Option Investor

Daily Newsletter, Wednesday, 9/20/2017

Table of Contents

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

Market Wrap

Fed's Plan For the Great Unwind

by Keene Little

Click here to email Keene Little
The market has been on hold since gapping up on Monday while it waited for this afternoon's FOMC announcement. The announcement of October as the start of the Great Unwind was initially met with selling in the stock market but the dipsters were ready and waiting to drive the indexes back up to save the day, maybe.

Today's Market Stats

Following Monday morning's gap up in the stock market it marched sideways while it waited to get through this afternoon's FOMC announcement. An initial negative reaction to the news that the Fed was going to start reducing its balance sheet in October (some were hoping not until December or next year) was followed by dipsters jumping back in and the market closed near the flat line, leaving us guessing what tomorrow's reaction might be.

It's been nine years since the Fed started its rampage through the forests in a reverse Robin Hood move by taking from the poor and giving to the rich. Today they announced that the rich need to start giving back some of its ill-gotten gains so that the Fed can start reducing its bloated $4.5T balance sheet. As a token of their appreciation they kept interest rates unchanged at 1.00%-1.25%.

The Fed intends to start small by rolling over its monthly expiring debt except for $10B of it each month. To put that into perspective, that's a reduction of 0.22% of its balance sheet each month, or 2.7% per year. At that rate they'll get back down to their pre-crisis level (about $600B) in a little over 32 years, or about the maturity of the 30-year bond. Well, it's a token amount and I'll bet the reduction program will be halted before this time next year as the market tumbles back down from being overly indebted and out of gas. The Fed will have to once again ride to the rescue of the rich.

If the stock market does start to falter and we enter a bear market, one has to wonder how long the Fed will tolerate that. They've made it their mission to rally the stock market so that people feel wealthier and spend money. A huge consequence of all the money the Fed created since 2009, along with abnormally low interest rates, is a huge increase in debt levels. It has become the MOAB -- the Mother of All Bubbles (some would say Mother of All Bombs and they would not be far from the truth).

Companies borrowed huge sums of money for dirt-cheap prices and then bought back large portions of their outstanding stock. Whether or not the company was improving earnings through higher sales/lower costs, the P/E of their stock was brought down through the buy-back programs. It was all smoke and mirrors to make it look like their stock was still fairly valued.

The consequence of all this, as stated in an article in the Wall Street Journal on Tuesday, is that "Financial assets across developed economies are more overvalued than at any other time in recent centuries." [Emphasis mine] We're not talking more overvalued since 2000 but instead more overvalued than in the past couple of centuries. That should be an eye-opener to many.

There are many examples of how badly out of whack the companies' stock prices have become. Exxon Mobil (XOM) is one example -- in 2006 (the last full year before the Fed started its monetary expansion policies) XOM reported $365B in revenue, profit of almost $40B and free cash flow (available to pay shareholders) of nearly $34B. In 2016 full-year revenue was $226B (down nearly 40%), profit was a little less than $8B and free cash flow a little less than $6B (down about 80%). One would think the share price would suffer accordingly. Nope, XOM's stock price is up 20%, from about $75 to $90.

General Electric (GE) is often thought of as a proxy for the economy and it has done terribly over the years (although it recovered nicely from its 2009 low). It reported free cash flow of nearly $14B in 2006 but last year its cash flow was negative. Its net worth dropped 37% from $122B to $77B. Its stock price in 2016, near $33, was roughly the same as it was in 2006 but up significantly from 2009's low at $5.73.

McDonalds (MCD) is another good example. The rise in its stock price has been steady since the low in March 2003 and it looks like the picture of health. But in the 10 years between 2006 and 2016 it has reported only a slight increase in revenues. It did well cutting costs because its profit improved by 30% over that time period. But it tripled its debt load from a little more than $8B to almost $26B. Its book value dropped from almost $16B to -$2B (in the hole by $2B). And over this time frame its stock price tripled (and was the strongest stock in the Dow 30 today, up +1.6%).

These are mere representatives of a stock market gone crazy and much of it has to do with too much money (from global central banks) chasing too few assets. It's all fake (like fake news) and the debt needs to be repaid. When the Fed tries to let tide water recede they will likely find the stock market reacting negatively. Lowering the water level exposes the rocks just below the surface that most investors have been ignoring.

The bottom line for the Fed and the stock market is that there has been an enormous positive impact on stock prices over the past 10 years from the Fed's supportive easy-money policies. It's hard to imagine that reversing those policies will go unnoticed by the stock market.

One of the big problems with the debt loads taken on by so many companies is that a lot of it is considered junk status. Think of the sub-prime mortgage market on steroids as many companies use "covenant-lite" loans, meaning they're not meeting the requirements of the loans but the banks look the other way. Not meeting profitability requirements, debt-to-asset requirements, etc. are violations that can trigger a loan recall by the bank.

The trouble with violations of a loan's covenants and a bank calling in the loan is that the company might not be able to come up with the money to pay off the loan (think Greece as an example of this). The bank doesn't want to have to report a non-performing loan on its balance sheet and so everyone makes believe everything is still OK. Multiply this by hundreds, perhaps thousands, of companies, large and small, and you have a debt pot that's boiling and ready to blow the lid.

The problem with much of the junk bonds is that many of them are coming due in the next couple of years. The Wall Street Journal warned investors in yesterday's article to be cautious about both companies and their junk bonds that are rolling over between now and 2020. The market could soon freeze up as more and more companies experience tightening lending standards, especially if the Fed is drawing money out of the monetary system.

This week's announcement by Toys R Us that they're declaring Chapter 11 bankruptcy (another retailer bites the dust) is actually being done before they need to. It is believed management is trying to get ahead of others who will be doing the same thing. The chart below shows the amount of money involved in junk bonds that will be rolling over in the next three years -- $1.3T coming due by 2020. As the WSJ said, Toys R Us is "a canary in the coalmine" for the broader credit markets.

Whether or not Toys R Us will be able to refinance their debt under Chapter 11 bankruptcy, and perhaps more importantly, under what terms, will be watched carefully. It could start a stampede by other companies if they too sense the market is tightening. The bond market dwarfs the stock market and how it reacts could have a huge impact on all markets. As Wilbur Ross, the billionaire investor, commented, "Refinancing is the real issue because you have a wall of maturities starting 2018, building up through 2021 to 2022... but [this wall of maturities] really reflects in the market a year or so earlier... so it's really a 2017 issue."

Keep an eye on HYG since this is the junk bond ETF that will provide fair warning to stock investors. HYG typically leads the stock market and for a long time it's been showing caution while SPX throws caution to the wind with a "what, me worry?" attitude. I've shown the HYG weekly chart before to point out this year's broken rising wedge, with bearish divergence, and at the moment it has bounced back up to the bottom of the wedge for what could be a bearish back-test. If it drops away from here it will likely drop quickly and I'd use that as a warning signal for the stock market.

The weekly chart below compares the performance of HYG vs. SPX (the green line) and you can see how SPX continued to rally strong from last November while HYG had a shallow climb higher in a small rising wedge with bearish divergence. I don't believe SPX will be able to ignore a further drop in HYG, if in fact one is coming.

High Yield Corporate Bond ETF, HYG, vs. S&P 500, Weekly chart

I mentioned above that one consequence of all the cheap money the Fed has provided is that companies have borrowed huge sums, much of it used to pay dividends to shareholders (nice but not productive use of the money) and to buy back the company's own stock. That has provided the bulk of the buying pressure for the stock market and I've often discussed in the past that it will be difficult for the market to sustain its rally if the buybacks slow down significantly. There's still a lot of buying going on but as you can see from the chart below, it has been slowing since peaking in mid-2016.

S&P 500 stock buybacks vs. S&P 500 index performance, Quarterly chart 2006-2nd Quarter 2017, chart courtesy Eric Pomboy, @epomboy on Twitter

Interestingly, following the November elections we've seen a much higher participation rate by investors. Bullish sentiment, even among retirees, is hitting highs not seen since 2000. It seems the public is finally involved in the rally and likely a great contributor to the rally in the past year. This in turn has compensated for the loss of buying pressure from companies buying their own stock. But the last time bullish sentiment from the masses reached current levels they were buying the top. Only time will tell if they're doing the same thing again.

Having spilled a lot of electronic ink above in an attempt to show how vulnerable the stock market is, we of course know that the market can stay irrational far longer than a trader can fight it. The trend is up and that could continue for the rest of the year. There are plenty of reasons to believe the market is nearing an important top but it's been a frustrating battle for the bears who can't understand how this market could possibly be rallying.

One reason for the rally is simply money and lots of it. There's still a lot of money out there chasing too few assets and as long as that's true we'll see the stock market rise higher in spite of fundamental reasons why it shouldn't. There are many who believe we're in the end stage of the bull market but that could mean an explosive move higher in a fit of panic as investors chase prices ever higher. Think late 1990s.

Dow 30000, 40000 and higher are not unreasonable expectations if you think we'll get another melt-up like we did in the late 1990s. Those were some of the best years to be an investor, even while the stock values became extraordinarily high. This must be kept in mind by the bears while watching carefully for signs that the market's rally is going to end a lot sooner than most currently think.

One measure of a rally's strength is the cumulative advance-decline line -- as long as it's increasing with the climb higher in the indexes it means the rally is firing on all 8 cylinders. The NYSE advance-decline line shown below (red and black line) is not showing any negative divergence to the NYSE (black line) and therefore there's a lot of money behind this rally. While it's more or less a concurrent indicator, moving up and down with price, many market tops have been put in place after the a-d line makes a lower high (same with a positive divergence at lows). The divergence is not always required but it's a good leading indicator when it happens. Right now there is no divergence.

NYSE Cumulative Advance-Decline Line vs. NYSE, Weekly chart

Not all is rosy with the picture above. RSI for the a-d line is overbought and as can be seen in the past this has warned of a pullback coming. What kind of pullback, and whether or not it will lead to something more significant to the downside, can only be guessed here.

Moving to my regular charts, since I show the NYSE chart above, I'll start with a weekly chart and work my way in.

NYSE Composite Index, NYA, Weekly chart

The decline in the first half of August had NYSE breaking its uptrend line from February-November 2016 and the recovery off the August 18th low has it making a new high but so far only a back-test of its broken uptrend line. The highs since March are showing bearish divergence. There's a lot of money behind this rally but from a technical perspective NYSE is in a vulnerable position here since it's typically a very good setup to play a reversal back down.

If the bulls can keep things going into October there is the potential for NYSE to make it up to the top of the rising wedge pattern, which will be near 12560 by mid-October. While I wouldn't bet on that outcome right here I'd turn more bullish if it can climb above a couple of resistance levels between here and about 12220.

NYSE Composite Index, NYA, Daily chart

The daily chart of the NYSE shows a closer view of the back-test of its broken uptrend line as the oscillators have reached overbought. It could run out of gas as it completes the back-test but slightly higher is a trend line along the highs for the rally from April, currently near 12220. Watch that level carefully if reached.

S&P 500, SPX, Daily chart

A few price projections for SPX, based on its wave pattern and prior moves, provide us with an upside target zone at roughly 2510-2516. Today's high at 2508.85 is close to the bottom of the zone and therefore any new highs from here bear close scrutiny for signs of topping. A trend line along the highs since March is currently near 2516, which is another reason why the bulls could run into trouble soon if they manage to press a little higher. With oscillators back into overbought it makes it tougher to get the energy to power through resistance. But if the bulls can get SPX above 2520 (and stay above) it would be a stronger bullish statement.

Key Levels for SPX:
- bullish above 2520
- bearish below 2480

S&P 500, SPX, 60-min chart

The 60-min chart for SPX shows some loss of momentum since September 12th as it approaches what I believe will be a tough resistance zone. Two equal legs for its rally from August 21st (August 21 - September 1 and the leg up from September 5th) points to 2509.58. The 127% extension of the previous decline (August 8-21), which is often a reversal level, is at 2510.87. For a longer-term projection, the 5th wave of the rally from 2009 (which started at the January 2016 low) would equal the 1st wave at 2516. The close correlation of several price projections, along with trend lines, tells me to watch this area closely for a possible top. I see a little more upside potential for this rally but not much (unless it can get above and stay above 2520).

Dow Industrials, INDU, Daily chart

The Dow is firmly in its up-channel for the rally leg from April and could rally a little further before reaching potential resistance at its broken uptrend line form November 2016 - May 2017, currently near 22515. There's higher potential to the top of its up-channel from April, which will be near 22775 by the end of the month. The oscillators are hinting of rolling over from overbought but if we see only small choppy corrections to its rally it will signal higher highs. A drop below its August 8th high at 22179 would be a bearish heads up.

Key Levels for DOW:
- bullish above 22,179
- bearish below 22,038

Nasdaq Composite index, COMPQ, Daily chart

The tech indexes have been relatively weak this month but the price pattern continues to look more bullish than bearish (even if less bullish than the others). The Nasdaq could rally to trend line along the highs from April 2016 - March 2017, near 6530, and while I don't see it happening, it would be more bullish above that level. There's an ending pattern for its leg up from September 5th and it suggests we could see a top at 6490-6495, about 40 points above today's close. One more new high on Thursday, maybe into Friday, could do it and that would leave a double top with its July 27th high, with bearish divergence, if it happens.

Key Levels for COMPQ:
- bullish above 6535
- bearish below 6334

A big drag on the tech indexes lately has been weakness in the FAANG stocks. F & N have been doing OK but the A's and G have been weak (although NFLX is looking vulnerable to putting in a double top against its July high with a large bearish divergence). AMZN's daily chart below shows a possible H&S top (with a confirming volume pattern) between its left shoulder in June, head in July and now the right shoulder. If it breaks its neckline, near 938, the downside objective for the pattern is 785. There's still time for AMZN to pull out of the dive but bulls can't waste too much time and it ideally needs to hold above its uptrend line from November 2016, currently near 956.

Amazon, AMZN, Daily chart

AAPL's weekly chart shows bearish divergence at its September high vs. its May/June highs and is threatening to break down from its up-channel from May 2016 (daily and weekly oscillators have rolled over). I show the potential for a rally to a price projection near 169 for the 5th wave of its rally from May 2016 but the minimum projection near 159 has already been achieved. Which way AAPL goes from here is very likely to lead the broader market.

Apple, AAPL, Weekly chart

Russell-2000, RUT, Weekly chart

I'm having a devil of a time trying to slap a meaningful EW count on the RUT but it has such a choppy pattern, including for its rally from February 2016, and that makes several different wave count possibilities. Because of its large megaphone pattern, the bottom of which starts from the February 2014 low and the top from June 2007, the legs inside this expanding triangle pattern are expected to be corrective rather than impulsive. In this kind of situation I depend a lot on price projections for 3-wave moves and trend lines.

The rally from the August 18th low would have two equal legs up at 1459, which is just above the top of its megaphone pattern, currently near 1456. The top of the megaphone has been resistance since first tested in December 2016 and I'm expecting it to remain resistance, especially seeing the bearish divergence since last December. Obviously it would be more bullish above 1460 but until that happens I think we're looking for a major top for the RUT.

Key Levels for RUT:
- bullish above 1460
- bearish below 1396

10-year Yield, TNX, Weekly chart

Treasuries sold off sharply on the FOMC announcement, presumably from worry that a less active Fed in the bond market will depress prices from a higher supply. That popped yields higher and TNX has seen a sharp bounce off its September 7th low at 2.034 to today's high at 2.289. Today the rally stopped at its broken 50-week MA at 2.284 and closed at 2.277.

The top of a down-channel for its decline from March is currently near 2.36 so there's a little more upside potential to that line but like the 2-week rally off its June 14th low, there's a good chance this upside reaction is going to falter. If the stock market does in fact roll over soon we could see a flight to safety in Treasuries and drive yields back down. It takes a rally above the July 7th high at 2.396 to suggest something more bullish could be playing out.

U.S. Dollar contract, DX, Daily chart

The US$ snapped to the upside this afternoon following the FOMC announcement. The Fed's decision to reduce its balance sheet and raise rates (presumably in December) strengthens the dollar. This afternoon's rally bounced the dollar up to the top of its narrow down-channel that it's been since May, as well as its broken 20-dma at 92.23. It would be more bullish if the dollar can continue its rally and break out of the down-channel but then it would soon have to fight through price-level resistance, the bottom of a previous down-channel from January and its broken 50-dma, all of which are currently near 93.

If the dollar can fight through all that resistance near 93 and then get back above its August 16th high near 94 I'd turn more bullish the dollar sooner rather than later. I think the dollar is setting up for a big rally into next year but I've been looking for a low near 90 before starting the rally. We'll soon find out whether or not the dollar has one more new low or if instead it will start its rally from here.

Gold continuous contract, GC, Daily chart

Gold has pulled back to price-level support near 1300 and its uptrend line from December 2016 - May 2017 that it had recovered with its rally from July into the September 8th high. A drop below 1298 would likely see a test of its 50-dma, which is climbing and currently near 1290. There are multiple support levels between here and 1200 to catch a fall but ideally gold bulls will get a rally off support here. The bearish price pattern suggests gold has started the next leg down, one that will take it below 1100. If the dollar starts a larger rally that could put pressure on gold.

Oil continuous contract, CL, Daily chart

With today's rally and this evening's jump higher oil has now made it up to two price projections that I've been watching for, which are based off its bounce pattern from June, one at 50.75 and the other at 50.84 (this evening's high so far is 50.79). That's not to say oil should turn around from here but that's the bearish setup.

Its bounce pattern from June suggests it's just a bounce correction and not something more bullish (although there's certainly additional upside potential for the bounce, such as to the price projection at 53.96 for two equal legs up). If oil can get above 52 I'd look for it to continue higher to the 54 area. But the bearish potential is for a little double top against its August 1st high.

Economic reports

Today's existing home sales report, which came in lower than expected (Hurricane Harvey got the blame), continues to show weakness in sales but primarily due to lower inventory levels and higher prices. That's a mixed message since we're seeing the same thing in the new home sales. Home builders are trying to control how much they build so that they don't get stuck with inventory in the next slowdown. It's currently more of a seller's market than a buyer's and as long as rates stay low the higher prices can be more easily absorbed.

There are no major economic reports on Friday and Thursday's reports include unemployment numbers and the Philly Fed index, which is expected to show some slowing from August. There are more signs of a slowdown in the economy and that's another worrisome sign for a bull market that's long in the tooth.


The VIX is back down in the weeds with today's close below 10, at 9.78, and fear has once again left the building. The CNN Fear & Greed index is now back into Extreme Greed territory. Retail investors have jumped back into the market in a big way, which often happens when the market is hitting the last of its new highs. There's obviously a lot more upside potential but this excessive bullishness comes when the indexes are showing waning momentum and that's usually not a good combination.

Keep in mind this is a year ending in 7 and you can think whatever you want about the silliness of such a thing, but years ending in 7 have not been kind to bulls in the fall. Octobers have a reputation for being bear killers as the stock market typically swoons in August-September/October, finds a bottom in October and then rallies into the end of the year. But October 1987 (big crash), October 1997 (little crash) and October 2007 (the top before a monster crash into 2008) could easily be described as bull killers. I think we're facing something like October 2007, or who knows, maybe a combination of 1987 and 2007.

Another common occurrence is for a market to turn on the spring and fall equinox, which is Friday, September 22nd. With a market looking vulnerable here I'm thinking this October is not going to be kind to bulls and kicking them in the teeth might not wait until October arrives. Just keep a close eye on the market's signals (and watch AAPL). While we're in an uptrend and you don't want to try catching rising knives, this is a potentially dangerous time of the year to be a complacent bull, especially with the number of new bulls who have joined the party. Don't be caught without a chair when the music stops. Keep in mind that portfolio insurance (LEAP put options anyone?) is real cheap right now.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

New Option Plays

Dip Buy

by Jim Brown

Click here to email Jim Brown

Editors Note:

AbbVie has posted some monster gains lately but after a little profit taking dip it is time to buy.


ABBV - AbbVie - Company Profile

AbbVie Inc. discovers, develops, manufactures, and sells pharmaceutical products worldwide. The company offers HUMIRA, a biologic therapy administered as a subcutaneous injection to treat autoimmune diseases; IMBRUVICA, an oral therapy for the treatment of patients with chronic lymphocytic leukemia; and VIEKIRA PAK, an interferon-free therapy, with or without ribavirin, for the treatment of adults with genotype 1 chronic hepatitis C. It also provides Kaletra, an anti- human immunodeficiency virus(HIV)-1 medicine used with other anti-HIV-1 medications as a treatment that maintains viral suppression in HIV-1 patients; Norvir, a protease inhibitor indicated in combination with other antiretroviral agents to treat HIV-1; and Synagis to prevent RSV infection at-risk infants. In addition, the company offers AndroGel, a testosterone replacement therapy for males diagnosed with symptomatic low testosterone; Creon, a pancreatic enzyme therapy for exocrine pancreatic insufficiency; Synthroid to treat hypothyroidism; and Lupron, a product for the palliative treatment of prostate cancer, endometriosis, and central precocious puberty, as well as for the treatment of patients with anemia. Further, it provides Duopa and Duodopa, a levodopa-carbidopa intestinal gel to treat Parkinson's disease; Sevoflurane, an anesthesia product for human use; and ZINBRYTA, a subcutaneous treatment for relapsing forms of multiple sclerosis. The company sells its products to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies, and independent retailers from its distribution centers and public warehouses. AbbVie Inc. has collaboration agreements with C2N Diagnostics; Calico Life Sciences LLC; Infinity Pharmaceuticals, Inc.; M2Gen; and Principia Biopharma Inc. Company description from FinViz.com.

A lot of companies have 1-2 real drugs in the pipeline that may be approved. Several companies have one drug that could be a blockbuster and reach $1 billion in sales annually. AbbVie has multiple blockbusters in the pipeline and dozens of other drugs already in the market.

AbbVie was a spinoff from Abbott Laboratories in 2012 and they are doing great. In the first quarter they reported earnings of $1.28, that rose 11.3% and beat estimates by 2 cents. Revenue of $6.5 billion rose 10.1% and that was higher than three of its biggest competitors Amgen, $2.8 billion, Biogen $5.5 billion and Celgene $3.0 billion.

Earnings are expected to continue growing with analyst estimates for 14% annual growth over the next five years. AbbVie guided for 13% to 15% in 2017. Despite the earnings growth the stock only trades at a PE of 11.

Shares dipped back in May when Coherus won a court battle invalidating one of AbbVie's patents on Humira, their biggest drug. However, AbbVie said it was not a problem because there were 61 other patents on the drug and they would fight it in the courts until 2020. The first trial is not even scheduled until 2019. Amgen won FDA approval for a biosimilar but AbbVie said it would not happen until 2020 at the earliest.

The company's confidence that there would not be a biosimilar drug until 2021-2022 matched analyst estimates. This is a steep uphill battle for anyone trying to copy this drug.

The company's other drugs are going to be cash cows. Imbruvica generated $1.8 billion in sales in 2016 and could reach $7 billion annually over the next couple of years. Venclexta was approved in 2016 for leukemia and sales could peak at $3.5 billion a year. An experimental cancer drug called Rova-T could hit $5 billion a year when approved. A psoriasis drug called risankizumab could produce $4 billion a year and arthritis drug upadacitinib could peak at $3.5 billion. Given all these cash flow giants in the pipeline, I am amazed the company only trades at a PE of 11.

The company recently received a favorable opinion on MAVIRET, a once daily Hep-C drug, from the European Medical Agency and the CHMP. This is an 8 week cure for Hep-C that will compete with Gilead's products. AbbVie has declared war on the Gilead Sciences Hep-C franchise. Mavyret has a 97.5% cure rate and only costs $13,200 for four weeks of treatment compared to Gilead's newest drugs at $25,000 for four-weeks. Most patients are cured in 8 weeks but some have to continue for 12 weeks. Gilead's Harvoni was initially $96,000 for a 12-week treatment.

Estimated earnings date is Oct 27th.

I would not normally pick a stock with the strong gains over the prior two weeks. However, the outlook for AbbVie is so strong that I believe they will move higher. After the $14 gain in early September, the stock pulled back for a week. Shares are starting to pick up again and I think we should buy this dip. The options are cheap so the risk is minimal.

Buy Nov $90 call, currently $1.89, initial stop loss $82.85.


No New Bearish Plays

In Play Updates and Reviews

Buy Program

by Jim Brown

Click here to email Jim Brown

Editors Note:

The indexes were mixed after the Fed statement but a buy program lifted the Dow and S&P at the close. The Dow and S&P were both negative after the Fed but a late day buy program lifted them body back into positive territory. The Nasdaq recovered significantly from the lows but could not return to positive because of big declines in Apple and Adobe.

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

A - Agilent Technologies - Company Profile


No specific news. Shares were flat but holding at the recent highs.

Original Trade Description: September 12th.

Agilent Technologies, Inc. provides application focused solutions to the life sciences, diagnostics, and applied chemical markets worldwide. Its Life Sciences and Applied Markets segment offers liquid chromatography systems and components; liquid chromatography mass spectrometry systems; gas chromatography systems and components; gas chromatography mass spectrometry systems; inductively coupled plasma mass spectrometry instruments; atomic absorption instruments; microwave plasma-atomic emission spectrometry instruments; inductively coupled plasma optical emission spectrometry instruments; laboratory software and informatics systems; laboratory automation and robotic systems; dissolution testing; vacuum pumps; and measurement technologies. The company's Diagnostics and Genomics segment provides reagents, instruments, software, and consumables; arrays for DNA mutation detection, genotyping, gene copy number determination, identification of gene rearrangements, DNA methylation profiling, and gene expression profiling, as well as sequencing target enrichment services; and equipment focused on production of synthesized oligonucleotides for use as active pharmaceutical ingredients. Its Agilent CrossLab segment offers GC and LC columns, sample preparation products, custom chemistries, and various laboratory instrument supplies; and startup, operational, training, and compliance support, as well as asset management and consultation services. The company markets and sells its products through direct sales, electronic commerce, resellers, manufacturers' representatives, and distributors. It has a collaboration agreement with University of Leuven to focus on detecting genetic abnormalities in cell-free DNA and embryo biopsies. Company description from FinViz.com.

Agilent reported earnings of 59 cents that rose 20.4% and beat estimates for 52 cents. Revenue of $1.11 billion rose 6.7% and beat estimates for $1.08 billion. They ended the quarter with $2.56 billion in cash and $1.8 billion in debt. Free cash flow was $228 million. They guided for revenues of $1.15-$1.17 billion for Q3 and earnings of 60-62 cents. Analysts were expecting $1.14 billion and 59 cents. The company raised guidance for the full year from $4.36-$4.38 billion to $4.435-$4.455 billion. Earnings guidance is now $2.29-$2.31, up from $2.15-$2.21. Analysts were expecting $2.22 and $4.39 billion.

Earnings expected on Nov 14th.

Shares spiked on the earnings and have been moving steadily higher. On Monday they gained $1 and closed at a new high. This stock may not be as "exciting" as Alibaba or Amazon but the options are cheap and they rarely decline.

Update 9/19: The company said the FDA had approved their PD-L1 IHC 28-8 PharmDX cancer diagnostic test for additional typed of cancers.

Position 9/13/17:

Long Nov $67.50 call @ $1.70, see portfolio graphic for stop loss.

ALB - Albermarle - Company Profile


No specific news but shares continued higher for another $1.43 gain.

The stock is now up $16 since September 8th. Eventually this rally will end with a dramatic decline. I will keep raising the stop loss until that decline takes us out. There are only 3 weeks left on the option.

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.

Update 9/18/17: Shares exploded higher by nearly $4 after the company said it had developed a new technology to produce lithium in Chile without requiring additional brine pumping. They are planning to boost production by 80,000 metric tons a year on a sustainable basis. Their lithium business rose 36% in Q2 and they are targeting 50% market share of the industry.

Position 8/22:

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

CAT - Caterpillar - Company Profile


No specific news. Shares posted a minor gain but closed at a new high. CAT is looking very extended and could correct at any time. The positive Dow is helping to lift the stock.

Original Trade Description: Aug 29th.

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives for heavy and general construction, rental, quarry, aggregate, mining, waste, material handling, oil and gas, power generation, marine, rail, and industrial markets. Its Construction Industries segment offers backhoe, compact, track-type, small and medium wheel, knuckleboom, and skid steer loaders; small and medium track-type, and site prep tractors; mini, wheel, forestry, small, medium, and large track excavators; and motorgraders, pipelayers, telehandlers, cold planers, asphalt pavers, compactors, road reclaimers, and wheel and track skidders and feller bunchers. The company's Resource Industries segment provides electric rope and hydraulic shovel, landfill and soil compactor, dragline, large wheel loader, machinery component, track and rotary drill, electronics and control system, work tool, hard rock vehicle and continuous mining system, scoop and hauler, wheel tractor scraper, large track-type tractor, and wheel dozer products; longwall, highwall, and continuous miners; and mining, off-highway, and articulated trucks. Its Energy & Transportation segment offers reciprocating engine powered generator set and engine, integrated system, turbine, centrifugal gas compressor, diesel-electric locomotive and component, and other rail-related products and services. The company's Financial Products segment offers finance for Caterpillar equipment, machinery, and engines, as well as dealers; property, casualty, life, accident, and health insurance; and insurance brokerage services, as well as purchases short-term trade receivables. Its All Other operating segments provides parts distribution and digital investments services. Company description from FinViz.com.

CAT has been alternately ignored or talked down for the last couple years but the shares keep rising. Part of the recent gains came from the guidance. The company has been bitten by the global slowdown in construction since the financial crisis. Then it was hit by the slowdown in the energy sector. Every expected rebound falied to appear and CAT continued to give cautious guidance. That changed over the last several months.

The global economy is rebounding. There are massive construction projects now underway in China and Asia. The Eurozone is also seeing a resurgence in consrtuction. Commodity metals are booming and mines are reopening shuttered capacity and opening new mines. Everything is suddenly positive for CAT.

In December they guided for full year 2017 revenues of $38 billion "as a reasonable midpoint expectation." Analyst estimates for earnings of $3.25 were "too optimistic" according to CAT.

In January they guided for $36-$39 billion in revenue and $2.90 in earnings.

In April they guided for $38-$41 billion in revenue and $3.75 in earnings.

In July they guided for $42-$44 billion in revenue and $5 in earnings.

In April they guided for revenue from construction at flat to 5%. In July they guided for 10% to 15% growth.

In April they guided for revenue from mining at 10% to 15%. In July they guided for 20% to 25% growth.

In April they guided for energy revenue at flat to 5%. In July they raised it to 5% to 10%.

After the devastation in Houston, there were new estimates from analysts today for 17% or higher revenue growth in construction equipment.

Shares spiked at the open to a new high before fading slightly with the market. I believe revenue estimates will continue to rise because they are running out of year and their conservative guidance will have to become more accurate.

Earnings October 24th.

CAT is reactive to Dow movement but shares have ignored the recent Dow weakness. Today's close at $116.01 is a record high.

Update 9/13/17: In Tuesday's investor day meeting the new CEO said they were targeting $55 billion in revenue in 2018 with margins of 14%-17% compared to 12% in 2017. That would take them back to 2014 levels before the bear market in commodity/energy began. That is 28% above 2017 levels. He was careful not to call it a target but said that level was achievable if the current rebound in mining, energy and construction continued.

Update 9/18/17: UBS upgraded CAT from neutral to buy and raised the price target from $116 to $140. The analyst said the growing cash position, rising earnings and revenue projections were all bullish. CAT is expected to produce $10 billion in free cash flow over the next two years and return most of that to investors. UBS said a survey of 50 mining companies found that 60% expected to hike new equipment budgets in 2018 and 50% expect to rebuild their entire fleet.

Position 8/30/17:

Long Nov $120 call @ $2.75, see portfolio graphic for stop loss.

DVMT - Dell Technologies - Company Profile


The Bain consortium, including Dell, have apparently won the bid for Toshiba's chip business. The news headlines are so contradictory, Dell shares closed flat but this is a good deal for Dell.

Original Trade Description: Sept 13th.

Dell Technologies Inc. provides a range of technology solutions worldwide. It offers client computing devices, including desktop personal computers, notebooks, and tablets; rack, blade, tower, and hyperscale servers for enterprise customers; value tower servers for small organizations, networks, and remote offices; networking solutions; and storage solutions, including storage area networks, network-attached and direct-attached storage, and backup systems. It also sells peripherals, including monitors, printers, projectors, and other client and enterprise peripherals, as well as third-party software products. In addition, the company offers support and extended warranty, enterprise installation, and configuration services; and infrastructure and security managed, cloud computing and infrastructure consulting, and security consulting and threat intelligence services. Further, it provides application services, such as application development, maintenance, migration, management, and consulting, as well as package implementation, testing and quality assurance functions, business intelligence and data warehouse solutions; business process services comprising back office administration, call center management, and other technical and administration services; and system and information management, and security software services. Additionally, the company offers financial services, including originating, collecting, and servicing customer receivables primarily related to the purchase of its products. It serves corporate businesses; educational institutions, government, healthcare, and law enforcement agencies; small and medium-sized businesses; and consumers directly, as well as through retailers, third-party solution providers, system integrators, and third-party resellers. The company was formerly known as Denali Holding Inc. and changed its name to Dell Technologies Inc. in August 2016. Company description from FinViz.com.

Dell suffered from years of banner growth that set it up for years of disappointments when that growth slowed. Dell created a new market niche when it started in 1984 and but by the early 2000s there were dozens of copycat clones. The PC revolution had stalled by 2010 as tablets and smartphones stole market share. Michael Dell organized a buyout and took the company private. They eventually acquired EMC in August 2016 and by doing so returned to the public market as Dell Technologies. Shares closed at a new high on Wednesday.

In its first year as a new public company they paid down $9.5 billion in debt and completed three major divestitures. They created a $35 billion revenue channel and added 10,000 business customers for the year.

They recently signed a long term deal in partnership with GE that is one of the largest non-governmental contracts in Dell or EMC history. Under the agreement Dell becomes the sole source IT infrastructure supplier to GE. The Dell Technologies family of businesses includes Dell, Dell EMC, Pivotal, RSA, SecureWorks, Virtustream and VMware. It stands as a $74 billion market leader with the industry's most expansive portfolio from the edge to the data center to the cloud.

The Dell PowerEdge server is now the largest selling X86 server in the world and Dell is also number one in global workstation shipments and global monitor shipments.

For Q2, they reported adjusted earnings of $1.88 and revenue of $19.3 billion, up 48% from Q2-2016 and +8.3% from Q1-2017.

Expected earnings December 7th.

Shares rallied after earnings and then plateaued at $75 for over a week. They began moving up again this week to close at a new high. With business booming and Q3 normally a strong quarter, they could continue to move higher.

Position 9/14/17:

Long Dec $80 call @ $2.40, see portfolio graphic for stop loss.

SWK - Stanley Black & Decker - Company Profile


No specific news. Shares closed at another new high.

Original Trade Description: Sept 16th.

Stanley Black & Decker, Inc. provides tools and storage, commercial electronic security, and engineered fastening systems worldwide. Its Tools & Storage segment provides corded and cordless electric power tools and equipment, including drills, wrenches and drivers, grinders, saws, routers, and sanders; pneumatic tools and fasteners, such as nail guns, nails, staples, and anchors; lawn and garden products comprising trimmers, mowers, edgers, and related accessories; home products, such as vacuums, paint tools, and cleaning appliances; power tool accessories that include drill and router bits, abrasives, and saw blades; measuring, leveling, and layout tools; planes, hammers, demolition tools, knives, saws, chisels, and industrial and automotive tools; and storage products, such as tool boxes, sawhorses, medical cabinets, and engineered storage products. The company's Security segment offers alarm monitoring, video surveillance, fire alarm monitoring, systems integration, and system maintenance services; markets asset tracking, infant protection, pediatric protection, patient protection, wander management, fall management, and emergency call products; sells automatic doors, commercial hardware, locking mechanisms, electronic keyless entry systems, keying systems, and tubular and mortise door locksets. Its Industrial segment sells fastening products and systems comprising stud welding systems, blind rivets and tools, blind inserts and tools, drawn arc weld studs, plastic and mechanical fasteners, self-piercing riveting systems, nut running systems, micro fasteners, high-strength structural fasteners, and hydraulic tools and accessories; sells and rents custom pipe handling, joint welding, and coating equipment; and provides pipeline inspection services. Company description from FinViz.com.

With two disasters already and three more hurricanes heading for U.S. shores, there is going to be a significant jump in the number of tools sold over the next quarter. Investors have already lifted SWK to a new high but shares are holding right at the breakout level. The three new hurricanes are likely to give it that additional lift and produce a breakout.

For Q2, the company reported earnings of $2.01 that beat estimates for $1.96. Revenue of $3.229 billion also beat estimates for $3.17 billion. For the full year they guided to earnings of $7.18-$7.38, up from prior guidance of $7.08-$7.28. This is before the hurricane demand so guidance should rise again with the next earnings. Organic revenue is expected to rise 10% to 13% for 2017.

Earnings Oct 26th.

I considered buying the short-term October $150 call for $1.95 with shares at $148. There are five weeks before expiration but without a strong rally, the premium could deflate quickly since it expires before earnings. I elected to go with the next available strike in January at $155. That is farther out of the money than I usually go but we will have an earnings premium in the option when we exit before earnings. That will keep premiums from deflating.

Position 9/18/17:

Long Jan $155 call @ $3.20, see portfolio graphic for stop loss.

TER - Teradyne - Company Profile


No specific news. Shares cannot seem to hold over resistance at $36. We have seen multiple closes over that level but always followed by a retracement. Eventually, we will see a breakout. I know this is a boring trade but as long as support holds, the trend is still pointing higher. The stop is tight in case short-term support fails. This is an Oct option so we do not have a lot of time.

Original Trade Description: Aug 30th.

Teradyne is a leading supplier of automation equipment for test and industrial applications. Teradyne Automatic Test Equipment (ATE) is used to test semiconductors, wireless products, data storage and complex electronic systems which serve consumer, communications, industrial and government customers. Our Industrial Automation products include collaborative robots used by global manufacturing and light industrial customers to improve quality and increase manufacturing efficiency. In 2016, Teradyne had revenue of $1.75 billion and currently employs approximately 4,400 people worldwide. Company description from Teradyne.

For Q2 they reported earnings of 90 cents compared to estimates for 86 cents. Revenue of $696.9 million beat estimates for $684.2 million. They raised revenue guidance to $455-$485 million and analysts were expecting $445 million.

In just the last 30 days analyst estimates for Q3 have risen from 38 cents to 43 cents. Full year estimates have risen from $1.88 t $1.97 per share. Zacks rates the Electronics Testing Equipment sector as #6 out of 250 industry sectors. Every new electronic device manufactured needs a new set of testing equipment.

Earnings October 26th.

Shares have been stuck under resistance at $35 for six weeks and broke out today. Analysts believe they will continue higher and make new highs. The $36 level is the next resistance.

Position 8/31/17:

Long Oct $37 call @ .90, see portfolio graphic for stop loss.

VAR - Varian Medical Systems - Company Profile


Varian was voted first in overall manufacture, system and service performance in a 2017 survey of radiation oncology professionals.

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 25th.

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 traded under 10 for the 42 day this year.

We still have plenty of time. North Korea, Iran and Venezuela are still a factor and could erupt at any time.

This is the fourth longest period in history of the markets without a 5% decline. While it does not look likely today, it could happen at any time.

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, see portfolio graphic for stop loss.

XRAY - Dentsply Sirona Inc - Company Profile


No specific news. This was a decent rebound but XRAY needs to string a couple of these together to get back to resistance.

Original Trade Description: Sept 9th.

DENTSPLY SIRONA Inc. designs, develops, manufactures, and markets various dental and oral health products, and other consumable healthcare products primarily for the professional dental market worldwide. It operates through two segments, Dental and Healthcare Consumables; and Technologies. The company provides dental consumable products, including endodontic instruments and materials, dental anesthetics, prophylaxis pastes, dental sealants, impression materials, restorative materials, tooth whiteners, and topical fluoride products; and small equipment products comprising dental hand pieces, intraoral curing light systems, dental diagnostic systems, and ultrasonic scalers and polishers. It also offers dental laboratory products, such as dental prosthetics that include artificial teeth, precious metal dental alloys, dental ceramics, and crown and bridge materials. In addition, the company provides dental equipment, such as treatment centers, imaging equipment, and computer aided design and machining systems for dental practitioners and laboratories; and dental implants and related scanning equipment, treatment software, and orthodontic appliances for dental practitioners and specialists, and dental laboratories. Further, it offers healthcare consumable products, such as urology catheters, various surgical products, medical drills, and other non-medical products. DENTSPLY SIRONA Inc. markets and sells its dental products through distributors, dealers, and importers to dentists, dental hygienists, dental assistants, dental laboratories, and dental schools; and urology products directly to patients, as well as through distributors to urologists, urology nurses, and general practitioners. Company description from FinViz.com.

Dentsply reported Q2 earnings of 65 cents that missed estimates by a penny. Revenue of $992.7 million missed the estimate for 1,004 million. Sales in the U.S. fell 9.7% but sales in Europe rose 2.5%. They guided for the full year for earnings of $2.65-$2.75.

The stock was crushed on the miss with a $9 drop over the following week.

However, there was a reason for the miss. Effective September 1st, they moved from a single distributor to multiple distributors. The existing distributor slowed purchases in the quarter in order to reduce inventory before the change in the distribution model.

The CEO said "In September, we should begin to benefit from the expanded distribution of our equipment in North America which should drive growth in the back half of this year and beyond. As we work through the distribution transition and integration initiatives, we are strengthening our foundation for the future. We believe that this should translate into more consistent growth and strong double digit earnings growth in the back half of the year creating momentum exiting the year going into 2018."

Shares have begun to rebound and should return to their highs on the "double digit earnings growth" guidance.

Earnings Nov 8th.

There are no Nov/Dec options. I am using the January but just because we buy time does not mean we have to use it.

Position 9/11/17:

Long Jan $60 call @ $2.70, see portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

MNK - Mallinckrodt - Company Profile


No specific news. Another minor rebound from Monday's historic low close.

Original Trade Description: August 19th.

Mallinckrodt public limited company develops, manufactures, markets, and distributes branded and generic specialty pharmaceutical products and therapies in the United States, Europe, the Middle East, Africa, and internationally. The company's Specialty Brands segment markets branded pharmaceutical products for autoimmune and rare diseases, including the specialty areas of neurology, rheumatology, nephrology, ophthalmology, and pulmonology; and immunotherapy and neonatal respiratory critical care therapies, as well as analgesics and hemostasis products, and central nervous system drugs. This segment offers Acthar, an injectable drug for various indications, such as neurology, rheumatology, nephrology, and pulmonology; Ofirmev, an intravenous formulation of acetaminophen for pain management; Inomax for inhalation; Therakos, an immunotherapy treatment platform; and Exalgo, a form of hydromorphone. It is also developing StrataGraft, a full-thickness product for severe burns and other complex skin defects. Its Specialty Generics segment provides specialty generic pharmaceuticals and active pharmaceutical ingredients (APIs) consisting of hydrocodone and hydrocodone-containing tablets; oxycodone and oxycodone-containing tablets; methylphenidate HCl extended-release tablets; and other controlled substances, including acetaminophen products. The company markets its branded products to physicians, pharmacists, pharmacy buyers, hospital procurement departments, ambulatory surgical centers, and specialty pharmacies. It distributes its branded and generic products through independent channels, including wholesale drug distributors, specialty pharmaceutical distributors, retail pharmacy chains, hospital networks, ambulatory surgical centers, and governmental agencies; and APIs directly or through distributors to other pharmaceutical companies. Company description from FinViz.com.

MNK is in trouble from multiple angles. Early this month a District Court invalidated 11 patents for the drug Inomax as competing companies prepare to launch generic copies. MNK said they planned to appeal but the patents expire anyway next October so it is only about 12 months before the onslaught of generic copies. Inomax represents 15% of revenue for MNK. The next generic challenge for MNK is the drug Acthar, which accounts for more than 50% of their revenue.

MNK is also under investigation on its marketing of opioid medications. States are becoming stricter about how companies sell these drugs off label. For instance, if a drug is approved for post surgical pain and the company also markets it for back pain or arthritis that is called off label. It is an effort to convert an entirely new class of patients into addicts.

Nobody knows if MNK is guilty of anything but the Missouri Atty General is expanding their probe.

Earnings Nov 7th.

Shares have been declining for months but they accelerated after the court ruling on Sept 1st. They closed at a historic low on Monday.

The November options just appeared today and the premiums are high and wide. I am going to reach out to the January puts. Just because we are buying time does not mean we have to use it.

Position 9/19/17:

Long Jan $30 put @ $2.30, see portfolio graphic for stop loss.

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