Option Investor

Daily Newsletter, Tuesday, 11/10/2015

Table of Contents

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

Market Wrap

Apple Crash

by Jim Brown

Click here to email Jim Brown

An implied downgrade to Apple based on production cuts at Asian suppliers knocked the Dow to a lower low at the open but it was purely an Apple related drop.

Market Statistics

Apple (AAPL) shares declined -$3.80 to knock about 28 points off the Dow and poison market sentiment at the open. Once it became evident that the rest of the Dow components were not going along for the ride the Dow clawed its way back to positive territory in the afternoon.

The overall market traded like it was sedated with no material movement and low volume after the economic reports failed to provide any boost. The NFIB Small Business Survey for October came in at 96.1 and exactly the same level as September. The internal components were mostly unchanged with an equal number rising 1 point as those that lost 1 point. The earnings trend component was the biggest change falling from -13 to -16 and suggesting business conditions were softening. This was a lagging report for October and was ignored.

The Intuit Small Business Employment Index for October rose +0.1% compared to the -0.1% decline in September. The internal components were also mostly unchanged and the report was ignored.

Import prices for October declined for the fourth consecutive month. Prices fell by -0.5% after a -0.6% drop in September and -1.8% decline in August. I guess you could say prices were stabilizing at a slower decline rate but they are still dropping. This will negatively impact inflation in the months ahead.

The main driver was a -2% decline in fuel imports following a -5.4% decline in September. Fuel import prices are now down -46.6% for the year. Nonfuel prices declined -0.3% and they have increased only 1 month in all of 2015. The rising dollar will continue to pressure prices in the months ahead.

Wholesale inventories in September rose +0.5% after a +0.3% rise in August. Durable inventories fell -0.4% with nondurables rising +1.9%. Durable sales rose +0.7% with nondurable sales rising +0.3%. This report was also ignored.

Friday remains the most important day of the economic calendar with the retail sales report for October. With retailers singing the blues, the report could easily be disappointing. The consensus estimate is for a +0.3% rise. The Producer Price Index could also disappoint to the downside and estimates are for a +0.2% gain.

Credit Suisse was the blame for Apple's nearly $4 decline today. The broker said Apple cut its November orders by about 10% for iPhone components. The reason given was to account for slowing iPhone demand in Asia where the cheaper Android phones are the hottest sellers. The analyst consensus was for only a -5% cut in orders after projections fell over the last two weeks.

CS analyst Kulbinder Garcha cut his 2016 earnings estimate for Apple by 6% to $9.81 but kept his outperform rating and a price target of $140. The problem is the lack of "must have" features in the current upgrade version of the 6 and 6+. This is slowing sales growth and will make tough comparisons against the Q4/Q1 sales from last year when the 6 was new.

Garcha is still predicting iPhone sales of 80 million for the holiday quarter and that is about 4 million over the year ago quarter. Sales are expected to decline to 45-50 million for Q1 and that is normal. He said Apple is still a buy because even at a slowing growth rate the installed base grows 20-25% per year and more than 70% of existing iPhones in use are 5C or older. That means there is a large number of people that will eventually upgrade and iPhone users typically upgrade to new iPhones. Garcha expects a -5.5% decline in sales in the current fiscal year to 222 million from 242 million. In 2017 he sees a 6% rise in unit sales to 235 million because of the new model.

If Apple announces the iPhone 7 in September with some new features, Garcha expects the cycle to repeat with even higher sales in Q4-2016. FBR analyst Daniel Ives said Apple has a bull's-eye on its back with analysts firing their typical bearish bullets and worry over tough comparisons. Apple will probably prove them wrong again this cycle but eventually the bears will be right.

Apple suppliers saw their shares hit hard on the news of production cuts. Cirrus Logic (CRUS) shares dropped -9%, Qorvo (QRVO), Broadcom (BRCM) and Invensense (INVN) lost -3%. NXP Semiconductors was the least damaged with a -1% drop.

Avago (AVGO) lost -5% despite an upgrade to buy from Drexel Hamilton. Skyworks Solutions (SWKS) declined -5% but there was an extra push after news broke that PMC Sierra (PMCS) was favoring Microsemi's improved acquisition bid of $11.88.

There was a lack of positive market sentiment at the open because there was a lack of any material earnings reports. There were plenty of reports but none were high profile.

Canadian Solar (CSIQ) posted adjusted earnings of 79 cents compared to estimates for 28 cents. Revenue was $849.8 million compared to estimates for $733.9 million. In theory, you would have expected this to cause a monster short squeeze in the stock. However, shares fell as did most of the solar sector. Analysts claimed the good results were expected.

It is more likely that Canadian Solar's results were tarnished by the drop in SunEdison (SUNE). SunEdison lost 92 cents compared to expectations for a 60-cent loss. Revenue was a beat at $476 million compared to estimates for $452 million. The problem with SunEdison is that their spinoffs, called yieldcos, reported results that disappointed. The solar companies are spinning off their installed projects into a high yield vehicle where the parent company can get paid for the project and the yieldco investors get a high yield over time.

Yieldco TeraForm Power (TERP) reported a loss of 3 cents compared to expectations for a gain of 28 cents. TeraForm Global (GLBL) also reported a loss and missed on revenue. SunEdison pioneered the yieldco model.

DR Horton (DHI) reported earnings of 64 cents that beat estimates for 62 cents and it was a 42% increase over the comparison quarter at 45 cents. Revenues rose +28% to $3.09 billion and a slight beat over $3.06 billion estimate. Sales orders rose +19% to 8,477 homes. That is huge by any standard. Closings rose +23% to 10,576 homes. The sales backlog at the end of the quarter rose +7.8% to 10,662 homes with the value rising +10% to $3.15 billion. Horton raised its cash dividend +28% to 8 cents. Shares rallied +8%.

Rockwell Automation (ROK) reported earnings of $1.57 compared to estimates for $1.78. Revenue of $1.61 billion was below estimates for $1.69 billion. The earnings were not the big problem. The company said 2016 earnings could decline to $5.90-$6.40 on revenue of about $6 billion. Analysts were expecting $6.71 and revenue of $6.41 billion. Rockwell said industrial markets including oil and gas have not yet stabilized and the strong dollar is making a significant impact on overseas business. Rockwell said they do not expect to see sales growth until later in fiscal 2016. Shares fell -3%.

Wayfair (W) reported a loss of 13 cents compared to estimates for a loss of 24 cents. Revenue of $594 million easily beat estimates for $522 million. Direct retail revenue rose +91% to $545 million and that was well over guidance at $475 million. The stock imploded after management warned that Q4 would have to measure up to an "extremely strong" 2014 holiday quarter and he wanted to provide a "thoughtful" forecast. That forecast failed to impress analysts and projected 70% growth, down significantly from year ago levels. While 70% growth is still an amazing achievement no investor ever wants to hear that growth is slowing and comps are going to be tough to beat.

Zebra Technologies (ZBRA) reported adjusted earnings of $1.39 compared to estimates for $1.22. Revenue of $916.3 million narrowly missed estimates for $917.6 million. Guidance for the current quarter of $1.38 to $1.63 per share disappointed because of the wide range with the midpoint below analyst expectations. Shares fell -9% on the news.

The Gap (GPS) reported earnings on Monday after the close and slowing sales caused shares to decline today. Same store sales fell -3% overall with Gap stores falling -4% and Banana Republic sales falling -15%. Only the Old Navy brand posted a gain of +2%. Gross sales fell from $1.26 billion to $1.20 billion in October and $3.86 billion in Q3. Analysts were expecting $3.94 billion. Gap blamed part of the decline on the strong dollar. The company guided to earnings of 62-63 cents in Q4 but analysts were expecting 67 cents.

We have another weak earnings calendar for Wednesday with Macy's (M) the highlight ahead of the monthly retail sales numbers on Friday. Thursday has several retailers along with Dow component Cisco. Thursday will be the last major earnings day for this cycle.

Oil service company Flotek Industries (FTK) lost 50% of its value this week after an article claimed there were errors in the company's FracMax fracking software. The company did review the article and their software and admitted the reviewer had found a minor bug that affected the reporting of post fracking production. The bug was only a reporting error not an error in the actual fracking process. I believe the sell off was seriously overdone and the stock fell back to support from 2012. I would be a buyer here once it appears a bottom has formed. I do not want to catch a falling knife but once that knife hits bottom I would pick it up. Flotek is a quality company that is taking advantage of the tough economic times in the oil patch to add customers at the expense of others.

Valeant Pharma (VRX) may have found a bottom at $80. The stock has moved sideways for four days and the company held another conference call today to calm investors. The biggest news was that short seller Citron Research had covered a significant portion of their short. The firm had predicted a $50 price target but when questioned today they dodged the answer and said maybe a few months from now. That sounds like they are done with this project and are moving on.

That new project is Mallinckrodt (MNK). Citron said the problems at MNK could be even worse than the ones at Valeant. However, when questioned repeatedly the Citron rep could not really pin the tail on the donkey with a material reason. Shares had declined to $53 ahead of the interview and then rebounded to $63 when there was no smoking gun.

Citron also called out Wayfair (W) as a failed business model and the weak guidance today as a preview of things to come.

A report out today claims it was Anadarko Petroleum (APC) that approached Apache (APA) with a buyout offer that Apache rejected. The buyout offer was more than likely a self-defense ploy. Anadarko has been rumored for months to be a potential takeover candidate by Exxon.

Secondly, Apache has 3 million acres in the Permian Basin that Anadarko would really like to acquire. Anadarko had previously mentioned to analysts that it was looking to acquire more Permian acreage. The Anadarko CEO said a couple of weeks ago that they had bid on numerous assets but have been continually outbid by private equity buyers that seem to think the land is worth more than it actually is. Anadarko has a market cap of $35 billion and Apache $20 billion. Apache has a lot of gas assets, which are not highly desirable in the current market. Their offices are about 30 minutes apart in Houston.

While the offer for Apache may have put the company in play by others, I would not be a buyer of Apache today. I think the company is close to fair value given their gas weighting. However, the drop in Anadarko makes them a decent buy today. If they are running from Exxon that drop in price could force Exxon to go public. Even if they are not acquired, they have about 2.86 billion barrels of oil equivalent reserves making them a prime target for appreciation when oil prices eventually recover.

Alibaba (BABA) is in the middle of the biggest shopping day of the year called Singles Day in Asia. Analysts expect their single day sales to reach as high as $11 billion this year. Last year Alibaba did $9.3 billion in sales in 278 million orders over the 24-hour period. Sales on Singles Day this year will exceed both Black Friday and Cyber Monday sales combined.

The original 11/11 singles day celebration (the date chosen because it is a group of 1s) started in the 1990s, which morphed into buying stuff for yourself, is called a "24-hour orgy of consumption." Alibaba hijacked the day and turned it into a monster promotion. More than 6 million products are for sale from 40,000 vendors. In the first 90 minutes of the sale, which started at midnight in Beijing, the gross sales exceeded $5 billion with 72% of sales from mobile phones. Singles Day was started by Alibaba six years ago and it has spread to other retailers such as JD.com, which has about 25% of the Chinese ecommerce market.


The short description for today's market is that nothing happened. It was as though everyone was on valium or suffering through a giant hangover. On the positive side the big decline from Monday did not continue. The early morning weakness was minimal and the Dow and S&P shook off the streak of five consecutive declines.

Only five stocks accounted for the majority of the decline on the Nasdaq, the only index that closed in negative territory. The S&P found support at 2,068 on Monday and 2,069 today before rebounding back over 2,080. The rebound ended the day with a gain of only +3 points but that was +13 points off the lows.

While the market weakness may not be over at least we have a new range to watch from 2,068 to 2,115. Those are the key levels for the rest of the week.

Resistance remains 2,090, 2,105, 2,115 and 2,128.

The early Dow weakness was solely Apple with the $4 drop knocking roughly 30 points off the Dow. The late day rebounds in those top gainers below suggest the selling may be fading.

The Dow is not far from the highs from last week despite the -180 point decline on Monday. It would only take one good day of short covering to put it back near that 18,000 level. Only one Dow component reports this week and that is Cisco on Thursday after the close. That means any impact will be on Friday.

I am expecting the Dow to recover from its dip and finish higher for November. The banks should continue to provide upward lift as we move closer to the December FOMC meeting.

Without any Dow components reporting on Wednesday, we do not have any risk of disappointment. Support is 17,650 and resistance 18,000.

The biggest impact to the Nasdaq came from MSFT, AAPL, AVGO, TSLA and QCOM, which knocked a combined 12 points off the Nasdaq 100 ($NDX), which was only down -14 for the day with the Nasdaq Composite down -12.

With so many of the solar and semiconductor stocks declining it is a wonder the Nasdaq did not fare worse. The Biotech sector is in rally mode again and the $BTK gained almost 1% for the day.

There are no major Nasdaq stocks reporting on Wednesday and there were none after the close today. The Nasdaq futures are down -4 at 8:PM and the S&P futures are down -1.50. Neither decline is material.

The Nasdaq big caps led the S&P and Nasdaq 100 to their recent highs. With Apple shares crashing on the production cuts it may be difficult for the Nasdaq to lead us higher but as long as the broader market is positive the Nasdaq should be able to keep pace. Today was an outlier with Apple down -4 and weighing on the index.

Support at 5,050 was tested with a dip to 5,051 today and the rebound was almost immediate. Resistance remains 5,092 and 5,160.

The Russell 2000 rebounded +10 points from the morning low to end with a +3 point gain at 1,187. The battle line at 1,200 remains solid but within reach. The farther we move into November the stronger the small caps normally become. Let us hope this year follows the trend.

In the weekend newsletter I said I was in buy the dip mode and we got a great dip to buy on Monday. While we cannot be sure that Monday low was the bottom of the profit taking and window undressing process, it did make a good entry point. If we get another dip with a lower low, I would buy that one also.

The historical trend is our friend even if November turns out to be a weak gainer after the strong October. There is no investment alternative. Nobody wants to buy bonds ahead of a Fed rate hike five weeks from now. That makes stocks the preferred investment vehicle and we are in the best two-month period of the year. There are plenty of reasons to be bullish despite the weak Q3 earnings and the projections for Q4. Buy the dip.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Poised To Hit Multi-year Highs

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidate(s), consider these stocks as possible trading ideas and watch list candidates. Some of these stocks may need to see a break past key support or resistance:

Bullish ideas: DPS, LH, SNA, RCL, GPN, V, ULTA

Bearish ideas: FFIV, EMN,


Alkermes Plc - ALKS - close: 73.87 change: +1.75

Stop Loss: 69.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 699 thousand
Entry on November -- at $---.--
Listed on November 10, 2015
Time Frame: Exit PRIOR to December option expiration
New Positions: Yes, see below

Company Description

Trade Description:
The healthcare and biotech names have started to show life again. Biotechs have definitely shown some relative strength in late October and now this week.

ALKS is in the healthcare sector. According to the company, "Alkermes plc is a fully integrated, global biopharmaceutical company developing innovative medicines for the treatment of central nervous system (CNS) diseases. The company has a diversified commercial product portfolio and a substantial clinical pipeline of product candidates for chronic diseases that include schizophrenia, depression, addiction and multiple sclerosis. Headquartered in Dublin, Ireland, Alkermes plc has an R&D center in Waltham, Massachusetts; a research and manufacturing facility in Athlone, Ireland; and a manufacturing facility in Wilmington, Ohio."

Recent earnings results have generally been better than expected. On July 30th ALKS reported its Q2 results with both earnings and revenues coming in above expectations. Management raised their fiscal 2015 guidance.

ALKS beat analysts' estimates again when they reported their Q3 results on October 29th. The company lost ($0.18) a share but that was better than the estimates for ($0.21). Revenues were down -4.6% to $152.7 million but that was better than expected.

In ALKS' Q3 press release they provided a breakdown of revenues:

Manufacturing and royalty revenues from RISPERDAL CONSTA and INVEGA SUSTENNA/XEPLION were $67.6 million, compared to $68.5 million for the same period in the prior year.

Net sales of VIVITROL were $37.9 million, compared to $25.8 million for the same period in the prior year, representing an increase of approximately 47%.

Manufacturing and royalty revenues from AMPYRA/FAMPYRA 1 were $22.1 million, compared to $16.5 million for the same period in the prior year.

Royalty revenue from BYDUREON was $13.0 million, compared to $10.3 million for the same period in the prior year.

A few weeks ago ALKS announced that the FDA had approved their ARISTADA treatment for schizophrenia. ALKS explained that schizophrenia is a chronic, severe and disabling brain disorder that affects millions of patients in the U.S.

In ALKS' Q3 press release the company also announced they were working toward key milestones for their ALKS 3831 treatment for schizophrenia, their ALKS 8700 treatment for multiple sclerosis, and their ALKS 5461 treatment for major depressive disorder. They expect more data on all three within the next six months.

Technically the stock has soared from the bottom of its major trading range near $55 toward the top of its trading range near $75.00. The current rally has produced a buy signal on the point & figure chart, which is also forecasting a long-term target of $108.00.

The key level to watch is resistance at $75.00. ALKS has been consolidating sideways in the $70-74 zone the last several days but shares are on the verge of a breakout. It would be tempting to buy calls on a rally above today's high ($74.11) but we are suggesting a trigger to buy calls at $75.25, which would be a new multi-year high and above resistance from early 2015.

Trigger @ $75.25

- Suggested Positions -

Buy the DEC $80 CALL (ALKS151218C80) current ask $2.00
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

Traders Are Still Buying The Dip

by James Brown

Click here to email James Brown

Editor's Note:

Stocks started Tuesday's session on a weak note. After yesterday's sell-off investors were worried about more profit taking. Fortunately there was very little follow through lower. Traders started buying the dip again mid morning and most of the market managed to trim or erase its losses for the session.

NFLX hit our new entry trigger.

Current Portfolio:

CALL Play Updates

Align Technology - ALGN - close: 66.10 change: -0.98

Stop Loss: 64.45
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 496 thousand
Entry on November -- at $---.--
Listed on November 09, 2015
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

11/10/15: ALGN underperformed today after the company lost a legal battle against rival ClearCorrect. The heart of the case was over Internet transmissions from Pakistan to a facility in Texas. ALGN lost the case. Shares of ALGN dipped to short-term support near $65.00 and started to bounce.

We are on the sidelines waiting for a new relative high. Our suggested entry point for bullish positions is at $68.55.

Trade Description: November 9, 2015:
A better than expected Q3 earnings report launched ALGN to new highs. Shares have managed to hold on to most of its gains.

ALGN is in the healthcare sector. According to the company, "Align Technology is the leader in modern clear aligner orthodontics that designs, manufactures and markets the Invisalign® system, which provides dental professionals with a range of treatment options for adults and teenagers. The Company also offers the iTero 3D digital scanning system and services for orthodontic and restorative dentistry. Align Technology was founded in March 1997 and received FDA clearance to market the Invisalign system in 1998. Visit www.aligntech.com for more information."

ALGN's guidance has been disappointing all year long. Prior to the company's Q3 earnings report on October 22nd, ALGN has lowered guidance three quarters in a row. That changed with their last report.

Wall Street was expecting ALGN to deliver earnings of $0.30 a share on revenues of $205 million. ALGN beat estimates with earnings of $0.34 a share. Revenues were up +9.4% to $$ 207.6 million. Their clear aligner shipments were up +23.3% worldwide. Their teenage clear aligner shipments rose +22.3%.

Joe Hogan, Align Technology President and CEO, commented on his company's quarterly results, "Q3 was another good quarter, with revenues and EPS above the high-end of our guidance. Our results were driven by strong Invisalign case volume, with growth across all customer channels and geographies, reflecting our highest year-over-year growth in North America in three years with continued strength coming from EMEA and APAC, expansion in low-stage product segment and seasonally strong uptake by teenage patients, which account for 75% of the Orthodontic market."

ALGN management then raised their guidance for Q4. They see earnings in the $0.50-0.53 range compared to analysts' estimates at $0.49. The company also raised their Q4 revenue forecast to $223-227.9 million.

The stock soared on this news from about $61 to nearly $68. Shares have spent the last couple of weeks digesting these gains. Now ALGN looks poised to breakout to new highs. The $65.00 level was major resistance and the breakout should signal a new leg higher. Tonight we are suggesting a trigger to buy calls at $68.55.

Trigger @ $68.55

- Suggested Positions -

Buy the JAN $70 CALL (ALGN160115C70)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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

Capital One Financial - COF - close: 79.38 change: -1.07

Stop Loss: 78.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 3.5 million
Entry on November -- at $---.--
Listed on November 07, 2015
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

11/10/15: COF is retreating from resistance in the $81.50-82.00 zone. Shares underperformed the financial sector today, which is worrisome. If COF drops again tomorrow we may remove it as a candidate. Currently we are waiting on a bullish breakout with a suggested entry at $82.15.

Trade Description: November 7, 2015:
Most people probably think of Capital One as a credit card company. They are also one of the top ten largest banks, based on deposits. The company is #145 in the Fortune 500. According to COF they have nearly 45 million customer accounts.

COF is part of the financial sector. According to the company, "Capital One Financial Corporation (www.capitalone.com) is a financial holding company whose subsidiaries, which include Capital One, N.A., and Capital One Bank (USA), N.A., had $212.9 billion in deposits and $313.7 billion in total assets as of September 30, 2015. Headquartered in McLean, Virginia, Capital One offers a broad spectrum of financial products and services to consumers, small businesses and commercial clients through a variety of channels. Capital One, N.A. has branches located primarily in New York, New Jersey, Texas, Louisiana, Maryland, Virginia and the District of Columbia."

COF's earnings results have been on something of a roller coaster. That big plunge in the stock price in July was a reaction to disappointing Q2 earnings (announced July 23rd). COF's earnings results were 19 cents worse than expected and revenues came in below expectations.

Shares reversed higher in late October when COF delivered better than expected Q3 results. Analysts were expecting a profit of $1.97 a share on revenues of $5.89 billion. COF beat estimates on both fronts with earnings of $2.10 a share. Revenues were up +4.6% to $5.9 billion. Shares of COF surged on this news and rallied to the $81.50 area, which has been resistance the last two weeks.

COF and most of the financials displayed relative strength on Friday (Nov. 6th) as the market reacted to the October jobs report. The better than expected jobs number almost guarantees the Federal Reserve will raise interest rates in December. This is very significant for the financials.

The Fed hasn't raised interest rates in almost a decade. When they do the banks should see a bump in their profit margin. Bears could argue that the Fed will raise rates so slowly it will take a long time for the banks to see any real impact. That might be true but the markets are always looking ahead and the financial sector should rally into the Fed's interest rate hike cycle.

Another bonus for the banks and credit card companies like COF was the surge in consumer credit. According to the Federal Reserve the U.S. saw consumer credit rise at a seasonally adjusted rate of +7.5% in the third quarter. Yet the numbers that just came out on Friday show that consumer credit surged to a higher than expected +10% annual rate in September.

Technically shares of COF appear to be coiling for a bullish breakout past resistance near $81.50. The point & figure chart is already bullish and forecasting a long-term target of $99.00. Tonight we are suggesting a trigger to buy calls at $82.15.

Trigger @ $82.15

- Suggested Positions -

Buy the 2016 JAN $85 CALL (COF160115C85)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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

Salesforce.com, Inc. - CRM - close: 78.25 change: +0.03

Stop Loss: 75.75
Target(s): To Be Determined
Current Option Gain/Loss: +13.1%
Average Daily Volume = 3.6 million
Entry on October 12 at $76.25
Listed on October 07, 2015
Time Frame: Exit PRIOR to earnings on November 18th
New Positions: see below

11/10/15: CRM dipped again this morning. Traders bought the dip at $77.30 multiple times midday and CRM managed to bounce back toward unchanged on the session.

No new positions at this time. We are planning to exit prior to CRM's earnings on November 18th.

Trade Description: October 7, 2015:
Cloud computing and software giant CRM has been churning sideways for almost seven months. In spite of this lack of upward movement CRM is still outperforming the broader market. The NASDAQ composite is up +1.2% year to date. CRM is up +26%. The good news is that CRM looks poised to breakout past major resistance and begin its next leg higher.

CRM is part of the technology sector. According to the company, "Salesforce is the world's #1 CRM company. Our industry-leading Customer Success Platform has become the world's leading enterprise cloud ecosystem. Industries and companies of all sizes can connect to their customers in a whole new way using the latest innovations in cloud, social, mobile and data science technologies with the Customer Success Platform."

CRM's revenues have been consistently growing in the mid +20% range the last few quarters. Their Q4 revenues were up +26%. Q1 revenues were +23%. The company's most recent quarter was announced August 20th. Analysts were expecting Q2 results of $0.17 a share on revenues of $1.6 billion. CRM beat both estimates with a profit of $0.19 as revenues grew +23.5% to $1.63 billion. Management raised their Q3 and full year 2016 revenue guidance.

Technically the stock is in a long-term up trend and the point & figure chart is forecasting an $85.00 target. The $75.00-76.00 area is major resistance with CRM failing in this region multiple times. The recent rally has boosted CRM back to this level and the stock looks poised to breakout soon.

(Side note - CRM did hit an intraday high of $78.46 on April 29th thanks to M&A rumors. The company is still considered a potential acquisition target by larger rivals.)

We like CRM's relative strength and consistently strong earnings and revenue growth. A breakout here could spark a run that lasts until the company's earnings report in November. Tonight we are suggesting a trigger to buy calls if CRM trades at $76.25 (or higher).

- Suggested Positions -

Long DEC $80 CALL (CRM151218C80) entry $3.05

10/31/15 new stop @ 75.75
10/17/15 new stop @ 74.75
10/12/15 triggered @ $76.25
Option Format: symbol-year-month-day-call-strike

The Home Depot, Inc. - HD - close: 125.26 change: +0.76

Stop Loss: 121.75
Target(s): To Be Determined
Current Option Gain/Loss: +56.6%
Average Daily Volume = 5.3 million
Entry on October 08 at $120.25
Listed on October 05, 2015
Time Frame: Exit PRIOR to earnings on November 17th
New Positions: see below

11/10/15: HD did not see any follow through on yesterday's profit taking. Shares bounced off their 20-dma and outperformed the market with a +0.6% gain.

No new positions at this time. We plan on exiting prior to HD's earnings report on Nov. 17th.

Trade Description: October 5, 2015:
Home Depot's stock has outperformed the broader market in spite of the fact shares have been stuck in a trading range for the last seven months. That could be about to change.

The big surge in the U.S. housing market this year has been a bullish tailwind for HD's business. The home remodeling and repair industry and consumer spending in this category is expected to hit levels not seen since before the "Great Recession" in 2008-2009. HD is poised to reap the benefits.

HD is in the services sector. According to the company, "The Home Depot is the world's largest home improvement specialty retailer, with 2,270 retail stores in all 50 states, the District of Columbia, Puerto Rico, U.S. Virgin Islands, Guam, 10 Canadian provinces and Mexico. In fiscal 2014, The Home Depot had sales of $83.2 billion and earnings of $6.3 billion. The Company employs more than 370,000 associates. The Home Depot's stock is traded on the New York Stock Exchange (HD) and is included in the Dow Jones industrial average and Standard & Poor's 500 index."

HD has been showing steady earnings and revenue growth. The company has beaten Wall Street estimates on both the top and bottom line the last three quarters in a row. Management has also raised their guidance the last three quarters in a row.

Their most recent report was August 18th. HD announced its Q2 earnings were up +14% from a year ago to $1.71 per share. Revenues were up +4.3% to $24.83 billion. Comparable store sales came in better than expected with a +4.2% improvement.

Wall Street analysts seem bullish with firms like Deutsche Bank and UBS recently raising their price targets on HD. Currently the point & figure chart is bearish but a rally past $120.00 would generate a brand new buy signal.

Earlier I mentioned that HD has been stuck in a long trading range or consolidation for most of 2015. With the exception of a few days, shares of HD have been churning sideways in the $110-120 range. Today HD looks poised to breakout from this channel. The $120.00 level is round-number resistance. Tonight we are suggesting a trigger to buy calls at $120.25. Plan on exiting prior to HD's earnings report in mid November.

- Suggested Positions -

Long NOV $125 CALL (HD151120C125) entry $1.43

10/22/15 new stop @ 121.75
10/10/15 new stop @ 117.45
10/08/15 triggered @ $120.25
Option Format: symbol-year-month-day-call-strike

iShares Russell 2000 ETF - IWM - close: 118.17 change: +0.35

Stop Loss: 114.85
Target(s): To Be Determined
Current Option Gain/Loss: +25.9%
Average Daily Volume = 36 million
Entry on October 28 at $116.55
Listed on October 24, 2015
Time Frame: 6 to 8 weeks
New Positions: see below

11/10/15: The IWM rebounded off short-term support near the $117.00 level today. Shares managed to outperform their big cap rivals.

No new positions at this time.

Trade Description: October 24, 2015:
If you haven't noticed the market is in rally mode. Worries over the Fed raising rates in 2015 are fading while the rest of the world is trying to add stimulus to their economies. Concerns over a terrible Q3 earnings season are also fading. Yes, earnings results have been bad but the bar was set low enough that companies are beating estimates. Now the U.S. market is surging.

One area of the market has lagged behind and that is the small cap stocks. The NASDAQ composite ended the week with a +6.3% gain for 2015. The S&P 500 edged back into positive territory with a +0.8% gain for the year. Yet the small cap Russell 2000 index is still down -3.2%. It's time for the small caps to play catch up with the rest of the market.

A couple of issues have driven this divergence. Right now big caps are outperforming because mutual fund and hedge fund managers are probably window dressing their portfolios for the end of their fiscal year (October 31st). Another factor has been weakness in the biotech stocks. Biotechs reversed sharply in the last three months and they have struggled to keep up with the market's rebound. Currently there are a lot of small biotech companies in the small cap index. Biotechs now account for about 7% of the Russell 2000 index. This group has definitely lagged the rest of the market over the last three weeks.

The good news is that the IWM small cap ETF, which tracks the Russell 2000 index, looks poised to breakout higher. It has been coiling below resistance in the $116 area the last several days. When it finally breaks higher it can move pretty quick.

Tonight we are suggesting a trigger to buy calls at $116.55. If triggered we will start with a stop loss at $113.35. This is a multi-week trade.

- Suggested Positions -

Long 2016 JAN $120 CALL (IWM160115C120) entry $1.89

11/03/15 new stop @ 114.85
10/28/15 triggered @ $116.55
Option Format: symbol-year-month-day-call-strike

Lear Corp. - LEA - close: 124.64 change: +1.10

Stop Loss: 121.45
Target(s): To Be Determined
Current Option Gain/Loss: -10.8%
Average Daily Volume = 951 thousand
Entry on October 28 at $123.65
Listed on October 27, 2015
Time Frame: Exit PRIOR to December option expiration
New Positions: see below

11/10/15: Good news! It looks like the pullback, that began last week, may be over. LEA displayed relative strength with a +0.89% gain today.

Today's intraday high was $125.23. I would use a rally past $125.50 as a new bullish entry point.

Trade Description: October 27, 2015:
Shares of LEA experienced a correction this summer but the stock has come charging back. Year to day LEA is up +25% against the S&P 500, which is virtually flat with a +0.3% gain. The relative strength has been very evident in the last couple of months. The S&P 500 is up +10.6% from its August-correction lows. LEA is up +36% off its August intraday lows.

LEA is in the consumer goods sector. They are part of the auto parts industry. According to the company, "The Lear Corporation is a Fortune 500 company with world-class products designed, engineered and manufactured by a diverse team of talented employees. As a leading supplier of automotive seating and electrical, Lear serves its customers with global capabilities while maintaining individual commitment. With headquarters in Southfield, Michigan, Lear maintains 235 locations in 35 countries around the globe and employs approximately 135,000 employees. Lear is traded under the symbol [LEA] on the New York Stock Exchange."

The strong dollar has created negative currency headwinds for LEA but the company continues to beat on the bottom line. Their Q2 results, announced on July 24th, were better than expected with earnings of $2.82 per share. That was 34 cents above estimates. Management raised their full-year 2015 guidance.

The trend of better than expected earnings continued in the third quarter. LEA just announced their Q3 results a few days ago on October 23rd. Analysts were expecting a profit of $2.37 a share on revenues of $4.41 billion. LEA delivered a profit of $2.56 a share. That is a +33% jump from a year ago. Revenues were only up +2.3% to $4.33 billion. That missed expectations. However, if you discount negative currency headwinds, sales were up +11%. LEA management raised their 2015 outlook again.

These results were good enough to generate some bullish analyst comments on LEA and a new price target at $138.00. Coincidentally the point & figure chart is bullish and forecasting at $138 target. The current rally in LEA has produced a bullish breakout past major resistance in the $118.00 region, which should now become new support. More aggressive traders may want to buy calls now. We are suggesting a trigger to buy calls at $123.65, which would be a new all-time high. .

- Suggested Positions -

Long DEC $125 CALL (LEA151218C125) entry $3.70

11/03/15 new stop @ 121.45
10/28/15 triggered @ $123.65
Option Format: symbol-year-month-day-call-strike

Lam Research Corp. - LRCX - close: 76.42 change: -0.58

Stop Loss: 73.85
Target(s): To Be Determined
Current Option Gain/Loss: -22.7%
Average Daily Volume = 2.5 million
Entry on October 30 at $76.25
Listed on October 28, 2015
Time Frame: 6 to 8 weeks
New Positions: see below

11/10/15: It was another quiet day for LRCX. Shares just can't seem to escape the gravitational pull of the $76.00 level. If you look at an intraday chart you can see that LRCX has been hovering in the $76-78 zone for more than two weeks.

Investors may want to wait for LRCX to rally past $78.00 before considering new bullish positions.

Trade Description: October 28, 2015:
Wall Street loves mergers and this month LRCX has jumped into the 2015 buying spree. Semiconductor stocks had a rough summer with the SOX semiconductor index plunging from early June through late August. Fortunately the group appears to have bottomed. LRCX's recent earnings news and acquisition announcement has accelerated the stock's rebound.

LRCX is part of the technology sector. According to the company, "Lam Research Corp. (LRCX) is a trusted global supplier of innovative wafer fabrication equipment and services to the semiconductor industry. Lam's broad portfolio of market-leading deposition, etch, and clean solutions helps customers achieve success on the wafer by enabling device features that are 1,000 times smaller than a grain of sand, resulting in smaller, faster, more powerful, and more power-efficient chips. Through collaboration, continuous innovation, and delivering on commitments, Lam is transforming atomic-scale engineering and enabling its customers to shape the future of technology. Based in Fremont, Calif., Lam Research is a Nasdaq-100 Index and S&P 500 company whose common stock trades on the Nasdaq Global Select MarketSM under the symbol LRCX."

LRCX's most recent earnings report was October 21st. Analysts were expecting a profit of $1.72 per share on revenues of $1.6 billion. LRCX delivered earnings of $1.82 a share. Revenues were up +38.8% from a year ago to $1.6 billion. Management then raised their Q2 earnings guidance to $1.32-1.52 a share, which is significant above analysts' estimates.

The news didn't stop there. LRCX also announced they were buying KLA-Tencor (KLAC) for $10.6 billion. This new combined company will have $8.7 billion in revenues.

Here are a few highlights from the LRCX-KLAC merger deal:

Creates Premier Semiconductor Capital Equipment Company: Strengthened platform for continued outperformance, combining Lam's best-in-class capabilities in deposition, etch, and clean with KLA-Tencor's leadership in inspection and metrology

Accelerates Innovation: Increased opportunity and capability to address customers' escalating technical and economic challenges Broadens Market Relevance: Comprehensive and complementary presence across market segments provides diversity, scale and value creating innovation opportunities

Significant Cost and Revenue Synergies: Approximately $250 million in expected annual on-going pre-tax cost synergies within 18-24 months of closing the transaction, and $600 million in annual revenue synergies by 2020 Accretive Transaction: Increased non-GAAP EPS and free cash flow per share during the first 12 months post-closing

Strong Cash Flow: Complementary memory and logic customer base, operational strength, and meaningful installed base revenues strengthen cash generation capability Anstice concluded, "We have tremendous respect for the company KLA-Tencor employees have built over nearly 40 years - their culture, technology, and operating practices. I have no doubt that our combined values, focus on the customer, and complementary technologies will create a trusted leader in our industry, capable of creating significant opportunity for profitable growth and in turn delivering tremendous value to all of our stakeholders. This is the right time for the right combination in our industry." You can read more details about the merger here.

The combination of the earnings beat, raised guidance, and the merger news launched LRCX stock higher. Traders have been consistently buying the dips since then. Now shares of LRCX are poised to break through technical resistance at its 200-dma soon. Shares have been upgraded with a new price target of $85.00. Meanwhile the point & figure chart is bullish and forecasting at long-term target of $107.00.

LRCX looks like it could run towards the 2015 highs in the $84-85 region. Today's intraday high was $76.19. We are suggesting a trigger to buy calls at $76.25.

- Suggested Positions -

Long JAN $80 CALL (LRCX160115C80) entry $3.30

11/03/15 new stop @ 73.85
10/30/15 triggered @ $76.25
Option Format: symbol-year-month-day-call-strike

Netflix, Inc. - NFLX - close: 112.70 change: +2.84

Stop Loss: 104.25
Target(s): To Be Determined
Current Option Gain/Loss: +6.4%
Average Daily Volume = 19 million
Entry on November 10 at $111.35
Listed on November 05, 2015
Time Frame: 6 to 8 weeks
New Positions: see below

11/10/15: Our NFLX trade is open. Right on cue shares bounced and NFLX hit our new entry trigger at $111.35. The stock displayed significant relative strength with a +2.58% gain today.

Trade Description: November 5, 2015:
Netflix has come a long way from its late 1990s roots as a DVD-rental-by-mail business. Today it is one of the largest online streaming video-on-demand businesses. The company's most recent earnings report was disappointing but failed to derail enthusiasm for the stock.

NFLX is part of the services sector. According to the company, "Netflix is the world's leading Internet television network with over 69 million members in over 60 countries enjoying more than 100 million hours of TV shows and movies per day, including original series, documentaries and feature films. Members can watch as much as they want, anytime, anywhere, on nearly any Internet-connected screen. Members can play, pause and resume watching, all without commercials or commitments."

Traditional media giants have been struggling with a massive change in consumer viewing habits. More and more people are "cutting the cord" with traditional cable television subscription packages. Case in point, Time Warner (TWX) just reported earnings this week and lowered their guidance as they expect more pay-TV subscribers to leave. That's because there are too many online streaming video options that are more competitive than regular cable services. NFLX has been a significant winner as people cut the cord.

NFLX is one of the market's best performers this year with a +132% gain year to date. Yet NFLX is not invincible. Doubts have been growing about NFLX's ability to keep growing and its rising costs. Their most recent earnings report is a good example.

NFLX announced their Q3 earnings results on October 14th. They missed Wall Street estimates on both the top and bottom line. Analysts were expecting a profit of $0.08 a share on revenues of $1.75 billion. NFLX delivered $0.07 a share. Revenues were up +23% to $1.74 billion. It wasn't a big miss but it was a miss. Furthermore NFLX management lowered their Q4 guidance below estimates. They now see Q4 earnings at $0.02 a share compared to estimates at $0.03.

One of the biggest disappointments was domestic subscriber growth. NFLX added 3.62 million subscribers globally. 2.74 million where international subscribers. The rest, 880,000 subs, were U.S. subscribers. That was significantly below analysts' estimates at 1.25 million.

NFLX partially blamed this subscriber miss on the credit card industry, which has been issuing new, more sophisticated credit cards with security chips in them. Essentially subscribers needed to update their billing info with the new card and that didn't happen, which produced more customer "churn". At least that is the story from NFLX. Credit card experts think this story is baloney and just a scapegoat for NFLX's poor growth.

Another challenge facing NFLX is growing competition. Amazon.com tries to dominate every market they are in. Their Amazon.com video streaming service is $99.00 a year (about $8.25/month) but this hasn't stopped NFLX's growth. Hulu has been a competitor in the online streaming video industry for years. They just launched a new ad free subscription service at $11.99 a month. According to Hulu, the customer response has been awesome but they are not releasing any numbers on how many people have signed up. Hulu's advantage over NFLX is being able to watch current season TV on their service. Yet another competitor for NFLX is YouTube. YouTube is launching a paid subscription service called YouTube Red for $9.99 a month. In spite of all the competition NFLX remains the dominant player and they continue to expand both in the U.S. and overseas. (FYI: new subscribers pay $9.99 a month for NFLX)

If missing earnings estimates and lowering guidance wasn't bad enough NFLX also told investors that they plan to raise additional capital next year (2016) to help "fund our continued content investments". That means more debt and could mean more stock (which dilutes shareholders). One of NFLX critics biggest arguments has been the company's rising expenses. Yet in spite of all these challenges NFLX's stock continues to perform.

Investors bought the post-earnings sell-off in the $97 range. Shares are now up three weeks in a row. They have filled the gap from October 15th (post-earnings drop) and kept rising. Now NFLX is on the verge of breaking out past its early October highs (near $115-116). The point & figure chart is bullish and forecasting at $148 target.

In summary, the growth story for NFLX seems a little bruised with their missed subscriber numbers. They continue to spend a ton of money on content and expansion. Yet investors continue to buy the name. The consumer trend of switching from traditional cable to streaming is not going to reverse and that benefits NFLX.

We are adding NFLX as a bullish candidate. We do consider it a higher-risk, more aggressive trader because shares can be so volatile. Tonight we are suggesting a trigger to buy calls at $116.15. I would use small positions to limit risk.

FYI: If you're curious about Netflix and their long-term outlook, check out this page on their website Netflix's View: Internet TV is replacing linear TV .

*small positions to limit risk* - Suggested Positions -

Long 2016 JAN $120 CALL (NFLX160115C120) entry $5.12

11/10/15 triggered @ $111.35
11/09/15 Entry Point Strategy Change - move the entry trigger from $116.15 down to $111.35. Adjust the stop loss down to $104.25.
Option Format: symbol-year-month-day-call-strike

United Technologies - UTX - close: 98.68 change: -0.34

Stop Loss: 97.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 3.1 million
Entry on November -- at $---.--
Listed on November 04, 2015
Time Frame: Exit PRIOR to January option expiration
New Positions: Yes, see below

11/10/15: UTX began trading ex-dividend this morning. The company paid a quarterly dividend of $0.64 a share. The stock price dipped to short-term support near $98.00 before paring its losses on the session.

Our suggested entry point for bullish positions is $101.15.

Trade Description: November 4, 2015:
It has been a tough year for UTX investors. The stock peaked near $124 a share in February 2015. Shares spent the next seven months in retreat. UTX finally bottomed in the $85-87 range in late September. Now shares appear to have reversed.

UTX is in the industrial goods sector. According to the company, "United Technologies, based in Farmington, Connecticut, provides high-technology systems and services to the building and aerospace industries." The company operates through different segments. They are: UTC Building & Industrial Systems, Pratt & Whitney (aircraft engines), UTC Aerospace Systems, and Sikorsky (helicopters). UTX is selling its Sikorsky unit to Lockheed Martin for $9 billion. The deal should close soon.

One of the biggest challenges for UTX has been an economic slowdown overseas and the strength of the U.S. dollar. The company gets more than 60% of their sales outside the U.S. That makes negative currency headwinds a serious issue.

Their most recent earnings report was October 20th. Analysts were expecting a profit of $1.56 a share on revenues of $14.59 billion. UTX beat the bottom line estimate with $1.67 a share, but that was still a double-digit decline from a year ago. Revenues were down -5.6% to $13.79 billion. Management reaffirmed their fiscal year 2015 guidance of $6.15-6.30 a share and revenues in the $57-58 billion range, which is in-line with Wall Street estimates. That was good enough for the street. The stock rallied.

The big reasons investors are looking past the disappointing earnings and revenue growth has been stock buybacks. Plus the current management has been selling off non-core assets as they try to streamline the company for better growth.

I mentioned earlier that UTX is selling their Sikorsky unit to LMT for $9 billion. UTX is going to use $6 billion of that money in an accelerated stock buyback program because they believe their stock is too cheap. Furthermore, UTX announced they were adding an extra $12 billion to their stock repurchase program. Altogether the company plans to spent $16 billion on stock buybacks through 2017.

Investors seem to like the news with shares up sharply from their Q3 report. The point & figure chart has turned bullish and is forecasting at $112 target. At the moment UTX is hovering near short-term resistance in the $100-101 zone. Tonight we are suggesting a trigger to buy calls at $101.15.

I will point out that UTX's daily chart seems to have resistance about every $5.00 ($105, $110, etc.). Odds are good we could see UTX rally back toward its simple 200-dma (currently near $109).

Trigger @ $101.15

- Suggested Positions -

Buy the 2016 JAN $105 CALL (UTX160115C105)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

11/10/15 UTX traded ex-dividend today ($0.64 dividend)
11/06/15 UTX finalized its sale of the Sikorsky helicopter business to Lockheed Martin today
Option Format: symbol-year-month-day-call-strike

PUT Play Updates

Anthem, Inc. - ANTM - close: 135.27 change: +1.50

Stop Loss: 141.00
Target(s): To Be Determined
Current Option Gain/Loss: -18.8%
Average Daily Volume = 2.2 million
Entry on November 04 at $134.25
Listed on November 03, 2015
Time Frame: 6 to 8 weeks
New Positions: see below

11/10/15: The big healthcare names bounced today. ANTM outperformed most of its peers with a +1.1% gain. That was enough to outperform the major averages too. ANTM should find resistance in the $135-137 zone. More conservative investors might want to adjust their stop loss closer to $137.50ish. Currently our stop is $141.00.

No new positions at this time.

Trade Description: November 3, 2015:
The big healthcare stocks used to be unstoppable. The group delivered huge gains in 2013 and 2014. Unfortunately the rally has peaked in 2015 and now the major names are retreating, in spite of increased M&A in the industry.

ANTM is in the healthcare sector. According to the company, "Anthem is working to transform health care with trusted and caring solutions. Our health plan companies deliver quality products and services that give their members access to the care they need. With over 72 million people served by its affiliated companies, including more than 38 million enrolled in its family of health plans, Anthem is one of the nation's leading health benefits companies."

The big story for healthcare has been consolidation. The handful of major insurers are getting bigger as they gobble each other up. Last July ANTM announced they were buying smaller rival Cigna (CI) for $54 billion. ANTM is holding a special shareholder meeting on December 3rd to approve the issuance of more stock to help pay for the merger. The deal is not expected to close until the second half of 2016. When it does CI should add to ANTM's earnings.

Speaking of earnings, ANTM is still growing. They reported their Q3 earnings on October 28th. Wall Street expected a profit of $2.32 a share on revenues of $19.65 billion. ANTM beat both estimates with a profit of $2.73 a share. Revenues were up +7.6% to $19.77 billion.

Investors seemed disappointed with ANTM's rising costs. Their benefit expense ratio rose 110 basis points to 83.6%. Furthermore ANTM raised their fiscal year 2015 guidance to $10.10-10.20 a share but that was seen as anemic. Wall Street estimates were already at $10.22 a share.

The IBD recently noted that all five of the big health insurers saw ObamaCare exchange enrollments fall in the third quarter. The average decline was -8.3%. That could be significant. The Affordable Care Act (ObamaCare) has driven a lot of growth for the big insurers over the last few years. Unfortunately the ACA has been plagued with problems and rising costs.

A couple of weeks ago a Credit Suisse analyst downgraded the healthcare sector over high valuations. The sector has been underperforming. Furthermore analysts earnings revisions have been slowing. Essentially Wall Street thinks growth is slowing for the group. ANTM has seen analysts lowering their price targets on the stock.

Technically the healthcare sector and shares of ANTM peaked this past summer. Currently ANTM is flirting with a breakdown into bear market territory with a -19.8% drop from its June closing high. The point & figure chart is already bearish and forecasting at $122 target. A decline under $134.00 would reaffirm the sell signal. ANTM does have significant support in the $134.50-135.00 zone. We want to be ready when it does break down. Tonight we are suggesting a trigger to buy puts at $134.25.

- Suggested Positions -

Long 2016 JAN $130 PUT (ANTM160115P130) entry $5.60

11/04/15 triggered @ $134.25
Option Format: symbol-year-month-day-call-strike

Darden Restaurants - DRI - close: 54.68 change: -0.26

Stop Loss: 63.65
Target(s): To Be Determined
Current Option Gain/Loss: +18.6%
Average Daily Volume = 1.7 million
Entry on October 21 at $63.40
Listed on October 20, 2015
Time Frame: Exit PRIOR to earnings in December
New Positions: see below

11/10/15: Ouch! It was a rough day for put option holders on DRI.

DRI completed its spin-off of its real estate assets. This new company (Four Corners Property Trust) is public and trades under the symbol FCPT. They plan to be classified as a REIT by January 1, 2016.

Under the terms of the spin-off, DRI shareholders received one share of FCPT for every three shares of DRI. Fractional shares were paid in cash. This spin-off reduced the value of DRI's common stock by $6.42 a share. If you check the quote on DRI today shares are only down -$0.26 but it's off $6.68 from yesterday's close.

According to the CBOE, the options for DRI have not changed. Now every DRI option represents 100 shares of DRI and 33 shares of FCPT. The exchange did adjust the root symbol for the option from DRI to DRI1.

Unfortunately the option market did not react well to the spin-off today. The value on our put was crushed with a -56% drop in value. Shares of DRI were relatively flat (-0.47%) but shares of FCPT surged +5.8%, which pushed the value of the put option lower.

Links for more information:

DRI press release on the spin-off DRI completes spin-off

CBOE adjustment for DRI spin-off new unadjusted DRI options

No new positions at this time.

Trade Description: October 20, 2015:
Consumer spending has been disappointing and some of the restaurant names are suffering for it. DRI has actually raised guidance two quarters in a row but investors are ignoring this news and seem to be focusing on the larger macro trends for the industry.

DRI is in the services sector. According to the company, "Darden Restaurants, Inc., (DRI) owns and operates more than 1,500 restaurants that generate $6.8 billion in annual sales. Headquartered in Orlando, Florida, and employing 150,000 people, Darden is recognized for a culture that rewards caring for and responding to people. Our restaurant brands - Olive Garden, LongHorn Steakhouse, Bahama Breeze, Seasons 52, The Capital Grille, Eddie V's and Yard House - reflect the rich diversity of those who dine with us. Our brands are built on deep insights into what our guests want."

DRI reported their Q4 report on June 23rd. They beat Wall Street's EPS estimate and raised their 2016 guidance. Shares popped on the news and the stock continued to rally into late summer. Unfortunately shares produced a bearish double-top pattern in the July-August time frame. DRI began to correct lower.

The company reported its 2016 Q1 results on September 22nd. Earnings of $0.68 per share beat estimates by 10 cents. Revenues were up +5.7% to $1.69 billion, which was above estimates. Same-store sales were up +3.4% for the quarter. Management raised their 2016 earnings guidance again. This looked like a pretty good report. Yet three days later investors sold the rally.

Nationwide the pace of consumer spending has been lower than expected. A few days ago an industry research firm said U.S. restaurant sales were up +1.5% in Q3 but that was slower than Q2's +1.8% growth. A higher tab helped offset slower traffic numbers. The outlook for traffic is worrisome. This firm expects restaurant traffic numbers to be stagnant. This is inline with another research note that expects foot traffic at retailers to fall -8% this holiday season.

The market used to think that consumers would take the money they saved from lower gasoline prices and spend it elsewhere. That doesn't seem to be happening. Now the restaurant industry is facing tough comparisons to last year's relatively healthy Q4 numbers.

Technically DRI is now in a bearish trend of lower highs and lower lows. Shares have broken down below their 200-dma. The oversold bounce just failed at resistance near $66.00. The point & figure chart is bearish and forecasting at $55.00 target. Tonight we are suggesting a trigger to buy puts if DRI trades down to $63.40. This is a multi-week trade. We will plan on exiting prior to earnings in December.

- Suggested Positions -

Long 2016 JAN $60 PUT (DRI1160115P60) entry $2.15

11/10/15 DRI completes spin-off of FCPT
Option now represents 100 shares of DRI and 33 shares of FCPT
10/31/15 new stop @ 63.65
10/21/15 triggered @ $63.40
Option Format: symbol-year-month-day-call-strike