Option Investor

Daily Newsletter, Sunday, 5/21/2017

Table of Contents

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

Market Wrap

Political Uncertainty

by Jim Brown

Click here to email Jim Brown

The Trump election caused a major market rally but the Trump presidency is causing significant political uncertainty.

Weekly Statistics

Friday Statistics

Another day, another potential disaster. President Trump was only an hour into his overseas flight when two different papers broke different stories that could have consequences. The New York Times said during the Trump meeting with the Russian ambassador in the oval office he trash talked Comey as "crazy" and a "nut job" saying the Russian investigation was a great pressure on him but he had fired the FBI director leading the investigation so the pressure would be removed. That comment seems to suggest that he fired Comey to impede the investigation and that would be obstruction of justice and also imply there might be something to the Russian collusion story. Press secretary spicer did not deny the comment but said the investigation was pulling focus from national security areas.

Secondly, the Washington Post reported that the FBI investigation had identified a senior White House adviser as a "significant person of interest." Prior persons of interest were written off by the administration as campaign associates and all past tense. The identification of a current "senior White House" adviser reduces the field significantly and would include family. If one of them were found to have colluded, it would be very bad for the president. Speculation late Saturday suggests it is Jared Kushner, Trump's son in law. Kushner was also responsible for negotiating the $109 billion arms deal with Saudi Arabia that President Trump signed this weekend.

Lastly, after but not related to the "nut job" comments, Comey agreed to testify publicly before the Senate Intelligence Committee after Memorial Day. You can bet that he will be asked all the hard questions about his meetings with the president and the answers could be damaging to the president. Comey has more credibility than the president. I would almost bet you Comey has agreed to testify against the will of his attorneys in order to set the record straight about their interactions. Since he was fired, he has been slandered almost every day by the administration. This is not going to be pretty even if Comey tries to remain professional. The senators are going to ask every hard question they can come up with over the next week. Recollection notes made by FBI officials have long been seen as credible evidence in trials.

For investors who thought President Trump's problems had been put on hold for several months until the special prosecutor finished the private investigation, they may be reconsidering it now. The press is not going to let this die and I am sure it was no coincidence all three stories broke one hour after his plane left for the overseas trip.

The market was in rally mode with the Dow at the highs of the day at 20,857 at 2:45 when the headlines began to appear. The Dow fell 55 points from that high to close at 20,802.

The dramatic decline in the dollar is further evidence investors are worried about the growing number of problems impacting the Trump presidency. The dollar soared after the election on expectations for tax reform, deregulation and better trade policies. If the president is under siege over the coming months, he will not be able to get anything passed. The democrats are already blocking all the major stuff and republicans are starting to peel away from the core support group. While Trump could remain in office, traders are starting to worry the agenda is dying.

Bank of America said more than $8 billion flowed into bonds for the week ended on Wednesday. Yields on the ten-year treasury fell to 2.19% on Thursday as the president's troubles deepened and the equity market was barely recovering from the Wednesday crash.

The market did not have any material economic reports on Friday to distract investors from planning their rebound purchases. Next week will be almost the same except for the FOMC minutes on Wednesday. The home sales reports will be of interest but both are expected to show declines. If there was an unexpected rise in sales that could be market positive.

The Richmond surveys on Tuesday are rarely market movers. The GDP on Friday is the first revision so it is not going to create any market excitement.

This is a holiday week even though the holiday is next Monday. This is the first official weekend of summer and traders will be leaving early for the week once the FOMC minutes are released. Volume will slow to a trickle.

Earnings are still taking center stage with some big movers on Friday. Deere (DE) reported blowout earnings of $2.49 compared to estimates for $1.68. Revenue of $8.29 billion easily beat estimates for $7.27 billion. The company said "We are seeing modestly higher overall demand for our products, with farm machinery sales in South America experiencing a strong recovery." After warning about a global recession for several quarters, the company said the worst of that recession may now be over. Deere said full year revenue should rise about 9%, up from the prior forecast of 4%. Net income is expected to be $2 billion, up from prior forecasts for $1.5 billion. Shares exploded higher on the earnings beat and raise.

Foot Locker's (FL) earnings stunk like a sweaty tennis shoe. The company reported earnings of $1.36 compared to estimates for $1.38 and less than the $1.39 posted in the year ago quarter. Revenue of $2.0 billion missed estimates for $2.02 billion. Same store sales rose only 0.5% and below estimates for 1.4%. The CEO said the weak results were due to late tax refunds in February. Gross margins also fell as the company struggled to unload excess inventory at discount prices. The CEO warned that Foot Locker may struggle to hit management's target of mid-single digit same store sales growth in 2017. Shares were hammered for a 17% loss.

Autodesk (ADSK) shares spiked $14 after the company reported a smaller than expected loss of 16 cents. Analysts were expecting a loss of 23 cents. Revenue of $486 million beat estimates for $470 million. They guided for a Q2 loss of 60-66 cents on revenue to $488-$500 million.

Shares rallied because the company is transitioning from a software sales model to software subscription model. Subscribers to the "new model" subscription plan rose 233,000 to end the quarter at 1.32 million. Maintenance plan subscriptions declined 47,000 to 1.97 million as customers moved to the new model. In total, they added 186,000 net subscribers to reach 3.29 million at the end of the quarter.

Whenever a company switches to a subscription model there is a couple years of declining revenue before the rising subscription base exceeds the prior metrics. Over the full year, they expect to add between 600,000 and 650,000 subscribers and begin generating positive net income for the first time in three years since they began the transition. Annualized recurring revenue (ARR) rose 103% to $692 million. Total ARR rose 18% to $1.74 billion. Deferred revenue rose 18% to $1.8 billion.

RBC Capital upgraded ADSK from sector perform to outperform with a $125 price target. Bank of America upgraded from underperform to neutral.

Campbell Soup (CPB) reported earnings of 59 cents that declined -4.8% and missed estimates for 64 cents. Revenue of $1.85 million missed estimates for $1.87 billion. The company revised guidance saying sales would fall up to 1% compared to prior guidance for a rise of up to 1%. Packaged foods companies have been struggling to adapt to the new healthier food demands of today's consumer. Campbell has created its own fresh-food unit in 2015 to sell various items and the unit is struggling. Sales equate to 14% of total volume and fell -6% in the quarter. "We have experienced significantly lower consumption across almost all our categories and felt it most acutely in February." Sales in the Americas fell by 2% with weak demand in V8 juices, condensed soups and broths. The company did raise earnings guidance for the year from $3.00-$3.09 to $3.04-$3.09. Shares fell -2% on the earnings.

Over 470 S&P 500 companies have reported earnings for Q1. Earnings have risen 15.2% over Q1-2016. For Q1, 75.2% of companies have beaten estimates. This is above the long-term average of 64% and the past four quarters of 71%. 62.8% have beaten revenue estimates and this is above the long-term average of 59% and the four-quarter average of 53%. For Q2 there have been 71 negative warnings and 33 positive preannouncements. There are 19 S&P-500 companies reporting this week and zero Dow components. The next Dow component is Nike in late June.

Hewlett Packard and Costco are the highlights for the coming week. Lowes and Best Buy would also be worth watching.

Lumber Liquidators (LL) rallied 11% after Oppenheimer upgraded the stock from perform to outperform with a $34 price target. This is the second upgrade this month with Wedbush upgrading from neutral to perform and a $27 price target. Shares closed Friday at $29 so that target has been hit. Both analysts said LL was succeeding in a post litigation recovery with an improved product lineup, procurement and improved store experience. The company now offers professional installation, which has proven to be very successful. Previously they just sold the flooring. With a strong housing sector there are more customers looking to upgrade their homes. The company still has not concluded the settlement on the bad Chinese flooring from a couple years ago but they took a charge for $15 million to cover any expected settlement.

Nvidia (NVDA) shook off the market crash and hit another intraday high on Friday after a Bernstein note. The analyst initiated coverage of Nvidia with an outperform saying the company has barely tapped into some massive growth markets. "Our analysis suggests their datacenter total addressable market (TAM) is likely somewhere between 'big' and 'huge,' driven by the mainstreaming of AI and the rise of accelerated computing; we forecast 63% annual growth through CY2019, reaching $3.6B in revenue." The analyst said Nvidia's multiyear head start in investing in artificial intelligence and deep learning puts the company well ahead of competitors in those two high-growth fields.

In addition, their automotive business is just getting started and could eventually be a multibillion-dollar business. Also, double-digit gaming growth should be sustainable in the long term. The analyst said even after their recent gains the stock remains reasonably valued compared to other high growth tech stocks and the market may not be fully appreciating Nvidia's long-term value. Currently the stock trades a 9 times sales and a PE of 40. Considering the explosive growth and technological lead on competitors that is probably conservative. Bernstein has a $165 price target.

UBS said Nvidia's new Volta chip has a 20% performance advantage over the yet to be released Vega chip from AMD and requires less power with better efficiency. They expect gross margin upside as sales of the Volta and Pascal chips increase. UBS has a $145 price target. Canaccord Genuity upgraded their price target to $155.

Boeing (BA) was the strongest performer on the Dow with President Trump headed to Saudi Arabia to discuss a closer relationship in combating ISIS and IRAN. They agreed on a new $100 billion arms sale agreement that could grow into $350 billion over the next ten years. There is already about $100 billion of arms sales in progress in multiple agreements. These agreements include missile defense systems, tanks, planes, helicopters, boats, radar systems, etc. Saudi Arabia is the archenemy of Iran and having a strong military capability along with a strong missile defense should keep Iran from becoming overly aggressive towards Saudi Arabia or any of their neighbors. BA, LMT, GD, ROK and HII were just some of the military contractors up on expectations for future deals.

Oil prices finally eased back over $50 on rumors OPEC could enact deeper and longer production cuts to end the inventory glut. Saudi Arabia and Russia have already announced an agreement to extend existing cuts through March 2018. Saudi's oil minister hinted there could be deeper cuts in the planning stages. OPEC meets on Thursday to discuss production and hopefully make an official announcement.

Some analysts claim OPEC cannot make deeper cuts because they are financially unable to take any less for their oil. I disagree. I am going to use Saudi Arabia as an example. In February, they exported 7.65 million bpd. At $45 a barrel that is worth $344 million a day. If they cut 250,000 bpd and everyone else did an equivalent amount and oil rose to $50, they would receive $370 million. That is more money for less oil. OPEC is totally in control of the price of oil. If they cut their production from the current 31.73 million bpd to 30.0 mbpd, they could push prices to $65 or even higher in the months ahead. It would not happen immediately but once inventories really began to decline, the prices would rise. They could easily lift prices to $75 if they wanted to. However, most OPEC nations are short sighted and they always cheat on the quotas so they cannot manipulate the price until they all stick together.

The recent production cut has had close to 100% compliance but that was only because Saudi Arabia, Kuwait and the UAE cut more than promised to make up for the other slackers. If they could reduce production more than the 1.8 million bpd that started in January and continue it into 2018 they could get back into control of prices.

Total crude inventories in OECD nations were 3.013 billion barrels as of May 1st. That is 276 million barrels over the five-year average range. That represents 64.8 days of supply. In a long term view, 64 days is nothing. Just think how quickly OPEC could be back in control with triple digit prices if they were willing to suffer some short-term pain for longer-term gain.

I think we could see some surprises out of the meeting this week.

Another reason oil prices rose on Friday was the Iranian elections. The current moderate president Hassan Rouhani was running against the hard line Ebrahin Raisi. If Raisi had won and adopted his hard line stance, Iran's oil output would have been at risk. Currently they are producing at full capacity and rapidly trying to increase that capacity. A hard line Iran would dramatically increase geopolitical tensions and risk of eventual outside military intervention. Rouhani won reelection by a decent margin. That could weigh on crude prices on Monday.

Active rigs surged higher with a gain of 16 land rigs with 8 oil rigs and 8 gas rigs. There was also a gain of 2 offshore rigs. If oil remains over $50 we could see these weekly numbers rise even higher.

Ironically, US production actually declined 9,000 bpd last week to 9.305 million bpd. That was the first decline in months but it is only temporary and likely caused by some minor pipeline outage in a gathering system.

The biotech sector has been very volatile with a series of 1% or greater advances and declines but remaining in a relatively narrow 200-point range for the last three months. On Friday, the index lost nearly 1% despite the rest of the indexes closing higher. There is a lot of indecision in the sector and the ASCO (American Society of Clinical Oncology) meeting starts on June 2nd. More than 5,000 abstracts have already been uploaded for that meeting. Typically, we see biotech stocks with a cancer focus, rise into this event.


If you just looked at the market stats graphic at the beginning of this commentary it looked like a boring week with only a minor decline. The Dow lost 92 points, Nasdaq 17 and S&P -9. Obviously, there was a big deal on Wednesday when the Dow lost nearly 400 points and the Nasdaq 158. While the recovery was lackluster on Thursday and choppy on Friday, traders did buy the dip. They did not rush in but approached it in a cautious manner on selected stocks.

Volume on Mon/Tue was 6.3 billion shares each. That spiked to 8.4 billion on Wednesday's crash and 8.1 billion on Thursday's battle to recover. Obviously, there were still a lot of sellers in the market on Thursday. Friday's volume shrank to 7.0 billion despite the slightly more bullish outcome. The conviction was still weak. The late day headlines scared traders back out of the market.

Watching the news shows on Saturday, the uproar appears to be fading. I am sure the Sunday shows will rekindle some worries but they should be offset by the positive news coming from Trump's visit to Saudi Arabia. Unless we get a new headline, the impact to the market on Monday should be minimal.

The S&P gained 16 points but closed 8 points off its intraday high. The prior support at 2,380 has returned as resistance over the last two days. Support is well below at 2,350.

The Dow benefitted from the arms deals in Saudi Arabia with Boeing leading the charge. Caterpillar benefitted from the positive earnings guidance from Deere. United Technology was also a defense related winner. Chevron was up because oil prices moved over $50 and Walmart reported earnings Thursday evening that powered it higher.

The Dow has failed to return to the prior support at 20,900 after bouncing off 20,600 on Thursday. The Dow finished 53 points below its intraday highs and remains the weakest index overall but it was the strongest on Friday. The support at 20,600 needs to hold or the damage to sentiment could be dramatic.

The Nasdaq was weaker than the Dow and S&P on Friday with only a 0.47% rise compares to the 0.68% rise on the Dow. The big cap techs faded sharply on Friday afternoon after decent rebounds from Wednesday's lows. I am not sure we are out of the woods yet because profit taking on the Nasdaq may not be over. Support is now 6,000 and resistance 6,160.

The small caps were very weak on Friday compared to the magnitude of their decline. The minor 6-point gain on the Russell was 7 points below its intraday high. If the markets are going to rally, the Russell is going to have to find some buyers. Continued weak performance will eventually drag the broader market lower.

While nobody can predict market action on Monday or the direction for next week, it would be very tough to bet against the market. Every dip is bought and there have been multiple reasons the market should have sold off over the last several weeks and with the exception of the Wednesday decline, it has held solid. This rebound has been lackluster and we are in the sell in May and go away period. However, 15% earnings growth is a strong stimulant for equities.

Unless the president develops a bad case of foot in mouth disease over the weekend, the market should shake off the Friday headlines and continue trying to regain its highs. However, another day of material declines could punish the dip buyers and poison sentiment. I would continue to buy the rebound as long as it remains intact. If we see the market begin to roll over again, I would move to the sidelines.

The MACD sell signal has been triggered on the sell in May and go away strategy. That could influence direction in the week ahead.

Random Thoughts

Amazing what a nearly 400-point drop in the Dow can do to market sentiment. The bullish contingent took a real hit with nearly a 9% drop. Those fleeing were equally divided between neutral and bearish. Since this survey ends on Wednesday, it has 4 days where the market was positive before the crash. The survey for this coming week will be interesting to see if investors rushed back into the bullish camp or remained on the fence.

Last week results

Last week the WannaCry ransomware attacks began. After several pauses, they are still going strong. At Option Investor, we have had more than 1,000 intrusion attempts by just the WannaCry worm in the last week. Fortunately, we have good firewalls and up to date software and none have succeeded. This is on servers that do not have email. These are indirect attacks. Once the malware imbeds itself on a system, it tries to spread by randomly attacking other IP addresses in the network. Having one system breached in a data center puts the thousands of other systems in that center at risk.

Cisco's Naveen Menon said last week that Cisco is tracking more than 20 billion cyber attacks a day. To put that in context there are only 3.3 billion Google searches a day. Naveen said a study by Cisco found that 2 out of every 5 companies that are attacked withdraw from implementing new mission critical technology and spend all their time building firewalls, protecting data and shrinking infrastructure to make it easier to manage. He said the financial impact from cyber attacks is incalculable but it is not from the actual losses but from the lost opportunity and the loss of technology development. He said without the security threat we could see 8 to 9 times the current technology growth rate.

Cyber security is going to be a key growth area forever. As long as the opportunity exists for unscrupulous people to use technology to steal from others or cause damage just for fun, the cyber security sector is going to benefit. The sector is currently fractured because of the thousands of ways to perpetrate an attack and the hundreds of ways to protect against those attacks. Every company has a different method. The various companies are going to be forced to consolidate in order for any one company to cover all the bases. SYMC, FEYE, PANW, CHKP, CSCO, PFPT, SCWX, TMICY and even IBM and Intel are all chipping away at the problem. The trick for us is to decide which companies will be acquired and which will be the acquirers.

There were 7,457 individually listed stocks in 1995. That number has fallen 42% to just over 4,000 today. There are currently more ETFs at 5,000+ than stocks and more than 26,000 mutual funds.

In 1984, an untitled piece of art by Hatian-American painter Jean-Michel Basquiat sold for $19,000. It is one of his pieces representing injustice for black men. The artist eventually went into a drug fueled death spiral with more and more critics talking down his work. He died on August 12th 1987 of a drug overdose. His unusual works began to rise in price as demand increased. David Bowie began collecting them and that stimulated others to pay attention whenever a Basquiat came up for sale. Last week a Japanese billionaire paid $110.5 million for the same painting. That is a great return for just over 30 years.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"Once you stop learning, you start dying." And "It's not that I'm so smart, it's just that I stay with problems longer."

Albert Einstein


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

subscribe now


Index Wrap


by Jim Brown

Click here to email Jim Brown
Last week I discussed the "Best Six Month Strategy" and what would trigger a market exit.

That trigger was a MACD sell signal on the S&P-500. With the big crash on Wednesday, that trigger was hit. When you couple that with the headline problems in Washington and the falling odds of getting any big agenda items passed, there "should" be a greater willingness to move to the sidelines.

However, greed is an interesting emotion. As long as the rebound continues, we could see investors hang on with hopes that this year will be different. Strong S&P earnings over 15% for Q1 are another reason traders are still buying the dips. It may take a couple additional days of losses to really start the exodus to safer locations. That may already be underway since fund flows into the bond market were $8.6 billion last week ending on Wednesday compared to a net outflow from equities of $1.6 billion. This was before the MACD sell signal was triggered at Wednesday's close.

The sell signal on the Russell 3000 also broadened and the rebound in the index mirrored the Dow. This is the broader market and this is a true directional portrait. The R3K closed just over 1,400 and any drop back below that level could poison sentiment and send the entire market lower.

The Russell 2000 small caps are rebounding the weakest from the Wednesday crash. The MACD is in full sell mode and without the Russell 2000 participating the broader markets will have a tough time moving higher.

As you can imagine the market drop impacted the number of S&P stocks still trading over their 50-day average. The crash knocked that percentage down to 44% but they recovered to 51.6% at Friday's close. For that much of change it suggests a lot of stocks were already trading right near their 50-day.

The crash also reduced the number of S&P stocks with a buy signal on the point and figure charting system. The 68.4% number is the lowest level in 2017.

Lastly, the earnings cycle is almost over. There are only a few companies left and this is the last week of material earnings. The market should be moving into its post earnings depression phase. However, 15% earnings growth is a powerful motivator for investors. They could decide to continue holding their positions until there is confirmation of the trend change.

The political headlines are causing the most grief. As investors become more convinced there will not be a tax reform package passed in 2017, if at all, they will be less inclined to continue holding winning positions that are shrinking in a trendless market.

I warned last week about adding long positions and that recommendation still stands. This could be a pivotal week for the markets.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Last Line of Defense

by Jim Brown

Click here to email Jim Brown

Editors Note:

With the ASCO meeting in two weeks, a cancer fighter is on deck. Varian is not a drug company. They manufacture xray machines to target cancer.


VAR - Varian Medical - Company Profile

Varian Medical Systems, Inc. designs, manufactures, sells, and services medical devices and software products for treating cancer and other medical conditions worldwide. It operates through two segments, Oncology Systems and Imaging Components. The Oncology Systems segment provides hardware and software products for treating cancer with radiotherapy, fixed field intensity-modulated radiation therapy, image-guided radiation therapy, volumetric modulated arc therapy, stereotactic radiosurgery, stereotactic body radiotherapy, and brachytherapy. Its products include linear accelerators, brachytherapy afterloaders, treatment simulation, verification equipment, and accessories; and information management, treatment planning, image processing, clinical knowledge exchange, patient care management, decision-making support, and practice management software. This segment serves university research and community hospitals, private and governmental institutions, healthcare agencies, physicians' offices, oncology practices, radiotherapy centers, and cancer care clinics. The Imaging Components segment offers X-ray imaging components for use in radiographic or fluoroscopic imaging, mammography, special procedures, computed tomography, computer aided diagnostics, and industrial applications. It also provides Linatron X-ray accelerators, imaging processing software, and image detection products for security and inspection purposes. This segment serves original equipment manufacturers, independent service companies, and end-users. In addition, the company offers products and systems for delivering proton therapy; and develops technologies in the areas of digital X-ray imaging, volumetric and functional imaging, and improved X-ray sources. The company was formerly known as Varian Associates, Inc. and changed its name to Varian Medical Systems, Inc. in April 1999. Varian Medical Systems, Inc. was founded in 1948. Company description from FinViz.com.

Drugs are not the only opportunity to rid yourself of a terrible disease. Varian produces multiple products for discovering and targeting cancer. They are the sector leader in imaging and radiation therapy.

Varian reported earnings of 89 cents that beat estimates for 88 cents. Revenue of $655 million beat estimates for $643 million. They guided for ful lyear earnings of $3.56-$3.64 per share.

Earnings July 26th.

On May 6th, the company announced a "game-changing treatment platform" to combat the cancer challenge. (their words) The new Halcyon system is an entirely new device that "simplifies and enhances virtually every aspect of image-guided volumetric intensity modulated radiotherapy (IMRT). This new treatment system is designed to expand the availability of high quality cancer care globally and help save the lives of millions more cancer patients." The new system requires only 9 steps compared with the 30 treatment steps required by current generation equipment. "Halcyon is well suited to handle the majority of cancer patients, offering advanced treatments for prostate, breast, head & neck, and many other forms of cancer." Press Release

The company demonstrated the new device to packed crowds at the ESTRO 36 conference in Vienna on May 8th. Shares spiked $4 on the announcement.

ASCO is about cancer treatment and the conference begins on June 2nd for four days. While the drug community will be getting plenty of press, the Varian equipment should also be benefitting from the headlines.

The market decline knocked $2 off Varian shares and gave us a buying opportunity.

Buy August $100 call, currently $2.10, initial stop loss $91.85.


No New Bearish Plays

In Play Updates and Reviews

Better But Not Great

by Jim Brown

Click here to email Jim Brown

Editors Note:

The rebound gained speed but faded in the afternoon on new Washington headlines. The major indexes made some decent gains but closed well off the highs as a new round of Washington headlines rekindled the worries the Trump presidency could be shortened.

While the implications from the headlines were vague at best, they probably rekindled some weekend event risk worries and that caused trades to take profits from the rebound.

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

No Changes

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

ATHN - AthenaHealth - Company Profile


No specific news. I am going to remove this from the portfolio because we may have to wait until expiration for the time premium to evaporate to get full value. However, the options at the close on Friday were in our favor. If you want to close it now, I would use limit orders and you can probably get pretty close to full value. I am removing it after today.

Original Trade Description: May 13th.

athenahealth, Inc., together with its subsidiaries, provides network-based medical record, revenue cycle, patient engagement, care coordination, and population health services for medical groups and health systems. It offers athenaCollector, a network-enabled billing and practice management solution; athenaClinicals, an electronic health record for electronic health record management to help manage patient's clinical documentation; athenaCommunicator, an engagement and communication solution that provides an automated communication service between patients and provider practices for interactions outside the exam room; and athenaCoordinator for order transmission and care coordination services. The company also provides athenahealth Population Health, a cloud-based population health service; and Epocrates service that include clinical information and decision support services in the areas of drug and disease information, medical calculator and tools, clinical guidelines, clinical messaging, and market research. In addition, it offers athenahealth Health Plan data exchange facilitates to exchange the data between providers and health plans for the healthcare operations of clients; athenaOne Analytics that includes an analytics and dashboard application, as well as provides visibility into the financial and operational health of an organization; and pre-certification processing and referral processing services. The company serves clients in the health care industry through its direct sales force and channel partners in the United States and internationally. athenahealth, Inc. was formerly known as athenahealth.com, Inc. and changed its name to athenahealth, Inc. in November 2000. Company description from FinViz.com.

ATHN shares fell from $121 to $95 after reporting slower than normal growth in the first quarter. The company reported earnings of 32 cents compared to estimates for 46 cents. Revenue of $284.4 million rose 11% but missed estimates for $296.6 million. ATHN has averaged 20% growth in the past and the slowdown hammered the stock. They guided for the full year for revenue of $1.21 to $1.25 billion.

There was good news. They added 2,406 new providers of its Collector software. They added 2,791 providers using their Clinical software system. The hospital software segment saw 86% growth in discharged bed days. Covered lives rose 25% to 2.8 million. They handle 88 million patient records and now have more than 99,000 providers.

The lower earnings came from a 13% increase in expenses, mostly due to an aggressive research and development effort, which will increase profits later.

Earnings July 27th.

Analysts believe ATHN was surprised by the lower growth in Q1 and they drastically lowered guidance to avoid missing estimates again in the future. This is the under promise and over deliver tactic.

Shares have been rebounding strongly since the drop. Even on weak market days, they continue to post gains.

Because of the positioning of share price and option strikes, I am recommending a spread using the June options. This will limit our potential gain but also limit out cost and risk. There are no July/August options and the September options are far too expensive.

Update 5/18/17: Activist investor Elliott Management said it had amassed a 9.2% stake in the company and they believed the stock was significantly undervalued. The filing said Elliott may propose changes to the company's operations, board and dividend policy, as well as a potential sale. Shares exploded higher with a $23.79 gain.

Unfortunately, this position was entered as a minor $110/$115 spread with the plan to make $2.55 in the June option cycle. Because it was a spread, we will not benefit from the $23 spike. That just means our initial spread will be earn us the $2.55 and nothing more. Yesterday we would have been happy with a $2.55 gain but today that is frustrating and depressing. I used the spread because of the high option premiums and short time frame. The idea was to limit our risk by purchasing a strike closer to the money and offset it with a higher strike call. It worked perfectly except for the last gains.

The downside here is that we have to hold it until expiration to get the maximum benefit. The premiums have to deflate to purely intrinsic values. This weekend I will drop this position from the portfolio since there is no reason to cover it daily for the next month.

Position 5/15/17:

Long June $110 call @ $4.30, see portfolio graphic for stop loss.
Short June $115 call @ $1.85, see portfolio graphic for stop loss.
Net debit $2.45, maximum gain $2.55.

CNC - Centene Corp - Company Profile


No specific news. Shares have lost their momentum and the next move could be lower. I am recommending we close the position.

Original Trade Description: April 28th.

Centene Corporation operates as a diversified and multi-national healthcare enterprise that provides programs and services to under-insured and uninsured individuals in the United States. It operates through two segments, Managed Care and Specialty Services. The Managed Care segment offers Medicaid and Medicaid-related health plan coverage to individuals through government subsidized programs, including Medicaid, the State children's health insurance program, long-term care, foster care, and dual-eligible individual, as well as aged, blind, or disabled programs. Its health plans include primary and specialty physician care, inpatient and outpatient hospital care, emergency and urgent care, prenatal care, laboratory and X-ray services, home health and durable medical equipment, behavioral health and substance abuse, 24-hour nurse advice line, transportation assistance, vision care, dental care, immunizations, prescriptions and limited over-the-counter drugs, specialty pharmacy, therapies, social work services, and care coordination. The Specialty Services segment provides pharmacy benefits management services; health, triage, wellness, and disease management services; vision services; dental services; correctional healthcare services; in-home health services; and integrated long-term care services, as well as care management software that automate the clinical, administrative, and technical components of care management programs. This segment offers its services and products to state programs, healthcare organizations, employer groups, and other commercial organizations. The company provides its services through primary and specialty care physicians, hospitals, and ancillary providers. Company description from FinViz.com.

Centene reported earnings of $1.12 compared to estimates for $1.05. Revenue jumped 69% to $11.72 billion to beat estimates for $11.42 billion. The big spike in revenue came from the $6.3 billion acquisition of Health Net last year.

The insurer said it had 12.15 million members on March 31st, an increase of 605,000. They raised guidance for the full year from $4.40-$4.85 to $4.50-$4.90. The health benefits ratio or HBR, the amount it spends on claims compared to the premiums received declined from 88.7% to 87.6%. The lower HBR is due to a greater mix of commercial businesses and the growth of its Obamacare businesses.

Earnings July 25th.

Shares had resistance at $73, which was broken last week. The next resistance is the 52-week high at $75.50 and the stock closed at $74.41 on Friday. There was a sell the news drop on Wednesday after the earnings but shares have already recovered $3 of that decline.

If the stock moves to a new 52-week high is should continue on to make a new high over $80.

Position 5/1/17:

Long June $77.50 call @ $1.57, see portfolio graphic for stop loss.

CVX - Chevron - Company Profile


No specific news. Oil prices broke over $50 and energy stocks should begin to rebound next week.

Original Trade Description: April 16th.

Chevron Corporation, through its subsidiaries, engages in integrated energy, chemicals, and petroleum operations worldwide. The company operates in two segments, Upstream and Downstream. The Upstream segment is involved in the exploration, development, and production of crude oil and natural gas; processing, liquefaction, transportation, and regasification associated with liquefied natural gas; transportation of crude oil through pipelines; and transportation, storage, and marketing of natural gas, as well as operates a gas-to-liquids plant. The Downstream segment engages in refining crude oil into petroleum products; marketing crude oil and refined products; transporting crude oil and refined products through pipeline, marine vessel, motor equipment, and rail car; and manufacturing and marketing commodity petrochemicals, and fuel and lubricant additives, as well as plastics for industrial uses. It is also involved in the cash management and debt financing activities; insurance operations; real estate activities; and technology businesses. Further, the company holds interests in power plants, as well as operates geothermal plants; and engages in the transportation of refined products primarily in the coastal waters of the United States. The company was formerly known as ChevronTexaco Corporation and changed its name to Chevron Corporation in 2005. Company description from FinViz.com.

Chevron is one of the U.S. energy majors with billions of barrels of reserves. The company pays an annual dividend of $4.32 or 4.07% yield. They are totally committed to preserving and raising the dividend. This makes them a top pick by nearly every major analyst.

Chevron is coming out of a major project cycle where they spent over $25 billion a year on capex building out monster projects. Now that the projects are nearly complete and ramping up production, the company can reduce its capex significantly and still increase production as those projects come online.

Chevron has amassed a two million acre position in the Permian Basin with 9 billion barrels of reserves. The company is currently operating 11 rigs in the Permian and will be adding 9 more in the coming months. They plan on ramping up their Permian production from the current 80,000 bpd to 700,000 bpd over the next few years. Chevron's Permian acreage is said to be worth more than $43 billion. It was acquired in pieces at much lower prices by predecessor companies over the last several decades. The Permian was never a big focus for Chevron as they concentrated on megaprojects elsewhere. They are increasing spending in the Permian by $2.5 billion in 2017. They are not hedging their oil production because they believe prices will rise.

Earnings on April 28th are expected to be a miss because of the sharp decline in oil prices in March. This is expected to lower earnings and force misses for the major producers. Since this is a well-known fact, I suspect it it being priced into the stock ahead of the report.

Thursday's decline of 3% put the stock right at light support at $106. If this level fails, there is strong support at $100.

Oil prices should begin to rally any day now. Refinery utilization of back over 90% and it is time to begin pushing summer blend fuels into the distribution system. We should begin to see inventory declines every week and that should last through July. August is normally when crude prices top out. OPEC should extend the production cuts because they are right on the edge of a reduction in inventories and an extension would guarantee it.

Chevron shares should rebound with crude prices. If they were to surprise with earnings, shares should rebound quickly.

The option is cheap and we are going to hold over the earnings report.

If the market tanks at the open on Monday, please do not enter this position until the S&P is positive.

Update 4/19/17: Chevron shares crashed with the entire energy sector after a nearly $2 drop in crude prices on weak inventory numbers from the EIA. WTI only declined -1 million barrels and gasoline rose 1.5 million compared to an expected decline of -1.6 million. The EIA said gasoline demand was down -0.8% from the same period in 2016.

Update 4/22/17: Chevron lost a court case in Australia for $260 million. The case ruled on the deductibility of interest on a $2.5 billion loan made from the parent company between 2003-2008. Chevron Australia paid 9% interest on the loan from Chevron and the parent company borrowed the money at a lower rate. The court said Chevron Australia could only deduct the interest at the parent's borrowing rate. Chevron said they would appeal.

Update 4/24/17: Chevron said it was selling its assets in Bangladesh to Himalaya Energy. No price was given but Bloomberg said the fields were worth about $2 billion. Chevron is planning on selling $10 billion in non-core assets in 2017. Himalaya is owned by a consortium of Chinese state owned firms. Bangladesh has a right of refusal on any deal and they said they were not done with their evaluations yet. The three fields held in the Chevron subsidiary produce 720 million cubic feet of gas and 3,000 barrels of condensate per day.

Update 4/28/17: Chevron reported earnings of $1.41 compared to estimates for 86 cents. The Chevron number did have a $600 million gain from the sale of an upstream asset so it is not really apples to apples comparison. Revenue of $33.4 billion missed estimates for $34.9 billion. Operating costs declined 14% and capex spending will be down more than 30%. Oil production rose 3% and full year growth is expected to be 4-9%.

Udate 5/15/17: Chevron said they had taken Train 1 of the massive Gorgon LNG plant offline for a month to do some maintenance. The plant cost $54 billion to build and has 3 trains that can produce 15.6 million tonnes of LNG per year.

Position 4/17/17:

Long June $110 call, currently $1.45. See portfolio graphic for stop loss.

FB - Facebook - Company Profile


Facebook is going to live stream 20 Major League Baseball Friday night games. The company also said it was adding an "Order Food" option to let some users order, pay and have food delivered or be available for pickup. The service works with restaurants that use Delivery.com or Slice.

Original Trade Description: May 17th.

Facebook, Inc. provides various products to connect and share through mobile devices, personal computers, and other surfaces worldwide. Its solutions include Facebook Website and mobile application that enables people to connect, share, discover, and communicate each other on mobile devices and personal computers; Instagram, a mobile application that enables people to take photos or videos, customize them with filter effects, and share them with friends and followers in a photo feed or send them directly to friends; Messenger, a messaging application to communicate with people and businesses across platforms and devices; and WhatsApp Messenger, a mobile messaging application. The company also offers Oculus virtual reality technology and content platform, which allow people to enter an immersive and interactive environment to play games, consume content, and connect with others. Company description from FinViz.com.

Facebook also blew away earnings estimates and they are growing earnings at the fastest rate of any of the FAANG stocks. They have multiple revenue streams and sites like Instagram and WhatsApp that are just starting to accelerate earnings. They said Instagram had reached 50,000 advertisers. Facebook's problem is they do not have enough page views to monetize despite the 1.9 billion users. They have more advertisers than they have space.

Earnings August 2nd.

Facebook had been moving sideways since hitting the $153 high post earnings. Volatility was low and investors were just waiting for a market dip so they could get a better entry point. Share fell to uptrend support at $145 and even if they due decline further there is strong support around $140.

Update 5/18/27: Facebook was fined $122.4 million by EU regulators for giving them false information in the WhatsApp acquisition process. The EU asked how many WhatsApp users were also Facebook users and the company said it did not know and did not have way of matching the usernames. A year after the acquisition Facebook launched a service that did match users and the EU said they had the capability all the time.

The company also announced a new effort to reduce "clickbait" headlines and punish websites that continually publish fake news. I hope they are successful.

Position 5/18/17:

Long Aug $150 call @ $4.90, no initial stop loss.

IWM - Russell 2000 ETF - Company Profile


The small caps rebounded with the market on Friday but crashed at the close on the latest revelations about the Russian probe into the Trump administration. This could be the start of a new decline next week. I am putting a tight stop on this position.

Original Trade Description: May 17th.

The iShares Russell 2000 ETF seeks to track the investment results of an index composed of small-capitalization U.S. equities.

The Russell 3000 is the top 3,000 investible stocks in the U.S. The Russell 1000 is the top 1,000 stocks by market cap and the Russell 2000 is the next 2,000 stocks by market cap. The Russell 2000 is commonly called the small cap index but it has a large number of midcap stocks as well.

The Russell 2000 imploded with a 39 point, -3% decline to 1,355. There is strong support at 1,344. "IF" the market rebounds as I expect the Russell is likely to rebound strongly now that all the stop losses have been hit.

The corresponding level on the IWM is $134 with the ETF closing at $134.89 on Wednesday. This support has held since January despite six intraday penetrations that were immediately bought.

Position 5/18/17:

Long July $136 call @ $3.08. No initial stop loss.

MCD - McDonalds - Company Profile


No specific news but a new record high.

Original Trade Description: May 3rd.

McDonald's Corporation operates and franchises McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, Latin America, and internationally. The company's restaurants offer various food products, soft drinks, coffee, and other beverages. As of December 31, 2016, it operated 36,899 restaurants, including 31,230 franchised restaurants comprising 21,559 franchised to conventional franchisees, 6,300 licensed to developmental licensees, and 3,371 licensed to foreign affiliates; and 5,669 company-operated restaurants. McDonald's Corporation was founded in 1940 and is based in Oak Brook, Illinois. Company description from FinViz.com.

McDonalds is surging because they have overhauled their menu, offered breakfast all day, shifted to fresh beef, mobile ordering, delivery with UberEats, kiosks AND they are selling coffee for $1 and specialty drinks for $2. That is vastly lower than Starbucks and it is helping them steal market share. People stopping by to pick up a cheap coffee tend to order a snack as well. Who can resist adding an Egg McMuffin to go with that coffee.

McDonalds reported better than expected earnings and raised guidance. They reported $1.47 compared to estimates for $1.33. Revenue of $5.68 billion beat estimates for $5.53 billion. Same store sales rose 1.7% compared to expectations for an 0.8% decline. Global sales were up 4%.

Earnings July 25th.

Goldman has had a neutral rating on them forever but upgraded the fast food giant today to a buy with $153 price target. Goldman admitted they were late but said there was still plenty of time given the improved metrics. Goldman cited McDonald's "Experience of the Future" plans for mobile ordering and kiosks and said the expanding delivery options could expand revenue.

McDonalds closed at a new high today in a weak market.

Update 5/4/17: McDonalds said it was adding Signature Crafted Recipes to its stores in Florida and would be adding 5,000 workers to handle the volume.

Update 5/15/17: McDonald's Bar-B-Que opened on May 15th, 1940. The store closed and was later reopened in 1948 with only 9 items on the menu. Hamburgers were 15 cents, cheeseburgers 19 cents and cokes/coffee were 10 cents. Today, McDonalds serves 77 million customers a day. Short history of MCD in pictures The stock celebrated today with a new high.

Update 5/18/17: McDonald's added 1,000 additional restaurants to its McDelivery program utilizing UberEATS food delivery service. They had been testing at 200 stores in Florida since January. Apparently, McDonalds customers are loving it.

Position 5/4/17:

Long July $145 call @ $1.67, see portfolio graphic for stop loss.

NFLX - Netflix - Company Profile


The screening of the Netflix movie "Okja" at the Cannes Film Festival was stopped after five minutes because of heckling from the audience due to a glitch in the projection system. The movie was restarted and received mostly good reviews. Netflix caused controversy because it refuses to show the movie in France. French regulations prevent online streaming of movies until 3 years after their original theatrical release. The movie stars Tilda Swinton and Jake Gyllenhaal. The live action movie is about a girl and her pet animal (animated) that resembles a loveable hippo that was captured to be sold for food.

Original Trade Description: May 17th.

Netflix, Inc., an Internet television network, engages in the Internet delivery of television (TV) shows and movies on various Internet-connected screens. The company operates in three segments: Domestic Streaming, International Streaming, and Domestic DVD. It offers members with the ability to receive streaming content through a host of Internet-connected screens, including TVs, digital video players, television set-top boxes, and mobile devices. The company also provides DVDs-by-mail membership services. It serves approximately 100 million streaming members in 190 countries. Netflix, Inc. was founded in 1997 and is headquartered in Los Gatos, California. Company description from FinViz.com.

Netflix posted blowout earnings and shares rocketed higher to hit $161 on Monday. I have been waiting for three weeks for a pullback. Analysts are projecting higher highs with the high price targets at $175. There have been continuous rumors that either Disney or Apple will try to buy them not only to acquire the platform but to keep the other company from acquiring it. Both have said they want to have a big presence in streaming. Tim Cook just said it last week. Both have the cash and Disney has billions of dollars in content it can immediately add to the platform.

Netflix is expected to add 3 million subscribers in Q2. They are testing higher prices in Australia to see what price levels will cause subscriber flight. Once they figure it out you can bet they will apply it to the rest of their 100 million customers. That is instant profit. Bumping rates by $5 gets them another $500 million a month in revenue.

They announced with earnings they were finally entering China through a partnership with the largest existing streamer in China. This is one more step to a full release in the future.

Update 5/18/17: The FCC voted 2-1 to roll back the 2015 net neutrality order from President Obama. Some say this will impact major internet users like Netflix. However, the company said last month that elimination of the order would not have any impact on their business because they were big enough and had a broad enough customer base that ISPs would not try to slow down their streaming traffic. The order prevented ISPs from charging for faster bandwidth for heavy users. Netflix is responsible for 40% of the internet traffic in peak hours.

Earnings July 17th.

We have to use a spread because options are still expensive.

Position 5/18/17:

Long July $160 call @ $6.45, no initial stop loss.
Short July $175 call @ $2.16, no initial stop loss.
Net debit $4.29.

$VIX - Volatility Index - Index Description


The strong open erased most of the VIX gains for the week. That is two spikes to 16+ over the last three weeks but I am not giving up on worries there could be a bigger spike in our future.

The May 8th close at 9.77 was the lowest close since December 1993. That is a 24 year low!!

This is a July call. We have plenty of time and the odds of a market sell off over the next 2.5 months are close to 100%. The VIX cannot go much lower but it can go a lot higher.

While holding the VIX call is an insurance play for us, I hope we are never in a position to profit from it. That would mean a lot of our long positions would be under water or stopped out.

Original Trade Description: Jan 26th

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.

Update 5/1/17: The VIX made a new intraday low at 9.90 and closed at a 10-yr low at 10.11. The government shutdown has been avoided according to reports out of Washington and that helped to deflate the VIX. Marine Le Pen is rapidly gaining on Macron in the French election runoff for next Sunday. She gained 6 points in two days to 41% in the recent polls compared to Macron's 59%. If she can gain another 6% early this week then the entire event risk scenario comes back into play with a potential come from behind win.

Position 3/30/117
Long July $14 call @ $2.55, no stop loss.
Added 5/9/17: Long July $14 call @ $1.60, no stop loss.
Average cost now $2.07.

Previously Closed 2/1/17: Long March $12 call @ $2.60, exit $2.50, -.10 loss.
Previously Closed 2/22/17: Long March $12 call @ $1.75 adj, exit $1.65, -.10 loss.
Previously Closed 4/10/17: Long Apr $13 call @ $2.30, exit $1.80, -.55 loss.

BEARISH Play Updates (Alpha by Symbol)

TSCO - Tractor Supply - Company Profile


No specific news. New 2-year low close.

Original Trade Description: May 15th.

Tractor Supply Company operates rural lifestyle retail stores in the United States. The company offers a selection of merchandise, including equine, livestock, pet, and small animal products necessary for their health, care, growth, and containment; hardware, truck, towing, and tool products; seasonal products, such as heating products, lawn and garden items, power equipment, gifts, and toys; work/recreational clothing and footwear; and maintenance products for agricultural and rural use. As of January 26, 2017, it operated 1,600 retail stores in 49 states. The company operates its retail stores under the Tractor Supply Company, Del's Feed & Farm Supply, and Petsense names. It also operates an e-commerce Website, TractorSupply.com. The company sells its products to recreational farmers, ranchers, and others, as well as tradesmen and small businesses. Tractor Supply Company was founded in 1938 and is headquartered in Brentwood, Tennessee. Company description from FinViz.com.

In mid April TSCO warned that sales were weak and cut its earnings outlook. Same store sales fell -2.2%. The average number of transactions declined -1.4% and the average ticket size fell -0.9%. The company blamed price deflation from competition and lower sales of seasonal merchandise. They cut estimates from 49 cents to 45-46 cents.

The company has been around since 1938. Have they not gotten a grasp of weather patterns yet?

When they reported earnings of 46 cents that matched the lowered analyst estimates. Revenue rose 6.6% to $1.56 billion.

Let make sure we have this right. In Mid April, they warned of lower sales for multiple reasons and cut earnings estimates. Two weeks later, they reported a 6.6% increase in sales rather than a decrease. Other investors picked up on the discrepancy and shares began to fall. Since Amazon does not sell tractors online, somebody else is forcing their profits lower. Maybe the sale of big ticket items like tractors is suffering from the same illness as motorcycles and motor homes. A lack of extra money in consumer pockets.

The next earnings release is July 26th.

I am going to step out to the October strikes because the July options would expire before earnings. It would be best to have some earnings expectation in the premium to keep them elevated.

We can buy all the time we want. We do not have to use it. We will exit before earnings.

Position 5/16/17:

Long Oct $55 put @ $1.95, see portfolio graphic for stop loss.

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

subscribe now