Trade Alert: When Lightning Strikes
We’re hitting the summer doldrums. This time of year, we’ve already put many of our summer and fall trades into play. In the meantime, I’m waiting for a few other trends to take shape before recommending new trades.
But while this might be a slow period for us, that doesn’t mean this season’s patterns have been put on pause — specifically its thunderstorms.
Chris and I created Precision Profits to capture the seasonal trends that play out in businesses across the world. That includes periods such as thunderstorm season (which we’re currently in) because lightning, heavy rain, hail and wind can have a huge impact on everyone from individuals to corporations — and even Chris.
Which brings me to what happened to Chris over the weekend.
Last Saturday night, his apartment was struck by lightning, which I’m told shook the entire building and set off car alarms. It was soon followed by three nights of torrential rains. While no one was harmed, Chris tells me the roof is hanging on by a thread. About 75% of it was destroyed by the fire that erupted after the building was stuck, and when you include the massive deluge, it’s a wonder the roof hasn’t already caved in.
While we may not hear about it often, lightning actually has a noteworthy impact on business. A bolt of lightning can top 50,000 degrees — five times hotter than the sun’s surface — and its energy can exceed the power of a nuclear reactor. Until the last few years, it was the second most common cause of storm-related deaths: Right now it’s No. 3, trailing flash floods and tornados. And just in the United States alone, lightning strikes the ground about 30 million times a year. According to the Insurance Information Institute, that translated to a cost of $739 million in homeowners’ insurance losses in 2014, up 9.7% from 2013.
Thankfully Chris wasn’t injured, but the damage to his home was extensive, and it underlines the role that weather plays in our lives — and in the economy — every day.
Before I sign off, I have a few quick updates for you and an action to take…
Let’s start with Briggs and Stratton (NYSE: BGG): As you know, a few weeks ago we set a good ‘til canceled limit order to sell half of our BGG October $20 put options for a 100% gain. So far, that trade hasn’t been filled. At this point, you can cancel it and we will wait for shares to climb higher before placing another trade. I will keep a close eye on it and send you an alert when it’s time to take profits.
Action to take: Cancel the limit order to sell to close half the BGG October $20 put options (BGG151016P00020000).
Now let’s turn to Carnival (NYSE: CCL).
Carnival, the global cruise-ship operator on which we own October puts, announced its second-quarter earnings this past Tuesday. Though it topped analysts’ estimates, its outlook for the third quarter was disappointing. Which is exactly what we are banking on with our puts. Due to rising fuel costs and an appreciating dollar, the company issued guidance that was roughly 6% below analysts’ estimates.
However, the stock hardly budged, and the following day Credit Suisse upgraded its price target for Carnival, sending shares slightly higher. So our options are underwater for the moment.
But I expect that share rise ultimately to reverse — and with our October expiration, we have plenty of time to see our thesis play out.
Now for a quick note on our two puts that expired worthless last Friday: Cabela’s and Cedar Fair.
We made the Cabela’s trade to capitalize on the company’s weak seasonal pattern from March through June. The stock followed that trend, just not quite enough to hand us a profit this time. Keep in mind that we doubled down on this seasonal trend by originally purchasing put options in April, which handed us half-gains of 126% and 169% in just a week’s time.
As for Cedar Fair, it was a short-term play that went the right way for us — just at the wrong time. We aimed to capture a time frame of less than two months because the longer-dated options were simply too expensive when we initiated the trade. In the end, however, we didn’t have enough time to see the trend go in our favor.
Instead of falling in early June as it typically has, Cedar Fair’s sell-off started a few weeks later, just as our options were expiring.
Well, that’s all for this week. You can see how the rest of our portfolio is doing by clicking here.
Until next time, good trading…
Editor, Precision Profits