Quad Witching Friday - Big Futures Gains Likely To Evaporate

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Includes: BWLD, KMI, ORCL, SLB
by: Philip Davis
Summary

Yesterday's Futures trade ideas made profits.

Wing prices take a knee.

The Futures are up again.

It's very exciting, especially if you took our trade ideas from yesterday's morning Report, which were:

  • Dollar (/DX) long at 93 - out at 93.50 for $500 per contract gains (playable again this morning)
  • Oil (/CL) long at $56.50 - out at $57.50 for $1,000 per contract gains
  • Gasoline (/RB) long at $1.65 - out at $1.675 for $1,000 per contract gains.
  • Natural Gas (/NG) long at $2.66 - out at $2.71 for $500 per contract gains.

So Merry Christmas and Happy Hunukkah to you all - now we can go shopping! I told you it was fun to play the Futures and that's why we don't mind cashing out of stocks during uncertain times - it certainly doesn't prevent us from making money. Even if we drop $1M to the sidelines, making $3,000 a day while we wait for the markets to cool off isn't a bad way to pass the time.

Today we'll be looking for another chance to short the indexes if they get back to yesterday's highs but, so far, no takers. Dow is closest (/YM) but only 24,635, very shy of 24,700 so our only active play at the moment is the Dollar (/DX) long at 93 again though we do still have active long trades on /NGV8 (October Nat Gas contracts) now $2.74 and /KCH8 (March Coffee) now $120.50 - but those aren't day trades.

One commodity not doing well this winter is chicken wings, with prices down 30% since Football season started and Conservative commenters are blaming NFL protests for spoiling people's appetites but I'd say Republican policies which are destroying the buying power of the Middle Class are having a negative effect on $1/each wings. The same goes for Buffalo Wild Wings (BWLD), who blamed players taking a knee for hurting their business - where 9 wings are $13.49 and celery is EXTRA.

I'd short BWLD but Arby's just bought them and we can't short Arby's because they are private.

We're going to have to think carefully about the stocks we take into 2018, when the tax laws change and put even more strain on Middle and Lower-Class Consumers. Right now, Consumers are very confident but, once they realize how little the tax bill helps them - if at all - that confidence is likely to evaporate very quickly but, for the moment, the timing is right for us to have a very good holiday shopping season.

We'll be shopping for companies that are likely to benefit from the GOP Tax Plan. CFRA put up a list of potential big winners of the GOP tax plan and Oracle (ORCL) just reported yesterday and is selling off a bit, but we think they are playable here ($47.50) for a nice, long entry:

  • Sell 5 ORCL 2020 $47 puts for $6 ($3,000)
  • Buy 10 ORCL 2020 $45 calls for $8 ($8,000)
  • Sell 10 ORCL 2020 $52.50 calls for $4.75 ($4,750)

That spread is net $250 cash on the $7,500 spread so your potential net profit at $52.50 is $7,250 (2,900%) and your worst case is owning 500 shares of ORCL for net $47.50, which is the current price. While we limit our upside we have great leverage and we're starting off $2,500 in the money so even a flatline from here will be a nice winner. Ordinary margin on the play is $2,708 so the return on margin is fantastic as well.

While ORCL may be disappointing the bulls this morning, the growth in their cloud platform to $1.5Bn (up 55% from last year), their large pile of overseas cash and their huge benefit from changes in the tax code should get them back over $50 very quickly - even if they have to buy back their own stock to get there.

Another good group of companies to look at are the companies that are paying a high effective tax rate. This table was compiled by Credit Suisse. Kinder Morgan (KMI) at $17.85 is a good one to look at and Schlumberger (SLB) at $62.50 is still cheap as well, coming off a down year and moving into a better cycle. Both rely on the energy sector, which I'm down on but KMI is more of a natural gas play, which I'm long on - so let's set up a trade with them as:

  • Sell 10 KMI 2020 $17 puts for $2.35 ($2,350)
  • Buy 30 KMI 2020 $17 calls for $2.85 ($8,550)
  • Sell 30 KMI 2020 $20 calls for $1.55 ($4,650)

Here we are netting $1,550 on the $9,000 spread so the upside potential at $20 is a $7,450 (480%) and worst case is owning 1,000 shares of KMI for net $18.55, which is aggressive as it's more than they are selling for now but I think KMI is way too cheap here, given both the tax advantage and the expected increase in traffic as the US pushes more and more Natural Gas overseas on LNG ships. Margin on this spread is just $1,603, so another super-efficient way to put that sideline CASH!!! to work for you.

Have a great weekend,

- Phil

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ORCL, KMI over the next 72 hours.

Additional disclosure: Positions as indicated but subject to RAPIDLY change (currently mainly cash and an otherwise slightly bullish mix of long and short positions - see previous posts for other trade ideas).