Option Investor

Daily Newsletter, Saturday, 8/12/2017

Table of Contents

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

Market Wrap

Weekend Event Risk

by Jim Brown

Click here to email Jim Brown

The major indexes tried to rebound but only the Nasdaq was successful.

Weekly Statistics

Friday Statistics

Fear of the weekend event risk was the likely cause for the mediocre rebound in the Dow, S&P and Russell. The war of words with North Korea continued to intensify and President Trump said the U.S. was "locked and loaded" to respond if Kim Jong-un did anything stupid. China took the unusual step of saying they would not take sides if NK started a military conflict but they would respond if the U.S. started the fight. Since China has always had North Korea's back, for them to say they would not respond if NK started the fight, probably had a cooling effect on Kim. Without his protector, North Korea would be a lonely place in a battle with the USA.

NK did respond to the locked and loaded statement saying they would pound the U.S. into jelly. I am sure that struck fear into the U.S. military.

If North Korea was not enough geopolitical tensions, the president said he was not ruling out a military option in Venezuela. President Maduro replied with a call to meet with President Trump at the UN General Assembly next month. Maduro said he wanted to have a "personal conversation" with the president. In the same speech to the new ruling body in Venezuela he also said, he would not cede authority to any foreign power. Maduro and Chavez before him, routinely called the U.S. an evil power causing all the hardship in the country. It is a typical ploy of dictators to take the focus off of themselves and transfer it to some other entity, then they can take credit for trying to solve the problems this entity caused.

The markets traded in a narrow range with most of the gains in the early hours with the exception of the Nasdaq. The big cap techs rebounded from big losses to allow the Nasdaq to regain 40 of the 135 points it lost on Thursday.

Volume was light at 6.1 billion shares and the A/D line was almost dead even. There was a total lack of conviction on both sides.

The main economic report on Friday was the Consumer Price Index (CPI). The CPI rose 0.1% for July after a flat reading in June and -0.1% in May. There is no inflation. Analysts were expecting +0.2%. This puts a damper on the Fed's intentions to hike rates in December. They will need a sudden surge in inflation if they are still data dependent. I suspect, regardless the numbers they will try to find some reason to allow them to hike again. They have already begun to quote other factors in their justifications.

Food inflation rose +0.2% and energy declined -0.1%. The core CPI without those two components rose +0.1% with goods falling -0.1% and services up +0.2%. On a trailing 12-month basis the CPI is up +1.7% and well below the recent peak in February at 2.8%. The 12-month core CPI is also 1.7%.

Over the prior six months the headline CPI was down -0.1% in total and the first decline since 2015. The drop in oil prices has reduced prices for everything and the Fed continues to stress this is "transitory" but that transit could be with us for a long while.

The odds of a rate hike in September are zero with a minimal 4.1% chance of a rate cut. The current rate is 1.00%-1.25% and has a 95.9% chance of staying there.

The December futures are suggesting there is only a 35.9% chance of a rate hike. That combines the 1.25-1.50% with the very slim chance of a bump to 1.50%-1.75%. A bump that high has zero chance of happening and analysts believe the odds of no hike at all will increase over the coming months.

The most likely event at the September meeting is the start of QE taper where the Fed stops replacing all the securities that mature each month. They have put forth a plan to let a portion mature without replacement while the rest of the maturing securities would be replaced with new purchases. The market has not gotten too excited whenever this is mentioned but the last time they tried to taper there was a "taper tantrum" and the market crashed. While nobody expects a market tantrum this time because of the open communication for the last year that it was coming, it is best to never say never.

The lack of inflation in the CPI and the market crash on Thursday saw treasuries rally again in a flight to quality move. The yield fell to 2.189% and some analysts are saying we could see a 2.15% or lower if the market declines further.

The weak CPI also weighed on the dollar and it headed back towards its 12-month lows. This is beneficial for the 50% of the S&P sales that are overseas.

The calendar for next week is highlighted by retail sales, Philly Fed Manufacturing and the FOMC minutes. Traders will be watching the minutes for signs of the QE taper details. That is the most important event for the week.

The retail sales are expected to show a big rebound from June's -0.2% decline and a miss there could be disappointing for the market because it suggests a weak economy.

The Philly Fed Manufacturing Survey is the proxy for the national ISM two weeks later. This will be insight into the national economy.

The Fed's Jackson Hole meeting is still two weeks away and Yellen is expected to set the stage for the QE taper in her speech.

I added the budget and debt ceiling deadlines to the calendar because it is looking more likely there is going to be a major battle and the potential for a government shutdown. Quite a few senators claim they will not vote for the budget or debt ceiling as proposed and the other side is saying they are not going to allow changes. With the extreme partisan politics in Washington today, both sides are fortifying their bunkers for a long drawn out fight.

The earnings calendar shrank for next week now that most of the big name companies have reported. However, the last three Dow components will report with HD before the open on Tuesday, Cisco Systems after the close on Wednesday and Wal-Mart before the open on Thursday.

Alibaba is the last big Nasdaq tech stock to report before the bell on Thursday. The week is heavily stacked with retail stocks and lately it has been feast or famine with either big beats or big misses.

The earnings should not move the market this week but they could be a contributing factor.

More than 455 S&P companies have reported and earnings are expected to have grown by 12.0% when the cycle ends. Of those 455 companies, 73.6% have beaten on earnings and 68.3% have beaten on revenue. The long-term averages are 64% and 59% respectively so we are well above the averages.

There have been 55 guidance warnings and 34 positive preannouncements. The forward PE remains 17.6.

There are 20 S&P companies reporting this week.

On Friday, JC Penny (JCP) reported an adjusted loss of 9 cents that was larger than the 5-cent loss analysts expected. Revenue of $2.96 billion beat estimates for $2.84 billion. Same store sales declined -1.3% and slightly worse than the -1.2% analysts expected. The company guided for the rest of 2017 for sales to be down 1% to up 1%. They expect earnings to be in the range of 40 to 65 cents and analysts were expecting 49 cents. Shares fell 16% on the news.

Bottomline Technologies (EPAY) reported adjusted earnings of 28 cents. Analysts were expecting 25 cents. Revenue of $93.5 million beat estimates for $90.9 million. EPAY operates as a Software as a Service (SaaS) company handling digital payments, documentation and digital banking. They offer Paymode-X, a cloud based payment network with invoices, payments, ledgers and vendor support.

While there were only a couple reports on Friday, there were some notable reactions to stocks reporting earnings on Thursday evening. Fan favorite Nvidia (NVDA) reported earnings of $1.01 compared to estimates for 69 cents. Revenue of $2.23 billion also beat estimates for $1.96 billion. They guided for the current quarter for revenue of $2.35 billion and analysts were expecting $2.13 billion. Despite the blowout earnings and guidance, shares fell $9.

Think about this. Revenue rose 56%, net income rose 123%, revenue in the data center segment rose 175%. Revenue from gaming rose 52%. The company has posted total revenue growth of more than 50% in each of the last three quarters and triple digit earnings growth for five consecutive quarters. So why did Nvidia shares crash? Because the stock is up 700% over the last three years and $35 in the last six weeks. Is Nvidia still a great stock? Absolutely, because it is growing faster than any other tech stock in the market and many times faster than any industrial stock. These gains will continue because they keep announcing new chips, new equipment and most importantly new performance standards. They just announced a new chip that is 12 times faster than their current top of the line chip and the current speed leader. Yes, they are replacing the fastest chip available with one that is 12 times faster. What has Intel and AMD done lately that even remotely compares?

When Nvidia fell back to $140 after their last earnings, I was pounding the table on the buying opportunity. While I do not know where this current post earnings drop will end, it is still a new buying opportunity even at the current level. If it declines any further it will just be a better opportunity.

Short seller Andrew Left was out talking his book on Nvidia again on Thursday saying he shorted Nvidia ahead of earnings because they were grossly overbought. You may remember him touting his short position in June and predicting the stock would decline to $90. He only missed it by $50 and if he is still holding that initial short he is in a world of trouble with the stock hitting a new high at almost $175 on Thursday. Left could continue to make waves with his short thesis and push the stock lower in the short term. If he does, we should thank him for the buying opportunity. Needham just upped their price target to $200.

Snap Inc (SNAP) continued to disappoint both with earnings and the tone of the conference call. Snap reported a loss of 16 cents compared to estimates for 14 cents. Revenue of $181.7 million missed already lowered estimates for $186.9 million. Snap officials blamed unnamed competitors (Facebook, Twitter and others) for "growth hacking" and using phone notifications to lure back prior users. An analyst spoke up and said "why is that different? Snap is doing exactly the same thing." The Snap answer was convoluted and the analyst laughed out loud and said, "I did not even understand his response" suggesting the CEO was being specifically vague. That would not have been a problem except the microphone was still on and everybody on the call heard the laughter and comments. This was typical for Snap. They tend to talk down to analysts on the call and then analysts talk down the stock. Snap will not give guidance so analysts are flying blind when they produce their estimates and they are going to be wide. Much of their problems are self-inflicted. Shares fell to $11.83 on their way to single digits.

Etsy (ETSY) shares spiked 2% after news that CEO Josh Silverman had purchased 64,000 shares in the open market for $15.67 each. That is roughly a $1 million acquisition. Silverman became CEO in May. Etsy blew away earnings the prior Friday.

Crude prices tried to rally after the big decline in inventories and the OPEC & non-OPEC meeting early in the week. WTI actually pushed through $50 briefly but fell back on the weak economics and general market weakness. Sometimes when the market crashes, you have to sell other things to cover margin calls and raise cash. That was probably a driver for crude prices.

The IEA pointed out that the decline in global inventories was not enough to allow OPEC to end its production cuts for a long time. The IEA said those cuts "could be here to stay" if something does not change in the demand cycle. Global inventories are declining about 500,000 bpd but even if the cuts lasted until the end of Q1-2018, they would still be 60 million over the five-year average and the target for OPEC. The compliance for the 1.8 million bpd production cut fell to 75% in July or about 470,000 bpd less than they agreed to cut.

On the positive side, the IEA raised their demand growth estimates for 2017 to 1.5 million bpd after Q2 demand soared to 1.8 million bpd. That is not expected to continue but they are seeing solid demand from Germany and the US. The EIA said US demand rose 820,000 bpd in May and the highest since 2007. China's demand rose 290,000 bpd in the first half of 2016 but European demand fell -125,000 bpd.

Global supply of oil rose 520,000 bpd in July to 98.16 million bpd. OPEC output rose 230,000 bpd to a new high of 32.84 million bpd, and this is with 75% compliance on the 1.8 million bpd of cuts.

I warned recently that Saudi Arabia was only promising to cut exports by 1.0 million bpd because they needed the extra oil to burn to produce electricity in August. They actually admitted it last week when Saudi Energy Minister Khalid al-Falih said exports would be limited to 6.6 million bpd to satisfy peak power demand in August. So much for the benevolent Saudi kingdom trying to do their part in boosting oil prices. We knew the truth would eventually appear.

U.S. shale drillers can see the future and it is bearish. More than anyone, they understand that demand is going to fall off a cliff in early September and prices will fall as well. To combat the expected fall in prices they are cutting back on active rigs. Five rigs were deactivated last week and 4 rigs the week before. Over the last five weeks, they have only added a net of 3 rigs. Multiple companies lowered capex guidance when they reported earnings. Projected well completions have been reduced with some completions pushed out until 2018.

U.S. companies are not joining OPEC in the voluntary cuts. They are just planning their expenses for the next down cycle in crude prices. The result is the same. Depletion will do the rest. In the Permian, they are losing 154,000 bpd per month to depletion in older wells. If they slow drilling that depletion will offset new production and total production will not rise.


The major indexes tried to rebound in a low volume market but the weekend event risk was likely to blame for their failure to make material gains. The early morning gains were sold at the close when traders realized stocks were not going higher.

I actually think the fact they did not fall back into negative territory was a positive. That could mean once traders see there were no military attacks over the weekend they will be more conducive to buying again. Of course, all the new weekend headlines will have to be factored in as well.

The S&P fell 36 points on Thursday and rebounded only 3 points on Friday. That is hardly a bullish event but there was the event risk. The S&P is flirting with very light support at 2,440 with the 2,420-2,410 the real target level.

While a 36 point drop is a lot for one day, the S&P is only down -1.6% from its closing high from Monday at 2,480.91. So far, Thursday's decline was just a hiccup rather than a sell off.

Until the S&P moves under 2,420, I am not going to be worried. We know the next 8-weeks are normally bearish so we should expect further declines and be happy if our expectations are wrong.

A drop to 2,381 would be a 3% decline and 2,332 would be a 5% decline. In normal markets a 3%-5% decline occurs a couple times a year.

The Dow declined -204 points on Thursday and rebounded only 14 points on Friday. Despite this decline, the Dow is only -1.2% below its closing high of 22,118 from Monday. The winners list from Friday was led by those normally at the top with the exception of Microsoft, which hardly ever gains $1 because of the 7.7 billion outstanding shares. It takes a lot to move that stock. Microsoft hit a 6-week low on Thursday and Disney a 9-month low so they were due for a decent rebound. It was probably not a change in their trend.

Apple has been an outperformer since their earnings. The iPhone 8/Pro is now expected to be announced on time but with slow deliveries. That is fine with analysts and they are just adjusting their Q4/Q1 sales expectations. Several key features are now rumored to be off the table and that has freed up production schedules.

The Dow could be a leader again if the market turns positive next week. The falling dollar and rising overseas economies favor the blue chips in the index.

Initial support on the Dow remains 21,500 and Friday's close was 350 points away. It would not hurt for the Dow to rest for a few additional days to let emotions settle before making another attempt to move higher.

The Nasdaq was the rebound leader on Friday with a 40 point gain on the Composite Index and a 43 point gain on the Nasdaq 100. The Nasdaq Composite is only down -2.6% from its 6,422 closing high from July 25th. The index did not make a new closing high on the 7th along with the other big cap indexes.

The Composite Index has support at 6,100 and closed at 6,256. From the intraday high of 6,460 on the 27th to the low on Thursday, the Composite has lost 246 points.

The Nasdaq 100 found initial support in the 5,800 range and closed at 5,831. That is roughly 257 points above real support around 5,575. Except for Thursday, the big cap index has been holding its recent gains even though it was not moving higher.

The Russell 2000 is the problem index. The Russell has fallen -78 points or -5.4% from its July 25th high of 1,452. The Russell began to decline before the other indexes and has fallen significantly farther. Current support is 1345-1355 so I am using 1,350 as a round number. If it reached that level, it would be a 6.5% drop. A move below 1,345 would be a significant negative event for the broader market.

Monday is going to be a critical day. The headlines from the weekend will be filtered and decisions made on whether they are important. Traders will determine if it is safe to go back into the market and sellers will be waiting for the next bounce. Volume is likely to be light and intraday volatility could be strong. Eventually one side will win the battle. Monday's outcome could influence the market for the rest of the week.

However, remember we are entering into a normally weak period and rallies could be sold. There is no rush to buy dips because there may be a better buying opportunity in the weeks ahead.

After the House comes back from the August recess there are only 12 work days before the budget and debt ceiling must be approved. The odds of this happening are very low. There will be volatility around these events in September.

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.

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Random Thoughts

This survey ended on Wednesday, before the big market drop. A few more bulls eased back over to neutral but I would expect next week's survey could be significantly different unless we get an early week rebound. 66% still believe the market is not going higher.

With all the headlines about North Korea attacking Guam and President Trump promising instant retaliation, I found it interesting that there are only 6 B1 bombers in Guam. Since that is the vehicle to deliver the long distance retaliation, it would seem to be a small fleet unless they are going to use nuclear weapons. The best description of a plan to retaliate suggests they will use the B1s and some cruise missiles to take out their 30+ missile launch and storage locations. However, there are no carrier strike forces near the Korean peninsula and it would take several weeks to move them back into position. Apparently, the U.S. is not taking the threat seriously despite the constant headlines.

Also of interest is that only 30 of the 62 B1 bombers in inventory can fly because of a lack of spare parts. This condition came from continuous budget cuts over the last 8 years. Nearly half of our existing fighters are grounded for parts and more than half of our tanks are mothballed because they have been scavenged for parts. Stockpiles of bombs and rockets are around 40% of recommended levels. We are not prepared to fight an actual war. We have the greatest military in the world but budget cuts have caused more damage than any enemy has.

Somebody in Illinois won the $393 million Mega Millions jackpot. Their odds were 1 in 258,890,850. You have better odds of being struck by lightning 3 times. Assuming they took the lump sum option of an estimated $247.3 million, the taxes are going to be painful. The Federal government will keep 25% up front and eventually get 39.6% or $97.9 million. Illinois will get $12.4 million up front. While a tax bill of $110.3 million is a lot of money, the $137 million that is left over would definitely pay my bills. I do not think any of us would complain about the taxes. Just give me the check please!

The world's oldest man died just short of his 114th birthday. He was born in 1903. He survived both wars and years in Auschwitz where his wife and two kids were killed. He was constantly asked what his secret was to a long life. He always replied, "I do not know. There have been smarter, stronger and better-looking men than me who are no longer alive." Francisco Olivera, a resident of Spain, now has the title of oldest man at 112 years and 242 days. The oldest verified male ever was 116 years and 54 days old when he died in Japan.

The oldest living woman is Jamaican resident Violet-Mosse Brown at 117 years, 155 days. She was born March 10th, 1900. When asked her secret she said, "Really and truly, when people ask what me eat and drink to live so long, I say to them that I eat everything, except pork and chicken, and I don't drink rum and them things," There you have it, the secret to living longer.

World's Oldest Women

World's Oldest Men

The CBOE said options on VIX hit a record 2.56 million contracts on Thursday. VIX futures volume hit a record of 939,000 contracts. Analysts said the sudden spike in volume to record levels suggested Thursday's decline was more serious than it appeared on the surface. With the near constant addition of volatility products including ETN/ETFs there could be an issue with leverage since all these products link back to the VIX. With the various inverse ETFs and the 2x, 3x ETFs there is the potential for very wide intraday swings in volatility that is accentuated by the heavy volume in the underlying that is much higher than would be dictated by the swing in the S&P. In a major market move, traders and funds are forced to buy back short positions at the worst possible time and that rapidly inflates prices just like a monster short squeeze in a thinly traded equity position. What this means is that individual traders should not be short volatility ETN/ETFs or you could eventually have a very bad day.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"De Omnibus Dubitandum" - Question Everything!

Soren Kierkegaard


Index Wrap

August/September Weakness?

by Jim Brown

Click here to email Jim Brown
The second week of August started with a bang with new highs on the Dow and S&P.

Unfortunately, it ended with a whimper in what could have been the start to the normally weak August/September period. There are no guarantees and there are plenty of bullish signs so do not bet the farm that a continued decline is imminent.

There are bearish signs as well. Some 40% of the S&P or 200 stocks are already in correction territory. A "correction" is when a stock or index declines at least 10% from its 52-week high. The majority of the 200 stocks were off significantly more with almost 100 stocks having declined more than 20%.

The chief market technician at MKM Partners pointed out that less than 60% of the Russell 3000 stocks are trading above their 200-day average. The Russell 3,000 represents 98% of tradable U.S. equities.

On the flip side, more than 70% of companies are beating their earnings estimates with earnings growth for Q2 at 12%. We are seeing a lot of those companies slide even after reporting great results. The post earnings depression seems to be worse this cycle because of the strong gains prior to earnings.

A chart I have been showing the last couple months as evidence of a continued strong rally has been the advance/decline line on the S&P. As long as that line was rising, the rally was intact. Unfortunately, it stopped rising and posted the biggest decline since March.

This is not a chart I would buy. The trend has definitely changed for the worse. The A/D line on the Dow is just as bad.

When you consider both indexes are only about 2% below their recent highs, it suggests there could be more weakness ahead. The severity of the A/D decline is significant.

The percentage of S&P stocks over their 200-day average has fallen to 68.5% and a three-month low. Only 1% lower and it will be a 7-month low. That is not good for market sentiment because this metric is closely watched.

The 50-day average is normally seen as a short-term trading signal by hedge funds and portfolio managers. When stocks fall below that average it triggers a sell and they buy again when stock move back above the 50-day. On the S&P the percentage of stocks over their 50-day has fallen to only 43.7%. That is only 6 tenths of a percentage from being a 9-month low.

The S&P closed under its 50-day average for two consecutive days and without a quick rebound over the 2,448 level, the sell orders will begin to appear. The indicators are solidly negative.

The Dow chart is still positive until a close under support at 21,500 with the 50-day at 21,550. The Dow has benefitted from a solid pattern of individual stocks rotating into the leadership position. However, post earnings depression could increase next week as we move farther away from the earnings events.

The Nasdaq was the leader to the downside last week and the biggest gainer on Friday. The index hit an intraday high on Monday at 6,423 and an intraday low on Thursday of 6,214 for a 209-point drop in four days. Traders were itching to buy the dip after that big of a decline. However, impatience is not a strategy. If you are fast on your feet, you might be able to pick up a couple points but a one day rebound does not reverse a trend. We need to see 2-3 days of gains before we can focus on upside again. That is especially true in August.

The Russell 2000 remains the weakest index. Support at 1,400 failed and the current target is 1355-1345. Note the severity of the decline in the indicators. The Russell is in full decline and the 1-point rebound on Friday was miniscule given the strong two-week loss. This is damaging to market sentiment and it will be worse if the index closes below 1,345.

The broad market Russell 3000 Index is in breakdown mode. The major support at 1,460 broke and the index closed well under the 50-day average. The next obvious support is the 1,425 level from early July. The indicators are negative and there could be trouble ahead.

Here is a different look at the same index. I drew uptrend support lines from multiple points and the index has broken both lines. This shows that the severity of the decline is different from those last three dips.

Nobody can accurately call the market direction on a short-term basis simply because there are too many factors that influence direction. You have technical, fundamental, seasonal, political, geopolitical, Federal Reserve, random stock news and random news events. Every factor may line up perfectly on Sunday evening and Monday morning sees a completely opposite reaction because of some combination of headlines.

We can only see what the charts tell us and then deal with reality when it occurs. The reality this week is that the August decline may have started and regardless of how eager traders are to buy the dip, there may be more volume from sellers restructuring portfolios ahead of the typical October bottom, buying opportunity. The potential is very high for a significant volatility event surrounding the budget and debt ceiling battles at the end of September. Portfolio managers are probably not willing to hold on to positions until the outcome because it is a cutthroat business. Profits are not profits until the positions are closed. Fund managers that do not outperform their peers will find themselves looking for another job. Nobody ever gets fired for taking profits.

Unless you are a short-term trader, the risks of holding long-term positions over the next 8 weeks are very high. If you have them, hold them but I would not add any new ones until we see a buying opportunity.

There is always another day to trade if you have money in your account.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Living Dangerously

by Jim Brown

Click here to email Jim Brown

Editors Note:

Sometimes you have to roll the dice. I looked at hundreds of companies this weekend for a potential play. Everything has risk in this environment. Apple may have the least risk.


AAPL - Apple Inc - Company Profile

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. Company description from FinViz.com.

Earnings Oct 31st.

We exited a position on Apple just prior to earnings. The report was strong and shares spiked $9 at the open the following day. After 9 days of trading they have been higher and lower but they refuse to give up their gains. Shares were up $2 on Friday when the rest of the big cap market was flat.

The reason Apple may have less risk than the rest of the market is the expected production announcement in September. They are expected to announce 2 new iPhone 7s and the iPhone 8/Pro plus some other upgrades. This is going to be a major product announcement that could propel Apple to $200 over the next six months. We know Apple shares normally ramp into an announcement and then decline shortly thereafter on a sell the news event. We will decide a couple days ahead of the announcement if we want to hold over.

I am using the November strikes because that is after earnings and the options should hold their value more in case of market volatility than an option that expires before earnings. Just because we buy more time does not mean we have to use it. I am recommending a spread because of high option premiums.

Buy Nov $160 call, currently $7.15, initial stop loss $148. (trying to avoid volatility dips)
Sell short Nov $175 call, currently $2.38, initial stop loss $148.
Net debit $4.77.


No New Bearish Plays

In Play Updates and Reviews

Minor Recovery

by Jim Brown

Click here to email Jim Brown

Editors Note:

Weekend event risk kept the markets from rebounding from Thursday's loss. The Nasdaq added 40 points and recovered about a third of the loss but the Dow barely remained positive. The verbal war between Kim Jong-un and President Trump continued and late Friday he said he is now considering military action in Venezuela. This makes holding over the weekend even more dangerous.

The Russell 2000 declined -1.74% or 24 points on Thursday and only rebounded 2 points on Friday. There is still a lot of concerns and traders were simply not going to put money at risk before a weekend.

Current Portfolio

Stop Loss Updates

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

Profit Targets

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

Current Position Changes

No Changes

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

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor

BULLISH Play Updates

MMM - 3M Co - Company Profile


No specific news. Shares declined slightly on fears the Dow was going to tank again.

Original Trade Description: Aug 9th.

3M Company operates as a diversified technology company worldwide. The company's Industrial segment offers tapes; coated, non-woven, and bonded abrasives; adhesives; advanced ceramics; sealants; specialty materials; separation and purification products; closure systems for personal hygiene products; acoustic systems products; automotive components; and abrasion-resistant films, and paint finishing and detailing products. Its Safety and Graphics Business segment provides personal protection products, traffic safety and security products, commercial graphics systems, commercial cleaning and protection products, floor matting, roofing granules for asphalt shingles, and fall protection products. The company's Health Care segment offers medical and surgical supplies, skin health and infection prevention products, inhalation and transdermal drug delivery systems, dental and orthodontic products, health information systems, and food safety products. Its Electronics and Energy segment provides optical films; packaging and interconnection devices; insulating and splicing solutions; touch screens and touch monitors; renewable energy component solutions; and infrastructure protection products. The company's Consumer segment offers sponges, scouring pads, high-performance cloths, repositionable notes, indexing systems, home improvement and care products, protective materials, and consumer and office tapes and adhesives. Company description from FinViz.com.

On July 25th, 3M reported earnings of $2.58 that missed estimates for $2.59. Revenue of $7.81 billion missed estimates for $7.88 billion. The company guided for full-year earnings of $8.80-$9.05. Traders were in knee-jerk mode and the stock fell $14 on the news.

The miss was minimal and the company did increase earnings 22.6% for the quarter. They reported organic growth of 3.5% and reaffirmed their full year estimate for 3-5% organic growth. There is nothing wrong with this company.

Expected earnings Oct 24th.

Shares have recovered half of their post earnings losses and the dip over the last couple of days has weakened the option premiums to allow us to enter. Resistance is $212.

Bear in mind that the market is struggling and it would not be a surprise to see further declines in the Dow. Today's rebound from the opening drop was encouraging enough for me to take a chance on 3M because MMM shares have already been hit. They could look like a safe port in the coming storm.

If the market does extend its rebound, 3M could be a Dow leader again.

Position 8/10/17:

Long Oct $210 call @ $2.91, see portfolio graphic for stop loss.

VAR - Varian Medical Systems - Company Profile


No specific news but another nice gain of $1.09.

Original Trade Description: Aug 2nd.

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.

Position 8/3/17:

Long Nov $105 call @ $1.75, see portfolio graphic for stop loss.

VIX - Volatility Index - Index Profile


The VIX held the majority of its gains from Thursday with fears about a geopolitical event over the weekend. One more day of sharp declines in the S&P and we could hit the exit target at 20. Plenty of time with our November option. We still have to get past the budget battle and the debt ceiling fight.

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 $20 to exit.

BEARISH Play Updates (Alpha by Symbol)

DIA - Dow ETF - ETF Profile


No material gain with worries about weekend event risk.

I am recommending we target 215.50 for an exit.

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. Minor rebound from critical support.

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 and no gain. As a Dow component, I am sure investors were being cautious ahead of the weekend. Anything can happen and the market can go either way on Monday.

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.

Update 8/5/17: Wedbush initiated coverage with a neutral rating saying IBM is going to face "structural headwinds" and free cash flow will continue to be consumed by "aggressive M&A." The analyst said the world has moved away from the labor intensive model of IT services with cloud computing and cloud software replacing those IT consultants. Legacy IT services contracts are going to see margins decline due to "pricing resets" and an industry wide "skills mismatch." He said IBM's lack of transparency about its current business models suggests they are lagging the evolution curve.

Update 8/7/17: A judge in Indiana ruled IBM must pay the state $78 million for failing to complete the automation of much of the state's welfare services system. The court case came after the state cancelled the $1.3 billion automation contract because of numerous complaints about long wait times, lost documents and improper rejections. An appeals court found that IBM had committed a material breach of its contract by failing to deliver improvements to the welfare system.

Position 7/31/17:

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

PCRX - Pacira Pharmaceuticals - Company Profile


No specific news. Only a minor rebound in an unsteady market. Shares are trying to form a bottom so I am lowering the stop loss again.

Original Trade Description: August 7th.

Pacira Pharmaceuticals, Inc., a specialty pharmaceutical company, develops, manufactures, and commercializes proprietary pharmaceutical products primarily for use in hospitals and ambulatory surgery centers in the United States. It develops pharmaceutical products based on its proprietary DepoFoam drug delivery technology. The company's lead product includes, EXPAREL, a liposome injection of bupivacaine, an amide-type local anesthetic indicated for infiltration into the surgical site to produce postsurgical analgesia. Its development pipeline comprises DepoTranexamic Acid, a long-acting local antifibrinolytic agent, which is in Phase II clinical development for the treatment or prevention of excessive blood loss during surgery by preventing the breakdown of a clot; and DepoMeloxicam, a long-acting non-steroidal anti-inflammatory drug, which is in preclinical development for the treatment of acute postsurgical pain. Company description from FinViz.com.

Pacira reported a loss last week of 29 cents that missed estimates for 28 cents and was well over the 2 cent loss in the year ago period. Revenue of $70.9 million ros eonly 1.9% and misses estimates for $74 million. Rising revenues for their top product, Exparel, were offset by falling revenues elsewhere. Exparel revenues rose 6.1% but DepoCyte and other product revenues declined -81.1%. Research and development costs rose 10`% and G&A costs rose 9.4%. Revenues slowing and expenses rising are never a good combination.

The company reaffirmed their full year revenue guidance for Exparel in the range of $290-$310 million.

Shares declined to a 6 month low after earnings.

Expected earnings November 3rd.

The optimistic outlook faded in late July when a Phase III trial of Exparel did not produce the desired results in treatment of total knee arthoplasty or TKA. Pacira is trying to expand the uses for Exparel as a way of expanding sales. This was a blow for the stock in July and the weak earnings is causing further declines.

Support is well below at $30.

Position 8/8/17:

Long Sept $35 put @ $1.44, see portfolio graphic for stop loss.

SPY - S&P-500 ETF - ETF Profile


The S&P dropped 36 points on Thursday and rebounded 3 points on Friday. That is hardly bullish but there was plenty of weekend event risk. If the weakness continues, the target should be support just over $240.

I am recommending we target $241 for an exit.

August has been down 5 of the last 7 years and up only 5 of the last 20 years.

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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