Trade Summary: January 19, 2016

| January 19, 2016

January 19, 2016

 

 Trade Rationale

Well, suffice it to say that things haven’t improved since our first trades of the year two weeks ago.  In fact, the S&P 500 is down 8% already on the year.  And, it’s the worst opening to a year in history.  Pretty ominous, right?

Believe it or not, I’m not that concerned.  The markets are acting like it’s 2008, and that’s simply not the case.  Not even close actually.  Yes, China is a mess.  Yes, oil‘s plunge doesn’t inspire confidence.  However, we’re nowhere even remotely close to a systemic collapse in financial institutions.  Moreover, the US economy is doing okay.  Not great, but not too bad either.

I do want to start making sure we get puts into our portfolio due to the elevated volatility in the markets right now.  On the other hand, this is as good a time to buy calls in undervalued stocks as I’ve seen in months.  There are some absolute no brainers out there.

As such, we’re going to buy calls on two massively undervalued companies and puts on one company in case the market continues to fall.

The first company we’ll buy calls in is Intel (INTC).  The world’s largest chip maker just beat Q4 earnings estimates by a decent margin.  However, a cautious outlook (due mostly to China) spooked investors.  The selloff was likely overblown due to the negative action of the overall market.  At 11.5x projected earnings, INTC is a great buy.

Perhaps an even better opportunity lies with Gilead Sciences (GILD).  The biopharmaceutical giant is down over 9% so far this year, but it’s all basically due to broad market action.  The stock is trading at a nearly absurd 7.6x projected earnings.

Finally, we’re going to buy puts on Lululemon (LULU).  There’s nothing particularly wrong with the popular athletic apparel maker.  However, it’s one of the few bigger name stocks actually up (over 6%) on the year.  If the market continues to sell off, LULU’s relatively high valuation will attract sellers as well.  That makes this position an excellent hedge against further downside action.

 

Trade Details

#1) Buy Intel (INTC) March 18th 30 Calls up to $1.40

For this trade, we’re looking at INTC to rebound.  Our first profit point for conservative traders is at $32.  For aggressive traders, you can hold up to $34.  For risk control, the conservative exit level is $28.  $26 is the final exit level for aggressive traders.

Intel

#2) Gilead Sciences (GILD) March 18th 100 Calls up to $2.15

With this trade, we’re also looking for a move higher.  Our first exit point for conservative traders is at $97.50.  For aggressive traders, you can hold to $102.50.  For risk control, the conservative exit level is $85.  And, $82.50 is the final exit level for aggressive traders.

Gilead Sciences

#3) Buy Lululemon (LULU) March 18th 52.50 Puts up to $2.75

Finally, we’re looking for a down move in LULU.  Our first profit-taking exit point for conservative traders is at $50.  For aggressive traders, you can hold to $47.50.  For risk control, the conservative exit level is $60.  $62.50 is the final exit point for aggressive traders.

Lululemon

 

Category: AOA Trade Summary

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