Option Investor

Daily Newsletter, Monday, 8/25/2014

Table of Contents

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

Market Wrap

S&P 500 Touches 2000

by Thomas Hughes

Click here to email Thomas Hughes
The S&P 500 index crossed 2000 for the first time today, making the 29th new high, without much fanfare or excitement.


After a tentative start in Asia and Europe, US bulls geared up for a march to new highs today. Asian indices were mixed after a weekend of questioning how markets would react to last weeks economic data and speeches made by central bank leaders at the Jackson Hole Conference. European indices were mixed as well, at least in the early part of their trading day. The major EU indices were able to power to new one month highs once they got the signal from US markets the bulls were still in charge. Futures trading indicated that the major US indices would open not only higher, but with some at new highs and the S&P 500 facing the much anticipated 2000 mark. There was no economic data and very little earnings to impact early trading.

The early indication was for the SPX to open about 7 or 8 points above last weeks close but that was soon surpassed. After the open the markets drifted higher for the first 30 minutes until today's economic data was released. Housing data in the form of New Home Sales, released at 10AM, helped to propel the market to the intraday high. After lunch the markets tested near term intraday support before bouncing back up to close near the top of the day's range. The SPX didn't close above 2000 but it is really, really close and did make the 29th new high of the year.

Market Statistics

Absent from the market, again, was news from the Russian/Ukraine front. The aid convoy that entered Ukrainian soil last week did not result in escalations of tensions or violence over the weekend. Neither did other potential hot spots such as ISIS. Both remain as possible influencers of market direction so some caution is still warranted. Eyes and attention is focused on events scheduled for later in the week. The economic calendar is not jam packed but has a few important items on it. Tomorrow Durable Goods orders are expected to rise, primarily on transportation. Along with the durables report will be the Case-Shiller index, housing price index and consumer confidence. Wednesday mortgage index data is followed on Thursday with the usual jobless claims data and the 2nd estimate for 2nd quarter GDP. Current estimates have 2nd quarter GDP in line with the previous estimate of 4.0%. Thursday data wraps up with Pending home sales followed up by a full day on Friday. Two regional gauges of the economy, Chicago PMI and Michigan Sentiment, are accompanied by personal income and spending as well as PCE prices.

Economic Calendar

The Economy

New Home Sales fell -2.4% to a seasonally adjusted rate of 412,000. This is down from last month's revised level and below the expected 427,000. Last month's figure was revised up by 16,000 to 422,000. Of course, this figure is very volatile and comes with a margin of error of +/- 12%. Regardless, sales of new homes on a year to date basis are still trending higher than last year at this time.

According to Mark Zandi and Moody's Survery Of Business Confidence confidence amongst US business has never been higher. Sentiment, as measured by the survey, hit a record high since it's inception in 2003. More than half of participants are positive on the economy going forward while less than 10% have a negative outlook.

The Oil Index

Oil prices were mixed today, WTI lost about $0.40 while North Sea Brent crude gained about a quarter. High storage and increasing supply were balanced today by reports violence across the mid east. Hot spots were flaring in Libya, Iraq and else where but as yet have not impacted production or delivery. The Oil Index rose in today trading, buoyed by the rising tide of stocks and economic trends. The index gained a full percent today, moving up from the short term moving average and setting a new one month high. The index has been consolidating along long term support for over a month and now looks to be moving in line with long term trends. The indicators are bullish and consitent with a rising market with support between 1625 and 1650. There is resistance around 1,700 which could keep the index contained in the near term.

The Gold Index

Gold prices hovered within a dollar or two of last weeks closing prices but fell below $1280. Positive economics and statements from central bank leaders last week have helped to boost the dollar which in turn is putting pressure on gold. This is now the third day that gold prices have traded between $1275 and $1280 with $1275 emerging as near term support. There is still a chance of near term fears to drive prices back up in a knee jerk reaction but long term fundamentals are in support of low, if not lower, gold prices.

The Gold Index fell today as well, dropping below the short term 30 day moving average. The index lost over 1% in today's action and is now testing support along the lower boundary of the support/resistance “zone” the index has been trapped inside the last two months. The current trend, and trend following signal, is down so it looks like a drop below the zone is likely. However, the long term 150 day moving average is just below the zone and could provide some support and there is some evidence of that in the charts over the past 12 months.

I think it will come down as always to gold prices and expectations of gold production. On one hand prices are below levels where I would expect gold companies to be able to increase earnings (based on last quarters average realized prices) based on simple price increases. On the other, if production or sales of reserves from gold companies ramp up in an effort to make more revenue that would depresses gold prices and earnings potential even further. But yet another factor is low oil prices, which will lower all in sustained costs per ounce and increase profit margins.

In The News, Story Stocks and Earnings

Burger King hit the news this morning. Not for earnings but for merger and specifically a potential tax inversion. Burger King Worldwide has put in an offer for Canada based Tim Horton, a chain of coffee and donut restaurants. The deal would effectively lower the tax rate for US based BKW but is not the only reason for the offer. One sign of this is a lack of clause giving BKW an out if anti-inversion legislation were to move forward. Analysts see good for both companies in the deal as it would give Burger King a better position in the breakfast/coffee niche and open Tim Hortons up to a whole new level of business. Shares of both companies shot up by more than 20% on an intraday basis.

Burger King

Tim Horton's

Earnings season is just about over for this cycle but there are still 10 S&P 500 companies left to report. As an example of the earnings doldrums we are in today there were only 12 reports and less than 75 for the entire week. According to FactSet out of the 490 S&P companies that have reported so far 74% of them have increased EPS and 66% have increased sales. This is an improvement over last week for both figures. So far for the quarter earnings growth is 7.7%, nearly 3% higher than the 4.9% expected at the end of last quarter. Leading sectors for earnings growth include telecom, health care, consumer discretionary and materials with telecoms and financials at the top of the expected list for the current quarter. Also looking forward to the current quarter NVIDIA has the greatest upward change in expectation for Q3 based on a trailing 10 week time frame.

Shares of NVIDIA traded up today but not significantly. The price action today was tame and over the past 6 months choppy/sideways at best. Pulling out to a longer term chart of weekly prices we can see that the stock is trading beneath a long term resistance after trending up the past 18 months (Nov '12 to the present). The stock is showing support along the long term 150 day EMA which is coincident with several areas of bullish activity over the past 18 months. The chart doesn't look particularly bullish right now but long term buyers could keep pushing the stock up against resistance and if earnings play out as expected or better could produce a break out. The company reported EPS of $0.25 for the past quarter and is expected to report again November 11th. NVIDIA is a computer technology firm focusing on a full suite of 3D technologies for home, business and industry.

NVIDIA Weekly Prices

Goldman Sachs reported late Friday that it had reached an agreement with the FHFA on soured mortgages it had sold to Fannie Mae and Freddie Mac. The agreement has Goldman repurchasing the residential mortgage backed securities for $3.15 billion with reserves set aside for such a purpose. Shares of the stock gained close to 2% in today's session, the first since the announcement, but was halted at resistance set this past February. The indicators are bullish and pointing higher at this time but are not yet strong enough to suggest a break to new highs is developing.


The VIX has been trending lower since hitting its Russian induced peak three weeks ago. The volatility index traded down today but formed a spinning top, neither bullish or bearish, as traders await the rest of what the week will bring. The index is now below the 12.50 level and the range of the “new normal” in volatility. While being the new now, I will point out that these are the levels at which the VIX traded years before the housing bubble built up and burst, and that was back when the market was still in the secular bear range. The indicators now are bearish although momentum may be waning. Based on past performance I am expecting the VIX to drift lower, or at least below 12.50, unless and until the next brick in the wall of worry emerges, which very well may be Russia again.

The Indices

Trading was light and basically uneventful today even as the SPX flirted with 2000. At the open the rally was very broad, about 95% of S&P companies were in the green. By the end of the day that had tamed a little to about 80% but there were still more advancing stocks that declining. The SPX gained 0.48% in today's session, about 10 points, closing just shy of 2000 after trading above it for a few hours this morning. The index is still drifting higher following the long term trend bounce and trend following signals but the volume has yet to return to the market. The light volume is a concern but should return sooner rather than later. The indicators are still bullish though momentum gains may have stalled. Near term support is just below the current level in the range from 1950 up to 2000 with the long term trend line down around 1,900. Near term risks include geopolitics and economic data but the trends are still up so I am not expecting any negative surprises right now. Geopolitics are harder to predict. Without any bearish catalysts the market could continue to drift higher, even without increased volume. And, now that the index looks set to cross 2,000 it could bring some traders back into the market. In the end 2,000 is nothing more than a psychological round number; the trend is up and the signal is up, now it's time to wait and see what everybody else is going to do.

The Dow Jones Industrial Average led today's rally, closing with a gain of 0.49%. The blue chip average gained just over 75 points today, coming just short of a new all time intraday high. This index is also moving higher following a long term signal and is currently indicated higher. The momentum is bullish and increased with today's candle stick while stochastic continues to trend higher. Stochastic is closing in on the upper signal line, where a crossover would indicate underlying strength in the index. Both indicators are in line with the underlying bull trend in the index and pointing to higher prices. A failure to break above the current all time high could result in the index trading within the current range between 16,500 and 17,100 until further evidence is revealed.

The NASDAQ Composite drifted higher in today's trade, gaining 0.41%. The tech heavy index climbed 18.80 points to create another spinning top and another new 14.5 year high. Today's candle, and those of the last few trading days, looks to me like a market that is moving higher on the underlying trend but just not sure it is going up. The indicators are both bullish, the momentum is strong and stochastic has crossed the upper signal line. If this break out to new highs is valid and holds up it could take the index up to 5000 based on the height of the March-April correction and ensuing consolidation. Current support exists just below the current level at the previous 14.5 year high just below 4,500.

The Dow Jones Transportation Average was today's laggard. The transports gained only 0.29% compared to the near half percent gained by the others. The transports gained just over 24 points today, creating the fifth in a series of spinning tops forming just under the resistance of current all time highs set last month. The index is in mid bounce, from a long term trend line, and is accompanied by bullish indicators. Momentum has tapered off a bit while the index has been in indecision but remains strong while stochastic is also confirming strength. There is still the resistance of the current all time high but it looks like the transports could push to a new high. Low oil prices will surely help this index.

Today was very uneventful when you consider what has been going on in the world and the markets of late. In the nearest terms Russia, Ukraine and Iraq have been playing tug of war with better than expected earnings while rising but uncertain economic trends dominate the long term. Today nearly none of the near term strife was present in the market. The Ukraine/Russia conflict was absent from headlines and Iraq barely had a mention. Earnings season is basically over leaving the economic trends to hold sway.

There wasn't a lot of data released today either but that really isn't a bad thing. The market had time to take a breather and while doing so drifted up and touched all time high levels. There are still near term risks, geopolitics number one in my book, but until they rear their ugly heads the market is drifting up on the tide. Tomorrow the week will heat up with the release of durable goods orders and consumer confidence so be on the lookout. Until then, remember the trend!

Thomas Hughes

New Option Plays

A Well-Oiled Machine

by James Brown

Click here to email James Brown


O'Reilly Automotive - ORLY - close: 156.96 change: +1.54

Stop Loss: 151.49
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 626 thousand
Entry on August -- at $---.--
Listed on August 25, 2014
Time Frame: 6 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The U.S. economy is slowly improving. We are seeing slow but consistent job growth. Yet consumers remain cautious. While there has been a healthy trend of new car sales this year most consumers are keeping their old cars. Of the 247 million cars in the U.S. the average age is at a record high. Passenger cars have hit an average age of 11.4 years while light trucks are at 11.3. If consumers are keeping their cars this long that is going to mean more replacement parts and repairs. That has been good news for the auto part companies.

ORLY is one such company. According to their company website, "O'Reilly Automotive, Inc. is one of the largest specialty retailers of automotive aftermarket parts, tools, supplies, equipment, and accessories in the United States, serving both professional service providers and do-it-yourself customers. Founded in 1957 by the O'Reilly family, the Company operated 4,257 stores in 42 states as of June 30, 2014."

One analysts on Wall Street called ORLY a "well-oiled machine." It's easy to see why. The company has delivered four years of consistent double-digit earnings growth. Steady same-store sales are impressive considering the tough retail environment we've seen over the last few years. The company's margins are expected to grow over the next 12-18 months. ORLY is on track to open 200 new stores in 2014. They have also boosted their stock buyback program. On August 13th ORLY announced an additional $500 million, which bumps their total stock repurchase program to $4.5 billion.

Technically shares have been consistently bouncing off their long-term trend of higher lows (on the weekly chart below). ORLY did spent the last few months consolidating sideways but it has started to breakout past resistance. This is our chance to hop on board. A rally past $158.00 could create a new point & figure chart buy signal.

Tonight we are suggesting a trigger to buy calls at $157.50. We're listing the October $160 call. You may want to consider a longer-dated option (like the Novembers or 2015 Januarys).

Trigger @ $157.50

- Suggested Positions -

Buy the Oct $160 call (ORLY141018C160) current ask $2.50

Option Format: symbol-year-month-day-call-strike

Annotated Chart:

Weekly Chart:

In Play Updates and Reviews

Stocks Up As S&P 500 Tags 2,000

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 index traded above 2,000 for the first time in history. The large cap index pared its gains but it was a bullish day overall.

IYT and PANW were closed this morning.

SLB and SPY hit our triggers.

Current Portfolio:

CALL Play Updates

BioMarin Pharmaceutical Inc. - BMRN - close: 70.89 change: +0.73

Stop Loss: 65.75
Target(s): To Be Determined
Current Option Gain/Loss: +56.8%
Average Daily Volume = 1.26 million
Entry on August 14 at $66.55
Listed on August 11, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

08/25/14: BMRN is starting the new week off on a strong note. Shares added +1.0% versus the +0.4% in the NASDAQ.

Earlier Comments: August 11, 2014:
BMRN is in the healthcare sector, specifically the biotech industry. According to the company's press release they "develop and commercialize innovative biopharmaceuticals for serious diseases and medical conditions. The company's product portfolio comprises five approved products and multiple clinical and pre-clinical product candidates."

The company's strategy is "providing first-in-class or best-in-class treatments for patients with serious unmet medical needs, optimizing powerful biology with demonstrated potential and development clarity, accelerating approval process, strategic pipeline development."

BMRN's current product portfolio looks like this: VIMIZIM™ for Morquio A syndrome (MPS IVA), Naglazyme® for MPS VI, Aldurazyme® for MPS I, Firdapse™ (currently approved in the EU only) for LEMS, KUVAN® Tablets for PKU.

BMRN lists their current clinical pipeline as follows: PEG PAL for PKU, BMN 673 for genetically defined cancers, BMN 701 for Pompe disease, BMN 111 for achondroplasia, BMN 190 for late-infantile neuronal ceroid lipofuscinosis (CLN2), a form of Batten Disease, BMN 270 for hemophilia A and BMN 250 for Sanfilippo Syndrome or MPS IIIB.

The company is developing a trend of beating Wall Street's earnings estimates. Back in February they reported results that bested analysts' estimates by a wide margin. They did it again in May. Wall Street was looking for a loss of 44 cents on revenues of $145.1 million. BMRN reported a loss of just 1 cent with revenues rising +18.5% to $151.6 million. Their most recent earnings report was July 30th. Analysts were expecting a loss of 41 cents on revenues of $159.2 million. BMRN announced a loss of 23 cents with revenues soaring +40.1% to $191.7 million. Furthermore BMRN management raised their 2014 guidance following the July 30th report.

The stock peaked back in February this year. When the market corrected in March most of the high-growth and momentum names were crushed. BMRN was in that group that saw their stock hammered lower. Shares fell from almost $85 to $55.00. Fortunately the $55.00 level has been solid support. Shares have been building a significant base in the $55-65 zone for over three months.

Currently the rebound from its July lows is pushing the stock up against major resistance in the $65.00-66.00 area. This is where BMRN has resistance with its simple 200-dma and its trend line of lower highs. If the stock breaks out it could spark a significant move higher.

Tonight we're suggesting a trigger to buy calls at $66.55. We're not listing an exit target tonight but I will share that the point & figure chart is bullish with a $77.00 target.

- Suggested Positions -

Long Oct $70 call (BMRN141018C70) entry $2.55*

08/23/14 new stop @ 65.75
08/20/14 new stop @ 64.75
08/14/14 triggered @ 66.55
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Concur Technologies - CNQR - close: 99.86 change: -0.60

Stop Loss: 96.90
Target(s): To Be Determined
Current Option Gain/Loss: -22.7%
Average Daily Volume = 576 thousand
Entry on August 19 at $100.50
Listed on August 16, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

08/25/14: CNQR slipped under the $100 level but traders bought the dip near its 10-dma. Investors may want to wait for a dip closer to $98.00 before considering new positions.

Earlier Comments: August 16, 2014:
CNQR is in the technology sector. The company provides travel and expensive management solutions. The company was founded back in 1993. Their focus is helping companies control travel costs. The business has been growing over 23,000 customers and over 25 million users.

The company press release describes Concur as "the leading provider of spend management solutions and services in the world, helping companies of all sizes transform the way they manage spend so they can focus on what matters most. Through Concur's open platform, the entire travel and expense ecosystem of customers, suppliers, and developers can access and extend Concur's T&E cloud. Concur's systems adapt to individual employee preferences and scale to meet the needs of companies from small to large."

There is no denying that it has been a rocky year for CNQR investors. The stock struggled with resistance near $130.00 for over a month earlier this year. When the momentum names corrected lower in March shares of CNQR were crushed. The stock produced a two-month retreat down to $75.00.

Meanwhile earnings continued to improve. When CNQR reported earnings on April 29th they beat estimates by six cents and guided higher for the second quarter. Their most recent earnings report was August 4th. Wall Street expected a profit of $0.16 on revenues of $175.1 million. CNQR delivered a profit of $0.25 with revenues rising +28.6% to $178.4 million. Management also raised their 2014 guidance.

Stocks analysts are starting to notice and a few of them have upgraded their price targets on CNQR into the $110-115 region. If shares of CNQR can breakout past resistance near $100 and its 200-dma then it might sprint towards $110. That's because the stock has a significant chunk of short interest.

The most recent data listed short interest at 12.2% of the relatively small 55.5 million share float. Since the $100 mark is significant resistance a breakout could definitely spark some short covering. The point & figure chart is already bullish and projecting at $108 target.

Tonight we are suggesting a trigger to buy calls at $100.50.

- Suggested Positions -

Long NOV $105 call (CNQR141122C105) entry $5.05*

08/19/14 triggered @ 100.50
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

CVS Caremark Corp. - CVS - close: 79.21 change: -0.03

Stop Loss: 77.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 4.1 million
Entry on August -- at $---.--
Listed on August 19, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

08/25/14: Monday was another quiet day for CVS. The stock is consolidating sideways under resistance at $80.00. Our suggested entry point is $80.25.

Earlier Comments: August 19, 2014:
Where can a company lose $2 billion in annual sales, voluntarily, and be rewarded for it? Evidently the answer is CVS Caremark Corp. Back in February 2014 the company announced they would stop selling cigarettes in all of their 7,700 stores by October this year. That accounted for $2 billion in sales a year. Management felt selling cigarettes didn't line up with the company's mission - to help people with their health.

It makes sense. About 480,000 people die from smoking every year in the United States. 16 million people already have at least one disease from smoking. Investors may have been concerned initially but CVS' most recent earnings report should remove any worries. CVS is focusing on building out their MinuteClinic busniess, their specialty pharmacy services, and capturing their share of the millions of new healthcare members through Obamacare. It seems to be working. CVS' MinuteClinic sees four million visitors a year. The company has 64 million pharmacy benefit plan members.

According to a company press release, "CVS Caremark is dedicated to helping people on their path to better health as the largest integrated pharmacy company in the United States. Through the Company's more than 7,700 retail pharmacy stores; its leading pharmacy benefit manager serving nearly 65 million plan members; and its retail health clinic system, the largest in the nation with more than 860 MinuteClinic locations, it is a market leader in mail order, retail and specialty pharmacy, retail clinics, and Medicare Part D Prescription Drug Plans. As a pharmacy innovation company, CVS Caremark continually strives to improve health and lower costs by developing new approaches such as its unique Pharmacy Advisor program that helps people with chronic diseases such as diabetes obtain and stay on their medications.

CVS is in a good position if you consider the demographics of the U.S. Right now there are 10,000 people a day turning 65 years old. An older population needs more healthcare services and more prescriptions. CVS plans to capitalize on this growing trend.

The company's most recent earnings report was August 5th. Analysts were expecting a profit of $1.10 a share on revenues of $33.52 billion. CVS reported earnings of $1.13 a share. That beat estimates and represents +16.5% growth from a year ago. Revenues were up +11% to $34.6 billion. Same-store sales in the second quarter were +3.3%, which beat rival Walgreen's (WAG) +2.2% growth. CVS management sees this bullish momentum continuing and raised their 2014 earnings guidance.

In their earnings press release CVS was pretty optimistic:

President and Chief Executive Officer Larry Merlo stated, "I'm extremely pleased with our strong performance this quarter. With Adjusted EPS increasing 16.5%, we came in two cents above the high end of our expectations. This was fueled by solid results across the enterprise, as both the PBM and retail businesses exceeded revenue expectations while delivering strong gross margins. Operating profit in the PBM increased 30%, exceeding expectations, while operating profit in the retail business grew 6.5%, at the high end of our expectations." Mr. Merlo continued, "Additionally, we have generated significant free cash flow through the first half of this year. Between dividends and share repurchases, we have returned $2.6 billion to our shareholders year-to-date, and remain on track to achieve our goal of returning more than $5 billion in 2014."

Following this earnings report Wall Street applauded. Several firms updated their outlook on the stock. Many were raising their CVS price targets in the $85, $86 and $88 range. The point & figure chart is a lot more optimistic and currently forecasting a $102.00 target.

Currently shares of CVS are hovering just below resistance at $80.00. We are suggesting a trigger to buy calls at $80.25.

Trigger @ $80.25

- Suggested Positions -

Buy the NOV $80 call (CVS141122C80)

Option Format: symbol-year-month-day-call-strike

Expedia Inc. - EXPE - close: 87.80 change: +0.74

Stop Loss: 83.95
Target(s): To Be Determined
Current Option Gain/Loss: + 0.0%
Average Daily Volume = 2.3 million
Entry on August 18 at $86.25
Listed on August 16, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

08/25/14: EXPE continued to push higher and added +0.8% on Monday. Traders may want to adjust their stop loss higher.

Earlier Comments: August 16, 2014:
EXPE is in the services sector. The company is in the super competitive online travel industry with rivals like Priceline.com (PCLN) and Orbitz Worldwide (OWW).

EXPE is developing a serious trend of beating analysts' estimates with strong profit and revenue growth. EXPE last reported earnings on July 31st. Analysts were expecting a profit of $0.75 a share on revenues of $1.44 billion. EXPE blew those numbers away with a profit of $1.03 a share. Revenues soared +24.0% to $1.49 billion. That's up from $1.2 billion the prior quarter. EXPE has now delivered double-digit year over year revenue growth for six quarters in a row.

EXPE's bookings continue to soar. Gross bookings were up +29%. Domestic gross bookings were up +35% and international gross bookings rose +21%. Both hotel revenues and air travel revenues were up more than +20% each.

Last time we traded EXPE we noted that Billionaire hedge fund manager David Tepper's Appaloosa Management is also bullish on EXPE. The latest 13F filing showed that Appaloosa had initiated a new stake in EXPE in the first quarter of 2014. In the second quarter Appaloosa added another 201,000 shares of EXPE.

The stock popped on its earnings results but have since spent the last two weeks digesting gains in a sideways consolidation. Now it looks like EXPE is poised to breakout and could make a run towards the $95-$100 area. The point & figure chart is bullish and forecasting at $105 target.

Tonight we are suggesting a trigger to buy calls at $86.25.

- Suggested Positions -

Long NOV $90 call (EXPE141122C90) entry $4.40

08/23/14 new stop @ 83.95
08/18/14 triggered @ 86.25
Option Format: symbol-year-month-day-call-strike

Gilead Sciences, Inc. - GILD - close: 107.45 change: +3.49

Stop Loss: 102.85
Target(s): To Be Determined
Current Option Gain/Loss: +256.7%
Average Daily Volume = 14.1 million
Entry on July 29 at $92.25
Listed on July 28, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

08/25/14: Biotechs were showing relative strength following more M&A news in the space. Swiss drugmaker Roche is buying InterMune (ITMN) for $8.3 billion. This boosted a lot of the high profile biotech names. The BTK biotech index surged +4.0%. Shares of GILD helped lead the pack with a +3.3% gain and another record high.

More conservative traders may want to take profits soon. We are raising our stop loss to $102.85. I am not suggesting new positions at this time.

Earlier Comments: July 28, 2014:
GILD seems to be everyone's favorite biotech stock. I only hear bullish opinions about the future of the company, and for good reason. They have some pretty amazing treatments with products for HIV/AIDS, liver diseases, oncology, cardiovascular, respiratory, and more. GILD has essentially revolutionized how we treat major diseases like HIV and Hepatitis C.

According to the company website, "Gilead Sciences, Inc. is a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need. We strive to transform and simplify care for people with life-threatening illnesses around the world. Gilead's portfolio of products and pipeline of investigational drugs includes treatments for HIV/AIDS, liver diseases, cancer and inflammation, and serious respiratory and cardiovascular conditions."

This year everyone has been raving over GILD's hepatitis C treatment called Sovaldi. Hepatitis C is a form of viral hepatitis that causes chronic inflammation of the liver. About 185 million people currently suffer with hepatitis C. Previously the most common treatment for hepatitis C had serious side effects and was less than 50% successful. GILD changed that with their Sovaldi drug that not only treats the symptoms but actually cures the patient. The company has drawn some negative publicity over the cost since GILD charges $84,000 for a 12-week course of Sovaldi in the United States. The fact that 80% to 90% of patients who take Sovaldi are cured is a major milestone.

The Financial Times noted that before Sovaldi the impact of hepatitis C in the U.S. took a heavy toll on the healthcare system. The disease can lead to liver failure and cancer, both of which cost significantly more than Sovaldi's $84,000 price target. Hepatitis C is the leading cause for liver transplants in the U.S., which can cost a minimum of $145,000. One consulting firm estimated that the annual cost of hepatitis C to the U.S. healthcare system was going to surge from $30 billion to $85 billion in the next twenty years. Sovaldi has the potential to change. that.

Stocks move on earnings and GILD has plenty of them. They company last reported on July 23rd. Wall Street was expecting a profit of $1.80 a share on revenues of $5.86 billion for the second quarter. GILD delivered a profit of $2.36 a share with revenues soaring +136% to $6.53 billion. Last quarter Sovaldi accounted for $3.5 billion in sales. Management issued bullish guidance on revenues and margins.

GILD has also had good news with both the FDA and the European Committee for Medicinal Products for Human Use approving GILD's Zydelig treatment for chronic lymphocytic leukemia and follicular lymphoma. The European committee's decision will now be sent to the full European Commission and if approved will open up Zydelig to all 28 countries in the EU.

The outlook is pretty bullish for GILD. Traders just bought the dip and shares closed at all-time highs. Today's intraday high was $91.73. We are suggesting a trigger to buy calls at $92.25. We are not setting an exit target tonight but I will point out the point & figure chart is bullish with a $106.00 target. I am concerned that the $100.00 level could be temporary resistance for GILD. We'll have to wait and see.

- Suggested Positions -

Long Oct $95 call (GILD141018C95) entry $3.70*

08/25/14 new stop @ 102.85
08/23/14 new stop at $99.95
08/16/14 new stop @ 93.45
Investors will want to seriously consider taking profits now with GILD testing potential resistance at the $100.00 mark.
08/14/14 new stop @ 89.95
Investors may want to consider taking money off the table as GILD nears the $99-100 zone.
07/29/14 triggered @ 92.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

LyondellBasell Industries - LYB - close: 112.95 change: +0.81

Stop Loss: 108.75
Target(s): To Be Determined
Current Option Gain/Loss: +36.0%
Average Daily Volume = 2.5 million
Entry on August 15 at $110.50
Listed on August 04, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

08/25/14: LYB shot higher this morning and traded above $113.50 before paring its gains. Shares still managed to outperform the major indices with a +0.7% gain.

Earlier Comments: August 4, 2014:
One way to play the shale-gas boom in the U.S. is plastics. The bloom of natural gas production has been a huge blessing for LYB. According to the company's website, "We participate in the entire petrochemical value chain, from refining to specialized petrochemical product end uses. We are the largest producer of polypropylene and polypropylene compounds; a leading producer of propylene oxide, polyethylene, ethylene and propylene; a global leader in polyolefins technology; and a producer of refined products, including biofuels. Additionally, LyondellBasell is a leading provider of technology licenses and a supplier of catalysts for polyolefin production."

The recent spike in LYB's stock price was a reaction to better than expected earnings results. Wall Street was looking for LYB to deliver a profit of $1.93 a share on revenues of $11.5 billion. LYB surpassed expectations with a profit of $2.22 a share with revenues rising +9.1% to $12.12 billion.

The stock has been an earnings machine with rising earnings the last four years in a row. Analysts are now estimating LYB will see earnings rise 11% in 2014 and 16% in 2015. Jefferies recently raised their price target on LYB from $120 to $125 as they upgraded their EPS estimates on the company.

After a strong rally from $100 to $110 in mid July the stock was short-term overbought and due for a pullback. Traders jumped in to buy the dip near LYB's simple 10-dma last week. Now LYB is rebounding higher.

More aggressive traders may want to buy the bounce today. We are suggesting a trigger to buy calls at $110.50 since the July high is $110.38.

FYI: For more background on the LYB story Forbes.com has a great article that you might find interest. You can read it here.

- Suggested Positions -

Long DEC $115 call (LYB141220C115) entry $2.50*

08/23/14 new stop at $108.75
08/15/14 triggered @ 110.50
*option entry price is an estimate since the option did not trade at the time our play was opened.
08/14/14 adjust the stop loss to $107.40 (trade not open yet)
08/14/14 LYB almost hit our trigger but failed at $110.49
Option Format: symbol-year-month-day-call-strike

Schlumberger Limited - SLB - close: 110.22 change: +1.19

Stop Loss: 107.45
Target(s): To Be Determined
Current Option Gain/Loss: -5.5%
Average Daily Volume = 5.5 million
Entry on August 25 at $110.50
Listed on August 20, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

08/25/14: We have been waiting for SLB to breakout past resistance near $110.00. The plan was to buy calls at $110.50. Shares traded just high enough to hit $110.50 before paring its gains. Our trade is open but readers may want to wait for a rally past $110.50 before initiating positions.

Earlier Comments: August 20, 2014:
Consistent earnings growth is what investors like to see. SLB has done it eleven quarters in a row. The company is considered best in breed for the oil services industry. This past weekend Barron's ran a story on SLB and suggested the stock has +50% upside (or more) from current levels. That's because SLB has made several acquisitions in North America and is now a major player in the U.S. hydraulic fracking boom.

According to the company's website, "Schlumberger is the world's leading supplier of technology, integrated project management and information solutions to customers working in the oil and gas industry worldwide. Employing approximately 126,000 people representing over 140 nationalities and working in more than 85 countries, Schlumberger provides the industry's widest range of products and services from exploration through production."

As mentioned above SLB has beaten Wall Street's bottom line earnings estimates eleven quarters in a row. Their most recent earnings report was July 17th. Analysts were expecting a profit of $1.35 a share on revenues of $11.95 billion. The company reported a profit of $1.37 a share, up +19% from a year ago, with revenues up +7.8% to $12.05 billion for the quarter.

Management noted margin improvement. SLB said every geographic area saw growth. On the conference call SLB's CEO said, "Our second quarter results were strong and fully in line with our expectations as international activity rebounded in Russia, Norway and Australia and North American activity grew in both offshore in the U.S. Gulf of Mexico and on land in spite of the Canadian spring breakup."

Looking ahead the company issued a mixed outlook. Management said, "Turning our focus back to the remaining part of 2014, we continue to see a relatively constant mix of headwinds and tailwinds in the global economy and in our industry, which leads us to maintain our already established outlook for the year. The slow and steady recovery in the global economy is continuing and the global oil market remains relatively tight with a solid demand outlook, continued supply uncertainty related to geopolitics and with Brent prices holding steady above $100 per barrel, which should encourage oil directed investments in both the North American and international markets."

Their relatively cautious outlook and falling oil prices in the last several weeks have sparked some profit taking in SLB's stock price. The pullback could be a significant entry point. Long-term SLB is forecasting almost +20% earnings (compound annual growth rate) through 2017.

Wall Street has been very bullish the last couple of months. Several firms have upgraded their price targets on SLB with a few recent upgrades coming in at $132, $138, $140 and $150 a share for SLB.

SLB did make headlines earlier this month regarding Russia. The U.S. and the EU have leveled sanctions against Russia. This is impacting international companies like SLB who do business in Russia and with Russian companies. Fortunately, SLB estimates that any impact from the sanctions will be limited. Management expects a decline of 3 cents per share due to the sanctions. Wall Street hates uncertainty so having SLB actually come out and offer some guidance on the sanctions impact is bullish.

Another potential challenge could be Iraq. SLB does a lot of business in Iraq but most of the oil production is in southern Iraq. Right now the hot zones with fighting between ISIS, the Iraq military and the Kurds, are all in the northern half of Iraq. As long as the violence stays in the northern half of Iraq then the Islamic State terrorists are unlikely to impact SLB's operations in the country.

Shares of SLB hit all-time highs in late June. Since then the stock experienced a six-week correction from $118 to $105. That's a -11% pullback. The stock has begun to bounce and looks poised to break through resistance near $110. Tonight we are suggesting a trigger at $110.55. More conservative investors may want to wait for SLB to rally past its 50-dma before initiating positions (50-dma is currently at $111.30).

- Suggested Positions -

Long NOV $115 call (SLB141122C115) entry $2.00

08/25/14 triggered @ 110.50
Option Format: symbol-year-month-day-call-strike

U.S. Silica Holdings, Inc. - SLCA - close: 66.40 change: +1.90

Stop Loss: 59.45
Target(s): To Be Determined
Current Option Gain/Loss: +38.0%
Average Daily Volume = 1.42 million
Entry on August 19 at $62.05
Listed on August 13, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

08/25/14: SLCA continues to race higher. Shares outpaced the market with a +2.9% surge to new highs.

Investors may want to adjust their stop higher again.

Earlier Comments: August 13, 2014:
We are bringing SLCA back after some post-earnings volatility.

There is a new gold rush going on for sand! America's shale oil and gas boom has created another boom for sand producers. Energy companies use hydraulic fracking to mine oil and gas out of tight shale formations. This fracking technique blasts millions of gallons of water at high pressure into shale rock where the oil and gas is trapped. These wells can cost between $4 million and $12 million each. In order to maximize their returns drillers use proppants to help "prop" open these minute cracks in the shale rock to help the oil and gas escape to the surface.

The cheapest and one of the most effective proppants has been fine sand. SLCA has been providing sand for industrial use for over 100 years. The company currently has 297 million tons in reserve. Oil and gas industry demand for proppants is expected to rise +30% between 2013 and 2016. That might be underestimated. The energy industry consumed 56.3 billion pounds of sand for fracking in 2013. That's up 25% from 2011.

According to SLCA they saw a +45% increase in demand for their sand. SLCA's CEO reported that some hydraulic fracking wells have doubled their use of sand from 2,500 tons per well to 5,000 tons. There are some wells using up to 8,000 tons.

Demand has been so strong that SLCA is actually sold out of some grades of sand and they're raising prices (about +20%) on non-contracted silica. SLCA believes demand for their products will rise another 25% this year alone.

Wall Street has taken notice of the dynamics of the sand industry and shares of SLCA have soared from their February 2014 lows. It may not be a coincidence that the stock was added to the S&P 600 smallcap index in February this year.

SLCA's most recent earnings report was July 29th. Wall Street expected a profit of $0.47 a shares on revenues of $189.7 million. SLCA beat estimates with a profit of $0.55 and revenues soaring +58.5% from a year ago to $205.8 million.

The company said sales were up sharply both from a year ago and from the first quarter. Management raised its 2014 earnings guidance.

Currently shares of SLCA are hovering just below resistance in the $61.75 area. Tonight we're suggesting a trigger to buy calls at $62.05. We are not setting an exit target tonight but Point & Figure chart for SLCA is bullish with a $69 target.

- Suggested Positions -

Long DEC $65 call (SLCA141220C65) entry $4.20*

08/23/14 new stop at $59.45
08/19/14 triggered @ 62.05
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

United Rentals, Inc. - URI - close: 117.98 change: +0.75

Stop Loss: 109.45
Target(s): To Be Determined
Current Option Gain/Loss: +8.9%
Average Daily Volume = 1.0 million
Entry on August 19 at $115.25
Listed on August 18, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

08/25/14: The rally in URI continues with a +0.6% gain on Monday. The stock traded above $119 intraday. The $120.00 level might be round-number resistance. I am not suggesting new positions at this time.

Earlier Comments: August 18, 2014:
URI is a company that is gaining market share. Traditionally equipment rental has been a very fragmented industry with a lot of mom and pop stores. URI has decided that being the biggest offers a better selection to their clients. Today URI is the biggest equipment rental company in the world.

Twenty years ago commercial construction clients only accounted for about 15% of the equipment rental market. Today that number is closer to 50%. The last few years have seen a strong trend of construction companies choosing to rent equipment instead of buy new equipment due to an uncertain economic outlook.

According to URI's website they were founded in 1997 and have grown into a network of 832 rental locations in 49 states and 10 Canadian provinces. Their rental fleet includes 3,100 classes of equipment.

Earnings are improving. URI's most recent earnings report was July 16th. Wall Street was looking for a profit of $1.50 a share on revenues of $1.36 billion. URI delivered $1.65 a share with revenues hitting $1.399 billion. URI's earnings results were up +47% from a year ago. Margins hit a second quarter record at 47.4%. URI management then raised their 2014 guidance.

In URI's earnings press release their CEO offered a bullish outlook:

Michael Kneeland, chief executive officer of United Rentals, said, "Our strong performance in the quarter reflects significantly more equipment on rent at better margins than a year ago, resulting in a new high water mark for second quarter EBITDA margin. The rebound in non-residential construction is continuing to drive up demand, particularly in the energy and commercial sectors. Given the vigorous activity we're seeing, and the benefit of secular penetration, we've raised our full year outlook - and we concur with the forecasts that show multiple years of healthy industry growth beyond 2014."

URI said their rental revenue was up +16.8% for the quarter. They're also see super growth in their specialty segment. Their trench safety rentals were up +21%. Their power and HVAC rentals were up +54%. URI purchased National Pump on April 1st this year. Now they've renamed it United Rentals Pump Solutions and they're using it as an opportunity to cross sell pumps to their broader customer base.

URI is also on track with their stock buyback program. In October 2013 they announced at $500 million repurchase program that's expected to be completed by April 2015. Thus far URI has bought back $228 million in common stock this year ($185 million of that was in the second quarter).

Technically the post-earnings depression for URI is over. Traders bought the dip near its long-term up trend of higher lows. Now URI is testing resistance at its all-time highs and resistance at the $115.00 level.

We are suggesting a trigger to buy calls at $115.25.

- Suggested Positions -

Long DEC $120 call (URI141220C120) entry $5.60*

08/19/14 triggered @ 115.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

PUT Play Updates

Pentair Plc - PNR - close: 69.89 change: +0.49

Stop Loss: 70.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 2.0 million
Entry on August -- at $---.--
Listed on August 23, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

08/25/14: The stock market's widespread gains on Monday helped buoy shares of PNR. I do not see any changes from the weekend newsletter's new play description below:

Earlier Comments: August 23, 2014:
Pentair is considered part of the industrial goods sector. They manufacture industrial equipment across the globe. According to the company website, "Pentair is a global water, fluid, thermal management, and equipment protection partner with industry leading products, services, and solutions. Pentair reports the performance of its business within four reporting segments that focus on five primary verticals."

Long-term the stock has had a strong 2012 and 2013 performance. The rally appears to have peaked in 2014 when the market started pulling back in March this year. If you recall many of the momentum names and higher-growth stocks were hammered lower starting in March. PNR doesn't really qualify as a big momentum name or a high-growth name but shares have been unable to recover anyway. Shares have trended lower from the March peak, currently down -16% from its 2014 highs and down -10.6% year to date.

PNR's earnings results have not helped the stock's performance. Back in April they beat estimates but missed the revenue number and then guided lower for the second quarter. Their most recent earnings report was July 31st. Depending whose estimate you use PNR either reported in-line profits or managed to just beat by a penny. Revenues disappointed again. PNR missed the revenue estimate with a -2.7% decline from a year ago to $1.91 billion. Management lowered guidance again but they also announced they were exiting their struggling water transport business.

PNR collapsed on this late July earnings news and lowered guidance with a drop toward $64. Shares have spent three weeks with an oversold bounce that is just now starting to roll over under resistance. PNR appears to have resistance near $70-71 and its 50-dma and 300-dma (see daily chart below). The point & figure chart is bearish and currently forecasting at $61 target.

Tonight we are suggesting a trigger to buy puts at $68.90.

Trigger @ 68.90

- Suggested Positions -

Buy the Nov $70 PUT (PNR141122P70) current ask $3.30

Option Format: symbol-year-month-day-call-strike

SPDR S&P 500 ETF - SPY - close: 200.20 change: +1.01

Stop Loss: 202.25
Target(s): To Be Determined
Current Option Gain/Loss: +3.2%
Average Daily Volume = 99 million
Entry on August 25 at $200.14
Listed on August 23, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

08/25/14: Stocks surged out of the gate this morning. The SPY gapped open higher above potential resistance at the $200 level. Our plan was to buy puts when the SPY traded at $199.95. Thus our trade began with the opening gap higher at $200.14.

We would still consider new positions while more conservative investors may want to wait for a drop under today's low ($199.86) as a new entry point.

Earlier Comments: August 23, 2014:
The U.S. stock market has delivered one of the longest bull markets in recent history and it's still going. The large cap index has gone more than 1,050 days without a normal -10% correction. Typically the market sees a correction about twice a year. What are the chances that tagging major milestone might spark some sell orders?

The S&P 500 is currently at all-time highs but the 2,000 mark might be major round-number, psychological resistance. It would not surprise us to see the index tag 2,000 and then retreat.

Tonight we're suggesting a trigger to buy puts on the S&P 500 ETF (SPY) at $199.95. We'll start this trade with a stop loss at $202.25.

(NOTE: We picked the normal September $199 puts that expire on the 20th. The current open interest is over 43,000.)

- Suggested Positions -

Long Sept. $199 PUT (SPY140920P199) entry $1.84

08/25/14 triggered on gap higher at $200.14, suggested entry was $199.95
Option Format: symbol-year-month-day-call-strike


Transportation ETF - IYT - close: 151.62 change: +0.53

Stop Loss: 144.75
Target(s): To Be Determined
Current Option Gain/Loss: +36.9%
Average Daily Volume = 276 thousand
Entry on August 11 at $146.03
Listed on August 09, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

08/25/14: The IYT had rallied to resistance near its July highs and stalled. Our plan was to exit positions on Monday morning at the opening bell. The IYT was kind enough to gap open higher at $152.05.

- Suggested Positions -

2015 Jan $150 call (IYT150117C150) entry $4.60 exit 6.30* (+36.9%)

08/25/14 planned exit this morning
*option exit price is an estimate since the option did not trade at the time our play was closed.
08/23/14 prepare to exit on Monday morning
08/20/14 new stop @ 144.75
08/11/14 trade begins. IYT gaps higher at $146.03
Option Format: symbol-year-month-day-call-strike


Palo Alto Networks, Inc. - PANW - close: 84.57 change: -0.44

Stop Loss: 79.90
Target(s): To Be Determined
Current Option Gain/Loss: +39.0%
Average Daily Volume = 1.3 million
Entry on August 04 at $80.50
Listed on July 30, 2014
Time Frame: Exit PRIOR to earnings on Sept. 9th
New Positions: see below

08/25/14: PANW has not been performing well the last couple of weeks. We decided in the weekend newsletter to exit this trade on Monday morning. Shares produced a minor gap higher from $85.01 to $85.78 at the open for us to exit.

- Suggested Positions -

SEP $85 (PANW140920C85) entry $3.20* exit $4.45** (+39.0%)

08/25/14 planned exit this morning.
**option exit price is an estimate since the option did not trade at the time our play was closed.
08/23/14 prepare to exit on Monday morning
08/13/14 new stop @ 79.90
08/04/14 triggered @ 80.50
*option entry price is an estimate since the option did not trade at the time our play was opened.
08/02/14 Strategy update: Move the entry trigger from $84.55 to $80.50 and move the stop loss from $79.65 to $76.75.
Adjust the option strike from Sep $90 call to Sep $85 call
Option Format: symbol-year-month-day-call-strike