Option Investor
Newsletter

Daily Newsletter, Monday, 2/13/2017

Table of Contents

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

Market Wrap

Another New High

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The indices set new all time highs, this time confirmed by the Dow Jones Transportation Average. There just isn't any other way to say it than that. This time the new highs came on Monday, driven by a surge in retail trading, as geo-political tensions ease. Today's trading was aided by a noticeable lack of news; there were no earnings reports of note, no economic data, no Tweets and no controversial executive orders to sway sentiment. The big event was Trump's meeting with the Canadian Prime Minister and Janet Yellen's testimony before congress, scheduled for later this week.

International markets were lifted by warming relations between the US and China and reaffirmed friendship with Japan. Markets around the region were able to make gains in the range of 0.5% despite the North Korean missile test. Both China and Japan were buoyed by economic data. In Japan, 4th quarter GDP came in at a rate of 1%, the fourth straight quarter of growth, while in China trade data suggests a pick up in exports and manufacturing that was forecast by PMI earlier in the month. European indices were not immune to the positive vibe. Indices in this region gained roughly 1% on average despite a downward revision to 2017 Eurozone GDP. The European Commission lowered its GDP forecast by a tenth of a percent due to economic headwinds including Brexit, Trump economic policy and political uncertainty in France and Germany.

Market Statistics

Futures trading indicated a positive open for the US indices all morning. The indication was not strong but began the day with the SPX about +3 and slowly, steadily gaining ground into the open. The open saw a quick surge, the SPX gapped up about 5 points to open at a new all time high, and then quickly added another 5. At 9:45 there was a brief pull back to test for support followed by a bounce that sent the indices drifting higher into the early afternoon. By 2PM the index was up more than 0.6% but gains were capped there. Profit taking set in at that point and slowly chipped away at the days gains leaving the index up 0.52% at the close.

Economic Calendar

The Economy

No economic data other than Moody's Survey of Business Confidence. Tomorrow and Wednesday we'll get PPI and CPI. Also on Wednesday is Retail Sales and Empire Manufacturing. Thursday is jobless claims, housing starts/permits and Philly Fed. Friday wraps the week with Leading Indicators.

Moody's Survey of Business Confidence jumped 1.5% to hit 33.1. This is just off the recently set 9 month high. Mr. Zandi remains upbeat in his summary, stating that global business sentiment is steadfast and strong and that business owners are positive in their outlook for current and future conditions.


Earnings season is more than 2/3 over. To date, 71% of the S&P 500 has reported and the results are generally good. 67% of those reporting have beaten EPS estimates, slightly below average but consistent with trends, while 52% have beaten revenue estimates, in line with averages. The blended rate of earnings continues to rise, gaining another 0.4% in the last week to hit 5%. Based on the averages we can expect this to continue rising into the end of the season, topping out in the range of 6% to 8%. On a sector by sector basis 8 of the 11 sectors are outperforming expectations which has led to an increase in full year earnings growth as well, up 0.3% in the last week to 0.5% Another 54 companies are expected to report this week.


Looking forward expanding growth remains in the forecast although those estimates are falling. Full year 2017 earnings growth estimate has now fallen to 10.3% for the S&P 500, down from nearly 14% late last year but still robust and double digit. The first half is expected to see growth in the range of 9.5%, 9.9% in the 1st quarter and 9.1% in the 2nd, with that expanding to over 10.5% in the 2nd half. In terms of outlook tax policy is the #1 thing on the minds of CEO's, mentioned in 85% of earnings statements/conference calls to date, followed by trade policy at 63%.


The Dollar Index

The Dollar Index continues to rebound from recent lows as sentiment firms and the market begins to accept the idea of a March rate hike. The CME's FedWatch tool is still showing only an 18% chance of March hike but the chatter has begun, economic data and Fedspeak over the next few weeks will help or hinder that outlook, further out June is showing a 70% chance. The Dollar Index gained a little more than 0.15%, not a big move, and created a small white bodied candle with visible shadows. The lower shadow is longer and shows a test of support at the heavily contested $100.50 level. Today's action extended a move above support at $100.50 and the short term moving average, confirmed the indicators. Both MACD and stochastic are showing bullish entry signals, in line with the short term trend, and suggest higher prices ahead. Upside target is near $102.50.


The Gold Index

Gold prices remain under pressure as the dollar strengthens. Spot prices fell more than -1.5% intraday, closing with a loss near -0.75%, and set a new one week low below $1,230. Prices hit resistance when the dollar hit bottom, last week, on Trump's announced tax reform plan. The details are still not known but we can still expect to see them in the next couple of weeks, probably timed perfectly to help the administration in some way. Until then, data and FedSpeak could weigh on prices and push them down to support. Support target is near $1,200, a break below that would be bearish.

The Gold Miners fell in today's session but not significantly. The Gold Miners ETF GDX lost nearly -1% and created a small doji candle pulling back from resistance. Resistance is at $25.50 and confirmed by both indicators. Both MACD and stochastic are showing divergences in the short term and weakness in the near term that suggests lower prices are on the way. A fall from this level may find support at $23.50, a break below there could go to $21.50.


The Oil Index

Oil prices fell more than -1.75% but remain within the near term range. Today's move was driven by concerns of overproduction as rising rig counts overshadow OPEC's estimated 90% production cut compliance. Last Friday Baker Hughes reported that rig counts rose globally. US rig count gained 12 to hit 741 and is up 200 from this time last year. Canadian rig count gained 9 to hit 352, up 130 YOY, and global rig count grew by 4. The global count is down -112 YOY, possibly due to OPEC's cut, mostly due to supply disruptions, but not enough to offset ramping North American production. With this development in mind it looks like oil prices could test support at $50, maybe lower. $45 is the magic number when it comes to shale oil and rising/declining rig counts.

The energy sector took a hit on lower oil prices but it wasn't too bad, the Oil Index itself falling only -0.35%. The index created a small spinning top candle just below resistance at the short term moving average but looks like a test of resistance is likely. Both indicators are consistent with a bullish entry, in line with the short term trend. Stochastic is looking the most promising, forming a double bottom at the lower signal line and now indicating a buy. Resistance is in the range of 1,235 to 1,250, a break above here would be bullish. The risk right now is oil prices and their impact on forward earnings. So long as forward outlook is positive, as it is, I'd expect to see the sector move higher in the short to long term.


In The News, Story Stocks and Earnings

Restaurant Brands, owner of iconic names like Burger King, reported full year earnings before the bell and then made headlines again later in the day. The company beat top and bottom line expectations driven by an increase in store counts and a rise in comp sales. Comps rose more than 2% across brands, store counts more than 4.5%. This news sent the stock soaring in pre-market action, caused it to gap up at the open and move higher. Later in the day news that a bid for chicken franchise Popeye's helped to keep it up and close with gains near 4.5%.


Cognizant Technology reported before the bell and matched EPS, revenue and guidance estimates. Revenue is up a little more than 7% YOY, 0.3% sequentially, with GAAP EPS flat. Adjusted EPS is up nearly 10%, excluding acquisition costs and currency impact. Shares of the stock trade flat on the day, just shy of a 5 month high.


The VIX rose in today's session but does not appear as if it will spike. The index gained a little more than 4% at the open, gapping up, but sold off throughout the day to close near the low of the session. Today's candle is just below the short term moving average which has been providing resistance and the indicators confirm it. Both MACD and stochastic are consistent with a test of resistance within a downtrend are rolling over in line with a trend following sell. Downside potential is limited, historic lows are just below today's closing level, but it doesn't matter. At these levels the index is indicating a period of calm within the market and the likelihood of higher equity prices.


The Indices

The market rallied today and right out of the gate. All the indices, including the Dow Jones Transportation Average, set new all time highs. The transports have been lagging but have now confirmed the rally, almost, by setting a new all time closing high but not a new all time intraday high. Today's move is a medium sized white candle, the fourth of four moving up from the short term moving average, capped at resistance. Resistance is the current all time intraday closing high, about 30 points above today's close, near 9,500. The indicators are showing a weak buy, trend following but weak because stochastic %D is still flat while rolling over, suggesting that resistance will tested. A break above resistance would be bullish and trend following with upside targets near 9,750 and 10,000.


The Dow Jones Industrial Average made the 2nd largest move today, 0.70%, and set a new all time intraday and closing high. Today's candle is medium sized, the third of 3 moving up since last weeks test of 20,000, and confirmed by the indicators. Both MACD and stochastic are confirming with trend following signals and both have plenty of room to move higher. Upside target is 20,500 in the near term but could go as high as 21,000 in the short to long.


The NASDAQ Composite and S&P 500 made identical moves of 0.52%, the tech heavy index opening at my near term target of 5,750 and moving up from there. This index is in obvious and protracted uptrend and confirmed by the indicators. Both MACD and stochastic are showing trend following buy signals and are on the rise. Stochastic is overbought in the very near term but otherwise there is still room to move higher, MACD has plenty of room to move higher. The caveat is that both indicators are also showing divergences that do not necessarily indicate reversal but suggest some caution is due as the index moves higher. Upside target is now 6,000 in the near to short term.


The S&P 500 created a small white bodied candle with visible upper shadow. The index is moving higher but the upper shadow indicates some resistance to higher prices, likely profit taking at this point. Today's action set a new all time closing high and is confirmed by the indicators. Both MACD and stochastic are firing trend following entries, both are on the rise and both have lots of room to move higher. Upside target is 2,350 in the near term, 2,500 in the short.


Trump's rhetoric; it's cooled down, fall-out from the immigration ban has largely blown over, foreign relations are warming and the outlook is just as positive as it was before. This means that GDP growth is on tap, earnings growth is on tap and both are still expected to receive a boost from infrastructure spending, tax reform and deregulation. This means that next years S&P 500 earnings outlook/estimates are likely to be low, possibly very low, and that is driving the market. It is possible we're in a buy-the-rumor-sell-the-reality but until the reality is here, or outlook dims, it's the buying part that is the operative portion of that adage right now. I'm still cautious because I hate to get burned by the market but I am bullish, optimistic and looking forward to the next few months.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Overbought

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Nasdaq indexes are very overbought and could pause soon. With earnings winding down, Yellen on tap for the next two days and everything appearing to go well at the White House, what could go wrong? The answer is of course anything.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

QQQ - Nasdaq 100 ETF - ETF Profile

PowerShares QQQ, formerly known as "QQQ" or the "NASDAQ- 100 Index Tracking Stock", is an exchange-traded fund based on the Nasdaq-100 Index. The Fund will, under most circumstances, consist of all of stocks in the Index. The Index includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization. The Fund and the Index are rebalanced quarterly and reconstituted annually.

The Nasdaq 100 big cap index has been leading the market higher since early December. The QQQ ETF is up 11% since the close on December 2nd. While the Dow and S&P were moving sideways over January the Nasdaq 100 was piling on the gains. Those gains have gone vertical since the beginning of February.

The Nasdaq 100 is in very overbought territory with the RSI at a whopping 78.47 at today's close. A reading of 70 is considered to be overbought. The last two times the NDX had a RSI reading over 70 there was a decline in the index.

Nobody can predict when an index will decline but we can read the indicators and they are telling us to be careful with new longs at this point.

Janet Yellen will be testifying before the House and Senate over the next two days. All she has to do is phrase one sentence the wrong way and we could see a serious decline.

This is going to be a short-term position because the dip buyers are still alive and well. If we did get a 3% decline, it would be bought. We have not had one since before the election.

I am going to jump right in rather than use an entry trigger. The options are cheap and the most we can lose is $1.29.

Buy March $127 put, currently $1.29, no initial stop loss.



In Play Updates and Reviews

Bears Back in Their Caves

by Jim Brown

Click here to email Jim Brown

Editors Note:

The bulls are stampeding and shorts are paying the price for their unbelief in the rally. Today's gains were exactly what we needed to see after the breakout last week. The market opened higher and continued to post additional gains during the day. This was a confirmation of last week's breakout. It was also a punishment day for any remaining shorts.

Brokers said retail money was showing up in volume even though the actual share volume was relatively light. That is a concern since retail investors are normally the last in on market rallies.

The Nasdaq indexes are well into overbought territory and are due for a profit taking pause. That could spread to the broader market. We have not had a 3% corrective dip since early November. We are due.

The Volatility Index normally implodes on these highly bullish days. However, the VIX posted a decent gain suggesting there was a lot of put buying in progress despite the market gains.



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


ADP - Automatic Data Processing

The long call position was entered at the open.

RHT - Red Hat Inc

Close the long call position at Tuesday's open.

VIX - Volatility Index

Double up on the position if the market opens positive.



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

ADP - Automatic Data Processing - Company Description

Comments:

No specific news. Nice gain to open the position.

Original Trade Description: February 11th

Automatic Data Processing, Inc., together with its subsidiaries, provides business process outsourcing services worldwide. The company operates through two segments, Employer Services and Professional Employer Organization (PEO) Services. The Employer Services segment offers a range of business outsourcing and technology-enabled human capital management (HCM) solutions, including payroll services, benefits administration services, talent management, human resources management solutions, time and attendance management solutions, insurance services, retirement services, and tax and compliance solutions. This segment's integrated HCM solutions include RUN Powered by ADP, ADP Workforce Now, ADP Vantage HCM, and ADP GlobalView, which assist employers of all sizes in all stages of the employment cycle from recruitment to retirement; and ADP SmartCompliance and ADP Health Compliance. The PEO Services segment provides a human resources (HR) outsourcing solution through a co-employment model to small and mid-sized businesses. This segment offers ADP TotalSource that provides various HR management services and employee benefits functions, such as HR administration, employee benefits, and employer liability management into a single-source solution. Company description from FinViz.com.

Earnings for the last quarter rose 20% to 87 cents and analysts were expecting 81 cents. Revenues of $2.99 billion rose 6% but missed estimates for $3.02 billion.

They guided for lower than expected bookings for 2017. The CEO said the decline in expectations was driven by the uncertainty surrounding the election but now that a new administration was in place they expected their bookings pressure to ease. "Despite the recent uncertainty in the U.S. business environment, we continue to believe that change will be beneficial to us, as we are well-positioned to help our clients navigate the complexities of HCM (human capital management)."

They are now expecting 6% revenue growth in 2017 compared to prior forecasts for 7% to 8%. Worldwide new business bookings would be similar to the $1.75 billion sold in 2016 compared to prior forecasts for 4% growth. They expect earnings to rise 15% to 17% over 2016.

ADP is rapidly expanding their Total Service product where they provide comprehensive outsourcing solutions where workers are co-employed by ADP and its clients. Revenue in that division rose 16% with 12% earnings.

Earnings May 3rd.

Shares crashed on the lowered guidance but are rebounding now that the market is improving. The bottom line is that earnings are expected to rise 16% and the emphasis on jobs by the Trump administration is going to be positive for ADP. Long-term investors are going to see the $2.28 dividend and the double-digit earnings growth and assume the worst is already priced into the stock with the post earnings drop.

Position 2/13/17:

Long May $100 call @ $2.18, see portfolio graphic for stop loss.


BMY - Bristol Myers - Company Profile

Comments:

No specific news. Resistance still holding at $52 and shares have not moved higher for 5 days. When this finally breaks, we could see a sharp move higher.

Original Trade Description: February 6th

Bristol-Myers Squibb Company discovers, develops, licenses, manufactures, markets, and distributes biopharmaceutical products worldwide. It offers chemically-synthesized drug or small molecule, and biologic in various therapeutic areas, including virology comprising human immunodeficiency virus infection (HIV); oncology; immunoscience; cardiovascular; and neuroscience. Its products include Baraclude for the treatment of chronic hepatitis B virus infection; Daklinza and Sunvepra for the treatment of hepatitis C virus infection; Reyataz and Sustiva for the treatment of HIV; Empliciti, a humanized monoclonal antibody for the treatment of multiple myeloma; Erbitux, an IgG1 monoclonal antibody that blocks the epidermal growth factor receptor; Opdivo, a fully human monoclonal antibody for non-small cell lung and renal cell cancer, and melanoma; Sprycel, a tyrosine kinase inhibitor for the treatment of adults with Philadelphia chromosome-positive chronic myeloid leukemia; Yervoy, a monoclonal antibody for metastatic melanoma; Abilify, an antipsychotic agent for adults with schizophrenia, bipolar mania disorder, and depressive disorder; Orencia to treat rheumatoid arthritis; and Eliquis, an oral factor Xa inhibitor targeted at stroke prevention in atrial fibrillation. Its products pipeline includes Beclabuvir, a non-nucleoside NS5B inhibitor for the treatment of HCV; BMS-663068, an investigational compound that is being studied in HIV-1; and Prostvac, a Phase III prostate-specific antigen to treat asymptomatic or minimally symptomatic metastatic castration-resistant prostate cancer. The company has clinical trial collaborations with Calithera Biosciences, Inc. and Janssen Biotech, Inc.; and a research collaboration with GeneCentric Diagnostics, Inc. Company description from FinViz.com.

BMY reported earnings of 63 cents that missed estimates for 67 cents. They guided for 2017 for earnings of $2.70-$2.90 and analysts were expecting $2.97. The shares were crushed with a $9 drop over five days. Complicating the earnings was news that sales of two drugs were slowing because of competition. However, what was not said was that BMY has dozens of other drugs currently being sold and dozens more in the pipeline. BMY has one of the richest pipelines in the business.

Fund manager Dodge & Cox did an extensive analysis of BMY and said the recent problems have just been a temporary setback and the strong pipeline of drugs plus their immuno-oncology business makes them particularly attractive and they initiated a large position. They said BMY has capitalized on its recent problems to become a focused biopharmaceutical company that is positioned to grow.

Several other analysts have recently called the BMY dip a buying opportunity. We are going to take them at their word.

Earnings April 27th.

Shares are starting to rebound from the $46 low and they have plenty of ground to cover. The biotech sector is actually positive over the last week as through investors believe the danger from Trump and drug prices may have passed or at least moved into a new stage.

Position 2/7/17:

Long March $52.50 call @ $1.11, no initial stop loss.


DVMT - Dell Technologies - Company Profile

Comments:

No specific news. Holding at new resistance at $65.

Original Trade Description: February 4th

Dell Technologies Inc. provides a range of technology solutions worldwide. It offers client computing devices, including desktop personal computers, notebooks, and tablets; rack, blade, tower, and hyperscale servers for enterprise customers; value tower servers for small organizations, networks, and remote offices; networking solutions; and storage solutions, including storage area networks, network-attached and direct-attached storage, and backup systems. It also sells peripherals, including monitors, printers, projectors, and other client and enterprise peripherals, as well as third-party software products. In addition, the company offers support and extended warranty, enterprise installation, and configuration services; and infrastructure and security managed, cloud computing and infrastructure consulting, and security consulting and threat intelligence services. Further, it provides application services, such as application development, maintenance, migration, management, and consulting, as well as package implementation, testing and quality assurance functions, business intelligence and data warehouse solutions; business process services comprising back office administration, call center management, and other technical and administration services; and system and information management, and security software services. Additionally, the company offers financial services, including originating, collecting, and servicing customer receivables primarily related to the purchase of its products. It serves corporate businesses; educational institutions, government, healthcare, and law enforcement agencies; small and medium-sized businesses; and consumers directly, as well as through retailers, third-party solution providers, system integrators, and third-party resellers. The company was formerly known as Denali Holding Inc. and changed its name to Dell Technologies Inc. in August 2016. Dell Technologies Inc. was founded in 1984 and is headquartered in Round Rock, Texas. Company description from FinViz.com.

The company came public without a lot of fanfare back in August and moved sideways for two months. Since the election, the stock has been unstoppable. There was a spike last week when Michael Dell was seen in one of the presidents CEO meetings and identified as the CEO of Dell Technologies. I do not think the average investor has picked up on the fact that Dell is public again.

You may recall that Dell recently bought EMC and VMWare and they are leveraging that technology internationally. Dell has been on a mission to divest as many non-core entities as possible. On October 31st, they sold the Dell Software Group for $2.4 billion. In November, they sold the Dell Services group for $3 billion. In September, they announced a deal to sell the EMC Enterprise Content division for $1.6 billion.

In Q3, they reported revenue of $16.8 billion. Not bad for a company many investors have forgotten about.

The original Dell Company created thousands of millionaires as the stock doubled and tripled, split and repeat multiple times. I know the chart is ridiculous with a $10 gain over the last month but it has very low volatility and the option is cheap. I have put off recommending it several times thinking I would wait for a dip, only it never dips.

Earnings March 9th.

Position 2/6/17:

Long March $65 call @ $1.75, see portfolio graphic for stop loss.


PANW - Palo Alto Networks - Company Profile

Comments:

No specific news. Nice continued gain of 94 cents. Now that February options have expired the short $155 call premium should begin to decline rapidly. Assuming no material decline, we should end up with roughly a $7.50 gain on the position.

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 28th.

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. Closed at a new 7-week high. The stock missed our $80 exit target by 18 cents and closed only 23 cents below it. I am recommending we close the position at the open on Tuesday. The market is seriously overbought and RHT has had a good run. Resistance is $80-$81.

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.

Target $80.00 to exit the position.


SPY - S&P-500 ETF - ETF Profile

Comments:

We had a good breakout over 2,300 and a decent gain in the option price. The Nasdaq is very overbought and the Russell barely gained 3 points after being up nearly 12 at the open. I think the breakout could be headed for trouble with Yellen speaking the next two days. I added a very tight stop and I plan on keeping it tight.

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 actually rose again today with the markets up very strongly. Clearly somebody is buying puts in volume.

I am going to recommend we double down on our existing position. The option has declined from $2.40 to $1.55 and we can lower our total cost by adding to this position BUT only if the market opens positive. The market is very overbought, especially the Nasdaq and the Dow. I am recommending we double our current position ONLY if the market opens higher. If we open negative the VIX will spike along with the premiums.

If the market opens positive, Buy Mar $12 call.

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 2/7/17:

Long March $12 call @ $2.40, no stop loss

Previously Closed 2/1/17: Long March $12 call @ $2.60, exit $2.50, -.10 loss.


VMW - VMWare - Company Profile

Comments:

No specific news. A decent 45 cent gain to a new 52-week high close.

Original Trade Description: February 8th

VMware, Inc. provides virtualization and cloud infrastructure solutions in the United States and internationally. Its virtualization infrastructure solutions include a suite of products and services designed to deliver a software-defined data center (SDDC), run on industry-standard desktop computers, servers, and mobile devices; and support a range of operating system and application environments, as well as networking and storage infrastructures. The company offers VMware vSphere, a SDDC platform, which enables users to deploy hypervisor, a layer of software that resides between the operating system and system hardware to enable compute virtualization; storage and availability products that provide data storage and protection options; network and security products; and management and automation products to manage and automate overarching IT processes involved in provisioning IT services and resources to users from initial infrastructure deployment to retirement. It also provides SDDC suites, such as VMware vCloud Suite, vSphere with Operations Management, and VMware vRealize suite for building and managing cloud infrastructure for use with the VMware vSphere platform. In addition, the company offers hybrid cloud computing solutions, including VMware vCloud Air Network Service Providers and VMware vCloud Air; and end-user computing solutions, which enables IT organizations to deliver secure access to applications, data, and devices to end users. Company description from FinViz.com.

In late January VMWare reported earnings of $1.11 that beat estimates for $1.08.Revenues of $2.03 billion also beat estimates for $1.99 billion. Overall revenues rose 8.8%, service revenues 9.8% and license revenues 7.5%. The exited the quarter with $8 billion in cash with free cash flow at $2.23 billion for the full year. They announced a new $1.2 billion share repurchase program.

For Q1 they guided for revenues of $1.625 billion to $1.725 billion and earnings of 93 to 96 cents. Dell Technologies owns 80% of VMW and the future earnings dates will be aligned with Dell's for transparency.

The company announced a joint venture with Amazon Web Services to provide VMWare on AWS beginning this summer. The VMW CEO said partnering with Amazon will allow VMWare customers to maintain their leadership while moving from a private cloud to the public cloud. Companies are increasingly closing or reducing existing data centers and moving operations to the cloud so someone else can be responsible for physical security, heating, cooling, electrical demand, server upgrades, etc. VMW is the number one maker of virtualization software and has shifted focus to combining customers public and private clouds into a hybrid cloud. VMWare has smaller partnerships with Google and Microsoft but they are also competitors in many cases.

At least five analysts hiked their price targets on VMW after the earnings and Amazon announcement.

Earnings April 27th.

Position 2/9/17:

Long April $92.50 call @ $2.25, see portfolio graphic for stop loss.


XBI - Biotech ETF - ETF Profile

Comments:

No specific news. The XBI stalled at $67 for three days now but the Biotech Index posted nearly a 1% gain for the day. There is a difference in the composition and weighting that normally favors the XBI but that did not happen today.

Original Trade Description: February 9th

The SPDR S&P Biotech ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Biotechnology Select Industry Index.

This is a sector ETF that tracks 90 biotech and pharma stocks having a market cap of at least $500 million. The index is rebalanced quarterly to remove stocks that have decreased and add stocks that have exceeded the market cap requirements. As such this ETF is focused on the larger cap names and many of the small cap stocks are not represented.

The XBI has rebounded from $61, where it fell after comments from the president in January, to $67 despite new comments earlier this week. The overall optimism about the economy, faster approval of drugs and tax cuts have lifted the sector.

If the ETF can move over $70 the next material resistance is $80. I am using an inexpensive March option because the sector can be volatile. There are no April options yet.

Position 2/10/17:

Long Mar $68 call @ $2.15, see portfolio graphic for stop loss.



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