Options Selling Frenzy Reaps Cross-Eyed Profit Bonanza (GDX, CTB)

Two trades are closing with today’s letter, both retired with last Friday’s options expiry. Both turned out very well for us, and we’ll get to each in turn.

We’ll start with a very nice move on the gold front, a trade we initiated on July 14th in a letter called Red Blooded American Gold Clot.

There, we combined 1) a steep fall in the precious metals with 2) an overbought Gold Miners sector and 3) a financial initiative from world-renowned Canadian precious metals guru Eric Sprott, to bring you a trade that profited from losses on the Market Vectors Gold Miners ETF (NYSE:GDX).

Here’s how it went down –

gdx
The miners drifted sideways for the last month, precisely as we had hoped, giving us, as of last Friday, a 100% return on our trade when the options we sold expired worthless.

But before we get to the nuts and bolts of our winnings, consider the chart of the miners, above.

It’s possible to view the cup as half full, as many gold bulls certainly will. But we don’t.

We see, in the first place, significant divergence (in blue) between a flat mining sector and swiftly declining RSI and MACD indications, a phenomenon that speaks to weakening momentum. Or, in the case of our chart: a mining sector that has less and less strength buoying the last two months’ flat performance.

In addition, we see RSI careening rapidly toward her waterline (black circle), with a probable plunge below that marker as early as today or tomorrow, should we see any weakness in the PMs as the week starts.

MACD could be a few days away confirming, with her plunge likely not coming until late Wednesday at the earliest, depending upon weakness in the PMs and exactly how severe it turns out to be.

But how do you know we’ll see weakness?

 

Nothing’s guaranteed, of course. We just don’t like the way price stacks up against the moving averages, particularly against the longer term (yellow) 411-day MA, which is swiftly declining and should provide abundant overhead selling pressure should GDX rise to meet it.

As of now, price is barely holding on to the short term moving average at $26.75, and should she drop below that marker, GDX is likely to plop right down to the $25 level, where the 137-day and 274-day moving averages currently reside.

hillary

A keen eye on the direction of the precious metals over the next few will help us determine whether our call on the miners is on the mark.

How the Money was Made

 

Back to the trade.

You’ll remember that when we initiated our trade we suggested selling five GDX August 28.50 CALLs, each for $0.35, for a total credit of $1.75. And with GDX never once rising above that level in the five-weeks that followed, the full $1.75 per round traded is now ours.

A sturdy handshake to all who participated.

Should we sell another round of CALLs?

Again, we’re going to keep an eye on the gold market over the next 48-hours to get a better sense of it. We don’t want to jump in early and get all crossed up.

Moving On

 

Our discussion now moves to a trade we opened at the end of June, a covered CALL on tire maker Cooper Tire and Rubber Co. (NYSE:CTB).

The letter was called The S&P Indy 500 and there we urged you to take the following action – sell one August 31 CALL for every hundred shares of CTB purchased. The CALLs sold for $0.70 and the shares went for $29.87. In addition, we urged you to sell one August 27 PUT for an additional credit of $0.30.

Because the shares remained in between the level of the two sold options, closing last Friday at $29.95, we pocketed the entire premium and reduced our cost base for the shares from $29.87 to $28.87. That means we’re currently in a profit position of $1.08 per share, or 3.7% after seven weeks.

decision

Do we take our profits now, or sell another round of CALLs (and perhaps PUTs) against the shares we currently own?

After looking at the chart, we see very little reason not to go ahead with a second round of option sales.

Take a look for yourself –

ctb
As we said when we initially wrote about CTB, “Technically, the chart is neither too hot nor too cold…”

And so it remains.

Both RSI and MACD indicators have further moderated since our June 30 letter went out (in black), giving us even more reason to like the trade than when we first initiated it – and additional confidence that selling CALLs is an appropriate strategy.

Second, we see the moving averages coming together in the $27 range (blue square), the level at which we initially saw support and sold our PUTs. Remember what we wrote then –

“We expect to see some modest movement higher from CTB in the weeks ahead and then a burst once the 137 DMA punctures above her longer term moving averages.”

Well, folks, the day of puncture has now drawn nearer, and we see the same burst higher coming to pass once that technical hurdle is crossed, a development that could be complete before week’s end.

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And it’s for that reason that we want you to consider another round of sales – both CALLs and PUTs on the CTB shares now in your possession.

We recommend you sell the CTB November 27 PUTs for $0.60 (again, just below support), and buy the November CTB 32 CALLs for $0.85, one CALL/PUT combo for every 100 shares of the stock you own.

That will reduce your cost base for the shares to just $27.42.

And should CTB indeed burst northward and close above the $32 mark by the November expiry, we will have pocketed a profit of just under 17% for five months work.

Pretty darn good.

Time will tell.

Wall Street Elite recommends you consider reinstating your CTB covered CALL position as detailed above.
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And it’s for that reason that we want you to consider another round of sales – both CALLs and PUTs on the CTB shares now in your possession.

We recommend you sell the CTB November 27 PUTs for $0.60 (again, just below support), and buy the November CTB 32 CALLs for $0.85, one CALL/PUT combo for every 100 shares of the stock you own.

That will reduce your cost base for the shares to just $27.42.

And should CTB indeed burst northward and close above the $32 mark by the November expiry, we will have pocketed a profit of just under 17% for five months work.

Pretty darn good.

Time will tell.

Wall Street Elite recommends you consider reinstating your CTB covered CALL position as detailed above.
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With kind regards,

Hugh L. O’Haynew, Senior Analyst, Normandy Research

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