Options Action Recap – 2/20/15: $CELG, $GDX, $M

by Dan February 22, 2015 6:55 pm • Commentary

On Friday’s Options Action on CNBC I detailed a short dated bullish trade idea in Macy’s (M). Additionally, Carter Worth shared his bullish technical view of gold and Mike Khouw offered a trade idea to express a bullish outlook on the GDX, the Gold Miners etf that I included in this post.  Mike also detailed a strategy in Celgene (CELG) using put sales to express a bullish view.


Macy’s (M): 

Macy’s reports Q4 results Tuesday before the open.  The implied move in the options market is about 3% vs the 4% avg over the last 4 qtrs, and the 4.5% avg over the last 8 qtrs  Macy’s like Nordstrom (JWN) and Kohl’s (KSS) has 100% revenue exposure to the U.S., so have little to no affect at all from the strength of the dollar, and their customers should benefit from lower gas at the pump.  IN the last couple weeks KSS and JWN (just Friday) broke out to new all time highs after giving results/guidance.  Macy’s has under-performed so far in 2015 (down 3.5% on the year and down 7.5% from the all time high on Jan 7th), and the stock has already absorbed plenty of news over the last couple months (they have reported Q4 comps, reiterated 2014 guidance, made an acquisition of a beauty brand and announced some store closings). It is my view that the stock is going to trade on fiscal 2016 guidance given Tuesday, and if JWN’s price action post its results/outlook (they actually guided current fiscal year down) is to be used as a guide, then Macy’s could be a scoop at these levels into the print. But I want to define my risk to play for a near term move back to the prior highs:

TRADE: Macy’s ($63.25) Buy to Open March 65/67.50 call spread for 60 cents

-Buy 1 March 65 call for .90

-Sell 1 March 67.50 call at .30

Break-Even on March expiration:

Profits: between 65.60 and 67.50 make up to 1.90, max gain of 1.90 above 67.50 up about 7%

Losses: between 65.60 and 65 lose up to .60, max loss of .60 below 65, or 1% of the underlying stock price.



Rationale:  This trade offers a fairly attractive risk reward risking 1% into an event with the max gain at the prior highs.

From a technical standpoint, the stock has pulled back to near term support level and targeting a move on better than expected guidance back to the prior high looks like a reasonable target:

Macy's 1yr chart from Bloomberg


Watch here:


Gold Miners etf (GDX):

Carter feels that the recent strength in Newmont Mining (NEM), the only gold miner in the S&P500 suggests that the index will play catch up, and that the recent sell off below the 2 year lows was a head-fake and the GDX could be poised for a sharp move higher.  Watch here:

And here is the chart Carter is looking at where he sees a classic bearish to bullish reversal:



Mike suggests that options prices are not inexpensive in the GDX, but he would look to a slightly long dated call spread to participate in Carter’s bullish technical view, but he would look to define his risk.  With the GDX about $20.40, Mike likes the June 21 / 26 call spread for 1.40, which offers a break-even on June expiration above 22.40, with a max gain of 3.60 at 26 or higher:



My View:  While Mike and Carter made a very good point that lower oil, one of Gold Miner’s largest input costs, is a positive for them, my view is that industrial commodity boom and bust of the last 5 years was a direct result of U.S. Fed policy and that another leg lower in oil will not be kind to mining stocks as the next leg lower may be a result of declining demand as opposed to over supply.  Its been hard to argue with Carter’s technical views of late, and while the sector is oversold on a long term basis, $20 appears to be important near term support.  Lets see how GDX and GLD act when the S&P makes new highs, if GDX shows good relative strength, I could be inclined to agree with Carter and Mike.


Put Selling as a strategy in Celgene (CELG):

Mike took a look at selling puts as a strategy to place limit orders to buy stocks that your want to own.  I thought his analysis was spot on as to why and how to go about this strategy.  Watch here:

Here is Mike’s Playbook:


Mike likes selling the CELG (stock reference $123.40) April 115 strike put at $2.60.  If the stock is above $115 on April expiration then he would collect 2.60 or about 2% of the underlying stock price, with the worst case scenario that he is put the stock at $112.40, down 9% from current levels:



My View:  Key point for those looking to employ this strategy is being prepared to be put the stock slightly below the put strike that you sell. I am very much in favor of put sales against long stock positions for those who would add to existing positions at lower levels. In this scenario if the stock is above the short put strike at expiration then you add yield to your existing long position. If the stock is below the strike you have the choice of being put stock at a discount to the strike or merely covering the put and booking a loss.  But this strategy is very similar to overwriting from a yield enhancement standpoint, but with a very different risk profile.  The obvious difference is that call sale against long stock merely caps gains, adds no additional risk to the initial long stock position. The exchange for potential yield enhancement is loss of potential gains beyond the premium of the sold call strike. On the flip-side the exchange for potential yield in put selling is the potential to magnify losses of initial long stock position in the event of a sharp move lower.  If you understand the trade offs of these two strategies, and you are a patient investor than either or the combination of both (selling strangles) could be an attractive way to add alpha to your portfolio.