Weekly Issue: Adding Two New Positions As We Pass the Summer Doldrums
Key points in this issue:
- We are adding the Netflix (NFLX) December 2018 400.00 calls (NFLX181221C00400000) that closed last night at 28.70 to the Select List and setting an initial stop loss at 19.00.
- We are adding the Dycom (DY) December 2018 110.00 calls (DY181221C00110000) that closed last night at 4.90 to the Select List with an initial stop loss at 3.00.
- We will continue to hold the AMC Networks (AMCX) September 2018 $65 calls (AMCX180921C00065000) that closed last night at 2.60. Our stop-loss currently remains set at 1.25.
Over the past couple of weeks, we saw a number of our Tematica Options+ positions get stopped out. These included:
- Discovery (DISCA) October 2018 30.00 calls (DISCA181019C00030000)
- Utilities SPDR ETF (XLU) August 17, 2018 53.00 calls (XLU180817C00053000)
- JPMorgan Chase & Co. August 110.00 calls (JPM180817C00110000)
- ProShares Short S&P 500 (SH) August 17, 2018 30.00 calls (SH180817C00030000)
Stop outs are never easy nor are they fun — especially if the underlying strategy pays off in the longer-term — but they speak to the importance of being a disciplined investor and managing risk. Those qualities will serve us well in the coming weeks as thousands of companies serve up their quarterly results, updating investors as to their views on how a slowing global economy, rising dollar, climbing interest rates and input costs, as well as tariff implications, will impact their business in the coming months. While we’ve heard from more than a handful of companies over the last several days we still have more than 85% of the S&P 500 companies to go. As baseball great Yogi Berra said, “It ain’t over till it’s over” and that means we will have several weeks of earnings fun and potential disruption in the market.
This will make trading options a tad more difficult than usual, and while we may get stopped out in the short-term, I go back to what I said above – it’s all part of being a disciplined investor and managing potential downside risk. I agree, it’s not optimal but we can look for opportunity where it is present and that brings two new call option trades to the Select List today. Here we go…
Adding a call position on Netflix shares
As I reminded you in yesterday’s issue of Tematica Investing, last week we added Netflix (NFLX) shares to the Tematica Investing Select List and also yesterday I shared my view on the company’s 2Q 2018 earnings results. To quickly recap those comments, I saw that earnings report as a bump in the road and the combination of stock rating upgrades as well as the share price recovery vs. the 14% post-earnings drop in after-market trading on Monday tells us we’re not the only ones remaining bullish on the shares.
One of the criticisms of the second quarter for Netflix was its lack of breakout content, and while that was a fair criticism of the quarter, CEO Reed Hastings reminded investors there is much more content coming in the back half of 2018 and even more in 2019 given the next few quarters are big content spending ones. We also have the benefit of pending price increases that should help with year over year revenue comparisons.
As we remain patient with NFLX shares over at Tematica Investing, the recent pullback in offers us an opportunity at Tematica Options+. To capitalize on that as well as the likely strength as we head into a seasonally stronger period for Netflix, I’m adding the Netflix (NFLX) December 2018 400.00 calls (NFLX181221C00400000)that closed last night at X to the Select List. As we do this, be sure to set a stop loss at 20.00, which is a little wider than we’ve been setting them of late but the duration on this position is also on the longer end of the spectrum.
- We are adding the Netflix (NFLX) December 2018 400.00 calls (NFLX181221C00400000)that closed last night at 28.70 to the Select List and setting an initial stop loss at 20.00.
Adding Dycom calls following positive 5G comments from Ericsson
Yesterday, leading mobile infrastructure company Ericsson (ERIC) reported its 2Q 2018 results, and while we are not involved in the shares, its comments on the 5G market bode very well for the shares of specialty contractor Dycom Industries (DY) and compound substrate company AXT Inc. (AXTI) as well as mobile infrastructure and wireless technology licensing company Nokia (NOK).
More specifically, Ericsson called out that its sales in North America for the quarter increased year over year due to “5G readiness” investments across all of its major customers. This confirms the commentary of the last few weeks as AT&T (T) and Verizon (VZ) – both of which are core Dycom customers – move toward commercial 5G deployments in the coming quarters.
While one could consider call option positions in AXT and Nokia, the former has very thin call option volume while Nokia’s customer mix is far more global in nature compared to Dycom’s US heaving business. For that reason as well as being in the middle of the seasonally strong period for construction activity as well as Ericsson calling out the North American 5G market, in particular, I’m opting to add the Dycom (DY) December 2018 110.00 calls (DY181221C00110000) that closed last night at X to the Select List. Again, given the time frame, we’re going to set a wider than usual initial stop loss at 3.00 for this position.
Signposts for this trade will include earnings results and 5G commentary on both spending and deployment from AT&T and Verizon both on Tuesday, July 24.
- We are adding the Dycom (DY) December 2018 110.00 calls (DY181221C00110000) that closed last night at 4.90 to the Select List with an initial stop loss at 3.00.
Housekeeping on AMC Network calls
After long last, it certainly looks like Disney (DIS) is poised to acquire 21st Century Fox (FOXA) although the Justice Department is looking to appeal the federal court ruling that paved the way for that transaction. I still suspect that means Comcast (CMCSA) will be on the acquisition hunt to bulk up against the post-acquisition Disney, and that is keeping the AMC Networks (AMCX) calls on the Select List.
I would share that it hasn’t gone unnoticed that trading activity in our AMCX calls has ground to a halt over the last few trading sessions across the board for September 2018 calls. While it could be the summer doldrums, the reality in any market is there needs to be a matching up of willing buyers to willing sellers and there has been an absence of that. I expect that to change as we near the company’s June quarter reporting date of Aug. 2. For now, let’s hold tight with the AMCX calls and we’ll revisit the situation based on that report and any other new media merger news.
- We will continue to hold the AMC Networks (AMCX) September 2018 $65 calls (AMCX180921C00065000) that closed last night at 2.60. Our stop-loss currently remains set at 1.25.
