Option Investor
Newsletter

Daily Newsletter, Monday, 5/9/2016

Table of Contents

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

Market Wrap

Market Wobble

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Monday traders were quiet and cautious in the wake of last week's weak jobs data. Also affecting today's sentiment; the Saudi cabinet shake up, a warning from Japanese officials and weaker than expected Chinese trade data. The removal of Al-Naimi as the Saudi oil minister was a shock to the market but did not seem to have much affect on oil prices. It's affect on the greater oil market is yet to be established. As for China, weaker than expected traded data renewed fear of a slowing China and one growing slower than data suggests. In Japan the finance minister says Tokyo is ready to intervene to stop the yens recent strengthening.

These new developments, coupled with ongoing weakness in corporate earnings, poor earnings growth outlook gave market participants more than reason to be cautious. In Asia trading was mixed; Chinese indices fell on weak economic data, the Japanese Nikkei gained about 0.7% on quantitative easing hopes. European indices were equally mixed, driven by global uncertainty and late day declines in both oil and gold prices.

Market Statistics

Futures trading indicated a higher open for our markets right from the start. Gains were not large but they were positive, moderating to near flat-line by the open of the day's session. There was no official economic data released today and little in the way of high profile earnings before the bell although today's list of earnings reports is quite large. Trading at the open was very lethargic to say the least. The indices opened with little to no gains on incredibly light volume and then proceeded to trade sideways from there, up to and into the close of the session. Today's SPX trading range is the second smallest in nearly 6 months, further evidence of the lack of action in today's action.

Economic Calendar

The Economy

No official economic data from the US today and the calendar for the week is on the light side. Tomorrow we'll get the JOLTs report and wholesale inventories. On Wednesday we'll get the treasury budget. Thursday will be weekly jobless claims and import/export prices and then on Friday the week rounds out with PPI, retail sales, business inventories and Michigan Sentiment. Needless to say, the big day this wee, in terms of data, will be Friday.

Moody's Survey Of Business Confidence shows that global business sentiment fell -0.8% from last week, the first decline in two months. The index is now reading 33.3, high by historic standards but well below the highs set last summer. According to Mr. Zandi sentiment is mixed throughout the world; it is strongest in the US and Europe but on shaky ground in South American where political upheaval is still rampant. Just today the apparent impeachment of Brazil's corrupt leader was postponed due to political wrangling within the government.


We are through the bulk of the earnings season but there are still quite a few left to report. According to FactSet 87% of the S&P 500 has reported so far, 20 are expected to report this week. Of those who have reported 71% have beaten EPS projections (above average) while only 53% have beaten revenue estimates (below average). The blended rate of earnings growth for the 1st quarter of 2016 rose slightly in the last week, rising a half percent to -7.1%. The improvement is a plus, but leaves this quarter's earnings decline deep in negative territory for the 4th quarter in a row and is the deepest decline since the earnings recession began.


Looking out to the next quarter and beyond earnings growth outlook improves, but continues to weaken. Full year 2016 earnings growth estimates have risen by a tenth, due solely to better than expected Q1 results, but Q2, Q3 and Q4 remain weak. Projections for Q2 sank deeper into the red and are now -4.7%, Q3 projections are little better having fallen -0.2% to only 1.4%. Fourth quarter growth remains stable at 7.5% with the caveat that this is less than half what had been expected at the start of the year. Looking further out 2017 earnings growth projections remain strong at 13.6%, but they too were revised down this week.


While it looks like earnings growth will return to the market, and maybe even this year, I don't believe forward outlook will have positive effect on the market until after the next earnings cycle at the earliest. Until then negative expectations in the 2nd quarter and declining expectations for the 3rd and 4th quarter are likely to weigh on the market. At the rate expectations are declining it is very possible that the 3rd quarter projections will turn negative in the next few weeks.

The Dollar Index

The Dollar Index surged in today's session driven by comments from Japan. Japan's finance minister says Tokyo is ready to act to weaken the yen if needed, a comment that helped to weaken the yen and send it to a 2 week low versus the dollar. The Dollar Index itself rose about 0.3% in a move that is fast approaching resistance targets near $94.30. This level was previous support, now broken, and should be viewed as potentially strong resistance at this time. This level is consistent with the 78.6% retracement level and the short term moving average, a combination that, if broken, would end the 5.5 month downtrend in dollar value we've seen since the start of the year. A break above $94.30 could take the index up to $95.60, a failure to break would likely see the index retreat back to the recent low near $92.50. Since today's move was driven by talk and not a change to fundamentals I think it more likely to see the DXY halted at resistance than for it to break through. The next meetings of the BOJ and FOMC are not until June with no expectation of a US rate hike.


The Oil Index

Oil prices were quite volatile. They started the day in positive territory, rising 2.8% in the early session and then giving up all those gains and more later in the day. By close of trading WTI was down -2.8% as the immediate affect of Al-Naimi's removal and the wildfires raging in Canada were debated. The fire did not expand as much as feared over the weekend, reducing fear of supply disruptions, which was the major cause of today's turnaround. Even with a possible 1 million BPD disruption global supply remains high, production remains high and demand remains tepid. Today's action may be sign of growing resistance to higher prices, resistance target near $45, with a potential decline to $40 if no bullish catalyst emerge.

The Oil Index fell hard today too, dropping more than -3% intraday and extending the decline which began 2 weeks ago. Today's candle is not overly strong but does help confirm resistance in the 1,100 1,120 range. The indicators are also weakening, bearish MACD momentum is on the rise while stochastic moves lower, suggesting further decline is on the way. Next down side target is near 1,020.


The Gold Index

Gold prices got walloped today, falling nearly -2.25%, to trade near $1265. Today's move was driven by the Japan comments and helps to confirm resistance at $1300. Today's candle was long and black but not overly strong. We may see a continuation of this sell-off in the near term with a possible support target near $1250. Even with today's news gold is more likely in a consolidation than reversing. Consolidation may continue over the next month while we wait on data the next round of central bank meetings.

The gold miners took a hit on gold's fall. The miners ETF GDX fell more than -6% in today's action to trade near the bottom of the 2 week trading range. The ETF appears to be in consolidation, between $23.25 and $26, with a chance this will continue into the near term. The indicators are pointing lower at this time, suggestive of a test of support, but consistent with consolidation over the past few weeks. With so much time until the next central bank meetings economic data will be closely watched and will drive day to day action. Gold and the miners could could continue to fall on the Japan news but could just as easily rebound if no follow through comes from that quarter.


In The News, Story Stocks and Earnings

Lending Club, one of many on line lenders who have been experiencing trouble over the past few months, announced the ousting of its CEO this morning and the market took it very hard. The CEO exceeded his authority on a number of items, including re-dating applications and selling bundles of loans that did not meet investor requirements, and was forced to resign. The news shook investor confidence in the on-line lending model and sent shares of the stock down more than -30%.


Teva Pharmaceuticals reported earnings before the bell and pleased investors even though forward guidance is a little light. The company reported EPS of $1.36, flat year over year and better than the $1.13 expected by analysts. The results were driven by strength in generics and negatively affected by currency conversion. Revenue was down -3% year over year, -1% when considering forex impact. Guidance was weak, but came with the caveat it did not include the addition of revenue from an upcoming acquisition that is expected to bolster the company's presence in the generic market. Shares of the stock gained more than 5% but did not recover all of Friday's losses.


Krispy Kreme, maker of oh so delicious frosted doughnuts and OK coffee, reported that it was being bought out by JAB Beech, INC, a subsidiary of JAB Holding Company. The move is worth $21 per share to holders of KKD, a 25% premium to last week's closing price, and is expected to close by the 3rd quarter of this year.

Tyson Food's also reported earnings before the bell. The iconic processor of poultry and poultry products delivered EPS of $1.10, well ahead of the $0.96 expected, and raised full year guidance. Results were driven by record sales, record revenue and growth in key retail brands. Shares of the stock jumped more than 5% premarket and gapped open to a new all time high.


The Indices

The market moved very little today despite the flurry of news. Trading ranges were tight, resistance was tested more than once, and little to no gains were made. Today's leader was the NASDAQ Composite Index with a rise of only 0.3%. The tech heavy index tried to complete a small bodied white candle but was not able to close near the high of the day, leaving some upper shadow in evidence of resistance. Resistance is just above the high of the day, near 4,790, with the short term moving average just above that. The indicators remain weak and pointing to lower prices, as suggested by stochastic's crossing of the lower signal line, although bearish momentum is slackening in the near term. A break above resistance would be bullish, failing to do so could see the index return to firmer support. First target for support is near 4,650.


The next biggest gainer, the only other gainer in today's action, was the S&P 500 which posted a gain of only 0.8%. The broad market created a very small spinning top doji, wedged tightly between the short term moving average (resistance) and the 2,050 support target. The indicators remain weak but there is a little sign of support at this level in the MACD; bearish momentum has made a peak in the near term consistent with possible support. That being said stochastic is not showing signs of support at this time and suggest lower prices are on the way. A break below 2,050 could take the index as low as 2,020 or 2,000 in the near term while a break above the moving average could find next resistance just above it, in the range of 2,075.


The Dow Jones Transportation Average made the smallest decline in today's session, only -0.01%, basically unchanged to last Friday's close. The move created a very small spinning top doji, confirming possible resistance at the 7,750 level. The indicators remain weak, as with the other indices, with mixed signals. MACD is bearish and strong, but has peaked, stochastic is moving lower in the longer term but showing signs of support in the nearer; both consistent with a bounce or rebound but one not showing much strength. A break above resistance would be bullish and comes with an upside target near the short term moving average, only about 100 points above today's close. First support target is near 7,600 and the low set on Friday. A break below this level would be bearish and could carry the index down to 7,500.


The Dow Jones Industrial Average made the largest decline in today's session, -0.2%. The blue chips created a very small spinning top candle that tried to break above the short term moving average and failed. Today's move may confirm resistance at the moving average, and could signify lower prices to come. The indicators are mixed but more bearish than not; MACD is bearish but momentum is waning, stochastic %D is moving lower but %K is bouncing. Together the indicators are consistent with rebound or support although neither are confirmed. A break above the short term moving average would be bullish and has an upside target near 18,000. A break below 17,615 would be bearish and could carry the index down to the long term uptrend line near 17,000.


The market is waiting. Today's action is classic wait and see activity but waiting for what is the question. The next round of central bank meetings aren't for another month, earnings season is mostly over, economic data is on tap but nothing truly market moving is on the schedule for this week. With so little to grab attention the market may fall back on the fundamentals, fundamentals that show slowing, tepid, spotty growth and declining earnings expectations.

The long term is still bright, but that brightness is still in the future and a long way off. Between now and then we've got at least one more quarter of earnings decline before coming out of the earnings recession, tepid economics, uncertainty over the Fed and the summer season fast approaching. It may not be time to sell-in-May-and-go-away but it doesn't look like we're on the cusp of a rally either. I remain bullish for the long term but increasingly bearish for the near term, looking forward to the next big dip.

Until then, remember the trend!

Thomas Hughes


New Plays

Hungry for Steak

by Jim Brown

Click here to email Jim Brown
Editor's Note

You must be doing something right when investors overlook your earnings problems and power the stock to a seven-month high.


NEW BULLISH Plays


BLMN - Bloomin Brands -
Company Profile

Bloomin Brands owns and operates casual, upscale casual and fine dining restaurants primarily in the USA. Their brands include Outback Steakhouse, Carrabbas Italian Grill, Bonefish Grill and Flemings Prime Steakhouse & Wine Bar. They operate over 1,500 locations in 48 states and 22 countries.

They reported operating earnings of 47 cents that missed estimates for 50 cents. Revenue of $1.16 billion missed estimates for $1.17 billion. Same store sales in the U.S. declined -1.5%. Shares surged 9% despite the miss.

Despite the weak quarter the company reaffirmed full year estimates for earnings growth of at least 10%. The company blamed restructuring costs on the weak quarter and said that would not be a problem in future quarters. They had previously projected a strong second half of 2016. They also pointed to sales in the Brazilian Outback Steakhouse that rose 8.8%. During the quarter they also bought back $75 million in stock. Strong dollar currency translation issues also reduced earnings. The company also declared a dividend of 7 cents payable on May 19th to holders on May 6th. They entered into a sale leaseback transaction where they sold 41 restaurants for $141.4 million and used $87 million to pay down debt.

Shares spiked 9% after the earnings and continued moving higher over the last two weeks. They closed today at a 7-month high.

Buy BLMN shares, currently $19.46, initial stop loss $18.25.

No option recommendation due to wide spreads.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Looking Negative for Tuesday

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P futures are down -5 in the afterhours session but that could change by morning. The futures give you the market sentiment right now but there could be a dramatic move in either direction before morning based on headlines from Europe, Asia, the Middle East and from events here in the USA.

The Gap (GPS) warned earnings would be significantly lower and this is retail earnings week. With Nordstrom, Dillards, JC Penny, Macys and Kohls reporting over the next three days that Gap warning is going to weigh on all of them. Same store sales were down 7% in April. Gap is now predicting 31-32 cents in earnings compared to estimates for 44 cents.

SolarCity disappointed on earnings posting a loss of $2.52 compared to estimates for $2.32. Shares were down -$3.50 or roughly 15% in afterhours. Hertz (HTZ) also missed on earnings and shares fell -4%. Rackspace (RAX) missed on earnings and fell -5% in afterhours.

In theory, our bearish positions could do well on Tuesday but as we have seen in the past, when the market is down hard the previously beaten up stocks tend to attract money from investors looking for a safe haven that should not fall as much as a stock with recent gains.

The S&P only posted a 1-point gain and we could see a retest of support at 2,040 if the futures remain negative overnight.




Current Portfolio





Current Position Changes


GPRO - GoPro

The short position remains unopened until a trade at $9.65. *** NEW TRIGGER ***


SQ - Square

The short position was opened at $10.17.


Profit Targets

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


Stop Loss Updates

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



BULLISH Play Updates


TRN - Trinity Industries - Company Profile

Comments:

No specific news. Support broke and the outlook is no longer good. The option is only worth 33 cents today and I recommend continuing to hold it because it is a July option.

We have time to wait for a rally.

Original Trade Description: March 18th

Trinity Industries manufacturers rail cars, highway guard rails and steel beams for infrastructure projects, structural towers for wind turbines and electrical distribution grids, oil and chemical storage tanks, barges to transport grain, coal, aggregates, tank barges to transport oil, chemicals and petroleum products. The company was founded in 1933.

Shares crashed in mid February after they reported earnings that beat the street but guidance that disappointed. Earnings of $1.30 easily beat estimates for $1.07 but revenue of $1.55 billion missed estimates for $1.61 billion. They had full year earnings of $5.08 per share.

They guided for 2016 to earnings of $2.00 to $2.40 per share. The challenge is the slowdown in orders for railroad tank cars and barges to transport oil. With oil prices crashing the producers and refiners are cutting back on capex spending until prices recover. Trinity said revenue in 2016 could decline -32%. Shares declined -35% over two days on the news.

The key here is that Trinity is now trading at a PE of 3. Yes 3.74 to be exact. With earnings in the middle of their range at $2.20 and a PE of 10 that would equate to a $22 stock price.

Here is the good news. The company has $2.12 billion in cash and undrawn credit. They are not in financial trouble. They authorized a $250 million share buyback starting January 1st. They have an order backlog of $5.4 billion in orders for 48,885 railcars. They received orders for 2,455 cars in Q4 and their backlog stretches out to 2020. The barge division received orders for $190.1 million in Q4 and had a backlog of $416 million as of December 31st. The structural tower segment has $371.3 million in order backlogs.

They recognize that tankcar and barge orders are going to remain slow until oil prices recover, which should happen later this year.

This stock was extremely oversold but began recovering in early March. Trinity produces a lot of railcars for carrying all types of products other than oil. That demand is not going to disappear and they already have order backlogs stretching into 2020.

At their current valuation they could also be an acquisition candidate. This is a great business that has been overly punished by the oil crash.

Earnings April 21st.

Position 3/21/16:

Long July $20 call @ $1.50, no stop loss.

Previously Closed 4/5/16: Long TRN shares @ $19.15, exit $17.50, -1.65 loss.



WIN - Windstream Holdings - Company Profile

Comments:

Minor decline after several days of nice moves. No specific news.

Original Trade Description: March 11th

Windstream provided network communications and technology solutions for consumers, businesses and enterprise organizations. They provide high-speed internet access, hosted web services and cable TV to a combined total of 1.6 million residential and business customers. They have more than 125,000 miles of high-speed fiber optic cable with speeds up to 500 gbps along their main corridors. They have 11 major data centers providing web hosting, cloud services, etc.

In the Q4 earnings, WIN reported adjusted earnings of $1.41 that crushed estimates for a loss of 48 cents. Revenue of $1.427 billion missed estimates slightly for $1.433 billion. The major earnings beat came from a spinoff of some of its telecom assets into a REIT. The cash received from the spinoff will allow some major network improvements in the months ahead.

The company declared a 15-cent quarterly dividend payable April 15th to holders on March 31st. That equates to a 7.3% annual yield.

WIN shares have been moving higher since they reported earnings on February 25th. Shares are at resistance at $8.25 and could breakout this week. The next resistance would be $11.85.

While we are not playing the stock for a takeover there is always the chance that somebody like Verizon or even Google could decide the $750 million market cap was chump change for 125,000 miles of high-speed fiber, cable TV and data center business.

I am going way out on the option to August because it is cheap and it will make a good lottery play even if we close the stock position early.

Update 5/5/16: Windstream reported a much smaller loss than expected. The company reported an adjusted loss of 23 cents compared to estimates for 54 cents. Revenues declined slightly to $1,373.4 million and missed estimates for $1,378.8 million. However, product revenues rose 11% to $32.4 million. WIN bought back $75 million in shares in Q1. The company ended the quarter with 1,430,700 household subscribers.

Position 3/11/16

Long August $9.00 call @ .38 cents.(Adjusted) NO STOP LOSS

Previously closed 3/29/16: Long WIN shares @ $8.22, exit $7.10, -1.12 loss.




BEARISH Play Updates


GPRO - GoPro - Company Profile

Comments:

Lots of negative news headlines for GoPro. I raised the entry trigger to $9.65.

Original Trade Description: May 5th.

GoPro develops hardware and software associated with capturing, managing, sharing and enjoying engaging content. They offer cameras and all the accessories associated with affixing those cameras to any object in order to capture action videos.

GoPro soared onto the scene in late 2014 and shares ramped up to nearly $100 until the execution problems began to appear. After owning the action camera sector for several years they are now facing a growing onslaught of competitors with far deeper pockets and bigger teams of software engineers. GoPro cameras remain some of the higher priced in the sector because of their history but that is quickly changing.

They reported earnings on Thursday after the bell. They posted a loss of 63 cents missing estimates for a loss of 60 cents. However, revenue of $183.54 million beat estimates for $171 million BUT it was a -49.5% decline over the year ago quarter of $363 million and a profit. They shipped 701,000 cameras but that was a -47.8% decline from last year. They affirmed guidance for revenue of $1.35 to $1.50 billion for the full year BUT they are delaying one of their biggest revenue drivers for the year.

The Karma drone was supposed to be released in the first half of 2016 and was expected to provide a revenue boost for the company. In the earnings conference call, they said the release of the drone would be pushed out into the holiday season. How they are going to meet their prior revenue estimates after losing six month of drone sales is a mystery. When asked about it on the conference call the CEO basically said, "trust us." This is especially troubling when SZ DJI Technology is rapidly monopolizing the drone market. DJI has been called the Apple of the drone industry. They sold and estimated 70% of the consumer drones sold in 2015. Now they will have another six months to flood the market with multiple drone models before the GoPro Karma even gets off the ground.

Shares fell slightly in afterhours but I expect them to make a new low in the weeks ahead. They closed the afterhours session at $10.16 and the historic low is $9.01. The afterhours low was $9.57.

With a GPRO trade at $9.65

Short GPRO shares, initial stop loss $10.75. I will lower that stop once we get past Friday.



INSY - Insys Therapeutics - Company Profile

Comments:

The Biotech sector rallied today but faded at the close. No specific news.

Original Trade Description: May 4th.

Insys is a specialty pharmaceutical company that develops and commercializes supportive care products. Their main drug (Subsys) is a sublingual fentanyl spray for cancer pain in opioid-tolerant patients.

They warned before earnings that Q1 sales of Subsys would only be in the range of $61-$62 million after Q4 sales were in the $91 million range, up +38%. In the year ago quarter Subsys sales were $70.5 million.

The problem is what the FDA said was improper off-label marketing that expanded the use of the drug last year. With that practice halted analysts believe the drug's best days are over.

Compounding the revenue problem was a decision by the FDA to move an approval date for Syndros from April 1st to July 1st. Syndros is a reformulation of the marijuana based drug marinol. Insys believes this could be a big seller in the hundreds of millions of dollars.

While that may be good for Insys in the future the trader community is leaving the stock until we get closer to the approval date.

Insys reported earnings of 11 cents that beat estimates for 8 cents. Revenue from Subsys was $62 million. Shares have been declining since the earnings report because of the revenue warning.

Earnings July 28th.

Position 5/5/16 with an INSY trade at $13.60

Short INSY shares @ $13.60, initial stop loss $14.60



NTAP - NetApp - Company Profile

Comments:

No specific news. Shares only declined 14 cents and came very close to stopping us out once again. We really need a breakdown here.

NTAP missed our stop loss at $23.25 by four cents.

Original Trade Description: April 25th.

NetApp provides software, systems and services to manage and store computer data worldwide. Data ONTAP storage operating system that delivers integrated data protection, comprehensive data management, and built-in software for virtualized, shared infrastructures, cloud computing, and mixed workload business applications; E-Series storage systems for storage area network workloads (SAN); all-flash arrays that deliver input/output operations per second and ultralow latency to drive speed, responsiveness, and value from the applications that control key business operations; and hybrid arrays for mainstream business applications.

About two weeks ago the stock trend turned negative and has started accelerating downward after Sterne Agee and Macquarie both downgraded from neutral to sell. Sterne Agee said the downgrade came after the Q1 IT survey. The survey showed weakness in end-user budgeting for storage systems and upgrades. Spending had declined 10% year-over-year and was negatively weighted towards incumbent vendors. Agee said they did not expect revenue from ONTAP8 and SolidFire to offset enough share loss potential over the next year. The analyst said valuation appears compressed and the stock should underperform its peers.

Another analyst said deteriorating net income would keep the stock depressed.

Earnings May 25th.

Based on the chart shares may not find support until $21. The last two days shares have stalled the decline at just over $24. I am recommending we short NTAP with a trade at $23.95 and target $21 for an exit.

Position 4/29/16 with a NTAP trade at $23.95

Short NTAP shares @ $23.95, initial stop loss $24.95

Optional

Long June $24 put @ $1.17, initial stop loss $24.95.



SQ - Square - Company Profile

Comments:

Square crashed at the open and spiked the put option from 65 cents to $1.10 while the call option only declined -15 cents for our entries. Square was down hard until the last five minutes of trading and shares spiked from $9.65 to $9.93. However, in afterhours they fell back to $9.70. I believe the path is still lower and we will be rewarded.

Original Trade Description: May 7th.

Square develops and provides payment processing, point-of-sale, financial and marketing services worldwide. It provides Square Register, a point-of-sale software application for iOS and Android, which enables sellers to process credit cards for multiple items through their smart device.

The company was knocked for a 22% loss after reporting a Q1 loss of 14 cents compared to estimates for 9 cents. Revenue rose +51% to $379.2 million and beat estimates for $343.6 million. However, operating expenses rose +72% to $207 million. G&A costs rose from $28 million to $96 million because of a $50 million charge for a lawsuit against Robert Morley, who claims to be the creator of the Square card reader.

Square also has a share lockup expiration on Square on May 17th. About 64 million shares will be unlocked and the float will increase nearly three times. A lot of early investors including Visa, Starbucks, Sequoia Capital (5%) and Khosla Ventures (17%) will be able to sell their shares. Given the reduced guidance and rapid decline there may be a race to the exits.

According to the Wall Street Journal, a whopping 69.48% of the shares (14.6 million) are short as of March 15th. Currently the public float is only 21.01 million shares. Source

I was going to recommend shorting the stock into the lockup expiration but the short interest is too high. The cost to borrow the shares would be prohibitive and with that much short interest it could be explosive. Also, I have seen many lockup expirations that have turned into the bottom for the stock. Expectations are so bearish that the stock declines to a ridiculous price before the actual expiration and then there is no selling. Anyone with shares in the lockup could have already shorted the stock to protect those declining shares. When the lockup expires they use their unlocked shares to cover their shorts.

I am proposing we use a combination strategy. I am recommending we buy a May $10 put, which expires three days after the lockup expiration. At the same time I am recommending we buy a June $11 call in expectation for a sharp post lockup rebound. Remember, revenue increased 51% in Q1 and they raised guidance.

If the stock declines, we sell our put for a profit before expiration and that reduces the cost in the call.

Position 5/9/16:

Long May $10 put @ 1.10. No stop loss.
Long Jun $11 call @ 55 cents. No stop loss.



XLF - Financial ETF - ETF Profile

Comments:

The ETF failed to decline despite Goldman Sachs being the third biggest loser on the Dow. The markets look like they are going to open lower on Tuesday and hopefully that will cause a dip in the XLF. Our May option is running out of time.

This ETF reacts to the markets just as much as it does to financial news.

Original Trade Description: April 11th.

The XLF is commonly referred to as the banking ETF. However, it is actually a Financial Sector ETF. Banks account for 33% of the holdings with WFC, JPM, BAC, C, USB and GS six of the top ten holdings. Insurance, brokers, diversified financial services and REITs make up the rest of the ETF.

We are playing it to capitalize on the movements in those six top banks as they report earnings. The ETF normally moves slowly and I would not recommend it as a stock holding ahead of those earnings simply because we do not know which way it will move.

I am recommending a short-term option strategy called a strangle using very inexpensive options. We only care about catching the post earnings move in what could be a rocky quarter. Since estimates are already very low there is the potential for an upside surprise and that could cause some short squeezes with the banks.

I looked at playing the weekly puts but the premiums were in some cases higher than the May premiums so we will buy the time even though we will not use it.

Position 4/12/16

Closed 4/29/16: Long May $23 call @ 19 cents, exit .58, +.39 gain.
Long May $22 put @ 47 cents, no stop loss.
Net debit 66 cents.





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