Option Investor

Daily Newsletter, Monday, 1/9/2017

Table of Contents

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

Market Wrap

Treading Water, Waiting

by Thomas Hughes

Click here to email Thomas Hughes


The indices tread water, once again, just below current all time highs waiting on earnings, the economy, the FOMC and Trump's inauguration. Outlook is mixed, depending on who's opinion you are reading, I still see expanding earnings growth and expanding economic growth leading the market. This week's action may be a little muted due to a light economic calendar and the Friday kickoff to earnings season. FYI, Alcoa no longer starts off the "official" season, its release date has been pushed back 2 weeks due to the recent split into two publicly traded companies.

International markets were mixed, hovering near the flat line with most closing with gains/losses in the range of 0.25% to 0.5%. In Asia, trading was affected by 3 things. First, Japanese markets were closed for holiday. Second, a lower forecast for iron ore. Third, evolving Trump/China rhetoric and in particular the battle over the One China policy playing out in social media and tabloid venues. European indices were sent skittering in the wake of comments from British PM May to the affect that the UK was in fact going to leave the EU.

Market Statistics

Futures trading indicated a flat to slightly negative open all morning. Trading was quiet, there was little in the way of real news, economic data or even market moving headlines to generate activity. The open was calm, the indices opened with losses in the range of -0.1% and moved sideways from there with choppy action. Tepid sideways trading persisted the entire day.

Economic Calendar

The Economy

No economic data today and very little this week. The reports that we do get will be dominated by Friday's lineup which includes retail sales for December, Michigan Sentiment, Empire Manufacturing and PPI. Tomorrow we'll get the JOLTs report; within that look for the number of job openings month to month and year to year along with the quits rate. The number of job openings is important, but more important is the state of employee confidence as displayed by the quits. Quits have been running steady at/near long term highs, a sign that workers are confident of finding new and/or better work.

The Moody's Survey of Business Confidence has spiked in the past 3 weeks, gaining another 0.3% in the last week to bring the 3 week total to +3.9. This is an 8 month high and a sign of rebounding confidence among global businesses. Mr. Zandi says that business has started 2017 off strong, led by improvements in assessment of current and future conditions.

Earnings season is about to get started in earnest. So far about 4% of the S&P 500 has reported, bringing the blended rate for 4th quarter earnings growth down another tenth to 3.0%. Of those who have reported 73% have beaten on the earnings end, consistent with the averages, but only 36% have beaten revenue estimates. The average is closer to 55%, the decline could be a sign of a number of thing during the period, some good some bad, but it is still too early to tell. On a positive note, full year 2016 earnings growth estimates have risen by a tenth to 0.2%.

Looking forward the outlook remains positive although estimates continue to fall in revisions. First quarter 2017 estimates for earnings growth have fallen to 11%, second quarter to 10.5%, but both are still strong. Full year 2017 is also strong, and steady, at 11.5%. Based on recent trends I would expect to see these numbers fall a bit before the end of the but there are changes at had. The FOMC is raising interests or one, for another Trumponomics. Both of these may induce some volatility in the numbers, possibly the beginning of a cycle of upward revisions. Now that we've exit the earnings recession and are looking forward toward growth upward revisions to earnings are the next bull market trigger I am looking for in this data.

The Dollar Index

The Dollar Index closed the day with some small losses following a mixed session. The index was first up a bit on last week's NFP report but then later fell to profit taking amid FOMC speculation to close with a loss near -0.20%. The index created a small black candle squeezed between resistance and the rising support of the short term 30 day moving average. The moving average has provided support three times in the last few months and is the established trend at this time. Both MACD and stochastic are bearish, if weakly so, and suggest that support will continue to be tested in the near term. A break below the moving average could be bearish but I'd be cautious about that until the FOMC meeting. Support is currently at/near today's close around the $102 level. A break below here could go as low as $100.49.

The trend is driven by strengthening economic data, the FOMC and Trumponomic outlook, all of which are highly questionable. It is these questions that have caused the current pull back from support, their answers will drive the market going forward. This week is light on all three, next week not so much. The economic calendar heats up for one thing, there is an ECB meeting for another and Trump is inaugurated to top it all off. Then, two weeks later, the FOMC meeting. At this time there is only a 2% chance of February rate hike. The ECB, they are not expected to do anything either, a change to their recently stated stated policy of tapering could roil the market further.

The Gold Index

The gold rebound continues. Spot gold jumped another 1% to trade at $1185 and a 6 week high. The rebound is driven by dollar weakness, an uncertain rate hike time line and a change in economic conditions and so may continue until we get firmer data, some action from Trump or the FOMC. Resistance is likely at $1200, a break above that could indicate a shift in sentiment toward gold.

The Gold Miners ETF GDX gained 1.25% but created a black bodied candle with visible lower shadow, the second day of listless action following the break above the 50% retracement line. Price action is consolidating above the 50% retracement line and the short term down trend line and may indicate a break in trend. The indicators are both bullish but there are some signs the rebound has, or is near to, running its course, namely a peak in the MACD and early signs of resistance in the %K. The ETF is currently sitting on support, near $22.50, with a possible move up to $24.50. If support is broken it would indicate a return to trend with downside target near $18.50.

The Oil Index

Oil prices fell nearly -4% today as concerns the OPEC deal isn't enough washed through the market. WTI fell more than -$2.00 to trade below $52 and set a 3 week low. Today's fear is driven by rising US output and Iranian exports which threaten to undo all that the OPEC deal hoped to achieve. I still favor the bear argument, supply and production are outpacing demand, so am expecting prices to remain volatile in the near term.

The Oil Index fell -1.21% to trade just above the short term moving average. The moving average is now support, just above 1,250, and may add lift to the index in the coming days and weeks. The indicators are bearish and suggest that support may be tested in the near term but are not strong enough to suggest that it will be broken. In the near term, oil prices are likely to drive volatility and possibly a test of support. Longer term, earnings growth outlook is supporting the sector and likely to drive it higher.

In The News, Story Stocks and Earnings

The earnings cycle will kick off on Friday with releases from JP Morgan, Wells Fargo and Bank of American which, as a sector, are expected to post the 2nd highest rate of growth this quarter, +13.8%. As a group these stocks also looked poised to rise as much as 15% to 25% in the near to short term, provided of course outlook does not change. The Financial sector SPDR XLF lost about a half percent in today's action but the losses are moot, it has been in a tight consolidation range for the past month of trading days. This range follows a strong up trend that is supported by earnings and economic outlook and could indicate continuation of that trend into the short term. The indicators are mixed but generally consistent with consolidation within an up trend, stochastic in particular having reversed and formed a weak bullish crossover and trend following entry. Support is near $23.25, upside targets are near $25 and $27 in the near to short term.

McDonald's announced that it was selling 80% of its China operations to a group of US and China based investors. The deal values the business at over $2 billion and is expected to close this summer. Benefits to McDonald's include lower costs while retaining ownership of the brand and a share of the profits. Shares of MCD fell -0.25% but held steady near last week's close and the short term moving average.

The Acuity Brands, maker of top lighting brands like Lithonia and Peerless, announced record first quarter results but fell well short of consensus. The good news is that sales, income, profits and diluted earnings all grew by double digits. The bad news is that margins declined due to weak sales volume and only modest activity in the quarter. The execs went on to say that they expect weak sales trends to linger into the first half of the year and may affect full year outlook, not good for investor confidence. Shares of the stock were hit hard by the news, falling more than -15% on high volume.

The Indices

Today's action was more sideways drift, more consolidation more waiting for earnings season, economic data, Trump and the FOMC. One however was able to drift up, and to set a new all time high while doing so. The NASDAQ Composite closed with a gain of 0.19% at 5531.82, a new all time closing high. The tech heavy index created a small spinning top candle while doing so and looks like it could test resistance again. Resistance is the all time intraday high set Friday, just a few points above today's close. The indicators are still mixed but appear to be rolling over into trend following entry signals; MACD is crossing the 0 line from below with today's action, a sign of shifting momentum, and stochastic is forming a weak bullish crossover while flattening out. If these signals confirm we can expect to see a continuation of the rally with upside target near 5,750.

The day's biggest loser was the Dow Jones Transportation Average which lost -0.89%. Despite the loss the transports did little more than bob along the 9,000 level for the 8th day in a row. This tight congestion band is the bottom of a one month consolidation range which has formed just below recently set all time highs. This consolidation has resulted in a retreat to support that is confirmed by the indicators. MACD remains bullish so support may be tested further, stochastic however is more bullish. Stochastic has already formed a weak bullish crossover and the first of two crossover signals that make up a strong trend following entry. When confirmed, if, we can expect to see the transports retest the recent highs and probably set new ones. If not, a break below current support would be bearish in the near term with downside target near 8,500.

The Dow Jones Industrial Average made the second largest decline today, -0.38%. The blue chips created a small spinning top candle within the one month consolidation range and does not look like it is going anywhere soon. The indicators are consistent with a test of support and consolidation within an up trend, stochastic showing overbought conditions have been relieved and set up for another rally. Resistance is 20,000, a break above this level would be bullish indeed, upside target 20,500 in the near term, 21,000 in the short. If resistance holds, or the break above 20K turns out to be whipsaw, downside targets for support are 19,500 and 19,000 in the near term.

The S&P 500 made the smallest decline, -0.35%, and created a small black bodied spinning top candle. Today's action is more sideways drift within the recent trading range, a range that does not look to be broken tomorrow or even this week. The indicators are mixed but generally consistent with consolidation within an uptrend. MACD remains bearish which suggest that support may still be tested, stochastic is showing a weak bullish crossover and early trend following signal which suggests that any test of support that may come is the next entry point for bullish trend following positions. Near term support target is the short term moving average and short term up trend line, a break below this would be bearish. A bounce would be bullish and trend following with upside target near 2,300 near term and 2,500 short term.

The indices continue to consolidate. The market continues to wait. Earnings, economic data, soon to be President Trump and the FOMC are all on the minds of traders. Will growth be as good as we expect, will the data continue to show recovery, will the new President do all the good things for the economy he has said and when will the FOMC raise rates again. The good news is that the indices have been able to hold at or near recently set highs while they consolidate. The market has been allowed to calm down after the post-election rally, overbought conditions have been alleviated and a base has been built. All we need now are confirmations of our expectations and the market should break out to the upside. I remain cautiously bullish.

Until then, remember the trend!

Thomas Hughes



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New Option Plays

Retail Winner

by Jim Brown

Click here to email Jim Brown

Editors Note:

PVH was one of only a handful of retailers that survived the holiday shopping season and actually raised guidance.


PVH - PVH Corp - Company Profile

PVH Corp. operates as an apparel company in the United States and internationally. The company operates through six segments: Calvin Klein North America, Calvin Klein International, Tommy Hilfiger North America, Tommy Hilfiger International, Heritage Brands Wholesale, and Heritage Brands Retail. It designs, markets, and retails men's and women's apparel and accessories, branded dress shirts, neckwear, sportswear, jeans wear, intimate apparel, swim products, handbags, footwear, golf apparel, fragrances, cosmetics, eyewear, hosiery, socks, jewelry, watches, outerwear, small leather goods, and home furnishings, as well as other related products. The company offers its products under its own brands, such as Calvin Klein, Tommy Hilfiger, Van Heusen, IZOD, ARROW, Warner's, Olga, and Eagle; and licensed brands comprising Speedo, Geoffrey Beene, Kenneth Cole New York, Kenneth Cole Reaction, Sean John, MICHAEL Michael Kors, Michael Kors Collection, and Chaps, as well as various other licensed and private label brands. Company description from FinViz.com.

In November, PVH guided lower for the full year because of a $1.65 per share negative impact from foreign currency exchange issues and some other problems. Shares fell from $119 to $90 where they spent most of December.

They guided for Q4 earnings in a range of $1.13 to $1.18 after a 23-cent impact for currency issues. On January 5th, the company updated guidance saying, "earnings would be at least at the top end of its guidance ranges for both Q4 and full year." That suggests a positive holiday shopping season. As of late last week 11 retail companies had reported sales for holiday shopping and 8 of them reported declines. It was a rough quarter and PVH raised guidance.

Earnings are March 1st.

I am playing PVH for multiple reasons, one of which is that they already lost $30 in the December guidance crash. The $90 support level has held and once a positive market returns, they should be favored by longer-term investors. Since they have already seen a steep decline, a market drop over the next couple weeks should not impact them materially.

I am reaching out to the March expirations so there will be some earnings expectations built into the premium when we exit before they report. If you want to use the February cycle the premiums are about $1 cheaper.

Buy Mar $95 call, currently $4.00, initial stop loss $89.25.


No New Bearish Plays

In Play Updates and Reviews


by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow and S&P hit a pothole on the way to record highs after a series of high profile stocks were downgraded. Goldman Sachs cut Procter & Gamble and Coke to a sell and both are Dow components. Oil prices fell $2.20 and that pushed Chevron and Exxon lower. A peak warning about Goldman Sachs caused that Dow component to decline $2. Suddenly Dow 20,000 appears to be in jeopardy. I told you in the last newsletter that once I adopted a bullish bias it would be the kiss of death for the markets.

One day does not make a trend but there was a lot of negativity today. The Dow, S&P and Russell closed at their lows for the day and there were no FANG stocks in the winners list for the Nasdaq. Nvidia was a strong performer as well as biotechs. That allowed the Nasdaq to close at a new high but it was not the high for the day. The Russell is now in danger of breaking support.

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

FDX - FedEx

Long call position remains unopened until a trade at $191.85

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BULLISH Play Updates

FDX - FedEx - Company Profile


The weakness in anything not in the technology sector kept FDX from hitting our entry trigger.

The position remains unopened until a trade at $191.85.

Original Trade Description: Jan 7th

FedEx Corporation provides transportation, e-commerce, and business services in the United States and internationally. The company's FedEx Express segment provides various shipping services for the delivery of packages and freight; international trade services specializing in customs brokerage, and ocean and air freight forwarding services; assistance with the customs-trade partnership against terrorism program; and customs clearance services, as well as an information tool that allows customers to track and manage imports. This segment also publishes customs duty and tax information; and offers critical inventory logistics, transportation management, and temperature-controlled transportation services, as well as international express transportation, small-package ground delivery, and freight transportation services. Its FedEx Ground segment provides business and residential money-back guaranteed ground package delivery services; and consolidates and delivers low-weight and less time-sensitive business-to-consumer packages, as well as offers third-party logistics services. The company's FedEx Freight segment offers less-than-truckload freight, and freight-shipping services. As of May 31, 2016, this segment operated approximately 65,000 vehicles and trailers from a network of approximately 370 service centers. Its FedEx Services segment provides sale, marketing, information technology, communication, customer, technical support, billing and collection, and other back-office support services; FedEx Mobile, a suite of solutions to track packages, create shipping labels, view account-specific rate quotes, and access drop-off location information; access to copying and digital printing through retail and Web-based platforms, signs and graphics, professional finishing, computer rentals, and ground shipping and time-definite express shipping services; and packing services, supplies, and boxes. Company description from FinViz.com.

On December 21st, FDX reported earnings of $2.80 that missed estimates for $2.91. Revenue rose 20% to $14.93 billion and beat estimates for $14.91 billion. The problem with the earnings was a large amount of spending to build new distribution hubs and improve others ahead of the holiday season.

FedEx said they were in the midst of a record-breaking holiday shipping season and package volume was expected to rise 10% or more over 2015. They raised full year guidance from $10.85-$11.35 to $10.95-$11.45. The CEO said the recent improvements would allow them to ship more packages at a lower cost with improved delivery.

During the holiday shopping season my family spends a lot of money on Amazon for gifts for our extended family. Because I am a Prime member, others in the family use my account to make purchases and everything comes to my house. In the 2015 season, UPS delivered to my house almost every single day from Amazon. I might get a box from USPS once a week and FedEx maybe once a week.

This year UPS only came twice between Thanksgiving and Christmas. Fedex came 3-4 days a week and USPS 3-4 days a week. That suggests FedEx gained a significant amount of market share from Amazon and moved a lot more packages than UPS. Hopefully this added to their profits on the improved shipping network.

Cowen just reiterated an outperform and raised the price target from $180 to $240.

Earnings are March 21st.

Because their earnings are expected to be good, the March option prices are out of sight at $7.50 for a $195 call with FDX at $190. We have to use the February options to get a reasonable price. Given the potential for market volatility between now and expiration, we do not want to spend a lot of money on premium.

I am putting an entry trigger on the position just in case the market decides to turn negative on Monday.

With a FDX trade at $191.85

Buy Feb $195 call, currently $3.25, initial stop loss $186.65

BEARISH Play Updates (Alpha by Symbol)

CAT - Caterpillar - Company Profile


No specific news. CAT continued to move lower and is nearing support at $92. Many of the Dow components are showing increased weakness and there could be a breakdown soon.

Original Trade Description: December 17th

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. The company's Construction Industries segment offers backhoe, small wheel, skid steer, multi-terrain, compact track, medium and compact wheel, and track-type loaders; mini, wheel, and track excavators; track-type tractors; and select work tools, motor graders, telehandlers, soil compactors, and pipelayers, as well as its related parts for the heavy and general construction, rental, mining and quarry, and aggregates markets. Its Resource Industries segment provides electric rope and hydraulic shovels; draglines; drills; highwall and longwall miners; hard rock vehicles; articulated, large mining, and off-highway trucks; large wheel loaders; wheel tractor scrapers; wheel dozers; machinery components; hard rock continuous mining systems; electronics and control systems; and select work tools for use in mining and quarry applications. The company's Energy & Transportation segment offers reciprocating engines, generator sets, marine propulsion systems, gas turbines and turbine-related services, diesel-electric locomotives, and other rail-related products and services. Its Financial Products segment provides retail and wholesale financing for Caterpillar equipment, machinery, and engines; offers property, casualty, life, accident, and health insurance; insurance brokerage services; and purchases short-term trade receivables. The company's All Other segments remanufactures Cat engines and components, and provides remanufacturing services for other companies; offers business strategy, and development, management, manufacturing, marketing, and support primarily for paving, forestry, industrial, waste, and Cat products. Company description from FinViz.com.

Caterpillar's business has been in decline for several years as the energy sector went into hibernation and Asia's economic growth appeared to slow. For some reason, the stock bottomed on January at $58 and rallied to almost $100 despite a weak outlook in every earnings cycle. The $18 post election bounce was just another example of irrational exuberance. The election did not sell more tractors overnight and a pickup in their business could be several quarters away.

The best thing Caterpillar has in its favor is OPEC's decision to cut production. That means a year from now oil prices may have recovered slightly and energy companies may begin to buy more tractors. That is a long time off for an $18 spike.

Earnings in 2014 were $6.38, 2015 $4.64, 2016 they are estimated to be $3.26 and for 2018 analysts expect $3.15. However, CAT said last week that the estimates were overly optimistic. While Asian sales may have quit declining there is no material rebound at present.

Earnings Jan 24th.

This is a play on the retracement of that $18 bounce. When the company says analyst expectations are overly optimistic you can bet analysts will begin to lower their numbers. That should produce an extra weight on the stock in addition to any normal decline with the Dow in January.

The earnings are Jan 24th and the February options are expensive. Since this is a short-term position, I am recommending the January options. I believe any material decline will happen in the first two weeks of January.

Position 12/19/16:

Long Jan $90 put @ $1.89, see portfolio graphic for stop loss.

DIA Dow ETF - ETF Profile


No attempt at 20K today as the Dow opened lower and closed at the low for the day. Maybe the January dip is finally going to appear.

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:

12/12 - 1/2 position: Long Feb $195 put @ $3.40, no initial stop loss.

12/13 - 1/2 position: Long Feb $195 put @ $3.15, no initial stop loss.

DRI - Darden Restaurants - Company Profile


No specific news. Still teetering on the brink of a crash.

Original Trade Description: December 20th

Darden Restaurants, Inc., through its subsidiaries, owns and operates full-service restaurants in the United States and Canada. As of May 29, 2016, it owned and operated 1,536 restaurants, which included 843 Olive Garden, 481 LongHorn Steakhouse, 54 The Capital Grille, 65 Yard House, 40 Seasons 52, 37 Bahama Breeze, and 16 Eddie V's restaurants. Company description from FinViz.com.

Darden Restaurants (DRI) reported earnings on Tuesday of 64 cents that beat estimates by a penny. Revenue of $1.64 billion missed estimates for $1.65 billion. They guided for the full year 2017 to earnings of $3.87-$3.97 per share. Same store sales growth was choppy. Olive Garden saw +2.6%, Longhorn Steakhouse +0.1%, Capital Grille+1.2%, Eddie V's +2.7%, Yard House +0.7%, Seasons 52 -0.3% and Bahama Breeze +2.6%. Shares spiked $2 on the news but faded in the afternoon to close negative. Darden had rallied 23% since the election.

The idea behind the rally was the end of the push for a $15 per hour minimum wage. When Clinton lost, that effort turned into wishful thinking because republicans have held the view that a lower wage offers entry level workers an opportunity and they can move up in the organization if they are qualified and work hard. Was that worth a 23% rally in Darden shares? I find it hard to believe.

Now that Darden earnings are over, we should expect a couple weeks of post earnigns depression and given the recent rally and the chance for a market decline in early January, the Darden drop could be significant.

Position 12/21/16:

Long Feb $72.50 put @ $1.55, see portfolio graphic for stop loss.

GATX - GATX Corporation - Company Profile


No specific news. Support broke, now at a 5-week low.

Original Trade Description: December 15th

GATX Corporation leases, operates, manages, and remarkets assets in the rail and marine markets in North America and internationally. The company operates in four segments: Rail North America, Rail International, American Steamship Company (ASC), and Portfolio Management. The Rail North America segment primarily leases railcars and locomotive, as well as other ancillary services. This segment also offers repair, maintenance, modification, and regulatory compliance services on the railcar fleet. The Rail International segment leases railcars, as well as offers repair, regulatory compliance, and modernization work for railcars. The ASC segment operates a fleet of vessels that provide waterborne transportation of dry bulk commodities, such as iron ore, coal, limestone aggregates, and metallurgical limestone for steel makers, automobile manufacturing, electricity generation, and non-residential construction markets. The Portfolio Management segment is involved in leasing, asset remarketing, and marine operations, as well as manages portfolios of assets for third parties. As of December 31, 2015, it operated a fleet of 17 vessels; a fleet of approximately 106,100 cars; a fleet of 18,400 boxcars; and a fleet of 611 older four-axle and 26 six-axle locomotives. Company description from FinViz.com.

There has been no news since the company announced a 40 cent dividend on Oct 28th. The dividend is payable on Dec 31st to holders on Dec 15th. That is today. That means nobody else is going to be buying the shares to get the dividend.

Earnings Jan 19th.

GATX has rallied 69% since the election. I can only assume it was because of the rally in the Dow Transports in anticipation of a better economy in 2017. There is no current fundamental reason for a 69% rally and odds are good once the stock begins to roll over with the market it could fall very hard. Apparently other investors believe the same way since the only put strike with any volume is the January 60 puts. There is more volume in that one strike than all the other strikes combined.

Position 12/16/15:

Long Jan $60 put @ $2.35, see portfolio graphic for stop loss.

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