Option Investor
Newsletter

Daily Newsletter, Tuesday, 10/28/2014

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Fed Fears Fade

by Jim Brown

Click here to email Jim Brown

Investor fears over an unexpected Fed announcement on Wednesday apparently evaporated with the market racing higher ahead of the Fed announcement.

Market Statistics

The markets shook off any Fed fears after mixed economics led credence to the idea that the Fed will not say anything negative to disrupt the markets. Add in some positive earnings reports and suddenly a short squeeze was born.

Putting a wet blanket on any unexpected Fed moves was the Durable Goods report for September. New orders declined -1.3% after falling -18.3% in August. This was well below the consensus estimates for a +0.6% rise. The weakness was broad based with core capital goods orders declining -1.7% and orders excluding defense goods declined -1.5%. Core capital goods shipments fell -0.2%.

Orders for computers, machinery and electronics declined and suggested business activity was slowing. The bright spot in the report was a +7.4% gain in defense orders after a +4.9% rise the prior month.

The weakness in the Durable Goods orders, even though not nearly as bad as the -18.3% decline in August, should keep the Fed on "worry watch" for a weakening of the U.S. economic cycle.

Offsetting the weakness in the Durable Goods orders was a surge in the Richmond Fed Manufacturing Survey, which rose from 14 in September to 20 in October. New orders rose from 14 to 22 and backorders rose from 6 to 9. Inventories declined from 23 to 15 suggesting further manufacturing strength in the months ahead.

On the negative side the employment component declined slightly from 17 to 14 and hours worked fell from 10 to 9. Capital expenditure plans dropped sharply from 38 to 25.

The Richmond Services Survey rose from 21 to 27. Excluding retail the index rose from 18 to 28. The six month outlook rose from 22 to 27.

The combination of the manufacturing and services gains in the Richmond region far outpaced the weak readings in other regions. This is positive for the Fed's outlook that the economy is continuing to improve at a modest pace. The index is very close to a post recession high.


While the Richmond numbers were surging the Texas numbers were not. The Texas service sector outlook for October declined from 27.5 to 18.0. The revenue component fell from 26.9 to 14.0 and selling prices fell from 8.0 to 6.6. Capital expenditure plans declined from 14.5 to 11.1. The hours worked component fell sharply from 6.9 to 4.1 suggesting some rising unemployment issues in Texas. However, the employment component rose from 11.9 to 12.3. The hours worked is a shorter term number while the employment component is more forward looking. The recovery in Texas is still well above contraction territory but slowing.

Consumer confidence for October rose sharply from 89.0 to 94.5 and the highest level since 2007. When you consider the Ebola scare plus the market correction this spike was very unexpected. Both internal components posted gains but the six-month expectations component roared ahead with a jump from 86.4 to 95.0 and the highest level since February 2011. The present conditions component rose only slightly from 93.0 to 93.7. About the only reasons you can apply to this expectations spike is the expected election outcome and falling gasoline prices. Everything else was negative. Europe, Ebola, market crash, etc were all producing negative headlines during the survey period.

Even more confusing is that the sharp rise in expectations was not accompanied by positive buying trends. Those respondents planning on buying a car declined from 12.1% to 10.8%. Homebuyers were flat at 5.1% while appliance buyers declined from 51.5% to 49.1%. Only 16.5% felt jobs were plentiful with 29.1% saying jobs were hard to get. Both numbers were nearly unchanged from the prior month.

The Fed will be relieved to see confidence climbing rapidly because eventually this will translate into consumers spending money and boosting the economy.


The economic calendar for Wednesday is dominated by the FOMC announcement. There is almost zero doubt that they will not end QE. The only uncertainty is what they will do about the "considerable period" terminology. A survey of 39 economists and analysts believe the Fed will keep the language until the December meeting. That suggests the market could be volatile if they elect to drop it at this meeting. Everything else they might say is already priced into the market.

You may remember the "taper tantrum" when they first floated the idea of cutting QE purchases. We are not likely to see a QE event this time because the end of QE in October has been telegraphed for the last 8 Fed meetings and by Fed speakers including Yellen. Ending QE this week is not a surprise to anyone. What happens over the next month is the real unknown.

Those same survey participants don't believe the Fed will raise rates until July at the earliest. They expect a .9% interest rate by the end of 2015, 2.0% at the end of 2016 and 3.3% at the end of 2017. The Fed has been so transparent that the majority of investors are no longer surprised by any Fed actions.

The GDP numbers out on Thursday are expected to show +3.1% growth for Q3. This has been correlated by numerous analysts so the potential for a negative surprise is low. However, that means a surprise, if it does occur, could create some volatility.


Twitter (TWTR) was the big disappointment for the day with a -10% decline after reporting disappointing earnings on Monday after the close. Analysts were quick to downgrade the stock when subscriber growth slowed. Twitter said it had 284 million active users and that was below some estimates. That was up +23% from Q3-2013 but up only +5% from Q2-2014 compared to +6.2% growth from Q1 to Q2. Twitter guided for Q4 revenue between $440-$450 million and the midpoint was below the consensus estimate of $448.2 million.

The results were not all bad with mobile ad sales rising +114% to $361.2 million and beating estimates by $10 million. Despite the rising sales RBC Capital cut their price target from $65 to $47, Nomura cut the target from $55 to $45 and lowered them from buy to hold.


Cummins (CMI) posted earnings of $2.32 compared to estimates for $2.28. Revenue of $4.89 billion was well above estimates for $4.71 billion. They raised revenue guidance for the full year to grow 10-12% compared to prior guidance at 8-11%. That puts the midrange at $19.2 billion compared to analyst expectations for $19.02 billion. The strong earnings came from sales of vehicle components in North America, Europe and China. The company said customers are upgrading their fleets and buying more trucks. Compared to prior guidance from Caterpillar about slowing sales this was a breath of fresh air. Shares rallied +7% on the news and helped fuel the market rally by boosting economic sentiment.


Buffalo Wild Wings (BWLD) rallied +13% after reporting earnings of $1.14 compared to estimates of $1.06. Revenue rose +18.3% to $373.5 million and topped estimates of $371 million. Same store sales rose +6%. More than 190 stores now have tableside tablets allowing customers to play games while waiting for food and they are also installing an app that lets customers pay at the table rather than waiting for a waitress to collect the money and process credit cards.


After the bell Facebook (FB) reported advertising revenues that rose +64% to $2.96 billion. Overall revenue rose +59% to $3.2 billion. Mobile ad revenue rose to $1.95 billion or 66% of the total for the quarter. That is up from 62% in Q2 and 59% in Q1. The company had 1.35 billion average monthly users, up +14%. Daily users rose +19% to 864 million. Monthly mobile active users rose +29% to 1.12 billion. Earnings of 43 cents beat estimates for 40 cents.

Unfortunately the conference call did not go well and shares plunged from the nearly $81 close to trade at $72. On the call the company said 2015 revenue could grow 40-47% but expenses could rise 50-70%. When quizzed about why expenses were rising so sharply they said they were investing in their recent acquisitions and investing in more people to build out new features. Investors were not happy and shares collapsed.


Gilead Sciences (GILD) reported adjusted earnings of $2.05 compared to aggressive estimates of $1.92. Revenue rose more than double from $2.71 billion to $5.97 billion. However, sales of their Hep C drug Sovaldi hit $2.8 billion in Q3 compared to estimates of $2.97. Q2 sales were $3.48 billion. Sales slowed in Q3 because of the impending announcement of Harvoni, which is an all oral form of Sovaldi and includes the two corresponding injection drugs that were necessary with Sovaldi alone. The all oral Harvoni does not require the other drugs so many patients were holding off on treatment until Harvoni was available. Sovaldi costs $86,000 for the 12 week treatment and Harvoni is $94,500. Analysts were not concerned about the dip in Sovaldi because they expect a strong surge in sales in 2015 once Harvoni becomes wildly available. RBC Capital said they expect $15 billion in Hep C drug sales for Gilead in 2015. That is up from nearly zero two years ago.

The company raised the lower range of full year revenue estimates from $21 billion to $22 billion and left the upper range unchanged at $23 billion. Analysts were expecting $24.3 billion. Clearly analysts were too aggressive in their expectations for Sovaldi sales during the changeover to Harvoni. Shares of GILD fell -$4 in afterhours. I view this as possibly your last buying opportunity before this stock soars in 2015. They reported a $2.73 billion profit in Q3, up from $788 million in the year ago quarter. If they boost their sales by $15 billion on Hep C alone in 2015 that profit is going to more than double if not triple. Where else can you get growth like that?


Panera (PNRA) shares declined -$6 after the close after they reported earnings of $1.46 compared to estimates of $1.44 but they cut Q4 and full year guidance on rising ingredient costs. They lowered the full year range from $6.65-6.80 to $6.60-6.70. Same store sales rose +2.1% and better than the +1.7% estimates.


Electronic Arts (EA) reported earnings of 73 cents compared to estimates of 53 cents. Revenue of $1.22 billion beat estimates of $1.16 billion. They raised guidance for fiscal 2015 from $1.85 to $2.05 and revenue from $4.10 billion to $4.18 billion. EA said they were seeing continued growth of generation 4 consoles (PlayStation 4 and Xbox One) and solid results in products for the older consoles. Shares were volatile after the close but ended down only -$1 in afterhours.


Wynn Resorts (WYNN) reported earnings of $1.95 compared to estimates of $1.84 thanks to a +9% revenue surge in Las Vegas that offset a -5.6% decline in revenue from Macau. The corruption crackdown in China has put the squeeze on high rollers and many of them are going low profile to avoid showing up spending lavish amounts of money. Overall revenue declined -1.4% to $1.37 billion. They also announced a 20% hike in their quarterly dividend to $1.50 and added a special dividend of $1 for a total of $2.50 for the quarter. Shares spiked to $194 on the news but returned to $185 and their closing price in afterhours.


With 49% of the S&P reported more than 73% of companies have beaten on earnings, 8% reported in line with estimates and 19% missed estimates. This has been a good quarter despite only 49% beating on revenue. Earnings growth is just slightly over 5%.

Highlights for Wednesday will be ADP, Visa and WellPoint. Thursday is the big day with GoPro, Expedia, Starbucks, MasterCard, Linkedin and First Solar.


IBM has been known as a serial purchaser of its stock as it tried to manage earnings by reducing the number of shares outstanding. They announced another $5 billion buyback today on top of $1.4 billion still unspent from the prior authorization. As buybacks go for IBM that is chicken feed. They announced $20 billion in 2013, $12 billion in 2012, $15 billion in 2011 and $18 billon in 2010. They have bought back more than half their shares over the last 20 years. They have repurchased more than $125 billion in shares just since 2005. With shares at three year lows I am surprised today's announcement was only $5 billion. In the seven years ending in 2013 IBM earned about $100 billion and paid $20 billion in dividends and bought back $100 billion in stock in a frantic race to continually lower the outstanding shares and boost earnings per share. If they had taken that money and developed their business the stock price would probably not be at three-year lows today.


Tesla (TSLA) was in the news again after Elon Musk took exception to some sales numbers reported in the Wall Street Journal and he went to Twitter to express his comments. The WSJ article said "Tesla probably delivered through September 10,335 Model S cars in the U.S. market, down -26% from the same period in 2013. Meanwhile production increased by 10%. With Tesla's goal of 35,000 cars in 2014, Tesla would have to sell 17,500 cars in the USA. At the current pace the automaker will miss that target by a wide margin." a href="http://online.wsj.com/articles/tesla-unveils-lower-cost-lease-plan-1414427518" target="new">WSJ article

Musk tweeted that September sales hit a "record high" worldwide and North American sales were up +65% from last September. That appeared to be a rebuttal to the WSJ article BUT they may both be right.

Analysts said the U.S. sales may not be surging because of the lower number of cars available for sale. Tesla is sending more cars overseas because of high demand and the desire to get a lot of cars on the roads as an advertising tool for future sales.

Shares rose +9.5% on the Musk tweet.


Markets

It was a very good day in the markets with all the indexes posting strong gains. The Nasdaq 100 and the Dow Transports both closed at new highs. The winner by far was the Russell 2000 with nearly a +3% gain of 32 points. This was short covering on a major scale. Once it broke over the 1,120 resistance level the rocket boosters fired up and it was a race to the close. I hesitate to pound the table too much on this Russell rally because of the short covering component but this was a very big move. It would not surprise me to see a decent retracement on Wednesday once reality returns.

The close at 1,149 was above both the 100 and 200 day averages so technicians are probably cussing their charts tonight. In theory that is bullish but in reality we will probably dip back below those levels tomorrow.


The Dow Transports exploded past the prior highs to close at 8,759 and a new historic high. The low oil prices plus full planes and overbooked trains are a tough combination to beat. The ramp up from the October lows has been nearly vertical. The transports should be due for a rest but they are currently showing no weakness. I mentioned last week that I expected a new high and I think there is still room to run once it consolidates.


The S&P punched through the strong resistance at 1,962-1,967 and raced to the next major resistance level at 1,985 where it ended the day. This is going to be another resistance battle and given the earnings results after the close. The futures are down -5 points and we should see some profit taking at the open tomorrow.

Fortunately intraday support is not far below at 1,970. However, if by chance we were to give back all the gains for today that would be severely negative for sentiment. The 1,955-1,957 level would be the key. If that level holds on the initial decline we should be ok. While I don't expect to see that level again you never know what to expect around a Fed meeting.

A punch through 1,985 faces even stronger resistance between 2,000/2,012.


The Dow powered to a +187 point gains to close just over 17,000 but the real resistance is now 17,150. The resistance waypoints have been falling like dominoes but the next one is going to be the toughest.

Not to beat a dead horse but a lot of these index gains today were short covering. We need to consolidate these gains before I expect the indexes to move higher.



The Nasdaq 100 ($NDX) closed at 4,107 and a new 14 year closing high. You can thank all the regular names for the gain but Apple added more than 8 points of that +60 point spike.

The Nasdaq Composite punched through strong resistance at 4,485 and then closed above the next resistance level at 4,545 with a +78 point gains. This was a huge move but unfortunately much of it was short covering. If the Nasdaq can push over 4,600 we should be off to the races for a yearend rally. Intraday support is now 4,530.




I am thrilled by the market rebound from the October lows. However, we have come too far, too fast and today's short squeeze was probably a climax spike. We need to see traders take profits and consolidate at these levels before we have a chance of punching through to new highs.

The Fed meeting should not produce positive volatility because the expectations are already priced into the market. That means we could be at risk for a sell the news event.

I would be a dip buyer on any material dip because I believe we are going higher by the end of December. However, there is significant resistance at the market highs on the Dow, S&P and Nasdaq. We know there will be a large number of people that will exit when those levels are reached and happy to get their money back after enduring the October decline. We need to get past this profit taking before we make new highs.

Volume today was moderate at 6.7 billion shares and barely more than the prior two days. Rallies on low volume should not be trusted.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Strong Guidance Fueling Gains

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

ULTA Salon - ULTA - close: 120.97 change: +3.25

Stop Loss: 116.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 925 thousand
Entry on October -- at $---.--
Listed on October 28, 2014
Time Frame: Exit PRIOR to earnings on December 4th
New Positions: Yes, see below

Company Description

Why We Like It:
ULTA is in the services sector. They're considered a specialty retailer. Founded in 1990 the company is headquartered in Chicago. According to the company website, "ULTA Beauty is the largest beauty retailer that provides one-stop shopping for prestige, mass and salon products and salon services in the United States. Ulta Beauty provides affordable indulgence to its customers by combining unmatched product breadth, value and convenience with the distinctive environment and experience of a specialty retailer. ULTA Beauty, through its stores and ulta.com, offers a unique combination of over 20,000 prestige and mass beauty products across the categories of cosmetics, fragrance, haircare, skincare, bath and body products and salon styling tools, as well as salon haircare products. ULTA Beauty also offers a full-service salon in all of its stores."

The stock had a rough time late last year when ULTA missed earnings estimates and guided lower back in December 2013. Shares collapsed from the $120 area toward the $90-95 zone. They missed and warned again in March. Yet it would appear that ULTA has worked out the kinks as the company's last two earnings reports have been strong. In June and in September ULTA reported quarterly results that were above Wall Street's estimates on both the top and bottom line. More importantly management guided higher for the next quarter both times.

Investors were really impressed with the latest quarterly report in September. You can see the huge gap higher in the stock price. Analysts were expecting a profit of $0.83 a share on revenues of $713.3 million. ULTA delivered $0.94 a share with revenues up +22.2% to $734.2 million. They also reported a very strong +9.6% same-store sales growth versus a tough +8.4% sale growth against the year ago period. Margins also saw improvement in the quarter.

ULTA management also laid out their long-term, five-year estimates. The company is forecasting annual comparable store sales growth in the 5% to 7% range. They expect EPS growth to be in the low 20% area. Their expansion plans include opening 100 stores a year. Jim Cramer lists ULTA as one of his best picks in this industry.

Mary Dillon, ULTA's Chief Executive Office, said, "A significant improvement in traffic, successful new product and brand launches, and rapid e-commerce growth drove better than expected top line performance. As a result, the Ulta team delivered healthy operating margin expansion in the second quarter. We are raising our outlook for the year and now expect to achieve sales and earnings per share growth in the 20% range, reflecting our confidence in continued strong market share gains."

The company is definitely seeing growth in its online sales. Their second quarter saw e-commerce sales soar almost 55%. They plan to grow their e-commerce sales to 10% of total revenues.

Technically shares of ULTA dipped toward support during the market's September-October pullback. Now shares have rebounded back toward resistance in the $120 area. Today saw ULTA showing relative strength and a new 2014 closing high. We want to hop on board if ULTA can breakout past the $120-121 area. We are suggesting a trigger to buy calls at $121.75.

Trigger @ $121.75

- Suggested Positions -

Buy the DEC $125 call (ULTA141220C125) current ask $5.50

Option Format: symbol-year-month-day-call-strike

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

Stocks Stampede Over Resistance

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 rushed past resistance at its simple 50-dma. The U.S. markets delivered another widespread rally on Tuesday.

Caution! Stocks could be volatile tomorrow afternoon following the FOMC meeting.

AYI, GMCR hit our entry trigger.

IYT is getting a strategy update.

SAFM is getting a new option strike to trade.

SOHU was stopped out.


Current Portfolio:


CALL Play Updates

Acuity Brands, Inc. - AYI - close: 138.41 change: +2.78

Stop Loss: 131.25
Target(s): To Be Determined
Current Option Gain/Loss: + 7.8%
Average Daily Volume = 485 thousand
Entry on October 28 at $136.25
Listed on October 27, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/28/14: Our brand new play on AYI is off to a strong start. Shares surged this morning and rallied toward round-number resistance at $140 before paring its gains. Shares hit our suggested entry trigger at $136.25 this morning and closed the day with a +2.0% gain.

Earlier Comments: October 27, 2014:
AYI is part of the technology sector. The company considers itself the North American market leader and one of the world's biggest providers of lighting solutions. Headquartered in Atlanta, Georgia, AYI does business in North America, Europe, and Asia. Their fiscal 2014 sales hit $2.4 billion.

It has been a rocky year for AYI's stock price but the August low definitely looks like a bottom. Shares have rebounded sharply and investors have been buying the dips. As of today's close AYI is up +23% in 2014.

The last few weeks have been volatile. The early October rally was a reaction to AYI's earnings results. The company reported on October 1st with a profit of $1.26 per share on revenues of $668.7 million. That beat Wall Street's estimates on both the top and bottom line. Sales were up +15% from a year ago and profits were up +22%. The company said they are seeing strong adoption of their LED lighting solutions, which saw sales almost double from a year ago.

AYI said their Q4 and full year 2014 results were both records. AYI's Chairman, President, and CEO, Vernon Nagel, was very optimistic in his outlook. Mr. Nagel said,

"We remain very bullish about our prospects for future profitable growth. Third-party forecasts as well as key leading indicators suggest that the growth rate for the North American lighting market, which includes renovation and retrofit activity, will be in the mid-to-upper single digit range for fiscal 2015 with expectations that overall demand in our end markets will continue to experience solid growth over the next several years.

We believe the lighting and lighting-related industry will experience solid growth over the next decade, particularly as energy and environmental concerns come to the forefront along with emerging opportunities for digital lighting to play a key role in the Internet of Things. We believe we are well positioned to fully participate in this exciting industry."

Since the report Goldman Sachs has added AYI to their conviction buy list and Oppenheimer has raised their price target on AYI to $160. The point & figure chart is bullish and forecasting at $162 target. Zacks is bullish on the account they are seeing analysts revising their earnings estimates for AYI higher.

Currently shares of AYI have been hovering near resistance in the $135.00 area. Today's move is starting to look like a bullish breakout. We are suggesting a trigger to buy calls at $136.25.

- Suggested Positions -

Long DEC $140 call (AYI141220c140) entry $3.80

10/28/14 triggered @ $136.25
Option Format: symbol-year-month-day-call-strike


FedEx Corp. - FDX - close: 168.20 change: +2.98

Stop Loss: 162.65
Target(s): To Be Determined
Current Option Gain/Loss: +111.3%
Average Daily Volume = 1.5 million
Entry on October 17 at $155.50
Listed on October 15, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/28/14: The rally in FDX continues with the stock up another +1.8%. We are moving our stop loss to $162.65. More conservative traders may want to just take profits now, especially since FDX is testing resistance at a trend line of higher highs.

Earlier Comments: October 15, 2014:
Last year a last minute surge of online shoppers overwhelmed the system and thousands of Christmas presents were delivered late. Part of the problem was terrible weather. The other challenge was the growth in online shopping. Amazon.com (AMZN) blamed UPS for the mass of delayed deliveries last year. You can bet that UPS' rival FDX has taken notice and plans to be ready this year.

Market research firm EMarketer is estimating that retail online shopping will surge +17% in 2014 to $72.4 billion. That might be under estimating the growth, especially this year as many consumers might opt to shop online instead of face the crowds and risk being a target for terrorism or catching Ebola. Granted neither a terrorist event inside the U.S. and a widespread outbreak of Ebola in the states has happened yet but people are already afraid with the daily headlines about the virus.

UPS and FDX hope to be ready. UPS is hiring up to 95,000 seasonal workers and FDX is hiring 50,000 holiday workers this year. That's 10K more than last year for FDX.

In addition to the surge in online shopping FDX should also benefit from the multi-year lows in oil prices. Low oil prices means lower fuel costs, one of FDX's biggest expenses.

It would appear that FDX has fine tuned its earnings machine as well. Their latest earnings report was September 17th. Wall Street was expecting a profit of $1.95 a share on revenues of $11.46 billion. FDX delivered a profit of $2.10 a share with revenues up to $11.7 billion. That's a +24% increase in earnings from a year ago and the second quarter in a row that FDX beat EPS estimates.

FDX chairman, president, and CEO Frederick Smith said, "FedEx Corp. is off to an outstanding start in fiscal 2015, thanks to very strong performance at FedEx Ground, solid volume and revenue increases at FedEx Freight and healthy growth in U.S. domestic volume at FedEx Express." Business has been strong enough that a few weeks ago FDX started raising prices on some services.

Since that September earnings report Wall Street analysts have been raising price targets. Some of the new price targets for FDX stock are $175, $180 and $183 a share.

The recent sell-off in the market and FDX could be an opportunity. FDX has already seen a -10% correction from its intraday high near $165 to today's low near $149. Right now FDX sits just below resistance near $155.

We're suggesting a trigger to buy calls at $155.50.

- Suggested Positions -

Long 2015 Jan $160 call (FDX150117c160) entry $5.30*

10/28/14 new stop @ 162.65, traders may want to take profits now!
10/25/14 new stop @ 157.85
10/23/14 new stop @ 155.90
FDX is nearing resistance at $164.00. Traders may want to take profits now.
10/21/14 new stop @ 153.45
10/17/14 triggered @ 155.50
Option Format: symbol-year-month-day-call-strike

chart:


Keurig Green Mountain, Inc. - GMCR - close: 146.66 change: +3.38

Stop Loss: 141.90
Target(s): To Be Determined
Current Option Gain/Loss: +4.5%
Average Daily Volume = 1.68 million
Entry on October 28 at $145.75
Listed on October 25, 2014
Time Frame: Exit PRIOR to earnings on November 19th
New Positions: see below

Comments:
10/28/14: GMCR completely erased yesterday's pullback. The stock displayed relative strength with a 2.3% rally to set a new all-time closing high. Potentially helping fuel today's move was a rumor that Coca-Cola (KO) might choose to just buy the rest of GMCR they do not already own. Currently KO is a minority stake holder.

Our suggested entry point to buy calls was hit at $145.75.

Earlier Comments: October 25, 2014:
GMCR is labeled as part of the consumer goods business. GMCR describes their company as "a leader in specialty coffee, coffee makers, teas and other beverages, Keurig Green Mountain (Keurig), is recognized for its award-winning beverages, innovative brewing technology, and socially responsible business practices. The Company has inspired consumer passion for its products by revolutionizing beverage preparation at home and in the workplace." GMCR makes almost 300 varieties of coffee, hot cocoa, teas, and other beverages in K-cup and Vue portion packs.

The company's latest earnings report back in August were better than expected but revenues were a disappointment and management guided lower. Yet the stock did see much follow through on the initial post-earnings drop. Then a couple of weeks later shares of GMCR soared to new highs on news it had finally signed a licensing deal with Kraft Foods, the second largest food and beverage company in the world. GMCR already had licensing deals with all the major coffee brands but Kraft was the lone holdout.

Several weeks later shares of GMCR soared again after Goldman Sachs slapped a buy rating on the stock and gave it a 12-month $166 price target. The Goldman analyst believes GMCR will see sales rise at a compounded annual growth rate of almost 30% and profits will soared at 23% per year through 2017.

On a short-term basis the middle of last week was starting to look like a top, especially with Thursday's bearish engulfing candlestick reversal pattern. Yet there was no confirmation on Friday.

Friday's intraday high was $145.54. We are suggesting a trigger to buy calls at $145.75. We'll try and limit our risk with a stop loss at $141.90. We are not setting an exit target yet but I will note the point & figure chart is suggesting a $182.00 target.

Earnings are coming up on November 19th. We will plan on exiting prior to the announcement. More aggressive traders may want to take a longer-term approach and hold over the announcement (and use longer-dated calls).

- Suggested Positions -

Long NOV $150 call (GMCR141122C160) entry $6.17

10/28/14 triggered @ $145.75
Option Format: symbol-year-month-day-call-strike


iShares Transportation ETF - IYT - close: 156.86 change: +2.37

Stop Loss: 151.85
Target(s): To Be Determined
Current Option Gain/Loss: +255.8%
Average Daily Volume = 320 thousand
Entry on October 13 at $138.75
Listed on October 11, 2014
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
10/28/14: The rally in the transports has been impressive and the IYT continued to climb today with a +1.5% gain. This is a new all-time high for the ETF.

Investors may want to take some money off the table or just lock in gains now. We are choosing to take a different approach. Using options can provide a lot of versatility in our trading strategy.

First we will move the stop loss to $151.85. Second, we are turning this trade into a spread by selling the November $159 call, which has a bid of $1.75. By selling the Nov. $159 call we can reduce the cost of our initial trade, the November $143 call, which cost us $3.40.

You will want to "sell to open" the Nov. $159 call. Once filled you will be short the Nov. $159 call and long the Nov. $143 call. This will cap our potential gains but also reduce our risk by reducing the cost of our initial trade.

Once the spread is active we will want to close both positions if the IYT hits our new stop loss at $151.85.

Earlier Comments: October 11, 2014:
The IYT is an exchange traded fund (ETF) that tries to mimic the performance of the Dow Jones Transportation Average index.

Stocks have been sinking as investors worry about a global slowdown, especially in Europe. Yet the U.S. economy is still growing. Plunging oil prices should be great news for both business and consumers. Lower fuel costs means more money to spend elsewhere. Lower fuel prices also mean better margins for transportation companies.

The IYT has hit correction territory with a -10% pullback from its September highs about four weeks ago. When the market finally bounces the transports should lead the market higher thanks to the U.S. economy and low oil prices.

It looks like IYT's current drop could be near a bottom. Volume was almost three times the norm on Friday and shares settled near technical support at its simple 200-dma. We suspect the market will see another push lower before bouncing. That could see the IYT pierce the $140 level.

Tonight we're suggesting a trigger to buy calls at $138.75 with a stop loss at $134.45. This should be considered a higher-risk, more aggressive trade. You've heard the term "catching a falling knife" and that's what we're trying to do. You may want to wait for the IYT to pierce $140.00 and then buy the rebound back above this level as an alternative strategy.

*Higher-risk, more aggressive trade* - Suggested Positions -

Long NOV $143 call (IYT141122c143) entry $3.40*

10/28/14 Strategy Update: new stop @ 151.85, Plus, we want to sell the November $159.00 call (current bid is $1.75).
10/25/14 new stop @ 148.65, traders may want to take some money off the table now
10/23/14 new stop @ 147.25
10/21/14 new stop @ 144.65
10/18/14 new stop @ 141.75
10/13/14 triggered @ 138.75
Option Format: symbol-year-month-day-call-strike


NetEase, Inc. - NTES - close: 92.75 change: +0.78

Stop Loss: 89.40
Target(s): To Be Determined
Current Option Gain/Loss: - 6.1%
Average Daily Volume = 430 thousand
Entry on October 21 at $91.59
Listed on Exit PRIOR to earnings on November 12th
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/28/14: Shares of NTES slowly drifted higher on Tuesday. I still think a rise past $93.50 could be used as an alternative entry point to buy calls. Keep in mind our time frame. We want to exit prior to earnings on November 12th.

Earlier Comments: October 20, 2014:
NTES is in the technology sector. They are part of the Chinese Internet space. The company operates online video games, an Internet portal and email services in China. Technically the stock has been outperforming most of its peers in the Chinese Internet industry (compare to the performance of the KWEB ETF of which NTES is a component).

Their most recent earnings report was healthy. NTES' quarterly profit was in-line but revenues were up +21% to $475.8 million, beating Wall Street's estimates. NTES' Chief Executive Officer Mr. Ding said, "This quarter we have achieved in three business areas MoM and YoY increase revenue total revenue growth of 17.2%, an increase of 22.3 percent compared with the same period last year, gaming revenues grew 13.1%, advertising services revenue grew 42.9%, mailboxes, electricity suppliers and other business income increased 201.5 percent."

After an initial rally on these results NTES share price stalled out at resistance near $90-91. Here we are more than two months later and NTES is testing resistance near $90-91 again. This time the point & figure chart is suggesting at $102 price target.

We are suggesting a trigger to buy calls at $91.15.

- Suggested Positions -

Long NOV $95 call (NTES141122C95) entry $2.45

10/23/14 new stop @ 89.40
10/21/14 triggered on gap higher at $91.59, trigger was $91.15
Option Format: symbol-year-month-day-call-strike


Semiconductor ETF - SMH - close: 50.23 change: +0.13

Stop Loss: 47.85
Target(s): To Be Determined
Current Option Gain/Loss: +59.0%
Average Daily Volume = 2.4 million
Entry on October 17 at $47.15
Listed on October 16, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/28/14: Shares of the SMH did not move that much today but the option values certainly improved for us. Technically the SMH's close above $50.00 and its 50-dma is bullish but it probably needs to extend these gains to actually confirm the breakout. The SMH still looks short-term overbought with the big rally from its October lows. Traders may want to raise their stop again. I'm not suggesting new positions at the moment.

Earlier Comments: October 16, 2014:
It looks like the correction in the semiconductor stocks might be done.

The SMH is the Market Vectors Semiconductor Exchange Traded Fund (ETF) that tries to mimic the performance of the Market Vectors Semiconductor 25 index. Semiconductors as a group had been strong performers with the SMH up +73% from its late 2012 lows.

A few weeks ago the industry started to see some profit taking. MCHP issued an earnings warning last week that that sparked the massive plunge in the SMH. The SMH has witnessed a -15% correction from its 2014 closing high to the closing low on Monday this week. Now it has started to bounce. It's possible all the panic selling is over.

Intel (INTC), a much bigger company than MCHP, just reported earnings on October 14th and the results were better than Wall Street expected. More importantly INTC offered slightly bullish guidance.

Bloomberg noted that INTC said its PC-processor business rose +8.9% last quarter. Sales for INTC's chips for notebook computers soared +21%. Even chips for desktop PCs rose +6% in the third quarter.

The strong results from INTC have helped buoy the SMH, which is starting to rebound after testing (and piercing) long-term support on its weekly chart (shown below).

We suspect the worst might be over. However, this could be a volatile trade. There are a lot of semiconductor companies who have yet to report their results.

The SMH saw its rally stall under $47 and near its 200-dma. Tonight we are suggesting a trigger to buy calls at $47.15.

- Suggested Positions -

Long 2015 Jan $50 call (SMH150117c50) entry $1.10

10/25/14 new stop @ 47.85
10/21/14 new stop @ 46.35
10/17/14 triggered @ 47.15
Option Format: symbol-year-month-day-call-strike




PUT Play Updates

Monsanto Co. - MON - close: 113.48 change: +0.66

Stop Loss: 115.15
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 4.1 million
Entry on October -- at $---.--
Listed on October 22, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
10/28/14: The widespread market rally today helped MON manage a gain but shares are still underperforming the broader market.

Our suggested entry point is $111.90.

Earlier Comments: October 23, 2014:
Monsanto describes itself as a company "committed to bringing a broad range of solutions to help nourish our growing world. We produce seeds for fruits, vegetables and key crops – such as corn, soybeans, and cotton – that help farmers have better harvests while using water and other important resources more efficiently. We work to find sustainable solutions for soil health, help farmers use data to improve farming practices and conserve natural resources, and provide crop protection products to minimize damage from pests and disease. Through programs and partnerships, we collaborate with farmers, researchers, nonprofit organizations, universities and others to help tackle some of the world’s biggest challenges."

What does that mean in plain English? The company operates two main segments. They have a seeds and genomics business and an agricultural productivity business. The seed and genomics business gets a lot of negative press over its bio-engineered seeds (GMO) to boost production and deter insects and weeds from hampering growth. The productivity business makes herbicides.

About 60% of MON's sales are in North America. They're trying to broaden their market and generate more customers in Europe, Latin America, and Africa. Unfortunately the plunge in grain prices in America has hurt with many grains at four or five year lows. If this doesn't change soon it could hurt future sales as farmers tend to buy less when prices are down.

It's easy to understand the long-term tailwinds for MON. The world needs to see significant growth in grain production to feed the booming population. Yet the company admits they are in a challenging commodity environment. Bears argue that the ethanol-driven boom in corn is over.

MON's most recent earnings report was October 8th and it was a disappointment. Wall Street was expecting a loss of 24 cents a share compared to a loss of 47 cents a year ago. MON reported their Q4 loss at 27 cents. They did see a strong surge in revenues of +19% to $2.63 billion in the quarter, which beat expectations. Here's an interesting factoid that should worry the bulls. What would MON's earnings have looked like if the company did not spend an astonishing $6.1 billion in stock buybacks last quarter?

Management did lower their guidance for fiscal year 2015. They expect their Q1 results to come in about half the same period a year ago. In the conference call MON claims that the weakness in corn will be made up by strength in soybeans. They pointed out that one of their biggest contributors in 2015 will be sales of their Intacta soybean seeds in Latin America. Yet the company is currently facing a legal battle with farmers in Brazil over getting paid royalties for these Intacta soybean seeds. Another challenge in 2015, which they just lowered guidance on, is they expect 4% to 5% of their EPS growth to come from their stock buyback program.

It looks like the next four quarters could be tough for MON. That's why today's bearish reversal at resistance near $115 and its 200-dma could be a bearish entry point. Tonight we are suggesting a trigger to buy puts at $111.90. The point & figure chart is bearish and suggesting a $90 target but the P&F chart also shows potential support in the $102-104 zone.

Trigger @ $111.90

- Suggested Positions -

Buy the 2015 Jan $110 PUT (MON150117P110)

Option Format: symbol-year-month-day-call-strike


Sanderson Farms, Inc. - SAFM - close: 79.07 change: -0.24

Stop Loss: 80.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 483 thousand
Entry on October 28 at $78.20
Listed on October 25, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/28/14: SAFM is also underperforming the market's major indices. Shares tried to rally this morning but failed at resistance at the simple 10-dma. The midday drop saw SAFM hit our suggested entry point at $78.20.

NOTE: The 2015 February $75.00 put did not trade today. If it had the best estimate would have been about $2.75-3.00 as our entry point based on yesterday's numbers. I suddenly see a better option strike at the December $75 put, which has a better bid/ask spread (currently $2.85/3.50). I am suggesting we use the 2014 December $75.00 SAFM put going forward. We'll use tomorrow morning as the entry point for this trade.

Earlier Comments: October 25, 2014:
SAFM is part of the consumer goods sector. They raise chickens - a lot of chickens. The company will process more than 3.0 billion pounds of chicken meat in 2014. At almost 9.4 million chickens a week that makes SAFM the third largest poultry farmer in the United States.

Earlier this year the stocks of chicken producers were soaring. The price of beef and pork were rising fast and consumers were buying more chicken. Now it would appear the price of chicken is catching up and consumers might be buying less.

SAFM's most recent earnings report was in August. Even though the retail price of chicken was near record highs the company still missed Wall Street's estimates by a mile. Management blamed the earnings miss on chickens that didn't reach their target weights fast enough, a lower hatch rate for new chicks, and a rise in employee bonus programs.

Nearly all the poultry producers have had a rough October thanks to a big drop on October 16th. It would appear that drop was sparked by SAFM's comments at an investor conference. SAFM said casual dining traffic was down and thus people were eating less chicken at restaurants. SAFM blamed the weak job market and weakness in the broader economy, which seems a little out of sync with the rest of the country since the U.S. economy is still growing and the labor market has been slowly improving.

The S&P 500 put in a short-term bottom in the October 15-16 time frame and is up sharply since then. SAFM has not participated in the market's bounce. Instead the oversold bounce is rolling over. The point & figure chart looks ugly and suggests a $63 price target.

More aggressive traders may want to buy puts now. We are suggesting a trigger to buy puts at $78.20. More conservative investors might want to see a breakdown under the October low (77.25) before initiating positions.

NOTE: I am listing the 2015 February puts. I would prefer to use Decembers or Januarys but I didn't see any decent option strikes to trade. Earnings are not due until December.

- Suggested Positions -

Long 2015 DEC $75 PUT (SAFM141220P75) current ask $3.50

10/29/14 Initiate positions at the open with the DEC $75 put
10/28/14 The 2015 February $75.00 put did not trade today. If it had the best estimate would have been about $2.75-3.00 as our entry point based on yesterday's data. I suddenly see a better option strike at the December $75 put, which has a better bid/ask spread (currently $2.85/3.50) and more activity. I am suggesting we use the 2014 December $75.00 SAFM put going forward. We'll use tomorrow morning as the entry point for this trade.
The 2015 Feb $75 put symbol is SAFM150220P75
The 2014 Dec $75 put symbol is SAFM141220P75
10/28/14 Would have been triggered @ 78.20 but the February $75 put did not trade.
Option Format: symbol-year-month-day-call-strike


CLOSED BEARISH PLAYS

Sohu.com Inc. - SOHU - close: 44.47 change: +1.44

Stop Loss: 44.75
Target(s): To Be Determined
Current Option Gain/Loss: -51.9%
Average Daily Volume = 393 thousand
Entry on October 22 at $43.25
Listed on October 18, 2014
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
10/28/14: When the whole market is in rally mode, like today, it can be tough to make bearish plays work. SOHU shot higher with a +3.3% gain and hit our stop loss at $44.75.

*Smaller positions to limit risk* - Suggested Positions -

NOV $40 PUT (SOHU141122P40) entry $1.04 exit $0.50 (-51.9%)

10/28/14 stopped out
10/25/14 new stop @ 44.75, caution! SOHU closed above its 10-dma
10/22/14 triggered @ 43.25
Option Format: symbol-year-month-day-call-strike

chart: