Option Investor

Daily Newsletter, Tuesday, 4/5/2016

Table of Contents

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

Market Wrap

Welcome to April

by Jim Brown

Click here to email Jim Brown

In the weekend commentary, I spoke about the lack of a catalyst to power the market out of its dormant phase. Who knew the Treasury Dept would provide that event.

Market Statistics

In case you have not heard, the Treasury Department took specific aim at a "serial inverter" and said it was implementing rules to prevent these types of transactions. An inversion is when a U.S. company buys a foreign company and then announces it will move its corporate headquarters to that other country while much of its operations remain in the USA. Typically, the other country has a much lower tax rate.

The target of the new rules was the $160 billion Pfizer (PFE) acquisition of Allergan (AGN). One of the new rules requires the overseas company to be of a certain size relative to the U.S. company. Allergan has been a serial acquirer. Actavis bought Warner Chilcott in 2013 for $5 billion. In 2014 Actavis bought Forest Labs for $25 billion. In 2015 Actavis bought Allergan for $66 billion and then changed the name of the company to Allergan. That combination of moves lifted Allergan's market cap to roughly $120 billion. Pfizers CEO has been working for several years to find a merger partner overseas that would qualify under the inversion strategy because Pfizer pays billions in taxes every year since the U.S. has the highest tax rate of any industrialized country. After Allergan bulked up to qualify for a deal, Pfizer and Allergan announced their merger. They specifically crafted the merger to fit under the inversion rules in effect at the time.

A new Treasury Dept rule they announced on Monday requires a three year look back provision to prevent this "bulking up" to qualify for an inversion. That means Allergan cannot count the market cap they gained in the Forest Labs or Allergan acquisitions in qualifying for an inversion until the three-year window expires at the end of 2018.

I am all for passing laws that make it advantageous to keep companies in the U.S. and paying taxes. However, I am against passing laws that target specific companies in order to prevent that company from moving. If you want to keep companies in the U.S., it needs to be a restructuring of the tax rate for everyone rather than using the power of the government to attack an individual company. This is what soured the market. Investors do not like government interference, especially targeted attacks.

Reportedly Pfizer and Allergan are about to announce the cancellation of their merger. There is a $400 million breakup fee to be paid by the party that terminates the transaction but given the circumstances that could be modified.

Hedge funds were big holders of Allergan shares and they had a bad day. Viking, Elliott, Third Point, Blue Ridge Capital and Paulson & Co were all big holders.

Allergan shares fell -15% on the news to $235 and Pfizer shares rallied +2.5%.

Dow component Disney (DIS) was also impacting the Dow with a -2% decline after COO Tom Staggs, the heir apparent to CEO Bob Iger, said he was leaving the company in May. Iger was planning on leaving in 2018 and now analysts believe he will stay until 2020 to give the board time to groom a new succession candidate. Staggs had been the assumed replacement for several years. For the board to suddenly dump Staggs caused a wave of confusion among analysts and sharp drop in Disney shares.

Ford Motors (F) also created a cloud over the market with news they were going to build a $1.6 billion manufacturing plant in Mexico. Normally this could not be a big deal since the passage of NAFTA has seen dozens if not hundreds of companies move operations to Mexico where wages are closer to $2.50 an hour instead of $25 an hour in the U.S. manufacturing sector. However, in the current political climate the announcement was a lightning rod for candidates and Trump wasted no time warning this would not happen if he were president. Analysts immediately wondered if the current administration would suddenly change the laws to target Ford's plan like they did with the Pfizer/Allergan plan.

To be fair, Ford is not moving a plant to Mexico. They are building a completely new plant to produce small cars that can be exported all over the world. Cars produced in the U.S. cannot be exported to a lot of companies because of trade laws. For instance, U.S. cars cannot be exported to Brazil and that is a rapidly expanding market. Mexico has more favorable export laws and trade agreements than the USA and cars can be exported from Mexico to most other countries.

Those facts did not ease the worry over the potential for new regulations in the current environment. Mexico had refrained from announcing or discussing the new plant in order to avoid being in the campaign spotlight. News leaked out and Ford finally announced the plans.

On the economic front, our friends overseas were not helping. IMF's managing director, Christine Lagarde, warned this morning that "the global recovery was too slow, too fragile and the risks to its durability are increasing." While she did not say anything new, the comments acted to depress the European markets and that depression carried over into the U.S. markets. The IMF cut its global growth outlook for 2016 to 3.4% in January and her comments today suggest there is another downgrade ahead. She warned "the global outlook has weakened further over the last six months, exacerbated by the slowdown in China, lower commodity prices and the prospect of financial tightening for many countries." "In the euro area low investment, high unemployment and weak balance sheets weigh on growth. In Japan, both growth and inflation are weaker than expected." Longstanding "crisis legacies" including high debt, low inflation, low investment, low productivity, and, for some, high unemployment, posed a risk for advanced economies. Emerging economies meanwhile were at risk from lower commodity prices, higher corporate debt and volatile capital flows."

In the U.S., the ISM Nonmanufacturing Index rose slightly from 53.4 to 54.5 and ahead of consensus estimates for 54.0. New orders rose from 55.5 to 56.7 but backorders were flat at 52.0. The employment component increased slightly from 49.7 to 50.3.

Overall, the report was slightly improved but it would be hard to class it as bullish. The gain on the headline number was only the second gain in the last eight months. The component with the biggest gain was exports with a jump from 53.5 to 58.5. That was a real plus because it means the impact of the strong dollar may be fading. Ten industries reported improving conditions while only three reported declining conditions.

The International Trade numbers were worse than expected. The February deficit rose to -$47.1 billion compared to -$45.7 billion in January. Analysts were expecting -$46.2 billion. Exports rose +1% with consumer goods rising +6.7%. However, that barely erased the -5% decline from January. Imports rose +1.3% with consumer goods also leading at +7.5%. Oil imports declined -6% to 275 million barrels.

Moody's Chart

The Atlanta Fed GDPNow real time GDP forecast for Q1 declined from 0.7% to 0.4% growth. Slowing vehicle sales and a decline in consumer spending weighed on the outlook. With a month to go before the March data is reported we could end up with a no growth quarter. The Fed is not going to raise rates in April with the GDP forecast so low.

The economic news for Wednesday is headlined by the FOMC minutes for the March meeting. Given the Christine Lagarde comments today and the six Fed heads over the last week talking about raising rates sooner rather than later, this will be an important insight as to how the meeting went and what to expect in April.

The Fed roundtable discussion after the close on Thursday with Yellen, Bernanke, Greenspan and Volcker is going to be the focus on Thursday and could provide a seriously directional market on Friday depending on what is said and how it is reported.

Crude prices started the day off weak at $35.30 and then improved on comments from a Kuwait official suggesting the production freeze agreement would still be implemented without Iran joining the party. Whether that will actually happen or the deal self-destruct before the April 17th meeting is still in doubt. Regardless, it will have no impact on the actual production and the current glut of oil.

Midday there was a report of an explosion at an Iraqi oil well and prices rose again. Later it was learned that the well was a mothballed natural gas well and had no impact on Iraqi oil production.

After the close the API inventory report said crude levels declined -4.3 million barrels last week compared to expectations for a 3.2 million barrel gain. Prices rose again on the news. However, the API numbers rarely match the EIA numbers on Wednesday morning so prices may have firmed at $36.60 but they are not moving any higher until after the EIA report.

Wynn Resorts (WYNN) shares declined -$2 in afterhours. The company guided to revenue from Macau for Q1 to be in the range of $603-$613 million and down from the $705 million in the year ago quarter. Earnings are expected to decline from $212.3 million to $187-$195 million. Macau gaming revenue has slowed its decline but remains at two-year lows.

Cree Inc (CREE) warned after the close that revenue would come in around $367 million compared to prior forecasts of $400-$430 million. Earnings would be in the range of 13-15 cents compared to prior guidance for 22-29 cents. Shares fell -$6 in afterhours to $23.60.

Darden Restaurants (DRI) shares fell -4% after they reported earnings of $1.21 that beat estimates by 2 cents. Revenue rose +6.7% to $1.85 billion. Sales at Olive Garden stores rose 6.6%, Longhorn Steakhouses 5.4%, fine dining locations 5.4% and other businesses 10.7%.

The chairman of Darden resigned saying he was proud of what he accomplished but he was done. Jeffrey Smith, CEO of the Starboard Value activist hedge fund had taken over as Chairman of Darden after Starboard successfully replaced all of the board after Darden sold off the Red Lobster chain against shareholder wishes in 2014. Shares are up 60% since he took over.

Tesla (TSLA) shares rallied despite missing production estimates in Q1. The company delivered 12,420 Model S cars and 2,400 Model X SUVs. Analysts were expecting 15,000 to 16,000 cars. Musk said the weak deliveries were prompted by a parts shortage on the Model X. He said about 6 of the 8,000 unique parts used in the Model X were delayed by third party manufacturers. Musk said Tesla failed to adequately validate supplier capabilities and producers were running behind. According to Musk, the shortages have been solved and by the last week of March, they were delivering about 750 Model X cars per week. The company said it was still on track to deliver 80,000-90,000 cars in 2016.

The company said it has addressed the producer shortcomings and they will not occur on the Model 3. As of Saturday evening, the company had received more than 276,000 orders.

Amazon (AMZN) and Sprint (S) reached a deal to allow Sprint subscribers to add Amazon Prime service to their Sprint account for $10.99 a month. Yes, that adds up to more than the $99 a year that Amazon charges but customers can pay by the month and cancel at any time.

Twitter (TWTR) beat out Amazon, Verizon, Facebook, Google, Yahoo and Apple to stream live the NFL's Thursday night football games this year. Twitter will pay $10 million to stream 10 of the 16 games CBS and NBC will broadcast. Last year Yahoo paid $20 million for a single game. You will not even have to have a Twitter account to view the games. Twitter has 320 million monthly average users (MAU) and 500 million "additional" users that do not have accounts but view the content from Twitter's website. Many of those users are not in the USA so the deal makes the ten games available worldwide. Apparently, Twitter was not the low bidder but the NFL thought Twitter's user base would be a good place to advertise the NFL by streaming the games. You have to wonder what prices those other tech giants were offering and how much the NFL gave up in awarding the deal to Twitter. Unfortunately, it did not help Twitter shares and they were fractionally negative for the day.

With a steady stream of earnings warnings, the outlook for Q1 earnings has not improved. FactSet is still predicting an 8.5% decline in Q1 earnings and the first time since 2009 for four consecutive quarters of declines. For Q1, 94 S&P companies have warned and 27 have issued positive guidance. The current S&P PE ratio is 16.6 and neither under or overvalued.

Despite the uptick in the Manufacturing ISM and the Services ISM and the drop in oil prices the Dow Transports ($TRAN) have declined for 9 of the last 11 days. Resistance at 8,000 held and today's close was a three week low. This does not bode well for the broader markets. The Dow Transports typically lead the Dow industrials.

The Biotech Index posted another gain in a weak market. That is the fourth consecutive daily gain and this was in spite of the $41 loss in Allergan. This appears to suggest the biotech crash may be over. It will take a rebound above the resistance at 3,250 to confirm but there are green shoots forming.


The S&P never tested real resistance at 2,075 before rolling over to fall back to 2,045. That high at 2,075.07 on Friday was only for an instant and the selling was immediate. However, that lower 2,045 level now appears to be new support. It has been tested multiple times since March 29th and has held each time. This could be a sign the selloff has run its course.

If the 2,045 level fails, the next obvious target is 2,020. However, if you note the 7 weeks of S&P gains in the chart below there have been multiple occasions where there was a 2-3 day pause. The S&P has been trading in a range between 2025-2072 since the middle of March. Because of the short hang time for the S&P at 2,075 on Friday, I believe the next test will be slightly higher high but have the same result.

With the FOMC minutes on Wednesday and worry over the Fed round table on Thursday, traders are not likely to have enough conviction to push through resistance.

The Dow fell back to light support at 17,585 and closed almost at the lows for the day. The stocks that were the biggest losers were from a variety of sectors and there was no rhyme or reason. It was simply a day of profit taking. Pfizer was at the top of the list of winners because of the potential for the Allergan merger to be cancelled. Boeing was the biggest gainer after winning a contract for (20) F16s to be used as target practice at a cost of $34.4 million. The planes can be flown manned or unmanned. They also won a $275 million contract for space work and $235 million for 11 P-8A surveillance aircraft. It was a good day for Boeing.

The Dow could retest support at 17,400 and resistance is strong starting at 17,750. That could provide a range for trading over the next couple of weeks.

The Nasdaq is challenged by the resistance at 4,900 and closed well back at 4,843. Biotechs were the big gainers but the leaders list is a jumble of different sectors. Amazon and Google were big losers, Facebook lost a whopping 33 cents and Netflix gained $1 to round out the FANG contingent.

There was no trend on the Nasdaq other than profit taking from some recent gainers.

The Russell 2000 closed under support at 1,100 and the biggest loser for the day. The small caps have lost their momentum and their volume. It appears fund managers have decided to reduce their small cap holdings and that is not good news for the market. The Russell struggled for 3 days to make any gains over 1,110 and finally failed at that level. If the selling continues, we could see a retest of 1,065.

I am neutral on the market for Wednesday. The dead stop on 2,045 on the S&P decline is somewhat positive and futures are up +6 as I type this. However, the weakness in the Russell and the Dow Transports suggests there could be additional problems. The FOMC minutes could give the market a boost or a shove off the cliff depending on their contents.

I believe we are going to chop around under resistance for a few more days until fund managers decide what they want to do. While April is normally a positive month, all Aprils do not normally have as many negative conditions weighing on the market. If the EIA oil inventories decline on Wednesday that could lift oil prices and equities.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Time to Reload

by Jim Brown

Click here to email Jim Brown

Editors Note:

Getting blown out of a position sometimes gives us a much better entry point for a new position. We were knocked out of S&W on Monday by a triple downgrade that knocked the stock down -25% from its recent highs and right back to strong support. The underlying story did not change but additional risk has shrunk considerably.


SWHC - Smith & Wesson -
Company Description

I am reloading the prior play on Smith & Wesson. Shares failed to decline any further today after being crushed on Monday. The triple downgrade by Cowen, CL King and BB&T Capital markets after the March NCIS background check data declined slightly was unreasonable. March checks declined -3% from February but they were sill up 25% over March 2015. The 3% decline was just noise in the greater outlook.

S&W shares declined to exactly the 100-day average on Monday and that has been support for a long time. I believe we should take advantage of this decline and the shrinkage of the option premiums.

Prior play description: Smith & Wesson was founded in 1852 and manufacturers firearms in the U.S. and internationally under many different brands but primarily Smith & Wesson.

Gun sales are booming. Sportsman's Warehouse said gun sales rose +34% in Q4 alone. With every terrorist attack or mass shooting more consumers rush out to buy guns for self defense. With the potential for additional attacks in the U.S. this trend is not going to slow. However, sales are cyclical. They surge after attacks like San Bernardino or after speeches by politicians about gun control. President Obama has been the best gun salesman we have ever had. Every push by the administration to get more laws passed results in millions of new gun sales.

In their Q4 earnings where there was a surge in gun sales after San Bernardino, the company reported earnings of 59 cents that beat estimates for 41 cents. Revenue rose +61% to $210.8 million and easily beat estimates for $182.3 million. The company guided significantly higher for the current quarter to revenue of $210-$215 million compared to estimates for $196 million. Earnings are expected to be 51-53 cents. That is a 13.7% increase in revenue and 20% increase in earnings. For the full year they guided to earnings for $1.68-$1.70 and analysts were expecting $1.42. This was also higher than the company's prior forecasts for $1.36-$1.41 from January.

The company said inventories were depleted because of the high demand and they were focused on increasing production rates to keep up with demand.

Earnings are June 16th.

Shares rocketed higher after the earnings in early March and they were already up strongly since December. I hesitated to buy the top since it was making new highs every week.

I am recommending a June call because it expires after earnings and should retain some expectation premium when we exit before earnings. Buying a May option would be subject to accelerated premium decay.

Buy June $24 call, currently $1.80, no initial stop loss.


No New Bearish Plays

In Play Updates and Reviews

Looking for a Bottom

by Jim Brown

Click here to email Jim Brown

Editors Note:

Now that the market has rolled over it is time to start looking for a bottom of the decline. We watched for a couple weeks for a top to form after seven weeks of gains. Now we can start looking for a bottom to form. Nobody expects this bout of profit taking to turn into a meaningful decline but that is always possible.

With the earnings forecasts still declining, economic conditions showing no growth in Q1 and the IMF director warning about slowing global growth and a fragile economy we could see the fundamentals come back into focus.

Right now, this is just profit taking. If the decline accelerates and breaks below the 2,020 level on the S&P then the outlook will change.

Until we reach that support level or see the internals begin to worsen, we are just in a temporary dip. We prepared for this decline by launching the put position on the SPY to hedge against any losses on our long positions. So far that is working perfectly.

Current Portfolio

Current Position Changes

AKAM - Akamai

The long call position was stopped at $53.65.

QSR - Restaurant Brands

The long call position was closed at the open.

Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.

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.

BULLISH Play Updates

ADBE - Adobe Systems -
Company Description


Nice dip at the open to provide us a perfect entry point into the position. The option was 50 cents lower than Monday's close.

Original Trade Description: April 4th.

Adobe Systems Incorporated operates as a diversified software company worldwide. Its Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote, and monetize their digital content.

For years they sold their Photoshop software and assorted tools as boxed software on a CD with a license key. Once you bought it you own it and Adobe never received any further revenue unless you upgraded to a newer version at some later date.

All that has changed with the move to the cloud. The new product is called the Creative Cloud and is a subscription based product where you pay and pay and pay for as long as you continue to use it.

Moving to the cloud model has a lot of inherent problems. Once you quit selling your boxed software that big chunk of retail revenue goes away. In the case of Adobe their software sold for many hundreds, if not thousands of dollars. That meant the one time revenue disappeared in exchange for a $19 to 49 a month subscription fee. Over the long term the revenue is stable and eliminates the volatility of the single sale model.

Earnings for the quarter reported in March were 66 cents that beat estimates for 61 cents. Revenue rose 25% to $1.38 billion also beating estimates for $1.34 billion. They signed up a whopping 798,000 new subscribers to the Creative Cloud suite service. They guided for earnings of 64-70 cents for the current quarter and above analyst estimates for 65 cents.

Earnings are June 21st.

Shares spiked to $98 on the news before pulling back to consolidate at $92 for over a week. Over the last several days they crept up to $96 and then sold off in the weak market on Monday. I believe this market weakness is a buying opportunity for Adobe.

I would like an entry point closer to $92 but there is no guarantee we are going to get it. The S&P futures are down hard tonight at -6.50 and the market is likely to open lower on Tuesday. I am suggesting we buy the option 5 min after the open. That will give the prices time to evaporate in a falling market. Hopefully ADBE will gap down a couple dollars.

Position 4/5/16

Long May $95 call @ $2.48. No initial stop loss.

AKAM - Akamai Technologies - Company Description


Akamai finally broke out of the consolidation phase but it broke down instead of up. The April option had already evaporated so the actual loss from Monday to today was negligible. The position was stopped out at $53.65 at the open.

Original Trade Description: February 26th.

Akamai Technologies provides cloud services for delivering, optimizing and securing online content for business applications on the internet. They are best known for their download delivery solutions for games, videos and audio files.

One of the things Akamai is famous for is archiving web content in centralized data centers geographically located to reduce the time and bandwidth needed to view those files. If you have a website that is visited by millions of viewers, Akamai can continuously monitor that website for changes and then replicate those changes in multiple locations so that viewers near those locations experience fast load times. For instance, a company in Kansas may have a high volume website viewed by people around the world. Akamai can replicate that website in cloud data centers in Los Angeles, New York, Miami, Dallas, London, etc, so a viewer close to one of those locations can get an immediate response time rather than having to pull the content from Kansas where bandwidth and server limitations could slow the response. If you have a million viewers a day all hitting the Kansas server from all over the world the lag time is going to be terrible.

Akamai also offers security solutions for web-hosted content thereby reducing infrastructure costs and increasing productivity.

Akamai reported Q4 earnings of 72 cents that easily beat estimates for 62 cents. Revenue of $579 million also beat estimates for $567 million. They announced a $1 billion buyback of 12.5% of their outstanding shares. CEO Thom Leighton said he was purchasing $10 million personally. The company guided to Q1 earnings of 61-64 cents and analysts were expecting 62 cents. Revenue is expected to rise +8%.

Performance and security revenues rose +16.4% to $286 million as demand for the cloud security products increased. Service and support revenues rose +17.8% to $46 million. Cash flow from operations was $218 million or 38% of revenue. Cash at the end of the quarter was $1.5 billion.

Akamai shares rallied 17% after the earnings on February 10th and reversed a four-month decline. Share barely consolidated after the spike and are continuing higher. Shares inched over resistance at $54.85 on Friday and could be poised to make a new leg higher.

Earnings are April 26th.

I am recommending an entry if AKAM traded at $55.75 and just over the Friday high of $55.55. Shares appear to be consolidating that post earnings run and the intraday ranges have been shrinking, which suggests the buyers are gaining ground.

Position 3/2/16 after an AKAM trade at $55.75

Closed 4/5/16: Long April $57.50 call @ $1.63, exit .07, -1.56 loss

HCA - HCA Holdings - Company Description


Minor decline in a weak market. No news.

Original Trade Description: March 29th.

HCA provides health care services in the USA. They offer general, acute care, intensive care, cardiac care, diagnostic, emergency and outpatient services. They operate 164 general and acute care hospitals with 43,275 licensed beds. They also operate 3 psychiatric hospitals and 116 freestanding surgery centers. They were founded in 1968.

In their Q4 earnings they reported $1.69 per share compared to estimates for $1.39. Revenue rose 6.4% to $10.25 billion also beating estimates for $10.14 billion. They guided for the full year to earnings of $6.00-$6.45 and revenue in the range of $42 billion.

In October, the company had warned on Q3 for the first time since 2013. The entire health care market was shaken by the warning because everyone assumed the revenue and profits would always continue to grow. This is the largest company in the healthcare space and is seen as a bellwether for the sector. HCA rectified the problems by Q4 and the CEO assured everyone on the call that all was well and HCA was "well-positioned for continued success."

One of the problems in Q3 was retaining qualified staff. There is an extreme shortage of nurses and the company has to pay premium wages to keep nurses from being lured away to other hospitals. The CEO said they have a plan in place and they view it as an opportunity for 2016.

Shares sank from the October warning through the market washout in January. After they reported earnings the shares rebounded but were hit again in the February decline. Since the February market lows the stock has risen steadily and has reached initial resistance at $78. Once through this level it could be clear sailing to $86-$88 depending on the market.

Earnings are April 28th.

I am recommending an inexpensive $80 strike for May that should still have some expectation premium left when we exit ahead of earnings. The risk is the resistance at $78.50.

Position 3/30/16

Long May $80 call @ $2.50, see portfolio graphic for stop loss.

NTAP - NetApp - Company Description


No specific news. No decline. Trading at the top of its recent congestive resistance range.

Original Trade Description: March 11th.

NetApp provides software, systems and services to manage and store computer data worldwide. They provide data protection and data management for virtualized, shares infrastructures, cloud computing and business applications. Their hot product is a storage area network (SAN) that is all flash memory and not spinning disk drives. This delivers super high performance without the mechanical delays and hardware problems associated with disk drives.

JP Morgan is going to host a moderated "Tech Talk" at 10:AM ET on Tuesday regarding the new SolidFire all-flash array architecture. NetApp acquired SolidFire for $870 million in cash in December in order to increase penetration into the high speed storage market. SolidFire was named the "All-Flash Systems Product of the Year" by Storage Magazine in late February.

NetApp reported Q4 earnings of 70 cents that beat estimates by 2 cents. However, that was down slightly from the year ago quarter. They announced a restructuring program to reduce costs as they focus development on the new SolidFire products. NetApp said they were cutting about 1,500 of their 12,810 employees. They guided for current quarter earnings of 55-66 cents that was below estimates for 72 cents. They expect to take some significant charges on their restructuring effort.

Shares crashed on the earnigns news to $21 but the press has been kind to NetApp and share have rebounded to $27 over the last four weeks. I expect shares to continue to rise to initial resistance at $31 and possibly a new high at $35. The momentum is increasing on the NTAP rebound.

Earnings May 25th.

Position 3/14/16:

Long May $28 call @ 99 cents, see portfolio graphic for stop loss.

OA - Orbital ATK - Company Description


Minor decline. No news. Down with the market.

Target $88.85 to exit.

Original Trade Description: March 19th.

Orbital ATK was created in 2015 by the merger of Orbital Sciences and Alliant Techsystems. The company develops and produces aerospace, defense and aviation related products for the U.S. Government, allied nations, prime contractors and other customers in the U.S. and internationally.

The currently have a contract to convert the four segment Space Shuttle Solid Rocket Booster into a five segment booster for the new Space Launch System that will carry astronauts back into space. They are working on a new rocket booster to replace the boosters the U.S. is currently buying from Russia. They also develop satellites for commercial, scientific and security applications. They also produce the Cygnus spacecraft that delivers cargo to the International Space Station and returns with completed experiments.

The Defense Systems Group provides tactical missiles, defense electronics and medium to large caliber ammunition, fuzed warheads, etc. The Flight Systems Group produces the Pegasus, Minotaur and Antares launch vehicles.

One of their newest projects is the Mission Extension Vehicle or "space tug." When an existing satellite develops a problem and engineers believe it can be repaired, the space tug would go get the satellite and push it towards the International Space Station where it can be repaired and the tug would then push it back into orbit where it belongs. Since these satellites cost from hundreds of millions to billions of dollars each, having the capability to repair them would save a lot of money.

Sometimes the satellite has simply been active for so long that its orbit has degraded. The space tug would attach itself to the satellite and then lift it back into an orbit that would give the old satellite several more years of useful life. Then the tug would disconnect and repeat the process with a different satellite. The tug could also push dead satellites into a descending orbit where they will burn up reentering the atmosphere. That would essentially remove the trash from what is becoming an increasingly crowded orbital space. The first space tug is expected to have enough fuel to keep it active for up to 15 years. They plan to launch 5 by 2020 and with dozens of very expensive communication satellites running low on fuel every year, it will be a very profitable venture. Clients are already entering into discussions on how the tug can help their satellites.

These are just some of the hundreds of thing Orbital ATK has in the works. They were also named a subcontractor on Northrop's new $120 billion B-21 stealth bomber program.

In early March Orbital reported earnings of $1.45 that beat estimates for $1.09. Revenue of $1.137 billion beat estimates for $1.11 billion. Order backlogs were over $13.5 billion. They guided for the full year to earnings of $5.25-$5.50. Shares crashed from $87 to $74 the next day after they filed a statement with the SEC saying the financial statements covering the Q2-Q3 in 2015 were not accurate due to an accounting error that occurred when the two companies merged. It was a non-cash error covering long-term contracts that were accounted for using different accounting methods in each company. There was no material impact from the restatement but shares always crash when an "accounting error" is disclosed.

After two weeks, shares began to rise again one the smoke cleared. Shares hit resistance at $82.60 on Friday and pulled back only slightly. I am recommending we buy a breakout over that resistance with a target at $90.

Earnings May 30th.

Position 3/21/16 with an AO trade at $82.80

Long May $85 call @ $2.80, see portfolio graphic for stop loss.

PKG - Packaging Corporation of America - Company Description


Sharp drop on no news and it was all at the open. Given the $15 rally over the last 6 weeks this was probably just profit taking in a weak market.

Target $64.25 for an exit.

Original Trade Description: March 7th.

PKG manufactures and sells containerboard and corrugated packaging products in the US, Europe, Mexico and Canada. They produce shipping boxes, display packaging and protective packaging. They also produce packages for meat, fresh fruit, processed food, beverages and other industrial and consumer products. They also produce papers for the office environment and for specialty printing. They are the fourth largest producer of containerboard and corrugated packaging in the USA.

They reported earnings of $1.08 that beat estimates for $1.03. However, revenue of $1.39 billion missed estimates for $1.42 billion because of the strong dollar. For the full year profit was $4.47 to give them a current PE of 12.

The company announced an additional $200 million stock buyback program at the end of February. They bought back 1.7 million shares in the last 5 months of 2015 and 1.9 million shares YTD in 2016. The company said its "substantial operating cash flow" gave it an "excellent opportunity" to continue buying back its stock and return value to shareholders.

They also announced a 55-cent quarterly dividend payable April 15th to holders on March 15th which equates to a 4% yield.

Next earnings are April 20th.

After reporting earnings the shares rebounded from a sector downgrade on IP in January. PKG has rebounded from $45 to $54 and could continue higher to as much as $65 before hitting significant resistance.

With recent economic reports suggesting the economy is improving slightly this might be the right time to speculate in companies that will profit from a summer recovery.

Shares dipped slightly on Thursday after hitting as 6-week high on Wednesday. This gives us an opportunity to buy a close to the money option relatively cheaply. There is no entry trigger.

Position 3/11/16:

Long April $55 call @ $2.20, no initial stop loss.

QSR - Restaurant Brands Inc - Company Description


The position was closed at the open for a 50-cent loss. Shares dropped back to support and only rebounded slightly.

Original Trade Description: March 7th.

QSR is the new name for the Burger King and Tim Hortons brands. Both have been serving customers for more than 50 years. QSR currently operates more than 19,000 restaurants in 100 countries with more than $23 billion in sales. The name change and rebranding came a year ago when Burger King bought the Tim Hortons chain.

QSR has been flying under the radar for the last year with all the news about McDonalds all day breakfast and Starbucks expanded menu. They reported earnings of 35 cents that beat estimates of 31 cents.

Same store sales rose +5.6% at Tim Hortons and 5.4% at Burger King.

Burger King sales are accelerating because of a flood of new menu items. They have Chicken Fries, which are fries dipped in fried chicken batter and fried. They have Jalapeno Chicken Fries. On February 23rd they introduced the Whopper Hot Dog. This is a foot long hotdog flame grilled and served with whatever you want on them.

Burger King received tons of free press when the new hot dog was delivered. Some food aficionados are calling the hot dog a "culinary calamity." Others called is a "disgusting disgrace" but customers are waiting in line to order them.

Franchisees claim the demand has been "overwhelming" and while only a couple weeks old they are selling over 100 a day and rising rapidly as more customers realize they are available. Americans eat more than 20 billion hotdogs a year.

Earnings are May 27th.

QSR shares are currently $37.85 and a breakout over resistance at $37.65 is in progress. I am recommending we buy the April $39 call, currently $1.10, and plan on exiting at $41 if that higher level of resistance slows the rally.

Position 3/9/16 with a QSR trade at $38.15

Closed 4/5/16: Long April $39 call @ $1.15, exit .65, -.50 loss.

SRCL - Stericycle - Company Description


No specific news. Minor decline in a weak market.

Original Trade Description: March 30th.

Stericycle provides regulated and compliance solutions to the healthcare, retail and commercial businesses in the U.S. and internationally. They collect and process regulated and specialized waste for disposal as well as personal and confidential records for destruction.

Everyone knows that doctors and hospitals produce tons of medical waste every month and that waste can be infected with all kinds of bacteria and viruses that can be contagious. You cannot just throw those bloody surgical gowns and blankets in the trash. They have to be disposed of in an environmentally safe way.

We also hear all the time about some food company recalling hundreds of tons of a particular food product because it was contaminated with ecoli or some other bad bacteria or foreign substance. Where does that food go? It goes to Stericycle and they dispose of it safely.

In Q4 they acquired Shred-It for $2.3 billion in order to expand into the confidential records destruction business. Stericycle sees Shred-It as an excellent opportunity for cross selling. Less than 20% of Stericycle's current customers use a document shredding service.

In their recent Q4 earnings they reported $1.11 per share that beat estimates for $1.08. However, revenue of $888.3 million missed estimates slightly of $889.1 million. Revenue was hampered by a $26.9 million hit from the strong dollar. Gross margins were 42.9%.

In 2016 earnings are expected to grow +20.3% to $5.26-$5.33 with revenue up +21% to $3.6-$3.67 billion.

Earnings are April 28th.

Shares have crept up to resistance from November at $126 and a breakout here could run to $140 or higher.

Position 4/1/16 with a SRCL trade at $126.75

Long May $130 call @ $2.70. See portfolio graphic for stop loss.

XBI - SPDR Biotech ETF - ETF Description


The XBI was positive most of the day and only turned negative at the close.

Original Trade Description: April 2nd.

The S&P Biotech ETF attempts to match the performance of the Biotech Select Industry Index. The ETF holds 90 stocks in the biotechnology and pharmaceutical sector.

The biotech sector has been in free fall since its high last July at 4,400 on the $BTK Index. The index hit 2,575 in early February and rebounded to trade in a narrow range between 2700-3000 for the last two months. On Friday, the index closed at 3,037 and a two month high. The rebound over 3,000 could be the beginning of a major breakout.

Biotech and pharma stocks have beenunder pressure because of attacks by political candidates claiming they would lower the prices on drugs if they are elected. This caused the sector to collapse most notably in January from 3,900 to that 2,575 level.

If a candidate is elected and did choose to follow through on a promise to lower drug prices it would take a long time, assuming they had the votes in the House and Senate to get a bill passed. I believe the selloff in the biotech sector has been overdone and I have been waiting for a sign there may be a rally in our future. The close over 3,000 on the $BTK could be that sign. The $BTK gained 5.7% last week suggesting buyers are returning.

The XBI gained 2.9% on Friday to cap off a week of gains. The ETF has resistance at $54 and again at $56.50. However, short interest in biotech stocks is so high that any further move higher in the $BTK could cause significant short covering.

I am recommending we buy the June $55 call, currently $3.40. If we get a breakout over $56, it could easily run to $70, which is significant resistance. Obviously that assumes a positive market as well.

A rebound in the biotech sector would lift the Russell 2000 and the S&P and that would help support a positive market.

Position 4/4/16

Long June $55 call @ $3.50, see portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

ENDP - Endo Intl Plc - Company Description


Big drop to close at a new three-year low. No news and this close could signal the start of a new leg lower.

Original Trade Description: March 28th.

Endo develops, manufactures and distributes pharmaceutical products and devices worldwide. The market well known brands including Percocet, Lidoderm, Voltaren and a wide range of pain medications and testosterone replacement therapies.

Shares have declined from $96 last April to $28 today. The acceleration of the decline over the last several weeks has been in reaction to some generic competitors expected to receive approvals from the FDA soon.

The company also lowered guidance at the Barclay's Healthcare Conference on March 15th. The company lowered guidance to revenue of $928-$972 million for Q1 and analysts were expecting $1.03 billion. Earnings guidance was $1.02 to $1.08 and analysts were expecting $1.19.

Endo is also under pressure as a result of the Valeant Pharmaceutical disaster and the overall decline in the biotech sector.

Earnings are May 9th.

Shares have flat lined at the $28.50 level for more than a week and I believe we are about to see another leg lower. Today was the lowest close since January 2013.

Position 3/29/16:

Long May $25 put @ $2.10. See portfolio graphic for stop loss.

SPY - S&P 500 ETF - ETF Description


Nice drop as the market rolls over.

I am recommending we add to this position when/if the SPY trades up to $210.

Original Trade Description: March 16th.

All good things must come to an end. The market appears poised to rally and produce a new leg higher. However, there is serious resistance starting at 2,075 on the S&P and continuing through 2,100. The odds are very slim that a rally will make it through that resistance ahead of the earnings cycle and assuming earnings for Q1 are as bad as the guidance we have been getting then it is even more likely the market rolls over into the "Sell in May" cycle.

Nobody can accurately pick turning points in the market on a routine basis. There are far too many things that can push and pull the indexes but at critical resistance levels we can normally anticipate at least a little reaction to those levels.

The S&P has strong resistance beginning at 2,078, which equates to $208 on the SPY. That resistance runs from 2,078 to 2,105 or roughly $211 on the SPY. I am proposing we buy puts on the SPY starting at $207 with a stop loss at $213.

The S&P may never hit those levels or it could hit them next week. The close after the Fed decision was 2,027, which means it would still have to rally 50 points to hit our initial entry point. Once it reaches that level it will have rebounded for +268 points and would be extremely overbought when it reached that 2,078 level. That makes it even more likely it will fail when it gets there.

I am going to recommend the June $200 puts. They should cost about $4 when the SPY reaches the $207 level. I want to use June because we may not reach that resistance for a couple weeks, if at all, and once we do hit that level I want to be able to profit from any sell in May decline.

This position could go for several weeks without being triggered and there is a good chance we will not get to play it with numerous analysts calling for a failure at 2,040 and 2,050 along the way. There are analysts calling for a retest of the 1,900 level this summer with some projecting significantly lower levels. If you look hard enough you can probably find someone projecting targets a couple hundred points higher or lower than the ones discussed.

Morgan Stanley's Adam Parker slashed his price target for the S&P from 2,175 to 2,050 yesterday. Most of the major banks are in the 2,050 to 2,100 range so the expectations for a major rally from here are pretty slim.

Position 3/23/16 with SPY trade at $204.11

3/23/16: Long June $200 put @ $4.77 with SPY trade at $204.11
4/01/16: Long June $200 put @ $3.26 when SPY traded at $207.

If the market continues higher add to that position again at $210.
See portfolio graphic for stop loss.

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