I spent my 20s in Chicago, one of the great “foodie” cities in the world. So when I’m hungry for a hamburger or pizza, I NEVER think of McDonald’s (MCD) or Domino’s Pizza (DPZ)—I just don’t care for their food. But despite not liking their food, I wouldn’t have shorted MCD or DPZ because the stocks’ charts and options trading were extremely bullish over the past six months.
Likewise, I love Apple (AAPL) products—my family has several iPhones, MacBook Pros and iPads. But I wouldn’t put on a bullish position because Apple’s earnings report was disappointing and there’s been an overwhelming number of bearish options trades on the stock.
For example, when I talk about the stocks I’m long and short with my wife (who’s not an investor), I don’t discuss obscure cybersecurity companies or cloud-computing upstarts. I bring up companies and brands that she knows.
And recently, Cabot Options Trader and Cabot Options Trader Pro subscribers have had positions in two companies my wife knows well: Kate Spade (KATE), whose purses, shoes and clothes she loves, and Chico’s FAS (CHS), whose products she doesn’t.
Momentum + Bullish Options
I read Mike Cintolo’s Cabot Top Ten Trader along with many of you. Mike is great at reading charts and finding stocks that are showing momentum, often on the verge of breaking out to new highs. I make notes about stocks Mike has highlighted, and if my options scanner picks up on unusual bullish options trading activity in one of his stocks, I often recommend a bullish position for my subscribers.
Mike’s stock picks, combined with my options trading scanner, have yielded many successes over the years. In mid-March, my options scanning tool picked up on unusual call buying in Kate Spade, just days after Mike recommended the stock. I recommended a bullish position called a buy-write, which is a conservative bullish strategy, whose goal is to make a small yield in a relatively short period of time. The stock was trading at 23.75, and if it stayed above 23 for the next month, my subscribers would collect a 3.13% yield in one months’ time.
This seemed like a great conservative strategy to make a solid yield in just over 30 days. But when I told my wife about my new trade, she told me that it’s a great company with great product so I should have been more aggressive.
My wife was confusing the stock with the company.
But I looked at it completely differently.
I wanted to execute a conservative strategy because I believed that the market was at a major inflection point. At the end of the month, KATE stock had chopped around, and we collected our full 3.13% yield.
And a Buy-Write on Chico’s FAS (CHS)
Recently I recommended another buy-write, this time in Chico’s FAS (CHS) for Cabot Options Trader and Cabot Options Trader Pro subscribers after my options scanner picked up these bullish call buys:
-Buyer of 3,500 CHS May 13 Calls for $0.80
-Buyer of 6,000 CHS August 14 Calls for $1.05
-Buyer of 2,500 CHS May 14 Calls for $0.50
Again, I chose a conservative buy-write strategy because I thought the S&P 500 might struggle near all-time highs (which turned out to be correct).
I sheepishly told my wife that night about my new bullish trade in Chico’s. I knew she would disapprove because she doesn’t care for Chico’s clothes—and I was right. But of course I don’t care about my wife’s fashion preferences. My option order flow reader told me that there was bullish positioning in the stock, so I put on a bullish position.
So back to McDonald’s and Domino’s—why didn’t I bet against the stocks as they ran up? The answer is in the question. The parabolic move higher in those companies’ shares and the option order flow told me I shouldn’t step in front of those freight trains.
And just because I don’t like the food those companies serve, doesn’t mean that millions of other consumers don’t love them.
Divorcing one’s personal beliefs from a company’s products and its stock can be extremely challenging. However, a look at the stock’s performance and options trading can go a long way to helping investors avoid their personal biases.
Sincerely,
Jacob Mintz
