The FOMC minutes suggested the Fed was worried about "transitory" problems in the economy and the chance of a rate hike at the June meeting was unlikely. The major indexes spiked on the news but were immediately sold to close back near the lows of the day.
The biggest loser was the transportation sector with the Dow Transports ($TRAN) falling -2% or -170 points on a spike in oil prices and the potential for airlines to begin adding capacity. Southwest airlines increased its capacity growth outlook for the second time in less than a month and the sector imploded. Southwest is planning on adding 8% to capacity in 2015. Shares of Southwest (LUV) fell -9% on the news. United Continental (UAL) fell -10.3% of -$6.27. Delta (DAL) was the best performer with only a -5.6% decline.
The airlines have just returned to decent profitability after shedding capacity for the last six years. The lower oil prices are a windfall and the outlook was good. However, the potential arrival of a price war just crashed the stocks of the major carriers. If capacity at Southwest is increased then fares will be lowered in order to fill the seats. That requires other carriers to lower prices to compete. Since the planes at the other carriers are already full it could mean they will have to add capacity to accommodate the cheaper seats.
On the bigger picture the Dow Transports crashed below critical support at 8,600. This is a strong sell signal for the broader market with the Dow Industrials the likely target of the selling. Dow Theory says any Dow high should be confirmed by a new high on the transports. This non-confirmation by the transports suggests the Dow Industrials will follow the transports lower.
The linkage between the two indexes has been rather uncoordinated over the last several years but a strong move on one index does normally produce a similar move on the other.
With the rest of the major indexes closing back near the lows for the day it sets up the potential for a decline on Thursday. The transports are crashing. The FOMC minutes are now history and while June is off the table for a rate hike there is a possible July hike because the Fed is determined to hike rates this year. The language of the minutes restates their implied urgency to "lift off" soon. This is going to weigh on the market despite economists predicting September at the earliest and more likely in 2016. The market economists are speculating against the Fed language and all it will take is some strong May payroll numbers and June could be back on the table.
What this means for us is the possibility of continued volatility and lack of direction. It means getting back into the green on the June positions is going to be very difficult.
The May expiration cycle did end with a minor gain. It was a rough month but the gains outweighed the losses.
I have learned some hard lessons in the June cycle. I was too aggressive in my strikes and the volatility in the stocks I chose was too high for the current market volatility. The big swings in the indexes earlier in the month caused swings in our positions. Also, the earnings cycle weighed on the plays but not because any of them had earnings. The earnings in the sector had an impact as did the extreme volatility in oil prices.
Going forward I am targeting smaller gains in less volatile stocks with options farther away from the stock price. Now that earnings are over that bit of volatility is no longer a factor. Unfortunately the market may be preparing to increase its movement and that will always be a challenge until it turns directional.
This is the last newsletter with the extended column for 10 contracts. I have had requests to put the option symbols in the portfolio and I don't have room for both. There is a 600 pixel width limit in the newsletter.
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Current Position Changes
Stop Loss Updates
Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.
LNG - Cheniere Energy (Stopped)
Cheniere spiked to $77.47 at the open on Monday despite a downgrade by Goldman. Out stop on the short call was $77.45 and that knocked us out by TWO cents. That was the second time we were stopped on the short side and I am not reentering the position. We still have the long June $85 call with the stock at $76.35. it would take a miracle to put that call in the money but stranger things have happened.
Closed June $80 short call, entry $.97, exit 1.17, -.20 loss.
Retain June $85 long call, entry .70, currently .30.
DDD - 3D Systems (Stopped)
3D spiked on Monday to $24 on news of a major contract signed with the Navy to put 3D printers onboard ships to produce replacement parts for the thousands of things that can break on a ship on a six-month cruise. This is a big deal for 3D but the stock immediately sold off again to $22 once the news passed.
We are never going to be totally immune from news headlines that produce spikes in the underlying stocks. Regardless of how carefully we screen potential plays we will be hit from time to time by an unexpected headline.
Closed June $24 short call, entry .49, exit .85, -.36 loss.
Retain June $26 long call, entry .23, currently .19.
WYNN - Wynn Resorts (Update)
Wynn shares continue to drift lower with a close at $107.69 today. We are currently short the $120 call, which has declined from $2.50 to 45 cents. For those readers that want to try and recover some of the losses on the WYNN position you could close the $120 call and sell the $115 call, currently $1.11. If Wynn moves lower or just holds its current position that would give you a little more premium to decay.
I am NOT changing the current position. I am comfortable just letting the $120 continue to decay. I have already been bit on Wynn and I don't want to add additional risk to the portfolio. I am only suggesting this change for those looking to be a little more aggressive on recovering the current loss.
Short June $120 call, entry $2.50, currently .45, +2.05 gain
Long June $125 call, entry $2.00, currently .15, -1.85 loss.
TRGP - Targa Resources (Bear Call Spread)
Targa is a pipeline company in the U.S. with 11,400 miles of pipeline dealing mostly with natural gas. Q1 revenue declined -27% to $1.67 billion. It would have been worse because of the drop in gas prices but they acquired Atlas Pipeline Partners and included one month of their revenue in the report.
Earnings were 21 cents compared to 78 cents in the year ago quarter. The announced a cash distribution of 82 cents that was paid on May 15th meaning there is no longer any incentive for investors to hold a stock with declining earnings until the next distribution cycle.
Goldman downgraded them from buy to hold and JP Morgan cut them from overweight to neutral.
Earnings August 4th.
Sell short June $105 call, currently .90, stop loss $102.45
Buy long June $110 call, currently .30, no stop.
Net credit 60 cents.
SWIR - Sierra Wireless (Bear Call Spread)
Sierra reported adjusted earnings of 22 cents that beat by a nickel but then guided lower for the current quarter. The GAAP loss was -30 cents compared to -13 cents in the year ago quarter. Sales and marketing costs rose by 6.3%. Admin expenses rose +11.6%.
They guided for Q2 revenue to be in a range of $153-$156 million with earnings of 21-24 cents. However, analysts were expecting $157 million and 25 cents.
Shares fell to $32.21 on Wednesday and right at a six month low. If this support breaks it could easily decline to $25.
Earnings August 6th.
Sell short June $35 call, currently .50, stop loss $33.55
Buy long June $40 call, currently .15, no stop.
Net credit 35 cents.
Existing Play Recommendations
Links to original play recommendation
$OVX - Oil Volatility Index (Bear Call Spread)
RCL - Royal Caribbean (Bear Call Spread)
GDX - Gold Miner ETF (Bear Call Spread)
JKS - JinkoSolar (Bull Put Spread)
BBBY - Bed Bath & Beyond (Bear Call Spread)
FB - Facebook (Bear Call Spread)
X - US Steel (Bear Call Spread)
WYNN - Wynn Resorts (Bear Call Spread)
UAL - United Continental (Bear Call Spread)
LNG - Cheniere Energy (Bear Call Spread)
FSLR - First Solar (Bear Call Spread)
DDD - 3D Systems (Bear Call Spread)
GPRO - GoPro (Bull Put Spread)
Prices Quoted in Newsletter
At Option Investor we have a long-standing policy prohibiting the editors and staff from actually trading the individual recommendations in order to conform to SEC rules concerning trades.
The prices quoted in the newsletter are the end of day prices in most cases.
When discussing fills or stops the prices quoted are the bid/ask at the time the entry trigger or exit stop is hit. This is NOT a price that someone on staff actually got using a live order.
For entry/exit points at the market open the prices quoted will be the opening print. The majority of the time the readers are able to get a better fill than the opening print because of market maker bias at the open.
For trades with an opening qualification the prices quoted will be the bid/ask at the time the qualification was met.
All of these rules normally produce worse prices than an active trader would normally get. Because they are standardized there may be some cases where a price quoted was better than an actual fill. If you received a price that was dramatically different than what was quoted please let us know.