Option Investor

Daily Newsletter, Tuesday, 1/26/2016

Table of Contents

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

Market Wrap

Pre Fed Announcement Drift

by Jim Brown

Click here to email Jim Brown

The historical trend for a positive market the day before a Fed announcement was in full bloom today and helped by positive earnings from Dow components 3M, JNJ and PG.

Market Statistics

The positive earnings from Dow components and another short squeeze in oil prices helped to overpower the major losses from Asia overnight. Chinese economics plunged again and the impact was very negative. Data showed that steel exports fell to a four-year low. China's rail freight volume declined -11.9% in 2015 compared to -3.9% in 2014.

The World Bank slashed price estimates for 80% of the world's commodities due to declining demand. For 37 of the 46 commodities the bank monitors, they revised the estimates lower for 2016. Metals are expected to decline another -10% after a -21% drop in 2015. They cut their oil price forecast for 2016 from $51 to $37 and they may still be higher than most analysts.

Fortunately, investors were focused on a flood of U.S. economic reports and earnings. Case Shiller home prices rose +5.8% for November, up from +5.5% in October. Offsetting that was a drop in the FHFA Purchase Price Index from +6.1% in October to 5.9% in November. I believe as all know that housing prices are rising because there is a shortage of inventory so those reports should not have come as a surprise.

On the downside, the Richmond Fed Manufacturing Survey declined from +6 in December to +2 in January. That equates to a reading of 53.2 on the ISM Manufacturing Index. The positive numbers were a rebound from negative numbers in the prior three months. With the headline number for January, dropping to +2 it is not very far from negative territory again. The Richmond Fed Services Survey rose from zero to 10.

New orders declined from 8.0 to 4.0 and backorders rose from zero to +4.0. Employment declined from 12 to 9. However, the gap between new orders and inventory declined from +19 to -20. That means inventories are rising sharply compared to sales.

The Texas Service Sector Outlook Survey for January fell from 3.3 to -10.4 and well into contraction. This comes after the Manufacturing Outlook Survey fell from -20.1 to -34.6 on Monday. That is the lowest reading since the financial crisis. All of the internals on the manufacturing and services surveys declined.

Texas business activity is crashing as a result of the continued decline in the energy sector and all the businesses that support and supply that sector.

Texas Manufacturing Survey

The final Consumer Confidence for January came in at 98.1, up from 96.5 in the prior release. This is the second month of gains and likely driven by the sharp drop in gasoline prices with the national average at $1.83 today. Oklahoma has the lowest average at $1.50.

The confidence internals showed that present conditions were flat at 116.4 while the expectations component rose from 83.0 to 85.9. Those respondents planning on buying a car rose from 11.3% to 12.2%. Homebuyers rose from 6.2% to 6.6% and appliance buyers rose from 51.5% to 52.4%.

The big event on the calendar for Wednesday is the Fed announcement at 2:PM. There is no post meeting press conference. The Fed is expected to try and calm markets by suggesting they could wait on further rate hikes until June. If they stick with their measured pace, four hikes in 2016, which suggests a March rate hike the market will probably be disappointed.

The GDP on Friday is also important with Atlanta Fed GDPNow real time forecast at only +0.7%.

Thank you 3M (MMM). The company reported earnings of $1.80 that easily beat estimates for $1.66. Revenue of $7.3 billion beat estimates for $7.23 billion. The company said the impact of the dollar on the revenue of their various segments was very strong. Revenue declined in Health Care (-0.8%) as a result of the dollar, Consumer (-2.4%), Industrial (-6.3%), Safety and Graphics (-5.3%) and Electronics and Energy (-11.7%).

3M affirmed guidance for $8.10-$8.45 in earnings for 2016 and they plan to accelerate their stock buyback. 3M shares rose $7.21 on the news to add about 50 Dow points.

Johnson & Johnson (JNJ) posted earnings of $1.44 compared to estimates for $1.42. Revenue of $17.81 billion missed estimates slightly for $17.9 billion. The company said stronger than expected demand for blockbuster drugs like Remicade for arthritis and psoriasis drug Stelara. This was the 20th consecutive earnings beat by JNJ. The company provided guidance for $6.43-$6.58 per share for 2016 with revenue of $70.8-$71.5 billion. That would appear to be another strong year. Shares rose $4.78 to add more than 30 Dow points.

Dow component Procter & Gamble (PG) posted earnings of $1.04 that beat estimates for 98 cents. Revenue declined -9% to $16.9 billion and barely missing estimates of $16.94 billion. The revenue was hurt by weaker currencies in Russia, Brazil, Mexico and elsewhere. Gross margins rose by +170 basis points and expenses fell by -180 basis points. The company warned the continued strong dollar would pressure 2016 revenues. Shares rose +2 points to add about 14 points to the Dow.

Dow component DuPont (DD) reported earnings of 27 cents that beat estimates for 26 cents but that was a decline from the 63 cents earned in the year ago period. Revenue of $5.299 billion missed estimates for $5.409 billion with the dollar a major factor. The company said it saw no hurdles for the merger with Dow and no need for asset sales. Shares rose 47 cents.

Freeport McMoran (FCX) posted a loss of $3.47 per share but that included $3.45 in charges. The adjusted loss was 2 cents compared to estimates for a 14-cent loss. The loss for the full year was 8 cents compared to estimates for a loss of 14 cents. Revenues declined -27.5% to $3.795 billion and missed estimates for $4.003 billion. Freeport said it would reduce its debts by $5-$10 billion through asset sales or joint ventures. Freeport has consolidated debt of $20.4 billion. Shares rallied 7% but that was only 26 cents.

After the bell, Apple (AAPL) reported earnings of $3.28 compared to estimates for $3.23. Revenue of $75.9 billion missed estimates for $76.54 billion. The strong dollar had a $5 billion impact to revenues, which in a constant currency basis would have been over $80 billion and a growth rate of +8% instead of 2%. The company said it sold 74.8 million iPhones and missing expectations for 75.46 million. They sold 74.5 million in the year ago quarter so a minor beat. Sales of iPads were 16.1 million compared to expectations for 17.93 million. Macs sold 5.3 million compared to estimates for 5.8 million.

CEO Tim Cook said "extreme conditions unlike anything we have experienced before just about anywhere we look" impacted commodity prices and weakened currencies. About two thirds of Apple's revenue is generated outside the USA and currency fluctuations have a "very meaningful impact on our results." Cook said they saw a record number of switchers from Android devices and they had their best quarter by far for Apple TV. Apple watch sales hit a new record, not hard since it is a brand new product, and customers spent billions with Apple Pay.

Cook warned for Q1 for revenue in the range of $50-$53 billion compared to already lowered analyst estimates for $55.61 billion. That is well below the $58 billion in Q1-2015. This will be the first ever decline in iPhone sales. A Nikkei report said production of iPhones was down -30% in the January-March quarter. Apple's lowered guidance suggests Q1 iPhone sales of 45-50 million, down from 61.2 million in Q1-2015. There are currently more than 1 billion active Apple devices.

Cook said the company is "long term and very optimistic" about its business in China. They are opening their 33rd Apple store in China this week. However, Cook said they are beginning to see some economic softness in China, most notably in the Hong Kong area. Revenue in China rose +14% over the prior year but 47% quarter to quarter. More than 24% of Q4 revenue came from China. Back in the Q3 earnings Cook said they saw no signs of economic slowdown in China so conditions are changing.

Shares of Apple declined -$3 in afterhours to $97.33 and S&P futures opened down -13. Nasdaq futures crashed -36 at the open. The odds are good that we are going to see lower lows on Apple in the coming days. The comments about weakness in China were probably as destructive as the warning on sales.

The big names out tomorrow with earnings are EBAY, JNPR, QCOM, ANTM, BA and UTX. Wednesday is a big day for earnings and hopefully some positive results can overcome the negative sentiment from Apple.

Crude oil rebounded again to $32.41 intraday after a report broke that there was a potential deal brewing between OPEC and Russia to cut global production. The actual report quoted the oil minister from Iraq saying Saudi Arabia and Russia are "showing signs of flexibility" on reducing the current oil glut. "We have seen more flexibility from the brothers in Saudi and a change in tone from Russia."

Russia has never previously agreed to cutting production or even discussing a production cut. Saudi has routinely said they would not cut production alone, which would cede market share to rivals, including Russia. The challenge would be how to verify production cuts from Russia. You cannot just take Putin's word for it.

Just the thought of a possible change in tone from Russia triggered another short squeeze that lifted oil from under $30 to the high of $32.41. Late in the day additional news headlines suggested the comment was overblown and not to expect an agreement in the near future and prices declined. The next OPEC production meeting is in June.

After the bell the API inventory report showed a monster gain of +11.4 million barrels for last week. The EIA report on Wednesday morning is also expected to show a giant increase.

Goldman's Jeffery Currie, global head of commodities research, warned that crude storage is near capacity restraints. Cushing Oklahoma, the delivery point for WTI, is at record levels and only has about 3 million barrels of capacity. They actually need that for operational reasons as they blend different grades of oil to ship to the coast. The lack of storage means speculators cannot buy oil and store it in hopes of higher prices in the months ahead. If there is nowhere to store it, nobody is going to buy on speculation.

Satellite tanker trackers have reported movement from the tankers storing oil for Iran in the Persian Gulf. Some of them have started moving toward the open ocean indicating the oil has been sold or is at least in play as it steams toward ports of likely buyers.

Hess Corp (HES) reported it was cutting capex spending by 40% for 2016, which is another 20% decline from the levels reported in October. The company is maintaining its forecast for production between 330,000-350,000 bpd in 2016. Hess spent $4 billion in 2015.

The constant stream of new capex cuts after a year of prior cuts shows that major companies are expecting crude to be lower for longer.

Wells Fargo (WFC) declared a dividend after the close of 37.5 cents and said the company would increase its stock buyback authorization to $17.5 billion. That is an increase of about 350 million shares to be repurchased. WFC has 5.1 billion shares outstanding. Shares did not move in afterhours trading.


The S&P recovered from its Monday plunge to 1,875 with a rebound to resistance at 1,907. This has turned into a material problem with that being the high point for the last three days. With the S&P futures at 1,888 overnight we will open well under that psychological 1,900 level as well.

There is a battle in process and indecision is extreme. The rebound from the three weeks of selling has settled into a very right range and we have had three days of 200-point moves in opposite directions on the Dow. The sellers keep trying to force it back down and the two short squeezes have lifted it back up.

Unfortunately, the 1,907 level on the S&P is not really the critical level. That belongs to 1,950 and should be a much harder level to cross.

For tomorrow the Fed announcement at 2:PM is going to be the potential turning point. Typically, we see a slight melt up ahead of the announcement, severe volatility after the announcement and then some sort of directional move. Since the Fed decision is assumed to be no hike and attempt to calm the waters we may not get any post Fed move if that comes to pass. Anything else could be disappointing for the market.

Normally when someone tries to predict post Fed market action there is always some unknown headline or twist on the Fed news that sends the market off in the opposite direction. I am not going to predict the direction but I do expect Thursday and Friday to be directional. That means we should break out of our current range and see several days in that direction.

The Dow has two components reporting earnings before the open. Those are Boeing and United Technologies. Since Boeing was up so strong, +$4.00 today on an announcement about a new rocket, I doubt their earnings will power them much higher but I could be surprised. United was in the middle of the pack but even a big surprise may not give them a big lift.

The wildcard is Apple with the big decline in afterhours. Most investors do not trade in afterhours. They will read the news tonight that Apple sales will decline in Q1 and revenue is going to be way down and many will believe the decade of growth is over and begin to liquidate positions. While Apple is still a monster company with strong earnings and mountains of cash the growth expectations have been damaged. This could cause Apple to be a drag on the Dow for the next few days.

The Dow is fighting its own battle with 16,000 and has traded on both sides for the last four days. The close at 16,168 would take a material decline to put us back under that level but the Dow futures are down nearly -100 and that could be the start of Wednesday's troubles.

Initial resistance is 16,180 where we have been stalled for the last six days. Support is 15,850.

On the Nasdaq resistance is 4,590 and 4,605 with initial support at 4,503 followed by 4,468. The big tech earnings are after the bell on Wednesday leaving the index to be knocked around by Apple during the day.

The biotech sector was down again today. Investors in that sector are schizophrenic and do not know who they are from day to day. The volatility there has been very heavy and today's drop barely saw any dip buyers. The $BTK has support at 3,000 and closed at 3,116. If the biotechs are not in rally mode, the Nasdaq will find it tough to mount any gains even if Apple is not crashing.

The Russell 2000 posted a strong gain of +20 points but failed at the same relative level as the rest of the broader indexes. That is 1,020 on the Russell. I am encouraged that the Russell stocks are no longer dragging the market lower but are participating in the rebounds.

It would appear that we are headed lower at the open on Wednesday. The pending FOMC announcement at 2:PM could provide some lift if the "Pre FOMC Announcement Drift" is still in play. However, any new positions would just be a coin toss until we see what happens after the announcement. There is no harm in waiting until Thursday to launch new positions. Hopefully we will then have a direction that is tradable.

The advertising for the EOY subscription special is over. However, we still have SEVEN sets of mouse pads and books left over so I will leave the link open until those are gone in case anyone wants to take advantage of the savings.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Coin Toss

by Jim Brown

Click here to email Jim Brown

Editors Note:

Would you bet several hundred dollars on a coin toss? Probably not.

The S&P futures are down -10 as I type this. Apple warned on future earnings and revenue. The FOMC announcement is Wednesday afternoon and market direction for Thursday is a coin toss. We could go either way and we could move in a hurry if the Fed says something the market does not like.

I would rather not speculate on market direction ahead of the Fed announcement. There are roughly 245 trading days a year and we can afford to stand on the sidelines several times a year when the situation warrants. We already have ten active positions so whichever way the market moves we will be covered.

It is better to be bored than broke.

In Play Updates and Reviews

Drifting with the Fed

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Fed is not expected to make any market moving decisions on Wednesday but that has nothing to do with the Pre FOMC Announcement Drift trend that has the day before an announcement up nearly every month there is a Fed meeting.

With Monday's big decline the shorts loaded up again and they were punished today as the markets rebounded to resistance at the open. There was no follow through and without any unexpected Fed comments we could see a fade on Wednesday afternoon.

The Fed is expected to calm the markets by saying economics have weakened and they are "not likely" to hike again before June. Anything contrary to that could upset the markets.

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

LULU - LuluLemon

The long call on LULU was triggered at the open. See the play description for details.

JUNO - Juno Therapeutics

The bearish put position was entered shortly after the open this morning when JUNO declined sharply. See the play description for details.

HPQ - Hewlett Packard

The strangle on HPQ was entered at the open this morning. See the play description for details.

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 rebounded sharply at the open but failed right at resistance of $101.40. Without a follow on rally tomorrow, we may have topped out here. I added a stop loss at $98.25 in case the market rolls over.

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, see portfolio graphic for 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


LULU spiked higher this morning on news hedge fund Lone Pine had taken a 6% stake in the company. We entered the position with 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.

Position 1/26/16:

Long March $60 calls @ $2.90, see portfolio graphic for stop loss.

PCRX - Pacira Pharmaceuticals

Company Description


Support is holding at $64 but there were no gains today in a strong market. I raised the stop loss to $63.25 to take us out if that $64 level breaks.

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, see portfolio graphic for stop loss.

QQQ - Nasdaq 100 ETF

ETF Description


The Nasdaq 100 rebounded sharply on short covering but the QQQ failed to return to Monday's high at $104, which is now decent resistance. The QQQ will be at the mercy of Apple on Wednesday. Whatever happens to Apple shares after the earnings smoke clears will likely determine the direction of the Nasdaq. I added a stop loss at $100.45 to take us out if the Nasdaq rolls over.

Original Trade Description: January 20th

The Nasdaq fell -163 points intraday on Wednesday 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, see portfolio graphic for stop loss.

STZ - Constellation Brands

Company Description


Big gap up at the open faded towards the close. After two days of outperformance we should expect some consolidation.

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, see portfolio graphic for stop loss.

Original Put Recommendations (Alpha by Symbol)

DVN - Devon Energy


Short covering rebound today after oil rallied intraday. The short covering spike in WTI to $32.41 was immediately sold and energy equities faded in the afternoon. Devon managed to keep most of its gains but further declines in oil will force it 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.

Position 1/25/16:

Long March $23 put @ $1.48, see portfolio graphic for stop loss.

HPQ - Hewlett Packard

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


HPQ gapped up at the open but faded as the day progresses. This is a long-term play to hold over the Feb 24th earnings. Earnings news by other companies will be the driver over the next several weeks.

Original Trade Description: January 25th

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.

Position 1/26/16:

Long April $9 put @ 41 cents, no stop loss.
Long April $10 call @ 50 cents, no stop loss.

JUNO - Juno Therapeutics

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


Juno put was triggered this morning after National Institute of Health (NIH) researchers published a study showing off-the-shelf T-cell therapy could induce remissions in patients with advanced blood cancers. This new "allogenic" T-cell therapy study represents a competitive threat to therapies from Juno, Kite and Novartis.

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.

Position 1/26/16:

Long March $27.50 put @ $1.75, see portfolio graphic for stop loss.

VXX - iPath S&P 500 VIX Futures ETN

Company Description


Minor decline in volatility since the market gains began to fade in late afternoon. 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 lifted equities again but the long term fundamentals have not changed. More oil is coming and prices are going lower.

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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