The Signal. By Safe Option Strategies. Trade Explanation of the Bull Call Calendar. Costco Wholesale Corp. (COST) Bull Call Calendar

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Sherman Douglas
5 years ago
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15 Debit STO May15 $155.00 Strike Calls - $2.45 Credit Total Debit $4.70 Per Share Max Risk is $4.70 Per share (same as the net debit).

1 March 23, 2015 The best weekly newsletter for the serious options trader. The Signal By Safe Option Strategies The Safe Option Strategy Costco Wholesale Corp. (COST) Bull Call Calendar The Safe Option Strategy BTO Jul15 $ Strike Calls - $7.15 Debit STO May15 $ Strike Calls - $2.45 Credit Total Debit $4.70 Per Share Max Risk is $4.70 Per share (same as the net debit). Target ROI is 25% Max ROI if short call is assigned early 6% Target time in trade is < 30 days Trade Explanation of the Bull Call Calendar Click on the link above to see the definition of the spread trade.

2 Company Profile Brief: Costco Wholesale Corp and its subsidiaries operate membership warehouses. It offers its member s low prices on a limited selection of nationally branded and select private-label products in merchandise categories. subscribers own potential risk.2

3 Company Technical s Summary Costco just keeps moving up. Sure, it pauses and tests all-time highs. It tests some weak levels of resistance. However, it keeps moving up nonetheless. The steady bullish move should continue, even if slowly. subscribers own potential risk.3

4 The Primary Exit Plan The primary exit is for the long call to gain value at a slightly faster pace than the short call does allowing us to exit the trade for about a 25% profit. We could also allow the short call to simply expire worthless (provided it stays out of the money between now and expiration). Either of these could happen if we get a steady slow bullish trend or even a stagnant to only slightly bullish trend. Because the difference in the strike prices is greater than the net debit of the trade, we could also allow ourselves to get called out. We could not do this if the difference in the strikes was less than the net debit. Adjustment for Bearish Trend If the stock price moves bearish and we begin to lose money on the long calls we could roll the short calls down in strike price and possibly to a different expiration week or month. This will take in a bigger credit against the long calls and if repeated for two or three weeks in a row could easily make the trade profitable. With the chosen strike prices and expiration months we would likely roll to May weekly options, or to June options. We could continue to roll down and out with each expiring short option until we have reached a profit level we want, or a break even if we want to free the money in this trade up to be used elsewhere in our trading. If the move down were sharp enough, we could roll the short option directly to the same expiration month as the long option, and to a lower strike price, creating a bear call spread. subscribers own potential risk.4

5 Trade Updates SWHC (03/16) - This trade opened as we wanted, and has trended flat, as hoped. We are down just a little bit in the trade right now, but not very much. No adjustments to the trade today. ADBE Strangle (03/09) We made the following adjustment to ADBE at the open of the market this past week: Add the Apr15 $77.50 short calls to the calls side of the trade. Our trade is now trending as we want, but some faster movement would be great. No additional adjustments to make today. NKE Call Ratio Back Spread (03/02) NKE had its earnings report, and did very well. The stock took a good jump up at the end of the week, and today the bullish trend continued. We are down a little bit in the trade, but it is moving the right way. We will allow it to keep moving and not adjust too quickly. NFLX Bull Put (02/23) Stock was not put to us until Friday (and the transaction settled over the weekend). This morning we woke up to the stock ownership we were expecting. Now, we need to reposition with some short calls to offset our small loss. At the open tomorrow, we will add short calls at the Sep15 $435 strike, and we will add long puts at the Jun15 $425 strike. We will be well collared in the trade at that time. Remember, we took stock ownership at $450, and had long puts expire worth $16.70/share. Our only loss was the $4.10/share difference in our strike prices, and the credit we will take in on our short calls (minus the cost of the long puts) will more than make up for that. VLO Iron Condor (02-09) We sent out an alternate adjustment to this trade later on the day of the 16 th. A number of students wanted to do something different. We rolled our long calls out, and then rolled our short calls out. We now have Jun15 $62.50 long calls, and MayWk1 $60 strike short calls. We are far enough out in expiration with our short calls, that we are going to let a little more extrinsic value bleed off them before adjusting again. No change today. COST Bear Call (01/05) At the open tomorrow, we are going to sell our stock, and buy to close our short calls. This will be the first part of two adjustments we will make. The net result of this will be about $2.00/share profit (on this part of the trade). The second of the two adjustments will be the addition of short puts to the current open long puts. At the open tomorrow morning, we will sell to open the Apr15 $150 strike puts for a credit of about $1.15 per share. subscribers own potential risk.5

6 APPL Bull Call (12/22) Today s bullish move is helping. No change needed today. RHT Bear Put Calendar (10/20) Earnings is a couple days away, and we are well positioned. No change today. GRMN Put Calendar (5/12) Great collar on this trade. No change needed today. Watch for the Signals Watch the Reports Signals to Watch for in the Upcoming Week and Why. Economic Reports Mar 23 Existing Home Sales Feb Mar 24 CPI Feb Mar 24 Core CPI Feb Mar 24 FHFA Housing Price Index Jan Mar 24 New Home Sales Feb Mar 25 MBA Mortgage Index 03/21 Mar 25 Durable Orders Feb Mar 25 Durable Goods ex transp. Feb Mar 25 Crude Inventories 03/21 Mar 26 Initial Claims 03/21 Mar 26 Continuing Claims 03/14 Mar 26 Natural Gas Inventories 03/21 Mar 27 GDP - Third Estimate Q4 Mar 27 GDP Deflator - Third Estimate Q4 Mar 27 Michigan Sentiment - Final Mar Existing Home Sales Existing home sales increased 1.2% in February to 4.88 mln from an unrevised 4.82 mln in January. The Briefing.com Consensus expected existing home sales to increase to 4.90 mln. Inclement winter weather conditions may have played a small part in the softer-than-expected existing home sales level. Sales in the Northeast declined 6.5% and sales in the Midwest were flat. The winter weather, however, was not the reason why overall sales trends remain weak and below 5.0 mln. Supply problems continue to keep downward pressure on home sales. Inventories remained at a 4.6 months supply at the current sales rate for a second consecutive month. During normal periods of buying and selling, inventories are generally maintained at 6.0 months supply. The lack of inventory continued to push up prices. The median existing home price increased 7.5% yearover-year in February to $202,600. That was the 36th consecutive month of year-over-year price increases. subscribers own potential risk.6

7 While the price gains are good for homeowners, it makes it more difficult for first-time buyers to enter the market. First-time home buyers accounted for only 29% of purchases in February. That was up from 28% in January, but well below normal (40%) market conditions. Individual investor demand softened in February, accounting for only 14% of transactions after accounting for 17% of sales in January. Sales of distressed properties accounted for 11% of total February sales, which was the same rate as January. High prices are making it difficult to draw in firsttime buyers. Without them, existing home sales growth cannot meaningfully accelerate. Consumer Pricing Index (CPI) The CPI index declined 0.7% in January after declining an upwardly revised 0.3% (from 0.4%) in December. The Briefing.com Consensus expected the CPI to decline 0.6%. Excluding food and energy, core CPI increased 0.2% in January after increasing 0.1% in December. The consensus expected these prices to increase 0.1%. As expected, a large drop in gasoline prices was the primary catalyst for the decline in consumer prices. Gasoline costs fell 18.7% in January after declining 9.2% in December. The resulting gasoline decline caused overall energy prices to fall 9.7% in January. Food prices were flat after increasing 0.2% in December. The only outlier came from personal care prices (+0.6%), which was the largest increase since that index was created in Otherwise, trends remain tame and there is no underlying acceleration in consumer prices. Over the last 12 months, core CPI increased 1.6% in January, the same rate as December. That is well below the Fed s implied CPI target of roughly 2.5%. Headline year-over-year CPI growth turned negative in January for the first time since October New Home Sales New home sales fell 0.2% in January to 481,000 from an upwardly revised 482,000 (from 481,000) in December. The Briefing.com Consensus expected home sales to fall to 470,000. For most of 2014, home sales showed hovered around 430,000 and showed little volatility. Over the last two months, however, sales have broken out of their doldrums. The move correlates with the improvements in the NAHB Home Builders Index, which showed increasing strength in both current and expected sales. It also comes during a time when the average conventional mortgage rate fell below 4.00%. The question going forward is whether sales growth can continue at this rates even if mortgage rates inch higher. The February data should provide some clues when it is released next month. There are some problems concerning the underlying fundamentals. At a 5.4 months' supply at current sales rates, inventory levels are constrained. Normally builders try to keep inventories at roughly a 6 months' supply. Prices are also a potential problem. The median home price increased 9.1% y/y to $294,300. The built in price premium of a new home versus the median existing home remains at historical highs. After a pretty flat 2014, new home sales are showing signs of acceleration. subscribers own potential risk.7

8 Durable Goods Orders Durable goods orders increased 2.8% in January after declining a downwardly revised 3.7% (from 3.3%) in December. The Briefing.com Consensus expected durable goods orders to increase 1.7%. Excluding aircraft, durable goods orders increased a much more modest 0.3% in January after declining 0.9% in December. The consensus expected these orders to increase 0.5%. Almost the entire increase in orders can be attributed to seasonal adjustments in the aircraft industry. Even though Boeing (BA) reported a large decline in January aircraft orders on both a monthly and yearly basis, the Census Bureau showed a 73.7% increase in orders of defense and nondefense aircraft and parts. Business capital demand ended four consecutive months of contractions. Orders of nondefense capital goods excluding aircraft increased 0.6% in January after declining 0.7% in December. Unfortunately the impact of the increase in capex won t be felt this month. Shipments of nondefense capital goods excluding aircraft declined 0.3% in January after increasing by 0.3% in December. The stock of unfilled orders of nondefense capital goods excluding aircraft continued to grow in January. Manufacturers, however, have been very reluctant so produce off their backlog. As a result, business investment growth is being held back. Initial and Continuing Claims The initial claims level increased to 291,000 for the week ending March 14 from an upwardly revised 290,000 (from 289,000) for the week ending March 7. The Briefing.com Consensus expected the initial claims level to increase to 293,000. The continuing claims level declined to mln for the week ending March 7 from an upwardly revised mln (from mln) for the week ending February 28. The consensus expected the continuing claims level to decrease to mln. There were no special factors impacting this week's claims reading. After averaging more than 300,000 over the past 5 weeks, the dip in claims may be signaling a return to a more relaxed trend. Labor market conditions are showing small signs of improvement. Volatility in the claims data has made it difficult to determine labor market conditions. Gross Domestic Product (GDP) Fourth quarter GDP was revised down to 2.2% in the second estimate from 2.6% in the advance estimate. GDP increased 5.0% in Q The Briefing.com Consensus expected Q GDP to be revised down to 2.1%. Despite the downward revision, the GDP report actually reveals slightly better economic trends in the second estimate. Nearly all of the revision was the result of weaker inventory growth $88.4 bln vs. $113.1 bln in the advance release. Excluding inventories, real final sales were revised up to 2.1% from an originally reported 1.8%. subscribers own potential risk.8

9 There were significant upward revisions to all of the components of nonresidential investment. Spending on structures was revised up to 5.0% from 2.6%, equipment investment was revised to 0.9% from -1.9%, and intellectual property product investment was revised to 10.9% from 7.4%. In all, the upward revisions to nonresidential investment added an additional 0.4 percentage points to GDP growth in the second estimate. Besides nonresidential investment, the only other GDP component that was revised higher was government spending, which declined 1.8% in the second estimate versus a 2.2% decline in the advance estimate. Federal government spending was unchanged while state and local spending was revised up to 2.0% from 1.3%. Nonresidential investment spending was revised down to 3.4% from 4.1%, but the contribution to GDP growth was virtually unchanged. Personal consumption expenditures were revised down to 4.2% from 4.3%. The revision was due to slightly weaker goods spending, which offset a modest upward revision to services demand. The net export deficit was revised up to $476.4 bln in Q from an originally reported $471.5 bln. The larger deficit reduced GDP by another 0.1 percentage points. Economic growth in the fourth quarter came primarily from consumption. Michigan Sentiment The University of Michigan Consumer Sentiment Index dropped to 91.2 in the preliminary March reading from 95.4 in February. The Briefing.com Consensus expected the index to increase to Slightly higher gasoline prices and a volatile equity market offset continued strengthening in the labor market. The Current Conditions Index fell to in March from in February. The Expectations Index declined to 83.7 in March from 88.0 in February. The decline in sentiment won t have much of an impact on consumption trends. Consumption relies on income growth and not sentiment. As long as income trends higher, consumption gains should follow. Consumer sentiment has little influence on consumption. As long as payroll levels continue to expand, the resulting income growth should keep consumption gains steady regardless of the monthly ebbs and flows in sentiment. subscribers own potential risk.9

10 The Watch List Symbol AAPL 4/21 ADBE 6/16 BA 4/21 BBY 5/20 BIDU 4/22 CAT 4/23 COST 5/27 CVX 4/30 DE 5/22 DIS 5/5 EBAY 4/22 F 4/28 FB 4/21 FSLR 5/4 GRMN 4/28 HD 5/19 MON 4/1 NFLX 4/20 NKE 6/24 P 5/5 RHT 3/25 SBUX 4/23 SNDK 4/15 SWHC 6/17 TSLA 5/5 TM 5/6 UA 4/22 V 4/22 VLO 4/23 XOM 4/29 Earnings subscribers own potential risk.10

11 The Bull Call Calendar A debit spread, the bull call calendar uses a long and a short call in different months of expiration, and with the short call at a higher strike price. The long call is placed at, or very near the money, (traditionally just out of the money, but whether in, or out, does not matter) and is the primary or money making option. A short call is then placed at a higher strike and with a shorter expiration date and is the secondary or hedging option. The idea is that any bullish move, even if slow, will increase the value of the long option faster than the value of the short option. This is due to a higher delta in the longer term option, and faster time decay in the shorter term option.. A good target ROI on most bull call calendar spreads is 20% - 30% and a good target time in the trade is 45 days or less. The expiration date of the options can be as near or far term as desired, so long as they are different dates for the long and short call, but to preserve the ability to adjust the trade, days is a minimum recommendation for the expiration of the long call unless using weekly options. Then a shorter expiration date could still be effective. subscribers own potential risk.11

The Under Armour, Inc. (UA) Bull Call Calendar

The Under Armour, Inc. (UA) Bull Call Calendar uly 27, 2015 The Signal Under Armour, Inc. (UA) Bull Call Calendar The Safe Option Strategy The Safe Option Strategy Ø BTO Oct15 $95.00 Strike Calls - $5.60 Debit Ø STO Sep15 $100.00 Strike Calls $2.15