In The Money with Fidelity Investments: XOM, ZM & LULU

by Dan

On this week’s In The Money with Fidelity Investments (filmed this morning), we discussed the state of the “reopening trade”, specifically how over the last week or two it appears that investors have gotten more defensive, again crowding into mega-cap tech stocks, opening a wide divergence between the Nasdaq and the S&P 500/Russell 2000/Bank Stocks.

We also discussed Crude Oil’s gap fill, back towards $40 where it broke down in March on its way to zero in April, and what this week’s rejection at technical resistance and what is certainly going to be a spotty economic global recovery means for commodities and related stocks. The clear theme of the show over the last couple of months has been to identify trading opportunities in stocks/sectors that have been both positively and negatively impacted by the coronavirus and the economic impact of the lockdowns. In today’s show I faded oil via Exxon (XOM) and looked to protect gains in Zoom (ZM) for those who have enjoyed dramatic gains of late and updated a bearish trade idea in Lululemmon (LULU) from a couple of weeks ago.

Watch by clicking below:

Here are my notes from the show this morning:

Macro:
The divergence between mega-cap tech (NDX) and SPX & Small Caps remains… I personally don’t think it is that healthy, also keep an eye on banks stocks this week out of there stress tests…
Crude Oil back at $40 shows a good bit of optimism about the pace of the global economic recovery.
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Technically that is some serious resistance just above $40, which was the March Breakdown level that saw the commodity literally go below zero.

Any hiccups on the trade front with China or the reopening and energy and material stocks will have trouble right out of the gates.

Trade Idea #1: Short exposure in big oil

Bearish Trade Idea: XOM ($46) Buy Aug 45 – 35 put spread for $2.50

-Buy to open 1 Aug 45 put for 3.10
-Sell to open 1 Aug 35 puts at 60 cents

Break-even on Aug expiration:
Profits of up to 7.50 between 42.50 and 35 with max gain of 7.50 below 35
Losses of up to 2.50 between 42.50 and 45 with max loss above 45

Rationale: risks ~5% of the stock price for a break-even down 8.5% for two months.

XOM breaking below uptrend from March lows, mid $30s downside target over the summer as recovery falters.

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Trade Idea #2:
ZM Collars stock is up 270% on the year. Has a $71 billion market cap, Trades 200x EPS, and 40x sales.

Great company for this moment, great product relative to most competitors, might have pulled forward a ton of demand and will take some time to grow into this valuation.

Long holders might consider collaring gains, allowing for upside participation to a certain point, but also downside protection at a certain point…

vs 100 shares long at $255 Buy July 300 – 210 Collar for even money

-Sell to open 1 July 300 call at $3
-Buy to open 1 July 210 Put for $3

Break-even on July expiration:
Profits of stock up to $300, stock called away at $300
Losses of stock down to $210 protected below

 

Also back on June 10th, I detailed a defined risk bearish trade on shares of LULU into their earnings report:

From June 10th when the stock was $320:

BEARISH TRADE IDEA: LULU ($320) BUY JULY 310 – 270 PUT SPREAD FOR $11

-Buy to open 1 July 310 put for 15
-Sell to open 1 July 270 put at 4

When we taped the segment today shortly after the open the stock was trading $296 and this put spread was worth about $16, the options were to let it ride, or a portion of it as there is still about 10% potential downside, take profits or roll the profits down and out to possibly the August 290-270 put spread.