Option Investor

Daily Newsletter, Monday, 10/10/2016

Table of Contents

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

Market Wrap

Calm Before The Storm

by Thomas Hughes

Click here to email Thomas Hughes


This week; a handful of earnings and a few economic reports. Next week nearly 20% of the S&P 500 reports earnings amid a flurry of important economic data. This is the calm before the storm. Even more so considering that earnings will be coming in hot for the next 3 to 4 weeks at least, and that the election and next FOMC meeting are only a month or so away as well. Most of today's talk not focused on earnings was centered around last nights presidential debate; Trump is an ass, Hillary a self-serving two-faced liar, they both suck chose your poison.

There was only 1 earnings report today, a small regional bank in Mississippi called First Bancshares which increased quarterly earnings by 22% but still failed to meet market expectations. There were no economic reports and none scheduled for Tomorrow, the only one of real importance Wednesday is the FOMC minutes. Thursday is weekly jobless claims and then Friday we'll some more substantial reporting; PPI, retail sales, business inventories and Michigan Sentiment.

Asian markets were mixed today but two, Hong Kong and Japan, were closed for holiday. European markets were open for business, rising about 1% on average and driven by rising oil prices.

Market Statistics

Futures indicated a positive open all morning although early indications were little more than hovering above break even. Later in the pre-opening session futures began to rise, indicating an open about a half percent above last week's close, and this held into the opening bell. The market opened with small gains, well within recent trading ranges, and moved slightly higher throughout the morning. The high was hit shortly before 10AM, about +1% for the SPX, and that was not broken the rest of the day. From that point on the market drift to the side and slightly lower, trading about a half percent above Friday's close, and held those levels into mid afternoon. Late day trading was more of the same, sideways drift that left the indices hanging around the +0.5% mark.

Economic Calendar

The Economy

No data today but still the Moody's Survey of Business Confidence release at 10AM. The index gained 0.2% to hit 25.2% and is holding steady at these levels. This is the 11th week the survey has been at or near this level since hitting bottom 3 months ago. Mr. Zandi says that business sentiment has held up rather well over the summer considering the series of global shocks the market sustained; the index shows a global economy expanding at a rate near its potential. Sentiment in the US is best, South America the worst although global sentiment appears to be catching up with the US. Businesses are cautious in the present but more optimistic and upbeat out to early next year.

Earnings season really gets started this week although there are only a few reports of importance on the schedule. Tomorrow kicks things off with Alcoa, after the bell, with a handful of the Big Banks scheduled for later this week. According to Factset the blended rate of earnings going into this week, for the 3rd quarter, is -2.1%, steady from last week. If the trend of all-index earnings beating expectations by roughly 4% holds true this may rise as high as +2% by the end of the cycle. If that happens full year 2016 earnings blended rate will move back into positive growth.

Looking forward the fourth quarter is still expected to see growth and expectations have risen in the last week. Estimates gained 0.3% to hit 5.9%, a 2.5 month high. If, and this is a big if, forward outlook continues to rise we will have entered a period of positive earnings growth with the tailwind of rising expectations. Full year 2016 outlook has risen to -0.1% and may soon turn positive. Full year 2017 outlook remains robust at 12.9% but has fallen by 0.1% once again.

The Dollar Index

The dollar is gaining strength on firming Fed rate hike outlook. There is still a low chance of rate hike this year but if data firms this month and next that chance could easily turn into a certainty. At this time the CME Fed Watch Tool shows only a 10% chance at the November meeting but a whopping 70% chance of at least a 25 bps increase by December. This week the FOMC Minutes and PPI data are the two events to watch. The Dollar Index gained about 0.5% today, confirming its break-out from the wedge pattern, but remains range bound longer term. Upside resistance is the top of the range near $97.50. A break above this level would be bullish and take the index up to 8 month highs.

The Oil Index

Oil prices are rising on hot air blowing out of OPEC. The cartel and its deal, dubiously supported by Russia, caps production at levels above those that contributed to the current oversupply situation and does nothing to alter the supply/demand imbalance. The conspiracy theorist in me has little doubt Russia and OPEC are somehow colluding to inflate prices. Regardless, prices are high and supported by talk so be careful. WTI gained more than 3% today to trade at the highest level since early July. On a technical note, today's WTI price action created an outside-day at the top of an uptrend and at/near resistance levels.

The Oil Index gained more than 1.5% today and may be breaking out of its range. The caveat is that the extreme top of the range dates back to late May, just before oil prices topped out, and is still above current price action. This level is near 1,190 and would need to be broken to get truly bullish on the sector. The indicators are bullish and moving higher but remain consistent with range bound trading. If oil prices are not able to sustain their rise neither will this sector.

The Gold Index

Gold prices rebound from long term low levels despite a rising dollar. Spot gold gained as much as 1% intraday to trade above $1,265 but remains well below previous support levels above $1,300. This move is likely a dead-cat bounce in light of the dollar's gains and move toward the top of its range. This week is likely to see more volatility regardless of direction simply because of the FOMC minutes, and possibly because of the PPI. Support target is $1,250, a break below here could go as low as $1,200.

The gold miners held steady in today's session, the miners ETF GDX gaining about 0.75% and creating a small doji spinning top. The ETF is in consolidation following last week's massive plunge and looks like it will at least test support in the near term. Support appears to be near the $22.50 level, just above the 50% retracement line I drew last week. The indicators are both bearish with stochastic crossing the lower signal line, indicative of lower prices, but MACD is already showing a peak and the peak is divergent from the new low so support at this level may hold. If broken a move down to $19.75 is likely.

In The News, Story Stocks and Earnings

No earnings to speak of but lots of business gossip making the rounds. The first bit was a tweet from Elon Musk, using his favorite method of investor communication, giving updates and teasers for Tesla. His message over the weekend said that the company would not need to raise more capital to make the Solar City purchase and that there was a new product coming from Tesla. In other news a coal mining big wig called Tesla a fraud during a televised interview. Shares of the stock were lifted by the first news, unaffected by the second, to trade just above $200.

Shares of Twitter fell hard today despite Elon Musk's use of the platform. Bidders for the company see to be drying up and that has left the market wondering what I always have, what's Twitter really for and why do I want to waste my time on it? Today's plunge shaved -13% off the stocks price leaving trading at a 2 month low. In the last 2 weeks shares of the stock have risen 35% and fallen 32%, a little bit of volatility I would say.

The VIX fell today but after opening with a small gain. By end of day the index was down about -0.52% but flat over the last 2 weeks. Even though volatility has settled back down it has done so above the previous low levels and looks like it might stick with us for a little while. The indicators are consistent with support at this level and have a bit of bullish bias. Another anything that scares the market could see this index spike back above 15 and hit 20 or 25 with a quickness.

The Indices

The market tried to rally today but couldn't get the indices out of the starting gates. Early gains of 1% (SPX) turned out to be the intraday highs, closing gains were closer to half that. Today's leader was the Dow Jones Transportation Average which made a nice attempt at breaking out of its trading range. The transports gained close to 1% in a move up to test resistance at 8,135 and the top of the now almost 8 month trading range. The indicators are consistent with resistance and the top of a range, both rolling over to form peaks although stochastic is showing a little strength by crossing the upper signal line. A break to new short term highs would be bullish but additional resistance is present just above.

The NASDAQ Composite made the 2nd biggest gain today, about 0.80%, and came within a point of hitting the current all time high. The index created a small bodied candle, an indecisive spinning top, and does not appear ready to break to new highs just yet. Price action is tentative and the indicatos continue to weaken so the chances of a surprise sell-off remain. Support is near the short term moving average and the 5,250 level, a break below here would be bearish in the near term at least and could go as low 5088 before finding support.

The S&P 500 and Dow Jones Industrial Average closed with nearly the same gain, about 0.5%, although the blue chips edged the broad market out of 3rd spot by a nose. The blue chips created a very small candle but one that moved up from the short term moving average and above the 18,250 support/resistance line. The bias has turned to the upside with this one but trading remains range bound, today's action is just above the mid point of the range. Prices may move up to test resistance at 18,500 but no break out is indicated at this time. Both indicators are weak, hovering at levels consistent with directionless trading, with no signs of strength or underlying momentum.

The S&P 500 closed with a gain near 0.45%, creating a small white bodied candle just above the short term moving average. The index remains range bound and is trading near the mid point of that range with indicators giving no sign of underlying direction. Near term support appears to be near 2,150, a break below that could go to 2,120 or 2,100. Resistance is near the current all time high, a break above that could go up indefinitely.

The market remains range bound, wound up and waiting. Waiting for earnings season, waiting on the election and waiting on the FOMC. The fundamentals are in place for a nice long rally, perhaps following a small correction, all we need is the green light to do so. This could be in the form of positive earnings outlook, a resolution to political uncertainty and a reduction of FOMC fears. One of those issues may get alleviated this week, more likely over the next few weeks, perhaps the other two will come into line as well. Until then I remain cautious in the near term, wary of correction, waiting and looking for my next great long term bullish entry.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Olympic Buzz Fading

by Jim Brown

Click here to email Jim Brown

Editors Note:

Nike shares rallied to a 3-month high going into the Olympics but have now crashed back to nearly a 52-week low. Competition is heating up and costs are rising.


No New Bullish Plays


NKE - Nike Inc - Company Profile

NIKE, Inc., designs, develops, markets, and sells athletic footwear, apparel, equipment, and accessories worldwide. It offers products in nine categories, including running, NIKE basketball, the Jordan brand, football, men's training, women's training, action sports, sportswear, and golf. The company also markets products designed for kids, as well as for other athletic and recreational uses, such as cricket, lacrosse, tennis, volleyball, wrestling, walking, and outdoor activities. In addition, it sells sports apparel; and markets apparel with licensed college and professional team and league logos. Further, the company sells a line of performance equipment, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment, golf clubs, and other equipment under the NIKE brand name for sports activities; various plastic products to other manufacturers; athletic and casual footwear, apparel, and accessories under the Jumpman trademark; action sports and youth lifestyle apparel and accessories under the Hurley trademark; and casual sneakers, apparel, and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron, and Jack Purcell trademarks. Additionally, it licenses agreements that permit unaffiliated parties to manufacture and sell apparel, digital devices, and applications and other equipment for sports activities under NIKE-owned trademarks. The company sells its products to footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops, and other retail accounts through NIKE-owned retail stores and Internet Websites (direct to consumer operations), as well as independent distributors and licensees. Company description from FinViz.com.

Nike is fading fast as revenue growth slows. Previously growth had been over constantly over 10% but that has not happened in the last few quarters. Revenue growth in Q1 was 5%, Q2 4%, Q3 8%, Q4 6% and Q1 is estimated to be 8%. Another challenge is currency issues. Only 42.5% of revenue comes from the U.S. meaning 57.5% comes from overseas where currency fluctuations are costing Nike 6-8% per quarter.

Nike had been targeting $50 billion in annual revenue but quarterly numbers are not growing that fast. In the last quarter Nike had revenue of $8.4 billion. With five quarters of revenue well under $10 billion each they are going to have to push their $50 billion target well out into the future to somewhere in the 2020 range.

Under Armour, Skechers and Adidas are stealing market share with Adidas on a fast track with recent market share gains.

When Sports Authority went out of business, it was a big problem for Nike. They lost money on receivables and had to take back a lot of inventory. In addition they lost 450 retail locations that were heavily subsidized by Nike.

I expect Nike shares to continue declining until sales begin to grow again.

Earnings December 27th.

Buy Dec $50 put, currently $1.11, no initial stop loss.

In Play Updates and Reviews

Range Break

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow gapped open to 18,399 to trade above the tight range from last week but the resistance at 18,400 was rock solid. The futures were up +6 before the debate and only declined slightly after the event before shifting back into rally mode. Trump was credited with a win but only by a narrow margin and without a knockout of Clinton that suggested she will retain her lead. The market celebrated with the potential for four more years of a divided government.

The Dow gave back 70 points of its gains to close at 18,329. The &SP gapped open to 2,170 but also gave back almost half of its gains to close at 2,163 and right back into the recent trading range. The Nasdaq traded within 2 points of a new intraday high and closed with a strong 36 point gain and only 11 points away from a new high.

The Nasdaq 100 big cap index gained +29 points and did close at a new historic high of 4,893, +2 points above the old high.

The big cap indexes are leading the market ahead of a flurry of tech earnings due out next week.

Current Portfolio

Stop Loss Updates

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

Profit Targets

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

Current Position Changes

PANW - Palo Alto Networks

The long call position was opened at $160.10.

If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor

BULLISH Play Updates

COST - Costco - Company Profile


No specific news. Looks like the bottom is forming.

Original Trade Description: October 4th.

Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. The company offers branded and private-label products in a range of merchandise categories. It provides dry and institutionally packaged foods; snack foods, candy, tobacco, alcoholic and nonalcoholic beverages, and cleaning and institutional supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio; meat, bakery, deli, and produce; and apparel and small appliances. The company also operates gas stations, pharmacies, food courts, optical dispensing centers, photo processing centers, and hearing-aid centers; and engages in the travel business. In addition, it provides gold star (individual) and business membership services. As of October 29, 2015, it operated 690 warehouses. Company description from FinViz.com.

Costco reported earnings last week of $1.77 compared to estimates for $1.73. Revenue of $36.56 billion barely missed estimates for $36.81 billion. Same store sales, excluding gasoline, rose 2% in the USA, +5% in Canada and +1% internationally. Overall sales rose +3%.

For the full year same store sales were up +4%. Membership fees rose from $785 million to $832 million. The company said some of its increased profitability came from the lower fees it was paying to Visa compared to the prior payments to American Express. There were initial problems in the conversion and some customers were angered leading to weaker sales in the prior two quarters. That is now over and customers are coming back.

The earnings were Friday and shares spiked to $154 on the news. Post earnings depression appeared along with a weak market over the last two days. I believe Costco will rebound into Black Friday because this is the strongest quarter. They typically sink into the September earnings and then rally into December.

The plan is to buy calls now and exit around Black Friday. The December calls are cheap and any rally should lift the stock back to $160-$165. I am not putting a stop loss on this position because of the potential for market volatility over the next two weeks.

Position 10/5/16:

Long Dec $155 call @ $2.76, no stop loss.

DISH - Dish networks - Company Profile


No specific news. Getting ready for another assault on resistance at $56.50.

Original Trade Description: October 3rd.

DISH Network Corporation provides pay-TV services in the United States. The company operates through two segments, DISH and Wireless. The company provides video services under the DISH brand. It also offers programming packages that include programming through national broadcast networks, local broadcast networks, and national and regional cable networks, as well as regional and specialty sports channels, premium movie channels, and Latino and international programming. In addition, the company provides access to movies and TV shows via TV or Internet-connected tablets, smartphones, and computers; and dishanywhere.com and mobile applications for smartphones and tablets to view authorized content, search program listings, and remotely control certain features. Further, it offers Sling TV services that require an Internet connection and are available on streaming-capable devices, including TVs, tablets, computers, game consoles, and smart phones primarily to consumers who do not subscribe to traditional satellite and cable pay-TV services. Additionally, the company operates Sling International that offers over 200 channels in 18 languages; and Sling domestic package that consists over 20 channels and tiers of programming, including sports, kids, movies, world news, lifestyle and Spanish language, and premium content, such as HBO. Further, it offers Sling Latino service; and satellite broadband services, wireline voice, and broadband services under the dishNET brand. Additionally, the company has wireless spectrum licenses and related assets. As of December 31, 2015, it had 13.897 million Pay-TV subscribers. Company description from FinViz.com.

Dish is gaining a significant number of views in the millennial generation that either have never had a cable subscription or cannot stand paying the monthly cable bills for what they believe should be free TV. They are also developing a large audience of Latino viewers with their various Spanish language channels. They also offer 18 other languages and more than 200 channels.

In early September, they gained the rights to about 800 sporting events offered by the six PAC 12 networks. Millennial's love to watch sports, especially when it is free or nearly free.

The online Sling TV offering is gaining market share with its skinny bundles including channel packages like HBO and Starz.

Over the last month the consensus earnings estimates for the current quarter have risen from 63 cents to 68 cents. Full year estimates have risen from $2.92 to $3.05.

Earnings Nov 7th.

Since they signed the sports deal on September 12th the stock has been in rally mode. Shares are closing in on resistance from June at $56.50 and should easily break through. The next resistance is in the $65 range.

Position 10/4/16

Long Nov $57.50 call @ $2.43, see portfolio graphic for stop loss.

IDCC - Interdigital - Company Profile


No specific news. Consolidating over $78.

Original Trade Description: September 7th.

InterDigital, Inc. designs and develops technologies that enable and enhance wireless communications in the United States and internationally. It offers technology solutions for use in digital cellular and wireless products and networks, such as 2G, 3G, 4G, and IEEE 802-related products and networks. The company develops cellular technologies comprising technologies related to CDMA, TDMA, OFDM/OFDMA, and MIMO for use in 2G, 3G, and 4G wireless networks and mobile terminal devices; and other wireless technologies related to Wi-Fi, WLAN, WMAN, and WRAN. Its patented technologies are used in various products, including mobile devices, such as cellular phones, tablets, notebook computers, and wireless personal digital assistants; wireless infrastructure equipment comprising base stations; and components, dongles, and modules for wireless devices. As of December 31, 2015, it had a portfolio of approximately 20,400 patents and patent applications related to the fundamental technologies that enable wireless communications. Company description from FinViz.com.

IDCC does not make the equipment that uses its designs and patents. They lease those patents to other companies for annual royalty payments based on the volume of devices sold. This is a very lucrative business because they do not have the cost of production or the risk any specific product will not sell in the marketplace.

For Q2 they reported earnings of 48 cents that beat estimates for 26 cents. Revenue of $75.9 million was $300,000 short of estimates. They received an arbitration award of roughly $150 million from Huawei in the quarter that will be reported as income in Q3. They also announced a new multi-year patent agreement with Huawei for 3G and 4G units. They ended Q2 with $814 million in cash.

Update 9/8/16: The company issued revenue guidance for Q3 of $220-$225 million. This compares to Q2 revenue of $75.9 million. Quarterly revenues are volatile because they receive royalties on new products when shipped. For instance, a royalty on the iPhone 7 would show a monster jump in Q4 compared to minimal revenue in Q3.

Update 9/28/16: In a study done by the EU Commission and IDCC they found the cost of rolling out 5G in all 28 EU member states could reach 56 bullion euros by 2020 and 141.8 billion annually by 2025. That is a huge amount of money that will be flowing into a hand full of companies including IDCC. The 5G standard is seen as 50 Mbps everywhere compared to the current 5-20 Mbps.

Earnings Oct 27th.

IDCC is a member of the S&P-400 MidCap index.

Position 9/27/16 with an IDCC trade at $78.65

Long Nov $80 call @ $2.90, see portfolio graphic for stop loss.

LITE - Lumentum Holdings - Company Profile


No specific news. Consolidating before next push higher.

Original Trade Description: September 12th.

Lumentum Holdings Inc. manufactures and sells optical and photonic products for optical networking and commercial laser customers worldwide. It operates in two segments, Optical Communications and Commercial Lasers. The Optical Communications segment offers components, modules, and subsystems that enable the transmission and transport of video, audio, and text data over high-capacity fiber optic cables. It offers optical communication products, including optical transceivers, optical transponders, and supporting components, such as modulators and source lasers; modules or sub-systems containing optical amplifiers, reconfigurable optical add/drop multiplexers or wavelength selective switches, optical channel monitors, and supporting components; and products for 3-D sensing applications, including a light source product. This segment serves customers in telecom and datacom markets. The Commercial Lasers segment offers diode, direct-diode, diode-pumped solid-state, fiber, and gas lasers; and photonic power products, such as fiber optic-based systems for delivering and measuring electrical power. This segment serves customers in markets and applications, such as manufacturing, biotechnology, graphics and imaging, remote sensing, and precision machining such as drilling in printed circuit boards, wafer singulation, and solar cell scribing. Company description from FinViz.com.

In Q2 LITE reported adjusted earnings of 41 cents compared to estimates for 35 cents. Revenue of $241.7 million beat estimates for $238.4 million. The company guided to earnings of 40-46 in Q3 and revenue in the range of $245-$255 million. Both were slightly ahead of analyst estimates.

Raymond James upgraded the stock saying strong demand from new datacenter build outs and from China was pushing sales higher. The company only has two competitors, Finsar and Nistica, and they only compete in certain products. Raymond James believes LITE can increase sales in that category by 50% by year-end. Verizon's network upgrades are expected to supply $900 million to LITE over the next several years. Zacks also joined the upgrade club with a strong buy.

The stock is also getting a boost from the strong performance of Acacia (ACIA), which sells some similar products. The winning is rubbing off on LITE.

Update 10/3/16: Jefferies raised earnings estimates to $2.61 for the 2018 fiscal year, which is 14% above consensus. Revenue estimates rose to $1.29 billion and 11% over consensus.

Shares made a new high at $37.82 on Friday morning and then dipped to $35.37 this morning before rebounding to close just under the prior high.

Position 9/13/16 with a LITE trade at $37.75

Long DEC $40 call @ $2.65, see portfolio graphic for stop loss.

PANW - Palo Alto Networks - Company Profile


No specific news. Lots of chatter about cybersecurity stocks in general given all the attacks.

Original Trade Description: October 8th.

Palo Alto Networks, Inc. provides security platform solutions to enterprises, service providers, and government entities worldwide. Its platform includes Next-Generation Firewall that delivers application, user, and content visibility and control, as well as protection against network-based cyber threats; Advanced Endpoint Protection, which prevents cyber attacks that exploit software vulnerabilities on various fixed and virtual endpoints and servers; and Threat Intelligence Cloud, which offers central intelligence capabilities, security for software as a service applications, and automated delivery of preventative measures against cyber attacks. The company provides firewall appliances; Panorama, a security management solution for the control of appliances deployed on an end-customer's network as a virtual or a physical appliance; and Virtual System Upgrades, which are available as an extensions to the virtual system capacity that ships with the physical appliances. It also offers subscription services covering the areas of threat prevention, uniform resource filtering, malware and persistent threat, laptop and mobile device, and firewall protection services, as well as cyber attack, threat intelligence, and content control services. Company description from FinViz.com.

The headlines are full of news about cyber attacks and hacking of personal computers. Just last week there were more than a dozen high profile hacks and Guccifer 2.0, a name taken by a Russian state sponsored team, published data claimed to be from the DNC, Clinton foundation and the Olympic doping committee. Not only are they hacking these agencies but the data they are releasing now contains fake data mixed in with the real data. Wikileaks just published thousands of additional emails stolen from democratic campaign officials.

These kinds of attacks and data dumps are very damaging and now that they have started modifying the actual data it could be even worse. Companies will have to admit to some things so they can disprove other claims. This goes beyond just stealing credit card info.

Every time there is a successful attack it emboldens others to increase their efforts. Years ago a company could successfully stop these attacks on their own because the technology was more primitive. Now, even successful enterprise size companies can no longer devote the time, effort, personnel and resources to protecting their data because the attack methods change almost daily. It requires a dedicated company like Palo Alto Networks and others to stop the attacks.

Palo Alto's dictionary of attack profiles is updated constantly in real time and a new attack on a server in New York can be cataloged and immediately used to stop a similar attack in Los Angeles.

State sponsored attacks from Russia, China, Iran and North Korea are just the tip of the iceberg. I am sure there are other attack teams from other countries already probing companies for their technology secrets and agencies for their political secrets. The information gained is very valuable and can be sold to other countries that were not successful in their attacks.

In their recent earnings, Palo Alto posted a 41% increase in revenue and earnings for the current quarter are expected to rise 35%. Of the 27 analysts that follow Palo Alto, 21 of them have a strong buy rating, 3 have a buy and 3 have a hold rating.

Earnings Nov 23rd.

Because the options are so expensive I have to recommend a spread. Resistance is $163 but since I doubt cyber attacks are going to suddenly stop, I expect that resistance to be broken.

Position 10/10/16:

Long Dec $165 call @ $7.30, see portfolio graphic for stop loss.
Short Dec $180 call @ $2.40, see portfolio graphic for stop loss.
Net debit $4.90.

WDC - Western Digitial - Company Profile


No specific news. Testing resistance at $60.

Original Trade Description: September 26th.

Western Digital Corporation, together with its subsidiaries, engages in the development, manufacture, sale, and provision of data storage solutions that enable consumers, businesses, governments, and other organizations to create, manage, experience, and preserve digital content worldwide. The company's product portfolio includes hard disk drives (HDDs), solid-state drives (SSDs), direct attached storage solutions, personal cloud network attached storage solutions, and public and private cloud data center storage solutions. It provides HDDs and solid-state drives for performance enterprise and capacity enterprise markets desktop, and notebook personal computers (PCs). The company also offers HDDs embedded into WD, HGST, and G-Technology branded external storage appliances with capacities ranging from 500 GB to 24 TB, as well as using various interfaces, such as USB 2.0, USB 3.0, FireWire, Thunderbolt, and Ethernet network connections. In addition, it provides consumer electronics solutions, including DVRs, gaming consoles, security surveillance, systems, set top boxes, camcorders, multi-function printers, and entertainment and automobile navigation systems. Company description from FinViz.com.

Western Digital recently acquired flash memory company SanDisk and they are stronger together. The company recently raised guidance for the second time as the integration of the two companies is turning out to be a winning duo.

WDC raised revenue guidance for the current quarter to $4.45-$4.55 billion up from $4.4-$4.5 billion. Analysts were expecting $3.41 billion. Gross margin guidance rose from 32% to 33%. Q3 earnings guidance rose from 85-90 cents to $1.00-$1.05. Analysts were expecting 68 cents. The company said the product mix was improving with the addition of the SanDisk lines. They also said PC sales were improving, as did Intel, and that means more disk drives sold.

Update 9/27/16: Research company Cleveland Research said channel checks for WDC showed continued strong demand for the most common hard drives and a potential ramp in demand for the new 10TB Helium drive. There was also strong execution and pricing for NAND chips. Cleveland projected earnings of $6.60 in fiscal 2018 and a mid $70s stock price. Shares closed at $58 after a $1.85 gain.

The Helium 10TB drive is filled with helium instead of air. Helium is one-seventh the density of air and that allows the read/write heads to fly smoother and closer to the actual magnetic recording surface, contain more recording platters, consume less power and operate at a lower temperature. More than one million Helium drives have already been sold with a mean time between failure of 2.5 million hours. Quality is expensive with a $750 price tag.

Earnings Oct 27th.

Shares spiked to $54 on the stronger guidance and then languished for a week before starting to move higher to start a new trend.

Position 9/27/16:

Long Nov $60 call @ $2.14, see portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

MBLY - Mobileye - Company Profile


No specific news. Shares closed at a new 3-month low.

Original Trade Description: September 27th.

Mobileye N.V., together with its subsidiaries, develops computer vision and machine learning, data analysis, and localization and mapping for advanced driver assistance systems and autonomous driving technologies primarily in Israel. It operates through two segments, Original Equipment Manufacturing and After Market. The company offers Roadbook, a localized drivable paths and visual landmarks using its proprietary REM technology through crowd sourcing; and proprietary software algorithms and EyeQ chips that perform detailed interpretations of the visual field to anticipate possible collisions with other vehicles, pedestrians, cyclists, animals, debris, and other obstacles. Its products also detect roadway markings, such as lanes and road boundaries, as well as barriers and related items; and identify and read traffic signs, directional signs, and traffic lights. In addition, the company provides enhanced cruise control, pre-lighting of brake lights, and Bluetooth connectivity, as well as related smartphone application. It serves original equipment manufacturers, tier 1 system integrators, fleets and fleet management systems providers, insurance companies, leasing companies, and others through distributors and resellers. Mobileye N.V. was founded in 1999. Company description from FinViz.com.

Mobileye was kicked to the curb by Tesla because their camera technology was not precise enough and was subject to errors from things like lightning flash, rain storms, fog and oncoming headlights. Analysts claim the location accuracy needs to be within 1.5 centimeters or about 0.6 inches. While I do not understand the need to be precise to within half an inch I would expect that to be on near objects with the size miss widening if the objects are farther away. For instance, a rifle bullet that misses the target by half an inch at 10 feet would be 15 inches off target at 100 yards. When your car is traveling at 60 mph any miss of that size could be an immediate challenge as in a car coming towards you in two-way traffic.

Tesla also said they were hard to work with because the company demanded all the sensor data received from their cameras could only be used by Mobileye. That would be like Intel claiming all the data on your PC belonged to them because the PC had an Intel processor.

Multiple car manufacturers including Tesla, Ford and Volvo have now moved away from Mobileye technology. The company replacing them is Nvidia with their Drive PX2 technology. Uber is now using an off the shelf camera that costs only $1 and image processing is done in the onboard computer.

Trip Chowdhry of Global Equities Research said the stock is worth $10 today but remains hyper inflated because it was an early leader in the mobile technology. He expects the stock to collapse within 6-8 months as more investors realize the company is being left behind.

Earnings Nov 3rd.

Shares have been falling from their high of $50 as the heated words between Tesla and Mobileye increase. When Mobileye learned it was being replaced they tried to stop Tesla from developing their own system and immediately halted any support for previously installed systems.

Position 9/28/16:

Long Nov $40 put @ $2.08, see portfolio graphic for stop loss.

VXX - VIX Futures ETF - Company Profile


New historic low.

This is a long-term position and I will not be commenting on it on a daily basis. There is no news on the VXX since it is not a company.

Original Trade Description: September 21st.

The VXX is a short-term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now down four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

After the August split the ETF moved sideways for four weeks at $36. The volatility event on Sept 9th with the Dow falling -2.5% spiked the VXX from $33 to $42 in three days. That bounce has faded and it is almost back at $33. You are probably thinking, the $40 level would have been a good entry point and you are right in hindsight. However, with the market in danger of breaking down if the Fed had hiked rates, it was better to wait. Now there is nothing on the horizon to cause a spike other than normal market movement.

This is going to be a long-term position. I am not putting a stop loss on the position because long term the VXX always goes down. If we get another volatility spike we will buy another position at a higher level and then ride them both back down.

The market typically rises in late October and into the Thanksgiving weekend. A rising market reduces volatility.

I thought about using a spread to reduce the out of pocket costs. However, that means the strikes have to be relatively close together for the short strike to have any premium. Since the VXX could decline 10 points or more before December, that would limit our potential return to 3-4 points in a spread. However, if we do get a big decline we can spread out at much lower level to further increase our gains.

Position 9/22/16:

Long Dec $33 Put @ $4.20. No stop loss.

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