Option Investor

Daily Newsletter, Monday, 12/12/2016

Table of Contents

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

Market Wrap

FOMC Week, That Say's It All

by Thomas Hughes

Click here to email Thomas Hughes


The FOMC meets this week, odds for a rate hike are running near 100%, the only thing now is to see if they do what we think they will; and the market is waiting. Today's action was primarily driven by Trump; his one China policy comments, China's response and a Tweet about the F-35 program only the latest. The S&P 500 and Dow Jones Industrial Average both set new intraday highs, the Dow at least was able to hold them. Other indices saw small pull backs, nothing major, ahead of the two day FOMC meeting and much anticipated 2nd rate hike, coincidentally 1 year after the first since the historic Global Financial Crisis (if they do it).

Global indices were a bit mixed today. In Asia Japanese stocks moved up to leave the Nikkei at a new 1 year high while new regulations in China caused indices there to sell off by roughly -2%. The Chinese national insurance regulator says it will curb "barbaric stock purchases" by the countries insurance carriers. European indices were also mixed but flat on the day as traders wait on the FOMC. As of last look the CME's FedWatch Tool is still showing a 95% chance of rate hike at this meeting. The question now is, how high will they raise rates, what else might they do and what will they say about the timing of the next rate hike?

Market Statistics

Futures trading indicated a flat market all day today. The trade was flattish, bobbing along just above break even, and held that into the opening bell. There was no economic data released today and no earnings report of note in the early hours to move the market. Trading at the open was a little wild, the indices first moved a hair lower to touch support, then bounced higher to hit new all time highs for the SPX and DJI and then fell back to the early low, and then a little lower, to trade sideways for the rest of the afternoon.

Economic Calendar

The Economy

No data today but several important bits of the puzzle will be delivered this week. Most important is the two day Fed meeting which begins tomorrow. The FOMC is expected to raise rates by 25 basis points and possibly give an indication of when the next will come. There has been no change to their rhetoric, that the pace will be gradual, but if that means it will be another year before the next hike we don't know it yet. The CME's FedWatch tool shows a roughly 50% chance for the third post-Financial Crisis rate hike by next summer. Also on tap this week; Retail Sales, CPI, PPI, Business Inventory, Industrial Production, Philly Fed, Empire Manufacturing and Housing Starts/Building Permits.

Moody's Survey Of Business Confidence fell -1.1% in the last week to hit 28.5. this is the lowest level in just over a month but still off the summer bottoms. Mr. Zandi says that sentiment is less upbeat than it was but is still positive and shows an economy expanding at its potential. Current and future outlook have both diminished a bit but are positive.

The third quarter earnings cycle has come to a close, the final rate of earnings growth is 3.1%, snapping the 6 quarter earnings recession. Looking forward, 3 companies have reported for the 4th quarter and 5 are due to report this week. Of those who have reported 2 have beaten on earnings expectations and 1 has beaten revenue expectations. The blended rate for the 4th quarter is now 3.0%. If the trends run true this quarter the final rate of earnings growth will be in the range of 7% to 8%. Full year 2016 outlook is holding steady at 0.1% but likely to rise by the end of the 4th quarter season.

Looking to next year outlook remains positive. Full year 2017 earnings growth is expected to come in around 11.4%, likely higher, with 11.3% in the 1st quarter and 10.5% growth in the 2nd.

The Dollar Index

The Dollar Index pulled back a bit today, retreating from just below the current long term high. The index fell about -0.60% to trade near the middle of the November/December range as the market awaits the Fed. The expectation for a rate hike is huge, if they don't deliver or don't sound hawkish enough it could send the index plunging. First target for support in such a situation is near 100.50, maybe as low as 100, a break below this level would be bearish and could take the index down to 98.65 or lower. However, the prevailing expectation is not only for the hike, but also for more hikes in the future which is overall bullish for the dollar. Resistance is near 102, a break above this level would be bullish and could take the index up to $103.50 or higher.

The Oil Index

Oil prices got another OPEC induced boost today as Russia and the Non-OPEC OPEC bloc came on board the historic, and largely ineffective, deal to support prices. Russia's agreement is a bit smaller than what was originally proposed and with the 1.2 million BPD cut by OPEC itself doesn't even hit the 2 million BPD mark. In any event, I expect this news to support prices in the near term but leave them vulnerable to correction in the short to long. Negative factors overshadowing the deal: oversupply still reigns, demand growth is still tepid, US rig counts are rising and we have to trust that those in agreement with the deal will actually cut production.

The Oil Index jumped nearly 3% at the open, gapping up to a near 18 month high, only to sell off throughout the day. Despite the selling the index was able to close with a gain, near 0.35%, but the candle signal looks pretty ominous, at least for the short term. The candle is long and black and comes at a possible peak/top of a rally driven more by talk and hope than anything else. The index may continue to rise, and probably will based on earnings growth outlook for next year, but in the short term it looks like there will be some profit taking, consolidation and maybe correction before more new highs are set. Resistance is just shy of 1,300, first target for support is 1,250.

The Gold Index

Gold prices were flat if a bit choppy, trading around the $1160 level. Spot prices are down on FOMC outlook and dollar value and could go lower. At this time the risk is that the FOMC won't deliver and the dollar will fall. Support for gold is in the $1150 to $1160 range, a break below here would be bearish. Resistance may be found at $1175 but more likely at $1200.

The gold miners rose in today's session but I think it more a lack of sellers than a presence of buyers. The Gold Miners ETF GDX gained nearly 0.75% at the close, creating a small doji candle in the lower half of the previous days black candle. The ETF is still in consolidation, trading sideways within a range bound by support near $20 and resistance near $22. The indicators remain mixed and consistent with a range bound asset. Where the ETF goes next is entirely dependent on the FOMC, the dollar and gold prices; a break to the upside may find resistance at $25, a break to the downside may find support near $16.50.

In The News, Story Stocks and Earnings

Today's Trump Tweet victim is Lockheed Martin, maker of the ill fated and over budget F-35 program. In today's Tweet Trump says the program is way over budget, out of control and it, along with other costs, will be trimmed come January. The news shook the stock, as well as the entire defense complex, but is likely setting up buying opportunities as Trump is also on track to increase defense spending overall. Shares fell -2.5% in the premarket, doubled the loss during the open session, recovered half of the total loss and closed with a small white bodied doji candle, hammer-like, which found support, not coincidentally, at the $250 level and the top of a gap opened a month ago. The stock is now trading about -7% off of the recently set all time high.

Chipotle Mexican Grill got a boost today when it announced that there would no longer be two CEO's. Monty Moran will step down as CEO and from the board, retiring completely from the company in 2017, and will be replaced by co-CEO Steve Ells. Ells will stay on as chairman of the board. The move is expected to help remove unnecessary "complexity" from company operations, both in the E suite and in the stores, and facilitate recovery following the e-coli outbreak earlier this year. Shares of the stock responded well to the news, gaining 3.5%.

The VIX gained 7.25% today but remains low relative to the past month, the short and the long term. The index is hovering 12.50 and below the moving average, consistent with periods of upward trend, but may be bottoming. The indicators are both diverging from recent lows and the stochastic is firing a weak buy. The caveat is that this set-up could also precede another push to test support, it just depends on which way sentiment turns. The indices are set up for a pull-back, with the FOMC this week I wouldn't be surprise to see it happen, and this could result in a test of the short term moving average for the the VIX, near 13.50, with a chance for a move up to 15.

The Indices

The indices are set up for a test of support, pull-back and possible correction. Today led by the Dow Jones Transportation Index. The transports fell -0.90%, creating a smallish black bodied candle sitting on the previous and recently broken all time high. This action is not unexpected following a break out, the question now is will support hold at this level or will the test be deeper. The indicators are divergent from the current high, consistent with a test, but give no indication of how deep it may be. The upshot is that the indicators are also consistent with a strong uptrend so any pull back that does occur is a buying opportunity, more likely than not. Support is at current levels, near 9320, a move below here could go as low as 9,000, about 3.5%, before hitting the next target for solid support.

The tech heavy NASDAQ Composite made the next largest decline today, about -0.60%. The index created a small black candle sitting on support at the previous all time high (the one set last week). The indicators are showing some wicked divergence here and suggest that we will see some more testing of support, if not a move lower. A break below current levels would have a target near 5,300 or 5,250, about -2.7%, with a possible move down to 5,100, about -5%.

The S&P 500 made the third largest decline, about -0.11%, and created a small spinning top doji. The index created a new all time intra-day high today, 2264.03, and looks poised to do one of two things; extend the rally or pull back to test support. First target for support is near 2,225 and a long term up trend line, the next is the recently broken previous all time high. The indicator are a bit weak but over all bullish, there are however divergences present which support the idea a pull back to is on the way.

The Dow Jones Industrial Average managed to eke out a gain today and close with a new all time high, 19,796.43. The index created a small white bodied spinning top, at the all time high, and appears to be drifting higher on unspent momentum. The indicators are both bullish if weakening over time and on the rise, suggesting that there is some room left to run. The caveat is that there are divergences present that suggest the rally is losing strength and susceptible to correction. Targets for support should the index begin to correct are 19,000, -4%, and 18,500, -6.5%.

The indices are trading at or near all time highs after a rally lasting a little more than 1 month. It is no surprise to see them poised for consolidation/correction and also no surprise to see them this way ahead of the FOMC meeting. Where they go from here, in the near term, will be heavily dependent on the FOMC meeting and policy statement. Where they go in the longer term is more dependent on the economic outlook, positive, and the earnings growth outlook, also positive and expanding over the next 5 quarters. If there is a pull back to support I think there is a high likelihood it will be the entry point for a long term index position I have been waiting oh so long for, fingers crossed.

Until then, remember the trend!

Thomas Hughes



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New Option Plays

Toll Takers

by Jim Brown

Click here to email Jim Brown

Editors Note:

Companies that charge a small fee every time their service is used are called toll takers. The CME Group is a toll taker. They charge a fee every time a futures contract is bought or sold.


CME - CME Group - Company Profile

CME Group Inc., operates contract markets for the trading of futures and options on futures contracts worldwide. The company offers a range of products across various asset classes, based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities, and metals. Its products include exchange-traded; and privately negotiated futures and options contracts and swaps. It executes trade through its electronic trading platforms, open outcry, and privately negotiated transactions, as well as provides hosting, connectivity, and customer support for electronic trading through its co-location services. The company also provides clearing and settlement services for exchange-traded contracts, as well as for cleared swaps; and regulatory reporting solutions for market participants through its global repository services in the United States, the United Kingdom, Canada, and Australia. In addition, the company offers a range of market data services, including live quotes, delayed quotes, market reports, and historical data service, as well as index services. CME Group Inc. serves professional traders, financial institutions, institutional and individual investors, corporations, manufacturers, producers, governments, and central banks. The company was formerly known as Chicago Mercantile Exchange Holdings Inc. Company description from FinViz.com.

The Chicago Mercantile Exchange is in the right place at the right time. Trading in commodity and futures contracts of all kinds is exploding. On December 1st the volume of energy futures contracts hit a record 4.5 million contracts. That broke the prior record of 3,832,201 contracts from February 11th. With crude futures in the spotlight after the OPEC production cuts and prices changing rapidly, that record is not going to last long. On November 11th the CME set a new record for single-day volume in all contracts of 44,516,949 contracts. The prior record was 39,567,064 so that was a major beat. Globex electronic contracts traded 39,997,534 contracts, also a record. The CME collects a fee on every contract traded.

Earnings in 2016 are expected to be at record levels and 2017 is likely to be even higher.

Earnings January 26th.

The equity volume over the last month has been huge and futures volume is keeping pace. The CME is expected to post strong earnings so there is likely to be some run up into the event, market permitting.

Shares spiked back in early November after the CME declared a 60 cent dividend payable Dec 29th to holders on Dec 9th. We are already past that date and the stock did not decline materially. That was also when they announced the record contract volume.

Going long ANY stock over the next three weeks is risky. However, any selling should be muted because taxes are expected to be lower in 2017 so most heavy hitters will be holding until January to get the benefit of any lower tax rate. At least that is the theory.

With a CME trade at $123.50

Buy March $125 call, currently $2.75, initial stop loss $119.75.


No New Bearish Plays

In Play Updates and Reviews

Foundation Cracking?

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow was the only index to post a gain and that was due to JNJ and XOM. Are foundational cracks forming? The Russell 2000 lost 15 points and the Dow Transports -85. The Nasdaq Composite lost 32 points and that was 18 points off the low. Market breadth was decidedly negative. The rally may be reaching the end of its run but there are still two more weeks of trading in 2016.

The sharp drop on the Nasdaq at the open plus a downgrade on Nvidia knocked us out of that stock and Western Digital. We are likely to see some more stops in the week ahead unless the dip buyers show up in volume. Today's dip buying was lackluster.

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


Long 1/2 position on DIA puts. Enter second half with trade at $199.

UNH - UnitedHealth

The long call position remains unopened until a trade at $160.25.

ESNT - Essent Group

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

ADP - Automatic Data Processing - Company Profile


No specific news. Only a minor decline. Holding at the new high.

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.

ESNT - Essent Group Ltd - Company Profile


No specific news. Minor gain in a weak market.

Original Trade Description: December 10th.

Essent Group Ltd., through its subsidiaries, provides private mortgage insurance and reinsurance for mortgages secured by residential properties located in the United States. The company also provides information technology maintenance and development services; customer support-related services; and contract underwriting services. It serves originators of residential mortgage loans, such as regulated depository institutions, mortgage banks, credit unions, and other lenders. Company description from FinViz.com.

Essent reported earnings of 65 cents compared to estimates for 58 cents. Revenue was $121.3 million. For 2015 they saw earnings rise 65.1%. The current growth estimate for 2016 is 37.8%. While that is less than 2015 rate the relatively young company is still in a growth spurt. It is easy to show big percentages in the early years since there were little to no earnings when you started. The company began in 2008

Over the last month analyst consensus estimates have risen from 60 to 62 cents and full year estimates have risen from $2.27 to $2.34.

Shares have risen $5 over the last $3 weeks but not at the frantic pace of some other high visibility stocks. Essent is moving slowly higher a few cents a day. When the eventual profit taking appears in the broader market, Essent could be less impacted than some other stocks.

Options are cheap and we can buy well into the future for just a couple dollars.

Position 12/12/16:

Long April $35 call @ $1.82, see portfolio graphic for stop loss.

FFIV - F5Networks - Company Profile


No specific news. No material movement. Waiting for a breakout over $144.

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 12/8/16 with a FFIV trade at $142.25

Long Jan $145 call @ $3.80, see portfolio graphic for stop loss.

FLOW - SPX Flow Inc - Company Profile


No specific news. Minor profit taking.

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


Pacific Crest warned there could be some dark clouds on the horizon for Nvidia based on a survey of "first tier" graphics card manufacturers in Asia's supply chain. The firm said the survey suggested there was "excess inventory" but if that was the case why are the cards on sold out all over the USA? They said GeForce GTX 1080 prices had fallen about 10%. Pacific Crest said Nvidia's high prices would ease any earnings pain. Jefferies reiterated a buy rating saying the business was still on track and the GPU market was actually growing rapidly and faster than expected.

We were stopped out at a breakeven on the $4.50 downgrade drop at the open. I will look for a bottom to form in January and reenter the position. Nvidia is the new Intel for this decade. Prices will go higher.

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:

Closed 12/12/16: Long Feb $95 call @ $5.03, exit $5.15, +.12 gain.

SMG - Scotts Miracle Grow - Company Profile


The company announced an offering of $250 million in senior notes at 5.2% due 2026. The proceeds will be used to reduce borrowings under its senior secured revolving credit facility. Shares spiked to a new high at the open but faded with the market back to $96 and breakeven for the day. Great 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.

Update 12/8/16: Shares were upgraded by BAML from underperform to buy and raised the price target from $80 to $105 saying the stock has more room to run. Shares spiked $4 on the upgrade.

Earnings Feb 2nd.

Position 11/14/16:

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

UNH - UnitedHealth - Company Profile


No specific news. Shares dipped slightly but rebounded to close just under resistance.

This position remains unopened until a trade at $160.25.

Original Trade Description: December 7th

UnitedHealth Group Incorporated operates as a diversified health and well-being company in the United States. The company's UnitedHealthcare segment offers consumer-oriented health benefit plans and services for national employers, public sector employers, mid-sized employers, small businesses, individuals, and military service members; and health care coverage, and health and well-being services to individuals aged 50 and older addressing their needs for preventive and acute health care services. It also provides services dealing with chronic disease and other specialized issues for older individuals; Medicaid plans, Children's Health Insurance Program, and health care programs; and health services, including commercial health and dental benefits. This segment serves through a network of 1 million physicians and other health care professionals, as well as approximately 6,000 hospitals and other facilities. Its OptumHealth segment offers health management services, including care delivery and management, wellness and consumer engagement, distribution, and health financial services. This segment serves individuals through programs offered by employers, payers, government entities, and directly with the care delivery systems. The company's OptumInsight segment provides software and information products, advisory consulting services, and business process outsourcing and support services to hospitals, physicians, commercial health plans, government agencies, life sciences companies, and other organizations. Its OptumRx segment offers pharmacy care services and programs, including retail pharmacy network management, home delivery and specialty pharmacy, manufacturer rebate contracting and administration, benefit plan design and consultation, claims processing, and clinical program services, such as formulary management and compliance, drug utilization review, and disease and drug therapy management. Company description from FinViz.com.

UNH will have about $184 billion in revenue in 2016 to put it at number six on the Fortune 500 list. With its broadening of scope using its various Optum programs it is maximizing profits by widening the service component of its business. Here is an excellent article on why UNH will be the most profitable. Amazon of Healthcare

I am not going to go into an in depth explanation of UNH. That article I referenced has plenty of information why UNH should be a long term holding of any investor.

Earnings January 17th.

I wanted to play UNH last week when it was at $152 but it had resistance at $153 and I decided to wait another day to see if that resistance was broken. Shares gapped up to $158 at the open the next day and ran to $162.50 over the next four days. Now that big gain has been digested and shares pulled back to $156 before adding a couple dollars on Wednesday. I believe the UNH rally will continue for the reasons listed in that article above. I am willing to take a shot here that the market rally also continues even if Wednesday's futures related spike fades in the days ahead. We have 16 trading days until 2017 and we should close the year at higher levels.

With a UNH trade at $160.25

Buy Jan $165 call, currently $2.45, initial stop loss $155.85.

WDC - Western Digital - Company Profile


No specific news. Shares dropped $2.60 at the open and stopped us out for a nice gain. It the stock returns to uptrend support ($62) we will reenter.

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.

Update 12/7/16: Shares spiked $5 higher after the company raised guidance at Tuesday's analyst meeting. The company said Q4 earnings would be in the range of $2.10-$2.15 compared to prior guidance of $1.85-$1.95.

Position 11/14/16:

Closed 12/12/16: Long Jan $62.50 call @ $2.20, exit $4.75, +2.55 gain.

BEARISH Play Updates (Alpha by Symbol)

DIA Dow ETF - ETF Profile


Minor gains today thanks to JNJ, XOM, CVX and TRV. The Dow was the only index that posted a gain and the market is starting to show some weakness. We entered a half position on the puts at the open. We will enter the second half with a trade at $199.

Original Trade Description: December 7th

The SPDR® Dow Jones® Industrial Average ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average.

Remember Dow 10,000? Traders talked about it for weeks. When it was finally hit, they were passing out Dow 10,000 hats on the floor of the NYSE for a week. That was December 11th 2003. It was a big milestone for the market.

Now 13 years later we are about to double that with Dow 20,000. Given the place on the calendar, the massive post election rally and the potential for normal profit taking in January, the Dow 20,000 touch could be a massive sell on the news event.

However, we are only 386 points way and it could happen as soon as next week. The Fed rate announcement on Wednesday could either cripple that potential or accelerate it if the Fed maintains a dovish posture on future rate hikes. I believe we will hit Dow 20K before the end of December. When that happens I want to be short the DIA ETF and plan on holding it through January.

I am choosing the Dow because it is the most overbought and could produce the biggest percentage move. Just look at Goldman's chart and the profit that needs to be removed there.

Because there will be plenty of other traders thinking along the same lines I want to enter the put position at 19,900 or $199 on the DIA ETF. I know I am jumping in front of a speeding train to enter a short position on a runaway market but the potential is very high for a good trade.

Position 12/12/16:

1/2 position: Long Feb $195 put @ $3.30, no initial stop loss.

With a DIA trade at $199.00 buy the second half.

VXX - VIX Futures ETF - Company Profile


I am recommending we close the position. The chances for a market decline over the next five weeks are increasing and it could be severe once we are in January. When that decline appears, I will reinstate the position at the VXX highs.

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.

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