Once again we’re harvesting some big gains and selling some calls
TWEAK TO OUR UPDATES SCHEDULE
As we shared last week, today we’re coming at you on Wednesday instead of Thursday. Also, next week there will be no weekly update on August 9th.
We’ll be back on August 16th; however as always, if market conditions warrant and we need to make a change to a position, we’ll send out an alert. Part of this reflects a trip to Singapore that I’ll be taking to keynote INVEST 2017 as well as some other travels.
We are nearing the end of the vapid 2Q 2017 earnings pace, and odds are that will lead to much digestion and thought as Wall Street soon heads for the final summer hurrah. We recognize that historically speaking September is one of the roughest months for stocks, and given what we see ahead for this September odds are it won’t be a walk in the park.
Before we get there, right now I am winging my way to Singapore today to give a presentation on thematic investing at INVEST 2017. While the trip to and fro will be a lengthy one, including a long layover in Japan, I strongly suspect I’ll have a number of data points and insight to share in the next issue of Tematica Investing that will be published on Aug. 16. That also happens to be when next issue of Tematica Options+ will be published.
The very good news is over the last few weeks, we’ve seen our newer call option positions move higher thanks to the pronounced tailwinds at their respective backs. It’s led to us taking some nice profits over the last few days, and we’re pleased to say, we’re about to do that again here and now.
Another Pop in AXT shares Prompts Us to Close Out On a High Note
Over the last several days, we have taken profits in our AXT Inc. (AXTI) November 17, 2017 calls (AXTI171117C00007500) twice, with each trade benefitting from the rise in the underlying shares. We’ve seen that happen once again in the last 24 hours, and with that added extra oomph that led the AXT calls to close last night at 2.05, up more than 270 percent vs. our 0.55 buy-in. As we head into the dog days of summer, and the post earning digestion period we talked about in today’s Tematica Investing, we’re opting to exit the remaining portion of the AXT call position. Our thinking that profits are very much like birds in the sense that a bird in the hand is worth two in the bush.
- We are exiting the final portion of our AXT Inc. (AXTI) November 17, 2017 calls (AXTI171117C00007500) calls that closed last night at 2.05 vs. our 0.55 buy-in. The blended return for this position across the stepped selling will be roughly 160 percent.
Closing Out XLU Calls with a Hefty Gain
Also this week, we sold half the Tematica Options+ position in Utilities SPDR ETF (XLU) September 15, 2017 $52 calls (XLU170915C00052000), booking a nice 81 percent move. Much like the AXTI situation above, the underlying XLU shares have continued to climb higher yesterday resulting in the XLU September 15, 2017 gapping up to close last night at 1.89, roughly 122 percent compared to our 0.85 purchase price. While we are tempted to sell another half of the position, given Versace’s pending travel schedule out of the country we see it as rather irresponsible to look this would be gift horse in the mouth.
- With that in mind, we will exit the remaining Utilities SPDR ETF (XLU) September 15, 2017 $52 calls (XLU170915C00052000) at market, and book a blended return just over 100 percent.
Costco’s Dividend Announcement Boosts the Shares and Our Calls
We’ve shared our view that over the last few weeks, shares of Costco Wholesale (COST) have taken an unfavorable beating amid Amazon (AMZN) related speculation. As we noted, the key to Costco’s business is the high margin membership fee income, which grows as Costco opens more warehouse locations as well as captures more wallet share from existing members. That led up to taken an initial position in the Costco Wholesale (COST) October 2017 $173 calls (COST171020C00173000) and then we doubled down as the shares slipped further. As the COST share pain continued, we used a layered approach to add the Costco Wholesale (COST) October 2017 $155 calls (COST171020C00155000) calls.
Over the last few weeks, COST shares have bumped higher, but then yesterday Costco announced it next dividend payment of $0.50 per share and COST shares jumped to close at $158.51, up from $152.89 the day before. This sent our Costco Wholesale (COST) October 2017 $155 calls (COST171020C00155000) soaring, and they closed last night at 8.35 — up 113 percent vs. our 3.91 purchase price just two weeks ago. Lending a helping hand, we noticed that quietly mentioned in the press release, Costco opening 2 more warehouse locations during July, bringing its tally to 736 vs. 708 a year ago. Our thesis remains intact despite the Amazon speculation.
We continue to be bullish on Costco, given its expanding warehouse footprint and recently installed membership price hike, however, we are prudent investors first and foremost. We also recognize that we want to earn back some of the capital associated with the COST October $173 calls. As such, we are going to sell half of the Costco Wholesale (COST) October 2017 $155 calls (COST171020C00155000), leaving the other half to capture the expected benefit of its growing membership fee stream as well as Back to School shopping. We will instill a protective stop loss on the remaining COST October 2017 $155 calls at 6.00, which should ensure a minimum profit of 53 percent.
As we make this trade and add that stop loss, we are keeping the Costco Wholesale (COST) October 2017 $173 calls (COST171020C00173000) calls in play. While we are down, these calls have rebounded, and we look forward to both Costco’s July sales report as well as the July Retail Sales Report as the two should give us some much-needed perspective when it comes to Costco’s business.
- We are selling half of the Costco Wholesale (COST) October 2017 $155 calls (COST171020C00155000) at market, leaving the other half in place to capture the expected benefit of its growing membership fee stream as well as Back to School shopping.
- We will instill a protective stop loss on the remaining COST October 2017 $155 calls at 6.00, which should ensure a minimum profit of 53 percent.
- As we make this trade and add that stop loss, we are keeping the Costco Wholesale (COST) October 2017 $173 calls (COST171020C00173000) calls in play.
More Auto Sales Pain in July for GM
Last week, we heard General Motors (GM) spin a rather upbeat outlook despite the simple fact that it’s challenged with a domestic auto industry that is not only rolling over, but it is plagued with bloated dealer inventories that are not responding to an aggressive use of incentives. Yesterday, we learned that July industry auto sales continued to rollover with sales for the month missing already dour expectations. The biggest miss was at General Motors as its July sales fell 15.4 percent vs. forecasts calling for a 9-10 percent drop by Edmunds Kelley Blue Book. Three of GM’s four brands posted double-digit percentage sales declines in July: Chevrolet was down 15.3 percent, Cadillac fell 21.7 percent and Buick plunged 30.5 percent, while GMC was down 7.3 percent.
The only way we see the company moving excess inventories is to further embrace incentives at the cost of profits – not the kind of situation we want to be long. Given concerns over consumer debt levels, and still rising auto sub-prime loan delinquencies as well as GM’s specific inventory situation we’ll stick with our short position in GM shares.
- We are holding steady with our short position in General Motors (GM) shares and our price target remains $30. Our buy-stop level remains at $40.
