Options Review, Auto Albatross and More…

The past few weeks have been unusually brutal with our options trades. First, I’d like to give a quick primer on my options strategies and a bit about the risk parameters.

All of Profit Catalyst Alert trade ideas are based on fundamental analysis. This means I research everything I can about a stock or a group of stocks. I do my best to be on top of industry trends and macro trends but most importantly to know and understand the fundamental trends and business models specific to each stock.

It’s a lot of work and a job that is never done as new information arrives daily. It is virtually impossible to know every risk and possibility for a stock. Sometimes I am wrong. There are portfolio managers far smarter than me with behemoth research budgets who still get trades wrong.

Look no further than the famous bull and bear war between legendary investors Bill Ackman and Carl Icahn over Herbalife (NYSE: HLF) to see how even the wisest players can be wrong. Both are tremendous investors with piles of data and analysis supporting their thesis. While both were likely right and wrong on many points, in the stock market the only way to be “right” is to have the stock move in your favor.

I remind you of this not to justify my bad trades but to help you understand that there is risk associated with my suggested trades. There is an exponential risk when trading options. Not only do you need to be right on the direction of the stock, but you also need to be right as to what price the stock will go to within a certain amount of time

When the service first launched, it did not include any suggestions for options trades, just equities. A groundswell of subscriber requests led to our inclusion of options trades.

The options suggestions that I provide are simple buys of puts (when I am bearish) or calls (when I am bullish) on a stock or a group of stocks. I have found it helpful to choose an expiration date that encompasses an event that I expect will move the stocks.

The biggest risk with options is that they will expire worthless. While I do my very best to sell an option before this happens, the execution of that strategy is tricky.

The General Motors (NYSE: GM) October 37 calls, for example, traded at $.70, up about 20% from our purchase price a bit more than a week ago. However, the stock faded quickly and they were at just $.08 last Friday. A similar situation occurred in the Chemours Company (NYSE: CC) and NXP Semiconductor (NSDQ: NXPI). All three call options, which expire on October 19, trade for pennies right now.

Obviously, this is a horrible loss. However, the risk/reward from such low proceeds tilts in the direction of holding on to the options for the chance the stocks might bounce.

I am considering holding firm to a rule of selling unprofitable options one month before expiration and rolling those proceeds into a future series. I believe using this hard and fast rule will allow us to avoid a greater loss.

The AGCO Corp. (NYSE: AGCO) and Allergan (NYSE: AGN) puts are both down from where we initiated the positions but they do not expire until November 16th so I am giving them a bit more time before a possible roll forward.

I can’t reiterate enough that despite my due diligence in research on these trade ideas, the possibility of losing 100% on options is always present. Many of you are more sophisticated than I regarding options hedging strategies and may find a way to limit that risk.

However, this newsletter is focused on bullish and bearish fundamental equity analysis so I will leave the options hedging to the experts. Many subs choose to simply utilize my equity ideas due to their limited risk tolerance for options trades.

Around the Portfolio:

AbbVie (NYSE: ABBV) received approval from Health Canada for the combination of VENCLEXTA with Rituximab as a treatment for patients with chronic lymphocytic leukemia in Canada, CLL accounts for approximately 2,400 newly diagnosed cases of leukemia each year and is responsible for more than 600 deaths a year.

I expect the onslaught of new migraine drugs to cut into Allergan’s Botox for migraine franchise. The FDA approved a third new preventative migraine drug last week. On Thursday Eli Lilly (NYSE: LLY) announced late Thursday the approval of Emgality, a once-monthly self-injection. Like the two prior approved drugs by Amgen (NSDQ: AMGN) and Teva (NYSE: TEVA), Emgality is an antibody drug that blocks calcitonin gene-related peptide (CGRP), a protein associated with migraine pain.

BJ’s Wholesale (NYSE: BJ) priced 28 million shares sold by insiders at a price of $26. The shares sold are from the private equity team. The sale doesn’t concern me as this is the traditional exit route for private equity investors.

BJ’s Wholesale was initiated with a Buy at Northcoast with a $38 target noting they see meaningful EPS upside potential from BJ’s mix shift. The Northcoast recommendation carries a bit more weight than other brokerage firms’ because the firm has never been part of the underwriting team for the company. Analysts of brokerage firms who help underwrite IPOs and secondaries are more likely to be positive on a stock but the Northcoast analyst has no such impetus.

All auto and auto-related stocks melted last week. Not only did hopes for a tri-party NAFTA agreement fade, but German automaker BMW issued a profit warning. General Motors, The Chemours, and NXP Semiconductor all sold off hard on this news.

As I write this Sunday evening there are rumblings that a deal is in the works, if so, please look for an early trade alert to exit our call positions if the stocks bounce.

While higher costs for emissions standards drove a big part of BMW’s profit miss, the company also noted disruptions in demand due to trade uncertainty. The entire auto sector and its suppliers sold off on this statement.

I’ve been surprised by the assumed correlation between The Chemours Company and NXP Semiconductor to auto production. NXP sells semiconductor chips to auto companies and one of the Chemours most profitable chemicals is used in auto paint.

A bit less than half of NXP’s revenue is sold to automotive customers but its’ chips are gaining share within the auto market. This should help insulate them from any slowdown in auto unit sales.

The bullish position in Chemours is mostly based on increased sales of its green refrigerant cooling chemicals. Its Tio2 product is used to make paint but that paint is used on a variety of industrial products in addition to autos. The company does not quantify how much of its sales are for autos but due to lack of disclosure, it is likely less than 10%.

The put options on MGP Ingredients (NSDQ: MGPI) and Molson Coors (NYSE: TAP) traded below my suggested buy prices so those are now in the portfolio. The Boston Beer (NYSE: SAM) puts appear to not have traded at all. That stock dropped 3% Friday on no apparent news. I will leave the trade suggestion open for another day or so to see if some volume materializes within my suggested price range. If that doesn’t look like it will work out, I will issue a new trade alert with different parameters.

Steelcase (NYSE: SCS) will host an Investor Day on October 3 at 9 am. I expect the stock to do well into the meeting due to increased exposure but don’t expect anything shattering fundamentally as the company just reported strong earnings last week.

Stock Talk

Daniel Long

Daniel Long

Appreciate the explanations. Thanks.

George McMillion

George McMillion

Thanks for insight. Anyone trading equities or options should know and understand risk and be prepared for losses.

Thanks, George



I elected to roll CC and NXPI
CC BTO Jan18, 32P STO Jan18 37P for 1.05 credit
BTO Jan 18 52.50C STO Jan 47C for .60 credit
BTO Nov.16 75P STO Nov 16p 1.00 credit
BTO Nov 16 100C STO Nov,16 95C .59 credit
Good trading

Add New Comments

You must be logged in to post to Stock Talk