Option Investor
Newsletter

Daily Newsletter, Thursday, 5/12/2016

Table of Contents

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

Market Wrap

Shaky Market

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market tried to rebound as weak earnings, tepid data and sluggish outlook weigh on sentiment. Neither the current quarters earnings, the recent string of data nor outlook give much reason for bullishness and today's events did nothing to alleviate concerns.

Global markets were mixed. In Asia markets were mostly lower but comments from a prominent, but unofficial, Japanese source helped to weaken the yen which in turn helped the Nikkei to move into positive territory before the close. Takotoshi Ito, an academic reportedly close to BOJ Governor Kuroda, says the bank my be ready to add QE as early as June. In Europe the markets started off on better footing, rising as much as 0.5% by mid day, only to give up the gains and more by the end of the session. Early strength was supported by rising oil prices, the late day sell-off in equities driven in turn by a reversal in those same oil prices.

Market Statistics

Futures trading indicated a positive open for the entire morning although indicated gains fell steadily throughout the morning. Weak earnings from the retailers along with a surprise jump in jobless claims may have been the cause, or possibly anticipation of three speeches to be given by Fed officials, a rising dollar or combination of these and other factors. The open was rocky, the indices did indeed move higher after the bell but gains were muted and intraday resistance was met within the first 10 minutes of trading.

By 10AM the indices had retreat to break even levels and by 10:15 had moved into negative territory, where they remained for the greater part of the day. Losses were not severe, the S&P 500 shedding about -0.5% at the low, and most were recovered by 2PM. A late afternoon rally helped to send the indices back up to test the early high but once again those levels were not sustainable. The indices retreated from the intraday highs going into the close and ended the day relatively flat.

Economic Calendar

The Economy

Not a lot of economic data today but what we got was a little surprising. Initial jobless claims jumped 20,000 in the past week, the 5th week of increases, to hit a near 15 month high. Claims came in at 294,000, still below the much watched 300,000 level and consistent with labor market health, but the pace of increases and the new high are waving a red flag. The four week moving average of claims also rose, by 10,250 to 268,750, to hit a four month high. On a not adjusted basis claims gained 7.6% versus the 0.6% projected by seasonal factors and are now above last years levels. The near term gains in claims may fall in the coming weeks as we enter the summer season but they will need to be watched, a reversal in trend would not be good.


Continuing claims rose by 37,000 to it 2.161, a 6 week high. This is on top of an upward revision to last week's figure of 3,000. The four week moving average of continuing claims is still falling however, but may begin to rise in the coming weeks. Despite the gains, like with initial claims, continuing claims remains low relative to long term trends and consistent with labor market health.

The total number of Americans receiving unemployment benefits fell by -61,992 to hit 2.136. This is the lowest level since late November 2015 and consistent with seasonal and long term trends. We can expect the total claims figures to continue falling for about the next 4-5 weeks providing the jump in initial claims does not linger and/or spillover into longer term unemployment. On a year over year basis total claims are down -5.2% and consistent with ongoing recovery in labor markets and unemployment.


Import/Export prices were released at 8:30AM. Import prices rose 0.3% following a 0.3% gain April, driven primarily by rising fuel prices. Export prices rose by 0.5%, impacted by both agricultural and non-agricultural products.

Not one but 3 different Federal Reserve presidents, all voting members this year, made speeches to day. They each spoke to different aspects of the economy, as well as the pace of FOMC rate hikes, and as a whole sound fairly hawkish. First up was Rosengren who says the market is too pessimistic on the economy and underestimating the pace of rate hikes. Mester says that uncertainty in forecasting should not stop the Fed from acting. Esther George says that rates are currently too low for the state of the economy, that low rates pose their own risks to economic stability and that she expects to see moderate growth to continue.

The next meeting is only 4 weeks away, the CME Fed Watch tool shows an 8% chance for a rate hike. Looking out to future meetings the Fed Watch Tool shows a less than 50% chance of rate hike all the way out to December when it jumps to 59%.


The Dollar Index

The Dollar Index rose by about 0.33% today on the heels of expected, projected, speculated BOJ intervention. Today's action recovered some but not all of yesterday's losses, and fell short of resistance at $94.30, the 78.6% retracement level. This level may prove to hold the index in check as BOJ talk at this time is just that, talk, and US data does not support a strengthening dollar. The indicators are bullish and pointing higher so a test of resistance is likely, but they are also very weak at this time so the strength of the move is questionable at this time. A break above this level could signal a reversal in the dollar and/or yen that could have negative impact on forward earnings, and take the index up to $95.50 in the near term. Tomorrow's CPI release could have an affect on the index, and PPI next week. If inflation gauges remain weak, and rate hike expectations and other economic indications, the index could easily return to retest its recent lows.


The Oil Index

Oil prices got a boost in early trading from yesterday's surprise draw of US stockpiles and an IEA report that says global oil markets are heading for balance. Within the report they also upped 2016 demand by over 1.5 million BPD and expect to see a steady draw-down of US stockpiles going into the summer. Oil prices surged in early trading to near $47 and a 6 month high only to attract sellers who brought volatility to the market. Prices were driven back below $46 intraday, but only long enough for the bulls to regroup and send them back up. By end of day WTI was trading near $46.50, just off the earlier high. It seems that fundamentals may finally be coming back into alignment, for the bulls, but are still skewed toward supply. Prices may continue to rise in the near to short term.

The Oil Index tried to rally on the rise on oil prices but succumbed to profit taking. The index opened with a small gain and pushed marginally higher only to fall back to break even before the close. Today's candle is small and black, with upper and lower shadows, sitting on a critical level. This level is near 1,115 and consistent with the short term moving average, today's support, and the 61.8% retracement level, broken. If support at this level fails the index could fall as 1,075 in the near term, if oil prices remain steady at the new highs and/or moves higher a bounce may be in store for the Oil Index with upside target near 1,175.


The Gold Index

Gold prices held steady near $1270 despite strengthening in the dollar. Today's session was a little choppy, early losses were erased mid-day only to have the index fall back to the earlier low about -0.25% below yesterday's settlement price. Regardless, today's action is more consolidation than anything else, gold prices remain above recently broken support with little expectation for a fall at this time. The risks are stronger than expected data or anything else that may lead the market to move up rate hike expectations, as well as possible moves from the ECB (not expected) or the BOJ (probable). Until then gold is likely to remain range bound with support in the region of $1250-$1260 and resistance near $1285 - $1300.

The gold miners fell in today's session but remain near recent highs. The miners ETF GDX fell about -1.35%, just off the long term high, to trade near the middle of the near term consolidation range. The ETF is in consolidation, longer term direction dependent on economic data, central bank activity, the dollar and gold prices. The consolidation range has support near $23.25 and resistance near $26, a break above could take the index higher into the long term with targets near $27.50 and $30. A break to the down side could take it down to support targets near $20-$21.


In The News, Story Stocks and Earnings

Apple was a major mover of the market today. The beleaguered tech company saw shares fall more than -2.25% to hit a near 2 year low as investor confidence continues to wane. Today's action also removes it from the top spot in terms of market cap. The indicators remain weak although bearish momentum is on the decline which could lead to a rebound from or consolidation at current levels. Looking back over the past 3 years the current bearish MACD peak is an extreme, showing underlying weakness in the market and suggesting that lower prices are likely. If the stock is able to mount a rebound I would expect to see today's lows tested before any rally were to develop. The risk is that the company will produce a new innovation or product to rejuvenate market dominance but there is little expectation of that at this time.


The retail sector got hammered again today. Macy's miss yesterday set the tone, today's miss by Kohl's cemented fears. Kohl's reported a miss on earnings and revenue despite the addition of new stores in the quarter, driven primarily by a near -4% decline in comp sales across the company's footprint. Shares of Kohl's fell more than -10% on the news and hit a new low. The XRT Retail SPDR also fell, shedding about -0.25% in a move that is testing support. The indicators are bearish and ticking stronger so further testing of support is very likely. Count in the after hours misses by Nordstrom's and Dillard's, as well as concern over the health of the consumer (mentioned in the Kohl's report) and I think we can expect to see the XRT fall in tomorrow's session. I think I've said this before, certainly no one is talking about it in the media, but the thing weighing down the consumer, the ones who have jobs anyway, is most likely Obamacare. High rates, low coverage and rising healthcare costs are digging into budgets across America.


IPO darling Shake Shak managed to beat EPS projections this quarter. The hamburger seller posted earnings of $0.08 versus the $0.05 consensus projection and was also able to raise full year guidance. Within the report revenue grew more than 43%, same Shak sales rose nearly 10% and the addition of 4 new stores was announced. The news was well received and helped to lift the stock 5% in after hours trading.


The Indices

The indices tried to rebound from yesterday's sell-off but could not muster enough bulls to make or hold significant gains. Today's action was led by the Dow Jones Industrial Average which was the only major index to close in positive territory. Now, positive territory means a gain of only 0.05% so flat is the operative word. The blue chips tested support in today's action, at the short term moving average, but the small doji candle and low trading volume show indecision in the move. The indicators are consistent with a bounce/test of support but remain weak at this time. Both MACD and stochastic are showing signs of rolling over into bullish crossovers but there is no guarantee of that happening. Should the index stage another rebound from this level resistance is just above, near 18,000, and will likely halt any upside providing no bullish catalyst emerges. A break below support could take the index down to the long term up trend line near 17,250.


The next best performer in today's session was the S&P 500 which lost only -0.02%. The broad market also created a small doji candle but one with longer lower shadow than upper, closing just above the short term moving average, showing support along the short term moving average near the 2,060 level. This support may hold, the indicators are consistent with support at current levels, but any upside move will encounter resistance near 2,075. A break above resistance would be bullish in the near term only as next resistance is just above near 2,100, with next target for resistance at the all time high. A break below the short term moving average could take the index as low as the long term up trend line, near 1975 and about 6% below today's closing price, with first target closer to 2,020.


The next best performing index was the NASDAQ Composite which had the additional burden of Apple weighing it down. The tech heavy index fell about -0.5% in today's action, creating a small bodied black candle falling from resistance. Resistance is near my line at 4,785 and compounded by the short term moving average which has been moving lower over the past few weeks. The indicators are mixed; both are bearish but they may be rolling into a bullish signal but with resistance just overhead any upside potential is muted, at best. A break above resistance could take the index up to 4,900 in the near term, a further fall from resistance may find support near 4,650.


The biggest decliner in today's session was the Dow Jones Transportation Average which lost a little more than -1.4%. The transports look the most bearish of all four indices and set a new 2 month low with today's close. The index is moving lower after a test of resistance at the short term moving average and is confirming resistance at 7,750. The indicators are also weak, much weaker than the other major indices, and are moving lower with today's action suggesting that lower prices are still on the way. If the index continues to fall first target for support is 7,500.


For the most part, discounting the transports, today's action appears to be more indecisive than not. Now, taking into consideration Dow Theory and the fact that the transports led us into the correction last year, and led us in the rebound which began in January, today's move is highly suspicious. If the transports continue to move lower the others are likely to follow. I've been growing more and more wary of decline in recent weeks, expecting a pull-back or correction driven by poor and declining earnings outlook, and nothing changed that today.

The long term outlook remains positive, a return to earnings growth is still in the forecast, but another quarter and maybe two of earnings decline is expected before then and that will be hard for the market to handle, especially over the summer. I'm still bullish long term but increasingly bearish in the near, cautious in the short and waiting for the next big bounce.

Until then, remember the trend!

Thomas Hughes


New Plays

Know When to Pass or Fold

by Jim Brown

Click here to email Jim Brown
Editor's Note

Tonight we are going to hold the positions we have and not add any new ones. The S&P futures are down -6.50 on earnings misses after the bell and the Asian markets are selling off. While the futures could reverse before morning, there is no reason to dive into what could be a strong drop at the open.

Anything we would try to short would likely be gapping lower at the open and not the way we want to enter a short position. Any long positions based on Thursday's close could be deep under water at the open.

The mixed markets on Thursday showed there was no conviction in either direction. However, the majority of the indexes were negative after a big decline on Wednesday. That suggests further declines ahead.


NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Investor Confusion

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow declined 90 points intraday but rebounded to close slightly positive thanks to the oil stocks. However, half of the Dow stocks were negative for the day with Apple down more than $2. The Nasdaq recovered half its losses but still closed down -23 points. The S&P came back from an 11 point loss to close flat.

Investors were confused with multiple high profile earnings misses setting the tone for the market early. The six-month high in oil prices at $47 lifted the energy sector and helped to offset the decline in the retail sector.

Dillard's, Kohl's and Nordstrom's all missed on earnings and Nordstrom's was crushed in afterhours trading for more than a 15% loss. This is going to weigh on the markets on Friday and should carry over into next week when Walmart and Target release earnings.

The market direction is still down despite the positive Dow close and the indexes still holding over recent support. That support is going to be tested again.

The support on the S&P is 2,040 and the index closed at 2,064 after trading down to 2,053 intraday. If that 2,040 level breaks it is lights out on any hope for the bulls.




Current Portfolio





Current Position Changes


ENDP - Endo Pharma

The short position was opened with a trade at $13.81.


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


BLMN - Bloomin Brands -
Company Profile

Comments:

No specific news. Minor gain in a weak market.

Original Trade Description: May 9th.

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.

Position 5/10/16:

Long BLMN shares @ $19.71, initial stop loss $18.25.

No option recommendation due to wide spreads.



TRN - Trinity Industries - Company Profile

Comments:

No specific news.

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:

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


ENDP - Endo Intl Plc - Company Description

Comments:

No specific news.

Original Trade Description: May 11th.

Endo develops, manufactures and distributes pharmaceutical products and devices worldwide. The market well known brands including Percocet, Lidoderm, Voltaren and a wide range of pain medications and testosterone replacement therapies.

Shares have declined from $26 last week to $14 today. The company slashed full year guidance by -11% on revenue and -23% on earnings. The acceleration of the decline over the last several weeks has been in reaction to some generic competitors expected to receive approvals from the FDA soon.

The company also disclosed they were being investigated by the U.S. Attorney's Office for its relationship with pharmacy benefit managers or PBMs. In light of the improper relationship between Valeant and Philidor the USAO is investigating to see if the same problems exist at Endo. In November, Novartis had to pay a $390 million fine to settle charges it paid specialty pharmacies for illegal kickbacks in exchange for inducing patients to refill certain medications.

Endo is also under pressure as a result of the Valeant Pharmaceutical disaster and the overall decline in the biotech sector.

Earnings are August 4th.

Even though shares are down significantly from the May 6th news, I believe they will continue falling and could go into single digits. The similarities to Valeant's pharmacy problems and the impact to Valeant's stock are too close and should weigh on Endo.

Position 5/12/16:

Short ENDP shares @ $13.81, initial stop loss $16.45.

Optional

Long June $12.50 put @ $1.05, initial stop loss $16.45.



GPRO - GoPro - Company Profile

Comments:

No specific news. Shares set a new low at 8.79.

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.

Position 5/10/16 with a GPRO trade at $9.65

Short GPRO shares @ $9.65. See portfolio graphic for stop loss.



INSY - Insys Therapeutics - Company Profile

Comments:

No specific news. New intraday low. The Biotech sector was down again and more than the broader markets.

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



SQ - Square - Company Profile

Comments:

Square dropped 4% to a three-month low ahead of Tuesday's IPO lockup expiration.

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 @ 60 cents. No stop loss. (Corrected entry)
Long Jun $11 call @ 55 cents. No stop loss.



XLF - Financial ETF - ETF Profile

Comments:

The ETF is moving sideways in a mixed market. The May option will expire on the 20th.

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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