Option Investor

Daily Newsletter, Monday, 1/25/2016

Table of Contents

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

Market Wrap

Waiting For The Fed

by Thomas Hughes

Click here to email Thomas Hughes
It's Fed week and once again the market is wound up, waiting for the news.


Fed meeting week has rolled around once again and once again the market is at a potential turning point, waiting for the event to occur. There is little expectation for another rate hike this go round but the statement and the FOMC's outlook will fuel speculation.

Global trading was mixed today. Asian indices were able to make gains but those in the EU and US did not. Asian indices closed with gains near to or just above 1%, those in the EU close with losses in the range of -0.25% to -0.5%. Oil prices are most likely the reason for today's declines, WTI and Brent both fell below $30, erasing Friday's gains.

Market Statistics

Early futures trading indicated a negative open for the US indices all morning, if a small one. The SPX was indicated to open with a loss of -6 points and this level held fairly steady all morning and going into the opening bell. After the opening bell the indices moved lower in choppy trading to post intraday losses near -0.75% . Intraday lows held until just after 3PM. At that time the market broke through intraday support and moved to new lows led by the transports. The late day sell-off intensified into the final half hour of trading and left the indices near their lows at the close.

Economic Calendar

The Economy

No official economic data releases today but nonetheless the economy was affecting trading today. The big event of the week is the FOMC meeting and policy statement on Wednesday afternoon. The second biggest is probably going to be the 4th quarter GDP first estimate on Friday. Between then an now are the Case-Shiller 20 City Index, Consumer Confidence and Housing Index on Tuesday; New Home Sales on Wednesday; Initial Claims, Pending Home Sales and Durable Orders on Thursday and then Employment Cost Index, Michigan Sentiment and Chicago PMI on Friday.

Moody's Survey of Business Confidence fell by -2 points to hit a new low. The index remains high by historical standards but has continued the slide begun last summer. Mr. Zandi says that financial market turmoil is to blame and under current conditions sentiment "appears fragile".

Earnings season is underway and not looking great at this time, primarily due to oil prices and some earnings misses in the financial sector. According to FactSet, the blended rate for earnings is now -6.0%, down from -5.9% last week and -5.3% the week before due to downward revisions within 6 sectors. I still think we can expect to see this rise by the end of the season but at this time no sign of that is present. So far 15% of the S&P 500 has reported; 73% of those have beaten on earnings but only 49% have beaten on revenue with another 27.2% of the index reporting this week.

Energy is the lagging sector for the quarter. The sector is expected to see earnings declines greater than -72.0%, down from -65% earlier in the quarter. With prices at current levels earnings growth is not expected until the 2nd quarter of 2016 at the earliest. 1st quarter earnings growth in the energy sector is now expected to be greater than -60%, down from -6% just a month or so ago. Looking further out earnings growth is expected to return in the second quarter but leave full year 2016 growth near -30%. Looking even further out 2017 earnings growth is project to be greater than +90%.

First quarter earnings growth, for the entire S&P 500, is now expected to be -1.7%. This is due to the massive downward revisions see in the energy sector. Positive growth is not expected until the 2nd quarter, about 2.3%, with that expanding into the end of the year, +6.5 in Q3 and +14.4 in Q4. The Consumer Discretionary sector is expected to lead positive growth in both the 1st quarter and the full year, near 15% for both. The first estimates for 2017 are coming out as well, FactSet is predicting about 13%.

The Oil Index

Oil prices fell in today's trading, reversing most of the gains seen during Friday's short covering rally. WTI fell nearly -6%, Brent just over -5%, both trading just below $31 and very near the $30 level. So far as I can tell there is still no reason to think that the supply and demand situation is changing so prices are likely to persist at these levels if not mover lower again. Production remains high, supply and storage remains high, demand remains low; oil may not reach new lows but there is little reason to get bullish on prices. According to FactSet, the average of 51 estimates of 2016 average oil prices are higher than 2015, but only by $0.15, so I think at best we can expect prices to stabilize between $40 and $50 although I don't see that rally starting now.

The Oil Index fell about -4.48% in today's session, dropping back below the 78.6% retracement level. This move is not a positive for sector bulls and closes the gap formed with Friday's candle. The indicators suggest a test of resistance may come but are otherwise weak and consistent with a relief rally within a a down trend. If the index is able to move higher resistance above 950 is near 1,000 and the short term moving average. If the index remains below 940 a move to retest the support at 900 is likely.

The Gold Index

Gold prices are getting a boost from diminished expectation for aggressive FOMC rate hiking in 2016. The ECB and the BOJ has set the dollar up for potential strength should either bank act but that potential is also tied to FOMC policy. If they do not give the market reason to think they will stay on track in 2016 the dollar could fall versus the euro and yen, or at best remain stable near current exchange levels. If the dollar weakens gold prices will likely continue to rise with targets near $1125 and $1150. If the FOMC sounds hawkish, combined with the already dovish ECB and BOJ, gold prices could fall back to test the lows near $1050.

The gold sector got a boost from the rise in gold prices, the miners ETF GDX rising more than 2.5%. Today action is a sign the market thinks the sector could rise but a very tentative one. The candle is a small spinning top just above the $13 support and below the short term moving average. The indicators are mixed, basically bearish but consistent with a bounce from support. In the near term, price action appears to be holding near the long term low with focus on the FOMC meeting, the dollar and gold prices.

In The News, Story Stocks and Earnings

The Dollar Index fell about -0.25% in today's session but remains perched near the midpoint between support and resistance targets. The indicators are exceedingly weak and without direction, leaving the index open to sharp movement in either direction, the FOMC meeting the most likely catalyst. Upside target is just above $100, downside target is near $98.25.

McDonald's was the star of the early morning session and one of today's market leaders. The global fast food giant reported a beat on earnings, revenues and comp store sales driven on turn-around efforts of new CEO and the new all-day breakfast menu. Consensus estimate for earnings was $1.23, actual was $1.31. Global comps were +5%, led by the US +5.7%. Shares of the stock jumped on the news during the early session, gapped up at the open but sold off during the day. Shares managed to close with a gain and look like they could continue higher. The indicators are confirming the break-out, the candle suggesting their may be a test of support before it moves on.

DR Horton also reported before the bell. The home builder reported revenue in-line with estimates and earnings that beat by a penny, along with other positive data, but did not inspire investors. Revenue rose by 4%, sales order rose by 12%, margin improved by 40 bps and back log is up by 16% and yet shares of the stock fell by -5% in today's session.

The banking sector has reported except for a string of small operators. The results are mostly in and they are not that great. The sector was expected to show growth in the range of 8.5% but so far has only produced 4.5% resulting in a near 1% on full year projections. The sector is also lowering outlook for Q1 and the full year. Q1 is now negative -0.5%, down from +2.5% at the beginning of the season, and full year is down to +8.6% from +9.4%.

The XLF Financial Sector SPDR is trading near a 12 month low and forming a pattern that could turn out to be a flag. The sector has been moving lower in the near term, is trading at 12 month lows, has bearish indicators strong and consistent with consolidation while earnings expectations are in decline. Is so, such a move would have a target near $19. The FOMC may be the trigger here too, rate hike outlook could impact earnings outlook across the sector.

RAMBUS reported after the bell. The chip maker announced better than expected revenue, earnings and guidance along with plans to make an acquisition. The stock jumped on the news, gaining 4% in after hours trading after closing with a loss near -1.5% .

The Indices

The market sold off today on a lack of data, mixed earnings and anticipation of the FOMC meeting. Today's action was led by the Dow Jones Transportation Average which lost about -1.86% and fell back to support levels near the recent low. The indicators are rolling over into what may become a bullish signal but for now simply consistent with bear market consolidation. Longer term, the past two MACD peaks are divergent from the recently set low and suggestive of support. Support target is between 6,500 and 6,600, if a bounce solidifies upside target is near 7,000, if support fails downside target is 6,000.

The NASDAQ Composite lost a little more than -1.55% and fell below 4,550. The index appears to be making a run for support with target possibly as low as 4,400. Today's candle is long and black, closing well below the previous candle, marking a peak and indicating lower prices. The indicators are mixed with bearish bias, consistent with bear market rally yet suggestive support will be retested, also consistent with the candle signal. Support targets may be reached before the Fed meeting but I don't think a decisive move in either direction will happen until Wednesday afternoon at the earliest.

The S&P 500 made the next largest decline, about -1.56%. The broad market fell from Friday's high to test support at 1,900, fell through and created a long black candle. Today's candle is a Dark Cloud Cover, a bearish signal within a near term down trend and suggestive of lower prices. Next target for support is 1,860 with 1,850 just below that. The indicators are rolling over in the near term and could become a buy signal but have yet to confirm, at this time they are merely showing a bounce from support that may be fading. In the short term MACD peaks are convergent with the recent low and suggestive it will be tested again, stochastic is oversold but pointing higher and about to cross above the lower signal line. If support holds and the index can get back above 1,900 upside target is near 1,980. If not downside targets are below 1,800.

The Dow Jones Industrial Average made the smallest decline in today's session, only -1.30%. The blue chips created a long black candle that closed below the Friday low, engulfing the previous candle and forming a dark cloud cover. This points to lower prices, in line with the near term down trend, with a target between 16,500 and 16,750, near the recent low. MACD momentum is convergent with the recent low so a retest at least should be expected, if not a new low. Stochastic is set up for some near term selling but is otherwise oversold. If support is broken down side target is near 15,000.

I'm still bullish for the long term and expecting a bounce to form but it is getting harder to stay so. The earnings led rally I have been expecting is still expected but, like the proverbial carrot on a stick, keeps slipping away. The ray of light, the silver lining, is that most of the weight of earnings declines falls on the shoulders of the energy sector. It sucks for them but otherwise is a plus for the rest of the economy.

It may all come down to the Fed and the dollar. If the Fed is more dovish and weakens the dollar outlook it could lead to a broad market rally. I say this because a weaker dollar will help improve currency impact for companies and firm forward earnings outlook for the broad market, help stabilize the commodities market and possibly put a bottom into oil prices.

Until then, remember the trend!

Thomas Hughes

New Option Plays

When In Doubt

by Jim Brown

Click here to email Jim Brown

Editors Note:

When you do not know which way a stock is going to trade you can sometimes lock in gains in either direction using a simple strategy.

When the market is not cooperating and stocks are directionless or headed lower there are always some low risk trades that can profit from either direction. One of those is Hewlett Packard today.

Rather than try to pick a market direction we can enter a cheap option strangle. This way we profit from a move in either direction. Normally strangles, which involve options that are not the same strike price and straddles that are the same strike price are too expensive to produce a reliable profit. The key in these strategies is to find a stock with cheap options.


No New Bullish Plays


HPQ - Hewlett Packard

Back in October Hewlett Packard spun off its enterprise server business into Hewlett Packard Enterprise (HPE) and the old Hewlett Packard that sells PCs and printers remained (HPQ). The problem with this spinoff is that the enterprise company is where the profits are. The PC business has been declining for years and that is why HP split the two entities.

Since the spinoff at $14.75 in October the HPQ shares have been in decline. They closed at a new low on Monday. I see no reason where HPQ should rally in the near future. PC sales are still expected to decline in 2016 only at a slower pace. There is nothing to produce excitement in the PC company.

In theory we could probably just buy a cheap put and sit on it but HPQ has earnings on February 24th. I expect those earnings to be disappointing. However, you never know if they will pull a rabbit out of the hat and announce something that powers the stock higher. This is why I am recommending a strangle rather than just a straight put play.

HPQ shares closed at $9.49 on Monday and halfway between the $9 put and $10 call. I am recommending the April strangle so we can benefit from the long-term trend if HPQ continues to decline. If earnings disappoint we could see HPQ at $5 by then.

Earnings are February 24th.

Buy April $9 put, currently 53 cents, no stop loss.
Buy April $10 call, currently 44 cents, no stop loss.

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In Play Updates and Reviews

Traders Getting Nervous

by Jim Brown

Click here to email Jim Brown

Editors Note:

Friday's short squeeze rebound was completely reversed with a -208 decline in the Dow and -30 points in the S&P.

The market gave back its gains and closed well under 16,000 on the Dow and 1,900 on the S&P. This is not what the bulls wanted to see. This substantiates the correlation between WTI and equities. WTI dropped back from Friday's $32.35 high to trade under $30 at the close for a -6% decline. This is not expected to improve. Oil prices are going to continue to grind lower as inventories build over the next two months.

Equities have a decision to make tomorrow. The normal "Pre FOMC Announcement Drift" equates to a market gain in the 24 hours ahead of the Fed announcement on Wednesday. Whether that tendency to drift higher can overcome a decline in oil remains unknown. However, oil typically rises on Tuesday afternoons as shorts cover ahead of the Tuesday night, Wednesday morning inventory reports.

All of these "normal" tendencies could be erased in a heartbeat if headlines appear that overpower the normal trends.

Today's decline is a warning that the lows from last week could be tested again. That means long positions should be entered carefully and sparingly.

Today's decline could also have been some worry over Apple's earnings on Tuesday. A significant drop in Apple shares could sour sentiment and impact the Dow and Nasdaq.

Current Portfolio

We are changing the format slightly this week. The entry date, earnings date, current price, change for the day and stop loss are all in the portfolio graphic. They will no longer be listed in the individual play descriptions. Everything you need is now available in a single location.

Current Position Changes


I added a stop loss on the XLE put position. See the play description for details.

DVN - Devon Energy

The bearish put position was entered shortly after the open this morning when Devon dropped to the entry trigger at $24.75.

Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

Original Call Recommendations (Alpha by Symbol)

IWM - Russell 2000 ETF

ETF Description


The IWM retreated to support from Friday at $99 but that is very short-term support. Any material volume on a further decline should blow through that without any problem. The real support is $95 and the low from last week.

Original Trade Description: January 20th

The IWM is the Russell 2000 ETF and the Russell was the only major index to close positive for the day other than the Biotech sector index. The Russell is in a bear market with a -24% drop from its highs. The Russell declined -47 points intraday and rebounded to gain +4.4 at the end of the day. The 960 level where it bounced was support from early 2013 and it was the 300-week average.

Typically, the small caps are the strongest index in December and January. That was not the case this year and there is a good possibility fund managers will bargain hunt there first when the buying begins.

Resistance from Tuesday's gap higher open is $101.20. I was going to recommend an entry trigger at $101.50 to get us past that level. The IWM closed at $99.18. However, by waiting to get past that resistance the option premiums could rise by more than $1. I would rather just buy the open and we will take what the market gives us.

Position 1/21/16:

Long March $102 call @ $2.76, no initial stop loss.

LULU - LuluLemon

LuluLemon designs, manufactures and sells athletic apparel and accessories for women, men and female youth. They operate through corporate owned stores and sell direct to the consumer online. They are best known for their yoga style clothing. Full Company Description


Good relative strength with only a 40 cent decline. The trade is not yet open while we wait for a trade at $59.05.

Original Trade Description: January 22nd

LuluLemon surprised everyone when they raised their guidance for Q4 sales saying they had a great holiday season. The company preannounced strong sales when most other retailers were posting losses or mediocre gains. The company now expects Q4 revenues in the range of $690-$695 million compared to prior guidance for $670-$685 million. This represents nearly 19% year over year growth on a constant currency basis.

Earnings guidance was raised to a range of 78-80 cents, up from 75-78 cents. Analysts were expecting 77 cents. The company said it entered 2016 with a bang thanks to a better than expected holiday season and continued increases in store traffic.

Cowen raised the target price from $52 to $66. Wells Fargo ungraded them from neutral to outperform with a target of $65. Jefferies upgraded it from hold to buy and gave it a $70 price target. Credit Suisse maintained its outperform rating but raised the target to $60. Suntrust Robinson reiterated a buy with a $66 target. Morgan Stanley reiterated an overweight with a target of $68. Morgan called it their favorite "turnaround" stock for 2016. Barclays issued an overweight rating with a target of $85.

It is amazing what a little positive guidance can do for Street ratings.

Earnings are March 9th.

With a trade at $59.05:

Buy March $60 calls, currently $2.81, initial stop loss $54.65

PCRX - Pacira Pharmaceuticals

Company Description


Support is holding at $64 but without a positive market we could be looking at another decline in the biotech sector. I considered raising the stop loss from $61.45 but passed for today. Conservative investors may want to look at something in the $63 level as a stop.

Original Trade Description: January 16th

PCRX delivered a very bumpy ride for investors in 2015. The stock outperformed the year before with +54% gain in 2014. Then sentiment changed last year and by October 2015 shares of PCRX were down -58% for the year and down -70% from its February 2015 highs. Fortunately some strong earnings news and a legal win helped PCRX pare its 2015 loss to -13%. Today PCRX is bouncing from support and looks poised to continue its late 2015 rebound.

PCRX is in the healthcare sector. According to the company, "Pacira Pharmaceuticals, Inc. is a specialty pharmaceutical company focused on the clinical and commercial development of new products that meet the needs of acute care practitioners and their patients. The company's flagship product, EXPAREL® (bupivacaine liposome injectable suspension), indicated for single-dose infiltration into the surgical site to produce postsurgical analgesia, was commercially launched in the United States in April 2012. EXPAREL and two other products have successfully utilized DepoFoam, a unique and proprietary product delivery technology that encapsulates drugs without altering their molecular structure, and releases them over a desired period of time."

The legal win I mentioned above was a fight between PCRX and the F.D.A. There was a disagreement over how PCRX was marketing its Exparel drug. The FDA argued the treatment was only approved for a couple different types of surgery. The company filed a lawsuit against the FDA in September last year. On December 15th they announced a resolution with the FDA. The lawsuit was dropped and the FDA officially rescinded its warning letter about how PCRX was marketing Exparel. Shares of PCRX soared about 15% on the news.

Some of the volatility last year was likely due to PCRX earnings. The company has beaten Wall Street's earnings estimates in three of the last four quarters. Yet they have missed the revenue estimate twice. At the same time Revenue growth has slowed from +84% to +59% to +25% to +19.6% in the most recent quarterly report.

PCRX did offer some good news this year. On January 7th they pre-warned that Q4 revenues would be better than expected. Wall Street was estimating $67.4 million for the quarter. PCRX is now forecasting +12.2% improvement from a year ago to $69.4 million. They also raised their full-year 2015 guidance.

The stock market's sell-off in 2016 pulled PCRX down toward support in the $60 area but traders started buying the dip in a big way on Thursday. PCRX has outperformed the market the last two days in a row. If this bounce continues it could spark some short covering. The most recent data listed short interest at 23% of the relatively small 33.7 million share float. Another positive is PCRX's point & figure chart shows the bounce off support and is currently forecasting an $83.00 target.

Earnings: Feb 26th, before the open.

Position 1/19/16:
Long Feb $75 Call @ $2.75, initial stop loss $61.45

QQQ - Nasdaq 100 ETF

ETF Description


The Nasdaq 100 suffered from big losses in PCLN, GOOGL, ISRG, BIIB, etc. The momentum stocks were sold hard and that suggests we could retest the lows from last week.

Original Trade Description: January 20th

The Nasdaq fell -163 points intraday and rebounded to positive territory just before the close. Some late selling in the last few minutes knocked it back to -5 for the day. From -163 to -5 is a monster rebound. The biotech stocks led the way but solar stocks, semiconductors and even Apple and Netflix got into the act and rebounded strongly.

Netflix declined from its afterhours high of $123 to a low of $97 intraday before rebounding to close at $108. I would have loved to buy Netflix at $97. What a bargain.

Obviously, a lot of that rebound was short covering and we do not know if it will last. However, the intraday low on the Nasdaq Composite was 4,319 and very close to the flash crash low of 4,292 from August. While it was not a perfect retest, it was close enough that a lot of traders closed shorts and bought stocks.

The Nasdaq 100 ($NDX) and the index the QQQ tracks, failed to decline anywhere close to the same distance as the Composite. The NDX dropped to 3,992 with major support at 4,000. The rebound there was very strong and from the right support level.

After the bell FireEye (FEYE) raised guidance and F5 networks (FFIV) beat on earnings. That could help with sentiment on Thursday. Nasdaq futures are up +6 in afterhours.

I am recommending the March $104 call with no entry trigger. If the market is going to open up I want to be there on the opening bell. These short squeezes can run for days and most lasting rallies begin with short squeezes.

Position 1/21/16:

Long March $104 call @ $2.63, no initial stop loss.

STZ - Constellation Brands

Company Description


Outstanding relative strength by STZ and holding near the prior highs. STZ remains a standout in the weak market.

Original Trade Description: January 14, 2016:

STZ was one of last year's best performing stocks with +45% gains in 2015. Consistently raising earnings and revenue guidance can do that for a stock. The company is seeing so much demand for their beer products that STZ just announced they're building a huge new brewery in Mexico. Meanwhile their wine and spirits business is seeing stronger margins due to recent acquisitions. Overall STZ is moving into 2016 with the wind at its back.

STZ is in the consumer goods sector. According to the company, "Constellation Brands is a leading international producer and marketer of beer, wine and spirits with operations in the U.S., Canada, Mexico, New Zealand and Italy. In 2014, Constellation was one of the top performing stocks in the S&P 500 Consumer Staples Index. Constellation is the number three beer company in the U.S. with high-end, iconic imported brands including Corona Extra, Corona Light, Modelo Especial, Negra Modelo and Pacifico. Constellation is also the world's leader in premium wine, selling great brands that people love including Robert Mondavi, Clos du Bois, Kim Crawford, Rex Goliath, Mark West, Franciscan Estate, Ruffino and Jackson-Triggs. The company's premium spirits brands include SVEDKA Vodka and Black Velvet Canadian Whisky... Based in Victor, N.Y., the company believes that industry leadership involves a commitment to brand-building, our trade partners, the environment, our investors and to consumers around the world who choose our products when celebrating big moments or enjoying quiet ones. Founded in 1945, Constellation has grown to become a significant player in the beverage alcohol industry with more than 100 brands in its portfolio, sales in approximately 100 countries, about 40 facilities and approximately 7,700 talented employees."

STZ has been killing it on the earnings front. They have beaten earnings the last three quarters in a row. Management has raised their guidance the last three quarters in a row. Their most recent earnings report was last week on January 7th. Analysts were expecting a profit of $1.30 a share on revenues of $1.62 billion. STZ beat estimates with a profit of $1.42 a shares. Revenues were up +6.4% to $1.64 billion. Strong beer sales has helped fuel double-digit shipment increases. The company announced they were building another brewery and raised their guidance again.

This bullish outlook sparked a couple of new price target upgrades ($172, $174 and $185). The stock soared to new highs and broke through key resistance near the $145.00 level on its earnings news and guidance. Shares have seen some profit taking since its spike to new highs. Now STZ is near support at one of its long-term trend lines of higher lows. The simple 50-dma should offer technical support at $140.40. Meanwhile the $140.00 level could offer some round-number, psychological support. Both of these are converging near its trend line of higher highs.

STZ underperformed the market today, which may mean more profit taking ahead. We want to buy calls on STZ as it nears support in the $140.00-140.50 area. Tonight we are listing a buy-the-dip trigger at $140.50 with a stop loss $138.25, just under its early January low.

Position 1/19/16:
Long April $150 Call @ $4.70, initial stop loss $138.25

Original Put Recommendations (Alpha by Symbol)

DVN - Devon Energy


Devon was triggered shortly after the open when the stock hit the entry point at $24.75. Declining oil prices will continue to force Devon lower.

Original Trade Description: January 21st

Devon Energy primarily engages in the exploration and production of oil and gas. The majority of their production is natural gas from more than 19,000 wells but they are making a concentrated effort to expand oil production. At year-end they had 689 million barrels of oil equivalent reserves. Company Description

In Q3 they produced 282,000 barrels of oil per day. That was a 31% increase over Q3-2014. That was the 5th quarter they exceeded guidance on oil production growth. That compares to their 680,000 Boepd of total gas and liquids production showing that oil was only about 41% of their total production. However, in Q3 oil accounted for 74% of total upstream revenue.

Devon is a well run company and highly regarded but the price of oil is killing them. They do have significant midstream assets including pipelines and processing facilities in the EnLink Midstream business. They own 70% of ENLC and 29% in ENLK. Those midstream companies generated $270 million in cash distributions in 2015.

The EnLink revenue is supporting Devon through this down cycle in the energy sector. Devon is also acquiring Access Pipeline in the first half of 2016 and that will add to their midstream assets.

If crude prices were to rally long term Devon would be a great company to own. However, in this period of falling oil prices from now until April the company is at the mercy of the declining sector.

On Thursday Devon shares rebounded with oil prices to resistance at $24.50 and then faded. When the switch to the March contract fades and crude prices begin to fall again I expect Devon to revisit the lows under $20 from Wednesday.

Earnings are February 16th so this will be a short-term play.

With a trade at $24.75:

NEW STRIKE!! Buy March $23 put, currently $1.95, stop loss $26.65

JUNO - Juno Therapeutics

Juno is a biopharmaceutical company that develops cell based cancer immunotherapies. Full Company Description


Juno remains untriggered. The stock showed good relative strength with a minor gain today. We are looking for a drop to $31.50 for a short entry.

Original Trade Description: January 22nd

Juno has been very active in buying up its competitors. On January 11th the company announced the acquisition of AbVitro for $125 million. That is their third acquisition in 12 months. However, Illumina (ILMN), ten times larger than Juno, is also on the same track and announced a similar acquisition on the same day.

Juno claims there is more than enough room in the space for both Juno, Illumina and Celgene (CELG) another competitor in the space. Apparently investors are not convinced. Shares of Juno have been in decline since early December and they hit a post IPO low last week. The rebound was lackluster and in a good market on Friday, they only gained 8 cents.

I expect to see a lower low in the weeks ahead.

Earnings are March 17th.

I am putting a downside entry trigger of $31.50 and upside stop just over the highs of last week at $35.15.

With a trade at $31.50

Buy March $27.50 put, currently $1.65, stop loss $35.15

VXX - iPath S&P 500 VIX Futures ETN

Company Description


No surprise here. The market decline spiked the volatility but long-term it will go down. Volatility spikes to 28 are very rare and do not last long.

Original Trade Description: January 16th

At the risk of stating the obvious, the last two weeks in stocks have been brutal. Investors have taken a risk-off attitude and sold just about everything. The small cap Russell 2000 index is already down -11% in the first ten trading days of 2016. The NASDAQ composite is off -10%. The S&P 500 has declined -8%.

The New Year has suffered a parade of negative headlines from disappointing economic data both in the U.S. and China. China devaluating its currency. N. Korea claiming to have hydrogen bombs (several times worse than normal nukes). Crude oil crashing into multi-year lows. Plus falling sentiment for corporate earnings, which are expected to be negative two quarters in a row.

No one wanted to be long over the three-day weekend, which helped drive stocks even lower on Friday. The S&P 500 dipped to 15-month lows before paring its losses on Friday. The fact that Friday was also options expiration just added to the volatility.

Stocks normally don't move that fast in a straight line for very long. Markets a very oversold and way overdue for a bounce. The rebound could show up this week. One way to play it is the volatility indices. The VXX follows the iPath S&P 500 VIX Short-Term Futures Index. When investors panic volatility spikes but these are almost always short-term events. You can see on the long-term weekly chart below these spikes always fade.

Tonight we are suggesting put options on the VXX to capture the decline as volatility fades again and it will sooner or later. We are betting on sooner. We want to buy the March $23 puts at the opening bell on Tuesday.

Position 1/19/16:
Long March $23 Put @ $2.41, no stop loss

XLE - Energy Select SPDR ETF

Company Description


The short squeeze in WTI ran its course and reality has returned to oil prices. We should see a continued decline as inventories build over the next two months.

Original Trade Description: January 19, 2016

The XLE is an ETF that represents the majority of the stocks in the energy sector. With the price of crude oil plunging and analysts predicting bankruptcy for 30-50% of the U.S. producers there is nothing to provide support for this ETF.

The few stocks that have dividends including Exxon, Chevron, Conoco and a few others, cannot support the sector. There are 45 stocks in the ETF with Exxon, Chevron and Schlumberger the largest weightings. That leaves about 40 stocks to drag the sector down as oil prices continue to fall.

This play does not need a lot of explanation. We are betting the energy sector will continue to decline as oil prices head for the low $20s.

This is the period of the year when oil inventories build. Demand is low and refineries will begin to shut down for spring maintenance in February and that will continue into March. Last year from the second week in January to the fourth week in April, U.S. inventories rose nearly 112 million barrels to record levels. They cannot repeat that this year because there is not enough available storage. This will drive prices even lower when producers run out of locations to store the oil.

We will plan on exiting this position the first week of March. I am not putting a stop loss on it initially because we could see some volatility whenever the shorts get squeezed. Once we are in the position for 3-4 days I will assign a stop loss

Position 1/20/16:

Long March $50 Put @ $2.62, no initial stop loss.

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