Option Investor

Daily Newsletter, Monday, 11/28/2016

Table of Contents

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

Market Wrap


by Thomas Hughes

Click here to email Thomas Hughes


The market took a pause today, perhaps due to OPEC uncertainty, perhaps due to the first round of monthly macro-data since the election. OPEC headlines over the weekend and this morning had oil prices moving in wide swings, the nature and probability of a price supporting deal are still highly questionable. Over the weekend the deal seemed to fall completely apart as Iran and Iraq both pulled back from agreement. Rumors have it that some sort of promises to Iran weren't kept, leading to their lack of cooperation and a plunge in oil prices; early this morning Iraq agreed to get on board and that news caused a major intraday turnaround in oil trading. Other than that the market only has a big week of major economic data to wait on so lots of opportunities for market movements.

International trading was a bit mixed, a bit choppy. In Asia indices closed mostly in the green, albeit with small gains, as dollar strength and falling oil prices induced caution. European indices were firmly in the red at the end of the day, first hurt by falling oil prices and then later by falling bank stocks. Today's reason to hit the EU financials, yet another possible extreme change in Italian government that is feared to hurt an already unstable banking sector and potential spillover into the greater EU. Nothing new but a reason for caution nonetheless.

Market Statistics

Futures trading was fairly stable if to the downside all morning. Volatility in the international markets did not seem to spill into ours and there was no earnings or economic data released in the early pre-opening hours. Trading at the open was calm and quiet, the SPX opened with a loss near -3 points, about -0.20%, and held near that level for the first hour of trading. The second hour of trading saw the indices dip lower, the SPX to -0.50%, trade sideways for a bit and then move back up a bit and eventually to the opening level.

Intraday resistance was found just below the opening level, 2210, and kept the indices trading sideways within the earlier range. Early afternoon saw the indices hover near the mid point of the intraday range and then move down towards the bottom of said range shortly after 2PM. The late day move lower was not strong, more of a slow drift down and to the right, that never quite reached the earlier bottom, not until the last half hour of trading when a final push lower set a new intraday low, leaving the indices near the lows of the day.

Economic Calendar

The Economy

No economic data today but lots this week. Tomorrow the second estimate for 3rd quarter GDP, slightly higher than the first, could sway the FOMC as could the NFP/Unemployment/hourly earnings bundle released on Friday. In between all that is Challenger job cuts, ADP employment, the Fed's Beige Book, personal income and spending, PMI, pending home sales, auto sales, ISM and construction spending.

Moody's Survey Of Business Confidence gained 0.5%, nearly reclaiming last week's loss, to come in at 32.5. The index is holding steady near recent highs, at 7 month highs, with little on the horizon to damage sentiment. In his remarks Mr. Zandi says that global sentiment is holding well and has weathered the geopolitical storm of the summer/fall. The only negatives he notes is that future outlook dipped over the summer, remains positive, and has not yet recovered.

The third quarter earnings cycle is coming to a close. A little over 98% of the S&P 500 has reported so far and there are 7, 1.5%, reporting this week. The blended rate of earnings growth moved up in the last week, gaining 0.2% to 3.2%. Of those that have reported 72% beat earnings and 54% beat revenue expectations, both above average.

Looking forward earnings growth outlook remains positive and on the upswing. Fourth quarter outlook fell a tenth to 3.3%, down more than 10% from it's peak but likely low relative to what we can expect the final rate of earnings growth to be, something more in the range of 7.5% to 8.5%. Full year 2016 outlook remains steady at 0.1%, likely to rise along with the fourth quarter as the season unfolds. Full year 2017 held steady as well, at 11.4%, but likely to see some change as we get closer to next year.

The Dollar Index

The Dollar Index fell in today's session but the move looks more like profit taking than anything else, there were no market shaking announcements, central bank meetings or comments from Fed members that I heard of. The index fell nearly a full percent in overnight trading to hit support just above the recently broken long term high near 100.50 and bounce back. The action created a doji candle at support and was basically completed before the US session opened, after the US market opened there was very little movement in the index. The indicators are consistent with a peak within an uptrend in that they are both showing strength, and peaking; the current peaks in both are both convergent with the new high and suggest strength in the rally. Additionally, the MACD peak, I don't know that I would call it extreme but it is the highest peak in more than 12 months. With the data this week, the ECB next week and the FOMC meeting just 2 weeks away I'd expect some volatility and at least a retest of the current high.

The Oil Index

Oil prices took a wild ride today, first down more than -1% and then later up more than 3% only to close closer to 2% as OPEC hopes, fears, dreams and realities clash together. The cartel is on the verge of losing its power as traders continue to question just what the deal is, will it be enough, will they all agree to it and then, will they actually do it. WTI gained settled up nearly 2% at 1.91%, trading just shy of $47, and is likely to be volatile going into Wednesday's official OPEC meeting.

Traders in the oil sector remain skeptical of the oil rally, as do I. The Oil Index fell more than -1.3% confirming resistance at the ultimate top of the 7 month trading range. The indicators are consistent with resistance within a trading range and suggest, along with the candle action, that the sector is heading back down to firmer support levels. The risk of course is that OPEC, or maybe the Saudis and Russia, will somehow talk the market back up. Downside target is 1,150.

The Gold Index

Gold prices bounced back somewhat today but remains below $1,200. Spot prices climbed more than 1% in mildly choppy trading to hover near $1,190. This move is linked to today's dollar weakness so does not appear to have strength or legs. Resistance is now $1,200, maybe lower, and with dollar outlook bullish I'd expect to see gold move lower rather than higher in the short to long term. FOMC rate hike expectation is 95.9% according to the Fed Watch Tool.

The gold miners of course got a boost from rising gold prices but they, like gold, are under pressure and appear likely to be headed lower. The Gold Miners ETF GDX gained nearly 4% in today's session, moving up from potential support levels, but remains within a narrowing flag pattern with bearish outlook. The indicators are mixed, MACD is bearish but consistent with a trough while stochastic is firing what could be buy signal. The caveat is bearish outlook for gold and the four month downtrend in gold stocks which makes today's set up in the GDX look more like the precursor for a bearish continuation than a bottom or bounce. Resistance is near $22, support is near $20, a break of either will be significant.

In The News, Story Stocks and Earnings

Time Inc, publisher of Time Magazine, received an unsolicited and turned down bid to buy from billionaire Edgar Bronfman Jr. The news was enough to spur investors to buy in the hopes that a deal could be reached, if not with this consortium then another. The current offer is $18 per share, a 22% upside to last week's close, which leaves some room if a deal were to get closed, even after today's 18% spike.

Wells Farge, the once unsullied banking gem, has suffered yet another blow. A new class action lawsuit, from the employees, alleging the company herded them into underperforming proprietary investments, over $3 billion worth, at the expense of employees. The news helped send the stock down by nearly -2% but does not appear to be material to the long term health of the bank or the banking sector. The chart still looks rather bullish to me.

Shoe Carnival reported after the close and missed expectations. The discount shoe store did not provide investors with reason to celebrate when they announced that seasonal sales were lower than expected, impacting revenue and earnings, and lowering full year guidance. Warmer weather hurt sales of boots of other cold weather shoes in the second half of the quarter but may be made up in later quarters if the winter precipitation forecast is to be believed. Shares of the stock fell -3.75% in the open session and look as if they may have hit a peak, action in after hours trading confirms it. Down -12%.

The Indices

The Trump rally is showing some signs of slowing. Today's action was light, but to the down side and comes with declining market momentum. The biggest decliner was the Dow Jones Transportation Average which lost -0.90% and created a small bodied black candle. The signal is not strong, a near term pause at most, but momentum continues to wane so more serious resistance could set in as the index approaches the all time high near 9,300. Stochastic remains strong and at the upper reaches of the upper signal zone, where it is likely to stay in the near to short term. Upside target remains 9,300.

The NASDAQ Composite is the next biggest loser in today's action, shedding -0.56%. The tech heavy index created a small bodied black candle, the fourth in what looks like a developing consolidation, just below the current and recently set all time high. The indicators remain bullish if consistent with a peak/consolidation. A pull back to test for stronger support go as low as 5,250 while a move to the upside could take it as high as 5,500 in the near term.

The S&P 500 comes in third today with a loss of -0.53%. The broad market created a small bodied black candle, closing near the low of the day, just below the recently set all time high. The index looks like it could be setting up to test for support, the indicators are bullish but consistent with a peak and possible near term pull back or correction, with that support level just below today's close. Support,first target anyway, is along a short term uptrend line and the previous all time high, which happened to intersect just below today's candle. A break below this level could be bearish and take the index down to a more established longer term uptrend line near 2,150. A confirmation of support would be bullish and has a target near 2,250.

The Dow Jones Industrial Average made the smallest losses today, only -0.20%. The blue chips created a small doji candle, just below the recently set all time high, and may indicate a pause in the rally is at hand. The indicators remain bullish but like with the other indices give reason to think a consolidation or test for support could be coming. MACD, while extreme and strong for the movement, is also diverging from the most recent peak suggesting that the rally has legs, but has reached a near term peak. Support could be at 19,000, if so great and bullish, if not the short term moving average near 18,600 looks like the next likely level. If the market is able to get its legs under it and move higher from here upside targets remain at 19,500 and 20,000.

Today's action certainly makes it look like a pause is at hand, and no wonder. The OPEC meeting alone is enough to move the market so waiting for it to pass is a good idea, the data load this week is another reason to wait, not to mention next week's ECB meeting, and the following week's FOMC meeting. This pause could hold current levels, and it could lead to a pull back to stronger support levels, but in either case I think it more likely the rally continues from that point forward than for it to end. Economic trends are positive, the consumer is getting stronger and earnings outlook is expansive... a recipe for bull market. I remain cautiously bullish, eyeing the market, waiting for the data, and eyeing my chance to get in on the next dip to support. OPEC may be a big deal, but only for a few more days.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Got Parts?

by Jim Brown

Click here to email Jim Brown

Editors Note:

If you have ever bought a car part online you probably used this company's services. CDK Global helps retailers manage the online process.


CDK - CDK GLobal - Company Profile

CDK Global, Inc. provides integrated information technology and digital marketing solutions to the automotive retail and other industries worldwide. The company operates through Retail Solutions North America, Advertising North America, and CDK International segments. It offers technology-based solutions, including automotive Website platforms; and advertising solutions comprising the management of digital advertising spend, for original equipment manufacturers and automotive retailers. The company's solutions automate and integrate various parts of the dealership and buying process from targeted digital advertising and marketing campaigns to the sale, financing, insuring, parts supply, repair, and maintenance of vehicles. It provides solutions to dealers serving approximately 27,000 retail locations and automotive manufacturers. Company description from FinViz.com.

The company reported Q3 earnings of 60 cents that beat estimates for 53 cents. Revenue od $550.7 million beat estimates for $540.4 million. Revenue rose 7% and earnings posted a 34% rise. Gross margin rose 590 basis points to 30.9%. They are committed to raise that to 35% over the next year. The company guided for full year earnings of $2.30-$2.37 per share, a rise of 23% to 27%. Advertising revenues rose +23% and earnings on advertising rose +203%.

Earnings February 1st.

Shares are at resistance at $59 and did not decline in today's market. A breakout to a new high appears imminent.

Buy Feb $60 call, currently $2.60, initial stop loss $56.85.


No New Bearish Plays

In Play Updates and Reviews

Baby Step

by Jim Brown

Click here to email Jim Brown

Editors Note:

The minor amount of profit taking today was simply a baby step in the right direction. The markets have had a fantastic run over the last three weeks and it will take more than today's minor dip to adequately remove the overbought pressures.

The selling was heavier at the open and the dips were immediately bought. When traders saw we were not going back to positive territory in the afternoon, the selling increased slightly ahead of the close. This was a calm and orderly day and there was no material selling pressure.

I would not be surprised to see a sharp dip at Tuesday's open that is bought and then finish the day in the green. If we do move lower and stay there, it simply give us a better opportunity to make a good entry with lower option premiums.

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

CONE - CyrusOne

The long call position was entered at the open.

IWM - Russell 2000 ETF

The long call position was stopped at $132.50 for a nice gain.

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

AAPL - Apple Inc - Company Profile


A Piper Jaffray survey of 1,000 consumers found that the iPhone 7 was the number one requested gift at 7.2%. That is up from the 5.2% share in 2015. The second most requested gift was a MacBook so Apple is still in favor.

Original Trade Description: November 16th.

Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players to consumers, small and mid-sized businesses, and education, enterprise, and government customers worldwide. The company also sells related software, services, accessories, networking solutions, and third-party digital content and applications. It offers iPhone, a line of smartphones; iPad, a line of multi-purpose tablets; and Mac, a line of desktop and portable personal computers. Company description from FinViz.com.

Apple shares have been under pressure since topping at $118.25 before their Q3 earnings. Q4 estimates are rising thanks to the problems with the Samsung Note 7 that forced its removal from the market. Sales are said to be booming despite tight supply. Apple cannot make enough phones to fill the demand going into the holiday season and that suggests it should be a good quarter.

The company is also expected to announce some new products soon including "digital glasses." The rumors breaking about the next iPhone model to be announced next September already have Apple fanatics excited. Those include full frontal screens without any edges. This will allow full use of the phone's screen and allow for smaller phones overall sizes while keeping the screen sizes the same. There is rumored to be a 4.7 inch, 5.0 inch and 5.5 inch model. The 5.5 inch model is said to be an OLED screen with curved edges.

Regardless of the future new product rumors, several high profile funds have increased positions in the stock. Steve Cohen and Ray Dalio have reportedly increased their stakes.

Apple shares dipped to $104 on Monday and touched the 200-day average. That has been support/resistance dating back to September 2013. Since Monday's dip, which was seen as the last bout of climax selling for the big cap tech stocks, Apple shares have risen for two days.

Today, with Apple at $108, somebody bought 160,000 contracts of the December $115 calls. Even at the average price of 75 cents that was a $12 million dollar bet that Apple is going higher over the next 30 days. That takes some serious conviction. I am recommending we follow them only use the January option just in case they are wrong about the timing.

Earnings January 24th.

Position 11/17/16:

Long Jan $115 call @ $1.85, no initial stop loss.

ADP - Automatic Data Processing - Company Profile


No specific news. Minor decline at the open was quickly erased.

Original Trade Description: November 19th.

Automatic Data Processing, Inc., together with its subsidiaries, provides business process outsourcing services worldwide. The company operates through two segments, Employer Services and Professional Employer Organization (PEO) Services. The Employer Services segment offers a range of business outsourcing and technology-enabled human capital management (HCM) solutions, including payroll services, benefits administration services, talent management, human resources management solutions, time and attendance management solutions, insurance services, retirement services, and tax and compliance solutions. This segment's integrated HCM solutions include RUN Powered by ADP, ADP Workforce Now, ADP Vantage HCM, and ADP GlobalView, which assist employers of all sizes in all stages of the employment cycle from recruitment to retirement; and ADP SmartCompliance and ADP Health Compliance. The PEO Services segment provides a human resources (HR) outsourcing solution through a co-employment model to small and mid-sized businesses. This segment offers ADP TotalSource that provides various HR management services and employee benefits functions, such as HR administration, employee benefits, and employer liability management into a single-source solution. Company description from FinViz.com.

ADP reported a 26.5% rise in earnings to 86 cents that beat estimates by 9 cents. Revenues rose 7.5% to $2.92 billion and beat estimates for $1.91 billion. The number of employees on client payrolls rose 2.7%. They ended the quarter with $2.82 billion in cash and long-term debt of $2 billion. The announced the sale of their CHSA and COBRA business to WageWorks for $235 million. The sale will be completed in Q2 2017.

The company guided for 2017 revenue growth of 7% to 8% and 15% to 17% earnings growth. The PEO Services segment revenues are expected to rise 14% to 16%.

The company just declared a 57-cent quarterly dividend to raise the annual dividend to $2.28.

ADP holds a dominant position in the payroll processing sector. With employment expected to rise again in 2017 this could be an attractive investment for funds that are tired of chasing industrials and bank stocks in the current rally.

There is resistance at $96 but given the time of year and the overbought conditions in the rest of the market, we could see a breakout. Options are relatively cheap.

Position 11/21/16:

Long Feb $95 call @ $2.50, see portfolio graphic for stop loss.

CONE - CyrusOne Inc - Company Profile


No specific news. Holding at resistance at $44. Shares positive in a negative market.

Original Trade Description: November 26th.

CyrusOne Inc., a real estate investment trust (REIT), owns, operates, and develops enterprise-class, carrier-neutral, and multi-tenant data center properties. The company provides mission-critical data center facilities that protect and ensure the continued operation of information technology infrastructure. Its customers operate in various industries, including energy, oil and gas, mining, medical, technology, finance, and consumer goods and services. As of December 31, 2015, the company's property portfolio included approximately 32 data centers in the United States, the United Kingdom, and Singapore collectively providing approximately 2,954,000 net rentable square feet. Company description from FinViz.com.

One commodity that will never see a surplus of supply is data center properties. As fast as they can be built they are filled up as data storage and cloud services expand exponentially. These centers capture top dollar from renters and they almost never leave.

CyrusOne reported earnings (FFO) of 67 cents compared to estimates for 63 cents. They posted revenue of $143.8 million that beat estimates for $136.2 million. They guided for full year earnings of $2.59-$2.62 and revenue of $523-$530 million.

Shares have been declining since August as REITs fell out of favor. There was a rebound in progress when the election knocked shares back -$5 as investors raised cash for industrials and financial stocks. That post election dip has been erased and shares are starting to move higher again.

They have a yield of 3.5% and after the big decline, there is significant opportunity for share appreciation as well.

Earnings Jan 30th.

Options are cheap.

Position 11/28/16:

Long March $45 call @ $2.23, see portfolio graphic for stop loss.

FB - Facebook - Company Profile


No specific news. No material movement in a negative market.

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.

Position 11/16/16:

Long Feb $125 call @ $3.05, see portfolio graphic for stop loss.

FFIV - F5Networks - Company Profile


No specific news. Shares still fighting resistance at $144 with a decent decline in a negative market. The company said it was presenting at a Nasdaq investor conference at 9:AM ET on Wednesday.

Original Trade Description: November 21st.

F5 Networks, Inc. develops, markets, and sells application delivery networking products that optimize the security, performance, and availability of network applications, servers, and storage systems. It offers Local Traffic Manager, which provides intelligent load-balancing, traffic management, and application health checking; BIG-IP DNS that automatically directs users to the closest or best-performing physical, virtual, or cloud environment; Link Controller, which monitors the health and availability of each connection in organizations with more than one Internet service provider; Advanced Firewall Manager, a network firewall; and Application Security Manager, an Web application firewall that provides comprehensive, proactive, and application-layer protection against generalized and targeted attacks. The company also provides Access Policy Manager, which provides secure, granular, and context-aware access to networks and applications; Carrier-Grade Network Address Translation, which offers a set of tools that enables service providers to migrate to IPv6 while continuing to support and interoperate with existing IPv4 devices and content; and Policy Enforcement Manager that offers traffic classification capabilities to identify the specific applications and services to service providers. In addition, it offers cloud-based and other subscription services; BIG-IP appliances; VIPRION chassis-based systems; and Traffix Signaling Delivery Controller for diameter signaling and routing. Company description from FinViz.com.

The big attack on the Internet several weeks ago was driven by malware that had been placed on IoT devices including security cameras, cable boxes, burglar alarms and dozens of other device types. These devices are typically delivered without any material malware defenses. It is up to each manufacturer to overcome this in the future with some kind of defense.

However, FFIV provides software and hardware to prevent denial of service attacks from these devices as well as the more robust attacks from computers and servers. With more and more servers in the cloud it is harder to protect them from attack like you would dedicated physical servers in a dedicated data center. This is where FFIV excels.

The company's Silverline service places a sophisticated cloud based filter around critical infrastructure that stops attacks instantly. Aided by hardware based firewalls in dedicated data centers they protect data and equipment from all outside attacks.

For Q3 they reported earnings of $2.11 compared to estimates for $1.94. revenue ot $525 million beat estimates for $520 million.

Earnings Jan 21st.

FFIV shares spiked on earnings in late October and have been moving steadily higher. They are about to break over resistance at $144 and we could see another leg higher when that happens.

Position 11/22/16:

Long Jan $150 call @ $3.15, see portfolio graphic for stop loss.

IWM - Russell 2000 ETF - ETF Profile


Eventually it had to end. The Russell finally took profits after 15 consecutive daily gains. We were stopped out at $132.50 for a whopping $11.18 gain.

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
Closed 11/28/16: Long Dec $119 call @ $2.47, exit $13.65, +$11.18 gain.

SMG - Scotts Miracle Grow - Company Profile


No specific news. Good relative strength.

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.

WDC - Western Digital - Company Profile


No specific news. New 10 month high.

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.

BEARISH Play Updates (Alpha by Symbol)

VXX - VIX Futures ETF - Company Profile


Only a fractional gain despite the negative market. Because this is a December option, I will continue to tighten stop on the position. The VXX missed our stop loss by 10 cents today. If we are stopped out, I will reenter the position on the next bounce with a longer term put.

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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