By almost any measure, Netflix, the Internet television “network” that has changed the nature of the industry, is all the rage.
After announcing blowout first-quarter revenues of nearly $1.57 billion and 4.88 million new subscribers – well above its 4.33 million guidance number – Netflix Inc.’s (Nasdaq: NFLX) stock soared over 25%.
The Netflix story is a work in progress, but I see its most recent results as another chapter on the way to even more profitable opportunities going forward.
Indeed, in a moment you’ll see how we can ring up a 280% profit in the Netflix “after-party.”
Recently some new neighbors moved in just down the street, and with new neighbors come changes.
The most apparent changes always happen outside of the house, and within a few months the house transformed as a pool, a patio, and even a sunroom became (welcome) additions. Indeed, so much changed that the neighbors around us started to talk.
You see, most people don’t like change – but I welcome it.
Indeed, as traders, we actually need change in order to find a potential to profit.
And in the case of my new neighbors, changes led me to an opportunity to double up on an investment in the world’s most important currency…
Two Simple Questions, One Profitable Play
I decided to meet this new neighbor of mine while he was hosting an outdoor party. Come to find out, he was like a lot of “Floridians,” a European who owned property in Florida while still residing in Europe.
He grew up in Greece, and like most Greek families, he invited my family to his house and showered us with food, drink, and conversation. Our conversation started with talk of family, then work, ultimately leading to the stock market.
He asked me two questions that got me to thinking about a great opportunity for those interested in riding the rise of the U.S. dollar.
“I don’t understand,” he first said. “How is it that the stock market, the bond market, and the U.S. dollar are all going up? That’s not supposed to be, right?” he added.
Logically, he’s correct.
Economics 101 tells us that the flow of money cannot go into everything at once, and typically money that comes out of stocks goes into bonds and the U.S. dollar. And when the stock market is booming, typically it comes on the heels of a falling U.S. dollar.
Think about it for a moment. Our economy might not be growing at a blistering pace, but it’s outpacing the world right now. World headlines are rife with recessions, energy crises, and tales of raging insurgencies and wars. All of which push fearful foreign investors toward U.S. stocks, U.S. treasuries, and the U.S. dollar. And many investors believe that the rise in the U.S. dollar hasn’t reached its peak potential yet.
So how can we take advantage of the growing trend in the greenback without getting short changed?
It’s easier than you think…
Doubling Down on the Dollar
The chart shown here is the PowerShares DB U.S. Dollar Index Bullish (NYSE Arca: UUP). This index is a tradable instrument that tracks the dollar against several foreign currencies at a rate of 2-1. That means if the dollar were to rise 1% against its outside neighbors, this index would rise 2%. The same thing would happen if the dollar were to fall against foreign currencies.
PowerShares’ Dollar Bullish Index was created to offer leverage in various assets, and I think for currencies they make sense since we see little day-to-day movement of them.
The chart above reflects UUP shares went up markedly over the last year. It has gone from $21.50 per share to as high as $26.50 per share recently, or a 24% increase during that time frame. That represents roughly a 12% increase in the U.S. dollar.
Our target on this index for the remainder of the year is $28 to $30, which when first looking at it is another 10% to 15% move. As an option trader however, I am looking for more than just 10%.
I typically look for a minimum of a double in my option investments.
And I believe this trade sets up as a dollar double for a $.50 entry price.
Twitter has often been dismissed as a company that should have sold out to Facebook (Nasdaq: FB) years ago, and until recently no one really wanted to own its stock.
I disagree. I believe now is the right time to buy Twitter Inc. (NYSE: TWTR) stock, and not just because it’s starting to show up on the Street’s buy lists.
Even so, as a rules-based trader, I need hard evidence that a trade will be worthwhile. And I just got it for Twitter. Let’s have a look at the catalyst that’s going to fatten our wallets while everyone else waits for the wrong signs. Then I’ll show you how to fuel your returns with an options strategy that could boost your profits to upwards of 300%.
Technical Signs Draw a “Triangle” of Profit
First have a look at a long-term chart of Twitter stock performance. Notice the red support line that is drawn on the chart. It goes from a stock price of $30 per share back in May of 2014 and rises through the latest support point at $35 per share in January of 2015.
We call this a rising support line. Now take a look at how the green resistance line on top of the chart is falling. The latest two resistance points are $55 back in October of 2014 and the latest resistance price of $50 just last month.
Put both of these lines together and you see that resistance is dropping and support is rising into a triangle formation. This “Triangle, Wedge, or Pennant” pattern clearly shows that the highs are getting lower, but the lows are getting higher. This can’t go on forever. Any chart pattern like this eventually has to break, either to the upside, which is bullish, or to the downside, which is bearish.
Lucky for us, Twitter has just decided which way the break is to occur… to the upside.
Social Trends Drive Our Profit Target
Fundamentally, things are looking up for Twitter.
First, it has put in a few better-than-expected earnings reports and, based on the last one, its stock is now finally reacting to the good news. The last report was followed by a bullish gap in the stock price, which is now serving as short-term support at $45. There seems to be some momentum to the upside as Twitter has just closed above its highs for the year.
I also like to look at social trends as they relate to the fundamentals of Twitter.
I believe that social trends come in two cycles: First the teens, then the adults. Think of our teens as beta testers. They want something new and cool, and if their parents don’t know how to use it, even cooler still! While teens are very sticky and will sit on their favorite social site for hours, they aren’t the best targets for advertising.
First they don’t have much discretionary income. In fact, many of our teens don’t have jobs, one of the big reasons they are on social media so much.
But, while Twitter has been a teen favorite, that’s changing. Adults are realizing the power of the Tweet now. This should send the stock back to the old highs of $70 per share soon. That’s roughly a 40% return from today’s stock prices – not too shabby for a stock that was once considered washed up.
Here’s how we can play this simple stock trade right now…
Buy Twitter at today’s price best price, which as of this writing is around $50 per share. Hold it until it hits $70, at which point I plan to exit.
Options Send Your Returns Skyward
And, while that may sound attractive, there’s a way to potentially supercharge that return into the three figures.
That’s possible because Twitter has a low correlation to other stocks. In fact over the last year Twitter has only followed the Dow Jones Industrial Average 18% of the time, and the S&P 500 just 22%.
In previous articles I have referenced the use of call options, and in the case of our Twitter play it’s really no different, with one exception.
Remember, options are a powerful trading instrument and allow traders the opportunity to make money on a stock without actually trading the stock. I’ve mentioned a few of the advantages of using call option before, but let’s highlight them once again.
Make money with less money spent up front.
With less money used on the option trade you have less risk on your overall account.
Your return on investment dollar for dollar on the option trade is usually higher – more bang for your buck!
But, options are riskier than stock in the sense that they are what is called a fixed time investment. The option contract has an expiration date and that is typically the third Friday of the month whose expiration you purchased. For example, a May option will expire at the close of the market on the third Friday of May. On more liquid or actively traded stocks there will be option contracts listed for every week of the month.
Our example is going to utilize an option expiration of January 2016… giving us plenty of time to be right!