Option Investor

Daily Newsletter, Tuesday, 11/15/2016

Table of Contents

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

Market Wrap

What a Difference a Week Makes

by Jim Brown

Click here to email Jim Brown

We moved from extreme election uncertainty and 4-month lows to new highs only 6 days later.

Market Statistics

We saw extreme volatility with the Dow futures falling -976 points from their intraday high late Tuesday night followed by a 1,453 point rebound into today's close at 18,870. The S&P and Nasdaq futures hit their circuit breakers with 5% declines in the overnight session and then rebounded with the cash indexes near new highs. The Volatility Index ($VIX) hit 20 and now it is back to 13.

Today was a nearly perfect day in the market. The Dow, which has been leading the big cap indexes higher, pulled back at the open after two prior days of small gains and then rallied again into the close at another new high.

We have seen three days of muted gains but they were still gains as the Dow has now completed 7 consecutive days of gains. This consolidation after three days of monster gains allowed the markets to pause and traders to rotate into new positions.

The Dow and Russell 2000 closed at new highs and the Nasdaq shook off some significant declines to post solid gains. It was a good day for the market.

The economic reports were market neutral. The NY Empire State Manufacturing Survey struggled back into positive territory at 1.5 for November. The reading for October was -6.8 and the Moody's forecast was -8.8 for November so this was a surprise. This was the first positive reading since July. Despite the positive headline number there was still a lot of red in the internal components. This report was ignored.

Retail Sales for October surprised with a +0.8% gain compared to estimates for +0.6% and a revised +1.0% gain in October. Excluding autos and fuel there was a +0.6% gain. Vehicles and parts, building materials, gas stations, sporting goods and nonstore retailers were the biggest gainers.

Business Inventories for September rose +0.1% and the sixth gain out of the last seven months. Manufacturing inventories declined -0.03% while retail inventories rose +0.22%. Autos and parts rose +0.7% for the largest gain. Business sales rose +0.7% and helped to keep the rise in inventories to a minimum. This report was ignored.

The calendar for the rest of the week is heavily weighted with Fed speeches. With the chance for a rate hike now at more than 81% every speech will be setting the stage and preparing investors for the event. At that high of a percentage, it is already priced into the market.

The most important economic report is the Philly Fed Manufacturing Survey on Thursday. However, everyone is focused on the market and not on economics so unless it is a disaster it will also be ignored.

Dow component Home Depot (HD) reported earnings of $1.60 that beat estimates for $1.58. Revenue rose 6.1% to $23.2 billion and beat estimates for $23.0 billion. Same store sales rose 5.9%. The company guided for full year revenue rising +6.3% and earnings to rise +15.9% to $6.33 per share. Same store sales are expected to rise 4.9%. Analysts were expecting a 6.4% rise in revenue and earnings of $6.33 so the affirmed guidance was slightly disappointing. Shares declined on the news and they were the biggest loser on the Dow.

I had expected HD earnings to be slightly better along with Q4 guidance because of all the repair work that is required after Hurricane Matthew. The company said they estimated sales rose $100 million as a result of the hurricane. While it was not a bad earnings report it did fail to impress. Home Depot does have a record of trying to keep expectations low and that may be why their guidance did not grow.

They did say the number of transactions rose 2.4% and transactions over $900 were up 11.3% in Q3.

Advance Auto Parts (AAP) reported earnings of $1.73 that beat estimates for $1.72. Revenue declined -2% to $2.25 billion but still beat estimates for $2.20 billion. Same store sales declined -1%. On the surface that would seem to be an uninspiring report but the shares spiked 15% on the news. Management said the increasing number of miles being driven and the aging vehicle fleet will be positive in future quarters. They are trying to improve operating margin by 500 basis points starting in 2017. The commentary did not excite me but there was enough meat that investors raced to cover their shorts.

3D printer maker Stratasys (SSYS) reported adjusted earnings of less than one cent compared to estimates for 4 cents. Revenue of $157.2 million missed estimates for $174.2 million by a wide margin. They guided for full year earnings of 13-21 cents on revenue of $662-$673 million. Traders were not impressed and shares fell -12%.

Dicks Sporting Goods (DKS) reported earnings of 48 cents that beat estimates for 42 cents. Revenue of $1.81 billion beat estimates for $1.77 billion. Dicks acquired numerous Sports Authority stores out of their bankruptcy and they just completed the acquisition of Golfsmith Holdings and they are going to retain 30 of the Golfsmith stores and rebrand them to their own Golf Galaxy name.

Dicks guided for Q4 earnings in the range of $1.19 to $1.31 and analysts were expecting $1.32. The expenses related to the acquisitions are taking their toll. Shares fell -7% on the news.

Teva Pharmaceuticals (TEVA) reported earnings of $1.31 on a 15% rise in revenue to $5.6 billion. Analysts were expecting $1.28 and $5.7 billion. They guided for Q4 to earnings of $1.34-$1.44 on revenue of $6.2-$6.5 billion. For the full year, they projected $5.10-$5.20 and revenue of $21.75 billion. Analysts were expecting $5.17 and $22.31 billion. Shares fell 8% on the news.

Zebra Technologies (ZBRA) reported adjusted earnings of $1.43 compared to estimates for $1.41. Revenue of $904 million missed estimates for $906.4 million. The company guided for the current quarter for earnings of $1.65-$1.85. Shares surged 13% after they announced Olivier Leonetti, formerly WDC CFO, as the new CFO for Zebra. He is known to the investing public as very shareholder friendly due to his efforts to return capital to shareholders. The CEO said Leonetti will be instrumental in developing a capital return program for Zebra.

Dow component Cisco Systems (CSCO) reports earnings after the bell on Wednesday followed by Walmart (WMT) before the open on Thursday. The combination of these two could cause some volatility on Thursday morning. Those are the last two Dow components to report for Q3.

Be careful what you short. Shares of Dryships (DRYS) were trading at $5 last Wednesday. They reported a larger than expected loss of $7.70 per share on revenue of $12.1 million. Nobody paid any attention. When the market continued to rise after the election the small cap sector was seeing a lot of buyers. Shares started to tick up and suddenly a short squeeze was born.

The company has been in trouble with the decline in shipping rates over the last two years. They did a 1 for 4 reverse split when the stock was trading at $1 in August. Shortly thereafter they engineered another 1 for 15 reverse split at the start of November. A reverse split removes shares from the market and doing two so close together removed about 90% of the float to leave only about one million shares available to trade. At the end of October there were 1.7 million shares sold short, up from 300,000 six months ago.

On Tuesday, more than 10 million shares changed hands compared to the daily volume before the reverse split of 500,000 shares. A monster short squeeze was born because traders did not take into account the dramatic reduction in the share count. That $5 stock last Wednesday hit $102 today. Clearly, there will be a massive decline eventually but this was the biggest short squeeze I can remember. A lot of money was lost over the last three days.

After the bell, the API oil inventory report showed a gain of 3.6 million barrels for the week ended on Friday. Crude prices had risen more than $2 during the regular session on positive comments out of OPEC about the potential for a production cut at the November 30th meeting. Those guys know how to play the media even better than Trump. Nothing changed. They just talked about a potential agreement again. The Saudi Arabian energy minister was quoted as saying "it is imperative that OPEC reach an agreement on curbing production" at the November 30th meeting. There were even "rumors" that Iraq and Iran were considering "restraining production." Just a week ago, they were adamant they would not participate. This is just a big con game. The IEA said on Tuesday that OPEC produced 33.8 million bpd last week. That was even higher than the prior estimate at 33.64 million. Actual production is rising rapidly at the same time they claim they want to cut it back to 32.5 mbpd.

Crude rallied to $45.76 intraday and declined slightly in afterhours on the API news. Since the API and EIA reports rarely agree, most traders are keyed into the EIA report on Wednesday morning.


It has been a great rally but not all stocks are in rally mode. Arthur Cashin reported that 300 stocks on the NYSE hit new highs on Monday at the same time that 300 stocks hit new lows. There is tremendous divergence between sectors and even individual stocks in those sectors.

Quite a few small cap stocks are up more than 15% or even 20% as the Russell 2000 hits new highs. The Russell has 19% of its weighting in financial services. That is the largest Russell sector followed by information technology 17%, industrials 15% and healthcare 13%. With the banks, industrials and biotech stocks in solid rally mode they are pushing the Russell to new highs.

However, it is either feast or famine in the small cap sector. For every stock with a 15% or more gain, there is another one testing its 52-week lows. The key is that the strong stock gains are outweighing the minor losses on the weak stocks.

Despite all the good news and the new highs, we are due for a decent bout of profit taking. I am happy to see the Dow waffle for three days but still continue its gains at a slower pace. That is the perfect way to keep the rally going.

I do not know if that is going to work on the small caps. The Russell is totally unsupported at the current level and the recent spike is totally out of character for the index.

The S&P had a great day with a 16-point gain that allowed the index to push through resistance at 2,175 and close at 2,178. The next hurdle is 2,188 and the historic high at 2,190. If the S&P can break out to a new high, it would cause an entirely new round of short covering and price chasing.

Today was a good day for the S&P because the Dow was negative for most of the day. For the S&P to shake off the Dow weakness and post a solid gain suggests there are more gains ahead. I would love to see that S&P streak continue to surge to new highs like the Russell and the Dow.

The Dow is closing in on 19,000 for the first time and the trader talk around the web is already focused on 20,000. That could be the mother of all sell signals when/if the Dow reaches that level.

The banks have been leading the Dow higher with Goldman Sachs up 20% since the day before the election. In what universe can Goldman rally 20% in seven days and not get hit by a huge decline on profit taking? We are way over due for a decent decline but I do think it will be a buying opportunity.

The Goldman chart looks like an Internet stock from the Nasdaq bubble in 2000.

The Nasdaq Composite never sold off as hard as the Nasdaq 100 and it closed at a three week high today at 5,275. The index is closing in on its prior high at 5,339 but it may not be accomplished in a straight line. That does represent significant resistance.

The 5,200 level has returned as support.

The Nasdaq 100 found support at 4,700 and it appears the big cap tech stocks have finally found some buyers. There are quite a few investors that wait for big events like we saw last week as buying opportunities and they came back in volume today.

The NDX has a long way to go before making at new high over 4,909 and we need the big caps to maintain a positive bias for a couple weeks if that is going to happen.

The Dollar Index broke over 100 intraday and that is a definite warning sign. The dollar will depress commodities but it also provides buying power overseas. This is a good news, bad news event but the bad news will eventually be the driver.

I believe the rally will continue but it should moderate in velocity. In reality, it should take several days off to rest. I would be very careful about buying any stocks with big gains because the eventual profit taking dip could be painful. Trees do not grow to the sky and rallies always see profit taking. Be prepared to buy the dips rather than chase prices higher.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays


by Jim Brown

Click here to email Jim Brown

Editors Note:

We were stopped out on Facebook on Monday because it was not done going down. I am reloading that position.


FB - Facebook - Company Profile


We tried to buy the dip on Facebook on Monday but the dip was not over. Shares fell more than $5 intraday to stop us out. The Nasdaq indexes were up strongly on Tuesday and I believe they will be favored over the next week as the Dow and Russell take a breather. I am going to try Facebook again and use the February option to retain some of the earnings expectation when we exit before the event.

Original Trade Description: November 12th.

Facebook disappointed on guidance when they reported earnings for Q3. Earnings were $1.09 compared to estimates for 92 cents. Revenue was $7.01 billion compared to $6.92 billion. That was a 56% increase from the year ago quarter. Monthly active users rose to 1.79 billion and beat expectations for 1.76 billion. That was a gain of 80 million users. Daily active users rose to 1.18 billion and beat estimates for 1.16 billion. More than 1 billion daily users are mobile users. That accounted for $5.7 billion in revenue or 84% of its total ad revenue compared to 78% in the year ago period.

The problem came from the guidance. The CFO said revenue growth rates will decline in coming quarters. The reason is the number of ads already running called the "ad load." Facebook has run out of places to display ads because they are all booked. The company also said 2017 would be an "aggressive investment year" as they grow capex "substantially" and ramp up hiring.

Facebook still makes a lot of money and they still have a lot of assets to monetize. Shares fell to the 200-day average on Thursday and that has been support since mid 2013. I believe buyers will take advantage of the sharp decline in order to establish new positions. Facebook will rebound and it will set new highs. Those highs may not be in the near future but that does not mean we will not see a short term rebound.

Earnings February 1st.

Buy Feb $125 call, currently $3.60, no initial stop loss.


No New Bearish Plays

In Play Updates and Reviews

Major Win

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P fought off early weakness in the Dow to close at a two month high. This is a major win given the lackluster performance of the S&P over the prior three days. This close above 2,180 tells us the rally is still intact and we could be preparing for a new leg higher if the 2,190 historic high is broken.

The Russell 2000 also closed at a new high and the Nasdaq indexes psted solid gains of more than 1% each. The stutter step at the open did not last and buyers were quick to pick up stocks on the dip.

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

CERN - Cerner

The long put position was entered at the open.

HON - Honeywell

The long call position was stopped at $112.75.

TREE -Lending Tree

The long call position was stopped at $92.45

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Credit spreads and naked puts = OptionWriter

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BULLISH Play Updates

HON - Honeywell - Company Profile


No specific news. Just a normal profit taking dip with the market to stop us out. Since the gains had slowed I had tightened the stop to take us out on any decline.

Original Trade Description: October 15th.

Honeywell International Inc. operates as a diversified technology and manufacturing company worldwide. Its Aerospace segment offers aircraft engines, integrated avionics, systems and service solutions, and related products and services for aircraft manufacturers and operators, airlines, military services, and defense and space contractors, as well as spare parts, and repair and maintenance services for the aftermarket. This segment also provides auxiliary power units; propulsion engines; environmental control, connectivity, electric power, flight safety, communication, navigation, radar, surveillance, and thermal systems; engine controls; aircraft lighting products, as well as wheels and brakes; advanced systems and instruments; and turbochargers, as well as management, technical, logistics, repair, and overhaul services to original equipment manufacturers in the air transport, regional, business, and general aviation aircraft; and automotive and truck manufacturers. The company's Home and Building Technologies segment offers environmental and energy, security and fire, and building solutions. Its Safety and Productivity Solutions segment provides sensing and productivity Solutions, and industrial safety products. Its Performance Materials and Technologies segment provides catalysts and adsorbents; equipment and consulting services for the petroleum refining, gas processing, petrochemical, and other industries; and automation control, instrumentation, software, and services for the oil and gas, refining, pulp and paper, industrial power generation, chemicals and petrochemicals, biofuels, life sciences, metals, minerals, and mining industries. Company description from FinViz.com.

On Oct 7th, Honeywell shares collapsed from $116 to $105 after the CEO warned that profits would be below guidance and they lowered guidance for the rest of 2016. The CFO said on the conference call, "In the third quarter, we continued to see slow growth across much of our portfolio." Declines in the emerging markets and the oil industry have crimped demand for business aircraft and helicopters, hurting Honeywell's unit that sells jet engines, cockpit controls and aerospace parts.

The company preannounced earnings of $1.60 compared to prior guidance of $1.67-$1.72. For the full year they lowered their forecast by 6 cents to $6.64 per share. The company is in the middle of a reorganization process that will increase profits in the future.

After the stock was crushed by the warning, the CEO appeared on CNBC and said the warning was not received in the way he thought it would be. "I gave credit for people understanding what our long-term profile was. I was wrong. I could have done a significantly better job of communicating this story. We tried to do it in the context of 2017 is going to be good, but it seemed to get totally lost" in the headlines.

The CEO went on to explain that the hiccup in Q3 was minor in the bigger picture given the businesses they just sold in September and the organizational restructuring currently in progress. They only cut full year earnings by 6 cents and will still produce earnings of $6.64 or better. Also the changes in progress will allow Honeywell to grow earnings by 10% or more in 2017. That adds another 66 cents or more to an already robust earnings picture.

He said he was "astounded by the reaction" to the minor cut in earnings. He went on to say that while the business jet business was lagging, the aerospace business was still doing well and should not have been lumped into the warning. He also said the energy business had bottomed in Q3 and would be improving in Q4.

Basically the CEO took a giant step by going on CNBC and saying he was wrong in how the lowered earnings estimates were portrayed and he did a good job of explaining that the weakness was much narrower than presented and the outlook for 2017 was outstanding.

Shares spiked on the news but faded slightly into the close as the market faded. Their formal earnings will be on Oct 21st and I am sure they will take great pains to present a rosy picture.

I am recommending a December call to get us through what is normally the best six weeks in the market. We will hold over those Oct 21st earnings.

Update 10/21/16: Honeywell reported earnings of $1.67 that beat estimates for $1.60. Revenue of $9.8 billion also beat estimates for $9.77 billion. They guided for the current quarter to earnings in the range of $1.74-$1.78 and analysts were expecting $1.75.

Position 10/17/16:

Closed 11/15/16: Long Dec $110 call @ $2.51, exit $3.85, +$1.34 gain.

IWM - Russell 2000 ETF - ETF Profile


New high on the IWM. This rally should end soon so I am just going to continue raising the stop until we are taken out.

Original Trade Description: November 5th.

The IWM currently holds 1,975 stocks and attempts to replicate the performance of the Russell 2000 Small Cap Index.

The S&P has now declined for nine consecutive days and the longest streak in 36 years. That is the equivalent to red coming up on the roulette table nine times in a row. The index is short-term oversold after a 4.8% decline. I believe the sell off over election uncertainty is nearly over. Investors and funds have had a week since the end of the October fiscal year end to make changes to their portfolios and raise cash for their post election purchases.

We all know there are several sectors that will not do well under a Clinton presidency and some that will prosper. Under a Trump presidency there are more profitable sectors but there is a greater fear of the unknown. He is a take no prisoners type of person and he has a lot of ideas about how to make American great again. Unfortunately, it may start off with a larger market sell off on that uncertainty.

Clinton is still ahead in the polls with two days to go and she is pulling out all the stops. The electoral map favors Clinton because there are more democrats than republicans. The heavily populated coastal states with a high number of electoral votes are liberal democrat while most of the flyover states are conservative republican.

The key point here is that Clinton is favored to win despite all her problems. If that turns out to be the case the market is expected to rally 3% to 5% very quickly.

There is always the possibility of a Trump upset and a temporary market dip but that would be the "Brexit dip" that should be bought. This is a headline event rather than a sudden change in the government. It would take many months or even years to get his changes passed into laws, and some would never be passed. The key point is that a Trump victory could be a sell the news event followed by a Brexit type rebound.

I am recommending a call position on the Russell 2000 ETF because the Russell is the most oversold. It is also cheaper for a speculative position.

I am going to recommend two entries. One for a positive move higher and one for a dip buy. It is entirely possible we could end up with both positions. If the dip entry is triggered first, cancel the rebound entry.

This is a SPECULATIVE position. Do not invest money you cannot afford to lose.

Rebound entry:

Position 11/7/16: With an IWM trade at $117.25
Long Dec $119 call @ $2.47, see portfolio graphic for stop loss.

SMG - Scotts Miracle Grow - Company Profile


No specific news. Shares faded after the open but recovered to close near the high for the day.

Original Trade Description: November 12th.

The Scotts Miracle-Gro Company manufactures, markets, and sells consumer lawn and garden products worldwide.

Nine states had legalization of marijuana on the ballot in some form and eight approved the measures. California, Massachusetts, Maine and Nevada approved it for recreational use. Arkansas, Florida and North Dakota approved it for medical use, which is a first step towards eventual recreational use. Montana approved a measure for commercial growing and distribution. Arizona was the only state where a recreational use measure failed.

Scotts has already said the legalization of pot was good for their business since growers want to grow it fast and grow it indoors. Over the last two years, Scotts has acquired two hydroponic acquisitions. One of them was a marijuana nutrient and growing products maker. They are branching out into the equipment and lighting required for indoor plant cultivation with the acquisition of Gavita, a grow light and hardware producer. They recognize pot as an "emerging high-growth opportunity" under their Hawthorne Gardening Company brand. They want to invest $500 million in the marijuana industry.

Scotts recently spun off its Scotts LawnService yard fertilizer business into a partnership with TruGreen so that low margin business is gone. The partnership pays distributions back to Scotts.

In the last quarter, sales rose 7% with consumer purchases rising 10%. This compares to the full year revenue growth of 2%. This shows how fast the business is growing with the new focus. They are projecting 6% to 7% revenue growth in 2017 and adjusted earnings of $4.10-$4.30. They called those numbers conservative.

Earnings Feb 2nd.

Position 11/14/16:

Long March $90 call @ $3.90, see portfolio graphic for stop loss.

TREE - Lending Tree - Company Profile


No specific news. Monster $7 drop at the open stopped us out with a nice gain. I kept the stop loss tight just in case the market rolled over.

Original Trade Description: October 31st.

LendingTree, Inc., operates an online loan marketplace for consumers seeking loans and other credit-based offerings in the United States. The company offers tools and resources, including free credit scores that facilitate comparison shopping for these loans and other credit-based offerings. Its mortgage products comprise purchase and refinance products. The company also provides information, tools, and access to various conditional loan offers for non-mortgage products, including auto loans, credit cards, home equity loans, personal loans, reverse mortgages, small business loans, and student loans. In addition, it offers information, tools, and access to other products, including credit repair, through which consumers obtain assistance improving their credit profiles; debt relief services, through which consumers obtain assistance negotiating existing loans; home improvement services, through which consumers have the opportunity to research and find home improvement professional services; personal credit data, through which consumers gain insights into how prospective lenders and other third parties view their credit profiles; real estate brokerage services, through which consumers are matched with local realtors who assist them in their home purchase or sale efforts; and various consumer insurance products, including home and automobile, through which consumers are matched with insurance lead aggregators to obtain insurance offers. Company description from FinViz.com.

Lending Tree reported revenues that rose 35.5% to $94.6 million but missed estimates for $96.9 million. Earnings of 80 cents were in line with analyst estimates. The company lowered its revenue guidance for the full year from $380-$390 million to $370-$375 million. The stock was knocked for a $16 loss to $75.

Yes, they reported a 35.5% increase in revenue but missed estimates by $2 million and the stock was crushed. That is hardly worth a major decline.

That is not the entire story. Mortgage product revenues rose 21%. Total loan requests rose 68%. Small business lending has risen more than 200% from the year ago quarter. The MyLendingTree.com customer portal product now has more than 3.7 million members.

The CEO was not apologetic. He said in a quarter where mortgage rates were near a record low we optimized the business to expand margins and grow profits.

Earnings Jan 26th.

I see nothing wrong with Lending Tree. While they did miss revenue fractionally and guided fractionally lower for the full year, the business is booming. We should see a swift rebound because there are very few companies of any type growing this fast.

Position 11/1/16:

Closed 11/15/16: Long Dec $85 call @ $4.00, exit $9.30, +5.30 gain.

WDC - Western Digital - Company Profile


No specific news. Still testing resistance at $60.

Original Trade Description: November 12th

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).

Western Digital bought flash memory maker SanDisk in October 2015 and this is going to supercharge their product offerings. They have already raised guidance after a couple quarters of integration. Revenue in Q3 rose 38% to $4.7 billion.

Last week WDC announced a 50-cent quarterly dividend payable Jan 17th to holders on Dec 30th.

The consensus rating of 27 analysts is a buy with a price target of $69.64. Shares closed at $58.89 on Friday.

They reported earnings on Oct 27th and spiked to $62. Post earnings depression saw them fade back to $55 and now they are moving up again. I believe they will exceed that $62 earnings high. They traded at $115 in 2015.

Earnings Jan 25th.

Position 11/14/16:

Long Jan $62.50 call @ $2.20, see portfolio graphic for stop loss.

XBI - Biotech ETF ETF Profile


Only a minor dip. The ETF is moving closer to resistance at $69. A breakthrough there could really run.

Original Trade Description: October 29th.

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 $56 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.

Comments from Clinton, Warren and Sanders about drug pricing concerns also caused investors to flee the biotech sector.

The biotechs may have ended their decline in fear of Hillary Clinton. After the news on Friday about the FBI reopening the criminal investigation on her emails, that should make it really tough to win the election. That means the biotech sector could begin to rebound even before the vote if the polls tighten even further or move into Trump's favor.

On Friday 10/28, the healthcare sector imploded on earnings and warnings from several companies including McKesson, AmerisourceBergen, Cardinal Health and others. The XBI failed to decline after hitting support at $56.

With the XBI now -18% off its September high, all of those factors above are baked into the market. This may be time to place a bet on a biotech rebound.

The ETF has support at $56 and the 200-day at $56.55. The dip on Friday penetrated to $55.80 but then rebounded $1 in a weak market.

I am recommending we buy a cheap December call ahead of the polls that will be out next week. If Clinton does win, we will exit on any weakness.

Position 11/8/16 with a XBI trade at $58

Long Jan $60 call @ $2.37, see portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

CERN - Cerner - Company Profile


Cerner announced a $500 million stock buyback in hopes of supporting their declining share price. That did not help the stock on Monday but there was a 50 cent gain today.

Original Trade Description: November 14th.

Cerner Corporation designs, develops, markets, installs, hosts, and supports health care information technology, health care devices, hardware, and content solutions for health care organizations and consumers in the United States and internationally. The company offers Cerner Millennium architecture, which includes clinical, financial, and management information systems that allow providers to access an individual's electronic health record at the point of care, and organizes and delivers information for physicians, nurses, laboratory technicians, pharmacists, front- and back-office professionals, and consumers. It also provides HealtheIntent platform, a cloud-based platform that enables organizations to aggregate, transform, and reconcile data across the continuum of care, as well as assists to enhance outcomes and lower costs. Company description from FinViz.com.

When the company reported earnings on November 1st they missed on all three metrics. Earnings of 59 cents missed estimates by a penny. Revenue of $1.18 billion missed estimates for $1.24 billion. They guided for Q4 earnings of 60-62 cents and analysts were expecting 65 cents. They guided for revenue of $1.23-$1.30 billion and analysts expected $1.32 billion. Bookings fell -10% to $1.43 billion and below Cerner's own guidance for $1.45-$1.60 billion.

Shares fell after the report then fell again after the election on uncertainty over what the health care changes will do to existing programs and services. With potentially sweeping changes to the sector and Cerner already under pressure the stock began to decline again.

Earnings Jan 31st.

With shares declining in a bullish market and setting a new 3-year low on Friday, I expect them to continue lower as the bullishness wears off.

Position 11/15/16

Long Jan $47.50 put @ $1.65, see portfolio graphic for stop loss.

VXX - VIX Futures ETF - Company Profile


New closing low after a -4.3% decline.

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.

YHOO - Yahoo - Company Profile


No specific news. Shares reversed direction for the fourth time in four days after a new 3-month low on Monday.

Original Trade Description: October 15th.

Yahoo! Inc., provides search and display advertising services on Yahoo properties and affiliate sites worldwide. The company offers Yahoo Search that serves as a guide for users to discover information on the Internet; Yahoo Mail, which connects users to the people and content; and Yahoo Messenger, an instant messaging service, which enables users to connect, communicate, and share experiences in real-time. It also provides digital content products, including Yahoo News, which gives users to discover, consume, and engage around the news, content, and video; Yahoo Sports, which serves audiences of sports enthusiasts; Yahoo Finance that offers a range of financial data, information, and tools; Yahoo Lifestyle to engage users passionate about style and fashion; and Tumblr, which provides a Web platform and mobile applications on iOS and android to create, share, and curate content, as well as Tumblr messaging that enables users to engage with other users that share their same interests and passions. Company description from FinViz.com.

After a lengthy process Yahoo agreed to be bought by Verizon for $4.8 billion. However, after the deal was done, Yahoo announced it had a serious cyberattack with data from over 500 million users stolen. This was not told to the potential buyers during the bidding process. The bidders were told there had been various attacks over the years but it was presented as a routine event that all online websites have to fight.

When it was disclosed a couple months ago that the attack happened in 2014 and involved more than 500 million accounts, that caused Verizon to take a second look and they are currently trying to decide on whether to back out of the deal or offer something significantly less. There are multiple class action suits against Yahoo for not guarding customer information. With 500 million accounts, even a $20 per account fine or settlement would cost them $10 billion and more than twice what Verizon agreed to pay. The announcement of the attack constitutes a material adverse change or MAC that allows Verizon to walk with no penalty.

On Friday, Yahoo announced they were not going to hold a conference call or the normal webcast of the earnings after the close on Tuesday because of the intense discussions with Verizon.

I view the odds of a Verizon backing out of the deal as very high. They were already paying about $1 billion more than the next highest offer. Now they are faced with potentially inheriting a $10 billion problem if they conclude the deal. Even if it was only $5 billion or even $2 billion, it makes the deal very uneconomical.

If Verizon walks, Yahoo shares will return to $30 or lower very quickly because nobody else is going to step up and assume that liability either. It would mean Yahoo will have to go it alone and the stock could be trashed.

Update 10/18/16: Yahoo reported revenue that fell -14% to $857 million. This is the fourth consecutive quarter that revenue has fallen more than 10%. They beat on earnings with 17 cents compared to estimates for 11 cents but did it on major cost cutting with the termination of 2,200 employees or one-fifth of its workforce. Verizon signaled last week it was reconsidering the acquisition because of the damage from the cyber attack. The decision to complete the deal or back out should be made over the next 2-3 weeks. Yahoo did not hold a conference call in order to avoid having to answer questions that might stir up more objections by Verizon.

Update 10/26/126: Verizon executive, Marni Walden, said Verizon was taking an in-depth look at how the Yahoo cyber attack occurred and what risk Verizon would have from continuing the acquisition. They would have an answer within 60 days. She said the deal still makes sense strategically BUT we have to be careful about what we do not know. The deal was tentatively still on track but the impact of the breach was "material" and still a big unknown. Use of the word material refers to a possible "material adverse change" or MAC clause in the contract that would allow Verizon to walk from the deal. With 500 million accounts hacked, a $20 fine on each account would be $10 billion and more than twice the $4.8 billion sales price.

Update 11/10/16: In a filing with the SEC the company admitted it waited 18 months after the hack was initially discovered before researching it so see what was really stolen and the actual number of account records hacked. The filing also said the FBI is researching data supplied from a hacker that includes a significant amount of account information that was not initially thought to be taken in the account. The hacker said he obtained the information on the web and turned it over to the FBI.

The new SEC disclosure contains this clause in the risk section.

"risks that Verizon may assert, or threaten to assert, rights or claims with respect to the Stock Purchase Agreement as a result of facts relating to the Security Incident and may seek to terminate the Stock Purchase Agreement or renegotiate the terms of the Sale transaction on that basis."

This is a speculative position. We do not know what is going to happen or in what time frame. Do not enter this position with money you cannot afford to lose.

Position 11/11/16:

Long Jan $40 put @ $1.90. See portfolio graphic for stop loss.

Previously closed 11/10/16: Long Jan $40 put @ $1.90. Exit 1.96, +.06 gain

YUM - YUM Brands - Company Profile


No specific news. YUM closed at exactly $60.70 for the last three consecutive days.

Original Trade Description: November 2nd.

YUM! Brands, Inc., operates quick service restaurants. It operates in three segments: the KFC Division, the Pizza Hut Division, and the Taco Bell Division. The company develops, operates, franchises, and licenses a system of restaurants, which prepare, package, and sell various food items. As of April 21, 2016, it operated approximately 36,000 restaurants in approximately 130 countries and territories primarily under the KFC, Pizza Hut, and Taco Bell brands, which specialize in chicken, pizza, and Mexican-style food categories. Company description from FinViz.com.

Yum China had 7,300 stores and adding 1,500 since 2012. Currently they are on a path to add 600 stores a year with a growth target of 20,000 stores. This was the growth engine for Yum Brands.

Now the parent company is going to focus on a dividend model and returning cash to shareholders. Yum is planning on reducing its owned store count in the U.S. from 3,200 to 1,000. In the U.S. the pace of new restaurants has slowed significantly and Yum will concentrate on generating and retaining cash of its existing portfolio.

While Yum may generate a great dividend in the years to come, the excitement has evaporated from the stock. There will be little growth and earnings are going to flat line.

Update 11/4/16: Yum announced a giant expansion plan for Taco Bell. They are going to add 2,600 stores by the end of 2022 to bring their total to 9,000 US locations. That will increase employment by 100,000 from the current 210,000. Shares declined on the news.

Apparently I was wrong about Yum Brands lack of expansion. They are taking their most popular store and spending the money they are getting from yum China to expand it. While this will have no impact on YUM in the near future, it would be beneficial five years from now and raise earnings and dividends.

Earnings Jan 4th.

Shares are at $60 and I think they have risk to $55 or even $45. There is support at $57.50 but the company has changed. I would not be surprised to see shares cut through that support very quickly.

The YUMC shares began trading on Tuesday and YUM shares have declined sharply on Tue/Wed. The option is cheap and we will have little risk.

Position 11/3/16:

Long Dec $57.50 put @ $1.10, see portfolio graphic for stop loss.

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