Option Investor

Daily Newsletter, Thursday, 10/13/2016

Table of Contents

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

Market Wrap

And Then There Was China

by Thomas Hughes

Click here to email Thomas Hughes


China fear reared its ugly little head today, depressing already skittish global markets. The latest trade data showed a sharp decline in China's imports and exports, raising fear of China's slowing economy and its affect on the global economy. Asian indices were a bit mixed on the news, the Shanghai index held break-even while others in the region fell more than -1%, those in Europe decisively lower with the addition of falling oil prices and FOMC outlook weighing them down.

Market Statistics

Futures indicated a sharply lower open all morning, in the range of -1%. There was little in the way of market moving earnings news before the bell and the economic data that was released was viewed as rate-hike positive, helping to keep futures near the low of the day. The broad market opened with a loss near -0.5% and quickly moved lower. By 10AM the indices had fallen to an early low, slightly more than -1%, and began a consolidation that lasted for the next hour. By 11AM an intraday bottom had been hammered out, leading to a nearly full reversal of earlier losses. By 3:30PM the indices were hovering close to break even levels and held those levels into the close of the day.

Economic Calendar

The Economy

Today's data was positive for the economy and future outlook yet at the same time reinforced FOMC rate hike expectations, raising fears. Initial jobless claims were reported as unchanged from last week, however that is from a downward revision of -3,000 that puts this week's data closer to the 43 year low. The four week moving average of claims fell by -3,500 and did hit a new 43 year low. On a not adjusted basis claims rose by 18.4%, a tenth hotter than the expected 18.3%, but remains lower on a year over year basis, -7.5%. Based on this data labor markets are experiencing improvements consistent with long term trends and supports the argument that labor markets are tightening and that we have already or soon will reach full employment. FYI, the JOLTs report was released yesterday and shows that job openings fell nearly 7% in August. Combined with initial claims data it looks like people are going to work.

Continuing claims fell by -16,000 to hit 2.046 million, the lowest level since June, 2000. The previous week's data was revised higher by 4,000. The four week moving average of continuing claims fell -25,750 to hit 2.07 million, the lowest level since July, 2000. These figures continue to trend lower and are on the verge of setting ultra-long term secular lows, consistent with ongoing improvement and health in the labor market.

The total number of jobless claims fell by -13,790 to hit 1.781 million, a new long term low. This low is consistent with long term improvement in labor and seasonal trends. Based on those trends we can expect to see it continue to fall for another 1 to 2 weeks although the rate of decline has moderated a bit. Regardless, total claims data is consistent with ongoing labor market health despite lack-luster job creation and a rise in unemployment.

Import/Export data shows a rise in prices for both. Import prices grew at a rate of 0.1% in September following a -0.2% decline in August, year over year import prices are down -1.1% but show what the report calls "upward trajectory" over the long term. Ex-fuel prices remain flat and unchanged over the prior month while fuel prices alone have risen 1.1%. Export prices outpace import prices, up 0.3% in September, but barely recovered from August's -0.8% decline. Ex-Ag items led with an increase in prices of 1.3%, offset by declines in agriculture products.

The Dollar Index

The dollar gave up some of its gains today, the Dollar Index falling -0.35%, but remains strong in the near term. Today's decline reveals possible resistance at the $97.60 level but upside targets are closer to $98.65. I redraw my Fibonacci Retracements today, using the peak set December, 2015 and the low of May, 2016, which is where that target comes from. The indicators are bullish in the near term but not overly strong and still consistent with range bound trading in the longer term. Support target should the index pull back is near $97.20. Tomorrow's economic calendar includes PPI data which could move the index, one way or another. Weak PPI would be seen as rate-hike negative, strong PPI rate-hike positive, with dollar value likely moving in line with each. The CME's Fed Watch Tool shows only a 9% chance of hike in November but a much greater 70% chance in December.

The Oil Index

Oil prices continue to waver at recent highs. WTI traded basically flat in an extremely volatile session which saw prices crash, shoot higher and stabilize in the matter of minutes. Inventory data released today showed a surprise decline in distillate inventories which offset a build in crude that would have otherwise been seen as bearish. WTI ended the day with gains near 0.2% after moving in a range of 2%, just above $50. Resistance is just above this level and may be broken if bullish evidence begins to appear. However, with the latest OPEC data and 2017 outlook I don't see that happening. OPEC's latest report shows output at 33.39 million barrels per day in September, the highest levels in over 8 years and above the recently agreed to production cap. The cartel also upped its non-OPEC supply outlook for 2017 adding downward pressure to outlook.

The oil sector continued to retreat to support today and may have found it. The Oil Index fell just over -1% intraday to hit the short term moving average and find support. Price action created a small but doji like candle, indicative of support but not strongly. The indicators are consistent with a fall from resistance and suggest range bound trading may persist into the near term. The top of the range is 1,180 , just above 1,180, with support targets at the moving average, just below that along the mid point of the range and then below that at the bottom of the range. Oil prices and earnings outlook among the oil companies is my target catalyst. Current outlook is bullish, if that is confirmed the index may break out of the range to the upside. Most of the big oil companies are set to report at the end of the month, 10/27 and 10/28, BP is first on 10/25.

The Gold Index

Gold prices held steady above $1,250 on a slightly softer dollar but gains were muted in light of the strong jobs data. The metal is tied firmly to FOMC outlook and at this time is under pressure. The jobs data reinforces the outlook that one of the Fed's two mandates have been met, tomorrow's PPI will reveal information about the other. Support for gold is just above $1,250, a break below this level would be bearish and could go as low at $1,200 in the very near term.

The gold miners are under pressure as well, their profits tied directly to the value of the dollar and its relation to gold. The miners ETF GDX gained a little in today's session, about 1.30%, but remain in consolidation near the recently set low. The sector is falling in tandem with gold, should gold fall through support this sector will fall right along side it. Support is near $22.50. The indicators are bearish but a bit mixed in their signals. Stochastic is showing weakness by dropping below the upper signal line, MACD potential support at this level through divergence.

In The News, Story Stocks and Earnings

Progressive Corporation reported earnings before the bell. The insurance company reported EPS in line with expectations but beat on net-written premiums. Net premiums grew year over year by more than 11% and helped lift the stock in early pre-market trading. The stock gapped up at the open and continued its rise throughout the day, closing with a gain near 2.65%.

Winnebago announced earnings before the bell as well, beating on the top and bottom lines. The company reported revenue up 4.9% due to higher shipments of vehicles and towables and gross margins which improved 90 BPS due to product mix and lower material costs. Shares of the stock fell on the news but opened at support, above the gap formed two weeks ago when an acquisition was announced, and traded up from there.

Delta Airlines missed revenue expectations but was able to deliver better than expected earnings. Earnings were negatively impacted by the technical outage experienced in early August. Looking forward the company is expected to slow capacity growth into the fourth quarter with revenue falling 3-5% year over year. Shares of the stock fell in pre-market trading but recovered the losses and more during the open session. Gains were capped however by resistance just above the $40 level.

The Indices

The market started today in a near freefall scenario. Data from China aggravated fear of slow global growth and hard landing which, on top of nerves already frayed by FOMC outlook, sent the indices ducking for support. The good news, at least in the near term, is that support was found. Today's action, in most cases, confirmed near term support levels and the bottom of the September/October trading ranges. The Dow Jones Transportation Average led the move, testing and confirming support at the short term moving average, right around the 8,000 level. The index closed the day with gains, about 0.5%, the only index to do so. The indicators have rolled into a bearish signal, consistent with an index trading within a range, and may indicate further testing of support. If broken a move to 7,750 looks likely, if not the index may be setting up to test 8,250.

The NASDAQ Composite posted the biggest loss today, about -0.50%. Despite the loss, the index created a white bodied candle although it is below resistance levels at 5,250 and the short term moving average. Near term, the indicators are bearish and both pointing lower so a deeper correction may be forthcoming. Short term the index remains within the September/October trading range with the lower range boundary near 5,100 as current target.

The S&P 500 made the next largest decline, -0.30%. The broad market traded in a range greater than 1% of its value, testing support at the 2,120 level. Support was found, the index created a small doji-like hammer candle, and the September/October trading range remains intact. The indicators are bearish and pointing lower so support may be tested further but they are very, very weak and remain consistent with range bound trading. If today's bounce continues a move up within the range can be expected with upside target near 2,180 and the top of the range.

The Dow Jones Industrial Average made the smallest decline today, about -0.25%. The blue chip index set a three month intraday low in today's session, testing and confirming support at the 18,000 level. The index has been trading in a tight range since the onset of volatility in early September and that range remains intact. The indicators are bearish and pointing lower so another test of support may be on the way, however, they are also very weak and remain consistent with range bound trading so a break of support does not look likely. If it were to break next target is along a long term up trend line near 17,750.

The market crashed hard on bad news but quickly recovered, but China was just an excuse. The data was bad, sure, but not earth shattering and merely caused a skittish market to make a knee-jerk reaction.

There is reason for the market to be skittish which means that volatility is likely to persist. Fear is growing that earnings, as foreshadowed by Alcoa and a number of negative warnings, may not be as good as we'd like and the FOMC question is still hanging over the market, as is the presidential election.

Today's data did little to indicate inflation but it certainly helps cement the notion that the economy is at or very, very near full employment so now all we need is some inflation to seal the deal on a rate hike. Tomorrow's PPI will affect that outlook for better or worse. On the earnings front nothing today swayed sentiment but tomorrow is another matter, when we get reports from Wells Fargo, JP Morgan and Citigroup. As for the election, that psycho drama will continue to unfold like the well scripted reality program it is. I remain cautious in the near term, wary of correction, not quite ready to commit, optimistic the next long term secular rally is just around the corner, waiting for my signal.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Catch a Falling Knife

by Jim Brown

Click here to email Jim Brown

Editors Note:

The biotech sector has been in decline since the end of September and that decline accelerated when Illumina (ILMN) gapped down -$50 on Tuesday. Now at support, is it time to catch this falling knife?


XBI - Biotech ETF - ETF Profile

The SPDR S&P Biotech ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Biotechnology Select Industry Index.

The XBI traded up to $69 in late September and has since crashed back to support at $60 as various biotech stocks released data on drug trials that were not successful, were involved in drug pricing schemes or simply issued a profit warning as was the case with Illumina.

The three weeks of headlines over the EpiPen pricing disaster pushed all the drugs stocks lower on worries of drug price controls. The Theranos disaster and the closing of their labs weighed on the sector even though Theranos was not a public company.

Comments from Clinton about drug pricing concerns also caused investors to flee some drug company stocks.

With the XBI now -13% off its September high and all of those factors baked somewhat into the market, it may be time to place a bet on a biotech rebound. New drugs are announced every week and old diseases are cured or at least made tolerable.

I know it is hard to buy a stock in free fall but this may be the right point. The $60 level is support from June and August. The 100-day average is currently $60.37. This appears to be a good spot to place a bet.

Other traders may have felt the same way today. The XBI posted a minor gain in a bad market and the opening dip to $60.50 was only a drop of 75 cents and it was quickly erased before 10:15.

Not posting a material decline when the Dow was down -185 and the Nasdaq was down -70 is a sign of good relative strength.

If we are wrong about the support at the $60 level, we will stop out quickly and look for a retest of the next support level at $50. I am going to put an entry trigger on it just in case the market gaps down again on Friday.

With an XBI trade at $62.50

Buy Nov $64 call, currently $1.83, initial stop loss $58.85


No New Bearish Plays

In Play Updates and Reviews

China Syndrome

by Jim Brown

Click here to email Jim Brown

Editors Note:

Chinese trade data and U.S. election polls combined to give the market indigestion this morning. China's exports for September declined -10% compared to estimates for -3% and a -2.8% drop in August. Year over year exports have now declined -10%. Imports declined -1.9% compared to estimates for a rise of +1% and a +1.5% rise in August. The weakness in Chinese trade data came shortly after we saw similar weakness from South Korea. Analysts are worried that the rebound in the Asian economies is slowing. Last month the WTO cut its forecast for global trade growth by one-third to 1.7%. The weakness in exports was even more worrisome given the tens of millions of new iPhones shipped globally in September.

The S&P declined below critical support at 2,120 at the open but managed to recover much of the lost ground. However, the index did close well under the 100-day average. Another decline under 2,120 could be a death knell for the potential end of October rally. However, markets in early October are doing what they normally do. The first two weeks of October often see dips to the lows for the second half of the year before the last two weeks of the month see strong rallies. The wild card here is the elections. The markets are scared of a Clinton win that is so strong the democrats flip control of the House and Senate and the resulting runaway regulation, taxes and deficit spending that would follow. The markets want a Clinton win but for the House and Senate to remain republican so that gridlock remains in place.

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

WOR - Worthington Industries

The long call position was opened at $47.45

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.

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. Finally a close above resistance.

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. Shares down with the tech sector.

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.

PANW - Palo Alto Networks - Company Profile


No specific news on PANW today. UBS said PANW, SYMC and CYBR were still well positioned to gain from shifts in tech spending towards cybersecurity.

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.

WOR - Worthington Industries - Company Profile


No specific news. Shares gapped down with the market at the open but rebounded more than $1. For a long position we got a good fill on the gap lower.

Original Trade Description: October 12th.

Worthington Industries is a leading global diversified metals manufacturing company with 2016 fiscal year sales of $2.8 billion. Headquartered in Columbus, Ohio, Worthington is North America's premier value-added steel processor providing customers with wide ranging capabilities, products and services for a variety of markets including automotive, construction and agriculture; a global leader in manufacturing pressure cylinders for industrial gas and cryogenic applications, CNG and LNG storage, Cryogenic transportation and storage and alternative fuel tanks, oil and gas equipment, and consumer products for camping, grilling, hand torch solutions and helium balloon kits; and a manufacturer of operator cabs for heavy mobile industrial equipment; laser welded blanks for light weighting applications; automotive racking solutions; and through joint ventures, complete ceiling grid solutions; automotive tooling and stampings; and steel framing for commercial construction. Worthington employs approximately 10,000 people and operates 80 facilities in 11 countries.

Worthington is a "value added" steel processing company. To put that into english it means they take steel and form it into products they can sell. They do not make the steel, they just turn it into something useful. Between 2009 and 2015 they acquired 18 companies, each with a special niche in the market, in order to broaden their product offerings and increase the size of their customer base.

As steel prices strengthen, the products Worthington makes will become more valuable and their product margins will increase. In a commodity market where the raw material is cheap, every product made from that material is also under price pressures. The growth in global auto sales is good for Worthington as is the growth in the aircraft industry, ship building, energy, construction and manufacturing of all types that requires steel parts.

In their recent quarterly earnings they reported $1.03 per share and easily beating estimates for 77 cents. Revenue declined -3% to $737.5 million and missed estimates for $742.8 million. They blamed the weaker revenue on the weak oil and gas sector. Shares spiked 8% on the news despite the revenue miss.

Earnings Dec 28th.

Shares have moved sideways with a minor uptrend bias since the Sept 28th earnings spike. After two weeks of consolidation, they should be ready to start a new leg higher, market permitting.

Position 10/13/16:

Long Dec $50 call @ $2.05, see portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

MBLY - Mobileye - Company Profile


No specific news. New 3-month low. Deutsche Bank questioned the technology used by Mobileye and others after recent announcements on falling costs. DB suggested the sharp drop in cost for technology offered by other vendors could weigh on future Mobileye sales.

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.

NKE - Nike Inc - Company Profile


Nike announced a $73 million a year, 15-year sponsorship deal with the Chelsea Football Club (soccer) that will total $1.1 billion. Shares still declined slightly in the negative market. I added the stop loss at $53.25 because shares are not declining below support.

Original Trade Description: October 10th.

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.

Position 10/11/16:

Long Dec $50 put @ $1.05, no initial stop loss.

VXX - VIX Futures ETF - Company Profile


Up slightly in a sharply negative market. The long term trend is still intact.

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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