Option Investor

Daily Newsletter, Tuesday, 11/29/2016

Table of Contents

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

Market Wrap

Much Ado about Nothing

by Jim Brown

Click here to email Jim Brown

The markets were tame despite strong economics. Today was a nothing day and sometimes that is the best kind.

Market Statistics

The big cap indexes dipped at the open but recovered in the afternoon to close mildly positive. It was touch and go at the close as a sell program appeared about 2:45 to knock -6 points off the S&P but it still squeezed out a 3-point gain.

Tuesday was a consolidation day where the buyers and sellers were almost evenly matched and it gave traders a chance to take a breath and decide what they are going to do the rest of the week.

On a 15 min chart the broadest market index shows how choppy the market has been the last two days. This is normal in a consolidation and it normally resolves to the upside.

The economics started strong when the Q3-GDP revision rose to +3.2% growth. That is the highest quarterly growth in two years. I discussed at length in the original release that it was a function of the pull forward of several billion dollars in soybean exports that normally occur in Q4. This was a onetime event and is not reflective of the actual growth.

Consumer spending declined from 2.88% in Q2 to 1.89% in Q3. Fixed investment declined -0.15% with inventories adding 0.49%. Corporate profits soared +6.62% after a -0.61% decline in Q2.

Over the prior three quarters, growth was 0.9% in Q1, 0.8% in Q2 and 1.4% in Q3.

Consumer confidence for November exploded higher from 100.8 to 107.1 and the highest level since July 2007. The Trump victory has apparently energized consumers. The present conditions component surged from 123.1 to 130.3. The expectations component rose from 86.0 to 91.7.

The rise in confidence after the election has not translated into new buying plans. Consumers planning on buying an appliance rose from 51.8% to 52.4% of respondents. Homebuyers increased from 5.5% to 6.5% but prospective auto buyers declined from 13.4% to 12.5%.

The idea of lower taxes, replacing the Unaffordable Care Act and creating more jobs seems to have caught fire. Now Trump only needs to do the impossible and make those things happen.

The Texas Service Sector Survey rose from 3.0 to 12.6 and a five-month high. The current conditions component rose sharply from 0.3 to 15.6 but the big gains were in the expectation component. The respondents are looking at the future through rose-colored glasses with a spike from 12.2 to a whopping 32.6. The general business activity index jumped from 9.1 to 29.1.

Economic expectations are busting out all over thanks to the election results and just the fact that it is now behind us.

The first big report of the week is out tomorrow with the ADP Employment. Unless jobs fell under 100,000, which is not likely, the actual number will have no impact on the Fed rate hike decision in December. They will hike and it is already priced into the market.

The bigger event for Wednesday is the OPEC production decision. That could impact equities in a big way depending on the outcome. If they fail to come up with a credible agreement that is verifiable the oil market is likely to crash back to $40.

Regardless of what they decide or fail to decide, they will more than likely announce an agreement of some sort to save face after three months of promising they would cut production. If it is readily seen as just a token announcement, the prices will likely fall and take equities down with oil.

Even if they do announce a credible agreement, there are so many facets that we could still get a sell the news event. The Saudi Oil minister said this week that Iran, Libya and Nigeria would be exempt. That means the three countries with the largest potential increases in production will not be bound by the agreement. That alone makes any agreement nearly worthless.

On Thursday, the ISM Manufacturing Index is the most important of the manufacturing reports for the month. It is expected to show a minor gain.

The Nonfarm Payrolls on Friday will be less important than normal because the Fed's mind is already made up. About the only real danger would be an extremely hot report over 250,000 that could create concerns about a half point hike in December rather than a quarter point. I am not sure the market would even care since the rate trajectory is already accelerating.

There was very little stock news since the earnings cycle has slowed to a trickle. Specialty pharmacy company Mallinckrodt Plc (MNK) reported earnings of $2.04 that 15.1% and beat estimates for $1.98. Revenue of $887.2 million rose 13.9% to beat estimates for $851.5 million. They ended the quarter with $280.5 million in cash and generated $140.8 million in free cash flow for the quarter. The company appears to be in good shape with a strong drug portfolio seeing double-digit sales increases. Apparently, I am the only one that saw that because shares fell -9% to $52. The company did say it saw a double-digit decline in generics revenue after an 18% decline in fiscal 2016. Analysts seized on that one point and shares crashed.

Tiffany (TIF) reported earnings of 76 cents compared to estimates for 67 cents. Revenue increased only 1.2% to $949.3 million and beat estimates for $923.7 million. This was the first quarterly sales increase in eight quarters. Same store sales declined -2% but that was better than the -3% analysts expected. They warned that sales could be impacted by the security cordon around 5th Avenue and Trump Tower. The company said there were very few shoppers because of the mob scene, protestors, heavy police presence and TV camera crews. Shares rallied 3% on the earnings.

Autodesk (ADSK) reported an adjusted loss of 18 cents compared to estimates for 24 cents. Revenue of $489.6 million beat estimates for $476.8 million. However, shares fell -$2 in afterhours when they guided to a loss of 32-39 cents for Q4 on revenue of $460-$480 million. Analysts were expecting 31 cents and $488.5 million. Autodesk is in the middle of a transition away from a software sales model to a subscription model, which will make earnings more regular in the future. Their "new model" recurring revenues rose 88% to $414 million. This was their first quarter of selling only subscriptions and no longer selling the software. New cloud subscriptions rose to a record.

Splunk (SPLK) reported earnings of 12 cents that beat estimates for 8 cents. Revenue of $244.8 million also beat estimates for $230.4 million. They guided for Q4 revenue of $286-$288 million and analysts were expecting $285 million. License revenue rose 34% to $140 million. Shares spiked to more than $63 in afterhours after closing at $57.41. Late session selling saw the stock sink back to $59.

Apple shares traded flat despite KGI Securities claiming iPhone sales in 2018 will set records. The analyst said Apple is testing more than 10 different models of iPhone 8 beta phones. He said the iPhone 8 plus two additional reiterations of the iPhone 7 could power record sales. Suppliers have been told to plan on 120-150 million units in order to avoid the problems Apple is having with the model 7. They cannot make phones fast enough after having cut component orders twice leading up to the model announcement. Apple is expected to sell 78 million phones in Q4, up from 75 million in the year ago quarter.

Online sales are setting records this year. Black Friday sales set a new record at $3.34 billion even though "Black Friday" has somehow morphed into a ten-day period surrounding the day after Thanksgiving. We do not have numbers for the other 9 days but from the look inside the UPS truck when it delivered today, there was plenty of buying. My driver knows I write about package demand and his truck was still fully loaded when he arrived at 3:PM. Starting next week he will have a holiday helper for the rest of the year. The vast majority of the packages had Amazon tape on them.

On Cyber Monday, sales rose 12.1% to $3.45 billion according to Adobe Digital Insights. They track over 80% of the major online retailers. Estimates were for 9.4% growth. Analysts believe the surge in post election buying will compensate for the slowdown the weeks before the election. The online shopping estimates for the full holiday season are currently $91.6 billion and 11% growth. ShopperTrak said actual visits to brick and mortar retailers declined on Black Friday weekend by more than 1%. The National Retail Federation said 3 million fewer shoppers visited stores over the weekend, while 5.5 million more shopped online. In total 108.5 million shopped online compared with 99 million that shopped in stores. For the entire retail sector, the November/December total is expected to rise 3.6% to $655.8 billion in sales.


If I were going to report any more stock news, I would have to make it up because there was nothing happening. The same is true on the market news. Nothing happened.

The markets opened slightly lower, dip buyers appeared and the losses were erased. A sell program hit at 2:45 that knocked 6 points off the S&P but all the big cap indexes closed slightly positive.

This was a textbook example of consolidation. There was not enough conviction on either side to extend either the gains or the losses and the contest ended in a draw.

While this type of consolidation will take longer than a sharp V bottom sell off and rebound, it is preferable. Those of us with stop losses may avoid being stopped out and be able to keep existing positions. On the V bottom method, everyone is forced to take profits and stock ownership is transferred to new buyers. We could still have a sharp decline at any time but so far, there are no signs of a pending collapse.

The S&P slipped back to 2,200 but held over that psychological level. It would not be unreasonable for a drop back to 2,175 but that would be a little more painful.

The Dow traded in a narrow 82-point range with most of the movement in the opening dip. UnitedHealth Group (UNH) added about 40 points to the Dow and along with Goldman's 14 Dow points they kept the index in positive territory. The advancers and decliners were about even and there was no sign about future direction. However, I doubt UnitedHealth is going to gain another $5 on Wednesday.

The Dow is holding well over psychological support at 19,000 and closed only 30 points below the historic high. It would be a hard argument to say the Dow is weak when it is holding the high ground on a consolidation day.

The Nasdaq Composite traded at new intraday highs in early afternoon but gave back 25 points with the late day sell program. The big cap tech stocks are still weak with Facebook and Netflix closing flat and Amazon losing 4 points. Google managed to remain positive but a $2 gain for an $800 stock is still flat.

The 5,400 level remains resistance but we have a solid pattern of higher lows so I do expect an eventual breakout.

The small cap indexes closed fractionally lower with the Russell 2000 losing -1.60 and the S&P-600 losing 68 cents. Given their massive gains over the prior three weeks, they could lose a lot more and still remain in a bullish uptrend. The Russell has closed negative for two days. Let's hope it is not starting a 15 day streak in the opposite direction.

I would not be surprised to see a new move higher begin at any time OR for the current consolidation process to continue the rest of the week. We had three weeks of massive gains. It only makes sense that it will take more than two days of mediocre selling to remove those overbought pressures.

Remember, Wednesday is month end window dressing. It is also MSCI index rebalance and the OPEC decision. Volume will be very high and normally there is no change in direction. However, normal may be the wrong word to use for Wednesday.



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New Option Plays

Tempting Fate

by Jim Brown

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Editors Note:

I do not believe we have determined market direction for the rest of the week. While I expect the market to resume its upward movement in the days ahead, the severity of the declines has been misleading. We could be setting up for a move in either direction.

Wednesday is month end. It is also the MSCI rebalancing and the OPEC production decision. I am recommending we wait until Wednesday night to consider new positions.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Barely Positive

by Jim Brown

Click here to email Jim Brown

Editors Note:

The big cap indexes shook off some negativity in the morning to close barely positive but the small cap indexes remained negative for the second day. If we are going to suffer through a week of profit taking rather than a strong V bottom drop, then this is the way to do it.

No crush of sellers, no panic and plenty of dip buyers. I would gladly suffer through another week like you see on the Dow chart where it went sideways then sprinted higher. That is good for buyers and sellers. Everybody gets a fair price.

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

CDK - CDK Global

The long call position was entered at the open.

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


KGI Securities said sales of iPhones in 2017 could break records with the iPhone 8 and two upgrades to the iPhone 7. Apple is reportedly testing more than 10 designs for its 10th anniversary phone. Apple suppliers were told to prepare for 120 to 150 million units in 2017. Apple has been challenged in 2016 because of slow production rates. They cut back too far on their initial orders and cannot catch up.

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. New closing high.

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.

CDK - CDK GLobal - Company Profile


No specific news. Shares testing resistance.

Original Trade Description: November 28th.

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 of $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.

Position 11/29/16:

Long Feb $60 call @ $2.50, see portfolio graphic for stop loss.

CONE - CyrusOne Inc - Company Profile


No specific news. Minor move over resistance at $44. Could be getting ready to run.

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. Facebook added Pac-Man, Space Invaders and Galaga games to its Messenger service. The gaming portal is still in beta test but it is coming.

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 an intraday high at $143.93. 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.

SMG - Scotts Miracle Grow - Company Profile


No specific news. Excellent spike to a new high.

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


New intraday historic low. Because this is a December option, I will continue to tighten stop on the position when possible. 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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