learn about this topic in this group. Regarding Tyson, the stop-loss trade was not allowed by Merrill Lynch (both on the app and over the phone). That being said, this is the first stop-loss I have tried to place while trying to keep the original sell order at a 50% gain open. Are there other trading companies that allow this? The broker implied that some might. Or do we change/cancel the original sell order to replace it with the new stop-loss order?

My answer: Mina, first, I’m really happy you’re having fun helping me beta test this investment service. Second, you’ve stumbled upon a problem several traders have: not being able to have two open orders on the same position — a limit order to take profits at a certain level and a stop-loss order to protect the downside.

Some firms allow that. In the new year, I will spend some time talking to the major options brokerage firms and compile a list of which ones do and don’t allow that.

For now, our strategy is to cancel the existing order and replace it with a new order. That’s the best we can do at the moment to ensure that everyone is able to execute their trades. But I will update you after the first of the year when I build that list.

Will R. asks:

I’m still reluctant to buy so many calls because exercising them would be a dollar amount well above my budget — even though there is no obligation to exercise a call (unlike selling a put).

For example, if 10 FUN call options with a strike of $60 were exercised, that would be $60,000,  if I understand it correctly — an amount which would unbalance my portfolio. This of course limits my returns from many of your trades. Any recommendations?

My Answer: Will, don’t worry about it — there is no chance of exercise with this service.

We own options for a few days to, at most, two months out. And with each one, the contract we own is dated beyond our projected position-close date. So we will never face options expiration that would force your contracts to exercise. And, assuming we did forget to tell you to sell your contracts, your brokerage firm will send you a notice a few days before letting you know that expiration is imminent. At that point, you could sell your contracts — again, assuming we forgot to tell you to sell them before that point. But we’re not going to forget.

So rest comfortably, Will. We’ve got your back.

That’s all for this week. Given that we’re in a slow period, and next week, our offices will be closed for the holidays, I won’t be sending your traditional weekly dispatch until the new year.

But rest assured that my team and I are keeping an eye on the portfolio, and we’ll alert you if anything noteworthy happens. With that said, I hope you and your loved ones have a wonderful time for the holidays.

Until next time, good trading…

Jeff Opdyke
Editor, Earnings Drift Alert