WEEKLY ISSUE: Putting Some Defensive Calls in Play
Key Points From This Issue
- We are issuing a Buy on and adding the ProShares Short S&P500 (SH) August 17, 2018 30.00 calls (SH180817C00030000) that closed last night at 0.35 to the Select List. We will set a protective stop loss at 0.20 to limit losses should a market-friendly tariff solution arise.
- We are issuing a Buy on and adding the Utilities SPDR ETF (XLU) August 17, 2018 53.00 calls (XLU180817C00053000) that closed last night at 0.68 to the Select List with an initial stop loss set at 0.40.
- We continue to have a Buy on the JPMorgan Chase & Co. August 110.00 calls (JPM180817C00110000) that closed last night at $1.24. Our stop loss set at 0.90 remains in play.
- We continue to have a Buy on the AMC Networks (AMCX) September 2018 $65 calls (AMCX180921C00065000) that closed last night at 2.40, and are boosting our stop loss for this position to 2.00 from 1.25.
- We also continue to have a Buy on the Discovery (DISCA) October 2018 30.00 calls (DISCA181019C00030000) that closed last night at 1.09 and our stop loss of 1.00 remains in play.
Given the way the Fourth of July holiday falls this year, we strongly suspect the back of the week will be quieter than usual. For those reasons, we’re coming at you earlier than usual this week. And while we have your attention, Tematica will be dark next week as we recharge our batteries ahead of the 2Q 2018 earnings onslaught that kicks off on July 16.
With the housekeeping stuff out of the way, let’s get to this week’s issue…
Putting some defensive calls in play ahead of earnings season
With trade, tariffs and uncertainty taking the pole position in investor conversation, which comes as no surprise given that more companies are sharing the negative impact that might result if these tariffs go through. I go through that in far greater detail in this week’s issue of Tematica Investing, which will be hitting your inboxes and the website later this morning.
The nutshell view is we are starting to see companies warn about the potential impact of these various tariffs and right so investors are growing increasingly uncertain about the expected rate of earnings growth to be had in the back half of 2018. With it looking like neither side is going to back down — Commerce Secretary Wilbur Ross told CNBC on Monday that there’s no level on the downside in the stock market that would alter the way President Donald Trump approaches trade – it looks like we are in for an earnings recasting lower that could make what seems like a moderately priced stock market that much more expensive.
To prepare ourselves, we’re going to add two positions to the Tematica Options+ Select List. The first one is a call option on the inverse ETF for the S&P 500 that is ProShares Short S&P500 (SH). Given the timing of the 2Q 2018 earnings season, I’m selecting the August 17 strike date, which will allow us to capture the majority of quarterly earnings reports. Based on the current share price for SH shares and my preference for out of the money calls, I’m utilizing a 30.00 strike price. In sum this means we are making the following trade:
- We are issuing a Buy on and adding the ProShares Short S&P500 (SH) August 17, 2018 30.00 calls (SH180817C00030000)that closed last night at 0.35 to the Select List. We will set a protective stop loss at 0.20 to limit losses should a market-friendly tariff solution arise.
The second trade is also a defensive one in nature, but it is also one that factors in the sweltering temperatures sweeping the country. The National Oceanic and Atmospheric Administration’s Climate Prediction Center has updated their July forecast and more heat is expected for the month ahead over most of the nation. While some may see that as heading deeper into summer, the reality is many will be facing higher electric bills as they look to keep cool and that has me adding a Utilities SPDR ETF (XLU) call option play to the Select List.
Breaking down the selection process as I did above for the SH call trade, we’ll use the same strike date – August 17, 2018 – but given where XLU shares are trading it means selecting the 53.00 strike price. Putting it all together:
- We are issuing a Buy on and adding the Utilities SPDR ETF (XLU) August 17, 2018 53.00 calls (XLU180817C00053000)that closed last night at 0.68 to the Select List with an initial stop loss set at 0.40.
JPMorgan upsizes dividend and buyback program
Last week we added a call potion in JPMorgan Chase & Co. (JPM), the world’s biggest investment bank by revenue, ahead of the Fed’s annual “stress test” results for U.S.-bank holding companies. Last Thursday night, following the results of the Comprehensive Capital Analysis and Review (CCAR) that is part of the Fed’s annual financial “stress tests” JPMorgan announced it would boost its quarterly stock dividend to $0.80 per share from $0.56 cents and authorized gross common equity repurchases of up to $20.7 billion from July 1, 2018 to June 30, 2019. That dividend hike is in line with expectations for a 3.0% dividend yield at or near the current share price.
While the JPM calls have traded off with the market, we expect the company will deliver a favorable earnings report on July 13 as it discusses this latest move to return capital to its shareholders.
- We continue to have a Buy on the JPMorgan Chase & Co. August 110.00 calls (JPM180817C00110000)that closed last night at $1.24. Our stop loss set at 0.90 remains in play.
Sticking with our media call plays
Recently, Walt Disney (DIS) upped its bid for assets of Twenty-First Century Fox (FOXA) and last week the Department of Justice made its sign-off official on Disney’s $71.3 billion of those assets, which provides for the divestment of 22 Fox regional sports networks within 90 days after closing the deal. It was then announced Disney and Fox would each hold a special meeting on July 27 to hold a definitive shareholder proxy vote to approve the transaction.
I continue to think the bidding war is not yet finished, and while I see Fox’s assets offering many synergies with Disney, I will monitor how far Disney is willing to stretch to win the deal. Here’s the thing – if Disney wins the bid, it means Comcast (CMCSA) loses; if Comcast surprises with a new winning bid, it means Disney loses. Either way, the race to add content is on and it likely means additional M&A activity will soon be had. For that reason, we are keeping our AMC Networks (AMCX) and Discovery (DISCA) call options in play. I am, however, boosting our stop loss on the AMC Network call options to 2.00 from 1.25. In sum:
- We continue to have a Buy on the AMC Networks (AMCX) September 2018 $65 calls (AMCX180921C00065000)that closed last night at 2.40, and are boosting our stop loss for this position to 2.00 from 1.25.
- We also continue to have a Buy on the Discovery (DISCA) October 2018 30.00 calls (DISCA181019C00030000)that closed last night at 1.09 and our stop loss of 1.00 remains in play.
