Option Investor

Daily Newsletter, Wednesday, 7/5/2017

Table of Contents

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

Market Wrap

A Split Market and Split Opinions

by Keene Little

Click here to email Keene Little
In the past few weeks we've seen some strong splits between major indexes and it's making it much more difficult to determine what the market is going to do next. The result has been a choppy market that's either consolidating for another bullish run or is in a topping pattern.

Today's Market Stats

The market has been chopping mostly sideways for weeks as money sloshes around from one sector to the other but without enough liquidity to get all boats rising again. A fractured market is usually not a good sign for bulls because it's usually a sign of a loss of liquidity that will soon turn to stronger selling. But there have been very few signs that the market is in a topping pattern.

Other than the noise from the White House and CNN and bellicose N. Korea, it's been relatively quiet on the political and geopolitical front. That and the lack of performance indications from companies has kept the stock market looking for something to spark a movement (we know what kind of "movement" the bears would like). The stock market continues to be resilient in the face of any kind of news and until we see selling on good news we should assume the bulls will remain in control of the tape.

This morning's economic reports included only the morning's Factory Orders and this afternoon's FOMC Minutes. The Factory Orders report showed a slowdown that was greater than expected -- down -0.8% vs. expectations for -0.5%. April showed a slowdown of -0.3%, which was a revision lower from the previously reported -0.2%. There was virtually no reaction to the news and if anything you could say the market rallied on the disappointing news. But it was the usual turnaround at 10:00 following the brief decline from the open.

There was also little reaction to the FOMC minutes since there were no surprises in the minutes. We'd already heard it before.

As for the market, there are some topping signs here and there but the bulls can easily argue there are enough signs that indicate another leg up is coming, one of which is the lack of impulsive (strong) selling. It's been hard to take a strong stance with either side and that simply means it's not a good time to make aggressive trades.

The bulls certainly can't complain about the lack of progress by the "sell in May" crowd. SPX might not have tacked on a lot of points since the beginning of May but it's about 50 points higher than it was at the end of April and that's nothing to sneeze at in a period that's supposed to be weak. If for no other reason, considering the uptrend remains in progress, we should be staying long the market until we're told otherwise.

The May lows are probably the line in the sand for the bulls -- those lows must be protected in order to maintain the uptrend. The Dow is the strongest index in regards to the price pattern following its May 18th low while NDX is the weakest. The NDX has come close to dropping below its May 18th low at 5568 with Monday's and today's lows near 5593.

As a comparison to the weak NDX, the Dow's May 18th low was 20553, which is 925 points below today's close. That's a real split in the market and the bears will argue it's been a flight to the safety of the blue chips while the bulls will argue the relative strength in the RUT, which says there's not been a flight from higher-beta stocks.

There are many other statistics that are not helping us figure out this market. I read an interesting article found on schaefersresearch.com that discussed the results from the first half of this year and what that could mean for the second half of the year. The first point in the article was bullish while the second point suggested caution by the bulls, of which there are many.

The author of the article, Rocky White, pointed out that in the first half of 2017 SPX gained 8% and the max drawdown was -2.8% between March 1 and April 13. Going back to 1929 this was only the second time the SPX has had less than a 5% drawdown. The last time was in 1995 when SPX pulled back only -1.7%. And the record is good for the bulls based on this statistic -- the second half of 1995 saw a gain of +13%. When the first half of the year has seen less than a 5% drawdown the average gain in the second half has been nearly +8%. Negative second halves have been trivial.

So is it time to load up on long positions for the second half? Unfortunately there's another statistic that urges caution -- bullish sentiment. When the weekly Investors Intelligence, a measure of bullish vs. bearish sentiment among stock advisors, is above 50% after the first half of the year the second half tends to be negative. While 81% of the years with good first halves (as measured by a drawdown less than 5%) were positive in the second half, it changes significantly if the Investors Intelligence gets above 50%, in which case it's a craps shoot (50%). In other words, too many bulls can spoil the party for the bulls and that's the situation we have currently with the II at 56.2%

One other statistic is that the Millennials have been increasing their stake in the stock market game. And it's not just stocks -- they're playing the derivatives market, just as traders did into the 2000 and 2007 highs. The Millennials have been staying out of the market and with the huge increase in new trading accounts by the Millennials it's an indication that the high-flying market is finally pulling them in. This could drive the market much higher in a melt-up but it's also another caution sign that things could be getting too frothy.

Normally this kind of confusion can be settled by the charts, which can normally provide at least some decent clues to follow. That's not the case at the moment, especially with the split between the indexes. The best we can do is follow the patterns on the charts and keep each one separate from the others and trade what you see on your chart, not what you think should happen. If nothing else you should be able to get some good trigger levels (to get in or out).

Dow Industrials, INDU, Weekly chart

Not much has happened with the market in the past 1-1/2 weeks and that can been seen in the small weekly candles as it has consolidated the previous month's gains. There continues to be upside potential to at least the trend line along the highs from December 2014 - May 2017, near 21750. The weekly uptrend remains intact until the Dow drops below its April 13th low at 20379, which would be an 1100-point decline (-5.1%).

Dow Industrials, INDU, Daily chart

You can see on the daily chart below how choppy price action has been since the high on June 19th. Today marks the 11th trading day since that date and the Dow still trades below the 21535 high on June 20th, but it hasn't been for lack of trying. The choppy consolidation/pullback keeps it potentially bullish for a run higher into early July. The first sign of trouble for the bulls would be a drop below price-level support at 21169 (the March 1st high). In the meantime, there's a confluence of trend lines at roughly 21700-21750 that provides us with an upside target zone.

Key Levels for DOW:
- bullish above 21,535
- bearish below 21,169

Dow Industrials, INDU, 120-min chart

The 120-min chart of the Dow shows a rising wedge pattern for the rally from April. It has the requisite 3-wave moves inside and we could get another 3-wave move up from June 29th to finish the 5th wave of the wedge. We might see a little further pullback from Monday's high and then head higher again but in any case watch for a rally to the top of the wedge, maybe a little throw-over, and then a collapse back down. A rally to the top of the rising wedge, which will be near 21715 early next week, would put it inside the 21700-21750 target zone mentioned above.

S&P 500, SPX, Daily chart

Since its June 19th high SPX has been looking like the Dow with its choppy pullback/consolidation. Assuming we'll get another leg up, I see upside potential to a price projection at 2481, which is also where it would run into its broken uptrend line from November 4 - April 13 and a trend line along the highs since April 26th. The two trend lines intersect near 2476 on July 11th. The first sign of trouble for the bulls would be a drop below price-level support at 2101-2105.

Key Levels for SPX:
- bullish above 2454
- bearish below 2405

Nasdaq-100, NDX, Daily chart

NDX had a nice pattern into a possible top on June 8th but the 2nd leg of its decline from that high is looking a little choppy for what should be a 3rd wave down. It's also struggling but holding onto its uptrend line from June-November 2016, which it closed below on Monday and back above today. Currently sitting near 5628, that trend line needs to hold in order to keep the bulls in control. But a drop below the uptrend line could open the trap door sitting under the bulls.

While the Dow keeps me leaning bullish, NDX keeps me leaning bearish. We're waiting for the market to make up its mind.

Key Levels for NDX:
- bullish above 5846
- bearish below 5592

Russell-2000, RUT, Daily chart

The RUT has been in a messy (choppy and whippy) pattern since December and has barely made any progress all year. The December 9th high was 1388 and today's close was 1420. That's 32 points (+2.3% over six months). But at least it's a gain and not a loss and the gains could continue if we're to see a choppy rising wedge continue into next week and get the RUT up to its trend line along the highs from 2007-2015, now near 1441. The bearish divergence and the choppy move higher tell me it's in an ending pattern and any new highs with these conditions would be a dangerous time to chase it higher.

Key Levels for RUT:
- bullish above 1442
- bearish below 1396

KBW Bank index, BKX, Daily chart

The banks have been strong since the low on June 23rd. BKX has again been testing the underbelly of its broken uptrend line from June 2016 - April 2017. The line, currently near 97.55, held as resistance when first back-tested June 12-13 and has again been holding as resistance since June 29th. If it can push a little higher it could hit the price projections at 98.12, where it would have two equal legs up for the bounce off the May 31st low. Above that is potential resistance at its March 1st high at 99.77.

Transportation Index, TRAN, Weekly chart

On Monday the TRAN closed at 9639 which was above its March 1st closing high near 9594. It added a few more points today with its close near 9646. This is a big deal for the bulls since it keeps the Dow Theory on a buy signal with both the Dow and TRAN in synch to the upside.

But it's not all sunshine and roses for the TRAN since there might not be much more upside left to the rally. I see the potential for a price projection at 9823 to be met (where the 5th wave of the leg up from January 2016 would be 62% of the 1st wave), and maybe all the way up to the projection at 10490 (5th wave equal to 1st wave). But the broken uptrend line from June-October 2016 is acting as resistance and it's showing bearish divergence against its highs since December.

A little higher for both the Dow and TRAN into next week could set up an important top for both so it pays to be cautious about any new highs from here.

U.S. Dollar contract, DX, Daily chart

The US$ made it down to the bottom of its down-channel from January and the trend line along the lows from March. Predictably, it got a bounce off that support and now we wait to see if the bounce develops some bullish legs to at least break the downtrend line from April, currently near 97.10. The 50-dma is coming down toward that level and it could meet the dollar at the trend line if it bounces strong from here.

If the dollar chops sideways/up we'll then have a good idea that the dollar will then head lower again. It's quite possible we'll see the dollar consolidate for months and make it back up to the top of its down-channel, maybe near 97.50 by September, before heading back down.

Gold continuous contract, GC, Daily chart

Gold's break of its uptrend line from December 2016 - May 2017, on June 23rd, was followed by a small back-test and then a steep decline into Monday's low. That was bearish price action and it's looking like gold will continue to head lower. It's getting oversold so there could be at least a bigger bounce/consolidation in its near future, especially as it tests its May 10-11 lows near 1217. Today's low was 1216.50. But the break through multiple support levels (20-, 50- and 200-dmas and its uptrend line) is an indication that a stronger decline is in progress.

Oil continuous contract, CL, Daily chart

Oil had spiked up strong off its June 21st low and then was able to make it back above its broken uptrend line from August 2016 - May 2017. It made it through its broken 20-dma, near the broken uptrend line, on June 30th and then banged its head on the broken 50-dma, near 46.95, on Monday and again today before selling off sharply today. If it can stay above the broken uptrend line and 20-dma, at 44.73-44.87, it will stay bullish for at least a larger bounce. Back below 44.70 could to a continuation lower, which I think has a good chance of happening.

Supposedly oil got hit hard today on the news that Volvo will be making electrically-powered cars starting in 2019 (I presume some will be hybrid). The other car manufactures are likely not far from announcing something similar and the gas consumption is expected to decrease dramatically as more consumers gravitate to electric. And if natural gas continues to be in large supply due to fracking and other methods, electric companies could continue to reduce their demand for oil. Add in a slowing economy in the near future along with growing oil supplies and the fundamentals for oil's price do not look favorable for the near future.

Economic reports

Thursday will be a big day for economic reports, including the ADP employment report and the ISM Services report. Whether or not the reports will move the market, and in which direction, is always the bigger question.


The stock market appears to be either consolidating for another big run higher or it's in a topping pattern. Depending on which metric or price pattern, and which index, you look at you could easily make the argument for either case. That's obviously not helpful for making trading decisions. Actually it is helpful -- when in doubt, stay out. Flat is a position and in times like this it's often the best position.

I see more potential for at least a little higher than lower in the coming week but only if the techs get on board with a rally. The pattern for NDX is bearish and maybe it will get at least a bigger bounce if the blue chips and RUT can chop their way a little higher. But if the techs continue to drop and the banks start to join them to the downside I'd be very reluctant to think long and instead start to look for shorting opportunities. By this time next week I suspect we'll have a good idea about whether or not to continue expecting new highs or if instead we have signals that the top is already in place. For now the jury is still out and we need to exercise patience.

Good luck and I'll be back with you next Wednesday. See below for a good deal on an OIN subscription.

Keene H. Little, CMT



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New Option Plays

Earnings Beat

by Jim Brown

Click here to email Jim Brown

Editors Note:

This company beat earnings but the quality of the report was lacking. Nike had a lower than expected tax rate that contributed to the beat and U.S. sales were flat to down.


No New Bullish Plays


NKE - Nike Inc - Company Profile

NIKE, Inc., together with its subsidiaries, designs, develops, markets, and sells athletic footwear, apparel, equipment, and accessories worldwide. It offers products in nine categories, including running, NIKE basketball, the Jordan brand, football, men's training, women's training, action sports, sportswear, and golf. The company also markets products designed for kids, as well as for other athletic and recreational uses, such as cricket, lacrosse, tennis, volleyball, wrestling, walking, and outdoor activities. In addition, it sells sports apparel; and markets apparel with licensed college and professional team and league logos. Further, the company sells a line of performance equipment, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment, golf clubs, and other equipment under the NIKE brand name for sports activities; various plastic products to other manufacturers; athletic and casual footwear, apparel, and accessories under the Jumpman trademark; action sports and youth lifestyle apparel and accessories under the Hurley trademark; and casual sneakers, apparel, and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron, and Jack Purcell trademarks. Additionally, it licenses agreements that permit unaffiliated parties to manufacture and sell apparel, digital devices, and applications and other equipment for sports activities under NIKE-owned trademarks. The company sells its products to footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops, and other retail accounts through NIKE-owned retail stores and Internet Websites (direct to consumer operations), as well as independent distributors and licensees. Company description from FinViz.com.

Nike reported earnings last week of 60 cents that beat estimates for 50 cents. Revenue of $8.7 billion narrowly beat estimates for $8.6 billion. The earnings spike was due mostly to a lower tax rate.

The stock spiked $5 on short covering after they announced they were turning to Amazon to help them sell shoes and apparel. Some analysts believe this will lead to further discounting because Amazon is a cutthroat market. We have already seen a weak market for high dollar Nike models with sales at 50% off. Moving to Amazon will cause additional discounting in those high dollar models. They also believe it will lead to lower orders from distributors and cause them even more grief in the U.S. where sales were flat. The U.S. is Nike's biggest market where they face less competition from brands like Adidas, which is rapidly accelerating.

Futures orders were reportedly down -10% indicating weak orders from distributors. As Nike shifts more from wholesale sales to the direct to retail market, they are going to face an entirely different set of problems. They announced they were laying off 1,400 employees as part of their consumer direct offense strategy.

Expected earnings Sept 28th.

The earnings are over and the post earnings depression phase should be starting. With everyone else starting their earnings next week, traders will be leaving Nike to find a stock with positive momentum.

Buy Aug $57.50 put, currently $1.39, initial stop loss $59.85.

In Play Updates and Reviews

Questionable Moves

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes reversed roles with the Dow negative and the Nasdaq positive. Monday's move had the Dow strongly positive and Nasdaq strongly negative. Wednesday saw the Dow negative most of the day with a -75 dip in the morning. The Nasdaq was positive all day after an ugly session on Monday.

The Dow has held over prior support at 21,400 both days this week but resistance at 21,530 remains intact. The Nasdaq tested 6,100 support both days and rebounded to close at 6,150 but below resistance at 6,175.

The reversal of roles is easy to understand but provides no clue to the future. The Nasdaq rebouned when portfolio managers returned from the holiday and put the new quarter end retirement funds into beaten down tech stocks. The Dow benefitted from financials and energy on Monday as that same money was put to work. Today's confusion from the FOMC minutes caused those big caps to pause.

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

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BULLISH Play Updates

AAPL - Apple Inc - Company Profile


No specific news. Nomura said iPhone 7 demand was weak but it was ok because of the pent up demand for the iPhone 8, expected out in a couple months. The analyst said the model 8 would provide sufficient upside in both volume and price to more than compensate for the current weak sales in the model 7.

Original Trade Description: June 28th.

Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players to consumers, small and mid-sized businesses, and education, enterprise, and government customers worldwide. The company also sells related software, services, accessories, networking solutions, and third-party digital content and applications. It offers iPhone, a line of smartphones; iPad, a line of multi-purpose tablets; and Mac, a line of desktop and portable personal computers. The company also provides iLife, a consumer-oriented digital lifestyle software application suite; iWork, an integrated productivity suite that helps users create, present, and publish documents, presentations, and spreadsheets; and other application software, such as Final Cut Pro, Logic Pro X, and FileMaker Pro. In addition, it offers Apple TV that connects to consumers' TV and enables them to access digital content directly for streaming high definition video, playing music and games, and viewing photos; Apple Watch, a personal electronic device; and iPod, a line of portable digital music and media players. Further, the company sells Apple-branded and third-party Mac-compatible, and iOS-compatible accessories, such as headphones, displays, storage devices, Beats products, and other connectivity and computing products and supplies. Additionally, it offers iCloud, a cloud service; AppleCare that offers support options for its customers; and Apple Pay, a mobile payment service. The company sells and delivers digital content and applications through the iTunes Store, App Store, Mac App Store, TV App Store, iBooks Store, and Apple Music. It also sells its products through its retail and online stores, and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers, and value-added resellers. Company description from FinViz.com.

This play is not going to take a lot of explanation. Shares rallied to $156 in May and then stalled at that level as various rumors continued to circulate over a potential delay in shipping the iPhone 8. Analysts routinely debated the various pros and cons of the Apple outlook. Shares fell to $144 and they have been trading at $145 for the last three weeks. On Tuesday's decline the stop lost $2, which was immediately recovered on Wednesday.

Apple is expected to report earnings on August 1st. The stocks always ramps up into earnings. Since Apple is expected to announce multiple iPhone models in September, a shipment delay on the big iPhone 8 will not be a disaster. We will be out of the position before the August earnings so that will not impact us either way.

The plan is to capture the ramp into the earnings and then exit. Having Apple dormant at $145 for the last three weeks shows there is plenty of support under that level and a rebound could start at any time. Fortunately, because of the dormancy, the options premiums have shrunk.

Apple is a sleeping giant. When it awakes, there could be plenty of price chasing.

Buy August $150 call, currently $3.05, initial stop loss $141.85.

BABA - Alibaba - Company Profile


Alibaba announced the Alexa clone called Genie X1, which will be available to the first 1,000 people for a one-month trial. The cost will be $73 during this live test and it only speaks mandarin. Shares spiked $4 on the announcement.

Original Trade Description: June 10th.

Alibaba Group Holding Limited, through its subsidiaries, operates as an online and mobile commerce company in the People's Republic of China and internationally. It operates Taobao Marketplace, an online shopping destination; Tmall, a third-party platform for brands and retailers; Juhuasuan, a sales and marketing platform for flash sales; Alibaba.com, an online wholesale marketplace; Alitrip, an online travel booking platform; 1688.com, an online wholesale marketplace; and AliExpress, a consumer marketplace. The company also provides pay-for-performance and display marketing services through its Alimama marketing technology platform; Taobao Ad Network and Exchange (TANX), a real-time bidding online marketing exchange in China; and data management platform through TANX for marketers to execute their campaigns with proprietary and tailored data. In addition, it offers cloud computing services, including elastic computing, database, storage and content delivery network, large scale computing, security, and management and application services through its Alibaba Cloud Computing platform; Web hosting and domain name registration services; payment and escrow services; and develops and operates mobile Web browsers. The company provides its solutions primarily for businesses. Company description from FinViz.com

Alibaba is the poor investor's Amazon. With shares at $135, the options are at least reasonable but not cheap. Alibaba is growing as fast or faster than Amazon and tries to copy everything Amazon does.

When the company reported earnings for the last quarter at 63 cents, they missed estimates for 68 cents. Revenue of $5.6 billion easily beat estimates for $5.2 billion. Other than the earnings miss it was a solid quarter with ecommerce up 47% and cloud computing up 102%. Digital media growth was up 234%. Mobile MAUs rose from 493 to 507 million. That is important because 90% of China's ecommerce occurs on a mobile device.

The company announced plans to buy back $6 billion in stock over a two-year period.

Earnings August 18th.

Shares dipped on the earnings miss then spiked on the guidance to $125.50, which was a new high. After a little more than two weeks of post earnings consolidation, shares returned to that $125.50 level and closed at a new high.

There was an analyst day last week and that kicked the stock up to another level with a $10 gain. The company guided for 45% to 49% revenue growth in this year and analysts were only expecting 37%. MKM partners raised the price target to $177. Pacific Crest raised their price target to $160 from $137. Needham raised their target to $155. The Benchmark Company is targeting $175.

Shares declined on Tuesday on no news. With the stock overbought after the analyst meeting we could be seeing some simple profit taking. I am going to put an entry trigger on the position. If shares continue lower I will revise the entry.

Update 6/20/17: Alibaba is hosting a forum for 3,000 entrepreneurs in Detroit to explain how easy it is for them to begin selling products on Alibaba's websites. CEO Jack Ma said in another interview he expects to employ 1 million workers in the USA.

Update 6/27/17: JP Morgan initiated coverage with an overweight rating and $190 price target. Barclays said it valued Alibaba in a sum of the parts method at $200 but their price target for the parent is $175 with an overweight rating.

Update 6/29/17: Mott Capital said Alibaba could be worth $210 on a fundamental basis. A "source" in China said Alibaba will launch a device similar to Amazon's Echo but Chinese speaking, next week. That should give the stock a decent pop.

Position 6/19/17 with a BABA trade at $139.50

Long Aug $145 call @ $5.95, see portfolio graphic for stop loss.
Short Aug $155 call @ $2.92, see portfolio graphic for stop loss.
Net debit $3.03.

PYPL - PayPal - Company Profile


Payment processor, Vantiv, offered $10 billion to buy London based Worldpay. That immediately boosted Paypal and Square on thoughts there may be other combinations in the future. Paypal has a market cap of $66 billion and Square $5 billion so Paypal is not likely a potential target but they could benefit from acquiring a smaller player.

Original Trade Description: June 21st.

PayPal Holdings, Inc. operates as a technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. It enables businesses of various sizes to accept payments from merchant Websites, mobile devices, and applications, as well as at offline retail locations through a range of payment solutions, including PayPal, PayPal Credit, Braintree, Venmo, Xoom, and Paydiant products. The company's platform allows consumers to shop by sending payments, withdraw funds to their bank accounts, and hold balances in their PayPal accounts in various currencies. Company description from FinViz.com.

PayPal started out as a payment system for Ebay. Since then they have moved into dozens of areas including credit cards, peer to peer payments. Instead of being locked into one business model, they are rapidly expanding to multiple business models. Recently they partnered with MasterCard and Visa to have their digital payments processed on their systems. The company is expanding the scope of its Venmo payment platform, which handled $6.8 billion in Q1, up 114%. This peer to peer app will now allow you to pay for goods at any merchant that accepts the app, just like Apple pay.

In Q1 PayPal revenue rose 17% to $2.975 million and earnings rose 5%. Total accounts rose 23% to 203 million. As a comparison, Mastercard's revenue was less at $2.7 billion. That is a shocker to most people.

With their Q1 earnings, PayPal committed to buy back $5 billion in stock.

Expected earnings July 26th.

Shares dipped with the Nasdaq tech crash but are recovering. Their recent high was $55 and shares closed at $53.50 today. Options are inexpensive.

Position 6/22/17:

Long August $55 call @ $1.58, see portfolio graphic for stop loss.

RH - RH Inc - Company Profile


No specific news. Excellent relative strength. New 52-week closing high.

Original Trade Description: June 26th.

RH, together with its subsidiaries, operates as a retailer in the home furnishings market. The company offers products in various categories, including furniture, lighting, textiles, bathware, decor, outdoor and garden, tableware, and child and teen furnishings. It provides its products through its retail galleries and Source Books, as well as online through rh.com, rhmodern.com, restorationhardware.com, rhbabyandchild.com, rhteen.com, and waterworks.com Websites. As of January 28, 2017, the company operated 85 retail galleries, including 50 legacy galleries, 6 larger format design galleries, 8 next generation design galleries, 1 RH modern gallery, and 5 RH baby and child galleries in the United States and Canada; 15 Waterworks showrooms in the United States and the United Kingdom; and 28 outlet stores. The company was formerly known as Restoration Hardware Holdings, Inc. and changed its name to RH in January 2017. Company description from FinViz.com

RH reported earnings of 5 cents that beat estimates for 4 cents. Revenue of $562.1 million beat estimates for $560.4 million. However, they guided for Q2 earnings of 38-43 cents and analysts were expecting 53-75 cents. That is not a misprint.

The company said it was ditching its prior merchandising model and switching to a membership model in order to make the company Amazon proof and enhance the customer experience. They are moving away from the highly promotional retail experience with constant sales and discounts and moving to a membership model where the focus will be on the customer experience. "Members" will pay $100 a year for the ability to shop in a high quality store where they will find only high quality merchandise.

The Costco CEO once told Jeff Bezos at an event that once people buy a membership they no longer price shop. Bezos went on to create Amazon Prime where customers pay $99 a year for a membership and the rest is history. RH is trying to duplicate that experience.

Shares crashed 26% to $42 on the guidance but the rebound has been amazing. Apparently, investors like the concept and the idea of a "Costco" model but in high quality products.

Earnings August 31st.

Shares closed at a 52-week high on Monday as shorts are being forced to cover. There are a lot of shorts! The surge over the May highs should be a trigger for an entirely new round of short covering.

Options are expensive because of the rapid gain since they changed the retail model. I am using September to retain that earnings expectation premium. We can buy time but we do not have to use it.

Position 6/27/17:

Long Sep $65 call @ $5.20, see portfolio graphic for stop loss.
Short Sep $75 call @ $1.26, see portfolio graphic for stop loss.
Net debit $3.94.

BEARISH Play Updates (Alpha by Symbol)

No Current Puts

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