I wish I had a penny for every word spoken or written about the possible rate hike on Thursday. This has been the sole topic of discussion for weeks and nobody is any closer to knowing the answer.
The markets rallied over the last two days on expectations the Fed would finally hike rates and the months of uncertainty would be over. Regardless of the outcome, we are pretty much guaranteed a bout of volatility. Rate hike announcements typically cause sharp declines but are then followed by long periods of gains in the months ahead. If they do announce a hike, the long-term outlook is good.
However, the economic numbers are not moving in the Fed's direction. The Consumer Price Index (CPI) declined for August by -0.1% and the first decline since January. The rate of inflation has been slowing since the +0.4% rise in May. It was +0.3% in June and +0.1% in July. Whether this decline in inflation will stop the Fed from hiking is unknown. The Fed claims it is data dependent but the data, other than employment, has been weakening. Almost daily
a new analyst forecasts a global recession for mid 2016. That is hardly an environment where the Fed should be raising rates.
The Fed has been a cheerleader for the U.S. economy. If by chance they don't hike rates on Thursday there will be a large number of analysts and investors that will wonder what the Fed knows that we don't. Is the economy worse than the recent numbers predict?
For these reasons, we are likely to see a strong bout of volatility Thursday afternoon and again on Friday. That could be positive or negative volatility but it will definitely exist.
I am putting entry triggers on the two new plays I recommended today. We do not want to blindly jump into new positions ahead of the Fed announcement. S&P futures are down -4 tonight but after two days of gains that is to be expected and it is a relatively small number.
Personally, I would recommend not trading ahead of the Fed announcement. When you know there is a trip wire for the market at 2:PM eastern and wild market swings may result, it is reckless to jump into positions that could create liability. Be patient, there is always another trading day.
Send Jim an email
Items shaded in blue were previously closed.
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.
HOT - Starwood Hotels (Stopped)
Starwood rebounded from its Sept 1st low at $68.41 to stop us out of the short side at $73.85 on Monday. Since it was a September position, the premium had already deflated to zero so there was no loss.
Closed Sept $82.50 short call, entry $1.10, exit .01, +1.09 gain
Expiring Sept $90 long call, entry .48, expiring, -.48 loss
Net gain 61 cents.
BABA - Alibaba (Stopped)
Alibaba rebounded +$7 in the last two days after warning of lower sales. If you want logic, do not look in the stock market. Their 1.2 billion share lockup expiration is on Sunday so there will be a lot more stock to trade on Monday. We netted almost a full profit on the position since the September option had already evaporated.
Closed Sept $77.50 short call, entry .55, exit .02, +.53 gain.
Expiring Sept $82.50 long call, entry .10, expiring, -.10 loss
Net gain +.43
CAT - Caterpillar (Stopped/Reenter)
The market rally over the last two days caused a serious short squeeze in Caterpillar. Their outlook for a significant slowdown in the Chinese economy has not changed. This was simply short covering.
I am recommending we reenter the short position with a trade at $74.25.
Closed Oct $77.50 short call, entry .92, exit $1.25, -.33 loss
Retain Oct $82.50 long call, entry .26, no stop.
Sell short Oct $77.50 call, currently $1.21 with a CAT trade at $74.25. Stop loss $75.75.
RRC - Range Resources (Stopped/Reenter)
Range Resources spiked on a strong short squeeze along with the market. Natural gas prices continue to decline and the future remains bleak for RRC.
Shares rallied right to strong resistance at $39 and I am recommending we reenter the short side with a RRC trade at $37.25.
Closed Oct $40 call, entry $1.35, exit $1.81, -.46 loss.
Retain Oct $45 long call, entry .63, currently .50.
Sell short Oct $40 call, currently $1.90, with a RRC trade at $37.25, stop loss $39.25.
QIHU - Qihoo Technology (Bear Call Spread)
Qihoo rallied +7% on Wednesday on no news. It was heavily shorted and investors not wanting to hold over the FOMC meeting fled the market and created a short squeeze in all the heavily oversold stocks. Qihoo is still in trouble. This is a technology company in search of a mission. Originally, they were a market leader in free antivirus software. To monetize this they launched ad sponsored, cloud based security products, web browsers, virtual goods bought in online games, etc. They launched So.com, the second largest search engine in China behind Baidu. For a while business was good. Advertising revenue from search engines, portal sites and security products, rose +72% annually last quarter but that was down from the prior two quarters at 75% and 89%.
Revenue from value added services declined -16%, compared to +140% growth a year earlier. The culprit was the suspension of online lottery operations. The number of daily clicks from the start page and sub pages fell -10%.
Earnings Dec 1st.
With a QIHU trade at $44.35
Sell short Oct $50 call, currently $1.15, stop loss $46.35
Buy long Oct $55 call, currently .35, no stop.
Net credit 80 cents.
WYNN - Wynn Resorts (Bear Call Spread)
We have an expiring September position and this will be a new October position.
Wynn Resorts is in trouble. Macau gaming revenue declined -35% in August but that is just one more decline in a string of 17 months of consecutive declines. The government is cracking down on high rollers. They banned smoking in the casinos and the decline in the stock market hit high net worth investor/gamblers hard. Revenue is not likely to increase in the near future. WYNN has already guided lower and cut their dividend.
Last week there was news of a $258 million theft from a junket operator inside the Wynn Macau. The casino has repeatedly said they have no exposure because the junket operators are independent companies that market gambling excursions and receive discount rooms and special facilities from the casino. That did not stop protestors from picketing outside the Wynn this week warning people to stay away.
WYNN shares rallied on Wednesday after the theft estimate was reduced to $34 million and the junket operator Dore Group said the money was never deposited into their company accounts. The theft was by a cage manager that deposited the money in a fraudulent account she setup for the purpose. In theory, this further insulates the Wynn from any liability.
However, it is another black eye for the casino and just one more problem in a long streak of unlucky events. Shares rebounded on short covering in a positive market but they have been under pressure for a long time. The Wednesday spike to resistance is probably another shorting opportunity for the bears.
Because of the potential volatility on Thursday I am putting a downside trigger on this position. We do not want to enter the play unless WYNN shares roll over from their current level.
With a WYNN trade at $72.35
Sell short Oct $80 call, currently $1.50, stop loss $74.65
Buy long Oct $85 call, currently .68, no stop.
Net credit 82 cents.
Existing Play Recommendations
Links to original play recommendation
HOT - Starwood Hotels (Bear Call Spread)
QRVO - Qorvo Inc (Bear Call Spread)
YUM - YUM Brands (Bear Call Spread)
BABA - Alibaba (Bear Call Spread)
BITA - Bitauto Holdings (Bear Call Spread)
WLL - Whiting Petroleum (Bear Call Spread)
WYNN - Wynn Resorts (Bear Call Spread)
SWKS - Skyworks (Bull Put Spread)
HP - Helmerich & Payne (Bear Call Spread)
CAT - Caterpillar (Bear Call Spread)
RRC - Range Resources (Bear Call 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.