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Trades of the Day: Kellogg (K) and HCP (HCP)

The smart move in the current market is to own both calls and puts


Stocks continued to thrive over the past week. And signs point toward that trend continuing as the bullish environment carried the Dow Jones Industrials and the S&P 500 to new all-time highs.

Our index indicators are giving bullish readings, unchanged from last week, as all three major indexes built on their gains. The primary bullish trends remain in place, with the Dow staying above 16,520, the S&P 500 above 1,885, and the Nasdaq above 4,170.

Our internal indicators are confirming the bullishness of the indexes, as the 200-day Moving Averages Index, Cumulative Volume Index and Advance/Decline Index are all bullish. All nine S&P sector funds remain bullish, and the Dow Transports and Dow Utilities are bullish. Volatility indexes have fallen to multi-year lows.

With economic numbers continuing to lag, the driving force behind the bullishness in stocks continues to be easy-money policies from the world’s central banks. In fact, the European Central Bank actually reduced key deposit rates to negative. In the United States, easy-money policies are evidenced by ongoing bullishness in long-term Treasury bonds (TLT).

Though TLT pulled back over the past week, it arrested the decline near its 50-day moving average. However, it did slip below its most recent low, so its “higher highs, higher lows” bullish chart pattern may be setting up for some leveling off. That is something to keep an eye on.

Commodity trends also built on their recent improvement. U.S. Oil (USO) and the First Trust ISE Global Copper Index (CU) remain bullish, although USO might be pulling back a little. The Gold ETF (GLD) looks to have stabilized somewhat from its recent fall, though its chart trend and recent history suggest that it is far from out of the bearish woods.

With stocks and key industrial commodities continuing to rally and central banks remaining willing to print money with abandon, signs point to stocks moving still higher. So, options traders should continue to weight their portfolios more toward bullish positions than bearish. But as we mentioned last week, when all seems good, that is when things turn bad; with this in mind, keep some puts in your portfolio as well, “just in case.”

Here is today’s bullish trade:

Buy the Kellogg (K) Sep 72.50 Calls at $1.20 or lower (K’s stock price closed Thursday at $68.84). After entry, take profits if the stock price hits $71.40 or the option price hits $2.20. Exit if the stock price closes below $67.30 or the option price closes below 80 cents.

In addition to the K calls, we recommend that you also add the following put trade as downside protection:

Buy the HCP Inc. (HCP) Oct 40 Puts at $1.25 or lower (HCP’s stock price closed Thursday at $42.64). After entry, take profits if the stock price hits $39.90 or the option price hits $1.90. Exit if the stock price closes above $42.40 or the option price closes below $1.00.

A note about summer trading: As we move into the summer trading months for the U.S. markets, it’s not uncommon to see volume dwindle, so traders should take extra precaution to avoid “moving” the markets by placing large orders at once. We also suggest trying to place limit orders initially and, if those don’t get filled, you can switch to market orders.

Just remember that for every one person who is trying to buy an option, there is a corresponding seller who is watching the orders come through and who will adjust the price accordingly, so do what you can to avoid price manipulation.

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