Option Investor

Daily Newsletter, Tuesday, 12/6/2016

Table of Contents

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

Market Wrap

Another Goldman Gift

by Jim Brown

Click here to email Jim Brown

Goldman Sachs added another $3 to their post election gains to add roughly 23 points to the Dow and power it to a new high.

Market Statistics

Goldman has gained $57 since the election and added about 441 points to the Dow or roughly one third of the Dow's 1,363 point rally since November 8th. Thank you Goldman Sachs. However, we know this Goldman spike will eventually end badly and the Dow will suffer as a result. When? Nobody knows.

The markets did break a new trend today. That trend was opening high and closing at the lows. That was broken today when buyers flooded into the intraday dip and pushed the indexes to close at the highs. That is a very positive sign and suggests the market weakness is easing.

Portfolio managers cannot afford to fade this rally with only 17 trading days left in 2016. They have ride the wave and try to stimulate it whenever possible in order to keep up with or exceed all of their peers. There should be ample window dressing over the next three weeks. Unfortunately, that is setting up for a sudden surprise in January when everyone is free to take profits from all these monster gains.

The U.S. economics just keep getting better. Factory Orders for October rose +2.7% compared to +0.3% in September. That was the largest monthly increase in about 18 months. Durable goods saw the biggest gain at +4.6% with nondurables at +0.9%. However, shipments, the component that feeds into the GDP, only rose +0.4%. They are running at the slowest pace since 2011. Backorders rose +0.7% and the first gain since April.

The International Trade deficit for October rose from $36.4 billion to $42.6 billion. That was over the forecast for $41.7 billion. It was the largest deficit since June. Exports declined -$3.4 billion to $186.4 billion and imports increased $3.1 billion to $229.0 billion. The larger deficit was largely responsible for the pull forward of the soybean exports into Aug/Sep. Exports of soybeans in October declined -30.6% after being up 45% in the prior two months.

The Core Logic Home Price Index rose 6.7% for October compared to a 6.3% rise in September. Those are annualized rates. The actual rate of change for October was +1.1% and the 22nd consecutive monthly increase. Home prices are still -4.7% below their 2007 peak.

The market ignored all those reports.

The calendar for the rest of the week is just as boring with nothing that should move the market. The next highlight will be the Fed rate announcement next Wednesday. William Dudley said yesterday he expects four rate hikes in 2017. That is exactly what I have been saying, one at the end of each quarter. However, I do not expect the Fed to be that clear in their guidance. They would like to maintain all their options and that means repeating the stance of "rate hikes will be data dependent" even though they have ignored the data for the last two years. Yellen's press conference could be telling since she will maintain her dovish posture but try to walk a thin party line.

At the close today the chance of a December rate hike was at 92.7%.

Apple was in the news for multiple reasons on Tuesday. The Supreme Court threw out the $399 million judgment against Samsung in the patent dispute over the iPhone design. The court said Samsung did not copy the entire phone but only some icon placements and Apple was not due the $399 million. The court ruled 8-0 against Apple and sent the case back to a lower court to decide how much the copied items were worth compared to the entire phone.

CEO Tim Cook came out on the attack against an IDC article on Monday that said Apple watch sales had declined -72% in Q3. IDC said Apple watch sales were 1.1 million units in Q3, down from 3.9 million in the year ago quarter. Tim Cook responded to a question about the report from Reuters saying, "Sales growth is off the charts. In fact, during the first week of holiday shopping, our sell-through of Apple Watch was greater than any week in the product's history. And, as we expected, we are on track for the best quarter ever for the Apple Watch."

The problem is the lack of context. Since Apple has never reported unit sales for the watch, analysts have nothing to compare "off the charts" to in order to make a rational decision. Also, Cook reported on "sell through" rather than IDC's reports on "sell in." It is one thing to sell retailers a lot of watches, but the key is the sell through to consumers. If you sell retailers one million watches but only 100,000 actually get sold to consumers then your sell through could be high on a relative basis to the past but lousy compared to the amount of inventory on hand.

The entire thing is a tempest in a teapot. Josh Brown said "If Apple decided to write off the entire watch unit, no one would even blink." Because they have not reported unit numbers or revenue, nobody knows if they are making money on them or not.

Autozone (AZO) reported earnings of $9.36 and that beat estimates for $9.31. Revenue of $2.47 billion rose +3.47% but missed estimates for $2.5 billion. During the quarter, they opened 16 new stores and bought back $363 million in stock. Cash on hand rose $30 million to $195.54 million.

Microsoft (MSFT) received the final approval for its acquisition of LinkedIn (LNKD). The European Commission was the last regulatory agency to sign off on the acquisition after the announcement six months ago. Microsoft will pay $26 billion for the company. Microsoft will have to make some changes to Windows to insure they are not forcing LinkedIn on new PC buyers. The company will have to continue allowing other developers to interface with the Office Add-in program that allows developers to integrate with Outlook and Office. Other developers will be able to continue marketing their products in the Office Store. Microsoft has to allow PC builders to "opt-out" of including LinkedIn software in the version of Windows they sell with their PCs. Any future Windows users must be able to seamlessly uninstall any LinkedIn software and not be repeatedly asked if they want to reinstall it.

Toll Brothers (TOL) reported earnings of 67 cents that missed estimates by a penny. Revenue of $1.86 billion beat estimates for $1.79 billion. For the full year, they reported earnings of $2.18 and revenue of $5.17 billion. Toll said the weak earnings were due to a $121.2 million warranty charge for some older stucco homes. The company said they expected to deliver 1,000-1,250 homes in the current quarter with an average price of $750,000-$780,000. For the full year for 2017, they expect 6,500 to 7,500 homes with a selling price of $775,000-$825,000 with gross margins around 25%. Shares spiked 5% on the guidance.

Netflix (NFLX) shares soared after Evercore ISI upgraded the stock saying the competition it feared never appeared. "Netflix seems to be in a good position now." The analyst said many of the announced over-the-top (OTT) competitors had either been delayed or were finding it hard to scale in the current environment. The deluge of original Netflix content in 2017 was going to be insurmountable. Netflix is producing more than 1,000 hours of original content in both movies and TV shows. That is up from 600 hours in 2016. Their content budget for 2017 is $6 billion. They are creating an athletic competition show called "Ultimate Beastmaster" that will have separate versions in six countries with local languages.

There are continuous rumors that Disney, Amazon or Apple will eventually buy Netflix if for no other reason than to prevent them from being a competitor in the decades ahead. Amazon and Disney are in the content generation business and they could eliminate their biggest opposition by making the acquisition.

Pandora (P) saw another lift today after Oppenheimer upgraded them to outperform with a price target of $21. The analyst says a buyout by SiriusXM is a legitimate possibility. This was speculated last week as well and shares rallied 15% on the call. Today's gain added another 3%. The SiriusXM CEO admitted he has made a new contact with Pandora about the potential.

Shares of Nike (NKE) were downgraded by Cowen & Company saying they were losing market share to Adidas and Under Armour. The preference for Nike shoes has declined from 55% to 44% in the latest survey. Cowen also said promotional discounts for Nike branded products appear "elevated" with 25% discounts at Dicks Sporting Goods and Kohls. The analyst warned of a high probability for a guidance cut for 2017. Shares fell slightly on the news.

After the bell Western Digital (WDC) raised guidance saying it now expected current quarter revenue to be $4.75 billion, up from prior guidance of $4.7 billion. The company announced it was shipping its new 12TB and 14TB hard drives along with 256GB MicroSD cards. They said acceptance of their new products was very strong and a new cross license agreement with Samsung would also increase revenue. Shares spiked 3% in afterhours to $67. WDC is a current long position in this newsletter.

Chipotle Mexican Grill (CMG) saw its shares fall 7% today after the co-CEO said they were nervous about hitting the guidance they gave in October. He said the company was not satisfied about their rate of recovery and the quality of the restaurant experience. Analysts were quick to slash forecasts. Instinet cut their Q4 forecast from $1.30 to 95 cents and the full year from $1.91 to $1.46. CMG management also said about half of their 2,000 stores would be graded C, D or F on customer service.

Boeing (BA) recovered from an early decline after Trump said the contract to produce the two new Air Force One planes was overpriced and should be cancelled. The reported price for two 747-8 custom built planes is around $4 billion. However, these are not just normal 747 aircraft. They have complete electronic shielding to protect them from EMP and nuclear blasts. They have the equivalent of armor plating around sensitive systems to make them more survivable from external threats. They have antimissile components and nearly as much communications gear as Cheyenne Mountain to enable the president to talk to anyone on earth at any time. The electrical and fuel systems are fully redundant. There is a complete operating room in the lower level in case someone is injured in an attack. There is a communications cabin, kitchen, crew quarters including his protection detail and more than 4,000 sq ft of living/meeting space. Each of the two planes is custom built to Air Force specifications and is not expected to be delivered until 2023 or later.

The Air Force said the 2016 commitment is $170 million for analysis and design. The budget for 2017 is $2.9 billion once the design is accepted and construction is expected to start in 2019. The current Air Force One plane and backup went into service in 1990 and are approaching the end of their service life after thousands of flights and many millions of miles. They need to be replaced and I am sure Boeing will continue with the contract. The comments from Trump are the first salvo in a long contract negotiation process.

Crude prices are holding over $50 but just barely after a 2% decline today. The OPEC news is fading but we could get some more headlines on Friday when they meet with the non-OPEC producers to firm up any proposed cuts. This meeting may not end well.


The S&P closed within 0.12 points of a new closing high. The index closed at the high for the day and that was a change in the recent trend. It would appear the market has shaken off the recent weakness but we are still facing some significantly overbought levels. The markets my go higher from here but they will not likely go in a straight line. The next 17 trading days are likely to be choppy with an upside bias.

For tomorrow, the prior high at 2,213.35 is the target and hopefully it does not produce a sell the news event. Support is well back at 2,190 and it held on two days last week.

The Dow hit resistance at 19,250 and came to a dead stop. The 35-point gain was driven by a 23-point lift from Goldman Sachs. If traders decide to start taking profits in Goldman the Dow is going to find it tough to move higher. Goldman's weighting in the Dow will be a major drag, just like it has been a huge lift on the way up.

Support from last week is in the 19,135 range and resistance if 19,250.

The Nasdaq Composite squeezed over the 5,325 resistance level but only by 8 points. That is still within range and can provide some downward pull in a weak market. Overhead resistance remains the 5,400 level and the historic highs. The big cap techs were in the wrong column today but the individual losses were minimal.

The small cap Russell 2000 rebounded back to a new high in only two days after a four-day decline. The small caps were the strongest sector today and that is very positive. As long as they continue to make new highs, the broader market will not crash.

Twenty years ago today Alan Greenspan uttered the words "irrational exuberance" saying external factors were driving the market to unreasonable gains. It would appear we are back in the irrational exuberance camp again with all manner of investors and analysts almost giddy with excitement over the potential for corporate tax cuts and the removal of a decade of regulatory burdens. Greenspan said today he would like nothing better than to see Dodd-Frank disappear. That bill was originally 2,300 pages with 293 new regulations. However, the bill is being modified by regulators almost daily and the page count is reportedly up to 80,000 pages and the overhead to banks and institutions is massive.

We are at the point where everyone is starting to project their hopes and dreams on the Trump administration but we are a long way from the reality of what will appear. I believe the market will finish the year higher, but I also believe January could be ugly. Enjoy the rally while it lasts and then get ready for a buying opportunity in 2017.



Don't forget to reward yourself with our 2016 End-of-Year Annual Subscription Sale!  You’ll save $1,147 when you renew now.

The options market isn’t waiting for you.  And you shouldn’t wait to keep Option Investor coming at the lowest prices you’ll see for at least a year! There isn’t a minute to spare. 
Order now.

Renew for as little as $495,
ONLY $1.35 per day

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now


New Option Plays

Good Portfolio

by Jim Brown

Click here to email Jim Brown

Editors Note:

The portfolio is in a safe place after the limited selling last week and the rebound to new highs. I would like to keep it that way. In my scans today I did not see anything that jumped out at me with a screaming buy signal. There is no reason to just keep adding plays just because the market is open. Today was a promising gain but the S&P did stall right at the old high. There is always time to add new plays if the rally continues.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Another Goldman High

by Jim Brown

Click here to email Jim Brown

Editors Note:

Goldman Sachs added roughly 23 Dow points to lift the Dow 35 points to a new high. Eventually this Goldman rally is going to fail and the Dow will lose its major support. Since the election, Goldman has added more than 441 points to the Dow with the stock's $57 point gain. Only three other Dow stocks gained more than 75 cents for the day and only Goldman gained more than $1.

I am not complaining but everyone should be very aware of what is supporting the Dow and therefore the market. The S&P closed at 2,212.23 and only -0.12 below its historic high close. There is bullish activity returning to the market AND today we actually saw the S&P close at its highs instead of its lows. That is a positive break in the recent trend.

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

ADP - Automatic data Processing

The long call position was entered at the open.

VXX - Volatility ETF

The long put position was entered at the open.

FFIV - F5 Networks

The long call position remain unopened until a trade at $142.25.

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

ADP - Automatic Data Processing - Company Profile


No specific news. Gap up at the open but faded with the market.

Original Trade Description: December 5th.

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.

Earnings Feb 1st.

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.

Shares took profits last week from a very nice climb and could be ready to try for a new high.

There is resistance at $97 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 12/6/16:

Long Feb $97.50 call @ $2.10, see portfolio graphic for stop loss.

FFIV - F5Networks - Company Profile


No specific news. Spiked at the open, faded with the market.

The position remains unopened until a trade at $142.25.

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.

With a FFIV trade at $142.25

Buy Jan $145 call, currently $3.15, initial stop loss $137.25.

FLOW - SPX Flow Inc - Company Profile


No specific news. New 52-week high close.

Original Trade Description: November 30th.

SPX FLOW, Inc. provides various engineered solutions worldwide. The company engineers, designs, manufactures, and markets products and solutions used to process, blend, filter, dry, meter, and transport fluids with a focus on original equipment installation, including turn-key systems, modular systems, and components, as well as aftermarket components and support services. It operates through three segments: Food and Beverage, Power and Energy, and Industrial. The Food and Beverage segment offers mixing, drying, evaporation, and separation systems and components, as well as heat exchangers, and reciprocating and centrifugal pump technologies primarily under the Anhydro, APV, Bran+Luebbe, Gerstenberg Schroeder, LIGHTNIN, Seital, and Waukesha Cherry-Burrell brands. The Power and Energy segment provides pumps, valves, and related accessories, principally for use in oil extraction, production, and transportation at wells, as well as for pipeline applications under the APV, Bran+Luebbe, ClydeUnion Pumps, Copes-Vulcan, Dollinger Filtration, LIGHTNIN, M&J Valve, Plenty, and Vokes brands. This segment primarily serves customers in the oil and gas industry, as well as in nuclear and other conventional power industries. The Industrial segment offers air dryers, filtration equipment, mixers, pumps, hydraulic technologies, and heat exchangers under the Airpel, APV, Bolting Systems, Delair, Deltech, Hankison, Jemaco, Johnson Pump, LIGHTNIN, Power Team, and Stone brands. This segment principally serves customers in the chemical, air treatment, mining, pharmaceutical, marine, shipbuilding, infrastructure construction, and general industrial and water treatment industries. Company description from FinViz.com.

SPX Flow was spun off from SPX Corp (SPXC) in September 2013. Shares sold off from the $40+ opening to $15 over the next six months. After a quick rebound to $31 in May the stock has moved sideways for the rest of the year.

They reported earnings of 34 cents that beat estimates for 33 cents. Revenue of $466.8 million narrowly missed estimates for $467.7 million. They guided for full year earnings of $1.27-$1.47 with revenue of $2.0 billion.

The CEO said the company had made good progress in its restructuring efforts post split. Revenue was light in Q3 because of a delay in shipping some orders in the energy sector. They are looking forward to a rebound in the energy sector and manufacturing in general.

Earnings Feb 1st.

Shares closed right at 52-week resistance at $31.50 and are poised for a breakout, market permitting. The stock gained $1 today in a weak market.

Position 12/1/16:

Long March $35 call @ $1.51, see portfolio graphic for stop loss.

NVDA - Nvidia Corp - Company Profile


No specific news but another nice gain. Louis Navellier just recommended Nvidia saying they were a leader in their sector with rapidly growing earnings and only 1 of seven semiconductor stocks that pays a dividend.

Original Trade Description: December 3rd.

NVIDIA Corporation operates as a visual computing company worldwide. It operates in two segments, GPU and Tegra Processor. The GPU segment offers processors, which include GeForce for PC gaming; Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications; Tesla for deep learning, accelerated computing, and general purpose computing; and GRID for cloud-based streaming on gaming devices. The Tegra Processor segment provides processors that integrate a computer onto a single chip under the Tegra brand name; DRIVE automotive computers, which offer supercomputing capabilities; and tablet and portable devices for mobile gaming under the SHIELD name. The company's products are used in gaming, professional visualization, datacenter, and automotive markets. It sells its products primarily to original equipment manufacturers, original design manufacturers, system builders, motherboard manufacturers, add-in board manufacturers, and retailers/distributors. Company description from FinViz.com.

Nvidia is taking market share from every chipmaker in the market. Their graphics cards are the hottest things going and every model sells out and are resold for higher prices in the secondary market. Their GPU products are the fastest processors available for extreme computing environments, monster applications, data mining, machine learning and artificial intelligence. One recent benchmark showed an Intel server would take over 2,000 hours to process one massive computation program. A Nvidia GPU server only took 30 hours. Amazon and other cloud providers are buying 1000s of GPU equipped servers to handle massive cloud applications.

They are also moving into a stronger position in the self driving vehicle sector with superfast visual and logic chipsets that can 1000s of inputs in a second to help the car navigate and avoid collisions.

Every time Nvidia announces a new product they are years ahead of the competition.

Earnings Feb 9th.

Shares are up +165% in 2016 alone but they are far from done. They spiked 10% after earnings in early November and held the highs for two weeks despite market volatility in tech stocks. On Thursday, Nvidia shares finally cracked when the Nasdaq fell -77 points for the second consecutive decline of more than 1%. On Friday, shares posted a gain and showed no signs of further weakness. Over the last two weeks, MKM Partners upgraded them to a $106 price target and Needham raised their target to $100. The problem is that most analysts do not understand the technological revolution underway at Nvidia.

Options are not cheap but you sometimes get what you pay for. You can spread it to reduce the cost but I am not going to recommend that today. As the stock moves higher we can spread later once the distant strikes become more valuable.

Position 12/5/16:

Long Feb $95 call @ $5.03, see portfolio graphic for stop loss.

SMG - Scotts Miracle Grow - Company Profile


No specific news. Higher at the open but faded with the market.

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


Nice gain ahead of the analyst meeting. WDC announced initial deliveries of their 12TB and 14TB Helium filled hard drives. They are also shipping a 256GB MicroSD card that can hold up to 60 hours of Full HD video. After the close they raised guidance and shares spiked to $67 in afterhours.

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


The put position was entered at the open. The VXX fell to a new historic low.

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.

Position 12/6/16:

Long March $24 put @ $2.36, see portfolio graphic for stop loss.

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now