Option Investor
Newsletter

Daily Newsletter, Tuesday, 2/14/2017

Table of Contents

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

Market Wrap

Considerable Progress

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Janet Yellen's testimony before congress began today and was largely uneventful. She used the words "considerable progress" in relation to the Fed's mandate and the market liked what it heard. And then it marched right on up to set another brand new all time high. I have to say that these are pretty exciting times to be in the market, how high the market will go is always hard to pinpoint but going higher it is, and we're watching it happen.

International indices were hesitant in the overnight session as participants were waiting on Janet Yellen's testimony. In both cases, Europe and Asia, indices closed mostly flat with one notable exception. Japan sank more than a full percent on talk from the finance minister and news from Toshiba. The Japanese finance minister says it may take some time to establish positive trade talks; Toshiba says it will delay the release of earnings by a month at least while they investigate something to do with their US nuclear operations.

Other news that did not go unnoticed was the confirmation of Steve Mnuchin as Treasury Secretary and the resignation of Flynn in the wake of his inappropriate Russian contact. Mnuchin's first acts were to label Venezuelan politicians as drug traffickers.

Market Statistics

Today's action was a tale of two markets, one before/during Yellen's testimony and one after. Before and during the testimony the indices tread water in sideways action at or slightly below yesterday's closing prices. Toward the end of testimony the indices began to move up from near the lows of the day, reaching break even right as the session was coming to a close. The verdict, pretty much as expected with absolutely no fireworks. In other words it was Goldilocks testimony and the market moved up, and up, and up.

Economic Calendar

The Economy

Two bits of economic data today, PPI and Janet Yellen's testimony. PPI came in hot at 0.6%, double expectations, but remains tepid over the long term. The more important core PPI, ex food and energy, was a much cooler 0.2% and in line with expectations. Year over year not adjusted PPI is running at a rate of 1.6%, core is running the same. While not too high the concern is that inflation has picked up noticeably over the past 6 months and is on a trajectory to reach the Fed's 2% target over the next 6 to 12 months.


Janet Yellen's testimony went on for about 3 hours and was largely uneventful, aside from the usual grandstanding senators trying to trip her up or make some kind of point. To keep it short I'll simply list the important bullet points that I got from the statements and Q&A. First, fiscal policy with the current administration is a source of uncertainty. However, the economy is sustaining moderate growth, the labor market is getting stronger, wage growth has picked up and business sentiment is improving. The FOMC expects to see inflation gradually rise to the 2% target rate and rate hikes will be evaluated on a meeting by meeting basis. In terms of the dual mandate, she says the FOMC has made considerable progress and that waiting too long to raise rates is a growing risk.

The Dollar Index

The Dollar Index gained on today's news, rising nearly 0.35% and extending its move above the shot term moving average. Yellen's testimony and the PPI data helped to firm rate hike expectations and subsequently the dollar. The CME's FedWatch tool shows this as well, expectations for rate hikes have risen in each of the next 3 months with June rising above 70%. Near term outlook is now bullish, upside target is $102.50. Looking forward economic data, here and abroad, will be the drivers until the next round of central bank meetings. Tomorrow is a non-policy meeting of the ECB, next policy meeting is March 9. The next BOJ meeting is March 15th, the next FOMC meeting is also March 15th.


The Gold Index

Gold prices were able to hold steady in today's action despite the rise in dollar value. Spot prices closed the session very near flat for the day, just above $1,226. Lingering uncertainty over the FOMC rate hike timeline and President Trump may be supporting prices in the near term but longer term fundamentals remain skewed to the downside.

The gold miners were also supported in today's session, opening with a small gap to the upside and then falling from there. Today's candle is small and black with a long lower shadow, falling from and confirming resistance at $25.50. Price action is also confirmed by the indicators, both of which are showing bearish crossovers in the near term, and divergence in the short. Resistance is $25.50, down side target is $23.50 in the near term.


The Oil Index

Oil prices held steady today as well, WTI gaining a half percent to trade just above $53 and near the middle of the near term range. US supply and rising production continue to offset the OPEC deal, tomorrow's storage data could tilt the scales one way or the other. Oil prices may remain in this range indefinitely and until there is more clarity concerning oil fundamentals. Until then rising US rig counts will continue to put pressure on prices.

The Oil Index continues to hang below resistance while the indicators continue to support higher prices. Today's action created a small hanging man doji just below the short term moving average and looks like it is having a hard time with resistance. The indicators however are consistent with a bullish buy and suggest that resistance will break down. The general trend in the index is up which makes the current set up trend following. Stochastic is the strongest indication right now, the two recent bounces from the lower signal line are divergent from the latest low, indicative of support and showing a strong bullish entry signal. MACD has not yet confirmed but is fast approaching the zero line from below, about to make a bullish crossover of its own. A break above the moving average and resistance at 1,230-1,250 would be bullish and supported by forward earnings outlook, upside target is 1,300.


In The News, Story Stocks and Earnings

The health insurers made headlines today when first one and then another major merger was scrapped. Early in the day Aetna and Humana announced they mutually agreed to end their merger talks following on anti-trust grounds. Later in the day Cigna pulled out of its deal with Anthem and delivered a lawsuit worth nearly $15 billion. Shares of Aetna jumped a little more than 3%, the others closed flat on the day.


ITT reported before the bell and beat on the top and bottom lines. Despite the beat revenue and earnings are down year over year and forward guidance is weak. The silver lining is that the dividend was increased but not enough to send shares moving higher. Shares of the stock fell in the premarket session but were able to regain some of the loss before the closing bell.


AIG reported after the closing bell and delivered mixed results. The net loss per share increased more than 100% from last year but due to increases in prior year adverse reserve development. Other positive highlights include faster than expected cost reductions and an increase to the current buyback program. Under the new terms there is approximately $4.7 billion to be used on share repurchases. Shares moved higher during the open session and then fell more than -2% after the release of earnings.


The Indices

The indices had a good day today. Early trading was cautious as traders waited on Yellen's testimony, later it was risk-on once the market realized there were to be no shocking surprises. The Dow Jones Transportation Average is the only one to not move higher, and the only to not set a new all time high. The transports created a small doji spinning top just below resistance at the current all time high and looks like resistance will be tested again. The indicators have both rolled into a trend following buy signal, consistent with a test of resistance and possible break to new highs. Resistance is 9,500, a break above this level would be bullish.


The Dow Jones Industrial Average made the largest gain in today's session, 0.45%. The blue chips created a medium sized white candle, setting a new all time closing and intraday high, and looks like it could continue higher. Both indicators are bullish and moving higher, consistent with a trend following entry, and support higher prices. Upside target is 21,000.


The S&P 500 made the 2nd largest gain in today's session, 0.40%. The broad market created a medium sized white bodied candle and set a new all time intraday and closing high. The index is moving higher, extending the Trump induced rally, and the indicators support higher prices. Both MACD and stochastic are moving higher following bullish, trend following, crossovers and stochastic is on the verge of showing strength by crossing over the upper signal line. Upside targets are 2,350 and 2,500 in the near to short term.


The NASDAQ Composite made the smallest gain today, just over 0.30%, but was able to set new all time highs, closing and intraday. The indicators are both bullish and moving higher, suggesting higher prices although divergence in MACD persists and stochastic is approaching overbought in both the short and long term. The indicators give reason for caution, there is a chance for correction, but until that happens the trend is up. Upside target is near 6,000.


The market is moving higher and that is going to start building some euphoria and start attracting new money, the "revolution" may not be televised but the rally certainly will. I expect to start seeing more and more positive coverage in the news, and that I think will draw in new money and to lead to further upside for equities. I am bullish, excited, and cautiously looking to add to my positions.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Peaked?

by Jim Brown

Click here to email Jim Brown

Editors Note:

There are no indicators you can add to a chart that trigger an alert when a market has peaked. If there were a bell at the top it may have been rung today. All the big cap indexes are hitting RSI highs that have not been seen in several years. The Nasdaq 100 at 79.63 is the highest level since July 2014. Indicators can continue to be overbought for days or weeks but the higher they rise the more likely we will see a dramatic fall.

I am not recommending anything today. I do not feel good about adding long positions when the market is this overbought and potentially setting up for a decline, even if it is just a minor bout of profit taking. Call premiums have inflated because of the rally and the instant the rally ends, even if it is just for a day or two, they will deflate immediately. Even stocks with bearish charts are in rally mode. Be patient, a buying opportunity will appear.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Enjoying the Ride

by Jim Brown

Click here to email Jim Brown

Editors Note:

The little dip at the open was immediately bought and the market's thrill ride continued to move higher. While the big caps indexes are moving even further into overbought territory, I am enjoying the ride. After months of sideways trading the market has finally gone directional and it is ignoring all the negatives like volume and breadth.

The Nasdaq 100 ($NDX) now has a RSI reading of 79.63 when 70 is considered overbought. That is the highest reading since July 3rd, 2014 when it hit 82.60 and the Nasdaq declined the next four days. Overbought oscillators can always become even more overbought but this is flashing a warning sign there could be a peak ahead.

Meanwhile, our longs are rising and that is not a bad thing.



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


QQQ - Nasdaq 100 ETF

The long put position was entered at the open.

RHT - Red Hat Inc

The long call position was closed at Tuesday's open.

SPY - S&P-500 SPDR ETF

The long call position was stopped at $232.25.

VIX - Volatility Index

Double up on the position at Wednesday's open.



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. New 3-week high.

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:

News from Barron's (actually strong rumors) suggest Novartis (NVS), Pfizer (PFE), Gilead Sciences (GILD) and Roche are actively involved in what could be a potential bidding war for BMY.

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:

The Cyber Threat Alliance (CTA) announced that FTNT, PANW, SYMC, CHKP, INTC and CSCO are the founding members and they appointed Michael Daniel as the first president. The CTA members are all contributing to an automated threat intelligence sharing platform to exchange actionable threat data. The CTA was incorporated as a not-for-profit organization in January.

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:

We exited the position at the open for a nice gain as shares near decent resistance.

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:

Closed 2/14/17: Long March $75 call @ $2.35, exit $4.90, +$2.55 gain


SPY - S&P-500 ETF - ETF Profile

Comments:

The morning dip to $232.16 stopped us out by 9 cents. The market rebounded after Yellen spoke and the SPY is making new highs again.

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

Closed 2/14/17: Long MAR $232 call @ $1.69, exit $1.74, +$1.05 gain.


$VIX - Volatility Index - Index Description

Comments:

The market opened lower so we did not add to the VIX position this morning. However, the strong post Yellen rally pushed the option price lower so I am going to recommend we just bite the bullet and double up the position at Wednesday's open.

Buy Mar $12 call at Wednesday's open.

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. Another minor gain to a new 52-week high close. Resistance at $90 is slowly losing its grip.

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:

The XBI stalled at $67 for three days but finally broke through with a nice gain today. Shares are now testing resistance at $68 but the challenge will be $69.

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.



BEARISH Play Updates (Alpha by Symbol)

QQQ - Nasdaq 100 ETF - ETF Profile

Comments:

The position is not off to a good start with the QQQ up another 40 cents. However, I am confident we will see weakness soon. Would you buy this chart at the current level?

Original Trade Description: February 13th

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.

Position 2/14/17:

Long March $127 put @ $1.29, see portfolio graphic for stop loss.




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