Option Investor

Daily Newsletter, Tuesday, 4/19/2016

Table of Contents

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

Market Wrap

Climbing the Wall of Worry

by Jim Brown

Click here to email Jim Brown

The big cap indexes shook off some high profile earnings disasters and the Dow posted a new nine-month high.

Market Statistics

A falling dollar, rising oil prices and a continued short squeeze in energy stocks and earnings from Dow components Goldman Sachs and United Health helped to overcome some big decliners. IBM dropped -$10 intraday to knock about 70 points off the Dow but the gains in GS, UNH, JNJ, DIS and CVX helped to erase that deficit.

The Nasdaq was not so lucky with Netflix (NFLX) and Illumina (ILMN) losing -$14 and -$41 respectively. Google, both of them, lost more than $10 each and Amazon sank -$7.50 to knock -20 points off the index.

Traders also shook off some negative economics to start the day. New residential construction for March came in at an annualized rate of 1.089 million homes and missing estimates for 1.170 million by a wide margin. The February rate was 1.178 million making March activity an -8.8% decline.

Given the relatively warm weather in March, this was a major miss for new housing starts. Single-family starts declined from 841,000 to 764,000 and multifamily starts declined from 353,000 to 325,000. New permits, normally a gauge for future activity also declined. Single-family permits declined from 736,000 to 727,000 and multifamily permits declined from 441,000 to 359,000.

The only bright point was a rise in completions from 1.025 million to 1.061 million or +3.5%. Housing starts, even at this depressed rate, are still 14.2% higher than March 2015. Single-family starts were up +22.6% from the prior March. The biggest decline in new construction came from the Midwest with a -25.4% decline.

After the close today, the API reported weekly crude inventories rose by 3.1 million barrels and higher than the 1.6 million estimate. The EIA forecast for Wednesday is for a 3.5 million barrel build. Crude futures sold off slightly on the report to $40.50, a -57 cent decline. May WTI futures expire at the close on Wednesday. This is why prices have been up this week. All those shorts ahead of the Doha meeting on Sunday had to cover their positions before the futures expire. Next week could be a different story for price direction.

The inventory build was expected to be light because the 590,000 bpd Keystone was closed for a week to fix a leak. That kept nearly 4 million barrels from moving south and into the refinery system.

Tomorrow we will get existing home sales as we head into the spring selling season. For sale signs are popping up all over my neighborhood where there have not been any for the last three years. This suggests homeowners may be sensing a top in prices and have the urge to cash out. There may also be an increasing trend to downsizing as the baby boomers look for smaller and cheaper homes closer to doctors.

The next big economic hurdle is the FOMC meeting next week. Nobody expects the Fed to move but everyone is still cautious ahead of the event.

Goldman Sachs (GS) reported the worst quarterly results in four years because of volatile markets that kept clients from trading and investing. Q1 revenues declined -40% from $10.62 billion to $6.34 billion. Fixed income, currency and commodities trading revenue fell -47%. Equity trading revenue declined -23%. Earnings fell -60% to $2.68. Analysts were expecting $2.48 on revenue of $7.11 billion. In the year ago quarter Goldman earned $4.68 on revenue of $7.27 billion. Despite the big decline in earnings, Goldman shares rose +$3.63 on the news. This was definitely a case of "less bad" results generating a relief bounce.

UnitedHealth (UNH) reported adjusted earnings of $1.81 compared to analyst estimates for $1.72. Revenue rose +25% to $44.53 billion. The company raised guidance for the full year to $7.75-$7.95 compared to analyst estimates for $7.73. Shares rose +$2.69 on the news.

UnitedHealth said they were exiting the Obamacare exchanges in all but a handful of states because they were not profitable. They expect to lose $475 million on the public exchange business in 2016, down from a $700 million loss in 2015. UnitedHealth now offers exchange plans in 34 states and said those would be reduced to a "handful" for 2017. Arkansas, Georgia and Michigan are already confirmed drops and there will be many more states disclosed in the coming months. United said the higher risk profile of this market segment means we can no longer serve it on an effective and sustained basis.

Johnson & Johnson (JNJ) reported earnings of $1.68 ($4.69 billion) that beat estimates by 3 cents. Revenue rose +0.6% to $17.48 billion and matching estimates. The strong dollar cost them 3.3% of revenue growth otherwise it would have been a blowout. In the consumer segment currencies reduced revenue by 9.3%. The company raised revenue guidance by $400 million to $71.2-$71.9 billion and earnings by 10 cents to $6.52-$6.68 per share.

Harley Davidson (HOG) reported earnings of $1.36 compared to estimates for $1.29. Revenue rose from $1.67 billion to $1.75 billion. International sales rose +4.5% but U.S. sales slowed due to increased competition. Sales in Latin America fell -26.5%. The company guided to deliveries of 269,000-274,000 motorcycles in 2016, up +3% from 2015. Shares opened up initially but declined -2.5% for the day.

After the bell, Intel (INTC) reported earnings of 54 cents that beat estimates for 48 cents. Revenue of $13.702 billion was short of estimates for $13.8 billion. They guided for Q2 revenue of $13.5 billion give or take $500 million. Analysts were expecting $14.2 billion. The company said they were going to continue to restructure and would cut another 12,000 jobs globally over the next year. They will take a charge of $1.2 billion in Q2 for the layoffs. The CFO is also moving to head sales and manufacturing and out of the CFO position. The CEO said Intel is evolving from a PC company to a company that powers the cloud and billions of smart connected and computing devices.

Intel expects PC sales to decline in the "high single digits" in 2016. However, servers and datacenter demand for high-end chips is robust. When asked if PC sales would decline so much that Intel would no longer be able to invest in other parts of the business the CEO said he was not worried because the restructuring would make the company more profitable and other business areas were expanding rapidly. Shares declined about 70 cents in afterhours.

Yahoo (YHOO) reported earnings of 8 cents compared to estimates for 7 cents. Revenue of $1.09 billion beat estimates for $1.08 billion. There was a news story out last week that Yahoo was buying traffic from other search engines and websites in order to keep overall revenue numbers higher until after the company was sold. Organic revenue was reportedly declining as Yahoo's once popular pages became stale.

They guided to Q2 revenue from $1.05-$1.09 billion and that missed estimates for $1.1 billion.

Reportedly, only two companies actually submitted bids to acquire Yahoo out of the 40+ that had expressed interest. Verizon and YP Holdings, formerly known as Yellowpages.com actually submitted bids. Time Inc, Alphabet, Comcast, AT&T and IAC Interactive stepped out of the bidding at the last minute prior to the Monday deadline. There was no word on what prices were bid but analysts believe the core business is worth $3-$5 billion and Yahoo is reportedly asking $10 billion. Given the two bidders, Verizon is likely to be the winner if a sale is completed. Yahoo shares rose 30 cents after the bell.

Discover Financial (DFS) reported earnings of $1.35 and beat estimates for $1.29. The company said charge card volume rose +4%. Shares rose +3% in afterhours.

Intuitive Surgical (ISRG) reported earnings of $3.54 compared to estimates for $3.43. Shares rose +2% in afterhours.

Shares of VMWare (VMW) rose nearly 6% after reporting earnings of 86 cents compared to estimates for 84 cents. Revenue of $1.59 billion beat estimates for $1.57 billion.

Myriad Genetics (MYGN) was crushed today after Medicare said it priced a hereditary breast cancer test at $622 compared to a similar test from Myriad at $2,180. InVitae (NVTA) had requested a price of $950 on the new test, which was already less than half the current rate. While Myriad's test is slightly more comprehensive and does not have the same Medicare code, the impact was to sentiment as Medicare tries to cut costs. MYGN fell -7% on the news and NVTA was unchanged.

Viacom (VIAB) shares fell -8% after the company warned viewers of Dish TV that Viacom channels including MTV, Nickelodeon and Comedy Central could be blacked out after today because of a contract dispute. This impacts 14 million subscribers. Viacom has been trying to renegotiate a contract with Dish at a lower price and Dish has refused. A blackout could cost Viacom 15% of its revenue. Viacom began running notices on its programming warning a blackout was possible. Dish replied back saying "We regret that Viacom has chosen to involve customers in a business negotiation when time remains to reach an agreement." Multiple cable TV operators have dropped Viacom over the last year. The Dish CEO, Charlie Ergen, is a former professional poker player, so I would say the odds favor a resolution in the favor of Dish.

Lexmark (LXK) announced after the close it had agreed to be acquired by a consortium led by Apex Technology, Legend Capital Management and PAG Asia Capital for $3.6 billion. The all cash deal for $40.50 per share. This was a 17% premium to the share price. The deal is expected to close in the second half of the year pending regulatory approval. While the three purchasers are in China, the company headquarters will remain in Lexington Kentucky.

Dow components American Express (AXP) and Coca Cola (KO) report earnings on Wednesday along with a bunch of tech stocks plus US Bank, United Continental and Yum Brands.


The rally that refuses to die continues to climb the bricks in the wall of worry to progressively higher levels. From a technical point of view, this should not be happening. Resistance has proven to be almost invisible and weak economics and earnings are being ignored. This is the new high syndrome in full bloom. The closer we get to the prior highs the less the fundamentals matter. As Spock would say, "Jim, it is not logical." If you want logic, you should not look in the stock market.

The S&P rallied to close just over 2,100 and over the initial resistance band from Q4. The next hurdle will be the 2100-2115 range and then the upper band at 2116-2128. With the S&P only 29 points from a new closing high it would appear the fix is in. It would take a significant change in sentiment to send the market lower today. The big declines in Netflix, Illumina, the Google(s), Tesla, Amazon and Priceline today barely dented the Nasdaq for a -20 point loss. The Nasdaq 100 lost -32 but the Composite is the index in focus.

The Dow shook off a 10 point decline in IBM for -70 Dow points and still closed positive thanks to "less bad" earnings from Goldman Sachs and some help from JNJ and UNH. That is all the proof you need that the prior highs are going to be tested.

The Dow has almost touched the sky with its high at 18,103 today. The high close last May was 18,312 and it is very close. The pesky resistance from 18,110 to 18,165 has to be crossed first but in this rally that is almost a given.

Eventually fundamentals and economics will matter and that will probably happen when the new high is made. Traders typically lose interest once the high is made and they immediately begin making plans for the next leg down. We could be setting up for a very wide double top but we will deal with that formation once it appears.

There are still ten Dow components to report this week but none should have the impact of IBM and Goldman. Support is now 17,750 followed by 17,600.

The Nasdaq has traded over resistance at 4,900 for the last five days but it cannot seem to seal the deal with a move over 4,950. Once over that level the real resistance is 5100-5160 and then the historic high close at 5,218. The Nasdaq has been lagging the other indexes because of the impact from the biotech sector. The Biotech Index lost -2% today due to various headlines from the cancer conference currently in progress.

Nasdaq futures are -9 tonight as a result of the Intel earnings and there are some big names reporting over the next couple days that could also sour sentiment. I am not as convinced the Nasdaq will make a new high as I am the Dow will complete the task. Time will tell.

The Russell 2000 sprinted over downtrend resistance and the 200-day average and has not looked back. All the small cap, mid cap indexes are outperforming. If the Russell can move over resistance at 1,165 that could produce some additional bullish sentiment for the broader market.

By all rights, the market should be declining. S&P futures are down -4.50, Nasdaq -9.50 and Dow futures -38 as I type this. In theory, that should mean a negative open but we were down -14 on Monday morning and rebounded into a major short squeeze. That energy squeeze has one more day to run. Some energy stocks are up more than 10% over the last two days because shorts are being squeezed. If WTI rolls over after the expiration at Wednesday's close, that short squeeze will fade and we could be looking at a different market.

The euphoria over "less bad" earnings will eventually run its course as well but probably not until the Dow makes a new high. I would be very cautious over adding new longs at this point but I would not back up the truck on new shorts until the new highs are reached. The sell in May cycle is still several weeks away so pace yourself. There is no rush to add positions in either direction.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Pause to Reflect

by Jim Brown

Click here to email Jim Brown

Editors Note:

With the markets nearing new highs and resistance increasing, we need to focus. The problem is that we do not know which direction to focus our attention. The S&P only has about 30 points before a new high and the Dow about 200. The Nasdaq is not in consideration because it has been lagging.

Typically, a new high after a long period of consolidation means a pause to reflect. Investors are suddenly left without a target and the market becomes listless. Traders want an overhead target to shoot at. Once into blue sky territory they lose their sense of direction.

This is even more complicated this week because the economics are still lousy, earnings, even "less bad" results will still be down for four consecutive quarters and this will be the worst quarter since the financial crisis. So why are we in rally mode? What will keep us in rally mode once the new high target is hit?

With the S&P futures down -5, Nasdaq futures -9 and Dow futures -38 tonight, I am not going to add any new plays. We do not really know which direction will appear on Wednesday. We could gap down and rebound like we did on Monday or maybe the market is actually going to take some profits before the next surge higher. We are pretty evenly split between longs and shorts so either way the market moves, some plays will do well and others will not. I see no reason to add plays when we do not have a reasonable sense of direction.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

New Nine-month High

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow surged at the open before rolling over intraday but still managed to tack on 50 points to Monday's gains. IBM's $10 loss intraday knocked about 75 points off the Dow but the index still managed to post a decent gain. That 18,100 level could prove to be difficult after the index failed with a print at 18,103 almost immediately after the open.

Helping lift the Dow higher despite the drag from IBM was a strong gain by Goldman Sachs (GS) after they reported an earnings beat. United Health (UNH) also beat and raised guidance. The dollar declined again and oil prices rose. If it were not for IBM (-$9), Netflix (NFLX -$14) and Illumina (ILMN -$41) the markets could have looked a lot different at the close.

The new high syndrome is definitely in play as investors buy stocks in anticipation of surpassing those old highs. While that may be wishful thinking, it is lifting the markets.

Current Portfolio

Current Position Changes

FDX - FedEx

The long call position was entered at the open at $167.80.

SPY - S&P-500 ETF

The third long put position was entered with a trade at $210.

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


No specific news. Minimal loss from Monday's new high.

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. See portfolio graphic for stop loss.

CSC Computer Sciences Corp - Company Description


No specific news. The IBM earnings did have a negative impact causing a -1% decline.

Original Trade Description: April 6th.

CSC is an information technology and professional 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 $34 call @ $1.50, see portfolio graphic for stop loss.

EXP - Eagle Materials - Company Description


No specific news. Shares closed at six-month high.

Original Trade Description: April 14th.

Eagle Materials Inc. manufactures and distributes Cement, Gypsum Wallboard, Recycled Paperboard, Concrete and Aggregates, and Oil and Gas Proppants from 40 facilities across the US. Eagle is headquartered in Dallas, Texas.

In the last quarter revenues declined -5% and earnings -12% to 93 cents. However, cash flow from operations increased +66% to $108.7 million.

There were two problems impacting EXP results. The first was the dramatic decline in oil well drilling. They supply cement for those wells and they use a lot. The slowdown in the sector has weighed on EXP for the last year. However, they have survived and they are doing well.

The second problem was a high volume of rain October and December that reduced sales volume by delaying and slowing construction projects that use EXP materials.

Cement, concrete and aggregates revenue rose 11% in the quarter thanks to a 4% increase in prices to offset the lower demand for oil well cement. Cement revenues alone rose +9% to $135.4 million. They delivered 1.2 million tons at an average cost of $97.10 a ton.

The rain caused sheetrock sales to decline 9% but missed revenues will likely be pushed into Q1. They sold 568 million square feet of sheetrock, which is actually called Gypsum wallboard. They raised prices on that product as of March 31st and they expected a surge in bulk purchases ahead of the price increase. That will show up in the current quarter numbers.

Oil anf gas proppant sales declined 73% because of the slowdown in drilling and fracking. Fracsand volumes declined -47%. Proppants are a minor part of company revenue at only $8.5 million in Q4 compared to total revenue of $277.4 million.

Earnings are May 12th. We will exit before earnings.

Standpoint Research initiates coverage at accumulate and BB&T Capital upgraded them from hold to buy.

As we move into spring the construction activity will surge along with demand for concrete and sheetrock. Earnings should have improved for Q1 and will likely be much stronger in Q2 because of the activity and price increases.

Shares have rebounded to resistance at $71.50 and the close today was slightly over that level. I believe EXP is going to breakout and possibly run to the $77-$80 level before earnings, market permitting.

Position 4/15/16 with a trade at $72

Long May $75.00 call @ $1.95, see portfolio graphic for stop loss.

FDX - FedEx - Company Description


No specific news. New six-month high close. The position was entered at the open today.

Original Trade Description: April 18th.

FedEx provides transportation, e-commerce and business services worldwide. I doubt there is anyone that does not already know what FedEx does so there is no need of a lengthy explanation.

FedEx operates 65,000 vehicles and trailers from a network of 370 service centers. By comparison Amazon is operating 20 planes but they are adding hundreds of trucks to move products between regional warehouses. After Amazon contracted for those 20 planes the analyst community was all worried that Amazon was going to create its own delivery service and kick FedEx and UP to the curb.

The FedEx CEO, Mike Glenn, called the rumors "fantastical" and said it would take years and tens of billions of dollars in order to build sufficient scale and density to even replicate some of the existing FedEx network." Glenn said Amazon is "supplementing" FedEx with their new push into moving product around the country. However, Amazon has no real interest in delivering that last mile to customers all across the country. Amazon is simply improving their capability to get vast numbers of packages to the UPS/FDX locations all around the country to reduce costs and improve delivery times. UPS/FDX will still be responsible for delivering each of those packages to the customers.

When FDX reported earnings in March they reported $2.51 compared to estimates for $2.34. That was up from earnings in the comparison quarter of $2.03. Revenue rose from $11.7 billion to $12.7 billion. The company raised guidance for the full year from $10.40-$10.90 to $10.70-$10.90. The analyst consensus estimate was $10.56 on revenue of $49.91 billion. Shares soared from $145 to $161 on the report.

After moving sideways for over a month, the shares are starting to tick higher. There was resistance at $165 and that broke late last week. I am recommending a $170 call with expectations FDX will try to make a new high over $180, market permitting. Oil prices are not expected to move much higher so that is a positive for future expenses.

Earnings are June 21st.

Position 4/19/16:

Long June $170 call @ $3.68, initial stop loss $162.50

HCA - HCA Holdings - Company Description


No specific news. Heath Care space declined and HCA fell -1.4%.

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.

XBI - SPDR Biotech ETF - ETF Description


-2% decline as the sector rolled over. Multiple abstracts at the cancer conference sent individual stocks lower.

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


No specific news. Very minor rebound of 12 cents.

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.

HRB - H&R Block - Company Description


No bounce, no specific news.

Original Trade Description: April 13th.

H&R Block has been doing taxes since 1946. They provide tax preparation, banking and other services to the general public through a system of retail offices.

Unfortunately for HRB the times are changing. The general public is moving to do-it-yourself tax preparation software like Turbo-Tax from Intuit (INTU). That is not the biggest problem. On Wednesday Senator Elizabeth Warren introduced the "Tax Filing Simplification Act of 2016" and Bernie Sanders is a co-sponsor.

Donald Trump, Ted Cruz and John Kasich have all said they would drastically change the tax code and Ted Cruz wants to simplify it enough so that all your taxes can be submitted on a post card sized form. If a republican wins the election the tax preparation business is going to suffer. However, if Hillary wins she has proposed 18 new taxes to raise $1 trillion in new revenue. That will further complicate the preparation situation.

Obamacare has also made tax preparation harder and more complicated. Taxpayers have been forced to use accountants to prepare their forms because of the complications. HRB could do it but the perception is that you need somebody other than a part time tax preparer to give you the right advice.

In the last quarter HRB posted a loss of 34 cents that was larger than the analyst estimates for 26 cents. It was also larger than the 13 cent loss in the year ago quarter.

Revenue declined -6.7% because of lower volumes of clients. Revenue of $474.5 million missed estimates for $505 million. Tax preperation fees declined -4.2%. Operating expenses rose +1.7%. Long-term debt rose from $500 million to $2.6 billion. Cash burn rose from $1.2 billion to $1.4 billion.

Earnings are June 8th.

I am recommending a July option so there will still be some earnings expectation premium left when we exit before earnings.

Position 4/18/16:

Long July $23 put @ $1.10, no initial stop loss.

SPY - S&P 500 ETF - ETF Description


The market spiked at the open to trigger our third tranche of SPY puts at $210. This is the last tranche on this position. Given the recent bullishness, I raised the stop loss slightly to what would be a new high. I like that the markets rolled over today because it shows the resistance is still in play.

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.

4/19/16: Long June $200 put @ $1.95 when SPY traded at $210.
See portfolio graphic for stop loss.

TWTR - Twitter - Company Description


Twitter stumbled again in a bullish market at the open. No specific news. This could be sympathy for the tech decline today.

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.

USO - US Oil Fund - Company Description


Short covering continued to push WTI futures higher ahead of futures expiration at the close on Wednesday. The short interest was very high going into the Doha meeting and all those shorts had to be covered.

Original Trade Description: April 12th.

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.

Position 4/13/16:

Long May $10.50 put @ 58 cents. No stop loss.

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