Option Investor
Newsletter

Daily Newsletter, Tuesday, 1/31/2017

Table of Contents

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

Market Wrap

Biotech Rescue

by Jim Brown

Click here to email Jim Brown

The markets crashed again at the open but a rebound in the biotech sector rescued the Russell and Nasdaq from big losses.

Market Statistics

The biotech sector rebounded from the opening dip after a meeting at the White House with pharma CEOs turned out to be a love fest rather than a cage match. The president convinced them he was going to lower taxes and speed up drug approvals at the FDA. Investors must have believed them because the Biotech Index ($BTK) spiked 3.72% and the S&P Biotech SPDR (XBI) surged 4.13%. This lifted the Nasdaq and the Russell 2000 off their lows and powered the Russell to a 9 point gain. I suspect short covering was a big factor since many traders expected Trump to give the CEOs a hard time about drug prices.



There was a flurry of economic reports today but none were market movers. The employment cost index for Q4 rose +0.5% compared to +0.6% in Q3. Private wages were up +2.3% on a year-ago basis. Government wages rose +2.1% and benefit costs rose 2.0% over the same period.

Consumer confidence for January declined slightly from 113.3 to 111.8. The three-month moving average is 111.5 and the highest level since 2001. The present conditions component rose from 123.5 to 129.7 but the expectations component fell from 106.4 to 99.8. Potential auto buyers fell from 13.9% to 12.0%, homebuyers fell from 6.7% to 5.2% and appliance buyers declined from 52.6% to 51.1%. With the president now in office the thrill of victory may be fading into voter remorse for some citizens regardless of their voting preference.


The Texas service sector outlook survey for January fell from 20.6 to 16.2. The revenue component declined from 21.3 to 16.2 and employment from 6.9 to 4.8. Components for selling prices and capex spending plans were flat but input prices fell from 29.9 to 23.4. The future business outlook fell from 40.3 to 33. The report was ignored.

The calendar for Wednesday is packed. The Fed decision at 2:PM will be the most important but nobody expects them to change interest rates. There is only a 4% chance of a rate hike according to the CME FedWatch Tool.


The estimates for the ADP Employment report for January declined slightly to 165,000 but that is still 12,000 jobs over the December number. The Nonfarm Payrolls on Friday saw the estimates rise slightly from 165,000 to 171,000 over the last several days.

The ISM Manufacturing Index is expected to decline only slightly and should not be a market mover as long as it is in that range.


Today was all about earnings and Exxon (XOM) started the parade before the open. Exxon reported the smallest quarterly profit in 17 years because of low prices in oil and gas. Profits fell -40% to the lowest since 1998. Adjusted earnings were 89 cents and beat estimates for 72 cents. Revenue of $61.016 billion beat estimates for $60.606 billion. Production averages 4.121 million Boepd, a 3% decline from 2015. The company took a $2 billion write down on reserves. Exxon said it would pay $5.6 billion in stock to fund acquisitions in the Permian Basin. Exxon's capex spending declined 35% in Q4.

The reserves write down has been expected. The SEC inquired into their accounting practices several months ago when they had not taken any charges while everyone else in the sector was slashing previously booked reserves. If a company makes a discovery of 10 million barrels with oil at $75 and it costs $50 to produce it, those reserves must go away if oil prices fall to $40. If it costs significantly more to produce than it is worth then the company takes a charge to those booked reserves. This does not mean the oil went away. It is still there in the ground and they still own it. If prices returned to $75, the reserves could then be produced at a profit and they would go back on the books at the correct price.


United Parcel Service (UPS) shares were crushed after the company reported business was too good. The company said a rapid shift to home deliveries exposed how much further the company has to go to keep up with the volume. They vowed to spend an additional $1 billion to further automate warehouses and delivery systems. That pushed their 2017 capex to $4 billion. The company said they deliver an average of 1.1 packages at residential addresses but commercial addresses average multiple packages and that lowers costs. Delivering more residential packages means more residences and that adds to costs. One online transaction tracker said transactions rose 13% in November but the dollar volume only rose 4%. During the quarter, UPS delivered 1.4 billion packages, a 7.1% increase. Average daily shipments rose 5% to 19.6 million.

Earnings came in at $1.63 with analysts expecting $1.69. Revenue rose 5.5% to $16.9 billion and just below estimates for $17 billion. UPS guided for full year 2017 for earnings of $5.80 to $6.10 and analysts were already expecting $6.17. They blamed the strong dollar for reducing 2017 earnings estimates by 30 cents per share. UPS had hedged against the dollar but those hedges are not enough to prevent the losses. The current hedges expire in 2017 and the program is being replaced. Shares fell -$8 on the earnings news.


Harley-Davidson (HOG) reported earnings of 27 cents that missed estimates for 32 cents. Revenue of $933 million also missed estimates for $986 million. The misses were due to lower shipments. Revenue on Harley-Davidson branded bikes fell -8.8% to $685.5 million. They shipped 42,414 motorcycles compared to 48,149 in 2015-Q4.


Under Armour (UA) reported earnings of 23 cents that missed estimates for 25 cents and was below the 24 cents earning in the year ago quarter. Revenues of $1.308 billion rose 11.7% but missed estimates for $1.412 billion. Wholesale sales rose 5% and online sales rose 23%. For all of 2017 revenues are expected to rise 12-13% on a currency neutral basis to $5.4 billion but that was well below analyst expectations for $6.06 billion. They said slower customer traffic in Q4 and lower demand for footwear and apparel plus international challenges were to blame. The lower traffic caused significant promotional activities, which reduced average selling prices. They also said a shift in the product mix was to blame for lower revenue. The cheaper shoes were selling and high prices shoes were being heavily discounted.

Analysts blasted the conference call saying the lowered guidance was strange since they are rolling out in all the Kohls stores in the near future. That is a lower dollar retailer and will probably sell the low end of the Under Armour line, therefore further dragging the average selling price lower.

They also reported that their newly hired CFO would be leaving the company for personal reasons effective immediately. That is never good news. Analysts were piling on the downgrades on the belief the athleisure fad could be slowing along with the high priced shoe phenomenon.


MasterCard (MA) shares fell -$3 after reporting earnings of 86 cents on revenue of $2.756 billion, up +9.5%. That beat earnings estimates by a penny but missed revenue estimates for $2.9 billion. They guided for low double-digit revenue growth in 2017 and earnings growth in the mid teens. However, they said first half revenue growth would be lower than the second half because of higher incentive promotions. MasterCard process an average of 65,000 transactions per minute.


The big dog in the earnings parade reported after the close. Apple (AAPL) reported earnings of $3.36 per share compares to estimates for $3.21. Revenue rose 3% to $78.35 billion against expectations for $77.25 billion. This was the first quarter of growth after three quarters of declining sales. They guided for Q1 for revenue of $52.5 billion and did not give EPS guidance. Analysts were expecting $2.08 on revenue of $53.79 billion making that guidance slightly weak but Apple normally does that.

The revenue for Q4 was a record for Apple and they sold a record number of iPhones, iPhone services, Mac and the Apple Watch. Services revenue rose 18% to $7.2 billion. To put that in perspective that service revenue is about the same as Facebook will report in total revenue. The company sold 78.29 million iPhones and estimates were for 75.1 million. However, Q4 had an extra week in 2016. If you subtract out for that week you get 72.7 million and that still beat estimates. In Q3 they sold 76.5 million units. They also launched the iPhone 7 earlier than normal but offsetting that was a big hit from foreign currency issues.

iPad sales of 13.1 million missed estimates for 15 million units. Mac sales rose 7% to $7.24 billion. The Apple Watch, Air Pods, Beats headphones and wifi routers were lumped into the other category with $4 billion in sales, a decline of about 8%. The Apple app store and services generated $7.2 billion, up 18%. The game Super Mario Run was downloaded 80 million times in the quarter.

Apple's cash hoard rose to $246.1 billion, up $8.49 billion from Q3. Apple's cash alone would be ranked as the 13th largest public company in the world. Apple shares rallied $4 in afterhours. That would be equivalent to about 28 Dow points at the open on Wednesday.


Arconic (ARNC), formerly Alcoa, reported adjusted earnings of 12 cents compared to estimates for 13 cents. Alcoa spun off the commodity business into a new entity called Alcoa and renamed the core business as Arconic. The company makes engineered metal parts for the aerospace, automotive and other industries. The Alcoa CEO, Klaus Kleinfield, remained with Arconic. There has been a lot of activist chatter about getting rid of the CEO because of his pattern of lackluster results. After the earnings tonight, activist investor Elliott Management, which owns 10.5%, launched a proxy fight to replace the CEO and has nominated five independent candidates for the board. Elliott claims it can increase the share price to between $33 and $54 a share. After the earnings, the share price trade in a $1 range but ended where it started at $22.45.


Match.com (MTCH) shares fell -8% after reporting earnings of 29 cents compared to expectations for 24 cents. Revenue of $320 million missed estimates slightly. They issued weak guidance for Q1. They also said they were selling their Princeton Review unit to ST Unitas. Shares fell sharply to $15.90.


The big earnings report for Wednesday is Facebook after the close. On Thursday, it is AMGN, AMZN and CMG.



Markets

The markets opened with another big decline but the happy smiles coming out of the White House meeting with the big pharma CEOs turned the Nasdaq and Russell 2000 around quickly. The S&P was not impressed. The S&P did not rebound from the support at 2,268 until 2:30 and then it added 10 points in just a few minutes. From the velocity, this appeared to be either short covering or a buy program. There were $500 million in market on close orders to buy on the NYSE.

The 2,268 level was the low on Monday so that appears to be a new support level. The S&P almost got back to positive territory but ended with a loss of 2 points. The 2,300 level has replaced the Dow 20,000 target as the critical level for the market.


The Dow was down -186 points at the low and recovered nearly 80 of those points in the closing rebound. The index was still severely handicapped by Goldman Sachs, Boeing, JP Morgan, IBM and Caterpillar. Those were the stocks that rallied significantly after the election and they are paying the price this week.

The unlikely group of winners at the top simply could not generate enough gains to offset the many losers. This scenario could continue for additional days. The Dow dipped below 19,800 at 1:30 and came very close to closing under that level, which would have been a sell signal. Support is actually 19,750 and the low was 19,784 so there was a little cushion on the bottom of the dip. Resistance remains 20,100.



The Nasdaq Composite did manage to break back into positive territory by a point thanks to the biotechs. The Nasdaq 100 big cap index lost 12 points for the day. There are no big cap stocks in the winners list except for Apple and that was because of the afterhours gain. Note the majority of the winners are biotech stocks.

The biotech sector was experiencing a major short squeeze and that may not carry over into Wednesday. The Nasdaq futures are up 13.50 in afterhours and we should open higher in the morning thanks to Apple.



The Russell 2000 made a miraculous recovery from being down -7 at the open to closing with a 9-point gain. Again, that is all due to the biotech recovery. We should not expect this rebound to continue.


Wednesday's market is a tossup but we should begin in positive territory thanks to Apple. With jobs, manufacturing and the FOMC decision, the morning would be lackluster with volatility appearing after the Fed decision. With those Dow big caps giving back their post election gains, that could be the anchor dragging the market lower if there are no headlines to offset the declines.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

All Aboard

by Jim Brown

Click here to email Jim Brown

Editors Note:

When a company makes the right acquisitions then beats on earnings and revenue, it is time to climb onboard. Western Digital bought Sandisk last year and it has worked out well. There are new highs ahead.


NEW DIRECTIONAL CALL PLAYS

WDC - Western Digital - Company Profile

Western Digital Corporation, together with its subsidiaries, develops, manufactures, and sells data storage devices and solutions worldwide. It offers performance hard disk drives (HDDs) that are used in enterprise servers, data analysis, and other enterprise applications; capacity HDDs and drive configurations for use in data storage systems and tiered storage models, as well as for use in storage of data for years; and enterprise solid state drives (SSDs), including NAND-flash SSDs and software solutions that are designed to enhance the performance in various enterprise workload environments. The company also provides InfiniFlash System, a system solution that offers petabyte scalable capacity with performance metrics; higher value data storage platforms and systems; datacenter software and systems; and HDDs and SSDs for desktop PCs, notebook PCs, gaming consoles, set top boxes, security surveillance systems, and other computing devices. In addition, it offers embedded NAND-flash storage products, including custom embedded solutions; and iNAND embedded flash products, such as multi-chip package solutions that combine NAND and mobile dynamic random-access memory in an integrated package for mobile phones, tablets, notebook PCs, and other portable and wearable devices, as well as in automotive and connected home applications, and NAND-flash wafers. Further, it provides HDDs embedded into WD- and HGST-branded external storage products; and NAND-flash products, which include cards, universal serial bus flash drives, and wireless drives. Company description from FinViz.com.

WDC is kicking butt and taking no prisoners in the disk drive sector. Since the acquisition of flash/NAND memory manufacturer SanDisk, they have upgraded and expanded their product line with additional new products announced almost weekly. SanDisk was the right acquisition at the right time. Today flash memory supply is tight and prices are rising.

The company reported earnings of $2.30 compared to estimates for $2.06. Revenue of $4.89 billion also beat estimates for $4.78 billion. They shipped 44.8 million hard drives in the quarter. The guided for Q1 earnings of $2.00-$2.10, which was above analyst expectations for $1.79. Of the 21 analysts that follow the company, 18 have it as a buy or strong buy. Only 3 rate WDC as a hold. The consensus price target is just under $95 per share with the stock trading at $79.

Earnings April 26th.

Shares traded up on Tuesday in a weak market.

Buy April $85 call, currently $2.53, initial stop loss $75.45.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Another Dip Bought

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets are refusing to move significantly lower with another rebound that turned some indexes positive. The Dow rebounded 80 points but still lost -107. That was the weakest index thanks to big losses from IBM, JPM, BA and GS. The S&P closed neutral with a 2 point loss but the Russell 2000 sprinted higher with a 9 point gain.

Support on all the indexes at the intraday lows appeared to be firm. With Apple beating earnings tonight we may not see a repeat of the dips on Wednesday.



Current Portfolio


Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.


Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.




Current Position Changes


QCOM - Qualcomm

The long put position was entered at the open.

LB - L Brands

The long put position was stopped at $60.25.



If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor



BULLISH Play Updates

PANW - Palo Alto Networks - Company Profile

Comments:

No specific news. Fantastic gain of $2.68 in a weak market.

Original Trade Description: Jan 23rd

Palo Alto Networks, Inc. provides security platform solutions to enterprises, service providers, and government entities worldwide. Its platform includes Next-Generation Firewall that delivers application, user, and content visibility and control, as well as protection against network-based cyber threats; Advanced Endpoint Protection, which prevents cyber attacks that exploit software vulnerabilities on various fixed and virtual endpoints and servers; and Threat Intelligence Cloud, which offers central intelligence capabilities, security for software as a service applications, and automated delivery of preventative measures against cyber attacks. The company provides firewall appliances; Panorama, a security management solution for the control of appliances deployed on an end-customer's network as a virtual or a physical appliance; and Virtual System Upgrades, which are available as an extensions to the virtual system capacity that ships with the physical appliances. It also offers subscription services covering the areas of threat prevention, uniform resource filtering, malware and persistent threat, laptop and mobile device, and firewall protection services, as well as cyber attack, threat intelligence, and content control services. In addition, the company provides support and maintenance services; and professional services, including application traffic management, solution design and planning, configuration, and firewall migration, as well as provides online and classroom-style education training services. Palo Alto Networks, Inc. primarily sells its products and services through its channel partners, as well as directly to medium to large enterprises, service providers, and government entities operating in various industries comprising education, energy, financial services, government entities, healthcare, Internet and media, manufacturing, public sector, and telecommunications. Company description from FinViz.com.

In November, PANW posted earnings that beat the street but revenue, which rose 34% missed estimates by a fraction. Revenue was $398.1 million and analysts were expecting $400.1 million. PANW had guided for revenue growth of 33% to 35% so they were right in the middle of their guidance range. Earnings of 55 cents beat estimates for 53 cents. Shares were crushed because the company said the market was "lumpy" and customers were taking longer to make purchase decisions.

In Q3 they added more than 1,500 new customers to hit 35,500 globally. Subscription revenue has risen to 60% of total revenue as they move to a cloud model.

In early January, noted short seller Andrew Left of Citron Research, put out a bullish note on PANW saying they had a fantastic moat, which would be a barrier to entry for other companies trying to duplicate their type of firewall. His price target is $170. Shares rallied $14 over the next three weeks on the call. At the same time Bernstein put out a very positive note on the company saying nobody serious about protecting their web environment should be without PANW as their security solution.

Shares have rebounded to their November gap down level of $144 and have found resistance. They are not giving back their gains but there was a slight retracement on Monday in a weak market. I believe they will overcome this resistance level and move higher, market permitting.

There is a persistent rumor in the market that Microsoft and Cisco Systems are both looking for a cybersecurity company to acquire. Given Palo Alto's position in the sector, they would be a good target.

Earnings February 20th.

Because of the price of the options I am forced to turn this into a spread. If you want to go with a naked call, I would probably use the $150 strike.

Position 1/24/17:

Long March $145 call @ $6.00, see portfolio graphic for stop loss.
Short March $155 call @ $3.15, see portfolio graphic for stop loss.
Net debit $2.85


RHT - Red Hat Inc - Company Profile

Comments:

No specific news. Nice gain in a weak market. Shares are still trying to move higher.

Original Trade Description: Jan 21st

Red Hat, Inc. provides open source software solutions to develop and offer operating system, virtualization, management, middleware, cloud, mobile, and storage technologies to various enterprises worldwide. It offers infrastructure-related solutions, such as Red Hat Enterprise Linux, an operating system platform that runs on hardware for use in physical, virtual, container, and cloud environments; Red Hat Satellite, a system management offering that helps to deploy and manage Red Hat infrastructure across physical and virtual servers, and cloud environments; and Red Hat Enterprise Virtualization, a software solution that allows customers to utilize and manage a common hardware infrastructure to run multiple operating systems and applications. The company offers application development-related and other technology solutions, such as Red Hat JBoss Middleware, a solution for developing, deploying, and managing applications, as well as integrating applications, data, and devices along with business processes automation; Red Hat cloud offerings, a software solution that enables customers to build and manage various cloud computing environments; Red Hat Mobile, a software development platform that enables customers to develop, integrate, deploy, and manage mobile applications for enterprises; and Red Hat Storage, a software solution that enables customers to treat physical server storage as a scalable, shared, centrally-managed pool of virtual storage and to manage large, unstructured, or semi-structured data in physical, virtual, and cloud environments. It also provides consulting, support, and training services; and real-time operating system, distributed computing, directory services, and user authentication. Company description from FinViz.com.

On December 21st, the company reported earnings of 61 cents that beat estimates by 3 cents. However, the beat came mostly from a lower tax rate. Revenue rose 17.5% to $615.3 million compared to estimates for $618.4 million so a slight miss there. Billings rose 8.7% to $679 million but misses estimates for $713 million. Subscription revenue rose 19% to $543 million and 88% of total revenue. That is recurring and will help smooth out future earnings.

The CEO explained that two large government deals worth $20 million slipped into Q4. Also, two large customers chose to be billed rather than pay up front and that took another $27 million out of billings. If those deals were included the billings would have been up +16% instead of 8.7%. The good news is that all of those deals are now in Q4 and that will give Q4 an earnings boost.

Earnings March 22nd.

Shares have rebounded to $74 and appear poised to break over that level and move back to the $80 range. I am using the March options, which expire 4 days before the earnings and they are half price the next cycle in June.

Position 1/23/17:

Long March $75 call @ $2.35, see portfolio graphic for stop loss.


SLCA - U.S. Silica - Company Profile

Comments:

Halliburton selected U.S. Silica as its preferred provider of containerized sand for last mile logistics to drilling locations. They signed a long-term contract with SandBox, a U.S. Silica subsidiary. Shares rebounded to within a few cents of a new high.

Original Trade Description: Jan 25th

U.S. Silica Holdings, Inc. produces and sells commercial silica in the United States. The company operates through two segments, Oil & Gas Proppants, and Industrial & Specialty Products. It offers whole grain commercial silica products to be used as fracturing sand in connection with oil and natural gas recovery; and resin coated proppants, as well as sells its whole grain silica products in various size distributions, grain shapes, and chemical purity levels for manufacturing glass products. The company also provides ground commercial silica products for use in plastics, rubber, polishes, cleansers, paints, glazes, textile fiberglass, and precision castings; and fine ground silica for use in premium paints, specialty coatings, sealants, silicone rubber, and epoxies. In addition, it offers other industrial mineral products, such as aplite, a mineral used to produce container glass and insulation fiberglass; and adsorbent made from a mixture of silica and magnesium for preparative and analytical chromatography applications. The company serves oil and gas recovery markets; and industrial end markets with customers involved in the production of glass, building products, foundry products, chemicals, and fillers and extenders. As of December 31, 2015, it had approximately 400 million tons of proven and probable recoverable mineral reserves. Company description from FinViz.com.

In the gold rush in the 1800's it was not the miners that got rich but it was the companies that sold them the picks, shovels and wheelbarrows. In the energy sector every shale well has to be fractured and that required mountains of sand. We are not talking regular beach sand. The primary frac sand is mined in Wisconsin and other northern states. There are various grades of sand depending on the geology of the well and what the drillers are trying to accomplish.

In 2014 it took an average of 4.2 million pounds of frac sand per well. However, in 2015 and 2016 there was a significant increase in fracking intensity that began to use much larger quantities per well. In late 2015 the amount of sand rose from 9% of the fracking fluid to 20%. In early 2016 Simmons & Co reported two wells in the Permian that used 60 million pounds of sand each while two in the Haynesville Basin used 35 million pounds each.

Houston based oilfield logistics company Twin Eagle reproted receiving "historic shipments" of frac sand at its facility outside the Eagle Ford. They reported receiving one 130-car train of sand a week. One car carries 100 tons so that is 13,000 tons per week. That is 26 million pounds of sand per week. If wells are now using 20 to 25 million pounds per well that is one train per well.

Last week the active rig count rose by 29 oil wells to 551 active oil wells. Each rig drills a minimum of two wells per month. If each well used 25 million pounds that would be more than 1,100 trains of sand per month.

There are rumors making the rounds that because of the increased intensity of sand in fracking there could be a sand shortage as the number of active rigs increase and producers began to rapidly complete the 3,000 or so wells that have been drilled over the last 18 months but never completed because of low oil prices. There is going to be a surge in the demand for sand.

U.S. Silica is one of the major sand suppliers with multiple facilities. They have used the downturn in the drilling industry to buy multiple competitors in order to bulk up for the future demand.

Earnings Feb 2nd.

SLCA has earnings on Feb 2nd but almost every company trading today has earnings over the next three weeks so that is just something we have to deal with. I am recommending we buy a longer-term option to get past any potential volatility around earnings. Their guidance should be good.

Position 1/26/17:

Long June $65 call @ $4.10, no stop loss until after earnings.


SPY - S&P-500 ETF - ETF Profile

Comments:

Another nice rebound from an opening dip. Support at $226.50 appears firm.

Original Trade Description: Jan 12th

The SPDR S&P 500 ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index.

The SPY dipped to $225 intraday before the dip buyers rushed into the market. Initial support is $223 and I believe we have a chance to test that level before the inauguration. There are only four trading days left. If the bank earnings disappoint on Friday we could see a decline in low volume. With the three-day weekend ahead we could see traders move to the sidelines to avoid weekend event risk while the U.S. markets are closed.

We could also see a pre inauguration decline as traders worry about event risk surrounding the event.

Whatever the reason we could see the ETF test that level over the next four days. Assuming there is no disaster surrounding the inauguration, we could see a real rally begin afterwards.

This is a short-term position using March options just in case any potential dip turns into a crash. The estimated option premium should be less than $3.

Position 1/25/17 with a SPY trade at $228.25

Long MAR $232 call @ $1.69, no initial stop loss.


$VIX - Volatility Index - Index Description

Comments:

The VIX shot up again at the open as the markets declined but gave it all back by the close as several indexes turned positive. I added a stop loss just in case the Apple news propels the market higher.

Original Trade Description: Jan 26th

The VIX is a computed index, much like the S&P 500 itself, although it is not derived based on stock prices. Instead, it uses the price of options on the S&P 500, and then estimates how volatile those options will be between the current date and the option's expiration date. The CBOE combines the price of multiple options and derives an aggregate value of volatility, which the index tracks.

The VIX closed at 10.63 and very close to record lows. You have to go back to June of 2014 for a lower recent close at 10.28. Before that, you have to travel back in time to Feb-2007 for a close at 10.05. The next lowest close was 9.48 in Dec-1993.

The point here is that volatility is near record lows only reached four times in the last 23 years. That qualifies for an abnormal event. I believe it is time we bought some VIX calls. The odds of the VIX remaining this low for the next two months are about as close to zero as you can get.

There is a very old saying in the market. "When the VIX is high, it is time to buy. When the VIX is low, it is time to go." You cannot get much lower than this.

The VIX is telling us that everyone expects the market to continue moving higher. Nobody is worried that some unexpected headline or event is going to trigger a significant market decline. When nobody expects an event is when we should be the most concerned.

Position 1/27/17:

Long March $12 call @ $2.60, no stop loss because the VIX cannot go much lower from here.



BEARISH Play Updates (Alpha by Symbol)

DIA Dow ETF - ETF Profile

Comments:

The Dow posted a -185 loss at the lows but everything rebounded in the afternoon to leave the Dow with a -107 point loss. Several indexes turned positive.

Original Trade Description: December 7th

The SPDR Dow Jones Industrial Average ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average.

Remember Dow 10,000? Traders talked about it for weeks. When it was finally hit, they were passing out Dow 10,000 hats on the floor of the NYSE for a week. That was December 11th 2003. It was a big milestone for the market.

Now 13 years later, we are about to double that with Dow 20,000. Given the place on the calendar, the massive post election rally and the potential for normal profit taking in January, the Dow 20,000 touch could be a massive sell on the news event.

However, we are only 386 points way and it could happen as soon as next week. The Fed rate announcement on Wednesday could either cripple that potential or accelerate it if the Fed maintains a dovish posture on future rate hikes. I believe we will hit Dow 20K before the end of December. When that happens I want to be short the DIA ETF and plan on holding it through January.

I am choosing the Dow because it is the most overbought and could produce the biggest percentage move. Just look at Goldman's chart and the profit that needs to be removed there.

Because there will be plenty of other traders thinking along the same lines I want to enter the put position at 19,900 or $199 on the DIA ETF. I know I am jumping in front of a speeding train to enter a short position on a runaway market but the potential is very high for a good trade.

Position 12/12/16:

12/12 - 1/2 position: Long Feb $195 put @ $3.40, no initial stop loss.

12/13 - 1/2 position: Long Feb $195 put @ $3.15, no initial stop loss.


FINL - Finish Line - Company Profile

Comments:

No specific news. Shares down early on the Under Armour earnings but rebounded to close slightly positive.

Original Trade Description: January 11th.

The Finish Line, Inc., together with its subsidiaries, operates as a specialty retailer of athletic shoes, apparel, and accessories in the United States. It operates in two divisions, the Finish Line and JackRabbit. The company's Finish Line division engages in the in-store and online retail of athletic shoes for Macy's Retail Holdings, Inc.; Macy's Puerto Rico, Inc.; and Macys.com, Inc., as well as online at macys.com. This division offers men's, women's, and kids' athletic shoes, as well as an assortment of accessories of Nike, Skechers, Converse, Puma, New Balance, Adidas, and other brands. As of April 2, 2016, the company operated Finish Line shops in 392 Macy's department stores in 37 states in the United States, the District of Columbia, and Puerto Rico. Its JackRabbit division retails lifestyle products, such as running shoes, apparel, and accessories of Brooks, Asics, Nike, Saucony, New Balance, and other brands. It also operates the e-commerce sites jackrabbit.com and boulderrunningcompany.com. The company operated 72 JackRabbit stores in 17 states in the United States and the District of Columbia. Company description from FinViz.com.

In late December Finish Line reported a loss of 24 cents compared to estimates for a loss of 18 cents. Revenue was $371.7 million, down -2.7% from the year ago period. Analysts were expecting $412.4 million. They guided for Q4 earnings of 68-73 cents compared to analyst expectations for 96 cents. Shares fell from $23 to $19 on the news and have continued to decline.

Finish Line does not report earnings again until March 22nd. That means every other retailer will post their disappointing quarters and with each earnings miss the weight should increase on FINL shares.

Finish Line operates mall stores and stores inside Macy's stores. Macy's already reported declining traffic and missed on same store sales. This should also impact FINL since lower Macy's traffic means lower traffic in the shoe section.

Shares are currently $17.50 and could easily break below the June lows before the next earnings reports. I am reaching out to May so there will be some earnings expectation in the premium when we exit before the earnings. We can buy time but we do not have to use it.

Update 1/26/17: Finish Line said it was selling its unprofitable JackRabbit running shoe business to CriticalPoint Capital. The company said it expected to realize a cash tax benefit of $30 million from the sale. Shares declined -28 cents.

Position 1/12/17:

Long May $17 put @ $1.55, see portfolio graphic for stop loss.


GIII - G-III Apparel Group - Company Profile

Comments:

No specific news. Strong rebound today. Probably bargain hunters in a weak market.

Original Trade Description: January 28th

G-III Apparel Group, Ltd. designs, manufactures, and markets men's and women's apparel. It operates through two segments: Wholesale Operations and Retail Operations. The company's products include outerwear, dresses, sportswear, swimwear, women's suits, and women's performance wear; and women's handbags, footwear, small leather goods, cold weather accessories, and luggage. It markets swimwear, resort wear, and related accessories under the Vilebrequin brand; footwear, apparel, and accessories under Bass and G.H. Bass brands; and apparel products under Andrew Marc, Marc New York, Jessica Howard, Eliza J and Black Rivet, Weejuns, and other private retail labels. G-III Apparel Group, Ltd. also licenses its products under the Calvin Klein, ck Calvin Klein, Karl Lagerfeld, Guess, Guess?, Kenneth Cole NY, Reaction Kenneth Cole, Cole Haan, Levi's, Vince Camuto, Tommy Hilfiger, Jessica Simpson, Ivanka Trump, Jones New York, Ellen Tracy, Kensie, Dockers, Wilsons, G-III Sports by Carl Banks, and G-III for Her brands, as well as have licenses with the National Football League, Major League Baseball, National Basketball Association, National Hockey League, Touch by Alyssa Milano, Hands High, Collegiate Licensing Company, Major League Soccer, and Starter. The company offers its products to department, specialty, and mass merchant retail stores in the United States, Canada, Europe, and the Far East; and distributes products through its retail stores, as well as through G.H. Bass, Wilsons Leather, Vilebrequin, and Andrew Marc Websites. As of January 31, 2016, it operated 199 Wilsons Leather stores, 163 G.H. Bass stores, and 5 Calvin Klein performance stores. Company description from FinViz.com.

The holiday shopping season was not kind to any retailer except for Amazon. Most retailers are reporting negative comps and warning about slowing traffic. GIII was no exception. GIII warned Q4 saw a significant decline in sales that would cut 20 cents off earnings. They guided for the full year 2016 that ended January 31st, for revenue of $2.41 billion and earnings of $1.21-$1.31 compared to their prior guidance of $2.43 billion and earnings of $1.41 to $1.51. For 2017, they guided to earnings of $1.41-$1.51 compared to $2.44 in fiscal 2016.

The company said they were expecting positive comps in Q4 but now expect low double-digit negative comps. That is a heck of a swing. They blamed warmer weather and significantly lower traffic in the stores.

Earnings March 2nd.

Shares broke below support and closed at a three-year low on Friday. Given the trends in the retail sector, they could continue significantly lower with their guidance warning.

Position 1/30/17:

Long March $25 put @ $1.60, see portfolio graphic for stop loss.


LB - L Brands - ETF Profile

Comments:

No specific news. Strong rebound to stop us out. Most retailers were up on Tuesday.

Original Trade Description: January 14th

L Brands, Inc. operates as a specialty retailer of women's intimate and other apparel, beauty and personal care products, and accessories. The company operates in three segments: Victoria's Secret, Bath & Body Works, and Victoria's Secret and Bath & Body Works International. Its products include loungewear, bras, panties, swimwear, athletic attire, fragrances, shower gels and lotions, aromatherapy, soaps and sanitizers, home fragrances, handbags, jewelry, and personal care accessories. The company offers its products under the Victoria's Secret, Pink, Bath & Body Works, La Senza, Henri Bendel, C.O. Bigelow, White Barn Candle Company, and other brand names. L Brands, Inc. sells its merchandise through company-owned specialty retail stores in the United States, Canada, and the United Kingdom, which are primarily mall-based; through its Websites; and through franchises, licenses, and wholesale partners. As of January 31, 2016, the company operated 2,721 retail stores in the United States; 270 retail stores in Canada; and 14 retail stores in the United Kingdom. It also operated 221 La Senza stores in 29 countries; 125 Bath & Body Works stores in 30 countries; 19 Victoria's Secret stores in 7 Middle Eastern countries; and 373 Victoria's Secret Beauty and Accessories stores, and various small-format locations in approximately 75 countries. Company description from FinViz.com.

The holidays were not good for L Brands. The warned on January 5th that net sales rose 1% for the five week shopping period BUT same store sales fell -1% and sales for Victoria's Secret fell -4%. That was a major blow because the holiday shopping season is normally the best five weeks of the year for the lingerie business. They even tried to combat the falling sales by advertising some of their bras at only $10 and even the deep discount did not work.

L Brands is also suffering because they maintain a mall store format. With the malls dying in favor of online shopping, they are losing sales. More than 80% of L Brands sales come from mall traffic and that traffic is rapidly declining. Hermand-Waiche believes that online sales will be over 30% of the market in 2017 and that means Victoria's Secret is becoming obsolete to 30% of the market.

The company warned on the 5th that earnings would be at the low end of prior guidance or $1.85. Shares fell -6% on the earnings warning. With Macy's and Kohl's warning in the same week it was a bloodbath for retailers in the market. Of 11 stores reporting same store sales 8 saw sales decline.

Earnings are February 15th.

Shares are hugging the $60 level but ticking slightly lower every day. If we do get a market meltdown, they could be a target of sellers wanting to exit a nonperforming stock.

Position 1/17/17:

Closed 1/31/17: Long Feb $60 put @ $1.85, exit $1.90, +0.05 gain.


QCOM - Qualcomm - Company Profile

Comments:

Qualcomm said NXP Semiconductor (NXPI) shareholders had approved the acquisition by Qualcomm. The acquisition is expected to be completed by the end of 2017. QCOM will start a new subsidiary in Amsterdam that will actually buy the shares for $110 each. The funding will come from $28.6 billion in cash currently held by Qualcomm overseas. They will not be taxed on the money as long as it is reinvested overseas.

Original Trade Description: January 30th

QUALCOMM Incorporated develops, designs, manufactures, and markets digital communications products and services in China, South Korea, Taiwan, the United States, and internationally. The company operates through three segments: Qualcomm CDMA Technologies (QCT); Qualcomm Technology Licensing (QTL); and Qualcomm Strategic Initiatives (QSI). The QCT segment develops and supplies integrated circuits and system software based on code division multiple access (CDMA), orthogonal frequency division multiple access (OFDMA), and other technologies for use in voice and data communications, networking, application processing, multimedia, and global positioning system products. The QTL segment grants licenses or provides rights to use portions of its intellectual property portfolio, which include various patent rights useful in the manufacture and sale of certain wireless products comprising products implementing CDMA2000, WCDMA, CDMA TDD, and/or LTE standards, as well as their derivatives. The QSI segment invests in early-stage companies in various industries, including digital media, e-commerce, healthcare, and wearable devices for supporting the design and introduction of new products and services for voice and data communications. The company also develops and offers products for implementation of small cells; mobile health products and services; software products, and content and push-to-talk enablement services to wireless operators; and development, and other services and related products to the United States government agencies and their contractors. In addition, it licenses chipset technology and products for data centers. Company description from FinViz.com.

Qualcomm it under attack from every direction. A while back China's regulator assessed a $975 million fine for improper licensing and made them lower royalties. The South Korean FTC imposed a fine of $853 million because it found the company's licensing practices to be monopolistic. The KFTC found that Qualcomm's market share had risen from 34% in 2010 to 69% in 2015 while many competitors were forced out of the market.

In early January, the US FTC attacked the company for anticompetitive practices that prevented competitors from supplying chips to handset makers. This is another billion dollar problem.

Three days later Apple sued Qualcomm for $1 billion claiming Qualcomm charged five times as much for licensing than all other cellular patent licensors combined. Apple also claimed the company withheld $1 billion in rebates because Apple had cooperated with KFTC when that investigation was active.

There is blood in the water and there will probably be other suits from companies that suffered under the Qualcomm licensing scheme as well. The odds are also good that Qualcomm will have to change their licensing scheme, which will probably result in lower fees.

With roughly $4 billion in fines and suits over the last few weeks, the investor appetite for QCOM shares has evaporated. Brokers are slashing their ratings from buy to hold or even sell.

Last week the company reported earnings of $1.19 that matched estimates but missed on revenue. They guided for $1.15-$1.25 for Q1 and analysts were expecting $1.17. Other than that the guidance was lackluster with a lot of excuses and questions deflected.

Earnings April 26th.

Shares have collapsed on the news of the suits and fines and are threatening a steeper decline. Initial support is $50.

Position 1.31.17:

Long March $52.50 put @ $1.68, see portfolio graphic for stop loss.




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