Shortly after the open yesterday, I recorded my weekly In The Money segment with Fidelity Investments.
We discussed the implications of declining rates and the U.S. dollar and rising gold on sentiment towards stocks. I also detailed a trade idea in a consumer staple laggard that pays a 3.5% dividend yield that could play catch if the S&P 500 (SPX) were to break out or if investors were to seek bond proxies. Then we discussed the pace of the economic reopening and what Disney’s (DIS) results and stock reaction might say about the broader travel sector as we head into what is normally a robust back to school season. And we looked back on a bullish trade on a semi stock that just can’t get going and we attempt to manage a losing trade.
Click below to watch and see my notes below the video:
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Show Notes:
Trade Idea #1: KO Bullish
Shares of Coca-Cola (KO) are down about 15% on the year, and down about 22% from its 52-week highs made in February, sorely lagging the SPX’s 2% YTD gain and its peer group as measured by the XLP etf up 2%, of which is more than 9% of the weight. KO’s business has been hit hard by the closing of restaurants globally, but its laggard status and 3.5% dividend yield could cause investors to kick the tires in the name either as a catch-up play if the SPX were to break out and the rally was to broaden, or in the event that investors seek relative value, defensive names that pay healthy dividend yields.
The stock has been rejected on three occasions just below $50 since early April and has found support near $44:
If I were inclined to get long the stock I would target a move over the next few months to the mid $50s, but look to stop myself below $45.
Or If I were inclined to define my risk I might consider buying a near the money call in October expiration, allowing for some time for the breakout to play out.
Bullish Trade Idea: KO ($47) Buy Oct 47.50 call for $1.50
Break-even on Oct expiration:
Profits above 49, up 4.2%
Losses of up to 1.50 between 47.50 and 49 max loss below 47.50
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Trade Idea #2: EXPE Bearish
Despite the optimism in the stock market about the pace of the reopening, prospects for therapies and vaccines for the coronavirus, a smooth back to school and work, I am just not buying it as we head into the fall where it feels like all the measures that could ensure a safe return and reopening are a little too little a little too late. Travel and hospitality stocks, unlike the broad market, reflect the lack of visibility on the potential success of a fall reopening of our economy, and Expedia (EXPE) in particular looks poised, from at least a technical standpoint for one more break lower. This might be one of the worst charts in the market, forming a wedge with a series of lower highs, and the stock below the uptrend from the March lows:
Trade Idea: EXPE ($81.50) Buy Sept 80 – 60 put spread for $4.50
-Buy to open 1 Sept 80 put for 5
-Sell to open 1 Sept 60 put at 50 cents
Break-even on Sept expiration:
Profits of up to 15.50 between 75.50 and 60 with max gain of 15.50 at 60 or lower
Losses of up to 4.50 between 75.50 and 80 with max loss of 4.50 at 80 or higher
Rationale:
this trade idea risks 5.5% of the stock price, has a break-even down 7%, and a max potential gain of 19% of the stock price if the stock is down 25% in a little less than 2 months.
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Lookback: Micron (MU) on July 1st I detailed a bullish trade idea in the semi stock (read here)
Bullish Trade Idea: MU ($50.50) Buy Aug 52.50 – 60 call spread for $2-Buy to open 1 Aug 52.50 call for $2.65-Sell to open 1 Aug 60 call at 65 cents
Now ith stock a little higher than it was on July 1, the value if the call spread is nearly at 50% of the initial cost… at this point to stay long you are making the bet that the stock will be at least $54.50 in a little more than two weeks. The risk-reward is poor, and the stock’s relative performance to its peers as measured by the SMH etf is even worse. take the loss and move on remembering our rule of thumb on long premium directional trades to cut losses when the trade is worth around 50% of the premium originally spent, especially as we get closer to expiration.
