Option Investor

Daily Newsletter, Tuesday, 2/3/2015

Table of Contents

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

Market Wrap

Thank Oil for the Rally

by Jim Brown

Click here to email Jim Brown

Crude oil prices rallied +24% over the last four days from $43.58 to a high of $54.24 intraday today. This caused better than 10% gains in many of the oversold energy stocks and helped power the Dow to a +305 gain. You have to love short squeezes!

Market Statistics

There is no bell to signify bottoms and tops. We never know when severely oversold or overbought will begin to reverse and everyone who was riding the trend find themselves on the wrong side of the trade. When the trend is lengthy as it was in the oil price decline the mindset is established and everyone begins forecasting lower lows. Just last week hedge funds cut their long positions in crude futures to multi-month lows and increased their bearish positions back to recent highs. Talk about a bad move, they increased bearish positions at the exact bottom of the market and the short covering has been brutal.

WTI has rallied $10.56 or +24% since Thursday's lows at $43.58 to today's high at $54.24. Brent rallied from $48.29 to $59 at today's high. While these moves should not last without some serious profit taking I seriously doubt we will see the lows again. The sector damage was severe and like every move in oil it always over shoots. In declines we always fall well below what the fundamentals support and on rallies to new highs the same is always true.

The bulls are being encouraged by the historical trends. Oil prices have fallen more than 50% only five times in the last 30 years and each time there was a 50% rebound over the next six months. If that trend continues we should see prices in the $75 range by late summer.

I wrote in the weekend commentary that the downdraft at the end of January was to be expected since traders were dumping losing positions to close out a losing month. Also, I expected a positive bias for the first two days of the week as month end retirement contributions were put to work. I did not expect a +629 point Dow move from Monday's low at 17,037. The Dow only lost -507 points last week and it has already erased that loss in only two days. The spike at the close today is typical of a capitulation event for the shorts. The opening gap today was huge and the market traded flat at the 17,500 level for 4 hours. When there was no selling by 1:PM the remaining shorts who were hoping for an afternoon fade finally begin pulling the exit trigger.

The S&P futures were down more than -5 late Monday night and the crude futures were responsible for reversing that decline. Crude rose almost $2 overnight and that reversed the S&P futures to positive.

The opening spike on the Dow was blunted by the Factory Orders report for December that came out at 10:AM. New orders fell -3.4% and the fifth consecutive monthly decline. This followed a -1.7% decline in November and -0.7% in October. The rate of decline is obviously accelerating as the dollar continued to hit new highs. Core capital orders have fallen -10.6% over the last three months. Defense orders declined -7.9% and inventories fell -0.3% for the first decline in six months.

Nondurables goods orders declined -3.4% and durable goods declined -3.3%. Backorders declined from +0.2% to -0.8% and the first time in contraction since March 2013. This was not a bullish report. Actually it was pretty bearish. In the chart below you can clearly see that orders are at two-year lows. This is not a growth economy.

Moody's Factory Orders Chart

On the positive side auto sales for January came in at an annualized rate of 16.7 million and well over estimates for 16.2 million. Sales of light trucks and SUVs rose from 8.8 million to 9.1 million while sales of cars declined from 8.1 million to 7.5 million. Clearly the low gasoline prices are having a big impact on what cars people are buying. That proportion of trucks to cars is the highest in ten years even though car sales were also the best in ten years.

January is normally a slow month for car sales because weather slows shopping and people are doing their taxes in hopes of getting a big refund they can use for a down payment in March or April. Jeep said this was the best January ever and they have been around a very long time.

Auto loans are readily available because banks are eager to write loans where they can actually charge a decent interest rate. Longer maturities mean a lower payment for buyers and that means they buy higher prices cars. The average transaction price in January was +5% over January 2014.

The first payroll report is tomorrow with the ADP report. After the jobless claims declined sharply last week to 265,000 analysts upgraded their forecasts for the ADP employment from +218,000 to +225,000. This is down from the actual number of +241,000 for December.

The consensus estimate for the Nonfarm Payroll report on Friday rose from +230,000 to +235,000. However, there are some estimates slightly under 200,000 so there is some concern in the analyst community. There are worries that the layoffs in the energy sector may have started filtering through the system but you could not prove that with the low jobless claims the prior week.

Earnings after the bell were a mixed bag. Chipotle Mexican Grill (CMG) reported earnings of $3.84 that rose +52% compared to estimates of $3.79. While that was a beat it was not nearly as strong as prior reports. Revenue rose +27% to $1.07 billion fell short of estimates for $1.08 billion. Same store sales rose +16.1% compared to estimates for 16.3%. While the overall earnings were still good they lacked the spark that powered the stock to $726 and a PE of 55. Shared declined -6% or -44 after the report to close at $679.

The company said higher food costs had slowed earnings gains. Chipotle raised prices +6% late in Q3 to cope with rising food expenses for dairy, beef and avocados. Apparently they did not raise the prices enough because margins only rose +1% and slower than the +2% rise in Q3.

Lastly the company reaffirmed prior forecasts that 2015 growth would slow to mid to low single digits. Coming down from 16.8% that is a tough statistic to swallow. The company opened 60 stores in Q4 and plans to open more than 200 in 2015. The company also authorized another share buyback of $100 million in addition to the $98 million remaining under the prior authorization.

Gilead Sciences (GILD) reported earnings of $2.43 compared to estimates for $2.22. Revenue of $7.31 billion also beat estimates for $6.72 billion. Sales of Hep-C drugs rose to $3.8 billion. Gilead declared its first ever quarterly dividend at 43 cents and announced a $15 billion stock buyback program in addition to $3 billion still outstanding from a previous authorization.

Shares of GILD declined -$5 in afterhours when the company said it was offering steeper than expected discounts to health insurers and other group payers for the Hep-C drugs. Gilead said the "gross to net" adjustment for Hep-C drug sales will average 46% in 2015, up sharply from 22% at the end of 2014. Analysts had expected a 25-30% discount. Gilead and AbbVie are in a price war on expensive Hep-C drugs that cost from $84,000 to $96,000 for a 12 week treatment.

Sales of Sovaldi, the initial Gilead drug totaled $1.73 billion for the quarter. Sales of Harvoni, which does not require companion drugs, totaled $2.11 billion. Analysts were expecting $2.05 billion and $1.58 billion respectively. The company said 141,000 Americans had been started on the drugs and they expect 250,000 to be treated in 2015. There are an estimated 3.2 million people in the U.S. with Hep-C, which can lead to liver transplants and death. For all of 2015 Gilead expects sales of $26.5 billion compared to estimates for $28.6 billion. Analysts agreed that the Gilead guidance is conservative since projecting large numbers can make it more difficult to avoid bigger discounts to new buyers.

I continue to believe Gilead is one of the best companies in the space but I did close Gilead positions ahead of earnings to avoid the problem of expectations being too high. I would love to see a decent pullback so I can buy the dip again.

Disney (DIS) shares rose +$4 in afterhours after reporting earnings up +23% to $1.27 compared to estimates for $1.07. Revenue of $13.39 billion also beat estimates of $12.87 billion. The consumer products segment saw revenue increase +22% to $1.379 billion and earnings rise +46% as holiday shoppers bought products related to the film "Frozen." Attendance at theme parks was still rising despite the measles outbreak at Disneyland that has resulted in 93 cases. Disney is a solid company and earnings growth should continue.

Wynn Resorts (WYNN) dropped -$6 after reporting earnings of $1.20 compared to estimates for $1.43. Revenue of $1.14 billion missed estimates of $1.24 billion. The drop was caused by a -32% decrease in net revenue in Macau and a -6% decline in revenue in Las Vegas. Casino revenue in Vegas declined -15.5%. Problems at the $4.1 billion Wynn Palace Casino in Macau has pushed the opening from the Chinese New Year holiday in 2016 to later in the year. Cost overruns at the Casino in Boston have pushed costs from $1.6 billion to $1.75 billion. All this came at a time when casino revenue everywhere is declining. It was not a good quarter for Wynn.

Companies giving positive earnings guidance today included:


Companies giving in line earnings guidance included:


Companies giving negative earnings guidance included:


Earnings highlights on deck for tomorrow include Dow component Merck, Green Mountain Coffee, Humana, YUM Brands, and ADP.

Canadian Solar (CSIQ) spiked +25% today after the company announced it was buying project developer Recurrent Energy LLC from Sharp Corp for $265 million. Recurrent has a large pipeline of projects under development in North America with 3.3 gigawatts under development and 1.1 gigawatts under signed contracts. This was a very good deal for CSIQ, which had 1.4 gigawatts of projects in its own pipeline. I recommended CSIQ for a covered call last night in Option Writer before this news broke. I had researched the company and thought it was in breakout mode on its own and this acquisition only accelerated the process.

Salix Pharmaceuticals (SLXP) spiked +5% after Bloomberg said the company was in talks to be acquired by Valeant Pharmaceuticals (VRX). The article also said Shire Plc (SHPG) may also be interested. Salix collapsed back in November when a sudden inventory problem led to an unexpected management change and the company said it would be forced to restate financials. Shares declined to $86 on the news but have since rebounded to $140 on takeover rumors.

Shares of Office Depot (ODP) rallied +22% and shares of Staples (SPLS) spiked +11% on news the companies were in merger talks. According to the WSJ the two stores are in advanced talks but no deal has been finalized. In January activist investor Starboard Value, which owns 6% of Staples and 10% of Office Depot launched an effort to get the two companies to merge. Both are struggling and the combination would have significant synergies. It would also have some tough challenges to get regulators to approve a deal. Combined the two chains have more than 4,000 stores and $35 billion in sales.

Stratasys Ltd (SSYS) shares fell -28% after the company warned 2015 expectations were significantly below Wall Street estimates. The issued guidance for 2014 as well with revenue expected to be $748-$750 million and below their prior guidance of $750-$770 million. Analysts expected $758 million. Net income is now expected to be $102-$105 million, down from previous guidance of $117-$122 million. For 2015 the company is now projecting earnings of $2.07-$2.44 compared to analyst estimate for $2.91. JP Morgan, Piper Jaffray and Brean Capital all cut their ratings.

Lear Corp (LEA) rallied on news activist hedge fund Marcato is urging them to split into two companies. Marcato believes the combined value of the two companies would be $145 per share compared to today's close at $108. The fund wants Lear to split its seating division from the electrical parts division to let each one prosper on its own. Shares rallied 5% on the news.


Does a +624 point Dow gain in two days make the market overbought? Not when it is coming back from a -507 loss the week before and a -3% loss for the month. The rebound put the S&P within 2% of a new high. Who would have thought last Friday when we closed at six week lows that the S&P would be 2% from a new high today? This is why we trade what we see not what we want to see.

Emotionally I want to wait for a pullback before going long here but that would probably be the wrong idea. We saw the S&P rebound from support at the 150-day average for the third time over the last two months. That is a key support level and each time it has provided a strong rebound. The 1,980-1,985 support level from last summer was also in play. Had the S&P declined below that 1,980 level it would have been a major failure and suggest a repeat of the October decline.

Now the critical level to watch is the 2,064 resistance from January. If the S&P can break through that in the days ahead then new highs may be just ahead. We all know that when traders all line up on one side of the market that seemingly impenetrable obstacles can be overcome with ease. When the markets become directional the technicals don't matter. Moving +624 points in two days was mostly a short squeeze but a fire has been lit under the markets.

Support is now 2,030 and resistance 2,064.

The Dow chart is not so clear cut. The downtrend resistance at 17,725 is the next challenge. If that resistance manages to hold the Dow advance another lower high will be formed. Today's short squeeze market may have some fuel left but it may depend on oil prices. If the rebound in crude fades then Chevron, Exxon and Caterpillar will fall back to the losers list and be a drag on the other components.

Resistance 17,725, support 17,500.

The Nasdaq was the laggard all morning. With the Dow up +135 the Nasdaq was still negative at 12:30. The opening spike was quickly sold but the midday dip was eventually bought. The close was a six-day high. The composite and the Nasdaq 100 traded in lock step with many of the big cap stocks absent from the winners/sinners list.

Both indexes are nearing the top of their congestion range and solid resistance.

The Russell 2000 had a good day with nearly a 2% gain. It moved within 3 points of 1,200 and could -2% from a new closing high over 1,219. The Russell small caps held up well during the January market and could be preparing to take their leadership place in the coming days. If the Russell breaks over 1,200 it should drag the Nasdaq indexes with it.

If you look really hard with a glass half full outlook you could make a case for new highs in the near future. However, the market has moved too far, too fast and without a new catalyst to force a continued squeeze we could be in for some backing and filling. The ADP Payroll report on Wednesday should not be a market mover unless it misses estimates by a mile in either direction. The S&P futures are flat late Tuesday so there is no rush to take profits on the week's gains. WTI prices are down $1 to $52 but that is still a significant gain from last week. With the high today $54.24 some of the sell stops have already been cleared. If oil were to continue positive even by a little bit the equity markets should remain positive as well.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

85 million customers and growing

by James Brown

Click here to email James Brown


UnitedHealth Group - UNH - close: 107.81 change: +0.52

Stop Loss: 104.85
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 4.2 million
Entry on February -- at $---.--
Listed on February 29, 2015
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Healthcare stocks have been consistent winners for investors over the last couple of years. Just check out a long-term chart of the IHF or XLV healthcare ETFs. Helping the group lead that charge is UNH, one of the biggest names in healthcare. The company's various businesses serve more than 85 million people around the world. The company is ranked No. 14 on the Fortune 500 list.

UNH has two different business segments. They have their UnitedHealthcare business and their Optum business. UnitedHealthcare provides health benefit products and services. Their Optum business is a health management services company.

The Affordable Care Act (ACA, or Obamacare) had a rough start but now the system is clearly seen as a huge benefit for the health insurance companies. According to Bloomberg the ACA has added millions of new customers to the healthcare industry. UNH recently joined the public exchanges and added more than 400,000 new individuals. UNH did say they are paying significantly more fees and taxes due to the ACA but thus far their increase in customers and better operating efficiency in 2014 have kept the costs manageable.

The results are showing up in the company's earnings growth. In July 2014 the company beat estimates and raised their guidance. In October 2014 they beat estimates and raised their guidance. In early December UNH reaffirmed their 2014 guidance and offered a 2015 forecast that was in-line with Wall Street estimates.

Their most recent earnings report was January 21st. The results were slightly ahead of expectations with profits up +10% from a year ago to $1.55 per share with revenues rising +7.4% to $33.43 billion. That was enough to surpass estimates of $1.50 a share on revenues of $33.15 billion.

UNH's CEO Stephen Hemsley commented on their business saying, "We enter 2015 with a positive outlook and rising business momentum. Steady innovation and year by year advances in the quality, breadth and value of our services to employers, government sponsors, consumers and care providers are creating opportunities for revenue and earnings growth in traditional and new markets."

Management offered 2015 guidance that was in-line with prior estimates. They expect earnings to grow about +7.4% in the $6.00-6.25 range. Revenues are expected to rise +8.0% in the $140.5-to-141.5 billion range.

The stock exploded higher on its better than expected Q4 numbers. Since the post-earnings rally peaked the stock has seen a nice correction. Traders just bought the dip yesterday near support at $105.00. We want to hop on board this healthcare train and buy the rebound. There appears to be short-term resistance near $108.00. Tonight we're suggesting a trigger to buy calls at $108.25.

Trigger @ $108.25

- Suggested Positions -

Buy the MAR $110 CALL (UNH150320C110) current ask $2.37

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

Daily Chart:

Intraday Chart:

In Play Updates and Reviews

Stocks Bounce For A Second Day

by James Brown

Click here to email James Brown

Editor's Note:

Market volatility continues with big numbers among the major indices. The Dow Industrials closed up +300 points, the NASDAQ +50, and the S&P 500 +29. This volatile back and forth action has been very sharp this year.

ALKS hit our stop thanks to widespread weakness in biotechs. We have decided to remove PCP as a candidate, the trade did not open.

Current Portfolio:

CALL Play Updates

Hanesbrand Inc. - HBI - close: 114.28 change: +2.91

Stop Loss: 109.90
Target(s): To Be Determined
Current Option Gain/Loss: -6.5%
Average Daily Volume = 800 thousand
Entry on February 03 at $114.14
Listed on February 29, 2015
Time Frame: Exit PRIOR to HBI's stock split on March 4th
New Positions: see below

02/03/15: We didn't have to wait long for HBI to rebound. With the stock market in rally mode today shares of HBI surged +2.6% and outperformed the major indices. Our suggested entry point was hit at $114.10. I would still consider new bullish positions at current levels.

Earlier Comments: February 2, 2015
How many stocks can you name that are up +400% in the last three years? HBI is in the consumer goods sector. They make apparel under a variety of brand names. Shares of HBI have been a big performer the last few years, outperforming the broader market.

According to the company, "HanesBrands, based in Winston-Salem, N.C., is a socially responsible leading marketer of everyday basic apparel under some of the world's strongest apparel brands in the Americas, Asia and Europe, including Hanes, Champion, Playtex, DIM, Bali, Maidenform, Flexees, JMS/Just My Size, Wonderbra, Nur Die, Lovable and Gear for Sports. The company sells T-shirts, bras, panties, shapewear, men's underwear, children's underwear, socks, hosiery, and activewear produced in the company’s low-cost global supply chain."

A good reason shares have been rising so consistently has been HBI's bullish guidance. Last year the company raised its earnings guidance three quarters in a row. Their most recent earnings report was January 29th (last week). HBI's Q4 results were $1.46 a share with revenues surging +20% to $1.55 billion. The bottom line number was two cents above estimates while revenues met estimates.

HBI said that 2014 was its second consecutive year of record results. Net sales rose +15% while its profit grew +28% and adjusted EPS soared +45%. Hanes Chairman and CEO Richard A. Noll commented on their results saying,

"We had another outstanding year in 2014, generating significant shareholder value and again achieving record results for sales, operating profit and EPS. We are in the midst of a multiyear period of strong growth supported by our powerful company-owned global supply chain, Innovate-to-Elevate product platforms, and acquisitions. Our guidance for 2015 translates into another year of double-digit EPS growth and what would be another record year for sales, profit and EPS, despite the challenges of currency exchange rates."

HBI's new guidance sees 2015 revenues in the $5.77-5.82 billion range. That's +9% growth but a little bit below Wall Street's estimates. HBI is forecasting earnings in the $6.30-6.50 range, which equals about +11% to +15% growth.

Management also raised its cash dividend +33% to $0.40 a share. On top of that they issued a 4-for-1 stock split. The split is coming up soon. HBI will start trading split adjusted on March 4th, 2015. We think HBI could see an old-fashioned split run.

Tonight we are listing a trigger to buy calls at $114.10. We'll start this trade with a stop at $109.90. Plan on exiting before the March 4th stock split date.

- Suggested Positions -

Long MAR $115 CALL (HBI150320C115) entry $3.21

02/03/15 triggered @ 114.14 on an intraday gap higher. Suggested entry was $114.10
Option Format: symbol-year-month-day-call-strike

Constellation Brands - STZ - close: 111.32 change: +0.02

Stop Loss: 108.40
Target(s): To Be Determined
Current Option Gain/Loss: -0.8%
Average Daily Volume = 1.25 million
Entry on January 15 at $109.36
Listed on January 14, 2015
Time Frame: Exit prior to February expiration
New Positions: see below

02/03/15: Uh-oh! STZ did not participate in the market's widespread rally today. That could be a warning to the bulls. Shares remain inside the $110-112 trading range.

We have about three weeks left on our February calls. A breakout past $112.35 could be used as a new entry point.

Earlier Comments: January 15, 2015:
Today the big players in the beer industry like Anheuser-Busch InBev (BUD) and Molson Coors (TAP) are losing market share to smaller craft beer brewers. Yet STZ actually seeing momentum in its beer portfolio.

STZ is part of the consumer goods sector. According to the company's website, "Constellation Brands, Inc. is a leading wine, beer and spirits company with a broad portfolio of premium brands. Constellation is the world leader in premium wine, the leading multi-category beverage alcohol company in the U.S. and the number three beer company in the U.S. Headquartered in Victor, New York, Constellation Brands is an S&P 500 Index and Fortune 1000® company with more than 100 brands in our portfolio, sales in approximately 100 countries and operations in approximately 40 facilities."

Last year the stock was a strong performer. The S&P 500 rallied about +11% in 2014 while STZ surged +39%. Investors have been consistently buying dips. The relative strength from last year has carried into 2015.

The company recently reported earnings on January 8th. Wall Street was expecting a profit of $1.14 per share on revenues of $1.51 billion. STZ said their earnings rose +11.8% to $1.23 a share. Revenues were up +7% to $1.54 billion, beating estimates on both counts. Management then raised their 2015 guidance from $4.10-to-$4.25 to $4.25-to-$4.35. That compares to Wall Street's 2015 estimate of $4.24.

STZ's CEO Rob Sands commented on their latest results saying, "We achieved outstanding results for the third quarter driven by the exceptional ongoing momentum for our beer business." Their beer sales rose +16% and gained market share.

The stock has seen multiple upgrades in January and currently trading at all-time highs. Today traders bought the dip near $105.00. The stock looks poised to breakout past short-term resistance at $108.50. The point & figure chart is bullish and forecasting a long-term target of $127.00.

We are suggesting a trigger to buy calls at $108.65. We'll start this trade with a stop at $104.85.

- Suggested Positions -

Long FEB $110 CALL (STZ150220C110) entry $2.47

01/31/15 new stop @ 108.40
01/15/15 triggered on gap open at $109.36, trigger was $108.65
Option Format: symbol-year-month-day-call-strike

Valeant Pharmaceuticals - VRX - close: 159.71 change: -2.27

Stop Loss: 155.85
Target(s): To Be Determined
Current Option Gain/Loss: -35.4%
Average Daily Volume = 2.5 million
Entry on January 26 at $160.55
Listed on January 24, 2015
Time Frame: Exit PRIOR to earnings in late February
New Positions: see below

02/03/15: Tuesday was pretty volatile for VRX. Shares were following the rest of the biotech space lower. Then midday, about 12:06 p.m., the stock shot higher with a move from $156.38 to almost $166 within a two-minute span. The big rally was a reaction to a story that VRX was considering an acquisition of Salix Pharmaceuticals (SLXP).

After VRX lost its bid to buy Allergan (AGN) last year there has been plenty of speculation that they might shop elsewhere. There was also a rumor that Shire Plc is interested in buying SLXP. Lately Wall Street has been pretty optimistic about all the M&A news and the sharp rally in VRX sent the stock to a new high. Unfortunately gains faded by the closing bell.

I am not suggesting new positions at this time. Today's intraday low was $156.16. We are moving the stop loss to $155.85.

Earlier Comments: January 24, 2015:
Healthcare stocks have been some of the market's best performers in 2015. VRX is helping lead the group higher with a +11.5% gain already.

The company's website says, "Valeant Pharmaceuticals International, Inc. is a multinational specialty pharmaceutical company that develops and markets prescription and non-prescription pharmaceutical products that make a meaningful difference in patients' lives. The company's growth strategy is to acquire, develop and commercialize new products through strategic partnerships, and strategically expand its pipeline by adding new compounds or products through product or company acquisitions. Headquartered in Laval, Quebec, Valeant has approximately 17,000 employees worldwide and is listed on both the New York Stock and Toronto Stock Exchanges under the symbol VRX."

VRX made a lot of headlines last year with its attempted hostile takeover of Allergan (AGN). Eventually VRX lost out to a rival. AGN agreed to a takeout by Actavis (ACT) for $219 a share, which was more than VRX wanted to pay.

Meanwhile VRX has been doing just fine on the earnings front. The company is developing a trend of beating analyst estimates. Plus they guided higher in April 2014, in September and with their last earnings report on October 20th. In November VRX's Board of Directors announced at $2 billion stock buyback program.

This year VRX has already raised guidance again. They see Q4 results above Wall Street estimates. They also raised their guidance for FY2015 into the $10.10-10.40 range compared to consensus estimates near $10.01.

The stock has been surging with a rally to new all-time highs. The point & figure chart is bullish and forecasting at $180.00 target.

Currently VRX sits just below round-number resistance at $160.00. We are suggesting a trigger to buy calls on a breakout at $160.55.

- Suggested Positions -

Long MAR $170 CALL (VRX150320C170) entry $4.80

02/03/15 News that VRX is interesting in buying SLXP
01/26/15 triggered @ 160.55
Option Format: symbol-year-month-day-call-strike

Whole Foods Market, Inc. - WFM - close: 53.41 change: +0.26

Stop Loss: 51.25
Target(s): To Be Determined
Current Option Gain/Loss: +80.4%
Average Daily Volume = 4.9 million
Entry on January 08 at $50.35
Listed on January 07, 2015
Time Frame: Exit PRIOR to earnings on February 11th
New Positions: see below

02/03/15: The bounce in WFM continued today but shares lagged behind the rest of the market with only a +0.48% gain versus the +1.4% gain in the S&P 500. WFM failed at recent resistance near $54 again.

I am not suggesting new positions at this time.

Earlier Comments: January 7, 2015:
WFM is in the services sector. As of November 2014 the company had 401 stores in the U.S., Canada, and the United Kingdom. Founded in 1978, WFM has become synonymous with healthy, organic food, at least for a growing portion of the population.

In early May 2014 the stock was crushed when the company missed Wall Street's earnings estimates and lowered its 2014 guidance. Investors were very unhappy with WFM's same-store sales growth as well. The organic food space has been growing more competitive in recent years as other retail groceries seek to boost their profits with wider margin "organic" fare.

WFM spent months languishing in the $36-40 zone before finally surging in early November. The big rally was sparked by better than expected earnings results and management raising their 2015 guidance. Shorts panicked and the stock exploded higher.

WFM has been slowly working its way higher since then but now WFM looks poised to breakout past key resistance at the $50.00 level.

The huge drop in gasoline prices is very bullish for the U.S. consumer. They now have more money in their pocket that they can spend on other items, like high priced organic foods at WFM.

Traders have started buying the dip and shares hit an intraday high of $50.18 today. Tonight we are suggesting a trigger to buy calls at $50.30. We will plan on exiting prior to WFM's earnings results in mid February.

- Suggested Positions -

Long FEB $50 CALL (WFM150220C50) entry $2.30

01/31/15 new stop @ 51.25
01/28/15 new stop @ 49.45
01/08/15 triggered on gap open at $50.35, suggested entry was $50.30
Option Format: symbol-year-month-day-call-strike

Williams-Sonoma Inc. - WSM - close: 79.82 change: +1.17

Stop Loss: 75.90
Target(s): To Be Determined
Current Option Gain/Loss: +0.0%
Average Daily Volume = 990 thousand
Entry on February 03 at $79.35
Listed on January 29, 2015
Time Frame: Exit PRIOR to earnings in March
New Positions: see below

02/03/15: Our bullish WSM trade is now open. Last night we adjusted our entry point strategy to buy the bounce if shares hit $79.15. This morning the stock gapped open at $79.35. If you missed it WSM gave you another chance with a dip to $78.35 intraday before rebounding. I would still consider new positions at current levels.

Earlier Comments: January 29, 2015:
Normally when a company lowers their earnings guidance Wall Street tends to punish the stock price. WSM has lowered guidance several times but that didn't stop shares for outperforming the market with a +29% gain in 2014.

The company describes itself as "Williams-Sonoma, Inc. is a specialty retailer of high-quality products for the home. These products, representing eight distinct merchandise strategies – Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, PBteen, Williams-Sonoma Home, Rejuvenation, and Mark and Graham – are marketed through e-commerce websites, direct mail catalogs and 603 stores. Williams-Sonoma, Inc. currently operates in the United States, Canada, Australia and the United Kingdom, offers international shipping to customers worldwide, and has unaffiliated franchisees that operate stores in the Middle East and the Philippines."

They have an enviable position of mostly selling to high-end customers who make more than $150,000 a year. Unlike many retailers, WSM has an extremely healthy online presence. Their e-commerce business generated half of all sales, which certainly gives their margins a boost compared to rivals.

WSM seems to have perfected the beat estimates and guide lower game to management Wall Street's earnings expectations. Looking at the last four earnings reports in a row WSM has beaten estimates three out of the last four reports on both the top and bottom line. Every time management has guided lower for the next quarter. This strategy has definitely generated some volatility in the stock price. A quick look at WSM's daily chart and you'll see a lot of big gaps up and down as investors react to news. Yet the overall trend has been higher. Today WSM sits at all-time highs.

Shares have been showing relative strength in 2015 with a +5.4% gain thus far. The point & figure chart is bullish and forecasting a long-term target at $105.00. Tonight I am suggesting a trigger to buy calls at $81.15. Please note that I am suggesting small positions to start. WSM is flirting with and apparently breaking out past a long-term trend line that you can see on the monthly chart below.

*start with small positions* - Suggested Positions -

Long MAR $80 CALL (WSM150320C80) entry $3.20

02/03/15 triggered on gap higher at $79.35, new trigger was $79.15
02/02/15 Strategy Update: Move the entry trigger from $81.15 to $79.15. Adjust the stop loss to $75.90. Adjust the option strike from March $85 call to March $80 call.
Option Format: symbol-year-month-day-call-strike

Zebra Technology - ZBRA - close: 86.63 change: +2.56

Stop Loss: 81.35
Target(s): To Be Determined
Current Option Gain/Loss: +44.1%
Average Daily Volume = 494 thousand
Entry on January 12 at $80.85
Listed on January 10, 2015
Time Frame: Exit prior to earnings on February 26th
New Positions: see below

02/03/15: Today is a big day for ZBRA. The stock outperformed the broader market with a +3.0% gain. Today's rally is also a breakout past its all-time high set last July near $86.00

I am not suggesting new positions at the moment.

Earlier Comments: January 10, 2015:
ZBRA is considered part of the industrial goods sector but they sound more like a technology company. The company website describes them as "Zebra Technologies is a global leader in enterprise asset intelligence, designing and marketing specialty printers, mobile computing, data capture, radio frequency identification products and real-time locating systems. Incorporated in 1969, the company has over 7,000 employees worldwide and provides visibility into valued assets, transactions and people."

Their goods are used by 90% of the Fortune 500 companies. They have almost no debt. Last year they spent almost $3.5 billion buying Motorola Solutions (symbol was MSI). ZBRA's CEO believes that the MSI acquisition will help them capitalize on three big trends: mobility, the Internet of things, and cloud computing.

In February 2014 ZBRA raised their earnings guidance. They did it again two months later in April. Their most recent earnings report was above expectations. ZBRA announced record revenues with sales up +19% in Middle East and Africa, +16% in North America, +11% in Latin America, and +9% in Asia Pacific.

Technically the stock has been stair-stepping higher with a bullish trend of higher lows and higher highs. This past week ZBRA displayed relative strength and broke out to new multi-month highs. The point & figure chart is bullish with a $92.00 target.

Tonight we are suggesting a trigger to buy calls at $80.85. We will plan on exiting positions before ZBRA reports earnings in mid February.

- Suggested Positions -

Long FEB $85 CALL (ZBRA150220C85) entry $1.70

01/28/15 new stop @ 81.35
01/12/15 triggered @ 80.85
Option Format: symbol-year-month-day-call-strike

PUT Play Updates

Starwood Hotels & Resorts - HOT - close: 74.27 change: +2.29

Stop Loss: 75.05
Target(s): To Be Determined
Current Option Gain/Loss: -60.0%
Average Daily Volume = 2.3 million
Entry on January 14 at $73.90
Listed on January 12, 2014
Time Frame: Exit PRIOR to earnings on February 10th
New Positions: see below

02/03/15: The U.S. market was in rally mode today and we saw lots of short covering. HOT's big +3.1% gain today looked like it started with short covering this morning. The close above its 10-dma and the 74.00 level is caution sign for the bears. Should this rally continue tomorrow there is a good chance HOT could hit our stop at $75.05.

I am not suggesting new positions.

Earlier Comments: January 12, 2015:
HOT is in the services sector. According to a company press release, "Starwood Hotels & Resorts Worldwide, Inc. is one of the leading hotel and leisure companies in the world with more than 1,200 properties in 100 countries, and 181,400 employees at its owned and managed properties. Starwood is a fully integrated owner, operator and franchisor of hotels, resorts and residences with the following internationally renowned brands: St. Regis®, The Luxury Collection®, W®, Westin®, Le Meridien®, Sheraton®, Four Points® by Sheraton, Aloft®, and Element®. Starwood also owns Starwood Vacation Ownership, Inc., a premier provider of world-class vacation experiences through villa-style resorts and privileged access to Starwood brands."

The company's most recent earnings report was October 28th. The company beat the bottom line estimate by a penny but missed the revenue number. Management then guided lower. Since then at least two analyst firms (UBS and JP Morgan) have downgraded shares of HOT. JPM said their downgrade was on valuation concerns. Other analysts have issued worries about how the strong dollar might hurt HOT's financials.

There are also concerns that Airbnb could be hurting the hotel business. Airbnb's growth has surged since it was founded back in 2008. Just four year later Airbnb announced their 10 millionth night booked. It may not be fair to say all 10 million of those would have gone to the hotel industry but certainly a good chunk of Airbnb's business has been stolen from more traditional lodging services.

Technically shares of HOT look weak. The point & figure chart is bearish and forecasting at $68 target (which could get worse). Today's breakdown under support near $75.00 looks ominous. The intraday low today was $74.06. Tonight I am suggesting a trigger to buy puts at $73.90. We will plan on exiting prior to HOT's earnings report in mid February.

- Suggested Positions -

Long FEB $70 PUT (HOT150220P70) entry $1.60

01/29/15 new stop @ 75.05
01/14/15 triggered @ 73.90
Option Format: symbol-year-month-day-call-strike


Alkermes plc. - ALKS - close: 69.22 change: -3.38

Stop Loss: 69.45
Target(s): To Be Determined
Current Option Gain/Loss: +77.4%
Average Daily Volume = 833 thousand
Entry on January 07 at $63.01
Listed on January 06, 2015
Time Frame: Exit PRIOR to February option expiration
New Positions: see below

02/03/15: I always caution readers that biotech stocks can be volatile. They proved that today. The whole group showed significant weakness this morning. This weighed heavily on ALKS and the stock collapsed with a drop from multi-year highs above $72 down to $66.38 intraday. Our stop loss was hit at $69.45.

- Suggested Positions -

Feb $65 CALL (ALKS150220C65) entry $3.10 exit $5.50 (+77.4%)

02/03/15 stopped out
01/31/15 new stop @ 69.45
01/24/15 new stop @ 66.85
01/10/15 new stop @ 59.25
01/07/15 triggered on gap higher at $63.01, suggested entry was $61.75.
Stock rallied on positive Phase 2 trial data for schizophrenia drug.
Option Format: symbol-year-month-day-call-strike



Precision Castparts Corp. - PCP - close: 208.31 change: +2.25

Stop Loss: 205.55
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.2 million
Entry on January -- at $---.--
Listed on January 29, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

02/03/15: PCP is not cooperating. The big rally in crude oil and the energy-sector stocks is rubbing off on PCP. It seems unlikely that shares will breakdown below support at $200 any time soon. We are removing it as a candidate.

Trade did not open.

02/03/15 removed from the newsletter, trigger was $199.50