Option Investor

Daily Newsletter, Saturday, 7/22/2017

Table of Contents

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

Market Wrap

Streak Broken

by Jim Brown

Click here to email Jim Brown

The streak of positive gains on the Nasdaq Composite ended at 10 days.

Weekly Statistics

Friday Statistics

The Nasdaq consecutive 10-day winning streak was the longest since July 2013. The index was due for a negative day. Despite the 2-point decline, the index is still bullish and poised to move higher next week with a flood of tech earnings. The following 2 weeks could be a different story.

Friday was not bothered by a bunch of economic reports. The Industry GDP for Q1, a lagging indicator at best, came in at 1.06% growth. Mining and energy contributed 0.32%, manufacturing 0.54%, construction 0.23%, wholesale trade 0.21%. Retail trade subtracted -0.21%, utilities -0.10%, entertainment, food service and lodging -0.04%. The report was ignored.

Personal bankruptcy filings for Q2 rose +0.8% and the first year over year rise since 2010. The average decline over the last two years was about -6.0% per quarter. Business filings remain near the 2006 lows. Banks have noted the change in personal finances and have begun to pullback sharply on auto loans. The report was ignored.

The calendar for next week is highlighted by the OPEC production meeting on Monday and the Fed's post meeting policy announcement on Wednesday. Saudi Arabia has been talking about cutting another one million barrels of production to hasten the decline in global inventories but nobody believes them. The post meeting headlines could move oil prices.

The Fed is not expected to make any changes to rates. There is only a 3.1% chance of a rate hike. They could begin to implement the end of QE with their first taper statement but analysts do not expect that until September. With the dollar crashing, the Fed is pretty much on hold.

The first look at the Q2 GDP is on Friday. The current estimate is for 2.5% growth, which is what I have been saying for months. The Atlanta Fed real time GDPNow has fallen to projections for 2.5%.

The home sales reports are not expected to change materially. This is for the June period and sales should have remained brisk since that is one of the best months of the year for consumers to move. They can buy/sell and get moved and settled before the kids go back to school.

The most important calendar for next week is the earnings calendar. With Alphabet/Google, Facebook, Amazon and PayPal leading the charge on tech stocks we could see a volatile Nasdaq depending on the reports. There are also 9 Dow components with the big day on Tuesday. All 5 companies will report before the open so there will be volatility.

In addition, there are 190 S&P companies reporting this week. When this week is over, we will know within a few percentage points how the quarter's results will end.

The current earnings forecast for Q2 has risen to 9.6%. Of the 97 S&P companies that have reported, 74.2% have beaten estimates, which is above the 64% average of the last four quarters. Of those companies, 72.2% have beaten on revenue, which is above the average of 59% over the last four quarters.

General Electric (GE) was drag on the Dow Friday morning after reporting earnings of 28 cents that beat estimates for 25 cents. Revenue of $29.56 billion beat estimates for $29.12 billion. Shares fell -5.4% at the open but recovered to lose only -2.9%. GE's small stock price of $26 meant that decline did not materially impact the Dow with only a 5-point drag on the index. Shares are down 18% year to date and closed at the lowest level since September 2015.

CEO Jeffrey Immelt ended his 64th quarter as CEO with the largest post earnings decline in four years. The drop in the stock came on weaker guidance to the bottom of the $1.60-$1.70 range for earnings in 2017. During his reign as CEO, GE has lost $170 billion in market cap.

The new incoming CEO is doing a "deep dive" into all the GE businesses and hopes to present a new forecast with the Q3 earnings.

Honeywell (HON) reported earnings of $1.80 that beat estimates for $1.78. Revenue of $10.078 billion beat estimates for $9.835 billion. They raised their earnings guidance from $6.90-$7.00 to $7.00-$7.10 with revenue up from $38.6-$39.5 billion to $39.3-$40.0 billion. Operating cash flow rose 25% and free cash flow rose 39%. Shares rose $1.40 for the day.

Honeywell is a slow grower but it is dependable growth. This is not a rocket stock but one you can look back on a year later and say, dang, I wish I had bought that last year.

The Swedish maker of auto safety systems, Autoliv (ALV) reported earnings of $1.44 compared to estimates for $1.48. Revenue of $2.54 billion missed estimates for $2.57 billion. Organic sales rose only 0.2% and well below the prior guidance for 2.0%. Guidance for Q3 was light and reflected slow production volume in North America and China. Shares fell 8% on the news.

The actual earnings on Friday were few and the stock reactions to earnings after the bell on Thursday were the bigger news.

Microsoft beat earnings on Thursday and shares rocketed $4 in afterhours to $77.24 but declined sharply before Friday's open. The stock lost 43 cents in regular trading to close at $73.75.

Visa (V) beat on earnings on Thursday and shares gained $1.49 to a new high in trading on Friday. The company reported 86 cents and analysts expected 81 cents. This was up from 17 cents in the year ago quarter. Payment volumes rose 12.1% to $840 billion. They forecast net revenue to grow 20% for the quarter ending on Sept 20th, up from prior guidance of 16-18%.

Capital One (COF) shares rose 8.5% after reporting earnings of $1.96 compared to estimates for $1.90. Revenue of $6.7 billion beat estimates for $6.67 billion. Shares were up strongly because the bank did not have to write down a large percentage of its loans. Analysts were worried the $582 million they have in Taxi Medallion loans would take a huge hit. In New York taxi medallions, the permit needed to operate a taxi, have sold for as much as $1.3 million. Since the advent of Uber and Lyft, those have fallen to $240,000. However, these loans represent only 0.24% of COF's outstanding loans. We also do not know how much they actually loaned on average on those medallions so we could be looking at pennies on the dollar and the loans are still viable.

There are currently 13,587 taxis in NYC and more than 50,000 Uber/Lyft cars. The average hourly earnings for a taxi driver in NYC is $30.41 not counting tips.

E-Trade Financial (ETFC) reported earnings of 52 cents on revenue of $577 million. Analysts were expecting 48 cents on $554.3 million. The company also said they authorized a $1 billion stock buyback program. They added 41,000 accounts during the quarter. Shares spiked 5% on the news.

Intuitive Surgical (ISRG) reported earnings of $5.95 per share on revenue of $756 million, a 13% increase in sales. Analysts were expecting $5.79 and $722 million. They shipped 166 da Vinci Surgical Systems in Q2 compared to 130 in the year ago quarter. Globally da Vinci procedures rose 16%. They announced a new model called the da Vinci X, which allows some of the most advanced procedures at a lower price point. Shares fell 5% or -$44.

In other news, Amazon (AMZN) was hit by a probe by the FTC after a complaint from the group Consumer Watchdog. The complaint said they looked at 1,000 items on the Amazon site and the reference price from which the discounts were calculated was not correct. The group said 61% of the items had sold for less than the reference price over the prior 90 days. Personally, I do not think it matters. If a Crock Pot has a manufactures list price of $29.95 and that is what Amazon is using as the reference price to calculate their discount, that should not be a problem. Even if they sold it on the website for $27.95 six weeks ago, so what? Everyone knows that nobody sells anything for the suggested retail price.

The real worry comes from the FTC probe in general. The current administration has dumped on Amazon in speeches multiple times. If the FTC is directed to "find something" then the probe could grow and grow and grow.

Secondly, with lawmakers urging a deeper review of the Whole Foods acquisition by regulators, this could cause even bigger problems getting that approved.

Everyone realizes that Amazon is the main driver behind the lack of retail price inflation in the U.S. and we are all thankful for it. If you are not an Amazon shopper, you may feel otherwise but you are still benefitting.

Amazon Web Services is also under attack but from another tech giant not the government. Microsoft cloud services rose 56% in Q2 and beat estimates by about $2 billion. KeyBanc said, "The sheer size and accelerating pace of cloud growth increases our confidence in the bull-case scenario that Microsoft Cloud can quickly scale north of a $50 billion segment by 2021." This could eventually allow Microsoft to bypass Amazon as king of the cloud. Microsoft cloud revenue is now 20% of their total revenue compared to 5% three years ago.

Whole Foods set August 23rd as the date of the shareholder meeting to vote on the Amazon acquisition. Given the 27% premium to the prior share price, this should be easily approved.

Amazon has begun offering meal kits similar to Blue Apron and Plated and the Amazon price is cheaper. With Amazon, you can order a single meal at any time without restrictions as a Prime customer. With Blue Apron and others, you have to commit to a monthly subscription of $60 or more and order a week in advance. The Amazon cost for a 2 serving meal was between $16-$20 plus a $10 delivery charge. For orders over $40, there is no delivery charge. Order 2-3 meals at once and you are set for several days. One analyst said he did not see the benefit in ordering "work in a box" when you could stop by a restaurant on the way home or order delivery.

Amazon earnings are next Thursday after the close.

Plug Power (PLUG) signed a new deal with Wal-Mart (WMT) where the company will install up to 30 more of its hydrogen fueling station and fuel cell energy solutions at Wal-Mart stores in North America. They have already installed 22 of these systems at Wal-Mart stores in the first deal with 5,500 Plug Power fuel cells at Wal-Mart distribution centers. As part of the deal Wal-Mart will buy up to 55,286,696 PLUG shares. Wal-Mart currently operates the largest fleet of fuel cell powered vehicles in the world. PLUG shares spiked 15%.

In a rare occurrence, two different brokers downgraded a Dow stock to a sell rating on the same day. Atlantic Equities and BTIG both downgraded Johnson & Johnson (JNJ) to a sell rating. BTIG put on a price target of $110 and the stock closed at $135. JNJ trades at a PE of 23 and set a new high on Thursday. It will be really interesting to see what happens to the stock over the next several weeks.

Netflix (NFLX) is not slowing down. The stock added another $5 on Friday in a weak market. With multiple upgrades after their earnings with several analysts targeting $200 and RBC targeting $210, the stock looks determined to hit those levels next week.

Alphabet (Google) reports earnings after the bell on Monday. The company is expected to report $8.25 per share. However, the company will have to report a $2.74 billion charge against earnings for the EU fine on prioritizing Google products above those being offered by non-Google sellers. It is not tax deductible so it will directly impact earnings. MKM Partners believe it will be a charge of $3.89 per share. Revenue is expected to be $20.9 billion, up from $17.5 billion. Paid clicks rose 44% last quarter so that will be the metric for comparison this quarter. Canaccord believes Google is facing a problem with ad load, meaning they have run out of places to put new ads and ad growth may be unsustainable. With Google reformatting ad placement in Europe as a result of the fine, they may have even less ad space available and Europe has been 30% of Google's revenue in past quarters.

The Volatility Index ($VIX) closed at 9.36 on Friday and a 24-year low. That is only 5 cents away from the 9.31 prior low in December 1993. The VIX has closed under 10 for the last seven days. To say this is abnormally low is an understatement. Some people claim the VIX is broken because of the switch to passive investing. Year to date more than $250 billion has flowed into ETFs according to Bank of America and that is a record. Others claim it is a factor of trading by computers. They do not have emotions that cause individual traders to think, "This market is getting overbought, I need to buy some puts."

Fundstrat Global Advisors just completed some research on the VIX and the question of low volatility. Fundstrat's Sam Doctor said after the research we believe the correlations are still there and "the divergence will be resolved in the coming months and could lead to a 10% decline in the S&P-500." They found since 1991 there have been 12 major volatility spikes and the correlation spreads collapsed. "According to our model, we see a 50% chance of a 10% correction in the S&P over the next several months, accompanied by a sharp spike in volatility." They recommend being overweight defensive large-cap growth stocks such as healthcare, telecom and staples. What could go wrong with this scenario? They said "The correlation spread divergence has persisted for over 7 months so far, and it could persist longer than we expect before resolving itself. In 2000, it persisted for 9 months before normalizing." Source

The dollar has imploded and the rate of decline is accelerating. The dollar index closed at a new 12-month low on Friday at 93.85. The Dollar Index has declined -6.4% this year. Against the euro, the dollar has fallen more than 10% and more than 15% against the peso. This is going to be a boon to companies that do business internationally and should boost earnings over the next few quarters.

August has not been kind to the market. Over the last 20 years the average August decline is -1.2%. That may not seem like much but there have been some dramatic declines that were offset by a few good years.

August 1990 - Kuwait invasion
August 1997 - Asian debt crisis
August 1998 - Russian debt default
August 2011 - U.S. debt ceiling, loss of AAA credit rating
August 2015 - China devaluation concerns

Those events caused declines of 5% to 15%. However, even in normal years, August is not kind. There are multiple reasons given by various analysts. The most common is that summer is fading, parents are getting kids ready to go back to school and they are trying to cram some late summer vacations in before that school bell rings. Volume is low as is interest in trading. Since Aug/Sep are the worst months of the year for the market, Sep/Oct are seen as the best months of the year to buy the dip.

October is known as the "bear killer" month because so many bear markets end with a low in early October and the dips are bought ahead of the best six months of the year strategy. November-1st to May-1st are the best six months of the year so everyone wants to be long when November arrives.

I explained these points to emphasize that traders should not be overly long once we enter August. We need to enjoy any continued gains but be ready to exit if the music suddenly stops.

Oil Prices crashed again on Friday despite a decline in active rigs. OPEC is meeting on Monday to discuss the progress of the production cuts but nothing is expected to change. There are cracks appearing in the fragile coalition between OPEC and non-OPEC producers and it will be a challenge just to retain the current level of cuts. Russia and Kazakhstan have both said they would not be part of any future cuts. Ecuador has pulled out of the agreement and is raising production and Iraq wants to increase production by 500,000 bpd. Saudi Arabia has talked about an additional cut of one million barrels on its own. This is highly doubtful since they are already carrying most of the load for the January cuts.

Nigerian production is up to 1.75 mmbpd, up about one million bpd since January. Libya's production jumped 500,000 bpd last month according to RBC Capital. Those two countries almost completely erased the 1.8 mmbpd the coalition agreed to cut starting January 1st. Fortunately, Nigeria is close to full production and cannot increase much further. Libya has room to grow but the easy gains are over.

Francisco Blanch, an analyst at Bank of America, said OPEC is boxed in. "They cannot get out of this problem very easily. It is either a fast death, slow death or death by a thousand cuts." If they kill the deal and increase production, it is a fast death. If they keep the deal, it is a slow death because production is still rising. If they cut production further they give away market share to U.S. shale producers and it becomes a long term death by a thousand cuts.

U.S. production rose 32,000 bpd last week to 9.429 million bpd and a post crash high.

Schlumberger (SLB) reported earnings last week. They said U.S. land revenue rose 42% from Q1 and almost twice the 23% rise in the rig counts. Revenue from fracking rose 68%. They said completion activity was accelerating and demand was "robust." They said U.S. activity has been leading the gains but they are suddenly seeing a burst in international activity among OPEC nations and other producers both onshore and offshore.

It appears to me we are not going to be seeing any material gains in energy prices in the near future. They will more than likely be volatile but with rising production at every turn, there is going to be a surplus of oil for the foreseeable future.

The U.S. onshore rig count declined by 2 last week. That was 1 oil rig and 1 gas rig. However, the offshore rig count rose by 2 to 23. There are several big projects in the Gulf that have been on hold but recent investment decisions have been made to proceed rather than lose the money already invested.


Friday's market movement was meaningless. It was expiration Friday in the summer earnings cycle. There were $550 billion in S&P options expiring. I wrote last weekend that the large number of call options in the 2450-2480 range could lead to hedging that would keep the markets flat within that range for the week. The S&P gained half a percent or only 13 points for the week despite all the indexes setting new highs on Wednesday. The market action over the last two days was expiration related plus a few earnings disappointments.

The S&P continues to climb slowly higher but Wednesday was the only real gain for the week. The S&P gained 14 points on Wednesday and 13 points for the week. That shows you the positive gain for the week was really only one day. Now that July expirations are over, we could see a little more movement next week. I would not expect it on Monday because that is expiration settlement day, which is rarely directional. Tuesday will be the turning point based on the 5 Dow components that report before the open.

The new target on the S&P is 2,500. This is the big round number that will draw traders like a flies to a picnic. It may also be the summer peak. Big numbers once hit tend to create a softness in the market because traders don't know what to do next. If we were to hit that level as we move into August, it could produce a sell the news event.

Support is now 2,450 and the index closed at 2,469. That gives us plenty of room to roam in both directions without causing any immediate change in sentiment.

The Dow rebounded from a low of -108 to end with a minor loss of 31 points. The intraday low was a higher low from Tuesday. However, the new resistance at roughly 21,650 has held on multiple attempts. The Dow chart is still bullish as long as we keep seeing those higher lows. Initial support is about 21,470. That gives the Dow about a 180-point range to traverse without triggering a breakout or a breakdown.

Tuesday will be the critical day with 5 Dow components reporting before the open. Monday is settlement day after expiration and is not normally directional but recent norms have not been following the historical patterns.

The Nasdaq Composite only gave back 2 points after ten days of gains. That is very good relative strength and with additional big tech earnings this week, we could see further gains. Alphabet is after the close on Monday so that will be the first hurdle to cross. Facebook is Wednesday and Amazon on Thursday.

Current initial support is 6,365 followed by 6,308. Resistance is 6,395. That 6,400 round number resistance will also be a factor but not as strong as the 6,500 target for the current move.

The small cap Russell 2000 had a good week with a record high close on Wed/Thr and a record intraday high on Friday. The index gave back only 6 points after a monster gain on Wednesday. As long as the Russell continues creeping higher, the big caps will eventually follow.

There are signs the markets should be positive this week but nothing is guaranteed. It is the two weeks after that concerns me because of the historical trend. I would still maintain a bullish bias for this week but starting next week I would tighten my stop losses. We may only get random volatility and that would be fine compared to the potential for a steeper decline.

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

subscribe now

Random Thoughts

There was a big jump to the bullish camp last week. With all the major indexes closing at new highs on Wednesday, the same day the survey ends, the bullish sentiment saw a whopping 7-point jump. They came from the undecided and from the bearish contingents. This is almost a contrarian indicator that so many investors switched sides on the breakout or what could be near a top.

Google is in the mosquito raising business. The Verily business unit deals with health care issues and one of their recent accomplishments is mosquito breeding. Why do we want to breed millions of mosquitoes a week? In order to wipe out the population. The mosquitoes Google breeds are then infected with the Wolbachia bacteria. This prevents any reproduction activity from being successful. The males go from female to female performing their function but the resulting eggs do not hatch.

The idea is to keep mosquitoes from transmitting Zika, Yellow Fever, Malaria and other diseases. More people are killed every year by mosquitoes than any other animal or insect.

Google has perfected a way for robots to raise millions of mosquitoes a week and sort them by male and female. Only the female of the species actually bite. The males are harmless to humans and are the only mosquitoes released. They are sorted by computer with a picture taken of each mosquito to determine its sex. The project is called MosquitoMate and Debug Fresno.

Intrexon (XON) has been working on a similar program for several years but it involves introducing a genetically modified mosquito into the wild and there could be unforeseen consequences in the future. Google's mosquitoes are not modified. They just carry the Wolbachia bacteria that kills the eggs. Therefore, there is no risk to future generations. Once the males die, the bacteria disappears as well.

Google is aiming on reducing the mosquito population by 90%. People ask why not 100%? Because we do not know if the mosquitoes have a yet undiscovered positive impact on humans, animals, etc. Who knew Google was a mosquito breeder?

Hawaii is preparing to be nuked by North Korea. Missile attack drills will begin in November and citizens will be told to "get inside, stay inside and stay tuned." Students will begin practicing evacuation drills similar to "active shooter" drills. North Korean missiles cannot yet reach Hawaii but the regime has promised that they will be able to reach any part of the U.S. very soon.

If satellites detected a missile launch from Korea, Hawaiians would have about 8-12 minutes to react after the time it would take to recognize a launch and plot the course to a probable target. The total flight time would be about 20 minutes.

Hawaiian officials want to be careful and keep the preparations low key to avoid scaring away tourists.

JP Morgan raised its yearend forecast for the S&P by 150 points to 2,550. They said tax reform and the weaker dollar would produce a meaningful earnings surprise later this year.

If you subtract those 150 points from the target, you get 2,400 and their old target. Actually, the median S&P yearend target from 16 major analysts is, drum roll please, 2,450 which was surpassed last week. That is why that level was so critical. Currently Morgan Stanley is projecting 2,700, they just upped it last week to the highest on the Street. The lowest target is Fundstrat at 2,275 with Wells Fargo second lowest at 2,280.

Having the median target at 2,450 should concern us. If only a couple analysts were projecting that level it would not be material. When the majority are averaging 2,450, it suggests the Aug/Sep period could be rocky because professional portfolio managers are going to be cautious over that level.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"We are winning, they are losing."

Sec of Defense James Mattis when asked how the ISIS fight was progressing.


Index Wrap

One Day Rally

by Jim Brown

Click here to email Jim Brown
All the major indexes closed at new highs on Wednesday. That was the only material gain except for the Nasdaq.

We had a one-day rally except for the tech indexes and they posted decent gains on two days. It is hard to find any real market momentum when the big cap indexes only posted one day of gains for the week.

Sentiment rose with the new highs dragging a lot of fence sitters off the sidelines. Volatility fell again to 24-year low levels. The VIX has closed under 10 for 7 consecutive days. That is scary but there is no reason it cannot continue.

The driving force in the market is the Q2-earnings cycle. We had a big week last week with more disappointments than expected. Next week is the busiest of the cycle with 190 S&P companies reporting plus more than 500 non-S&P companies.

The outlook for this week is positive after we get past Monday. Of course that all depends on the earnings reports. We saw last week what damage a few high profile companies can cause with a disappointing report.

The S&P punched through uptrend resistance on Wednesday and held the gains on Thursday. The minor 1-point decline on Friday was just noise. The S&P could be primed to push higher assuming there are no disasters when those five Dow stocks report on Tuesday morning.

The round number target is now 2,500 and I would be shocked if we broke through that level. I will be recommending SPY puts when we get close. The historical trend for Aug/Sep is too negative not to at least take out some insurance. If Tuesday morning produces a breakout, the next two days could accelerate it but it all depends on earnings. Friday is the day I will start to worry about market direction since most of the big cap stocks will have already reported.

The advance/decline line on the S&P is still in rocket mode and until we see a stumble there, the rally should continue.

The Dow remains a caution indicator but that is mostly because of its narrow 30 stock composition. We saw just 4-5 stocks cause a world of trouble last week. The index posted a nice gain on Wednesday but it was offset by four days of declines. The Dow remains the weakest link but those five stocks on Tuesday morning could cause it to rocket to new highs again if their reports are positive.

Note that the MACD has rolled over again. The MACD has not yet turned negative but is very close. If you look at the top of the chart over the last five weeks, there has been zero momentum. All the gains have come from the July 12th and 14th spikes. Everything else was sideways volatility. This chart may be technically bullish but I would not bet on it going higher. Everything depends on those five stocks on Tuesday morning.

The Nasdaq Composite is the market leader. The index posted 10 consecutive days of gains that ended on Friday with a miniscule decline of 2 points. The index should pause here as investors wait for Google to report earnings Monday after the close. There is some fear that they could disappoint again and the market reaction could be negative. When you are a $1,000 stock, everyone expects strong results to justify the high dollars. If it were a $100 stock with the same PE the expectations would not be so critical.

On Tuesday, Amgen and Biogen both report and they could push the index around. However, Biogen is in the morning and Amgen after the close so the reaction will be spread over two days.

The Nasdaq is facing new high resistance at 6,385 and round number resistance at 6,400. If I were betting, I would pick 6,500 as the potential pre August top. If GOOGL, FB and AMZN all report positive earnings surprises, we could be there by Friday.

The Russell 3000 continues to be the index to watch since those 3,000 stocks are market. The new highs on Wed/Thr and the minor 1-point decline on Friday suggest the rally will continue. This is a case of the troops leading the charge rather than a few big caps leading the market.

Remember this chart? I have shown this chart without modifications since early 2016. The target of 2,458 has been achieved and now we are waiting to see if the index can push to new highs or whether we will see a return to that 2,134 level as support. That 2,458 projection was made back in May 2016.

The FANG stocks have regrouped after widening their relative performance in June. They are all clustered at what could be called group resistance from late May. This could have a lot to do with Nasdaq direction after next week.

The Nasdaq sprinted ahead of the semiconductor sector over the last two weeks but the short term decline in the $SOX definitely dented the Nasdaq gain last week. If the chip stocks are going to weaken, that would be a massive weight on the tech sector.

Historically August and September are the two worst months of the year for the market. However, the market has been ignoring historical norms over the last several months. Will it ignore this trend as well?

While the indicators suggest the market will continue higher next week, we could be nearing a turning point. I would refrain from being overly long as the week draws to a close.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Tough Times

by Jim Brown

Click here to email Jim Brown

Editors Note:

The economy may be slowly improving but consumers are finding it tougher to get by. It is especially tough to find people who can pay $15K to $25K for a new Harley.


No New Bullish Plays


HOG - Harley-Davidson - Company Profile

Harley-Davidson, Inc. primarily manufactures and sells cruiser and touring motorcycles. The company operates through two segments, Motorcycles & Related Products, and Financial Services. The Motorcycles & Related Products segment designs, manufactures, and sells wholesale on-road Harley-Davidson motorcycles, as well as motorcycle parts, accessories, general merchandise, and related services. It offers motorcycle parts and accessories, such as replacement parts, and mechanical and cosmetic accessories; general merchandise, including MotorClothes apparel and riding gears; and various services to its independent dealers comprising motorcycle services, business management training programs, and customized dealer software packages. This segment also licenses the Harley-Davidson name and other trademarks. It sells its products to retail customers through a network of independent dealers, as well as ecommerce channels in the United States, Canada, Latin America, Europe, the Middle East, Africa, and the Asia-Pacific. The Financial Services segment provides wholesale and retail financing services; and insurance and insurance-related programs primarily to Harley-Davidson dealers and retail customers in the United States and Canada. This segment offers wholesale financial services, such as floorplan and open account financing of motorcycles, and motorcycle parts and accessories; and retail financing services, including installment lending for the purchase of new and used Harley-Davidson motorcycles. It also operates as an agent providing point-of-sale protection products, including motorcycle insurance, extended service contracts, credit protection, and motorcycle maintenance protection. Harley-Davidson, Inc. was founded in 1903 and is based in Milwaukee, Wisconsin. Company description from FinViz.com.

A week ago they reported earnings of $1.48 compared to estimates for $1.38. Revenue of $1.77 billion also beat estimates for 1.59 billion. That was the good news. The bad news was a 6.7% drop in motorcycle sales, with a 9.3% decline in the USA. They warned they only expected to ship 241,000 to 249,000 for the full year, down 6% to 8% from 2016 .Prior guidance was for flat sales to 1% lower. For Q3 they only expect to ship 39,000 to 44,000 units, down 10% to 20% from Q3-2016.

Finding consumers who can afford a new bike and finding financing is getting tough. The major banks are pulling back from auto and motorcycle loans because of the rising defaults. The situation for Harley is not going to improve this year.

Expected earnings Oct 17th.

Friday's close was a 52-week low.

Buy Nov $45 put, currently $1.80, initial stop loss $50.65.

In Play Updates and Reviews

Normal Expiration

by Jim Brown

Click here to email Jim Brown

Editors Note:

Except for a few big losses dragging down the Dow this was a normal expiration Friday. The big $1.30 drop in oil caused Chevron and Exxon to be a drag on the Dow. Add in Goldman, JNJ and GE and the Dow was cursed. The Nasdaq rebounded from the opening drop and overcame the sentiment hit from the Dow to almost close positive.

This was a typical expiration Friday in earnings season. Profits are taken and positions closed. We should not assume any long-term direction from Friday's market action. The Dow is showing the impact of being a narrow 30 stock index.

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

AAPL - Apple Inc
The long call position was stopped at $149.85.

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

AAPL - Apple Inc - Company Profile


We were stopped out when the Nasdaq gapped lower at the open. With earnings just a few days away and constant worries over iPhone production delays, I had placed the stop loss tighter than normal to make sure we exited with a gain.

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.

Update 7/5/17: 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.

Update 7/6/17: Qualcomm is seeking to ban imports of some iPhones in their long running patent dispute with Apple. The news was announced after the bell and shares of Apple declined about 10 cents. This will not impact any current phones or the iPhone 8 because the case will not even begin to be heard until spring of 2018 or later. The two companies will eventually settle out of court. This is just legal sparring.

Update 7/7/17: Canaccord Genuity said it was seeing "steady" iPhone 7 sales ahead of the company's earnings on August 1st. The analyst said the pace of sales is consistent with prior estimates for 42 million in Q2 and 47 million in Q3. They have a $180 price target. A Raymond James analyst said their survey found strong consumer interest in the watch, and Apple speakers including the Beats wireless speakers and the upcoming HomePod smart speaker. The survey found that 14% of iPhone owners plan to buy the HomePod when it goes on sale in December. They also found that 12% of consumers plan to buy the Apple Watch, the highest level since the watch was announced.

Update 7/10/17: An Apple analyst said the iPhone 8 could start at $1,200 and go higher from there. This is definitely going to put a crimp in iPhone 8 sales but Apple should still post higher revenue and profits thanks to the high price. The iPhone 8 is rumored to be available in four colors. There is a continuing rumor that Apple may drop the fingerprint sensor from the model 8 because of space considerations. There are so many features packed into the model 8 that there is no physical room for the sensor in the new screen configuration. Just a rumor but it refuses to go away.

Update 7/11/17: Susquehanna Financial warned that higher prices and stronger competition from Android models, were going to dent Apple's sales. The analyst also said talks with suppliers in Asia confirmed that Apple is trying to put too many things in the iPhone 8 and there is not enough room. The finger print sensor is looking much more likely to be dropped from the top of the line OLED iPhone 8 model. Apple only has a very few weeks to either work out a solution or drop the feature or risk production delays of 2-3 months while engineers go back to the drawing board on the internal hardware configuration.

Deutsche Bank also dumped on Apple's parade saying the expectations for the iPhone 8 are too high. DB warned that the iPhone 8 supercycle was probably only going to be a regular upgrade cycle. DB is expecting sales of 230 million phones in FY 2018. Peak sales were 231 million in FY 2015 and DB is expecting that to be a ceiling because of price, availability and competition. The bank said it was confused about where the new buyers were coming from, especially at a $1,200 price point.

Update 7/12/17: Bank of America and Keybanc both posted notes saying the iPhone 8 production could be delayed. BAC lowered iPhone sales estimates by 11 million units for Q3 and 6 million for Q4 because of the expected delivery delay of 3-4 weeks or longer. They raised the estimates for Q1 by 10 million units. The firm Fast Company said there is a "sense of panic" among iPhone team members as they rush to try and fix software bugs impacting the next release. RBC Capital, Cowen, KGI and Drexel Hamilton believe the announcement could be delayed until October or November.

Update 7/17/17: Morgan Stanley reiterated an overweight rating and raised their price target to $182.

DigiTimes, normally a reliable Apple researcher, said the production on the iPhone 8 could be delayed by up to 2 months because yields at the Foxconn assembly plant are not yet sufficient to begin volume production. Full story

Update 7/18/17: Guggenheim reiterated a buy rating and $180 price target in a note titles, "Quit Worrying" any delay in the iPhone this fall just gets added to subsequent quarter's sales. "Loyal users will wait" for the next model. He said even if unit volume do not grow significantly the higher sales price will lift Apple's revenue 10%. He said the majority of Apple's revenue increases have been from rising prices since the first phone launched at $499 in 2007.

Update 7/19/17: JP Morgan reiterated a buy on Apple with a $165 price target. The analyst said the iPhone Pro (8) would be announced and ship on time but in low volume. Based on channel checks with suppliers, they did not expect volume shipments until November. He was targeting $1,100 for the price. He said limited production was not unusual for Apple and the limited availability only increased the hype once it was available. He said the Apple Pro would be a "very high end product."

Position 6/29/17:

Closed 7/21/17: Long August $150 call @ $3.00, exit $3.95, +.95 gain.

AMAT - Applied Materials - Company Profile


No specific news. Shares posted a minor decline in a weak market.

Original Trade Description: July 17th.

Applied Materials, Inc. provides manufacturing equipment, services, and software to the semiconductor, display, and related industries worldwide. It operates through three segments: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. The Semiconductor Systems segment develops, manufactures, and sells a range of manufacturing equipment used to fabricate semiconductor chips or integrated circuits. It offers products and technologies for transistor and interconnect fabrication, including epitaxy, ion implantation, oxidation and nitridation, rapid thermal processing, chemical vapor deposition, physical vapor deposition, chemical mechanical planarization, and electrochemical deposition; patterning, selective removal, and packaging products and systems that enable the transfer of patterns onto device structures; and metrology, inspection, and review systems for front- and back-end-of-line applications. The Applied Global Services segment provides integrated solutions to optimize equipment and fab performance and productivity, including spares, upgrades, services, remanufactured earlier generation equipment, and factory automation software for semiconductor, display, and other products. The Display and Adjacent Markets segment offers products for manufacturing liquid crystal displays, organic light-emitting diodes, and other display technologies for TVs, personal computers, tablets, smart phones, and other consumer-oriented devices, as well as equipment for flexible substrates. The company serves manufacturers of semiconductor wafers and chips, liquid crystal and other displays, and other electronic devices. Applied Materials, Inc. was founded in 1967 Company description from FinViz.com

Estimated earnings date August 17th.

AMAT is an old chip company founded in 1967. In chip terms this company is an antique. However, they are growing by focusing on new products rather than fight it out for low margin chip products everyone else is making. One of their focus products is OLED screens. The adoption rates for OLED screens means strong demand for chips to power those screens. By 2021 more than two-thirds of smart phones could have OLED screens. AMAT is shooting for 30% to 40% of the total addressable market two years from now. They currently have 15% share. They have grown their display revenue by 20% annually for the last five years.

The company said the demand for memory, which is currently off the charts, is just getting started. The coming of big data, IoT, streaming video and massive data storage requirements has caused a surge in demand that is just the tip of the coming iceberg. AMAT grew its memory revenue to 35% of the total in the last quarter. Manufacturers are raising prices by about 15% per quarter because of the shortages and there is no end in sight.

The upgraded analyst price targets after the big semiconductor show last week is now $65 on the high side and $55 on the low end. AMAT closed at $46 today.

Position 7/18/17:

Long Aug $47 call @ $1.30, see portfolio graphic for stop loss.

BABA - Alibaba - Company Profile


No specific news. Shares declined slightly for the third day but bounced off support at $150. The 22-cent loss was minimal considering the weak market. I lowered the stop loss slightly to stay under that $150 support.

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.

Update 7/5/17: 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.

Update 7/10/17: RBC analyst Mark Mahaney raised his price target on BABA from $140 to $160 and reiterated an outperform rating saying fundamental trends remain impressive. Alibaba said recently it is targeting $1 trillion in gross merchandise volume in 2020. Alibaba's Singles Day promotion is 40 times larger in sales than Amazon's Prime Day, which starts tonight.

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


No specific news. PayPal shares declined slightly in the weak market. They report earnings Wednesday after the close so we will exit on Tuesday morning if not stopped on Monday. I raised the stop loss just under today's low.

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.

Update 7/5/17: 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.

Update 7/12/17: PayPal announced a partnership with Apple to use PayPal in the iTunes App Store. This will let users with Paypal accounts buy songs, movies, etc from iTunes. This is a good deal for both companies.

Update 7/13/17: Analyst at Monness, Crespi, Hardt published a note saying PayPal was his "top pick" for 2017. Shares rallied $1.35 to a new high.

Position 6/22/17:

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

THO - Thor Industries - Company Profile


No specific news. THO is reactive to the Dow's movement. Shares posted a larger decline with the Dow. I tightened the stop to just below today's low to take us out on any further decline.

Original Trade Description: July 15th.

Thor Industries, Inc., through its subsidiaries, designs, manufactures, and sells recreational vehicles, and related parts and accessories primarily in the United States and Canada. It operates through Towable Recreational Vehicles and Motorized Recreational Vehicles segments. The company offers travel trailers under the Airstream International, Classic Limited, Sport, Flying Cloud, Land Yacht, and Eddie Bauer trade names, as well as Interstate and Autobahn Class B motorhomes; gasoline and diesel Class A and Class C motorhomes under the Four Winds, Hurricane, Chateau, Challenger, Tuscany, Axis, Vegas, Palazzo, Synergy, Quantum, Compass, Gemini, A.C.E, Alante, Precept, Greyhawk, and Redhawk trade names; and fifth wheels under the Redwood and DRV Mobile Suites trade names. It also provides conventional travel trailers and fifth wheels under the Montana, Springdale, Hideout, Sprinter, Outback, Laredo, Alpine, Bullet, Fuzion, Raptor, Passport, Cougar, Coleman, Kodiak, Aspen Trail, Voltage, Cameo, Cruiser, ReZerve, Sunset Trail, Zinger, Landmark, Bighorn, Sundance, Elkridge, Trail Runner, North Trail, Cyclone, Torque, Prowler, Wilderness, Shadow Cruiser, Fun Finder, Stryker, Sportsmen, Spree, Venom, Durango, SportTrek, Connect, Sportster, Sonic, Jay Flight, Jay Feather, Eagle, Pinnacle, Seismic, AR-One, Launch, Autumn Ridge, Travel Star, Highlander, Roamer, and Open Range trade names. In addition, the company offers equestrian recreational vehicle products with living quarters under the Premiere, Silverado, Ranger, Laredo, Trail Boss, and Trail Hand trade names; lightweight travel trailers and specialty products under the Camplite and Quicksilver trade names; and Class A motorhomes under the Insignia, Aspire, Anthem, and Cornerstone trade names, as well as provides aluminum extrusions and specialized component products. Company description from FinViz.com

In a weak economy, Thor is kicking butt. The company reported earnings of $2.11 which rose 41.6% compared to estimates for $1.87. Revenue of $2.02 billion rose 57% beat estimates for $1.96 billion. Operating cash flow rose 26.2% and gross profits rose 45.5%.

Sales of towable travel trailers rose 52.6% and sales of motorized RVs rose 78.7%. There was no bad news in the Thor report.

Estimated earnings date September 4th.

With the company posting record earnings the stock spiked from $94 to $104 on June 6th. When the market dipped, shares only pulled back to $102. In late June they rebounded to $110. During the market volatility over the last three weeks they dipped back to $102 and found support there once again. Now that the market has turned positive shares are rebounding.

I am using the September strike because of the September earnings date. We will exit well before then but that date will keep the premiums inflated.

Position 7/17/17:

Long Sept $110 call @ $3.00, see portfolio graphic for stop loss.

VIX - Volatility Index - Index Profile


After a minor lift at the open, the VIX trended lower in the afternoon despite the Dow, Nasdaq and S&P in negative territory. The 9.36 closing low is only 5 cents from the 24 year low at 9.31.

Original Trade Description: July 12th.

The CBOE Volatility Index (VIX Index) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, the VIX Index has been considered by many to be the world's premier barometer of investor sentiment and market volatility. Several investors expressed interest in trading instruments related to the market's expectation of future volatility, and so VX futures were introduced in 2004, and VIX options were introduced in 2006.

The VIX closed at a 24-year low on July 14th at 9.51. The index has been spending a lot of time under 10 over the last three months and this is highly abnormal. The VIX typically trades up to 20 or more three times a year or more. That has not happen since the days before the election. This period of abnormal volatility WILL eventually end.

With the Trump administration getting more desperate to achieve some legislative goals there is always the risk they will go to extremes to get them accomplished. Add in the unknown but rapidly expanding Russian probes and anything is possible. We saw the Dow fall triple digits intraday on just the release of 5 emails from Trump Jr. If the probe actually uncovered something material, it could cause a major market meltdown.

The debt ceiling and the budget expire on Sept 31st. If Congress cannot get a budget passed and raise the debt ceiling, the government would shut down on October 1st. We have seen this before. The last time it happened the U.S. lost its AAA credit rating and the market declined sharply for more than a week.

What about North Korea? Military force could be used at any time but North Korea seems dead set on testing another nuke and expanding its ICBM tests. If fighting breaks out between the U.S. and North Korea it would cause a significant market decline because of the geopolitical concerns and the potential loss of life in Seoul, South Korea.

Even if none of those events occurred, there is always the risk of a 10% market decline just because we have not had one in a very long time. With August and September the worst months of the year for the market, the potential for a correction this year could be higher than normal. The Nasdaq is already up 18% and the Dow 9% for the year. The FAANG stocks are at record highs, which many say are unsupported by fundamentals.

There are so many potential opportunities for a market disaster. It only makes sense to take out some protection while the volatility is at record lows. I am recommending a November call to get us past the Aug/Sep period and the potential for a debt ceiling event in early October.

Position 7/20/17:

Long Nov $15 call @ $1.85, no stop loss. Target $22 to exit.

BEARISH Play Updates (Alpha by Symbol)

ROST - Ross Stores - Company Profile


No specific news. The negativity returned as the weak market overcame the retail hope from earlier in the week.

Original Trade Description: July 11th.

Ross Stores, Inc., together with its subsidiaries, operates off-price retail apparel and home fashion stores under the Ross Dress for Less and dd's DISCOUNTS brand names in the United States. It primarily offers apparel, accessories, footwear, and home fashions. The company's Ross Dress for Less stores sell its products at savings of 20% to 60% off department and specialty store regular prices primarily to middle income households; and dd's DISCOUNTS stores sell its products at savings of 20% to 70% off moderate department and discount store regular prices to customers from households with moderate income. As of March 6, 2017, it operated 1,363 Ross Dress for Less stores in 37 states, the District of Columbia, and Guam; and 198 dd's DISCOUNTS stores in 15 states. Company description from FinViz.com.

Expected earnings August 17th.

They reported Q1 earnings of 82 cents compared to estimates for 79 cents. Revenue of $3.31 billion beat estimates for $4.27 billion. Same store sales rose 3%. Operating margins shrank. The company is planning on operating 90 stores in 2017.

Unfortunately, they guided for the full year for earnings of $3.07 to $3.17 and analysts were expecting $3.15 at the midpoint. The guidance from Ross also includes an extra week in 2017 over 2016 and that means it is even weaker than it seems.

They guided for same store sales of 1-2% and well below the 3% in Q1. They also guided for margins to contract again from 15.2% in Q1 to 13.9%-14.1%. A week later regulators posted criminal charges against a California man that generated $8.2 million in profits on insider trading in Ross shares. The insider was not named. Shares rolled over and are still falling. Three analysts have cut their estimates for Ross since the earnings.

With the retail sector getting hit every day by some store closure notice or analyst downgrade, Ross could continue falling until their earnings report.

Update 7/14/17: Telsey Advisory Group upgraded Ross from market perform to outperform with a $70 price target. Shares spiked $1.60 at the open to stop us out but then gave back all but 34 cents. I am recommending we reload this position using the same option/strike.

Update 7/17/17: The company said they opened 28 new stores in June/July as part of their plans to open 90 stores in 2017. The company currently has 1,384 locations and are planning on 2,500 in the years ahead. That is a lot of additional overhead in a declining retail market.

Position 7/17/17:

Long August $52.50 put @ $.80, see portfolio graphic for stop loss.

Previously closed 7/14: Long August $52.50 put @ $1.04, exit .65, -.39 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