Yesterday, shortly after we placed a 75% stop-loss to preserve capital on our Interpublic Group of Companies (NYSE: IPG) calls, the option traded below our official $0.14 stop-loss order.
As you know, we instituted this 75% stop-loss rule to protect us from larger losses. Most of the time, if an option breaches this level, there’s a good chance the drift isn’t coming to fruition. Of course, options can be volatile, and there will be times when this level gets hit and then the price quickly reverses.
Unfortunately, this was one of those times. The price of the calls rebounded to close the day down 39%.
So here’s what that means for us…
Since the first price recorded at or below our stop-loss level was $0.10, that is our official exit price — resulting in an 82% loss.
If your stop didn’t trigger for any reason and you don’t want to monitor this position on your own, go ahead and close it at the market today. I will no longer be following the trade.
Of course, if your stop wasn’t triggered — and you don’t mind keeping tabs on the position — feel free to keep your stop in place and continue holding the calls. You can see if the price can rebound even more. It’s up to you.
Just keep in mind that this position is officially out of the portfolio.
It’s never fun taking losses like this — no one enjoys it. But it’s inevitable when playing the markets. What’s important is to not let the occasional loss cloud the gains you’ve been taking — like the recent 175% profit on the second half of Activision Blizzard, the 9% and 51% gains on each half of United Rentals and the 70% gain on the second half of Juniper Networks.
Our drift system is clearly working. We can’t bag winners 100% of the time, but our gains will continue to outpace our losses.
As for the rest of our portfolio, things are holding up.
We have four remaining positions, so I’ll briefly touch on each of those today.
Monster Beverage (Nasdaq: MNST) June $45 call options: We are basically flat in this option so far, and we entered it a couple of weeks ago. Based on its historical drift, this trade has worked out positively in 10 out of 11 instances, so I’m not worried about it at all. We know this upswing can kick in at any point from now through May 1, so there’s still plenty of time for this trade to hand us a significant gain.
Garmin (Nasdaq: GRMN) July $52.50 call options: We are currently down 18% in this option, but the stock is at $50.90, just slightly below our strike price. Our exit date should be around April 22, and with a July option, that’s more than enough time for this return to turn around. The data on this drift showed a 72% win rate, occurring 18 total times, with gains from a modest 1% to more than 20% for the stock. With options, these can turn into handsome returns. So we will patiently ride this drift a little longer.
Akamai Technologies (Nasdaq: AKAM) May $65 put options: The stock is around $63, so it’s really close to our strike. This specific drift was tracked seven times during our 10 years of research, and only one of those times did the stock rise. The other six occurrences saw declines anywhere from 2% to 15%. Which brings up a point: This is our only put option open at the time.
This is the fantastic thing about Earnings Drift Alert. We can benefit from rising and falling stocks simultaneously.
As I mentioned last week, this is a major advantage of a system dependent on earnings performances. As market conditions deteriorate, the system will pinpoint more put options. But if the strong bull market continues, calls will be our main trades. It automatically adjusts to market conditions — making it a true system that we can use no matter which way the market is heading.
Lowe’s Companies (NYSE: LOW) April $82.50 call options: This is down the most, 41%, and I expect to close this the soonest — April 1. There isn’t much to add about this right now. The stock isn’t far away from our strike — trading at $81.85. We paid $1.85 for the option, so if the stock gets back to $84.35, just 3% higher, we would be at breakeven.
Since April 1 is a Saturday, though, I’ll look to manage this trade next Monday by either exiting it or placing a stop-loss to give it a little bit of time to run higher. I’ll have more on that Monday.
That’s all for today. Our next wave of trades doesn’t really get going until the second week of April, but there are a few possible trades between now and then. I’ll alert you immediately when one meets our parameters so you can benefit.
Chad Shoop, CMT
Editor, Earnings Drift Alert