Option Investor
Newsletter

Daily Newsletter, Tuesday, 5/23/2017

Table of Contents

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

Market Wrap

Missing Catalyst

by Jim Brown

Click here to email Jim Brown

The market has lost its catalyst and cannot find its way.

Market Statistics

The Dow and S&P posted minor gains and the Nasdaq traded in negative territory several times before squeezing out a gain at the close. With earnings winding down and economic reports weak, there was nothing to energize the market. There were worries over the FOMC minutes on Wednesday and what the Fed might say about selling off the positions acquired in QE.

Without a catalyst, the markets were left to wander but at least they had a positive bias. The S&P tried to trade over 2,400 twice bout could not hold the gains. Volume was only 5.9 billion shares and the S&P traded in a narrow 4-point range after noon.


New Home Sales for April fell 11.4% from 642,000 to 569,000 and well below estimates for 619,000. Sales declined in all four regions. Sales fell -7.5% in the Northeast, -13.1% in the Midwest, -4.0% in the South and -26.3% in the West. The median home price fell from $316,300 to $306,200. Despite the decline in sales, the outlook is still strong. On 33% of homes sold the construction had not yet started, up from 28% in March. The percentage of sales for homes currently under construction was 35.9%. Completed homes accounted for 31.1% of sales.


The Richmond Fed Manufacturing Index for May fell off a cliff. The headline number declined from 20.0 to 1.0 and the first time in five months to be in single digits. New orders fell from 26 to zero. Order backlogs dropped from 4.0 to -15. The shipments component fell from +25 to -1. This suggests the post election optimism in manufacturing sector is crashing.

The separate services survey rose from 22 to 34 but that is more a function of warmer weather and more outdoor events than a sudden surge in business activity. A troubling component was shopper traffic that fell from 27 to 7 and expected demand fell from 96 to 73. Inventories fell from 24 to 1.



Wednesday we get existing home sales for April and they are expected to have declined.

The biggest problem for the week is the FOMC minutes. The Fed is widely expected to have discussed reducing their $4.5 trillion balance sheet. Depending on how they decide to do this it could be market negative. Currently, they are still replacing treasuries that have matured by acquiring new treasuries. This is keeping the supply of treasuries tight and interest rates low. If they elect to stop replacing the matured securities, it would still take many years for all their positions to mature and roll off the books. There are no conversations about actually selling treasuries back into the market. That could happen a couple years from now but not in the current plans.

The best thing for the market would be for the Fed to limit repurchases rather than halt entirely. Assuming there was $40 billion in maturities next quarter; they could limit repurchases to $20 billion and buy the shorter durations. That would begin to shorted the overall duration of the portfolio and allow for a faster roll off a couple years from now when the economy is expected to be stronger. Reducing their portfolio would have the desired effect of raising interest rates without actually announcing a rate hike. By allowing market supply to increase, it would increase rates very slightly.

After the FOMC minutes the market is likely to go dormant as volume crashes ahead of the holiday weekend. Volume is already under 6.0 billion shares and the lowest since April 17th and everyone is just waiting for the minutes so they can dress their positions and head for home.


In earnings news, AutoZone (AZO) reported earnings of $11.44 compared to estimates for $12.00. Revenue of $2.62 billion also missed estimates for $2.17 billion. Same store sales fell -0.8% and well below estimates for 2.7% growth. The company blamed the weak performance on the delay in tax refunds. However, the CEO said for whatever reason those refund dollars never seemed to show up. He also blamed the weak sales on the weather. That is always a convenient excuse. Shares were crushed for a -12% decline of $78.


Take-Two Interactive (TTWO) reported earnings of 83 cents compared to estimates for 59 cents. Revenue of $571.6 million easily beat estimates for $407 million. They guided for full year earnings of $4.25-$4.65 per share. On a negative note, they delayed the release of the highly anticipated western, "Red Dead Redemption 2" from fall 2017 to spring 2018. This is the first game built completely from the ground up to take advantage of the new class of gaming consoles. Their Rockstar development unit is known for being focused on perfection and this game is no exception.


Toll Brothers (TOL) reported earnings of 73 cents that rose 40% compared to estimates for 62 cents. Revenue of $1.36 billion beat estimates for $1.25 billion. They delivered 1,638 homes, up 22% in dollars and 26% in units. The average price was $832,400. They signed contracts for 2,511 units for $2.02 billion. Their current order backlog is 6,018 units and $5.0 billion. In the current quarter, they expect to deliver between 1,675-1,975 homes. Shares rallied at the open but faded into the close.


DSW Inc (DSW) reported earnings of 32 cents that missed estimates for 34 cents. Revenue of $691.1 million beat estimates for $685.3 million. Same store sales fell -3.0% but was slightly better than the expected -3.4% decline. They guided for the full year to earnings of $1.45-$1.55 and analysts were expecting $1.55. Shares fell 8% on the news.


After the bell, Intuit (INTU) reported earnings of $3.90 that beat estimates for $3.87. Revenue of $2.54 billion also beat estimates for $2.5 billion. They guided for revenue in the current quarter in the range of $795-$815 million and analysts were expecting $772 million. Full year guidance was $4.38-$4.40 and revenue of $5.13-$5.15 billion. Shares spiked from the $129 close to end the afterhours session at $141.


The highlights for the rest of the week are Hewlett Packard on Wednesday and Costco on Thursday. Best Buy and Lowes will also be watched.


Steel stocks spiked on expectations for the Commerce Dept to give some clues on steel import rules at a hearing on Wednesday. The department was supposed to determine if steel imports from China and elsewhere could pose a threat to national security through quality issues or because of U.S. capability shrinking due to the reliance on imports. The initial report claimed 26% of steel imports came in at unfair prices because of subsidies.


Bunge (BG) shares spiked 18% after an article in the WSJ claimed that Glencore approached the company about a takeover. After the close, Bunge issued a statement saying it was not involved in business combination discussions with Glencore and will continue to execute its own global agri-foods strategy.


After the bell the API reported crude inventories declined -1.5 million barrels last week but that was less than the expectations for a 2.3 million barrel decline. Gasoline inventories fell by -3.15 million barrels. Distillate inventories fell -1.85 million barrels.

Prices were up in the regular session after the Kuwait oil minister said OPEC was considering even deeper cuts when they meet on Thursday. Kuwait has already said they would support the Saudi Arabian - Russian agreement to extend cuts through March 2018. "All indications so far show that most countries, if not all, back the extension of this agreement." The minister also said four other non-OPEC countries, Egypt, Norway, Turkmenistan and Indonesia, could join the production cut. Shortly thereafter, Norway's energy ministry said it had no plans to reduce output. Prices rose to $51.50 in the regular session.


Markets

The markets traded in a daze after the noon high. Everyone is waiting for the FOMC minutes and hoping they will say nothing that will upset the market. If the minutes are tame, trading will come to an immediate halt and volume will die for the rest of the week. Without a catalyst, this market is going nowhere.

There is a slight upside bias but it is very slight and resistance is strong. The S&P tried to trade over 2,400 intraday but both attempts were immediately rebuffed.

The resistance is strong and without a catalyst, I would be surprised to see a major breakout. The post earnings depression phase is in full swing and the market is being lifted by an ever-shrinking number of big cap stocks.

The percentage of S&P stocks with a buy signal has fallen to 68.4% and the low for 2017.



The Dow gained 43 points and it was thanks to three stocks. Goldman, Caterpillar and JP Morgan. The rest of the components were evenly matched. Yesterday it was Boeing, 3M and Unitedhealth and BA/MMM were at the bottom of the losers list today. Fame is fleeting.

The index eased over the 20,900 resistance level thanks mostly to Goldman and the opening gap higher. The index is now facing much stronger resistance at 21,000. Since volume is a weapon of the bulls and volume is expected to be light the rest of the week, I would not be surprised to see that 21,000 level hold until next week.



The Nasdaq traded in negative territory multiple times throughout the day. With the exception of Google the FAANG stocks were absent from the winners list below. Amazon was only fractionally positive and Apple and Facebook were negative.

The Nasdaq is nearing its recent highs and there are probably some sellers waiting at the 6,150 level. The lack of excitement is evident and that should be with us the rest of the week.



The small caps are limping along but this was the fourth consecutive day of gains. The Russell has a long way to go to return to the pre crash resistance at 1,400.


The biotech sector is uncharacteristically calm ahead of the big ASCO conference next week. Typically, companies presenting at the conference are seeing their stocks rise. The weak biotech sector is holding back the Nasdaq and the Russell.


Why buy? Investors are probably asking themselves that question this week. Without any catalyst and with only a minor upside bias, there is no reason to rush into the market. The dip last week was a buying opportunity but hedge funds are not chasing stocks higher. Those stocks that did rebound sharply have now begun to fade.

Facebook is an example. The stock declined $5, rebounded $5 then resumed its original trend with a slightly negative bias. I scanned my entire watch list of 850 stocks and there were hundreds where the previously bullish charts were rolling over with post earnings depression. There is no reason to rush into the market this week. I would wait until after the holiday and see if traders come back refreshed.


Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Why Buy?

by Jim Brown

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Editors Note:

Volume will be very low for the rest of the week and there is no catalyst to produce a market move. Futures are negative and declining and even if they do turn around the market is likely to be flat the rest of the week. With earnings over there is a greater potential for a negative headline over the next three days than a positive headline that pushes the indexes through resistance. No new plays today.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Conviction Lacking

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes closed barely positive after pulling back from the early gains. It was not a negative day for the markets but it was only barely positive. The lack of conviction was readily apparent and the Nasdaq drifted in and out of negative territory several times to gain only 5 points at the close. The Nasdaq 100 only gained 3 points.

Two of the FAANG stocks were negative and Amazon was only fractionally positive. There was not a lot of negative news but there was a shortage of positive news as well. The market is lacking a catalyst and any material resistance should be tough to cross.



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


ATVI - Activision Blizzard
The long call position was entered at the open.



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BULLISH Play Updates

ATVI - Activision Blizzard - Company Profile

Comments:

Shares spiked to $60 at the open, a $3 pop that also spiked option prices. We entered the position at the high of the day. I need to be more faithful about posting the warning commentary about not entering a position if it spikes more than $1 at the open.

Original Trade Description: May 22nd.

Activision Blizzard, Inc. develops and publishes games for video game consoles, personal computers (PC), mobile devices, and online social platforms. The company operates through three segments: Activision Publishing, Inc., Blizzard Entertainment, Inc., and King Digital Entertainment. The company develops, publishes, and sells interactive software products and entertainment content through retail channels or digital downloads; and downloadable content. It also publishes subscription-based massive multiplayer online role-playing games; and strategy and role-playing games. In addition, the company maintains a proprietary online gaming service, Battle.net that facilitates the creation of user generated content, digital distribution, and online social connectivity in its games. Further, it engages in creating original film and television content; and provides warehousing, logistics, and sales distribution services to third-party publishers of interactive entertainment software, as well as manufacturers of interactive entertainment hardware products. The company serves retailers and distributors, including mass-market retailers, consumer electronics stores, discount warehouses, game specialty stores, and consumers through third-party distribution and licensing arrangements in the United States, Australia, Brazil, Canada, China, France, Germany, Ireland, Italy, Japan, Malta, Mexico, the Netherlands, Romania, Singapore, South Korea, Spain, Sweden, Taiwan, and the United Kingdom. Activision Blizzard, Inc. was incorporated in 1979 and is headquartered in Santa Monica, California. Company description from FinViz.com.

Activision reported Q1 earnings of 56 cents, up 17%. Sales rose 19% to $1.73 billion. Activision had originally guided for 25 cents and $1.55 billion. Analysts were expecting 22 cents and $1.1 billion so it was a major blowout. For the full year, they raised guidance to 88 cents and $6.1 billion, up from 72 cents and $6.0 billion.

Blizzards's monthly active users rose to 431 million. King Digital has 342 million active users. The new Overwatch game was the fastest Blizzard title to hit 25 million registered players and now has more than 30 million. Revenues from in game purchases rose 25% driven by World of Warcraft and Overwatch customization features.

Activision is a powerhouse with rapidly rising revenue and multiple game titles arriving in the coming months.

Earnings August 3rd.

Shares dropped sharply with the market last Wednesday and have already rebounded to close at a new high today.

Position 5/23/17:

Long August $60 calls @ $2.66, see portfolio graphic for stop loss.


CVX - Chevron - Company Profile

Comments:

No specific news. With inventories tomorrow and the OPEC meeting on Thursday, there was little movement in the sector today.

Original Trade Description: April 16th.

Chevron Corporation, through its subsidiaries, engages in integrated energy, chemicals, and petroleum operations worldwide. The company operates in two segments, Upstream and Downstream. The Upstream segment is involved in the exploration, development, and production of crude oil and natural gas; processing, liquefaction, transportation, and regasification associated with liquefied natural gas; transportation of crude oil through pipelines; and transportation, storage, and marketing of natural gas, as well as operates a gas-to-liquids plant. The Downstream segment engages in refining crude oil into petroleum products; marketing crude oil and refined products; transporting crude oil and refined products through pipeline, marine vessel, motor equipment, and rail car; and manufacturing and marketing commodity petrochemicals, and fuel and lubricant additives, as well as plastics for industrial uses. It is also involved in the cash management and debt financing activities; insurance operations; real estate activities; and technology businesses. Further, the company holds interests in power plants, as well as operates geothermal plants; and engages in the transportation of refined products primarily in the coastal waters of the United States. The company was formerly known as ChevronTexaco Corporation and changed its name to Chevron Corporation in 2005. Company description from FinViz.com.

Chevron is one of the U.S. energy majors with billions of barrels of reserves. The company pays an annual dividend of $4.32 or 4.07% yield. They are totally committed to preserving and raising the dividend. This makes them a top pick by nearly every major analyst.

Chevron is coming out of a major project cycle where they spent over $25 billion a year on capex building out monster projects. Now that the projects are nearly complete and ramping up production, the company can reduce its capex significantly and still increase production as those projects come online.

Chevron has amassed a two million acre position in the Permian Basin with 9 billion barrels of reserves. The company is currently operating 11 rigs in the Permian and will be adding 9 more in the coming months. They plan on ramping up their Permian production from the current 80,000 bpd to 700,000 bpd over the next few years. Chevron's Permian acreage is said to be worth more than $43 billion. It was acquired in pieces at much lower prices by predecessor companies over the last several decades. The Permian was never a big focus for Chevron as they concentrated on megaprojects elsewhere. They are increasing spending in the Permian by $2.5 billion in 2017. They are not hedging their oil production because they believe prices will rise.

Earnings on April 28th are expected to be a miss because of the sharp decline in oil prices in March. This is expected to lower earnings and force misses for the major producers. Since this is a well-known fact, I suspect it it being priced into the stock ahead of the report.

Thursday's decline of 3% put the stock right at light support at $106. If this level fails, there is strong support at $100.

Oil prices should begin to rally any day now. Refinery utilization of back over 90% and it is time to begin pushing summer blend fuels into the distribution system. We should begin to see inventory declines every week and that should last through July. August is normally when crude prices top out. OPEC should extend the production cuts because they are right on the edge of a reduction in inventories and an extension would guarantee it.

Chevron shares should rebound with crude prices. If they were to surprise with earnings, shares should rebound quickly.

The option is cheap and we are going to hold over the earnings report.

If the market tanks at the open on Monday, please do not enter this position until the S&P is positive.

Update 4/19/17: Chevron shares crashed with the entire energy sector after a nearly $2 drop in crude prices on weak inventory numbers from the EIA. WTI only declined -1 million barrels and gasoline rose 1.5 million compared to an expected decline of -1.6 million. The EIA said gasoline demand was down -0.8% from the same period in 2016.

Update 4/22/17: Chevron lost a court case in Australia for $260 million. The case ruled on the deductibility of interest on a $2.5 billion loan made from the parent company between 2003-2008. Chevron Australia paid 9% interest on the loan from Chevron and the parent company borrowed the money at a lower rate. The court said Chevron Australia could only deduct the interest at the parent's borrowing rate. Chevron said they would appeal.

Update 4/24/17: Chevron said it was selling its assets in Bangladesh to Himalaya Energy. No price was given but Bloomberg said the fields were worth about $2 billion. Chevron is planning on selling $10 billion in non-core assets in 2017. Himalaya is owned by a consortium of Chinese state owned firms. Bangladesh has a right of refusal on any deal and they said they were not done with their evaluations yet. The three fields held in the Chevron subsidiary produce 720 million cubic feet of gas and 3,000 barrels of condensate per day.

Update 4/28/17: Chevron reported earnings of $1.41 compared to estimates for 86 cents. The Chevron number did have a $600 million gain from the sale of an upstream asset so it is not really apples to apples comparison. Revenue of $33.4 billion missed estimates for $34.9 billion. Operating costs declined 14% and capex spending will be down more than 30%. Oil production rose 3% and full year growth is expected to be 4-9%.

Udate 5/15/17: Chevron said they had taken Train 1 of the massive Gorgon LNG plant offline for a month to do some maintenance. The plant cost $54 billion to build and has 3 trains that can produce 15.6 million tonnes of LNG per year.

Position 4/17/17:

Long June $110 call, currently $1.45. See portfolio graphic for stop loss.


FB - Facebook - Company Profile

Comments:

No specific news and no movement for the third consecutive day.

Original Trade Description: May 17th.

Facebook, Inc. provides various products to connect and share through mobile devices, personal computers, and other surfaces worldwide. Its solutions include Facebook Website and mobile application that enables people to connect, share, discover, and communicate each other on mobile devices and personal computers; Instagram, a mobile application that enables people to take photos or videos, customize them with filter effects, and share them with friends and followers in a photo feed or send them directly to friends; Messenger, a messaging application to communicate with people and businesses across platforms and devices; and WhatsApp Messenger, a mobile messaging application. The company also offers Oculus virtual reality technology and content platform, which allow people to enter an immersive and interactive environment to play games, consume content, and connect with others. Company description from FinViz.com.

Facebook also blew away earnings estimates and they are growing earnings at the fastest rate of any of the FAANG stocks. They have multiple revenue streams and sites like Instagram and WhatsApp that are just starting to accelerate earnings. They said Instagram had reached 50,000 advertisers. Facebook's problem is they do not have enough page views to monetize despite the 1.9 billion users. They have more advertisers than they have space.

Earnings August 2nd.

Facebook had been moving sideways since hitting the $153 high post earnings. Volatility was low and investors were just waiting for a market dip so they could get a better entry point. Share fell to uptrend support at $145 and even if they due decline further there is strong support around $140.

Update 5/18/27: Facebook was fined $122.4 million by EU regulators for giving them false information in the WhatsApp acquisition process. The EU asked how many WhatsApp users were also Facebook users and the company said it did not know and did not have way of matching the usernames. A year after the acquisition Facebook launched a service that did match users and the EU said they had the capability all the time.

The company also announced a new effort to reduce "clickbait" headlines and punish websites that continually publish fake news. I hope they are successful.

Update 5/19/17: Facebook is going to live stream 20 Major League Baseball Friday night games. The company also said it was adding an "Order Food" option to let some users order, pay and have food delivered or be available for pickup. The service works with restaurants that use Delivery.com or Slice.

Update 5/22/17: Facebook shares were weak after the BROWSER bill was introduced in the House. Websites and browsers must get explicit permission from users in order to collect and use personal data including browser history, search terms, cookies, etc. They also cannot deny you the use of their program if you decline to give them permission to use your data. While the bill has little chance of passing it was a wet blanket on Facebook today.

Position 5/18/17:

Long Aug $150 call @ $4.90, no initial stop loss.


IWM - Russell 2000 ETF - Company Profile

Comments:

Minor gain in the small caps as the overall market was struggling.

Original Trade Description: May 17th.

The iShares Russell 2000 ETF seeks to track the investment results of an index composed of small-capitalization U.S. equities.

The Russell 3000 is the top 3,000 investible stocks in the U.S. The Russell 1000 is the top 1,000 stocks by market cap and the Russell 2000 is the next 2,000 stocks by market cap. The Russell 2000 is commonly called the small cap index but it has a large number of midcap stocks as well.

The Russell 2000 imploded with a 39 point, -3% decline to 1,355. There is strong support at 1,344. "IF" the market rebounds as I expect the Russell is likely to rebound strongly now that all the stop losses have been hit.

The corresponding level on the IWM is $134 with the ETF closing at $134.89 on Wednesday. This support has held since January despite six intraday penetrations that were immediately bought.

Position 5/18/17:

Long July $136 call @ $3.08. No initial stop loss.


MCD - McDonalds - Company Profile

Comments:

No specific news and shares rested with a rare decline.

Original Trade Description: May 3rd.

McDonald's Corporation operates and franchises McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, Latin America, and internationally. The company's restaurants offer various food products, soft drinks, coffee, and other beverages. As of December 31, 2016, it operated 36,899 restaurants, including 31,230 franchised restaurants comprising 21,559 franchised to conventional franchisees, 6,300 licensed to developmental licensees, and 3,371 licensed to foreign affiliates; and 5,669 company-operated restaurants. McDonald's Corporation was founded in 1940 and is based in Oak Brook, Illinois. Company description from FinViz.com.

McDonalds is surging because they have overhauled their menu, offered breakfast all day, shifted to fresh beef, mobile ordering, delivery with UberEats, kiosks AND they are selling coffee for $1 and specialty drinks for $2. That is vastly lower than Starbucks and it is helping them steal market share. People stopping by to pick up a cheap coffee tend to order a snack as well. Who can resist adding an Egg McMuffin to go with that coffee.

McDonalds reported better than expected earnings and raised guidance. They reported $1.47 compared to estimates for $1.33. Revenue of $5.68 billion beat estimates for $5.53 billion. Same store sales rose 1.7% compared to expectations for an 0.8% decline. Global sales were up 4%.

Earnings July 25th.

Goldman has had a neutral rating on them forever but upgraded the fast food giant today to a buy with $153 price target. Goldman admitted they were late but said there was still plenty of time given the improved metrics. Goldman cited McDonald's "Experience of the Future" plans for mobile ordering and kiosks and said the expanding delivery options could expand revenue.

McDonalds closed at a new high today in a weak market.

Update 5/4/17: McDonalds said it was adding Signature Crafted Recipes to its stores in Florida and would be adding 5,000 workers to handle the volume.

Update 5/15/17: McDonald's Bar-B-Que opened on May 15th, 1940. The store closed and was later reopened in 1948 with only 9 items on the menu. Hamburgers were 15 cents, cheeseburgers 19 cents and cokes/coffee were 10 cents. Today, McDonalds serves 77 million customers a day. Short history of MCD in pictures The stock celebrated today with a new high.

Update 5/18/17: McDonald's added 1,000 additional restaurants to its McDelivery program utilizing UberEATS food delivery service. They had been testing at 200 stores in Florida since January. Apparently, McDonalds customers are loving it.

Update 5/22/17: The Chicago Tribune said restaurants offering the delivery service were seeing a surge in large orders. People are ordering the 40-piece Chicken McNuggets in quantity as well as the Big Mac and Chicken McNuggets Meal Bundle. That is 2 Big Macs, a 20-piece McNugget, 3 medium fries and 3 beverages for $14.99, which were also being ordered in quantities. When you think about it, if you are having friends over, ordering multiples of those deals gives everyone a choice and plenty to eat. Having UberEats deliver it is simpler than having someone gather up everyone's orders and money and then driving to McDonalds, waiting in line and then waiting while they put together your large order. If you can get it all home without spilling french fries and soda all over your car you are very lucky. This is another reason why McDonalds sales are going to rise in the coming quarters.

Position 5/4/17:

Long July $145 call @ $1.67, see portfolio graphic for stop loss.


NFLX - Netflix - Company Profile

Comments:

No specific news. Loop Capital reiterated a buy and raised their price target from $172 to $180. The highly anticipated fifth season for House of Cards is only a week away and shares typically rally on the releases. The next two weeks could see chares rise.

Original Trade Description: May 17th.

Netflix, Inc., an Internet television network, engages in the Internet delivery of television (TV) shows and movies on various Internet-connected screens. The company operates in three segments: Domestic Streaming, International Streaming, and Domestic DVD. It offers members with the ability to receive streaming content through a host of Internet-connected screens, including TVs, digital video players, television set-top boxes, and mobile devices. The company also provides DVDs-by-mail membership services. It serves approximately 100 million streaming members in 190 countries. Netflix, Inc. was founded in 1997 and is headquartered in Los Gatos, California. Company description from FinViz.com.

Netflix posted blowout earnings and shares rocketed higher to hit $161 on Monday. I have been waiting for three weeks for a pullback. Analysts are projecting higher highs with the high price targets at $175. There have been continuous rumors that either Disney or Apple will try to buy them not only to acquire the platform but to keep the other company from acquiring it. Both have said they want to have a big presence in streaming. Tim Cook just said it last week. Both have the cash and Disney has billions of dollars in content it can immediately add to the platform.

Netflix is expected to add 3 million subscribers in Q2. They are testing higher prices in Australia to see what price levels will cause subscriber flight. Once they figure it out you can bet they will apply it to the rest of their 100 million customers. That is instant profit. Bumping rates by $5 gets them another $500 million a month in revenue.

They announced with earnings they were finally entering China through a partnership with the largest existing streamer in China. This is one more step to a full release in the future.

Update 5/18/17: The FCC voted 2-1 to roll back the 2015 net neutrality order from President Obama. Some say this will impact major internet users like Netflix. However, the company said last month that elimination of the order would not have any impact on their business because they were big enough and had a broad enough customer base that ISPs would not try to slow down their streaming traffic. The order prevented ISPs from charging for faster bandwidth for heavy users. Netflix is responsible for 40% of the internet traffic in peak hours.

Update 5/22/17: Netflix expects to have 102 million subscribers by the end of Q2 with 51.45 million in the U.S. and 50.49 million internationally. Three years ago the company only had 11 million international subscribers. They expect international numbers to exceed U.S. subscribers by the end of the third quarter. With international subscribers growing roughly 3 million per quarter they should reach 100 million in 2020 as acceptance continues to grow. That puts them on track for 200 million total subscribers by 2025.

Earnings July 17th.

We have to use a spread because options are still expensive.

Position 5/18/17:

Long July $160 call @ $6.45, no initial stop loss.
Short July $175 call @ $2.16, no initial stop loss.
Net debit $4.29.


VAR - Varian Medical - Company Profile

Comments:

No specific news. Not a big gain but still a gain.

Original Trade Description: May 20th.

Varian Medical Systems, Inc. designs, manufactures, sells, and services medical devices and software products for treating cancer and other medical conditions worldwide. It operates through two segments, Oncology Systems and Imaging Components. The Oncology Systems segment provides hardware and software products for treating cancer with radiotherapy, fixed field intensity-modulated radiation therapy, image-guided radiation therapy, volumetric modulated arc therapy, stereotactic radiosurgery, stereotactic body radiotherapy, and brachytherapy. Its products include linear accelerators, brachytherapy afterloaders, treatment simulation, verification equipment, and accessories; and information management, treatment planning, image processing, clinical knowledge exchange, patient care management, decision-making support, and practice management software. This segment serves university research and community hospitals, private and governmental institutions, healthcare agencies, physicians' offices, oncology practices, radiotherapy centers, and cancer care clinics. The Imaging Components segment offers X-ray imaging components for use in radiographic or fluoroscopic imaging, mammography, special procedures, computed tomography, computer aided diagnostics, and industrial applications. It also provides Linatron X-ray accelerators, imaging processing software, and image detection products for security and inspection purposes. This segment serves original equipment manufacturers, independent service companies, and end-users. In addition, the company offers products and systems for delivering proton therapy; and develops technologies in the areas of digital X-ray imaging, volumetric and functional imaging, and improved X-ray sources. The company was formerly known as Varian Associates, Inc. and changed its name to Varian Medical Systems, Inc. in April 1999. Varian Medical Systems, Inc. was founded in 1948. Company description from FinViz.com.

Drugs are not the only opportunity to rid yourself of a terrible disease. Varian produces multiple products for discovering and targeting cancer. They are the sector leader in imaging and radiation therapy.

Varian reported earnings of 89 cents that beat estimates for 88 cents. Revenue of $655 million beat estimates for $643 million. They guided for ful lyear earnings of $3.56-$3.64 per share.

Earnings July 26th.

On May 6th, the company announced a "game-changing treatment platform" to combat the cancer challenge. (their words) The new Halcyon system is an entirely new device that "simplifies and enhances virtually every aspect of image-guided volumetric intensity modulated radiotherapy (IMRT). This new treatment system is designed to expand the availability of high quality cancer care globally and help save the lives of millions more cancer patients." The new system requires only 9 steps compared with the 30 treatment steps required by current generation equipment. "Halcyon is well suited to handle the majority of cancer patients, offering advanced treatments for prostate, breast, head & neck, and many other forms of cancer." Press Release

The company demonstrated the new device to packed crowds at the ESTRO 36 conference in Vienna on May 8th. Shares spiked $4 on the announcement.

ASCO is about cancer treatment and the conference begins on June 2nd for four days. While the drug community will be getting plenty of press, the Varian equipment should also be benefitting from the headlines.

The market decline knocked $2 off Varian shares and gave us a buying opportunity.

Position 5/22/17:

Long August $100 call @ $2.00, see portfolio graphic for stop loss.


$VIX - Volatility Index - Index Description

Comments:

Choppy day in the market but the VIX continued to slide.

The May 8th close at 9.77 was the lowest close since December 1993. That is a 24 year low!!

This is a July call. We have plenty of time and the odds of a market sell off over the next 2.5 months are close to 100%. The VIX cannot go much lower but it can go a lot higher.

While holding the VIX call is an insurance play for us, I hope we are never in a position to profit from it. That would mean a lot of our long positions would be under water or stopped out.

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.

Update 5/1/17: The VIX made a new intraday low at 9.90 and closed at a 10-yr low at 10.11. The government shutdown has been avoided according to reports out of Washington and that helped to deflate the VIX. Marine Le Pen is rapidly gaining on Macron in the French election runoff for next Sunday. She gained 6 points in two days to 41% in the recent polls compared to Macron's 59%. If she can gain another 6% early this week then the entire event risk scenario comes back into play with a potential come from behind win.

Position 3/30/117
Long July $14 call @ $2.55, no stop loss.
Added 5/9/17: Long July $14 call @ $1.60, no stop loss.
Average cost now $2.07.

Previously Closed 2/1/17: Long March $12 call @ $2.60, exit $2.50, -.10 loss.
Previously Closed 2/22/17: Long March $12 call @ $1.75 adj, exit $1.65, -.10 loss.
Previously Closed 4/10/17: Long Apr $13 call @ $2.30, exit $1.80, -.55 loss.



BEARISH Play Updates (Alpha by Symbol)

TSCO - Tractor Supply - Company Profile

Comments:

No specific news. Shares fell -$2 to a new 4-year low close.

Original Trade Description: May 15th.

Tractor Supply Company operates rural lifestyle retail stores in the United States. The company offers a selection of merchandise, including equine, livestock, pet, and small animal products necessary for their health, care, growth, and containment; hardware, truck, towing, and tool products; seasonal products, such as heating products, lawn and garden items, power equipment, gifts, and toys; work/recreational clothing and footwear; and maintenance products for agricultural and rural use. As of January 26, 2017, it operated 1,600 retail stores in 49 states. The company operates its retail stores under the Tractor Supply Company, Del's Feed & Farm Supply, and Petsense names. It also operates an e-commerce Website, TractorSupply.com. The company sells its products to recreational farmers, ranchers, and others, as well as tradesmen and small businesses. Tractor Supply Company was founded in 1938 and is headquartered in Brentwood, Tennessee. Company description from FinViz.com.

In mid April TSCO warned that sales were weak and cut its earnings outlook. Same store sales fell -2.2%. The average number of transactions declined -1.4% and the average ticket size fell -0.9%. The company blamed price deflation from competition and lower sales of seasonal merchandise. They cut estimates from 49 cents to 45-46 cents.

The company has been around since 1938. Have they not gotten a grasp of weather patterns yet?

When they reported earnings of 46 cents that matched the lowered analyst estimates. Revenue rose 6.6% to $1.56 billion.

Let make sure we have this right. In Mid April, they warned of lower sales for multiple reasons and cut earnings estimates. Two weeks later, they reported a 6.6% increase in sales rather than a decrease. Other investors picked up on the discrepancy and shares began to fall. Since Amazon does not sell tractors online, somebody else is forcing their profits lower. Maybe the sale of big ticket items like tractors is suffering from the same illness as motorcycles and motor homes. A lack of extra money in consumer pockets.

The next earnings release is July 26th.

I am going to step out to the October strikes because the July options would expire before earnings. It would be best to have some earnings expectation in the premium to keep them elevated.

We can buy all the time we want. We do not have to use it. We will exit before earnings.

Position 5/16/17:

Long Oct $55 put @ $1.95, see portfolio graphic for stop loss.




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