Option Investor

Daily Newsletter, Thursday, 1/26/2017

Table of Contents

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

Market Wrap

New All Time Highs

by Thomas Hughes

Click here to email Thomas Hughes


The broad market pulled back slightly from new all time closing highs, but not before setting new intra-day all time highs. Today's action was not the follow through we'd like to see in a really strong rally but may be the next best thing; a cool, calm consolidation at new all time highs.

The morning started with global markets in rally mode. Asian and European indices were moving higher and setting new long term highs in both regions. Asia was strongest, both China and Japan gaining more than 1.25%, Japan rising more than 1.75%. Europe was stronger in the early portion of the session but pared gains to just above break-even on the open of the US market.

Market Statistics

Futures trading was positive all morning but not strong. The indices were indicated to open with gains of only a few points and this held for most of the morning. There was quite a bit of earnings and little bit of data to move early trading but none did more than cause a mild ripple on the charts. The open was orderly if a bit choppy, the indices opened with marginal gains and then trend sideways from there for the first half of the day. At noon the indices were near the lows of the session, just below break-even for the S&P 500, and then shortly thereafter falling to new lows. The SPX hit its intraday low just after 1:30PM, about -5 points, and bounced from there, moving higher over the next hour to regain all of the losses. Late afternoon saw the indices continue to churn within the earlier ranges and close near the midpoint of the day.

Economic Calendar

The Economy

Today's economic calendar included Trade Balance, New Home Sales and Leading Indicators along with the weekly jobless claims. Claims rose by 22,000, from last week's surprise drop, to hit 259,000. Last week's figure was revised higher by 3,000. The four week moving average of claims fell by -2,000 to hit 245,500, a new low dating back to November of 1973. On a not adjusted basis claims fell by -19.9% versus an expected decline of -26.9% and are down -5.2% year-over-year. The largest increase in claims was California, +16,984, the largest decline in claims was in New York, -22,100. This week's increase is not too surprising given last week's large drop and a sign of post-holiday seasonal volatility.

Continuing claims rose by 41,000 on top of last week's upward revision to hit 2.100 million. The four week moving average fell by -1,250 to hit 2.92 million. This figure remains near recently set long term lows and consistent with long term labor market health.

The total number of Americans on unemployment rose by 54,418 to hit 2.561 million. This is likely the peak, based on seasonal trends, and should begin to fall off next week. On a year over year basis this week's figure is -6.1% below this same time last year and consistent with long term improvements in the labor market. Looking forward we can expect to see total claims figures fall off into the spring with a target near 1.88 million. Simply based on the pledged new jobs we've been hearing about lately I would expect to see the spring hiring season come in on the strong side.

New Homes Sales fell a surprising -10.4% in December from November and are down -0.4% from last December. The market had been expecting sales to remain flat. Despite the miss full year 2016 new homes sales grew 12.2% over 2015 and are expected to continue growing into 2017.

The Index of Leading Indicators rose by 0.5% in December after rising 0.2% in October and 0.1% in November. The Coincident and Lagging Indices both rose as well, by 0.3% each.According to economist at the Conference Board the index is indicating continued growth in 2017, and the possibility of that growth expanding in the 1st half, perhaps as early as the 1st quarter. The biggest contributor to this month's gains are an increase in forward outlook.

Tomorrow's data includes the first read on 4th quarter GDP, durable goods and Michigan Sentiment.

The Dollar Index

The Dollar Index has begun to rebound from support levels. The index gained nearly 1% intraday, rising up from the $100 level, but gains were capped at the $100.50 level and previous long term high. Today's move is in response to economic data and forward outlook; the US economy remains on track for growth, rising interest rates and a stronger dollar while global economies remain in QE mode. The indicators remain weak, consistent with a test of support within an uptrend, but not yet supportive of higher prices. The index may remain at/near current levels over the next week as economic data is released and up to the release of the FOMC statement next Wednesday. A move higher faces resistance at $100.50, $102.50 and $103.50. A break below support would have a target of $98.65 in the near term.

The Gold Index

Spot gold fell another -0.75% today, extending a drop from resistance levels, to trade below $1190 and at a two week low. This move is driven by the dollar's bounce from support and a decline in safe haven flows although today's spat between President's Trump and Nieto may renew those flows. To be brief, President Nieto canceled his trip to the US saying Mexico won't pay for a wall while Trump says the cancellation was mutual. More on that story to come. Getting back to gold, now that is below $1200 with stronger dollar in the forecast it will come down to the FOMC. A hawkish Fed will mean a stronger dollar and weaker gold, a dovish Fed the opposite.

The gold miners fell in today's session and look poised to move lower. The Gold Miners ETF GDX fell -2.5% to trade just above support with increasingly bearish indications. Both MACD and stochastic are consistent with a trend following sell signal; stochastic has already confirmed, MACD is very close. Support is near $22.50, coincident with the short term moving average and the 50% retracement level that has provided support and resistance in the past. A break below these levels would be additional confirmation of a trend following sell with downside target near $20. Depending of course on the FOMC and the dollar.

The Oil Index

Oil prices rebound today, WTI gaining more than 2% at the close of trading. Despite the gains oil prices remain trapped in a near term trading range driven by OPEC cuts and rising US production. This week's news includes further sign of OPEC's commitment to production cuts and signs those cuts are digging into supply counterbalanced by rising US rig counts and oil storage levels. I expect this tug of war to go on into the near to short term.

The Oil Index fell despite the rebound in oil prices, shedding about -0.25%. Although counter to the move in oil the move in the index has a bullish undertone, testing support at the short term moving average following a trend following bounce from strong, longer term support. The indicators are promising, stochastic is firing a strong buy signal and MACD is close to confirming, so I expect to see it move up to test the top of the near term range at least. Longer term, earnings outlook remains robust and 2017 year end oil prices are expected to be higher so I am bullish on this sector. A break above 1,300 would have targets near 1,350 and 1,400.

In The News, Story Stocks and Earnings

There was quite a bit of earnings news before the bell and the results are about as expected, mixed with a positive overtone. There were some notable misses, on revenue earnings and guidance, but just as may beats or upgrades so nothing really has changed, we're still in a stock picking sector rotational kind of environment.

Caterpillar reported EPS that beat expectations smartly but were only flat compared to last year. This comes on a decline in revenue that was worse than expected. The company blames weak global economic conditions and provided weakened guidance although it does not include the possibility that Trumponomics will actually spur the US and global economy to growth. In regard to that company CEO said that the Trump outlook was promising but any benefits would likely not be realized by them until next year. Guidance was reported as being lowered but what really happened was the range was widened around the current mid-point, allowing for the possibility of better or worse results than previously expected. Shares of the stock fell more than -1% after setting a new intraday 2 year high.

Ford reported 4th quarter and full year results that were a little better than expected and the 2nd best in company history. EPS met estimates and revenue was a little strong. Guidance for 2017 is a little on the weak side, full year pre-tax profit is expected to hold flat with EPS down on expected investment in global infrastructure. Shares of the stock fell more than -3% on the news.

Royal Caribbean beat EPS, missed on revenue and raised full year guidance. Company CEO says that bookings are stronger than ever, guests are booking earlier and earlier and at higher prices. Shares of the stock jumped 10% on the news and is one of 58 S&P 500 companies making new highs today.

After hours action was all about tech, and coffee, as earnings from some of the biggest names in the industry hit the market.

Google - Earnings miss but revenue beat, shares of the stock fell -2.5% but regained some of the loss before the afterhour session came to a close.

Microsoft - Beat on the top and bottom lines on strong demand, shares rise to new all time highs on positive forward guidance.

Intel - Beat on the top and bottom line but full year 2017 guidance was little light. The company expects to see full year EPS in a range of $2.66 to $2.94, consensus is $2.83. Shares fell nearly -1.0% on the news.

Paypal - Revenue and earnings were in line with expectations, guidance was in line with expectations. Shares of the stock fell -2.25% on the news.

The Indices

The indices held almost exactly flat for the day, where was up a hair another was down a fraction. Regardless of closing positive or negative for the day all the indices set new intraday all time highs. The leader was the Dow Jones Transportation Average with a gain of 0.51%. The transports made a medium sized white bodied candle, the third in a move up to test all time highs, and set a new all time intraday high by about a dozen points. Today's move is trend following and supported by the indicators. Both MACD and stochastic are firing trend following entry signals and both have plenty of room to move higher.

The Dow Jones Industrial Average also posted a gain, 0.16%, and set new all time closing and intraday highs. The index is setting new all time highs, in line with near, short and long term trends, and supported by the indicators. Stochastic firing an early entry signal and MACD will likely confirm with a zero line crossover tomorrow. Upside target is 20,500 in the near term with additional targets in the short to long term.

The NASDAQ Composite posted the smallest loss, -0.02%, and created a very small spinning top. The tech heavy index, despite making a black bodied candle, set a new all time intraday high in line with the prevailing trends. The indicators have both confirmed the new highs with trend following bullish crossovers and support higher prices. Upside targets are near 5,750 in the near term.

The S&P 500 made the largest decline but still only -0.07%. The broad market was able to set a new intraday high despite posting a loss and looks like it will go higher. The indicators are both firing trend following bullish crossovers, MACD confirming today, and support the idea of higher prices. Upside targets are now 2,350 in the near term with additional targets in the short to long.

At the risk of jinxing the whole thing I have to say I am pretty pleased with the way things are setting up. The indices are breaking out to new highs, the indicators are confirming with technical trend following buy signals, economic trends and outlook are positive, earnings trends and outlook are positive and the whole thing is being turbocharged by the idea of tax reform, improved trade agreements and job creating Trumponomic outlook. With all this behind it I just don't see any reason to be bearish, and no reason to be selling. I still advise caution, better to be safe than sorry, but I think the bull market is back and getting ready to stampede.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Got Vol?

by Jim Brown

Click here to email Jim Brown

Editors Note:

With volatility at near record lows, option premiums are shrinking. The only volatility we care about today is the Volatility Index. It is time to bet on a change of direction.


$VIX - Volatility Index - Index Description

The VIX is a computed index, much like the S&P 500 itself, although it is not derived based on stock prices. Instead, it uses the price of options on the S&P 500, and then estimates how volatile those options will be between the current date and the option's expiration date. The CBOE combines the price of multiple options and derives an aggregate value of volatility, which the index tracks.

The VIX closed at 10.63 and very close to record lows. You have to go back to June of 2014 for a lower recent close at 10.28. Before that, you have to travel back in time to Feb-2007 for a close at 10.05. The next lowest close was 9.48 in Dec-1993.

The point here is that volatility is near record lows only reached four times in the last 23 years. That qualifies for an abnormal event. I believe it is time we bought some VIX calls. The odds of the VIX remaining this low for the next two months are about as close to zero as you can get.

There is a very old saying in the market. "When the VIX is high, it is time to buy. When the VIX is low, it is time to go." You cannot get much lower than this.

The VIX is telling us that everyone expects the market to continue moving higher. Nobody is worried that some unexpected headline or event is going to trigger a significant market decline. When nobody expects an event is when we should be the most concerned.

Buy March $12 call, currently $2.55, no stop loss because the VIX cannot go much lower from here.


No New Bearish Plays

In Play Updates and Reviews

Buyers Faded Away

by Jim Brown

Click here to email Jim Brown

Editors Note:

While traders failed to continue their buying ways, there was no selling. We saw another minor short squeeze at the open but it was met with heavy resistance on the Dow and S&P. Once the initial battle was over the indexes traded sideways to down the rest of the day but the decline was minimal. There were no sellers and volume was decent at 6.7 billion shares. Decliners were 4:3 over advancers so there was no material imbalance.

With the big name earnings over for the week and all the big tech names except for Microsoft losing ground after their late session earnings, we could see some weakness on Saturday. The S&P futures are down -3 points but there is a lot of darkness before morning.

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

SLCA - U.S. Silica

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

PANW - Palo Alto Networks - Company Profile


No specific news. Minor consolidation of the recent gains.

Original Trade Description: Jan 23rd

Palo Alto Networks, Inc. provides security platform solutions to enterprises, service providers, and government entities worldwide. Its platform includes Next-Generation Firewall that delivers application, user, and content visibility and control, as well as protection against network-based cyber threats; Advanced Endpoint Protection, which prevents cyber attacks that exploit software vulnerabilities on various fixed and virtual endpoints and servers; and Threat Intelligence Cloud, which offers central intelligence capabilities, security for software as a service applications, and automated delivery of preventative measures against cyber attacks. The company provides firewall appliances; Panorama, a security management solution for the control of appliances deployed on an end-customer's network as a virtual or a physical appliance; and Virtual System Upgrades, which are available as an extensions to the virtual system capacity that ships with the physical appliances. It also offers subscription services covering the areas of threat prevention, uniform resource filtering, malware and persistent threat, laptop and mobile device, and firewall protection services, as well as cyber attack, threat intelligence, and content control services. In addition, the company provides support and maintenance services; and professional services, including application traffic management, solution design and planning, configuration, and firewall migration, as well as provides online and classroom-style education training services. Palo Alto Networks, Inc. primarily sells its products and services through its channel partners, as well as directly to medium to large enterprises, service providers, and government entities operating in various industries comprising education, energy, financial services, government entities, healthcare, Internet and media, manufacturing, public sector, and telecommunications. Company description from FinViz.com.

In November, PANW posted earnings that beat the street but revenue, which rose 34% missed estimates by a fraction. Revenue was $398.1 million and analysts were expecting $400.1 million. PANW had guided for revenue growth of 33% to 35% so they were right in the middle of their guidance range. Earnings of 55 cents beat estimates for 53 cents. Shares were crushed because the company said the market was "lumpy" and customers were taking longer to make purchase decisions.

In Q3 they added more than 1,500 new customers to hit 35,500 globally. Subscription revenue has risen to 60% of total revenue as they move to a cloud model.

In early January, noted short seller Andrew Left of Citron Research, put out a bullish note on PANW saying they had a fantastic moat, which would be a barrier to entry for other companies trying to duplicate their type of firewall. His price target is $170. Shares rallied $14 over the next three weeks on the call. At the same time Bernstein put out a very positive note on the company saying nobody serious about protecting their web environment should be without PANW as their security solution.

Shares have rebounded to their November gap down level of $144 and have found resistance. They are not giving back their gains but there was a slight retracement on Monday in a weak market. I believe they will overcome this resistance level and move higher, market permitting.

There is a persistent rumor in the market that Microsoft and Cisco Systems are both looking for a cybersecurity company to acquire. Given Palo Alto's position in the sector, they would be a good target.

Earnings February 20th.

Because of the price of the options I am forced to turn this into a spread. If you want to go with a naked call, I would probably use the $150 strike.

Position 1/24/17:

Long March $145 call @ $6.00, see portfolio graphic for stop loss.
Short March $155 call @ $3.15, see portfolio graphic for stop loss.
Net debit $2.85

RHT - Red Hat Inc - Company Profile


No specific news. Shares fell back to erase Wednesday's gains.

Original Trade Description: Jan 21st

Red Hat, Inc. provides open source software solutions to develop and offer operating system, virtualization, management, middleware, cloud, mobile, and storage technologies to various enterprises worldwide. It offers infrastructure-related solutions, such as Red Hat Enterprise Linux, an operating system platform that runs on hardware for use in physical, virtual, container, and cloud environments; Red Hat Satellite, a system management offering that helps to deploy and manage Red Hat infrastructure across physical and virtual servers, and cloud environments; and Red Hat Enterprise Virtualization, a software solution that allows customers to utilize and manage a common hardware infrastructure to run multiple operating systems and applications. The company offers application development-related and other technology solutions, such as Red Hat JBoss Middleware, a solution for developing, deploying, and managing applications, as well as integrating applications, data, and devices along with business processes automation; Red Hat cloud offerings, a software solution that enables customers to build and manage various cloud computing environments; Red Hat Mobile, a software development platform that enables customers to develop, integrate, deploy, and manage mobile applications for enterprises; and Red Hat Storage, a software solution that enables customers to treat physical server storage as a scalable, shared, centrally-managed pool of virtual storage and to manage large, unstructured, or semi-structured data in physical, virtual, and cloud environments. It also provides consulting, support, and training services; and real-time operating system, distributed computing, directory services, and user authentication. Company description from FinViz.com.

On December 21st, the company reported earnings of 61 cents that beat estimates by 3 cents. However, the beat came mostly from a lower tax rate. Revenue rose 17.5% to $615.3 million compared to estimates for $618.4 million so a slight miss there. Billings rose 8.7% to $679 million but misses estimates for $713 million. Subscription revenue rose 19% to $543 million and 88% of total revenue. That is recurring and will help smooth out future earnings.

The CEO explained that two large government deals worth $20 million slipped into Q4. Also, two large customers chose to be billed rather than pay up front and that took another $27 million out of billings. If those deals were included the billings would have been up +16% instead of 8.7%. The good news is that all of those deals are now in Q4 and that will give Q4 an earnings boost.

Earnings March 22nd.

Shares have rebounded to $74 and appear poised to break over that level and move back to the $80 range. I am using the March options, which expire 4 days before the earnings and they are half price the next cycle in June.

Position 1/23/17:

Long March $75 call @ $2.35, see portfolio graphic for stop loss.

SLCA - U.S. Silica - Company Profile


No specific news. New 52-week high after a minor gain.

Original Trade Description: Jan 25th

U.S. Silica Holdings, Inc. produces and sells commercial silica in the United States. The company operates through two segments, Oil & Gas Proppants, and Industrial & Specialty Products. It offers whole grain commercial silica products to be used as fracturing sand in connection with oil and natural gas recovery; and resin coated proppants, as well as sells its whole grain silica products in various size distributions, grain shapes, and chemical purity levels for manufacturing glass products. The company also provides ground commercial silica products for use in plastics, rubber, polishes, cleansers, paints, glazes, textile fiberglass, and precision castings; and fine ground silica for use in premium paints, specialty coatings, sealants, silicone rubber, and epoxies. In addition, it offers other industrial mineral products, such as aplite, a mineral used to produce container glass and insulation fiberglass; and adsorbent made from a mixture of silica and magnesium for preparative and analytical chromatography applications. The company serves oil and gas recovery markets; and industrial end markets with customers involved in the production of glass, building products, foundry products, chemicals, and fillers and extenders. As of December 31, 2015, it had approximately 400 million tons of proven and probable recoverable mineral reserves. Company description from FinViz.com.

In the gold rush in the 1800's it was not the miners that got rich but it was the companies that sold them the picks, shovels and wheelbarrows. In the energy sector every shale well has to be fractured and that required mountains of sand. We are not talking regular beach sand. The primary frac sand is mined in Wisconsin and other northern states. There are various grades of sand depending on the geology of the well and what the drillers are trying to accomplish.

In 2014 it took an average of 4.2 million pounds of frac sand per well. However, in 2015 and 2016 there was a significant increase in fracking intensity that began to use much larger quantities per well. In late 2015 the amount of sand rose from 9% of the fracking fluid to 20%. In early 2016 Simmons & Co reported two wells in the Permian that used 60 million pounds of sand each while two in the Haynesville Basin used 35 million pounds each.

Houston based oilfield logistics company Twin Eagle reproted receiving "historic shipments" of frac sand at its facility outside the Eagle Ford. They reported receiving one 130-car train of sand a week. One car carries 100 tons so that is 13,000 tons per week. That is 26 million pounds of sand per week. If wells are now using 20 to 25 million pounds per well that is one train per well.

Last week the active rig count rose by 29 oil wells to 551 active oil wells. Each rig drills a minimum of two wells per month. If each well used 25 million pounds that would be more than 1,100 trains of sand per month.

There are rumors making the rounds that because of the increased intensity of sand in fracking there could be a sand shortage as the number of active rigs increase and producers began to rapidly complete the 3,000 or so wells that have been drilled over the last 18 months but never completed because of low oil prices. There is going to be a surge in the demand for sand.

U.S. Silica is one of the major sand suppliers with multiple facilities. They have used the downturn in the drilling industry to buy multiple competitors in order to bulk up for the future demand.

Earnings Feb 2nd.

SLCA has earnings on Feb 2nd but almost every company trading today has earnings over the next three weeks so that is just something we have to deal with. I am recommending we buy a longer-term option to get past any potential volatility around earnings. Their guidance should be good.

Position 1/26/17:

Long June $65 call @ $4.10, no stop loss until after earnings.

SPY - S&P-500 ETF - ETF Profile


No gain today but there was no selling either. The Dow, Nasdaq 100 and Transports were the only positive indexes. The S&P only declined -1.69 so no real profit taking.

Original Trade Description: Jan 12th

The SPDR S&P 500 ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index.

The SPY dipped to $225 intraday before the dip buyers rushed into the market. Initial support is $223 and I believe we have a chance to test that level before the inauguration. There are only four trading days left. If the bank earnings disappoint on Friday we could see a decline in low volume. With the three-day weekend ahead we could see traders move to the sidelines to avoid weekend event risk while the U.S. markets are closed.

We could also see a pre inauguration decline as traders worry about event risk surrounding the event.

Whatever the reason we could see the ETF test that level over the next four days. Assuming there is no disaster surrounding the inauguration, we could see a real rally begin afterwards.

This is a short-term position using March options just in case any potential dip turns into a crash. The estimated option premium should be less than $3.

Position 1/25/17 with a SPY trade at $228.25

Long MAR $232 call @ $1.69, no initial stop loss.

BEARISH Play Updates (Alpha by Symbol)

DIA Dow ETF - ETF Profile


The Dow posted a minor 32-point gain but it was just a minor short squeeze on earnings at the open. After the initial spike there was no further gains and it traded in a very narrow 58 point range.

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.

FINL - Finish Line - Company Profile


Finish Line said it was selling its unprofitable JackRabbit running shoe business to CriticalPoint Capital. Te company said it expected to realize a cash tax benefit of $30 million from the sale. Shares declined -28 cents.

Original Trade Description: January 11th.

The Finish Line, Inc., together with its subsidiaries, operates as a specialty retailer of athletic shoes, apparel, and accessories in the United States. It operates in two divisions, the Finish Line and JackRabbit. The company's Finish Line division engages in the in-store and online retail of athletic shoes for Macy's Retail Holdings, Inc.; Macy's Puerto Rico, Inc.; and Macys.com, Inc., as well as online at macys.com. This division offers men's, women's, and kids' athletic shoes, as well as an assortment of accessories of Nike, Skechers, Converse, Puma, New Balance, Adidas, and other brands. As of April 2, 2016, the company operated Finish Line shops in 392 Macy's department stores in 37 states in the United States, the District of Columbia, and Puerto Rico. Its JackRabbit division retails lifestyle products, such as running shoes, apparel, and accessories of Brooks, Asics, Nike, Saucony, New Balance, and other brands. It also operates the e-commerce sites jackrabbit.com and boulderrunningcompany.com. The company operated 72 JackRabbit stores in 17 states in the United States and the District of Columbia. Company description from FinViz.com.

In late December Finish Line reported a loss of 24 cents compared to estimates for a loss of 18 cents. Revenue was $371.7 million, down -2.7% from the year ago period. Analysts were expecting $412.4 million. They guided for Q4 earnings of 68-73 cents compared to analyst expectations for 96 cents. Shares fell from $23 to $19 on the news and have continued to decline.

Finish Line does not report earnings again until March 22nd. That means every other retailer will post their disappointing quarters and with each earnings miss the weight should increase on FINL shares.

Finish Line operates mall stores and stores inside Macy's stores. Macy's already reported declining traffic and missed on same store sales. This should also impact FINL since lower Macy's traffic means lower traffic in the shoe section.

Shares are currently $17.50 and could easily break below the June lows before the next earnings reports. I am reaching out to May so there will be some earnings expectation in the premium when we exit before the earnings. We can buy time but we do not have to use it.

Position 1/12/17:

Long May $17 put @ $1.55, see portfolio graphic for stop loss.

LB - L Brands - ETF Profile


No specific news. Decent decline after resistance held at $62.15.

Original Trade Description: January 14th

L Brands, Inc. operates as a specialty retailer of women's intimate and other apparel, beauty and personal care products, and accessories. The company operates in three segments: Victoria's Secret, Bath & Body Works, and Victoria's Secret and Bath & Body Works International. Its products include loungewear, bras, panties, swimwear, athletic attire, fragrances, shower gels and lotions, aromatherapy, soaps and sanitizers, home fragrances, handbags, jewelry, and personal care accessories. The company offers its products under the Victoria's Secret, Pink, Bath & Body Works, La Senza, Henri Bendel, C.O. Bigelow, White Barn Candle Company, and other brand names. L Brands, Inc. sells its merchandise through company-owned specialty retail stores in the United States, Canada, and the United Kingdom, which are primarily mall-based; through its Websites; and through franchises, licenses, and wholesale partners. As of January 31, 2016, the company operated 2,721 retail stores in the United States; 270 retail stores in Canada; and 14 retail stores in the United Kingdom. It also operated 221 La Senza stores in 29 countries; 125 Bath & Body Works stores in 30 countries; 19 Victoria's Secret stores in 7 Middle Eastern countries; and 373 Victoria's Secret Beauty and Accessories stores, and various small-format locations in approximately 75 countries. Company description from FinViz.com.

The holidays were not good for L Brands. The warned on January 5th that net sales rose 1% for the five week shopping period BUT same store sales fell -1% and sales for Victoria's Secret fell -4%. That was a major blow because the holiday shopping season is normally the best five weeks of the year for the lingerie business. They even tried to combat the falling sales by advertising some of their bras at only $10 and even the deep discount did not work.

L Brands is also suffering because they maintain a mall store format. With the malls dying in favor of online shopping, they are losing sales. More than 80% of L Brands sales come from mall traffic and that traffic is rapidly declining. Hermand-Waiche believes that online sales will be over 30% of the market in 2017 and that means Victoria's Secret is becoming obsolete to 30% of the market.

The company warned on the 5th that earnings would be at the low end of prior guidance or $1.85. Shares fell -6% on the earnings warning. With Macy's and Kohl's warning in the same week it was a bloodbath for retailers in the market. Of 11 stores reporting same store sales 8 saw sales decline.

Earnings are February 15th.

Shares are hugging the $60 level but ticking slightly lower every day. If we do get a market meltdown, they could be a target of sellers wanting to exit a nonperforming stock.

Position 1/17/17:

Long Feb $60 put @ $1.85, see portfolio graphic for stop loss.

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