Monday Market Mayhem: Back Over Our Bounce Lines

Includes: FCX, FIT
by: Philip Davis


The week is off to a roaring start.

We look at what's coming up on the Data and Earnings front.

Trade ideas for TNA, FCX and FIT.

And up we go again!

The market changes almost as fast as the temperature this winter (we went from 0 to 60 in two days last week!) and oil and gold are all over the place (see this morning's Alert for details) which is FUN! for us as we've been playing these wild swings.

In Thursday's post, we liked the Russell Futures (/TF) over 1,010 and this morning we took $1,000 profit and ran at 1,020 but our options spread is looking like it's on track as well - but we'll see how the week plays out before doing a victory dance. Monday's are not very meaningful so we'll have to wait until tomorrow to see how well the markets are holding up. We have "good" news out of OPEC as they seem to have agreed to hold production levels but it's not like they could increase them if they wanted to - as we're out of storage space.

That's boosting the energy sector and giving a lift to the Energy Sector as well as the Banksters who loaned them money, of course. I'll be appearing at the Traders Expo in NYC this afternoon, teaching people how to Be the House - NOT the Gambler and, very appropriately, one of my top picks for the show is Freeport McMoran (NYSE:FCX) and a turnaround in materials this week is just what the doctor ordered for that beaten-down stock. My notes from the PowerPoint slides are:

•Freeport has a lot of debt ($19Bn) and that spooks investors, but there is something else FCX has a lot of - $300 BILLON WORTH OF RESOURCES!

•While we're comfortable buying this stock for $6.92 ($8.5Bn market cap) and waiting for gold, copper and oil to come back in price, it's more fun to practice our core strategy of BEING THE HOUSE and selling risk by promising to buy FCX if it hits $5 by selling the 2018 $5 put for $2.16.

•By itself, that sale either nets us into the stock at $2.84 (43% below the current price) or, if FCX does not go lower, the margin on the short sale is just 0.52, which makes the return on margin a very nice 415% in 20 months.

We can make that a more aggressive trade by adding the Jan $5 ($3.15)/$10 ($1.25) bull call spread at $1.90 and let's say we do a 2:1 ratio making the trade look like this:

  • Sell 10 FCX 2018 $5 puts for $2.16 ($2,160)
  • Buy 20 FCX Jan $5 calls for $3.15 ($6,300)
  • Sell 20 FCX Jan $10 calls for $1.25 ($2,500)

That nets us into $10,000 worth of Jan spreads for $1,640 so the profit potential on this trade would be $8,360 for a 509% gain on cash. You are obligating yourself to buy 1,000 shares of FCX for $5 ($5,000) if it slips below that line but we like putting our value foot down here ($6.92) and our worst case is owning it for net $6.64, so no worse than buying the stock but the reward potential is more than double what we'd make at $10 if we bought 1,000 shares AND we use far less of our cash to do it. And that's the "aggressive" version of the play. Our conservative put-selling only approach simply gives us either a 40% discount or a 31% profit on FCX.

That's what BEING THE HOUSE is all about - let other people gamble - all we're doing is buying stocks for a discount to the current price and levering our upside potential by 100%. If you did that with every stock you bought would you be doing better or worse than you are now?

We have a good amount of data out this week along with 5 Fed speakers and a revised Q4 GDP report on Friday. Hopefully we'll see some improvement in home sales but the weather may have prevented that. Durable Goods cannot possibly be worse than last month (-5%) so expect to hear that our economy is turning up - especially if Personal Income and Spending are looking up (and they should be):

There's still plenty of earnings and now comes the part of the quarter where we will take a few pokes on earnings plays.

FitBit (NYSE:FIT) should be a good one this evening as the company has lost half it's price already this year and is now trading at 25% below it's $20 IPO. I never liked them before as they are in a crowded space and offer a very "me too" sort of product but, now that expectations are low, I love the fact that you can sell a May $13 put for $2 to net into the stock for $11 (worst case) or make a very quick $2 (18% of your $11 commitment) for promising to do so. See - BEING THE HOUSE is SMART!

Lots more exciting trades to look at and we'll discuss them in Member Chat today and at the Trader's Expo this evening and we'll look for some earnings trade ideas to add to our Options Opportunity Portfolio as well as all of our tracking portfolios are doing very well this month and that means we can afford to take a few riskier pokes to pick up a little spending money into the spring.

Disclosure: I am/we are long FIT, FCX, TNA, SPY, UNG, USO, QQQ, DIA, IWM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Positions as indicated but subject to RAPIDLY change (currently mainly cash and an otherwise bullish mix of long and short positions - see previous posts for other trade ideas). Positions mentioned here have been previously discussed at - a Membership site teaching winning stock, options & futures trading, portfolio management skills and income-producing strategies to investors like you.