Option Investor

Daily Newsletter, Tuesday, 8/22/2017

Table of Contents

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

Market Wrap

One-Day Trend

by Jim Brown

Click here to email Jim Brown
One day does not make a trend. A short squeeze after three days of losses is normal.

Market Statistics

The short squeeze was triggered by an article on Politico titled "Trump's team and lawmakers making strides on tax reform plan." Unfortunately, 99.99% of traders only heard of the article rather than read it. The article stated there was a broad consensus on some of the best ways to pay for tax cuts. However, having six guys in a room agree on potential changes in the tax code is a long way from actually getting a tax reform bill passed in the House and Senate.

The options discussed included capping the mortgage interest deduction, ending the deductions for state and local taxes, eliminating the interest deduction on business loans and phasing in full expensing of investments in equipment or facilities for small businesses.

We all know that capping the mortgage interest deduction would be a major challenge for voters unless the caps were very high. Killing the deduction for state and local taxes against your federal taxes would also be a major sticking point. High personal tax states in the Northeast and West would be hit hard. The only thing that keeps voters from storming the state capitals every time the local taxes are raised, is that they can deduct it from their federal taxes. Changing that deduction would cause serious problems for high tax states. The lobbying against it would be massive.

Gary Cohn hinted last week that we have a great "skeleton" for tax reform. That is about all it is and you are not going to change 75,000 pages of IRS tax code with a skeleton plan discussed by a six guys in a room over a weekend. The "Big Six" as they are being called includes, Gary Cohn, Steven Mnuchin, Mitch McConnell, Paul Ryan, Orrin Hatch and Kevin Brady. The article also quoted Cohn as saying "we would like to put some skin and muscle on the skeleton and drive tax reform forward by the end of the year." Investors got excited and covered a few shorts and I am sure nobody saw that "end of the year" comment. There was also a comment that any reform program will "require" companies to repatriate cash from overseas. That may not go over well if the government is going to lower the tax only slightly but require repatriation. Another decision being considered is whether to make the cuts permanent or sunset them after 5-10 years.

The short squeeze in response to this headline was definitely a case of premature expectation since nothing has changed and nothing is likely to change until late in the year. The market trend has not changed. Three days down, one day up is normal for Aug/Sep.

Contrary to normal short squeezes where the market gaps higher and then trades sideways the rest of the day, this started as a squeeze at the open but actually rose the rest of the day. This suggests it was not all squeeze. There was some follow through buying. The key will be its ability to last for several days and not fade on Wednesday.

The economic reports were sparse for Tuesday. The FHFA purchase only home price index for June rose 6.5% and slightly less than the 6.9% in May. This was a lagging report for three months ago and it was ignored.

The Richmond Fed Manufacturing Survey for August was flat at 14.0. The only component to change significantly was employment, which rose from 10 to 17 and their highest level since March. This unchanged report was also ignored.

After the bell, the API inventory report showed a decline of 3.595 million barrels of oil. This was significantly smaller than the last EIA report with a decline of -8.9 million barrels. API said gasoline inventories rose 1.402 million barrels with distillates rising 2.048 million. The gasoline inventories were for the week before the eclipse. Given all the driving to and from the eclipse viewing sites it will be interesting to see what happens in next week's report. Various states reported 6-10 times the normal interstate traffic.

Wednesday's calendar has the new home sales with only a minor gain expected. The big event is still the Yellen speech on Friday where she is expected to mention tapering QE. That could have a cooling effect on the market depending on the wording.

Toll Brothers (TOL) reported earnings of 87 cents that beat estimates for 69 cents. Revenue of $1.5 billion rose 18% but missed estimates for $1.51 billion. The average price of a delivered home was $791,400 compared to $842,700 in the year ago quarter. The company has added a new home style of lower priced homes for millennials in addition to their normal luxury homes. These lower priced home sales weighed on the average selling price.

They delivered 1,899 homes, up 26%. They expect to deliver 7,000-7,300 homes in 2017. That was up from prior guidance of 6,950-7,450. The average delivered price is expected to be between $800,000-$825,000. Toll said a recall on floor joists by the manufacturer pushed the completion of 150 homes into 2018. This caused them to narrow their revenue forecast for the full year from $5.4-$6.1 billion to $5.6-$6.0 billion. New orders rose 24% to 2,163 in Q3. Shares declined $1 on the revenue miss.

DSW Inc (DSW) reported earnings of 38 cents compared to estimates for 29 cents. Revenue of $680.4 million also beat estimates for $669.2 million. They guided for full year earnings of $1.45-$1.55 compared to estimates for $1.44. Same store sales rose 0.6% compared to a -1.2% decline in the year ago quarter. They said online sales rose 27% thanks to large growth in mobile traffic. DSW has an active rewards program for online shoppers. Shares spiked 17% on the earnings.

Cosmetic seller Coty Inc (COTY) reported zero earnings compared to estimates for 9 cents. Revenue of $2.24 billion beat estimates for $2.17 billion. For the full year, they reported earnings of 63 cents, down -54%, and missing estimates for 76 cents. On the full year basis revenues declined 5%. They ended the quarter with $535.4 million in cash and $7.2 billion in debt. Shares crashed 9% on the news.

Medtronic (MDT) reported earnings of $1.12 that beat estimates for $1.08. Revenue of $7.39 billion missed estimates for $7.45 billion. The company said it was hurt by a global IT disruption in June and the shortage of diabetes sensors. The company guided for a 4%-5% increase in full year revenue and 9%-10% rise in earnings. Shares fell slightly on the report.

After the bell, Salesforce.com (CRM) reported earnings of 33 cents, which beat estimates for 31 cents. Revenue of $2.56 billion beat estimates for $2.52 billion. They guided for the current quarter for earnings of 36-37 cents and revenue of $2.64-$2.65 billion. Analysts were expecting $2.61 billion. For the full year, they guided for $1.28-$1.31 and revenue of $10.35-$10.40 billion. Shares were down slightly in afterhours.

Chipmaker Cree Inc (CREE) reported earnings of 4 cents that missed estimates for 5 cents. Revenue of $358.9 million beat estimates for $350.3 million. They guided for the current quarter for revenue of $353-$367 million and analysts were expecting $368.5 million. Shares fell 10% in afterhours.

La-Z-Boy (LZB) reported earnings of 24 cents that missed estimates for 29 cents. Revenue of $351.1 million missed estimates for $357.7 million. The company said low volume in their plants was not enough to absorb the fixed costs, which impacted margins. Translated, that means earnings were weak due to slow sales. Shares fell -15% in afterhours.

Earnings for Wednesday will be headlined by Hewlett Packard, Lowes, PVH and Guess. Broadcom is the big dog on Thursday.

After the bell, the Wells Fargo CEO warned employees to brace for another round of negative headlines. He said the bank would announce over the next several weeks the completion of a third party review of the consumer sales scandal. He said, the results will "generate news headlines" but the best thing the bank can do is focus on fixing problems. They have already paid out $5 million in individual settlements and are facing several hundred million more in class action settlements. They have already paid $185 million in fines and penalties. CEO Sloan took over after the bank was found to have opened about 2 million fake accounts without customer authorizations. Shares fell $2 in afterhours but recovered to close unchanged.

Restaurant Brands International (QSR), parent of Tim Hortons, Burger King and Popeye's, was named a "top pick" at UBS. The analyst said the current initiatives are driving earnings, unit growth and same store sales. Shares rose 2.4% on the upgrade.

The Air Force awarded contracts to Boeing (BA) and Northrop Gruman (NOC) to development a replacement for the silo based Minuteman III intercontinental ballistic missile system. The Minuteman missiles are our biggest deterrent against a nuclear strike by another country. Launching a strike against the U.S. by another country would be suicidal for the country launching the strike. The U.S. could obliterate any other country on earth if attacked. The Minuteman missiles are one of the three legs of the nuclear triad with ballistic missile submarines and missiles/bombs delivered by bombers the other two legs. Currently there are 400 silo-based missiles on standby to respond to any attack. However, these missiles are decades old and need to be replaced. These contracts are just the first step in designing a replacement system that does not depend on floppy disks for guidance info. Seriously, they are really old.


At its lows on Monday, the S&P was down -2.95% from its closing high on August 7th. That is hardly a serious correction. In a normal market, it is common to get declines like that or worse at least once a quarter. Investors are so accustomed to markets only going up, this was a somewhat traumatic event for some. FAANG stocks actually went down. The end of the world was upon us.

After a less than a 1% rebound today, all is right with the world if you believe the chatter from traders. New highs are being predicted and the declining trend has been forgotten. Unfortunately, those who do not learn from history are doomed to repeat it.

There is nothing specific to discuss about the markets this evening. The indexes were down for several days and a short squeeze appeared. Move along, there is nothing to see here.

The key point is that the trend has not changed. If you look at the S&P, Nasdaq and Russell charts, the trend is still bearish. Until the market rallies for a week and starts to break through some of that overhead resistance, it will remain bearish. One day does not make a trend.

The S&P tested support at 2,420 twice and then rebounded to 2,450. Until it moves over 2,475, the trend is still bearish and today's candle is just another lower high.

It was a good day for the Dow. Only 3 components were negative and there were some strong gainers. We would all be thrilled if this continued for the rest of the week but I would not hold my breath. While it is possible, it is not probable.

The Boeing headline caused a $4 spike in the shares and a gain of nearly 28 Dow points. As long as there are 3-4 companies a day with outstanding gains, the index can move higher.

However, resistance is now 22000-22050 and until that level is broken, we remain in a short term down trend. The longer-term trend remains bullish but only over a much longer window. Some of the gains here were definitely short covering after some of the stocks suffered serious declines over the last two weeks. Remember, the Dow was down about 450 points over the last two weeks.

The Nasdaq big caps were back in force today. They powered the Nasdaq Composite to an 84-point gain and the Nasdaq 100 to an 87-point gain. However, you would have thought the gains in the big caps would have caused an even bigger rise but there was still some undercover selling.

The negative trend in the market is easily seen in the Nasdaq chart. The declines are larger than the gains and resistance is still intact.

The Russell 2000 had a nice gain of 14 points but compared to the -103 point decline that was hardly material. The small caps are still the weakest index but they did hold at initial support of 1,350. A break under 1,340 would be the signal to short the market.

Contrary to what I might have implied in the comments above, I am not bearish on the market. I would be thrilled if the rally continued. However, given our point on the calendar, the Yellen speech on Friday and the expected political volatility in September, I simply believe we are at a great risk of further declines than further rallies. One day does not make a trend and until the negative trend changes we should respect the current market direction.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Retracement Ahead

by Jim Brown

Click here to email Jim Brown

Editors Note:

Tuesday's short squeeze is likely a one-day event. I would be thrilled if the rally continued but the calendar is working against us. We have a full portfolio with both bullish and bearish positions. There is no reason to add additional risk without a good idea about market direction.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Refreshing Rebound

by Jim Brown

Click here to email Jim Brown

Editors Note:

Tuesday's short squeeze was great for our bullish plays but it may not last. This was simply a short squeeze on a rumored headline after three days of declines. One day does not make a trend. Until the market strings several positive days together, the trend has not changed.

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

ALB - Albermarle
The long call position was entered at the open.

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


No specific news. iPhone 8 leaks are now happening almost daily so Apple must be moving into production. That is the only way so many pictures and feature lists could be appearing. That puts to rest the rumors of a 2-3 month delay in shipping.

Original Trade Description: Aug 12th.

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.

Update 8/14/17: BlueFin Research, as reported in Barrons, claims the production ramp for iPhones in Q3 is at record levels with 53 million phones expected. They will be split between the 7s, 7s Plus and the iPhone 8/Pro with the iPhone 8 only 5-6 million of that total. That will change in Q4 to 44 million of the model 8 with 30 million a quarter for the rest of 2018. They did not disclose sources but it is believed they are basing their estimates on the component quantities being shipped to manufacturers.

Aetna (AET) and Apple held talks last week with Aetna wanting to offer the Apple Watch either free or discounted to all 23 million of its members. They currently offer the watch to their 50,000 employees as part of a fitness program.

Another news story said that Google is paying Apple a license fee of up to $3 billion for 2017 to remain the default search engine on Apple devices. That would equate to 5% of Apple's total annual profit and 25% of their earnings growth. That is the largest contributor to the growth in service revenues. Bernstein said Google pays a fee to Apple of 34% of whatever it earns from ads delivered to Apple users. That is huge!

Position 8/14:

Long Nov $160 call @ $8.05, see portfolio graphic for stop loss.
Short Nov $175 call @ $2.72, see portfolio graphic for stop loss.
Net debit $5.33.

ALB - Albermarle - Company Profile


No specific news. Nice gain to open the position.

Original Trade Description: Aug 21st.

Albemarle Corporation develops, manufactures, and markets engineered specialty chemicals worldwide. The company offers lithium compounds, including lithium carbonate, lithium hydroxide, lithium chloride, and lithium specialties and reagents for applications in lithium batteries, high performance greases, thermoplastic elastomers for car tires, rubber soles and plastic bottles, catalysts for chemical reactions, organic synthesis processes, life science, pharmaceutical, and other markets; cesium products for the chemical and pharmaceutical industries; and zirconium, barium, and titanium products for pyrotechnical applications. It also manufactures cesium products for the chemical and pharmaceutical industries; and zirconium, barium, and titanium products for various pyrotechnical applications, including airbag igniters; and performance catalyst solutions, such as polymer catalysts, curatives, organometallics, and electronic materials for polyolefin polymers, packaging, non-packaging, films, injection molding, alpha-olefins, electronic materials, solar cells, polyurethanes, epoxies, and other engineered resins markets. In addition, the company offers bromine and bromine-based solutions for fire safety, chemical synthesis, mercury control, water purification, beef and poultry processing, and various other industrial applications, as well as for the oil and gas well drilling, and completion fluids applications. Further, Albemarle Corporation provides clean fuels technologies, which is primarily composed of hydroprocessing catalysts; and heavy oil upgrading, which is primarily composed of fluidized catalytic cracking catalysts and additives for application in the refining industry. It serves petroleum refining, consumer electronics, energy storage, construction, automotive, lubricants, pharmaceuticals, crop protection, food safety, and custom chemistry services markets. Company description from FinViz.com.

With production of electric cars exploding with more than 1 million expected to be manufactured in 2018, the demand for Lithium-ion (Li-ion) rechargeable batteries is also exploding. When Tesla's Gigafactory reaches full production in 2020 of 35 gigawatt-hours, that will be more battery capacity than the entire world produced in 2014. Tesla has blamed the battery shortage for misses in auto production and they are already planning on building a second Gigafactory. The demand for lithium is suddenly huge and Albemarle is already responsible for 35% of global production.

They reported Q2 earnings of $1.13, up 22%, that beat estimates for $1.11. However, revenue of $737.3 million missed estimates for $740.6 million. They guided for full year earnings of $4.20-$4.40, a 21% rise and revenue of $2.90-$3.05 billion. The revenue miss was due to a divestiture of a specialty chemicals business and currency exchange issues. They repurchased $250 million in stock in the first 6-months of 2017 and paid dividends of $69.8 million.

Next earnings Nov 6th.

Shares declined after the revenue miss but rebounded exactly from long-term uptrend support.

Position 8/22:

Long Oct $120 call @ $1.75, see portfolio graphic for stop loss.

MMM - 3M Co - Company Profile


No specific news. Shares moved just over prior support, which is now resistance.

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. Varian was an outperformer again with a move over two resistance levels.

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


Major drop in the VIX of 14% thanks to the market rally.

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)

CAH - Cardinal Health - Company Profile


No specific news. The market rebound triggered short covering everywhere. CAH was heavily shorted.

Original Trade Description: July 29th.

Cardinal Health, Inc. operates as a healthcare services and products company worldwide. The company's Pharmaceutical segment distributes branded and generic pharmaceutical, over-the-counter healthcare, specialty pharmaceutical, and consumer products to retailers, hospitals, and other healthcare providers. It offers distribution, inventory management, data reporting, new product launch support, and contract pricing and chargeback administration services to pharmaceutical manufacturers; pharmacy and medication therapy management, and patient outcomes services to hospitals, other healthcare providers, and payers; consulting, patient support, and other services to pharmaceutical manufacturers and healthcare providers. This segment also operates nuclear pharmacies and cyclotron facilities that manufacture, prepare, and deliver radiopharmaceuticals, as well as operates direct-to-patient specialty pharmacies; offers logistics, marketing, and other services; and repackages generic pharmaceuticals and over-the-counter healthcare products. The company's Medical segment distributes a range of medical, surgical, and laboratory products and services to hospitals, ambulatory surgery centers, clinical laboratories, and other healthcare providers, as well as to patients in the home. This segment also develops, manufactures, and sources medical and surgical products comprising surgical drapes, and gowns and apparel; exam and surgical gloves; fluid suction and collection systems; cardiovascular and endovascular products; and wound care and orthopedic products, as well as assembles and offers sterile and non-sterile procedure kits. In addition, it offers supply chain services, including spend, distribution, and inventory management services to healthcare providers; and post-acute care management, and transition services and software to hospitals, other healthcare providers, and payers. Company description from FinViz.com.

Cardinal reported earnings of $1.31 that beat estimates for $1.24. Revenue of $33.0 billion beat estimates for $32.7 billion. While the company may be winning some market share from McKesson, the cost of the wins means lower margins.

The company said generic deflation and competition was depressing margins. They had previously guided lower for 2018 in April and did it again with earnings. For fiscal 2018 they guided for earnings of $4.85 to $5.10 and analysts were expecting $5.25. They also said earnings would be impacted by some "company discrete items" that could result in a profit decline for the drug business. They reemphasized that in the recent earnings report saying these actions will be detrimental in the short term but improve our trajectory in 2019.

Investors like it when companies build for the future but in the case of CAH, the short term including the rest of 2017 and 2018 is actually long term for traders. They bailed on the stock and it is still falling.

President Trump tweeted about lowering drug prices this morning and it is a good bet it will eventually happen in some form. Just talking about it is going to pressure CAH.

Expected earnings Nov 1st.

Position 8/15/17:

Long Sept $65 put @ 77 cents, no initial stop loss.

DIA - Dow ETF - ETF Profile


Today's rebound was just a short squeeze with a lower high unless it continues for several more days. One day does not make a trend.

I am recommending we target 213.25 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.

DRQ - Dril-Quip - Company Profile


No specific news. Just a minor short squeeze in a market rebound.

Original Trade Description: August 19th.

Dril-Quip, Inc., together with its subsidiaries, designs, manufactures, sells, and services offshore drilling and production equipment for use in deepwater, harsh environment, and severe service applications worldwide. It operates through three segments: Western Hemisphere, Eastern Hemisphere, and Asia-Pacific. The company's principal products include subsea and surface wellheads, subsea and surface production trees, subsea control systems and manifolds, mudline hanger systems, specialty connectors and associated pipes, drilling and production riser systems, liner hangers, wellhead connectors, and diverters, as well as consumable downhole products. It also provides technical advisory services, and rework and reconditioning services, as well as rental and purchase of running tools for use in the installation and retrieval of the its products. The company's products are used to explore for oil and gas from offshore drilling rigs, such as floating rigs and jack-up rigs; and for drilling and production of oil and gas wells on offshore platforms, tension leg platforms, and Spars, as well as moored vessels, such as floating production, storage, and offloading monohull moored vessels. Company description from FinViz.com.

The company reported earnings of 9 cents compared to estimates for 1 cent. On the surface, that is a huge beat. Unfortunately it was down from a 64 cent profit in the year ago quarter. Revenue of $127.9 million declined from $142.2 million but still beat estimates for $102 million. So far, so good.

Selling, G&A expenses rose from $5.8 million to a whopping $31.2 million. Total expenses rose from $97.2 million to $129 million. On an operating basis they lost $1.1 million compared to net income of $45.2 million in the year ago quarter. Order backlogs fell from $296 million to $235 million.

While earnings and revenue beat significantly lowered estimates, they were dramatically below year ago levels. Everything is working against Dril-Quip because offshore drilling is rapidly shrinking because of the low cost of oil. It is not profitable to produce oil at $75-$85 a barrel when it is selling for less than $50. Offshore oil rigs in the U.S. have fallen from more than 50 to only 16.

Dril-Quip is actually a good company but the offshore sector is in serious pain. Their benefitting from the various gas wells being drilled overseas where multiple giant gas fields have been discovered. It will be enough to keep the bills paid but long-term, oil prices will have to rebound before DRQ can return to hero status.

With the summer driving season almost over, crude prices are likely to move lower than higher over the next couple of months.

Expected earnings Oct 26th.

Position 8/21/17:

Long Dec $35 put @ $1.65, see portfolio graphic for stop loss.

IBM - International Business Machines - ETF Profile


No specific news. Shares rebounded slightly with the Dow. The next material support level is $120.

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.

SPY - S&P-500 ETF - ETF Profile


Major short squeeze but still just a lower high in the overall pattern. The next support level is $240.50.

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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