The S&P gains another 5 points in low volume as the markets appear to be moving slowly higher, point by point. Investors and traders are probably waiting for the debate to be over and the ECB announcement on Thursday before they start making commitments for the normal end of October rally. Fund managers do not want to invest in big positions only to have a presidential candidate come out against that sector tonight. After the debate, they will be more confident of the market direction and their stock selection.
The biotech index was down another 1% today on worries Clinton could restate her plans on lower drug pricing tonight. That kept the Nasdaq and Russell 2000 from making any significant gains. The Nasdaq 100 was actually negative for the day as large cap tech stocks retreated slightly.
Jim, I'm curious about what you showed as credit rec'd when closing the PANW Bull Call spread. You're showing a cost when opened of $4.90 and a credit when closed of 3.28. I opened my trade on 10/10 for 4.80 cost & closed trade on 10/17 at $146.80 for a credit of only $1.45 (simu-trade on OptionsXpress).
Confused about why such a big difference on the credit rec'd from your table figure & my results ?? Thanks, Dennis
Dennis, thanks for the question. I get my entry/exit numbers from the bid/ask second by second in the Time and Sales screen on Qcharts. Sometimes they do not reflect the actual values traders would get because the T&S does not cover all markets or individual broker inventories. If somebody like Fidelity has dozens of people with pending orders at various prices to buy and somebody puts in a sell, they can fill the order out of their own inventory of buyers and it never makes it to an exchange. I would think on the PANW spread that would not have been the case.
The bottom line is that there can be a wide variety of bid/ask quotes on thinly traded, high volatility options. The numbers I use in the newsletter are the exact bid and ask at the exact time the stop losses are hit. That does not mean options were actually traded at that second. Many readers use the stop losses only as a guide and they may not actually close the position for several minutes or even hours but the T&S bid/ask is the closest to a perfect system I can get. I know simu-trade claims the quotes are real time. Have you ever checked that against a true real time feed elsewhere? I know a lot of virtual trading systems are actually delayed slightly because they are the lowest priority in the brokers system. Actual trading activity has priority and virtual trading occurs as time permits which can be several minutes behind.
Also, the actual quotes can vary significantly between exchanges. Many broker systems offer the options of routing your trades to specific exchanges rather than take the luck of the draw when your order is filled. Many brokers are paid for order flow by the exchanges. As an example, if the broker has an order agreement with exchange XYZ, that means the broker will route all their option orders to that exchange unless the trader has specified a particular exchange in their order. That can be very dangerous to traders unaware of the practice.
The Time and Sales listing below is from the open today on the PANW Dec $165 call. Note in just the first five seconds of trading that the best ask price was listed from $3.20 to as high as $6.00 depending on the exchange. If two traders put in market orders to buy that option at the open each could have received a very different price. As a rule of thumb, I highly recommend that everyone direct their orders to the CBOE.
Note that on the ISE alone there was a difference in price from $3.30 to $6.00 in just ONE SECOND. That is the difference in a potentially profitable trade and a big loss.
When I select the prices used in the newsletter, I use the CBOE prices. However, because of the comments above, traders actually placing the orders can and often do receive fills that are different (in both directions) than the quoted prices. Sometimes you will get a better fill because there are anomalies in the system. A broker that uses the "best price" system to fill orders across all exchanges could receive a better price than the CBOE price. If your broker does not use a "best available price" system, then direct your orders to the CBOE.
While I am on this subject of prices, if you have the capability of placing conditional orders where you can specify more than one condition, it is helpful to add the condition of time. For instance, many positions are stopped out at the open because of a gap up or down. The opening prices for those options are going to be very high/low because the options market has not had time to react and the market maker is going to protect himself by expanding the spreads. Once the market is open and options have traded, the fair price will appear.
One option would be to place your stop loss order as a conditional order. For example: "If ABC stock is less than the stop price AND the time is greater than 9:35 am, then sell the option at market." That five-minute window gives the prices time to settle from the outrageous prices at the open. You can adjust that time as you see fit. Normally 1 minute is enough but on highly volatile stocks with thinly traded options it is better to use 2-5 min.
In the T&S example above it only took 50 seconds for the options to normalize and by 9:31 AM the bid/ask spread was $2.55/$3.10 and far different than the opening prices.
I hope this helps everyone. If you have questions about anything, just email me and I will answer them here.
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.
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
SWHC - Smith & Wesson
The long call position was opened at $26.28.
XBI - Biotech ETF
The long call recommendation has been cancelled.
If you are looking for a different type of option strategy, try these newsletters:
Credit spreads and naked puts = OptionWriter
Long term option investments = LEAPS Investor
3-6 month Option Trades = Ultimate Investor
Iron Condors = Couch Potato Trader
Long and short equity trades = Premier Investor
BULLISH Play Updates
COST - Costco - Company Profile
Northcoast upgraded from neutral to buy. The retail sector is still moving sideways. Citigroup said the Costco branded Visa cards were a giant success. In the first full quarter consumers charged more than $28 billion and more than 70% was charged at retailers other than Costco. More than 12 million Costco accounts were converted from American Express to the Costco branded Citigroup Visa. Over the last quarter they signed up another 800,000 accounts through Costco stores.
Original Trade Description: October 4th.
Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. The company offers branded and private-label products in a range of merchandise categories. It provides dry and institutionally packaged foods; snack foods, candy, tobacco, alcoholic and nonalcoholic beverages, and cleaning and institutional supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio; meat, bakery, deli, and produce; and apparel and small appliances. The company also operates gas stations, pharmacies, food courts, optical dispensing centers, photo processing centers, and hearing-aid centers; and engages in the travel business. In addition, it provides gold star (individual) and business membership services. As of October 29, 2015, it operated 690 warehouses. Company description from FinViz.com.
Costco reported earnings last week of $1.77 compared to estimates for $1.73. Revenue of $36.56 billion barely missed estimates for $36.81 billion. Same store sales, excluding gasoline, rose 2% in the USA, +5% in Canada and +1% internationally. Overall sales rose +3%.
For the full year same store sales were up +4%. Membership fees rose from $785 million to $832 million. The company said some of its increased profitability came from the lower fees it was paying to Visa compared to the prior payments to American Express. There were initial problems in the conversion and some customers were angered leading to weaker sales in the prior two quarters. That is now over and customers are coming back.
The earnings were Friday and shares spiked to $154 on the news. Post earnings depression appeared along with a weak market over the last two days. I believe Costco will rebound into Black Friday because this is the strongest quarter. They typically sink into the September earnings and then rally into December.
The plan is to buy calls now and exit around Black Friday. The December calls are cheap and any rally should lift the stock back to $160-$165. I am not putting a stop loss on this position because of the potential for market volatility over the next two weeks.
Long Dec $155 call @ $2.76, no stop loss.
DISH - Dish Networks - Company Profile
Dish Networks Sling TV announced deals to add NHL Network and the Hallmark channel and Hallmark Movies and Mysteries to its service. Shares closed at a new nine-month high.
Original Trade Description: October 3rd.
DISH Network Corporation provides pay-TV services in the United States. The company operates through two segments, DISH and Wireless. The company provides video services under the DISH brand. It also offers programming packages that include programming through national broadcast networks, local broadcast networks, and national and regional cable networks, as well as regional and specialty sports channels, premium movie channels, and Latino and international programming. In addition, the company provides access to movies and TV shows via TV or Internet-connected tablets, smartphones, and computers; and dishanywhere.com and mobile applications for smartphones and tablets to view authorized content, search program listings, and remotely control certain features. Further, it offers Sling TV services that require an Internet connection and are available on streaming-capable devices, including TVs, tablets, computers, game consoles, and smart phones primarily to consumers who do not subscribe to traditional satellite and cable pay-TV services. Additionally, the company operates Sling International that offers over 200 channels in 18 languages; and Sling domestic package that consists over 20 channels and tiers of programming, including sports, kids, movies, world news, lifestyle and Spanish language, and premium content, such as HBO. Further, it offers Sling Latino service; and satellite broadband services, wireline voice, and broadband services under the dishNET brand. Additionally, the company has wireless spectrum licenses and related assets. As of December 31, 2015, it had 13.897 million Pay-TV subscribers. Company description from FinViz.com.
Dish is gaining a significant number of views in the millennial generation that either have never had a cable subscription or cannot stand paying the monthly cable bills for what they believe should be free TV. They are also developing a large audience of Latino viewers with their various Spanish language channels. They also offer 18 other languages and more than 200 channels.
In early September, they gained the rights to about 800 sporting events offered by the six PAC 12 networks. Millennial's love to watch sports, especially when it is free or nearly free.
The online Sling TV offering is gaining market share with its skinny bundles including channel packages like HBO and Starz.
Over the last month the consensus earnings estimates for the current quarter have risen from 63 cents to 68 cents. Full year estimates have risen from $2.92 to $3.05.
Earnings Nov 7th.
Since they signed the sports deal on September 12th the stock has been in rally mode. Shares are closing in on resistance from June at $56.50 and should easily break through. The next resistance is in the $65 range.
Long Nov $57.50 call @ $2.43, see portfolio graphic for stop loss.
HON - Honeywell - Company Profile
No specific news. Minor gain on a couple of PSA announcements.
Original Trade Description: October 15th.
Honeywell International Inc. operates as a diversified technology and manufacturing company worldwide. Its Aerospace segment offers aircraft engines, integrated avionics, systems and service solutions, and related products and services for aircraft manufacturers and operators, airlines, military services, and defense and space contractors, as well as spare parts, and repair and maintenance services for the aftermarket. This segment also provides auxiliary power units; propulsion engines; environmental control, connectivity, electric power, flight safety, communication, navigation, radar, surveillance, and thermal systems; engine controls; aircraft lighting products, as well as wheels and brakes; advanced systems and instruments; and turbochargers, as well as management, technical, logistics, repair, and overhaul services to original equipment manufacturers in the air transport, regional, business, and general aviation aircraft; and automotive and truck manufacturers. The company's Home and Building Technologies segment offers environmental and energy, security and fire, and building solutions. Its Safety and Productivity Solutions segment provides sensing and productivity Solutions, and industrial safety products. Its Performance Materials and Technologies segment provides catalysts and adsorbents; equipment and consulting services for the petroleum refining, gas processing, petrochemical, and other industries; and automation control, instrumentation, software, and services for the oil and gas, refining, pulp and paper, industrial power generation, chemicals and petrochemicals, biofuels, life sciences, metals, minerals, and mining industries. Company description from FinViz.com.
On Oct 7th, Honeywell shares collapsed from $116 to $105 after the CEO warned that profits would be below guidance and they lowered guidance for the rest of 2016. The CFO said on the conference call, "In the third quarter, we continued to see slow growth across much of our portfolio." Declines in the emerging markets and the oil industry have crimped demand for business aircraft and helicopters, hurting Honeywell's unit that sells jet engines, cockpit controls and aerospace parts.
The company preannounced earnings of $1.60 compared to prior guidance of $1.67-$1.72. For the full year they lowered their forecast by 6 cents to $6.64 per share. The company is in the middle of a reorganization process that will increase profits in the future.
After the stock was crushed by the warning, the CEO appeared on CNBC and said the warning was not received in the way he thought it would be. "I gave credit for people understanding what our long-term profile was. I was wrong. I could have done a significantly better job of communicating this story. We tried to do it in the context of 2017 is going to be good, but it seemed to get totally lost" in the headlines.
The CEO went on to explain that the hiccup in Q3 was minor in the bigger picture given the businesses they just sold in September and the organizational restructuring currently in progress. They only cut full year earnings by 6 cents and will still produce earnings of $6.64 or better. Also the changes in progress will allow Honeywell to grow earnings by 10% or more in 2017. That adds another 66 cents or more to an already robust earnings picture.
He said he was "astounded by the reaction" to the minor cut in earnings. He went on to say that while the business jet business was lagging, the aerospace business was still doing well and should not have been lumped into the warning. He also said the energy business had bottomed in Q3 and would be improving in Q4.
Basically the CEO took a giant step by going on CNBC and saying he was wrong in how the lowered earnings estimates were portrayed and he did a good job of explaining that the weakness was much narrower than presented and the outlook for 2017 was outstanding.
Shares spiked on the news but faded slightly into the close as the market faded. Their formal earnings will be on Oct 21st and I am sure they will take great pains to present a rosy picture.
I am recommending a December call to get us through what is normally the best six weeks in the market. We will hold over those Oct 21st earnings.
Long Dec $110 call @ $2.51, see portfolio graphic for stop loss.
IDCC - Interdigital - Company Profile
No specific news. Shares have rebounded back to resistance.
Original Trade Description: September 7th.
InterDigital, Inc. designs and develops technologies that enable and enhance wireless communications in the United States and internationally. It offers technology solutions for use in digital cellular and wireless products and networks, such as 2G, 3G, 4G, and IEEE 802-related products and networks. The company develops cellular technologies comprising technologies related to CDMA, TDMA, OFDM/OFDMA, and MIMO for use in 2G, 3G, and 4G wireless networks and mobile terminal devices; and other wireless technologies related to Wi-Fi, WLAN, WMAN, and WRAN. Its patented technologies are used in various products, including mobile devices, such as cellular phones, tablets, notebook computers, and wireless personal digital assistants; wireless infrastructure equipment comprising base stations; and components, dongles, and modules for wireless devices. As of December 31, 2015, it had a portfolio of approximately 20,400 patents and patent applications related to the fundamental technologies that enable wireless communications. Company description from FinViz.com.
IDCC does not make the equipment that uses its designs and patents. They lease those patents to other companies for annual royalty payments based on the volume of devices sold. This is a very lucrative business because they do not have the cost of production or the risk any specific product will not sell in the marketplace.
For Q2 they reported earnings of 48 cents that beat estimates for 26 cents. Revenue of $75.9 million was $300,000 short of estimates. They received an arbitration award of roughly $150 million from Huawei in the quarter that will be reported as income in Q3. They also announced a new multi-year patent agreement with Huawei for 3G and 4G units. They ended Q2 with $814 million in cash.
Update 9/8/16: The company issued revenue guidance for Q3 of $220-$225 million. This compares to Q2 revenue of $75.9 million. Quarterly revenues are volatile because they receive royalties on new products when shipped. For instance, a royalty on the iPhone 7 would show a monster jump in Q4 compared to minimal revenue in Q3.
Update 9/28/16: In a study done by the EU Commission and IDCC they found the cost of rolling out 5G in all 28 EU member states could reach 56 bullion euros by 2020 and 141.8 billion annually by 2025. That is a huge amount of money that will be flowing into a hand full of companies including IDCC. The 5G standard is seen as 50 Mbps everywhere compared to the current 5-20 Mbps.
Earnings Oct 27th.
IDCC is a member of the S&P-400 MidCap index.
Position 9/27/16 with an IDCC trade at $78.65
Long Nov $80 call @ $2.90, see portfolio graphic for stop loss.
QQQ - Powershares QQQ ETF - ETF Profile
No material movement with the $NDX down -3 points.
Original Trade Description: October 17th.
PowerShares QQQ, formerly known as "QQQ" or the "NASDAQ- 100 Index Tracking Stock", is an exchange-traded fund based on the Nasdaq-100 Index. The Fund will, under most circumstances, consist of all of stocks in the Index. The Index includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization.
The QQQ dipped to support at $116 on Thursday. Shares rebounded in the Friday short squeeze but closed at the lows for the day. On Monday the ETF faded with the market ahead of earnings from IBM and Netflix. After the Netflix earnings, the QQQ traded up slightly in afterhours.
Of all the companies reporting over the next couple weeks the tech sector has the best chance of posting positive earnings. That should make the Nasdaq/QQQ a little stronger than the broader market.
While there is no guarantee the market will follow traditional seasonal trends, Monday was the first day of the six best weeks of Q4 in normal years. End of fiscal year window dressing by funds occurs between now and the year end on October 31st. There is a possibility the election could damage this normal seasonal cycle if portfolio managers are too confused to know how to invest depending on which candidate wins Wednesday's debate.
If that is the case, the most likely action will be for managers to throw all their excess cash into big cap tech stocks as a way to be fully invested but also have limited risk. They can exit those positions quickly once we are in November.
This is a play on the expected relative strength of big cap tech stocks over the next six weeks.
Position 10/18/16 with a QQQ trade at $117.50
Long Dec $119 call @ $2.54. See portfolio graphic for stop loss.
SWHC - Smith & Wesson - Company Profile
No specific news. Gun stores are starting to advertise their "Pre Hillary" sales. Link
Original Trade Description: October 18th.
Smith & Wesson Holding Corporation manufactures and sells firearm products and accessories. The company operates in two segments, Firearms and Accessories. It offers handguns, including revolvers and pistols; long guns, such as sporting, bolt action, and single shot rifles; hunting rifles; black powder firearms; handcuffs and restraints; and firearm-related products and accessories. The company also provides accessories, such as reloading, gunsmithing tools, gun cleaning supplies, tree saws, shooting and field rests, gun vises, hearing protection, ammo tumblers, and vault accessories. It sells its products under the Smith & Wesson, M&P, Thompson/Center Arms, Caldwell Shooting Supplies, Wheeler Engineering, Tipton Gun Cleaning Supplies, Frankford Arsenal Reloading Tools, Lockdown Vault Accessories, Hooyman Premium Tree Saws, BOG-POD, and Golden Rod Moisture Control brands. In addition, the company engages in selling parts of other brands; operates a private law enforcement training facility. It serves gun enthusiasts; collectors; hunters; sportsmen; competitive shooters; individuals desiring home and personal protection; law enforcement and security agencies and officers; and military agencies. The company markets products through independent dealers, large retailers, in-store retail channels, and range operations utilizing consumer-focused product marketing and promotional campaigns; social and electronic media; and in-store retail merchandising systems and strategies. It also operates Websites; and online retail stores that sells hunting and shooting accessories, branded products, apparel, and related shooting supplies. Company description from FinViz.com.
I have written about Clintons potential attacks on firearms and gun owners multiple times. She has pledged to issue an executive order implementing various types of gun control in her first 100 days in office. She has also vowed to nominate antigun judges to the Supreme Court in an effort to rewrite firearms laws as cases are presented to the court. She wants to restrict purchases, eliminate concealed carry, close gun shows, eliminate quantity purchases of ammo and ban modern sporting rifles, etc.
Since Clinton surged in the polls on Trump's Access Hollywood comments, gun manufacturers shares have found a bottom and begun to rise again. The closer we get to the election the more the firearms issues will be in the press. If she is elected there will be a flood of purchasers rushing to acquire guns before she can issue her executive order.
Earnings December 1st.
I am going out to January on this option and if she is elected, we will hold over the December earnings because guidance should be off the chart.
Long Jan $28 call @ $1.35, no initial stop because of low price.
WOR - Worthington Industries - Company Profile
No specific news. Shaes posted a decent gain today and back to resistance.
Original Trade Description: October 12th.
Worthington Industries is a leading global diversified metals manufacturing company with 2016 fiscal year sales of $2.8 billion. Headquartered in Columbus, Ohio, Worthington is North America's premier value-added steel processor providing customers with wide ranging capabilities, products and services for a variety of markets including automotive, construction and agriculture; a global leader in manufacturing pressure cylinders for industrial gas and cryogenic applications, CNG and LNG storage, Cryogenic transportation and storage and alternative fuel tanks, oil and gas equipment, and consumer products for camping, grilling, hand torch solutions and helium balloon kits; and a manufacturer of operator cabs for heavy mobile industrial equipment; laser welded blanks for light weighting applications; automotive racking solutions; and through joint ventures, complete ceiling grid solutions; automotive tooling and stampings; and steel framing for commercial construction. Worthington employs approximately 10,000 people and operates 80 facilities in 11 countries.
Worthington is a "value added" steel processing company. To put that into english it means they take steel and form it into products they can sell. They do not make the steel, they just turn it into something useful. Between 2009 and 2015 they acquired 18 companies, each with a special niche in the market, in order to broaden their product offerings and increase the size of their customer base.
As steel prices strengthen, the products Worthington makes will become more valuable and their product margins will increase. In a commodity market where the raw material is cheap, every product made from that material is also under price pressures. The growth in global auto sales is good for Worthington as is the growth in the aircraft industry, ship building, energy, construction and manufacturing of all types that requires steel parts.
In their recent quarterly earnings they reported $1.03 per share and easily beating estimates for 77 cents. Revenue declined -3% to $737.5 million and missed estimates for $742.8 million. They blamed the weaker revenue on the weak oil and gas sector. Shares spiked 8% on the news despite the revenue miss.
Earnings Dec 28th.
Shares have moved sideways with a minor uptrend bias since the Sept 28th earnings spike. After two weeks of consolidation, they should be ready to start a new leg higher, market permitting.
Long Dec $50 call @ $2.05, see portfolio graphic for stop loss.
XBI - Biotech ETF - ETF Profile
Biotechs are fading again. Apparently, the worry over a potential Clinton election are overcoming the short term rebound. I am cancelling the recommendation.
Original Trade Description: October 13th.
The SPDR S&P Biotech ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Biotechnology Select Industry Index.
The XBI traded up to $69 in late September and has since crashed back to support at $60 as various biotech stocks released data on drug trials that were not successful, were involved in drug pricing schemes or simply issued a profit warning as was the case with Illumina.
The three weeks of headlines over the EpiPen pricing disaster pushed all the drugs stocks lower on worries of drug price controls. The Theranos disaster and the closing of their labs weighed on the sector even though Theranos was not a public company.
Comments from Clinton about drug pricing concerns also caused investors to flee some drug company stocks.
With the XBI now -13% off its September high and all of those factors baked somewhat into the market, it may be time to place a bet on a biotech rebound. New drugs are announced every week and old diseases are cured or at least made tolerable.
I know it is hard to buy a stock in free fall but this may be the right point. The $60 level is support from June and August. The 100-day average is currently $60.37. This appears to be a good spot to place a bet.
Other traders may have felt the same way today. The XBI posted a minor gain in a bad market and the opening dip to $60.50 was only a drop of 75 cents and it was quickly erased before 10:15.
Not posting a material decline when the Dow was down -185 and the Nasdaq was down -70 is a sign of good relative strength.
If we are wrong about the support at the $60 level, we will stop out quickly and look for a retest of the next support level at $50. I am going to put an entry trigger on it just in case the market gaps down again on Friday.
BEARISH Play Updates (Alpha by Symbol)
MBLY - Mobileye - Company Profile
No specific news. Minor rebound from new 3-month low on Tuesday.
Original Trade Description: September 27th.
Mobileye N.V., together with its subsidiaries, develops computer vision and machine learning, data analysis, and localization and mapping for advanced driver assistance systems and autonomous driving technologies primarily in Israel. It operates through two segments, Original Equipment Manufacturing and After Market. The company offers Roadbook, a localized drivable paths and visual landmarks using its proprietary REM technology through crowd sourcing; and proprietary software algorithms and EyeQ chips that perform detailed interpretations of the visual field to anticipate possible collisions with other vehicles, pedestrians, cyclists, animals, debris, and other obstacles. Its products also detect roadway markings, such as lanes and road boundaries, as well as barriers and related items; and identify and read traffic signs, directional signs, and traffic lights. In addition, the company provides enhanced cruise control, pre-lighting of brake lights, and Bluetooth connectivity, as well as related smartphone application. It serves original equipment manufacturers, tier 1 system integrators, fleets and fleet management systems providers, insurance companies, leasing companies, and others through distributors and resellers. Mobileye N.V. was founded in 1999. Company description from FinViz.com.
Mobileye was kicked to the curb by Tesla because their camera technology was not precise enough and was subject to errors from things like lightning flash, rain storms, fog and oncoming headlights. Analysts claim the location accuracy needs to be within 1.5 centimeters or about 0.6 inches. While I do not understand the need to be precise to within half an inch I would expect that to be on near objects with the size miss widening if the objects are farther away. For instance, a rifle bullet that misses the target by half an inch at 10 feet would be 15 inches off target at 100 yards. When your car is traveling at 60 mph any miss of that size could be an immediate challenge as in a car coming towards you in two-way traffic.
Tesla also said they were hard to work with because the company demanded all the sensor data received from their cameras could only be used by Mobileye. That would be like Intel claiming all the data on your PC belonged to them because the PC had an Intel processor.
Multiple car manufacturers including Tesla, Ford and Volvo have now moved away from Mobileye technology. The company replacing them is Nvidia with their Drive PX2 technology. Uber is now using an off the shelf camera that costs only $1 and image processing is done in the onboard computer.
Trip Chowdhry of Global Equities Research said the stock is worth $10 today but remains hyper inflated because it was an early leader in the mobile technology. He expects the stock to collapse within 6-8 months as more investors realize the company is being left behind.
Earnings Nov 3rd.
Shares have been falling from their high of $50 as the heated words between Tesla and Mobileye increase. When Mobileye learned it was being replaced they tried to stop Tesla from developing their own system and immediately halted any support for previously installed systems.
Update 10/13/16: Deutsche Bank questioned the technology used by Mobileye and others after recent announcements on falling costs. DB suggested the sharp drop in cost for technology offered by other vendors could weigh on future Mobileye sales.
Long Nov $40 put @ $2.08, see portfolio graphic for stop loss.
NKE - Nike Inc - Company Profile
No specific news.
Original Trade Description: October 10th.
NIKE, Inc., designs, develops, markets, and sells athletic footwear, apparel, equipment, and accessories worldwide. It offers products in nine categories, including running, NIKE basketball, the Jordan brand, football, men's training, women's training, action sports, sportswear, and golf. The company also markets products designed for kids, as well as for other athletic and recreational uses, such as cricket, lacrosse, tennis, volleyball, wrestling, walking, and outdoor activities. In addition, it sells sports apparel; and markets apparel with licensed college and professional team and league logos. Further, the company sells a line of performance equipment, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment, golf clubs, and other equipment under the NIKE brand name for sports activities; various plastic products to other manufacturers; athletic and casual footwear, apparel, and accessories under the Jumpman trademark; action sports and youth lifestyle apparel and accessories under the Hurley trademark; and casual sneakers, apparel, and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron, and Jack Purcell trademarks. Additionally, it licenses agreements that permit unaffiliated parties to manufacture and sell apparel, digital devices, and applications and other equipment for sports activities under NIKE-owned trademarks. The company sells its products to footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops, and other retail accounts through NIKE-owned retail stores and Internet Websites (direct to consumer operations), as well as independent distributors and licensees. Company description from FinViz.com.
Nike is fading fast as revenue growth slows. Previously growth had been over constantly over 10% but that has not happened in the last few quarters. Revenue growth in Q1 was 5%, Q2 4%, Q3 8%, Q4 6% and Q1 is estimated to be 8%. Another challenge is currency issues. Only 42.5% of revenue comes from the U.S. meaning 57.5% comes from overseas where currency fluctuations are costing Nike 6-8% per quarter.
Nike had been targeting $50 billion in annual revenue but quarterly numbers are not growing that fast. In the last quarter Nike had revenue of $8.4 billion. With five quarters of revenue well under $10 billion each they are going to have to push their $50 billion target well out into the future to somewhere in the 2020 range.
Under Armour, Skechers and Adidas are stealing market share with Adidas on a fast track with recent market share gains.
When Sports Authority went out of business, it was a big problem for Nike. They lost money on receivables and had to take back a lot of inventory. In addition they lost 450 retail locations that were heavily subsidized by Nike.
I expect Nike shares to continue declining until sales begin to grow again.
Earnings December 27th.
Long Dec $50 put @ $1.05, no initial stop loss.
VXX - VIX Futures ETF - Company Profile
This is a long-term position and I will not be commenting on it on a daily basis. There is no news on the VXX since it is not a company.
Original Trade Description: September 21st.
The VXX is a short-term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.
As evidence of this flaw, they have now down four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.
After the August split the ETF moved sideways for four weeks at $36. The volatility event on Sept 9th with the Dow falling -2.5% spiked the VXX from $33 to $42 in three days. That bounce has faded and it is almost back at $33. You are probably thinking, the $40 level would have been a good entry point and you are right in hindsight. However, with the market in danger of breaking down if the Fed had hiked rates, it was better to wait. Now there is nothing on the horizon to cause a spike other than normal market movement.
This is going to be a long-term position. I am not putting a stop loss on the position because long term the VXX always goes down. If we get another volatility spike we will buy another position at a higher level and then ride them both back down.
The market typically rises in late October and into the Thanksgiving weekend. A rising market reduces volatility.
I thought about using a spread to reduce the out of pocket costs. However, that means the strikes have to be relatively close together for the short strike to have any premium. Since the VXX could decline 10 points or more before December, that would limit our potential return to 3-4 points in a spread. However, if we do get a big decline we can spread out at much lower level to further increase our gains.
Long Dec $33 Put @ $4.20. No stop loss.
YHOO - Yahoo - Company Profile
No specific news. Lots of conflicting opinions over whether Verizon can back out of the Yahoo deal or not. Verizon has earnings on Thursday before the open so we could get some news from them about the deal.
Original Trade Description: October 15th.
Yahoo! Inc., provides search and display advertising services on Yahoo properties and affiliate sites worldwide. The company offers Yahoo Search that serves as a guide for users to discover information on the Internet; Yahoo Mail, which connects users to the people and content; and Yahoo Messenger, an instant messaging service, which enables users to connect, communicate, and share experiences in real-time. It also provides digital content products, including Yahoo News, which gives users to discover, consume, and engage around the news, content, and video; Yahoo Sports, which serves audiences of sports enthusiasts; Yahoo Finance that offers a range of financial data, information, and tools; Yahoo Lifestyle to engage users passionate about style and fashion; and Tumblr, which provides a Web platform and mobile applications on iOS and android to create, share, and curate content, as well as Tumblr messaging that enables users to engage with other users that share their same interests and passions. Company description from FinViz.com.
After a lengthy process Yahoo agreed to be bought by Verizon for $4.8 billion. However, after the deal was done, Yahoo announced it had a serious cyberattack with data from over 500 million users stolen. This was not told to the potential buyers during the bidding process. The bidders were told there had been various attacks over the years but it was presented as a routine event that all online websites have to fight.
When it was disclosed a couple months ago that the attack happened in 2014 and involved more than 500 million accounts, that caused Verizon to take a second look and they are currently trying to decide on whether to back out of the deal or offer something significantly less. There are multiple class action suits against Yahoo for not guarding customer information. With 500 million accounts, even a $20 per account fine or settlement would cost them $10 billion and more than twice what Verizon agreed to pay. The announcement of the attack constitutes a material adverse change or MAC that allows Verizon to walk with no penalty.
On Friday, Yahoo announced they were not going to hold a conference call or the normal webcast of the earnings after the close on Tuesday because of the intense discussions with Verizon.
I view the odds of a Verizon backing out of the deal as very high. They were already paying about $1 billion more than the next highest offer. Now they are faced with potentially inheriting a $10 billion problem if they conclude the deal. Even if it was only $5 billion or even $2 billion, it makes the deal very uneconomical.
If Verizon walks, Yahoo shares will return to $30 or lower very quickly because nobody else is going to step up and assume that liability either. It would mean Yahoo will have to go it alone and the stock could be trashed.
Update 10/18/16: Yahoo reported revenue that fell -14% to $857 million. This is the fourth consecutive quarter that revenue has fallen more than 10%. They beat on earnings with 17 cents compared to estimates for 11 cents but did it on major cost cutting with the termination of 2,200 employees or one-fifth of its workforce. Verizon signaled last week it was reconsidering the acquisition because of the damage from the cyber attack. The decision to complete the deal or back out should be made over the next 2-3 weeks. Yahoo did not hold a conference call in order to avoid having to answer questions that might stir up more objections by Verizon.
This is a speculative position. We do not know what is going to happen or in what time frame. Do not enter this position with money you cannot afford to lose.
Long Jan $40 put @ $1.90. No stop loss.
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