Option Investor

Daily Newsletter, Wednesday, 8/2/2017

Table of Contents

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

Market Wrap

Dow 22,000

by Thomas Hughes

Click here to email Thomas Hughes


The Dow Jones hit a new all time intra day high above 22,000 but was not able to hold the gain into the close. The index was lifted by Apple which reported earnings after the bell last night. Other indices were not so buoyant as traders keep a close eye on this week's economic data and earnings reports. Today's data was in the Goldilocks zone, not too hot and not too cold with the tailwind of positive upward revisions.

Asian indices closed flat and mixed. Japan, Hong Kong and Korea closed with gains in the range of 0.20% to 0.50%, mainland China and Australia both posted small losses. The tech sector helped to support the region in the wake of Apple's release, those participating directly in Apple's supply chain posting the largest gains. European indices were mostly lower in the wake of earnings releases. The tech sector saw some favor but some high profile misses in basic materials and financials dragged the broader markets lower.

Market Statistics

Futures trading was mostly positive this morning although the broader market flirted with break even. Economic data was positive and helped to support prices which moved slightly higher going into the opening bell. The open was calm, the Dow set a new all time high, but selling quickly set in. The industrials and transports moved mostly sideways while the SPX and Comp both moved modestly lower. By early afternoon the selling was mostly over. The Indices stabilized at intraday support and move sideways into the late afternoon. The last hour of trading saw the indices move back to reclaim most if not all of the days losses and hold that level into the close.

Economic Calendar

The Economy

The ADP report on labor estimates the creation of 178,000 new jobs in July. This is in line with expectations and in the sweet spot. If job creation runs too hot rate hike expectation may come back to a simmer, if they are too cold then economic growth comes into question. When in the sweet spot economic growth can continue as expected with little to no expectation of interest rate increases for the near to short term. The CME Fed Watch Tool indicates chances of another rate hike at less than 50/50 until January 2018 and only just above 50/50 until late spring next year. NFP expectations have not been altered by the news and stand pat near 180,000.

The Dollar Index

The Dollar Index moved marginally higher in today's action but remains low relative to recent trends. The index is moving lower on a rebalancing of central bank expectations and in danger of moving lower. The $93 level is potential support, the $92 level looks like a probably target as well. Today's ADP did little to alter outlook, if Friday's NFP is the same I would not expect to see the index move higher. A break below $93 has a target at $92 in the near to short term, a move below $92 would be bearish and set a 2.5 year low.

The Gold Index

Gold prices moved lower on dollar firmness but the dip was bought. Spot price ended the session near break even after opening with a small loss and falling more than -1% intraday. Today's candle a medium sized green bodied candle with long lower shadow making new highs within an uptrend. It is bullish, indicative of near term support and positive upward momentum. Support appears to be at $1275 with next upside targets near $1290 and $1300.

The Gold Miners ETF GDX moved within a very tight range and exactly sideways from yesterday. The ETF appears to be forming a near term consolidation within an uptrend that could take it up to test resistance near $24 and the middle of the 7 month trading range. The indicators are bullish, stochastic more firmly so, and consistent with upward movement within the range. Support is at the short term moving average near $23.85, a break below which would negate my near term bullish outlook.

The Oil Index

Oil prices fell hard in early trading on expectations of a draw down in US stockpiles. We did indeed get a draw down but nearly as much as was expected. Spot price for WTI rebound from the early low to recover all the losses and close with a gain near 0.5%. Despite the rebound price remains below the $50 resistance level reached in the last few days. A break above $50 would be bullish with potential upside target of $55. While near term trends are bullish a break above $50 may need an additional catalyst.

The Oil Index opened with a loss but moved higher throughout the day to recover it and more. The index finished the day with gains near 0.25% and created a medium sized candle. Today's action tested support at the short term moving average and support was confirmed. The indicators are bullish and convergent with the near term up trend so further upside can be expected. Upside target is near 1,170 in the near term. The 1,170 level is the top of last years trading range and a target of potentially strong resistance, a break above here would be bullish longer term. Until then it looks like the index may be reversing, or at least re-establishing its previous trading range.

In The News, Story Stocks and Earnings

Autonation reported earnings this morning before the bell and results were not good. The company is suffering from sluggish auto sales that are not expected to recover this year. Revenue is down nealry -3% over last year and missed expectations by more than -5%. Earnings of $.86 missed by more than -11%. Other data within the report was equally depressing. Comp store sales are down -3%, vehicle revenues are down more than -4.5% and sales units declines nearly -3%. Shares of the stock were down more than -6% in the pre market and held those losses into the close.

Molson Coors reported before the bell and gave mixed results. The brewer of banquet beer reported a slight miss for earnings on revenue in line with expectations. Shares drifted higher despite the weak results on signs of improving business fundamentals. Brand volume increased globally by 2.7% while revenue per hectoliter increased 1.7% on a successful pricing increase. Shares jumped more than 5% pre-market and opened with a nice gap higher. Shares sold off intraday but were still able to close with gains near 5%.

Earnings action after the bell was active. Square, the card reader for small business, reported top and bottom line beats on higher transaction volume. Shares moved higher on the news.

Fitbit, the Internet of Things connected fitness device, reported top and bottom line beats that drove shares up by more than 10% in after hours action.

Tesla reported better than expected revenue and earnings, smaller than expected loss, that drove shares higher in after hours action. Shares of the stock gained more than 4% on the news.

AIG reported revenue and earnings well above expectations. EPS of $1.53 blew past estimates of $1.20 as global business grows. Shares of the stock moved up by more than 1.5%.

The Indices

The indices tried to make gains today but action was hesitant; early gains were given up, later in the day losses were recovered leaving the indices hovering near break even. In terms of percent the Dow Jones Transportation Average made the largest gain today, 0.31%. The transports created a small green bodied candle sitting on the long term moving average but support is dubious. The indicators are consistent with a touch to support but are not indicative of reversal. The recent bearish peak in MACD is in fact convergent with the latest low which suggests it will be retested or bested in the near future. Upside target for resistance is near 9,320, downside target should support fail is near the long term up trend line at 8,900.

The Dow Jones Industrial Average was the day's leader with a gain near 0.20%. The blue chips created a very small doji spinning top and set a new all time high above 22,000. The indicators are both pointing higher in confirmation of the move although price action looks weak. The move may continue higher but caution is due.

The SPX closed with a gain of 0.05% and created a small hammer doji. Today's action is the 11th day of sideways consolidation at current all time highs and beginning to take on some near term bearishness. The indicators are both rolling over into bearish crossovers that could result in near term correction. A break below 2,460 may find support at the short term moving average, a break below there could go as low as 2,420. Short and long term trends remain bullish so any dip that may occurs is a likely buying opportunity.

The NASDAQ Composite brings up the rear with no gain and no loss. The tech heavy index created a small red bodied candle with visible lower shadow testing support at the short term moving average. The indicators have turned bearish in confirmation of this test and suggest that it may continue into the near term. A break below 6,300 would be bearish and could take the index as low as 6,200 in the near term. Short and long term trends remain bullish so this dip would be a buying opportunity if it were to develop. A bounce from here would be bullish and trend following with first upside target at the current all time high.

The indices remain mixed. Where one is making new all time highs another is sitting on long term support while two more are moving sideways within near term ranges. At face value it looks like earnings driven rotation and until something changes that is the stance I am taking. Earnings have come in well above expectations, forward earnings growth outlook remains strong and economic conditions are accommodating so I see no reason to get overly bearish. There may be more rotation and it may result in near term correction, if it does I will be ready to buy on the dip.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Safe Port in a Storm

by Jim Brown

Click here to email Jim Brown

Editors Note:

Varian Medical System beat on earnings, raised guidance and fell $6. We played them recently and were caught in a biotech sector decline. We are going to buy this dip.


VAR - Varian Medical Systems - Company Profile

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

Expected earnings October 26th.

On July 26th, Varian reported earnings of $1.04 that beat estimates for 95 cents. Revenue of $662.4 million just barely missed estimates for $663.2 million due in part to currency translation issues. They sell their high dollar imaging systems all over the world.

The guided for the current quarter for earnings of $1.15-$1.23 and analysts were expecting $1.18. This should have been positive but the stock fell $6 because of the minor revenue miss.

If the market is going to be historically weak in August, shares that have already been beaten up will fare better than the rest of the market. I am choosing the $105 strike instead of the $100 strike for reduced cost/risk going into August.

Buy Nov $105 call, currently $1.80, initial stop loss $93.50.


No New Bearish Plays

In Play Updates and Reviews

Market Manipulation

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow gapped open to 22,004 thanks to Apple but fought the rest of the day to maintain that level. At 3:45 it was trading below 22,000 and it was only a last minute surge of market manipulation that powered the index back over that level for the close. Big round numbers are magnets for the market. Once that close has been achieved, traders tend to lose interest because there is no obvious secondary target.

The Nasdaq was down over 20 points intraday but recovered to trade flat just before the close. The S&P managed to recover from negative territory to gain 1 point. The Russell 2000 posted a big 1% decline to close at 1,413 and well under critical support at 1,425. This should be damaging for market sentiment now that the Dow target has been reached.

End of month retirement cash flows should support the indexes for the first couple days of the month with the normal August volatility not expected until the second week of August.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Current Position Changes

No Changes

If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

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Long and short equity trades = Premier Investor

BULLISH Play Updates

COST - Costco - Company Profile


Shares continued to post gains after Guggenheim said July same store sales, expected out on Wednesday, could be strong and provide a stabilizing influence on the stock.

Original Trade Description: July 26th.

Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. It offers branded and private-label products in a range of merchandise categories. The company provides dry and packaged foods, and groceries; snack foods, candies, alcoholic and nonalcoholic beverages, and cleaning supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio; meat, bakery, deli, and produces; and apparel and small appliances. It also operates gas stations, pharmacies, optical dispensing centers, food courts, and hearing-aid centers; and engages in the travel businesses. In addition, the company provides gold star individual and business membership services. As of August 28, 2016, it operated 715 warehouses, including 501 warehouses in the United States, Washington, District of Columbia, and Puerto Rico; 91 in Canada; 36 in Mexico; 28 in the United Kingdom; 25 in Japan; 12 in Korea; 12 in Taiwan; 8 in Australia; and 2 in Spain. Further, the company sells its products through online. Company description from FinViz.com.

Costco shares were knocked for a $32 loss on the news that Amazon was buying Whole Foods. There was panic that Amazon was getting into the grocery business and would decimate the sector. Nothing could be further from the truth. Even if it was it would cause the most trouble for chains like Kroger, Safeway, Sprouts Farmers Market, etc.

If the acquisition goes through, and there is growing doubt, I do not foresee Whole Foods selling big screen TVs, winter parkas, cameras, caskets, cruises or ketchup and toilet paper by the case. The two stores are not compatible.

Furthermore, 45% of Costco members are already Amazon Prime members we as well based on a Morgan Stanley survey. Members of both services are looking for deals.

Costco makes the majority of its money from memberships (75%) and very little margin on its products. Amazon and Whole Foods are not going to undercut Costco on prices. Costco had 48.3 million members at the end of last quarter, up from 47.9 million. There were 37.4 Gold Star members and 18.3 million executive memberships. Total cardholders rose from 88.1 million to 88.9 million. Whole Foods has 350 stores and only about 12 million estimated repeat shoppers.

Did you know that Costco sells its products on Amazon. Costco's private label brand, "Kirkland" makes up about 20% of Costco's sales in the stores and those same products are available on Amazon. Actually, sales of the Kirkland products on Amazon are higher than in the stores.

Earnings August 24th.

Costco shares are starting to recover from the decline. Shares appear to have bottomed at support at $1.50. I expect them to rise as we get closer to earnings. Any remaining shorts will not want to hold over an earnings report that is likely to be strong. It the market decides to weaken in August, Costco is insurance since it has already sold off. Investors will be looking to buy the beaten down stocks as a safety play.

Update 7/28/17: WR Baird reiterated an outperform rating with a $200 price target. They see the 15% decline a major buying opportunity and expect revenue to grow 4% to 5% in the current quarter. They see Costco as the leader in the retail sector.

Position 7/27/17:

Long Sept $155 Call @ $2.40, see portfolio graphic for stop loss.

VIX - Volatility Index - Index Profile


The VIX gained slightly because of the mixed markets. There appears to be some fear underlying the market.

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)

DIA - Dow ETF - ETF Profile


The Dow posted another positive close thanks to gains in Apple, McDonalds and 3M. The Dow traded at 22,000 most of the day and it was not until the last two minutes before it surged to close over that level at 22,014. Tomorrow could be a fight.

Original Trade Description: July 27th.

The SPDR Dow Jones Industrial Average ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average (the "Index"). The Dow Jones Industrial Average (DJIA) is composed of 30 "blue-chip" U.S. stocks. The DJIA is the oldest continuous barometer of the U.S. stock market, and the most widely quoted indicator of U.S. stock market activity. The DJIA is a price-weighted index of 30 component common stocks.

The Dow closed at a new high in an ugly market solely because of big gains in Boeing, Disney and Verizon. If the rest of the market continues lower, the Dow will eventually crater as well. I am recommending we enter a put position on the Dow ETF at the current high.

Position 7/28/17:

Long Oct $215 put @ $3.33, see portfolio graphic for stop loss.
Short Oct $205 put @ $1.29, see portfolio graphic for stop loss.
Net debit $2.04.

FTNT - Fortinet - ETF Profile


No specific news. Shares declined to test support at $36.

Original Trade Description: July 29th.

Fortinet, Inc. provides cybersecurity solutions for enterprises, service providers, and government organizations worldwide. The company offers FortiGate physical and software licenses that provide various security and networking functions, including firewall, intrusion prevention, anti-malware, virtual private network, application control, Web filtering, anti-spam, and wide area network acceleration; FortiManager product family to provide a central management solution for FortiGate products comprising software updates, configuration, policy settings, and security updates; and the FortiAnalyzer product family, which offers a single point of network log data collection. It also provides FortiAP secure wireless access points; FortiWeb, a Web application firewall; FortiMail email security; FortiDB database security appliances; FortiClient, an endpoint security software; and FortiSwitch secure switch connectivity products. In addition, the company provides FortiSandbox advanced threat protection solutions; FortiDDos and FortiDB database security appliances; and FortiSIEM family of products to provide a cloud-ready security information and event management (SIEM) solution for enterprises and service providers. Further, it offers security subscription, technical support, training, and professional services.Company description from FinViz.com.

Expected earnings October 25th.

The company reported Q2 earnings of 14 cents that beat estimates for 8 cents. Revenue of $363.5 million also beat estimates for $361 million. All the normal metrics were good to great but their guidance failed to impress. Full year guidance was higher but Q3 guidance disappointed.

They guided for revenues in the $367-$373 million range and analysts were expecting $372 million. Earnings guidance for 22 cents matched estimates. Investors normally do not want a match, they want a raise. The lower level on the revenues is also a caution. Shares fell $3 over the last three days and are right on the verge of breaking through support.

The entire cybersecurity sector has been weak despite the recent attacks. This is another weight on FTNT.

Position 8/1/17:

Long Sept $36 put @ $.90, see portfolio graphic for stop loss.

IBM - International Business Machines - ETF Profile


No specific news. Shares fell almost $1 despite the positive Dow.

Original Trade Description: July 29th.

International Business Machines Corporation provides information technology (IT) products and services worldwide. Its Cognitive Solutions segment includes Watson, a cognitive computing platform that interacts in natural language, processes big data, and learns from interactions with people and computers. The company's Cognitive Solutions segment also offers data and analytics solutions, including analytics and data management platforms, cloud data services, enterprise social software, talent management solutions, and solutions tailored by industry; and transaction processing software that runs mission-critical systems in banking, airlines, and retail industries. The company's Global Business Services segment offers business consulting services; delivers system integration, application management, maintenance, and support services for packaged software applications; and business process outsourcing services. Its Technology Services & Cloud Platforms segment provides cloud, project-based, outsourcing, and other managed services for enterprise IT infrastructure environments. This segment also offers technical support, and software and solution support; and integration software solutions. The company's Systems segment offers servers for businesses, cloud service providers, and scientific computing organizations; data storage products and solutions; and z/OS, an enterprise operating system for z systems. It has a strategic collaboration with ABB Ltd to develop industrial artificial intelligence solutions. The company was formerly known as Computing-Tabulating-Recording Co. and changed its name to International Business Machines Corporation in 1924. Company description from FinViz.com.

Expected earnings October 17th.

IBM reported revenue of $19.29 billion, down -5% annually and the 21st consecutive quarterly decline. Analysts were expecting $19.49 billion and that was already on the low side. Earnings were $2.97 and beat estimates for $2.74 thanks to a lower tax rate of 9.2%. Full year guidance was reiterated for "at least" $13.80. Several years ago, they made a big deal out of forecasting $20 a year in earnings. That is not likely to happen in this decade. All five of IBM's reporting segments posted revenue declines.

The problem with IBM is the lack of a light at the end of the tunnel. There is no way out of this problem without major changes which could include splitting the company up or going on an acquisition spree. Shares hit $182.50 in February but hopes have now been dashed twice with Q1 and Q2 earnings. The outlook is dim.

If the market were to roll over and the Dow decline materially, IBM would be a leader in that decline. It has been losing ground even when the Dow is setting new highs.

With earnings Oct 17th we can use the Oct options which expire on the 20th. They should hold their premium well.

Position 7/31/17:

Long Oct $140 put @ $3.10, see portfolio graphic for stop loss.

SPY - S&P-500 ETF - ETF Profile


End of month retirement cash inflows lifted the indexes again and the Dow closed over 22,000 but the S&P only posted a minor gain of 1 point. Thursday could see some serious volatility without another big Dow stock pushing the index higher.

Original Trade Description: July 24th.

• The SPDR S&P 500 ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index (the "Index") The S&P 500 Index is a diversified large cap U.S. index that holds companies across all eleven GICS sectors.

The S&P is marching slowly towards a date with destiny and 2,500. Since the median estimate by the top 16 analysts was a 2,450 yearend price target on the S&P, the arrival at 2,500 could be a tripwire that triggers an August correction. We have not had a 5% drop in a year and it has been 9 months since a 3.5% decline. With earnings rapidly playing out and most of the high profile companies will finish reporting by next Wednesday, I am going to recommend a bearish position for August/September.

I am going to set an entry trigger for a SPY put with the S&P at 2,495. Since aggressive traders normally want to anticipate a particular number, I want to enter the position just before we reach that level.

Update 7/26/17: The Dow was up +100 points, Nasdaq +10, Nasdaq 100 +20 and the S&P only gained 70 cents. The Russell 2000 lost -6 and the S&P-400 lost -15. We may not get to that 2,495 level. I am going to add another trigger/strike in case we get a failure from this level.

Position 7/27/17 with a S&P trade at 2,465:

Long Oct $243 put @ $3.65, see portfolio graphic for stop loss.

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