Emoluments and Stimulants – Two for Profit, One Narcotic (BMY,CMG,LKQ)

Two trades to close out today, so pull out a fresh sheet of paper, dippidy-do your stylus and take this down.

We start with an initiative launched way back in April (8^th) on Chipotle stock.  The letter was called Rush on Border Creates Surge in Chipotle Shares!, and there we urged you to sell the CMG September 20th 760 CALL for $47.90 and buy the CMG September 20th 780 CALL for $41.00.  Total credit on the trade was $6.90.

A month later, we sold the long CALL for $10.30, adding to our initial credit and giving us a full $17.20 buffer.

And there it remained until expiration, when our short CALL expired in-the-money and we were short a lot of CMG shares at $760.

Then the sun came out…

And today?

CMG trades today at $768.63, and though we suspect it may fall further, we’re not chancing it.

Buy back the stock at the market and you’re out $863.  But with the existing credit of $1720, you come out ahead $857!  On nothing spent!

Adjusted for commissions, that’s an extraordinary gain of 5613%.

Take it easy…But take it!

Our next closure comes from a letter we sent September 23 called, appropriately enough, LKQ Will Trade in a Range.  The recommendation was to sell a strangle: the LKQ November 15th 30 PUT for $0.75 and the November 15th 35 CALL for $0.50.  We then advised you to purchase the LKQ February 21st 35 CALL for $1.20.  Total credit was a nickel.

And today?

LKQ his risen beautifully, putting our options nicely in the black.

The short PUT is worth $0.05 and the short CALL goes for $0.75.  Buy them both back and sell the long CALL for $1.90, and you walk away with $1.15 on nothing spent.  Adjusted for commissions gives you a 667% profit in six weeks.

And that’s better than a dirty cowboy boot in the eye.

This Week’s Trade

Today we’re looking at Bristol Myers Squibb (NYSE:BMY), one of the world’s largest manufacturers of medicines that kill, whose stock has been on a tear since mid-summer, but looks ready to cool coming into the rainy season.

She’s still cheap relative to her peers on a valuation basis, but the big drug pushers rarely boil over fundamentally.

That said, BMY just reported a reasonable earnings beat last week, and we say it’s time to sell the news.

Why?

Have a look at the chart –

Technically, we have

• An overbought stock, according to the 80+ RSI read (in green),
• That has put on a lot of weight over the last 10 weeks (in red – a full 40%!).
• Along the way, a significant gap has also opened between $53 and $54 (in blue).
• And that will have to close.

So…?

Our preferred method of dealing with drug dealers is somewhat less delicate than what we’re proposing today.

We’re choosing to act with restraint: we’re selling a CALL spread and using the proceeds to buy a PUT.

Like this –

A Jew and His Money recommends you consider selling the BMY January 17^th 57.50 CALL for $2.28 and buying the BMY January 17^th 62.50 CALL for $0.67.  With your $1.61 credit, purchase the BMY January 17^th 55 PUT for $1.56.  Total credit on the trade is $0.05.

With kind regards,

Hugh L. O’Haynew

Follow @HughLOHaynew