May 11, 2015 The best weekly newsletter for the serious options trader. The Signal By Safe Option Strategies www.safeoptionstrategies.com The Safe Option Strategy Deere & Co (DE) Call Ratio Back Spread The Safe Option Strategy STO Jun15 $92.50 Strike Calls- 1.56 Credit BTO Jun15 $97.50 Strike Calls - $0.39 Debit X2 (twice the number of long call contracts is $0.56 X 2 or $0.78 per share relative to our short calls) Total Credit $0.78 Per Share Max Risk is $4.22 Per share (difference in the spreads, minus the net credit). Limit Credit Order of $0.75 to open the trade Target ROI is 15% Max ROI if 18% Target time in trade is < 20 days Trade Explanation of the Call Ratio Back Spread Click on the link above to see the definition of the spread trade.
Company Profile Brief: Deere & Company operates in three business segments: agriculture/ turf, construction/forestry, & financial services. The Company helps customers to be more productive as they help to improve the quality of life for people around the world. subscribers own potential risk.2
Company Technical s Summary Deere & Co. reports in 11 days. They have never traded above $92.50 (the strike of our short calls). They could move the needle higher, but we believe it is unlikely. subscribers own potential risk.3
The Primary Exit Plan Letting the short calls expire worthless, and taking some debit back in the trade by closing the extra long calls will maximize our profitability should the stock continue in a bullish or stagnant trend. Any premium we get back on our long calls adds to the overall credit of the spread. Simply allowing the whole trade to expire worthless is the best possible exit. Adjustment for Bullish Trend The Call Ratio Back spread can be adjusted in a couple of ways: 1. We can do nothing and hope the increase in the price of the stock is far enough that half of our long calls gain profit to offset the maximum loss on the even spread of short and long calls. In the case of this trade, the max risk on all of our short calls is $4.22 per share. This means that our long calls have to be worth at least $4.22 per share at the time of expiration to ensure at least a break even in the trade. An increase in the price of the stock to $101.72 per share is needed to guarantee we do not lose money (this is the strike price of the long calls, plus the max risk in the trade). 2. We can buy back the short calls for a loss and offset that loss as soon as twice as many long calls gain enough value to do so. The risk here is a reversal in the direction of the stock before this happens. We have to feel confident that the stock will keep going up, even if slowly. We can always add short calls again if we are wrong. subscribers own potential risk.4
Trade Updates UA Bear Put (4/27) We can exit our trade tomorrow with almost 20% profit, and that is exactly what we will do. As of today s close, we can get out with about a $0.25/share profit. That is 17%, and there is a good chance that after the overnight bleed off of extrinsic value, we may do better than that. Either way, we will take it. At the open tomorrow we will sell to close our trade (we bought to open, so we will sell to close) with a limit credit order of $1.70. We opened the trade for $1.45, so that will assure us a $0.25/share return. subscribers own potential risk.5
NKE Call Calendar (4/20) We are profitable in the trade, and moving in the right direction. No adjustment today. CAT Call Ratio Back Spread (4/13) Early in the day CAT was up enough to have us profitable, but at the end of the day, it fell off. It is close to breakeven right now. We are watching for an exit this week. subscribers own potential risk.6
SBUX Iron Condor Plus (4/6) Our short calls expired on Friday for the full credit we took in. We waited to see what the stock would do today before making another adjustment. At the open tomorrow, we are going to roll our long calls out to Jun15 (monthly options expiring on 6/19) $52.50 strike. We are then going to add MayWk4 (expiring 5/22) short calls for $0.39 credit. The roll or the long calls should be close to break even, and the addition of the short calls will help give us profit, and a more adjustable trade. ADBE In the Money Bear Put (3/30) Fortunately ADBE fell off its highs of the day today, but Friday s move up caused us to lose our advantage. If the range is tested again, we may have to roll this spread out, but for today there is no adjustment. Remember, $75.45 is our break even, and we are not far away from that. subscribers own potential risk.7
COST Bull Call Calendar (03/23) We are up, then down, then up, then down again. Our short calls expiring this week would not be a bad thing, but with another day of down movement, we may roll them out and get more credit sooner. No adjustment today, but it is likely we will have one before the end of the week. SWHC Call Calendar (03/16) We still need about $0.50/share upward movement before we adjust this trade. No changes today. subscribers own potential risk.8
VLO Iron Condor (02-09) No changes today. COST Bear Call (01/05) No changes today. GRMN Put Calendar (5/12) Still collared and still moving down. No changes needed today. Watch for the Signals Signals to Watch for in the Upcoming Week and Why. Economic Reports May 12 JOLTS - Job Openings Mar May 12 Treasury Budget Apr May 13 MBA Mortgage Index 05/09 May 13 Retail Sales Apr May 13 Retail Sales ex-auto Apr May 13 Export Prices ex-ag. Apr May 13 Import Prices ex-oil Apr May 13 Business Inventories Mar May 13 Crude Inventories 05/09 May 14 Initial Claims 05/09 May 14 Continuing Claims 05/02 May 14 PPI Apr May 14 Core PPI Apr May 14 Natural Gas Inventories 05/09 May 15 Empire Manufacturing May May 15 Industrial Production Apr May 15 Capacity Utilization Apr May 15 Mich Sentiment May May 15 Net Long-Term TIC Flows Mar subscribers own potential risk.9
Watch the Reports Treasury Budget Highlights The Treasury Budget showed a deficit of $52.9 billion in March 2015, up from a deficit of $36.9 billion in March 2014 and wider than the Briefing.com consensus estimate that called for a deficit of $44.0 billion. The Treasury data are not seasonally adjusted, so the March deficit cannot be compared to the $192.4 billion deficit recorded in February. Key Factors Total outlays were $287.1 billion while total receipts were $234.2 billion. Outlays increased by $34.4 billion from March 2014. Receipts increased by $18.4 billion from March 2014. Fiscal year-to-date, the deficit is $439.5 billion versus $413.3 billion for the comparable period in FY14. Big Picture Raw data available at: www.fiscal.treasury.gov/fsreports/rpt/mthtreasstmt/c urrent.html Retail Sales Highlights Retail sales increased 0.9% in March after declining an upwardly revised 0.5% (from -0.6%) in February. The Briefing.com Consensus expected retail sales to increase 1.0%. Excluding motor vehicle sales, retail sales increased 0.4% in March after an upward revision left sales flat (from -0.1%) in February. The consensus expected these sales to increase 0.7%. Key Factors A significant portion of the increase in March sales was the result of a rebound in motor vehicle demand. Sales at motor vehicle and parts dealers increased 2.7% in March after declining 2.1% in February. That gain was in-line with the motor vehicle manufacturer sales reports that showed unit sales surpassing 17.0 mln SAAR for the first time since November 2014. Sales were pretty strong across the board, but not strong enough to warrant that the entire weakness in February was the result of inclement weather conditions. Overall income levels increased pretty significantly in the first quarter, and the March retail sales report showed that consumers still preferred savings over consumption in the aggregate for the quarter. Furniture stores (1.4%), clothing stores (1.2%), restaurants (0.7%), general merchandise stores (0.6%) all reported sizable gains in March. Sales declined at gasoline stations (-0.6%), food and beverage stores (-0.5%), and electronics and appliances stores (-0.4%). Core retail sales which exclude motor vehicle dealers, gasoline stations, and building material and supply stores increased 0.4% in March after declining a downwardly revised 0.2% (from -0.1%) in February. These sales more closely track consumption growth in the GDP report than the headline and still show lackluster growth trends. Big Picture The string of increases in the personal savings rate was broken in March, but overall trends still point to a hesitant consumer. Business Inventories Highlights Business inventories increased 0.3% in February after being flat in January. The Briefing.com Consensus expected business inventories to increase 0.3%. subscribers own potential risk.10
Key Factors The changes in inventories for manufacturers (0.1%) and merchant wholesalers (0.3%) were known prior to the release. The only new information was that retailer inventories increased 0.4% in February after being unchanged in January. Inventories increased in every retail sector except food and beverage stores (-0.3%). The gains were led by building materials (1.2%), furniture (0.8%), and clothing stores (0.5%). Total business sales were flat in February after declining 2.3% in January. The inventory-to-sales ratio remained at 1.36. Big Picture Business inventories include wholesale inventories, manufacturing inventories, and retail inventories. Inventories are a component of GDP, and thus are of interest to economists, but the financial markets don't pay much attention to this release. Over the long term, the inventory-to-sales ratio has been declining, due to improving techniques for inventory management. Initial and Continuing Claims Highlights The initial claims level increased to 265,000 for the week ending May 2 from an unrevised 262,000 for the week ending April 25. The Briefing.com Consensus expected the initial claims level to increase to 280,000. The continuing claims level declined to 2.228 mln for the week ending April 25 from 2.256 mln for the week ending April 18. The Briefing.com Consensus expected the continuing claims level to increase to 2.295 mln. Key Factors There is no doubt that businesses have actively cut down on their layoff activity. The four-week moving average for initial claims declined to 279,500 from 283,750. For comparison, it was only a little more than a month ago in March wherein the four-week moving average was stable over 300,000. In the entire history of the data set, the four-week moving average has been below 280,000 only a handful of times. The last time was in May 2000. Furthermore, the Department of Labor stated that no special factors caused the change in trends. That is the lowest continuing claims level since November 2000. Big Picture The initial claims level is showing vast improvements in labor force conditions. Producer Price Index (PPI) Highlights Producer prices increased 0.2% in March after declining 0.5% in February. That was the first increase in the PPI since October 2014. The Briefing.com Consensus expected the PPI to increase 0.2% in March. Excluding food and energy, core PPI increased 0.2% in March after declining 0.5% in February. The consensus expected these prices to increase 0.1% in March. Key Factors Energy prices increased 1.5% in March after being flat in February. That was the first increase in energy prices since June 2014. Gasoline prices increased 7.2% in March and were the main contributor to the overall increase in energy costs. Food prices declined 0.8% in March after declining 1.6% in February. These prices haven t increased on a monthover-month basis since November 2014. Final demand for services increased 0.1% in March after declining 0.5% in February. Most of the increase in services prices was the result of a 4.1% increase in portfolio management fees. Pipeline pressures remain weak. Core processed intermediate goods prices declined 0.2% in March after declining 0.4% in February. That was the seventh consecutive monthly decline. Core unprocessed subscribers own potential risk.11
intermediate goods prices declined 2.3% in March after declining 5.2% in February. Intermediate services prices increased 0.2% in March after increasing 0.1% in February. Big Picture There are no pricing pressures down the producer pipeline. This should keep both consumer and producer price growth in check. Industrial Production and Capacity Utilization Highlights Industrial production declined 0.6% in March after increasing an unrevised 0.1% in February. The Briefing.com Consensus expected industrial production to decline 0.3%. Key Factors Nearly the entire decline was the result of warmer temperatures, which reduced utilities usage by 5.9% after extreme cold boosted production by 5.7% in February. Mining production (-0.7%) also contributed to the pullback as relatively low oil prices continue to constrain the industry. Manufacturing production shook off the weaknesses associated with the contracting regional manufacturing surveys by increasing 0.1% in March after declining 0.2% in February. That was the first monthly increase in manufacturing production since November 2014. Normally, that would be a good sign for future economic gains. However, the entire increase in manufacturing production came from the motor vehicle industry. Motor vehicle and parts production increased 3.2% in March after declining 3.6% in February. Excluding motor vehicle production, manufacturing production declined 0.1% and total industrial production declined by an even worse 0.8%. Motor vehicle assemblies increased to 11.74 mln SAAR in March from 10.98 mln SAAR in February. Auto assemblies increased to 4.28 mln SAAR from 3.83 mln SAAR and truck assemblies increased to 7.45 mln SAAR from 6.83 mln SAAR. Those assembly numbers are near relative peaks and are unlikely to expand too much further without a bigger jolt in motor vehicle sales Big Picture Over the entire first quarter, industrial production declined 1.0%. That was the first quarterly decline since the Great Recession ended. Michigan Sentiment Highlights The University of Michigan Consumer Sentiment Index was unrevised in the final April reading. Sentiment rose from 93.0 in March to 95.9 in April. The Briefing.com Consensus expected the Consumer Sentiment Index to be revised up to 96.0. Key Factors Unlike the Conference Board's Consumer Confidence Index, which declined in April, relatively higher gasoline prices and volatility in the equity markets had no adverse effects on the Consumer Sentiment Index. The Current Conditions Index was revised down to 107.0 in the final April reading from 108.2 in the preliminary report. The index is still above its March (105.0) level. The Expectations Index was revised up to 88.8 from 88.0 and topped the 85.3 reading in March. The improvement in sentiment does not necessarily foreshadow upcoming gains in consumption trends. Consumption growth follows income growth. An acceleration in income is needed to spur an acceleration in consumer demand. Big Picture 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.12
The Watch List Symbol AAPL 4/27 ADBE 6/16 BA 4/21 BBY 5/20 BIDU 4/29 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 6/24 NFLX 4/20 NKE 6/24 P 4/23 RHT 6/16 SBUX 4/23 SNDK 4/15 SWHC 6/17 TSLA 5/5 TM 5/6 UA 4/22 V 4/22 VLO 4/28 WBA 7/9 XOM 4/29 Earnings
The Call Ratio Back Spread A call ratio back spread simply takes the bear call spread and adds additional long calls to the trade. This creates a ratio of long to short calls (i.e. 2:1, 5:3, etc.). In a traditional bear call spread the short call is the money making option and the long call, placed at a higher strike and in the same expiration month or week, is the hedging option. The same is true in the ratio spread variation, but the difference is that if the stock were to move very strong bullish, the additional long calls could then become more than a hedge, and actually make a profit possible. Just like in the bear call, all the options expiring worthless would give us our max profit (return on risk). The ratio spread is the same, but with a much different adjustment strategy should it trend against us. subscribers own potential risk.14