Option Investor

Daily Newsletter, Tuesday, 4/12/2016

Table of Contents

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

Market Wrap

Thank You Russia

by Jim Brown

Click here to email Jim Brown

The news powering the market today came from Russia's Interfax news service claiming Russia and Saudi Arabia had agreed to freeze production even if Iran stays out. The report was unconfirmed.

Market Statistics

Crude prices exploded higher to close at $42 and a four-month high on a "rumor" those two oil producers have agreed. You may remember last week when the deputy crown prince Mohammad bin Salman Al Saud said Saudi would only participate in a production freeze if "major producers, including Iran, also participate." Obviously, he could have changed his mind but there are dozens of news articles, comments and quotes over the last three weeks that confirm his position.

The biggest point to this entire dog and pony show is that freezing production at the current level still leaves 1.45 million barrel per day in excess production and that number is growing daily as Iran, Libya and Iraq continue to ramp up production. Those three countries have already said they would not participate in the freeze.

The key here is that the OPEC leaders and Russia have figured out how to spam the headlines with positive comments in order to boost oil prices. Eventually gullible investors are going to realize that global inventories are continuing to grow and prices will decline. John Kilduff, a partner at Again Capital and energy analyst said "This could be the mother of all buy-the-rumor, sell-the-news events."

For today, the spike in oil prices to $42.17 caused a major short squeeze in energy equities. That squeeze carried over into the broader market and we saw the major indexes return to prior resistance levels.

Short squeeze examples from the energy sector.

The oil story captured a lot of headlines because there were not a lot other news events to capture attention. The NFIB Small Business Survey for March declined slightly from 92.9 to 92.6. This was the third consecutive monthly decline and well below the 96.0 reading in October. Of the ten component categories, only two posted a gain and that was plans to increase capital expenditures and improving credit conditions. Analysts blamed unrest in financial markets as the reason for the continued decline in small business sentiment.

Import prices for March rose +0.2% after a -0.4% decline in February. Analysts were expecting a +1.2% rise. However, if you exclude oil imports, prices declined -0.2%. If you exclude autos prices declined -0.3%. Petroleum product prices rose 6.5%. Export prices were flat after a -0.5% decline in February.

The only real surprise for the day came from the Treasury Budget for March. The deficit was -$108.0 billion compared to -$192.6 billion in February. That compares to -$52.9 billion in March 2015. Government revenues declined -2.7% to $227.8 billion while spending increased +17% to $335.9 billion. So far, in fiscal 2016 the government has incurred a cumulative deficit of $461 billion. Individual income taxes fell -10.3% because of the drop in full time jobs and sharp increase in lower wage part time jobs. Self-employment tax receipts declined -3%. Medicare spending rose 87.2% with Medicaid spending up 14.7% because of the Affordable Care Act. Interest payments on the debt rose 51.8%.

Wednesday is a big day for economics with the Retail Sales for March and the Fed Beige Book. The retail sales for March could easily disappoint with multiple retailers warning about Q1 results. The Fed Beige Book should not be a problem for the market unless several of the regions report declining economic conditions.

Starbucks (SBUX) needed some extra caffeine this morning after being downgraded by Deutsche Bank from buy to hold. The bank said customer traffic might slow after the company changed its loyalty program last month. Starbucks changed the program to reward customers on dollars spent rather than store visits completed. The program offers free food and drinks after they spend money in the stores. Currently customers are awarded 2 stars for every dollar spent. That was a change from receiving one star for every visit regardless of the money spent. Under the old system you received a free food item for every 12 stars accumulated. Under the new system, you have to accumulate 125 stars ($62.50 in spending) to reach the same benefit level. At the end of December, there were 11.1 million rewards customers, up 50% over the last two years. The analyst said the stock was fully valued and cut his price target to $64.

L Brands (LB) was downgraded by Goldman Sachs (GS) from buy to neutral. They also removed the company from their conviction buy list. They lowered the price target from $115 to $91. The downgrade came on worries about the current restructuring process that will split the organization into three business units, Lingerie, PINK and Secret Beauty. Goldman said the split could cause near term sales growth to slow.

Horizon Pharma (HZNP) shares fell -26% after the company provided disappointing guidance. The company reiterated the guidance from January for revenue of $1.025 billion to $1.050 billion and EBITDA of $505-$520 million. However, they pushed out the expectations for this not to happen until later in the year. Q1 guidance is only expected to bring in 19-20% of the total with 22-23% in Q2 and 57-59% in the second half. Approximately 64-66% of EBITDA is not expected until the second half. Investors do not like delays and revenue shifts. Shares crashed on the news.

Integrated Device Technology (IDTI) shares rallied as much as 23% on a reported buyout bid for $32 a share in cash. That would have been a 65% premium to Monday's close. However, almost immediately the purported bid began to be questioned. There were some analysts claiming it was a "fakeover" bid similar to one made on another company in 2015. Someone uploaded a fake 13D document to the SEC website just to spike the price. Tuesday's reported bid from a group of investors led by Libin Sun could not be verified. Even if the bid was real there is a good chance the government would not approve it. Libin Sun owns 4.4 million shares. The 13D uploaded for IDTI said the bid was nonbinding and included a go-shop provision. We should know in 24 hours if the bid is real. IDTI and the SEC declined to comment on the filing. Shares dropped back to only a 4% gain on the questions over legitimacy.

A brave investor could buy the May $21 calls for $1.00 in case the bid turns out to be real.

Facebook (FB) kicked off its developer's forum and there was plenty of hype. The company said it was going to promote its Messenger platform as a way to sell products over the Internet and offer customers support. Currently users send 60 billion messages a day. Zuckerberg spent a lot of time in his keynote speech talking about bridging borders and expanding the Internet to everyone, everywhere. Of the 2,600 developers in attendance one-third were from other countries.

Zuckerberg talked about using lasers and drones to make the Internet available to everyone. With 7.1 billion people in the world, more than half do not have Internet access. He talked about using virtual reality to bring friends together using a pair of normal looking glasses. He has been spending a lot of time in China and India in an effort to bring those 2.5 billion people online with Facebook. Neither country allows Facebook. India just rebuffed his offer to supply free Internet along with a limited Facebook to their population.

Eventually China and India will concede and allow some form of Facebook into their borders. This is why you have to have a position in Facebook at all times. One morning we are going to wake up to an announcement that China has agreed to let Facebook in and the monthly active users will jump by one billion almost immediately. Recently some analysts have started to cut estimates on Facebook saying it has peaked. While user growth may have slowed, it is far from peaked. Users could actually double when, not if, he is successful in getting the product into China and India.

Chipotle Mexican Grill (CMG) is expected to report its first quarterly loss ever for Q1. They are expected to report a 29% drop in same store sales after their multiple food contamination issues in prior months. Also, customer traffic is expected to have declined -26%. Long time customers may have become accustomed to eating elsewhere after they avoided Chipotle during the period where the food scare was active. In order to counter the declining traffic Chipotle handed out 26 million coupons for a free burrito. This will also impact their margins as those customers redeemed those coupons. They report earnings on April 26th. There is actually a chance for either a surprise beat or more likely a "kitchen sink" quarter. Since they know the estimates are lousy, they could throw all the bad stuff into this report to clear the runway for future quarters.

After the bell, CSX Corp (CSX) reported earnings of 37 cents that matched estimates. Revenue of $2.62 billion declined -14% and missed estimates for $2.68 billion. Coal shipments declined -33% dragging total traffic lower by -6.5%. CEO Michael Ward said the railroad was parking locomotives and unused cars and reducing employees until conditions improved. He also said the intermodal business rose 11% because of the severe driver shortage for over the road trucks. To combat this, the truck lines are shipping more trailers by rail and using their drivers to pick up and deliver from the rail yards. The earnings were not as bad as some expected and shares were flat in afterhours.

Also after the bell, Valeant (VRX) got some bad news. Last week the company reported a deal with bondholders to postpone a potential technical default event by gaining approval for a late filing of their 10K. Tonight Centerbridge Partners sent Valeant a notice saying they intend to call a default. This means Valeant will have 60 days to file its annual report or be forced to repay what it owes Centerbridge before that 60 days expires. Reportedly Valeant owes Centerbridge $250 million. If Valeant were to default on those bonds, it would trigger default provisions in the other $32 billion it owes to other creditors. Valeant said the notice does not change anything. They plan to file the 10K by April 29th even though they have an agreement with creditors for a May 31st deadline. Analysts said the move by Centerbridge could be an attempt to win additional concessions in negotiations with Valeant. Lenders have used these tactics for decades to leverage their position. Centerbridge may have given notice simply to insure Valeant does what it has promised in producing the reports in a timely manner. Valeant shares were down $1 in afterhours.

The Q1 earnings cycle kicks off for real in the morning with Dow component JP Morgan reporting before the open. JPM is the first of the top 5 banks reporting over the next five days. These earnings have the potential to set the tone for the entire quarter.

Q1 earnings are still expected to decline -9.1% and the biggest quarterly decline since Q1-2009. On the S&P 121 companies issued guidance and 78% guided lower. Estimates for Q2 are for a -2.7% decline, Q3 +3.8% growth and Q4 +11% growth. Obviously if the market can get through the Q1 earnings with any kind of improvement from the estimates, we will see investors start to load up on stocks ahead of the second half of 2016. Whether that happens in May or July remains to be seen.

Today's short squeeze could continue a long way if there was something to power it higher. As much as 4.5% of the float of the U.S. markets is short. That is near record levels. The short interest in the SPY is at record levels. Globally there is $12 trillion sitting in cash in investor accounts. If an economic rebound broke out there would be a monster rally in equities.


In order for the short squeeze to continue, we have to break through that monster resistance above the Dow and S&P. The S&P close at 2,062 was right at initial resistance but it has 13 points it has to scale to reach the real resistance that starts at 2,075. Just getting there will be a challenge and getting through the multiple resistance levels to make a new high at 2,132 would be a serious undertaking.

I am not going to write a book about the resistance challenge because I have written about it every day for the last three weeks. Support is now 2,042 and resistance 2,062 and 2,075.

All 30 Dow components were positive today and that is a rare occurrence. Chevron led the pack because of the oil story. Tomorrow JP Morgan will lead and probably determine the direction. Resistance on the Dow begins at 17,750 through 17,925. That is going to be a tough minefield to cross. Support is about 17,550. The Dow has moved almost perfectly sideways for almost a month. That next 80 points is going to be a challenge.

The Nasdaq came to a dead stop at 4,900 last week and has failed to return to that level in the last four sessions. The short squeeze in the biotech sector ended and today the semiconductor sector was negative. Every day it is a different drag but next week the big techs begin to report and the gains/losses will be headline driven.

The morning drop today to 4,808 broke through the recent support at 4,835 but the rebound was quick. The index ended the day right in the middle of its recent range after making that lower high, lower low for the day.

The Russell 2000 remains stuck below resistance at 1,110 but turned in a respectable day with an 11-point gain. The Russell remains captive to the biotech sector, financials, semiconductors and energy stocks. Those energy stocks offset the losses in the other sectors on Tuesday.

Tomorrow is all about earnings and oil. The API inventories tonight showed a 6.2 million barrel build and WTI traded about 70 cents lower at $41.50 but then stabilized to wait on the EIA numbers on Wednesday morning. Cushing inventories declined -1.5 million barrels because the 590,000 bpd Keystone pipeline was halted for seven days. That pipeline flows into Cushing Oklahoma. However, we should see the EIA inventories build because of the backlog of tankers waiting to unload in Houston after those fog closures of the Houston ship channel the prior two weeks. Even if the EIA inventories show a big build as expected, the price of crude will probably not decline much because everyone is waiting for some miracle in Doha this Sunday.

The S&P futures have not declined tonight. They have been flat to slightly positive and after a big short squeeze like today, they would normally be down several points. There is a lot of darkness before the dawn so anything is still possible.

I am neutral on the market for Wednesday because it will be headline driven with earnings and economics. I am bearish on the market in the days ahead because of the strong resistance. However, if the first few companies to report, beat the street estimates and rally then we could easily see a longer term short squeeze because of that strong resistance. As the indexes pass through it, those short at those levels will be forced to cover.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Doha Disaster?

by Jim Brown

Click here to email Jim Brown

Editors Note:

The short squeeze in equities on Tuesday was a direct result of the spike in oil prices ahead of the Doha meeting on Sunday. Energy analyst, Jon Kilduff said "This could be the mother of all buy-the-rumor, sell-the-news events." Expectations are more than high, they are ridiculous and go against recent comments from Saudi Arabia.


No New Bullish Plays


USO - US Oil Fund -
Company Description

The U.S. Oil Fund is designed to track the daily price movement of WTI crude oil. This is the simplest method to speculate on the direction of crude oil on a short-term basis.

The USO, or any futures ETF, should not be held long-term because it bleeds value when the futures roll over once a month. On a short term basis it works great for speculation.

Crude oil has spiked 15% over the last several days with a 4% rise today alone. This is speculation over a production freeze agreement in Doha, Qatar on Sunday between OPEC and major crude producing countries. On Tuesday Russia's Interfax news service quoted some diplomat in Qatar saying Russia and Saudi Arabia had agreed to freeze production even if Iran decided not to participate.

This is contrary to what the Saudi deputy crown prince has said over the last couple weeks. The prince said Saudi would not participate unless Iran and the other major producers all agreed to freeze production. Obviously, he could change his mind but after making those statements more than once a change of heart could make him look weak.

There is significant potential for a Doha disaster where the meeting deteriorates into a brawl and nothing is accomplished. Even if they do agree to a freeze that would still maintain 1.45 mbpd of excess production at current levels. Iran, Libya, Kuwait, Iraq, Nigeria and the UAE all have plans to increase production so it would be a major change of plans to agree to a freeze. Most have said they would not support a freeze but when it comes down to the meeting, anything is possible.

Lastly, OPEC members are notorious about saying one thing and doing another. They could all agree to the freeze, wink wink, in order to lift prices and then continue on doing what they are already doing and pumping every barrel they can produce.

I believe there is a good probability we will see oil prices significantly lower in the days/weeks following the meeting. I am recommending we buy an inexpensive put on the USO and see what happens. If you are aggressive you could also buy a call just in case a miracle does occur and prices spike higher. I view that as nearly impossible since Saudi Arabia has said they do not want to see prices much over $40 because that would allow U.S. shale drillers to increase production.

Buy May $10.50 put, currently 56 cents. No stop loss.

In Play Updates and Reviews

Only a Short Squeeze

by Jim Brown

Click here to email Jim Brown

Editors Note:

Everyone would like to think today's gains were the start of a new rally but today was only a short squeeze, not a sudden surge of buyers. However, most long-term rallies begin with a short squeeze so Wednesday will be a key pivot point. If we continue higher the S&P still has to travel 14 points just to get to major resistance at 2,075.

The big spike in crude prices caused a rebound in the energy sector and the financial sector because there is less fear of banks facing loan defaults with higher oil prices. That situation could reverse in an instant if oil prices rolled over on some new headline out of the Middle East.

The morning drop in the Nasdaq to 4,809 knocked us out of Stericycle and the afternoon rebound in the index lifted BBBY, TWTR and ENDP but only slightly.

The S&P rebounded to the resistance highs we saw over the prior five days at 2,060 and that is where the sellers have been appearing. The Dow came very close to the strong resistance starting at 17,750 with a high of 17,744 before fading into the close.

If we move to resistance at 17,750 and 2,075 and fail once again I would expect a decent decline. If we move into that major resistance band over those levels and then hold the gains then the market direction may be changing.

The Dow will be driven by earnings from Dow component JP Morgan at the open on Wednesday.

Current Portfolio

Current Position Changes

BBBY - Bed, Bath & Beyond

The long put position was opened at $46.65.

PKG - Packaging Corp

The long call position was closed at the open on Tuesday.

OA - Orbital ATK

The long call position was stopped out at $85.50.

SRCL - Stericycle

The long call position was stopped out at $125.65.

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


Minor gain after FBR raised the price target from $110 to $115. The analyst said the transition from one time software sales to a subscription model was a more attractive business model.

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.

CSC Computer Sciences Corp - Company Description


No specific news.

Original Trade Description: April 6th.

CSC is an information technology and profesional services Fortune 500 firm that provides solutions in North America, Europe, Asia and Australia.

On February 11th the Supreme Court of Victoria, Australia, approved the acquisition of WXC Limited for (AU)$427.6 million. CSC believes the acquisition of UXC will strengthen their global commercial business by adding the UXC platform to the CSC cloud, cyber and big data offerings. Back in August CSC acquired two other companies, Fruition Partners, a service-management technology provider and London-based Fixnetix, a provider of front-office managed trading software for capital markets.

They are also acquiring Xchanging, a UK company that provides software and outsourcing services for the insurance industry for $697 million. That deal is currently going through the regulatory approval process.

The point here is that CSC is a leading provider of information technology and they are growing rapidly through acquisitions. They are moving towards a mix of cloud based higher margin products that will be beneficial over the long term. They are also buying back stock with a new authorization in January. They paid a special dividend of $10.50 when they spun off the public sector business in Q4. That accounts for the $10 drop in the stock price at the end of November.

Earnings for last quarter were 71 cents that beat estimates for 69 cents. However, revenue declined -10.2% to $1.75 billion missing estimates for $1.859 billion. Shares fell to $24 on the news. However, the reduced revenue came from a switch to cloud products, which have a long term subscription revenue rather than a short term one time sale. Adobe had the same problem when they went from software sales to software as a service. There is always a drop in revenue during the switch but long-term revenue rises and is more stable.

Total company bookings rose +21% to $2.7 billion. Operating income rose +9.2% to $190 million.

Earnings are May 17th.

Shares rebounded from that post earnings low in February to pass resistance at $33 last week. The market decline this week took some of the bloom off the stock and deflated the option premiums. Prior resistance became support and shares started to tick higher on Wednesday afternoon. This is a relatively slow mover but it has been steady since the rebound began.

I am recommending a June option but we will exit before earnings in May. Using a June option the premium will still have some earnings expectations premium when we exit.

Position 4/7/16:

Long June $24 call @ $1.50, see portfolio graphic for stop loss.

HCA - HCA Holdings - Company Description


No specific news. Another five-month high.

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.

OA - Orbital ATK - Company Description


OA dropped to $85.34 at the open before rebounding back into positive territory. That was enough to stop us out at $85.50 and the raised stop from Monday. We exited with a minor gain. The bid/ask spread was 60 cents wide intraday and that bit us on the exit. The news was good with the company announcing a new deal with Intelsat as an anchor customer.

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

Closed 4/12/16: Long May $85 call @ $2.80, exit $3.40, +.60 gain.

PKG - Packaging Corporation of America - Company Description


We closed this position at the open and unfortunately shares gapped down at the open to cost us about 30 cents but we still exited with a nice gain of $3.40.

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:

Closed 4/12/16; Long April $55 call @ $2.20, exit $5.70, +$3.50 gain

SRCL - Stericycle - Company Description


No specific news. Shares dropped under support at $126 and stopped us out at $125.65 for a minor loss.

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

Closed 4/12/16: Long May $130 call @ $2.70, exit $1.95, -.75 loss.

SWHC - Smith & Wesson - Company Description


The support of the 100-day average failed with a minor decline today that came within 4 cents of our stop loss at 22.25. The average was also pierced for one day back in August. Because this is a June option and there is support at $22, I lowered the stop loss to $21.75. The gun manufacturers have been getting a lot of positive press from the analyst community and S&W "should" bounce here.

Original Trade Description: April 5th.

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.

Position 4/6/16:

Long June $24 call @ $1.80, no initial stop loss.

XBI - SPDR Biotech ETF - ETF Description


The sector was mildly positive today with most of the attention going to the energy sector. Support at $54 held.

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)

BBBY - Bed, Bath & Beyond - Company Description


Shares rebounded slightly after two days of steep declines. Wednesday will be a key for direction.

Original Trade Description: April 11th.

BBBY operates a chain of retail stores selling a range of domestics merchandise for bedrooms, bathrooms, kitchens and home furnishings. They also offer health and beauty aids, giftware and infant and toddler merchandise. The currently operate 1,530 stores.

In the age of Amazon can a retail store still exist and be expected to grow their profits? The company posted earnings of $1.91 compared to estimates for $1.80. Revenue of $3.42 billion also beat estimates for $3.38 billion. For the full year they reported earnings of $5.10 and revenue of $12.1 billion.

On the surface that would appear to be a great operation. Revenue increased 2.4%. In the year ago quarter they reported earnings of $1.80. However, same store sales at 1.7% were below the 3.7% increase in the comparison quarter. Online sales increased 25%. They repurchased $1.1 billion in stock in 2015 and declared their first ever dividend of 12.5 cents along with the earnings report. This would seem like a recipe for a rising stock price.

Unfortunately, the post earnings spike of 6% lasted about 2 hours and shares closed negative. BBBY has been in a long-term decline and the February rebound was already fading when the earnings were announced. Analysts believe Amazon will eventually spell the end of profits for large retail chains like BBBY.

Earnings are July 6th.

Shares closed at a six-week low on Monday, only two days after the earnings beat. The chart suggests the stock is going back to the January lows at $41 with today's close at $46.

With the retail sales report on Wednesday likely to disappoint we could see an acceleration in the downward trend.

Position 4/12/16:

Long May $45 put @ $.98, no initial stop loss.

ENDP - Endo Intl Plc - Company Description


Endo posted a minor rebound after a big drop to a new 3-year low on Monday.

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


The energy short squeeze lifted the S&P back to 2,061 but remains well under strong resistance starting at 2,075. This was just a short squeeze. No real buying.

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.

TWTR - Twitter - Company Description


Only a 6 cent gain in a positive market. We do not care which way it moves, just as long as it moves a lot.

Original Trade Description: April 9th.

Twitter operates as a global platform for public self expression and conversation in real time. I am pretty sure everyone knows what Twitter is so I am not going into depth in this explanation.

Twitter has become the bet of the year. Analysts either think it is going to single digits or going to the moon. The highest price target is $36 and the lowest is $11 with the average at $20.86 across a total of 27 brokers.

Twitter has trouble keeping users because the learning curve is steep and Twitter spam is increasing daily. Twitter bots can be programmed to spread tweets and make it appear there is a huge volume of interest in a specific subject. Andres Sepulveda, a Latin American political operative used custom software to direct 30,000 Twitter bots to create false enthusiasm for candidates and spread rumors about the opposition. Sepulveda said the tactics gave him "the power to make people believe almost everything." The man responsible for his operations said two American presidential candidates had contact him and one of those was Donald Trump.

Unfortunately, Twitter has been having trouble monetizing all the traffic regardless of whether it is real or fake. Their monthly active users include a lot of churn and barely any growth. While nobody expects Twitter to go out of business they are losing faith in the business model.

CEO Jack Dorsey is also CEO of Square and that carries mixed emotions. Some want him replaced and others want him full time. Almost nobody wants him to continue the dual role.

There are constant rumors that Twitter will be bought by someone like Google or Apple. If that were to occur it would carry a huge premium to the current $16 stock price.

Twitter has been earnings challenged for a long time and the stock has declined from $55 to the current $16 level on a lack of confidence they will turn the company around.

Earnings April 26th.

The stock is either going to single digits or it will be back well over $20 soon. It is not likely to continue moving sideways at $16.

I am recommending we do a strangle on Twitter using the June options. Regardless of the stock or market direction we should be able to profit. Because Twitter is $16 and stagnant the options are relatively cheap. I want to buy them now and hold over earnings because that is likely to be a volatility event. We could also get some market moving news with the earnings release.

You could use the $18 call and $15 put for a net debit of $2.22 if you want a cheaper option.

Position 3/11/16

Long June $17 call @ $2.07, no stop loss.
Long June $16 put @ $1.45, no stop loss.
Net debit $3.52.

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