Option Investor

Daily Newsletter, Saturday, 10/28/2017

Table of Contents

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

Market Wrap

Nasdaq Blowout

by Jim Brown

Click here to email Jim Brown

The big cap tech stocks posted monster gains on Friday to power the Nasdaq to the largest one-day move since November 2016.

Weekly Statistics

Friday Statistics

Amazon, Alphabet, Microsoft and Intel all beat the street on earnings after the bell on Thursday and stocks posted monster gains on Friday. The Nasdaq had been trending lower the first four days of the week on worries about those earnings reports. Traders were taking profits and some were entering short positions ahead of the events. Those on the wrong side after the close on Thursday paid a heavy price to cover those shorts on Friday.

Shortsqueeze.com said short interest on Amazon declined 15% on Friday from 6.342 million shares to 5.416 million. Alphabet short interest only declined -3% to 2.447 million shares. Amazon shares rose $128 and Alphabet gained $42.

There were quite a few aggressive traders going in the opposite direction on Microsoft and Intel. Microsoft short interest rose 11% to 50.228 million shares on 4.7 times average volume and Intel shorts rose 14% to 131.85 million shares on 3.5 times average volume. The QQQs saw short interest rise 3% to 57.0 million shares.

While there were a lot of traders covering at the open, there were also quite a few betting in the afternoon that the gains would not last. A lot of the index gains came from the buying in the QQQs with 3 times normal volume at 60 million shares. Sudden buying the ETFs requires managers to buy large volumes of the underlying stocks in order to keep the ETFs balanced.

Amazon traded 16.6 million shares worth $18.26 billion on 5.5 times the average volume. You will never be able to convince me that tens of thousands of investors saw the earnings and suddenly just had to have Amazon shares in their portfolio at $128 more per share than Thursday's close. This was almost entirely short covering. Nobody in their right mind would buy Amazon as an investment on this spike. Every knowledgeable investor would wait for a few days until the post earnings depression phase arrived and then buy it cheaper.

There were 1,709 advancers on the Nasdaq and 1,015 decliners. Total volume of 2.089 billion shares was only 311 million over the 1.878 billion from Thursday when the index closed down 7 points. For a day when the Nasdaq gained 2.2% or 144 points you would have expected the A/D line to have been 2:1 or even 3:1 in favor of advancers, instead of 1.7:1. Back on Sept 27th the Nasdaq gained 73 points and the A/D ratio was nearly 3:1 in favor of advancers.

The point I am trying to make is that this was not a broad market rally. In the morning hours is was almost entirely the Nasdaq big cap stocks but as the day progressed the activity broadened somewhat simply because of the improvement in sentiment. Booming markets make people want to buy something.

The Dow did not turn convincingly positive until after 11:00 and then traded back near the flat line at 1:30 and again at 3:30. It was touch and go on the Dow until the final minutes of trading.

Apple, Microsoft and Intel added 95 points to the Dow and it barely closed positive. This was not a broad market rally.

Do not get me wrong. I am thrilled the indexes closed positive on Friday and I hope they move higher. We just need to be observant and not get caught up in the market hysteria we saw on Friday. Next week is another busy week of earnings but the following week is where we could see trouble appear. There will be some post earnings depression. There always is and we should look at those periods as buying opportunities.

There were two economic reports on Friday and one was a shocker. That was the first look at GDP for Q3. The headline number was 2.99% growth and well over the 2.6% estimate. Analysts were convinced the hurricanes had knocked off at least a half a point or more from the 3.1% growth in Q2. Consumer spending did decline and contributed 1.62%, down from the 2.24% in Q2. However, that is expected to rocket higher in Q4 as the hurricane rebuilding shifts into high gear along with the holiday shopping season.

Exports contributed 0.41%, inventories 0.73%, business investment 0.49%and residential investment subtracted -0.24%. The BEA said the hurricanes impacted data collection but they did not quantify an impact to the headline number. Puerto Rico and the Virgin Islands are not included in the GDP so the damages there had no affect on the numbers.

The economy is on a roll and without another major disaster we are on track for greater than 3% growth in 2018. Fortunately, despite the growth there is no inflation in sight. The Fed is more than likely going to hike rates in December but that is already factored into the market.

The CME Fed Funds Futures are signifying a 100% chance of a rate hike from 100-125 Bps to 125-150 Bps in December.

The final reading for consumer sentiment for October declined only slightly from 101.1 to 100.7. This is still the highest level since 2000. The present conditions component rose from 111.7 to 116.5 and the six-month expectations component rose from 84.4 to 90.5. Those respondents saying now was a good time to buy a major household item rose from 78% to 81%. Those thinking it was a good time to buy a car rose 6% to 72%. Those who believe the country will see good economic times over the next 12 months increased 8% to 55%. Clearly, consumers are in a good mood.

The economic calendar for next week is crazy. This is the first week of the month and that means the payroll reports. Estimates have exploded higher with the Nonfarm Payroll forecast for 310,000 compared to the loss of 33,000 jobs in September. That was due to the hurricanes and I expect that to be revised significantly. The ADP number is forecast at 225,000 compared to 125,000 last month.

There is also a Fed meeting this week with the announcement on Wednesday. Nobody expects any changes to rates but they will likely comment on the expectations for December.

The House is expected to release their tax reform plan on Wednesday. That could be a good news/bad news event. Some features are likely to be bullish and some are likely to be bearish.

President Trump is expected to reveal his pick for the new Fed Chair on Thursday. The White House said it would be this week and before the president leaves on his China trip on Friday. Since the Fed meets on Tue/Wed and the tax plan release is on Wednesday, the obvious day for the Fed head announcement is Thursday. I would doubt it would be before the Fed meeting but you never can tell. The market seems to have settled on Jay Powell with Taylor as the second choice. Yellen has fallen out of contention based on the various polls. Powell would be seen as a continuation of Yellen's policies with a little more emphasis on normalization.

Apple iPhone X orders began at 3:AM ET on Friday and they were sold out within minutes. Within 30 minutes, the anticipated ship dates for online orders were well into December. If you did not order a phone on Friday morning, the odds are very slim that you will get it before Christmas. The two versions available online were silver or black in 64gb or 256gb models for either $999 or $1,149.

Apple released a statement saying orders for the iPhone X were "off the charts" and they were working to get this "revolutionary" phone into customer's hands as quickly as possible. This is probably the same statement they would have used regardless of the order volume. Apple also said the Bloomberg story about production delays and limited inventory was "completely wrong."

Cascend Securities conducted a survey in the 100 most populous markets in the US. In every case the iPhone X was sold out by 5:AM ET, 2 hours after orders opened.

Apple shares exploded higher after they said the Bloomberg report on supply shortages was completely wrong. Shares gained $5.64 and added 39 points to the Dow. Apple reports earnings next Thursday after the close and guidance will be critical.

Dow component Merck (MRK) reported earnings of $1.11 that beat the estimates for $1.03. Revenue of $10.33 billion missed estimates for $10.54 billion. Drug sales fell -3% to $9.16 billion. Gardasil sales fell -22% to $675 million and missed estimates for $776.4 million. Keytruda sales nearly tripled to $1.05 billion but slightly under estimates for $1.07 billion. The company guided for the full year for $3.91-$3.97, up from $3.76-$3.88 and revenue guidance rose from $39.4-$40.4 billion to $40.0-$40.5 billion. That did not satisfy investors and shares fell sharply. After the bell, the company said it withdrew an application for Keytruda in Europe and that caused additional questions about future sales.

Dow component Chevron (CVX) reported adjusted earnings of 85 cents that missed estimates for 98 cents. Revenue of $36.21 billion beat estimates for $34.5 billion. Production rose 8% to 2.72 million Boepd. Production in the US rose by 6,000 bpd to 525,000 Boepd. Gas production fell from 1,098 million cubic feet to 988 million cubic feet due to declines in existing wells and low gas prices. Chevron is reducing capex in 2018-2019 because the major expenses at the Wheatstone and Gorgon LNG facilities have been completed and production is underway. As production ramps up significantly over the next year, this will be a major source of cash flow for Chevron. Shares declined on the lack of guidance and weak production growth in the USA.

Dow component Exxon (XOM) reported adjusted earnings of 97 cents ($3.97 billion), up from 63 cents and beat estimates for 86 cents. Production rose 2% to 3.9 million Boepd. Shares took a 4 cent hit from the hurricanes. Revenue rose 13% to $66.17 billion and beat estimates for $63.51 billion. Capex spending rose 43% to $6 billion. Cash flow from operations rose 33% to $8.4 billion. They paid $3.3 billion in dividends.

Exxon won 12 block offshore Brazil representing 2 million high potential acres at competitive fiscal terms. The company also completed the Turbot-1 exploration well offshore Guyana and represents their fifth major discovery in that region. They signed a production sharing agreement offshore Suriname for 2.8 million acres. They added 22,000 acres in the Permian with 400 million Boe added to their existing resource base of 6 billion Boe in the Permian.

AbbVie (ABBV) reported earnings of $1.41 that beat estimates for $1.39. Revenue of $7.0 billion missed estimates for $7.04 billion. They guided for the full year for earnings of $5.53-$5.55, up from $5.44-$5.54, and increased their quarterly dividend by 11% from 64 cents to 71 cents. The company said sales of Humira, the world's largest selling drug, would bring in $21 billion in annual sales by 2020. That is up $3 billion from prior forecasts. Sales in 2016 were $16.08 billion. Sales of the arthritis drug in Q3 were $4.7 billion.

Here is the key point for AbbVie. The company said non-Humira sales are expected to rise from $9.6 billion in 2017 to $35 billion by 2025. The company is launching 20 additional products by 2020 with at least 8 of them expected to generate more than $1 billion in annual sales. These drugs will focus on Alzheimers, womens health and Hepatitis C.

Expedia (EXPE) was in the biggest loser category after reporting earnings of $2.51 that missed estimates or $2.59. Revenue of $2.97 billion rose 15% but missed estimates for $3.01 billion. Gross bookings rose 11% to $22.2 billion but that also missed estimates. Marketing expenses rose 21% and the company said it was being forced to lean more heavily into paid marketing channels. They blamed the hurricanes for their earnings weakness saying consumers avoided travel to the south for weeks after the storms. That excuse did not buy them any mercy from investors with a $24 drop.

Align Technology (ALGN) creator of the Invisialign braces reported earnings of $1.01 compared to estimates for 82 cents. Revenue of $385.3 million beat estimates for $359.7 million. They guided for Q4 revenue of $391-$398 million. The company is benefitting from Instagram and the selfie generation. Everyone wants straight teeth in their pictures. Shares rallied 16%.

Earnings expectations for Q3 took a sizeable jump upwards last week from 4.4% to 6.7%. Of the 273 S&P companies that have reported 74% have beaten estimates for earnings and 66.7% have beaten revenue estimates. Those are above the averages of 64% and 59% respectively. Next week there is one Dow component (AAPL) reporting and 135 S&P-500 companies.

Other notable earnings on the calendar include Facebook, Tesla and Alibaba.

On Friday, Tesla reportedly cut parts orders for the Model 3 by 40%. Production of the cars has not accelerated to the expected level and their parts inventory is overflowing. Parts order sets will be reduced from 5,000 per week to 3,000 per week starting in December. Tesla only produced 260 Model 3s between July-September and far short of the 1,500 goal. Elon Musk is blaming production bottlenecks and said there were no fundamental issues with the supply chain. In 2010 Tesla acquired the Nummi plant, which was a joint venture between Toyota and GM. In 2006, the last year of operation the plant produced 428,633 cars so there is plenty of capacity once Tesla gets all the bugs worked out of their process. Earnings are Wednesday after the close and they rarely do well after earnings.

Deckers Outdoor (DECK) said it has ended its efforts to sell itself after 90 prospective buyers turned it down. Throughout the process, the company continued to restructure and has been seeing success in its direct-to-consumer channel. International sales have also been rising. The CEO said they were looking forward to the holiday season with a stronger product lineup and cleaner inventories compared to a year ago. The company is projecting a 2% rise in revenue and earnings of $4.15-$4.30 that is 15-20 cents higher than prior guidance. They even authorized $335 million in additional buybacks to bring their outstanding authorizations to $400 million.

Crude prices rallied $1.50 after the Saudi Crown Prince Mohammad bin Salman said he backed an extension of the production cuts for 9 months until the end of 2018. Russia also expressed their support. The next OPEC meeting is November 30th and given the state of the oil market they may advance their plan for a formal agreement to come out of the November meeting rather than waiting until January as previously stated. Tensions in Iraq also contributed to the price rise. However, Iraq and the Kurdish Peshmerga agreed to a ceasefire late Friday. That could allow prices to fall on Monday.

Jefferies said an extension of the cuts would leave the market modestly under supplied until 2019 and facilitate the reduction of global inventories. Weak prices have caused supply growth estimates for 2018 to decline slightly. If all of this comes together, we could actually see higher prices late in 2018. However, OPEC is known to hedge on commitments. Current compliance with the 1.8 million bpd cut is only 86% and if the truth were known it would probably be even less than that.


The Dow posted another new high on Tuesday after about 15 days of gains but the AAII Sentiment survey that ended on Wednesday showed a dramatic shift from neutral to bearish sentiment. The bulls gained 1.7% but the bears saw a 5.1% jump. Those neutral on the market fell to 27.33% and the lowest level since March 9th. Apparently, investors are moving off the fence and taking a stand for November.

The S&P blew through resistance on Friday to gain 21 points and close at a new high. Having stocks like Amazon gain 128 points and Google 42 points will do wonders for a cap weighted index. All of the big techs with the exception of Priceline and Tesla were strongly positive.

The obvious key here is whether those big caps can add to their gains or simply hold those big gains. I suspect there will be some profit taking once the short squeeze wears off and that should happen by Monday's close. Traders are going to get their margin calls over the weekend and they will have to liquidate something to cover their short falls. That is not as simple as just closing their shorts. They will have to sell something else to cover the shortfall from those shorts.

The S&P has support back at 2,555 and I would be very surprised if we did not see that again in the days ahead. Opening gaps are normally filled and that would be 2,560 based on Thursday's close.

The Dow managed to close positive but it was a fight. Only 12 components were positive and the top four on the list added 118 Dow points. Even with that strong support, the index was barely able to remain positive ahead of the close. Art Cashin said there was $700 million in buy on close orders on the NYSE and that kept the index from closing in negative territory.

Apple is the only Dow component reporting earnings next week so there will be a distinct lack of earnings power to support the index. Apple does not report until after the close on Thursday so there will be no help for the first four days of the week. With all but five Dow components already reported, we are going to be heading into the post earnings depression phase.

Positive market forces next week could be the tax plan announcement on Wednesday and a Powell appointment as Fed chair on Thursday. Both should be market positive but they both could have negative results depending on the announcement details. Picking anyone other than Powell will be market negative.

The Nasdaq was the beneficiary of the monster short squeezes but it was also impacted by some major earnings losses as seen in the graphic below. Fortunately, the gains were larger but they were concentrated in only a handful of stocks. That means those outsized gains will likely be followed by declines.

The Nasdaq spiked to resistance at 6,700 and came to a dead stop. Support is well back at 6,555 and I doubt we will see that level in the near future. However, I seriously doubt the Nasdaq will continue to move much higher without first consolidating those gains.

The Russell 2000 rebounded back into its consolidation zone but failed to retest the prior high at 1,512. The index is still struggling to digest the 162-point gain from the August low. I would be surprised to see a breakout but I would also be thrilled.

In mid November the tax loss selling will increase. Investors will be selling losers to offset the capital gains from winners. Offsetting that could be stock buybacks. The passage of Q3 earnings kicks off the Q4 buyback cycle. Q3 buybacks declined but buyback announcements increased by 20% and once a company is out of their earnings quiet period they can begin buying again. Q4 is setting up to be a strong quarter for companies buying back their own shares.

Any reasonable investor would expect the indexes to rest next week. However, reasonable rarely applies to the market. Rallies can last well past where investors expect them to fail. In this case, a pullback would be a buying opportunity. With Q3 earnings expectations rising sharply, guidance for Q4 also improving, the economy growing at 3% or better, tax reform in the headlines and funds still under invested in equities, the odds are good we will see higher highs before the end of November. That does not mean the middle of November will not be bumpy but that will give us some additional opportunities.

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

subscribe now

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"The income tax has made liars out of more Americans than golf."

Will Rogers


Index Wrap

Market Risk Rising

by Jim Brown

Click here to email Jim Brown
There was a lot of pain in the market on Friday as Amazon shorts were crushed into sawdust.

The Nasdaq rallied early on gains by the big four techs, AMZN, GOOGL, MSFT and INTC. Of those four Amazon was the biggest winner. Anyone short ahead of earnings and expecting the normal Q3 weakness in their report, was in a world of trouble on Friday. Stocks that can gap $130 on an earnings surprise are probably widow makers for your portfolio. I get it that the stock could have fallen $40 to support at $935 on a bad report but the upside risk is too great. The same is true on stocks like Facebook, Nvidia, Broadcom or Alibaba. They are too dangerous to buy/short as an earnings trade even if you have several million dollars in your account. This is a perfect case for options.

The November $1,020 call option was $10 at Thursday's close and $89 at Friday's close. The $950 put was $17 on Thursday and $1 on Friday. Every one of those Amazon shorts are wishing today they had bought that put rather than shorted the stock.

The challenge for us next week is deciding if the gains are going to stick or will the post earnings depression phase appear a week earlier than normal this year. With more than half the S&P already reported the earnings expectations for those stocks has already evaporated. There are still 135 S&P stocks reporting this week so there is some market support but the declines in the 273 that have already reported could offset those still to report. As the cycle progresses, the numbers will favor the depression phase since next week there will be 408 stocks that have already reported and only about 35 companies reporting in that week.

The Nasdaq gapped exactly to resistance at 6,700 and came to a dead stop. "IF" there is going to be a decline, this is where it "should" start. The index is prone to sudden declines when it reaches this uptrend resistance.

The index was in decline ahead of the earnings and that suggests investors were already taking profits from the October bounce. Everyone was leaning bearish and was caught off guard by the short squeeze. This giant candle exactly to resistance rarely continues higher. That is especially true for a new high.

I looked at Nasdaq candles all the way back to 2010. The only candle that even came close was a 100-point spike on Oct 27th 2011. Over the next three days, the index fell -150 points. This type of gap higher is almost always filled, which would be a drop back to 6,560. I am not saying that is going to happen but the chances of a big decline back towards that level are very good.

The Dow is struggling after its 1,685-point sprint from the September 8th lows. The Dow remains very overbought and came very close to ending the day negative on Friday. Resistance at 23,475 has been strong since the first touch on Oct 24th. I would not be surprised if we saw a drop back to 23,000 or lower in the coming weeks. The Dow only has one component reporting earnings next week and that is Thursday after the close so there will be no earnings lift the first four days.

The S&P broke out to a new high but was not as bullish as the Nasdaq, which gained 2.2% compared to 0.8% on the S&P. This index has plenty of converging support in the 2545-2555 range and that should hold on anything but a major market decline.

The A/D line on the S&P struggled last week after closing at a new high the prior Friday. The strength is starting to fade but the Friday gains kept it from closing at the low for the week. This suggests we could see this indicator roll over next week and that will be negative for market sentiment.

The Volatility Index is back under 10 again and flashing its complacency warning. The index closed at a historic low on October 5th at 9.19. Prior to 2017, the last time the VIX broke below 10 was in 2007 just before the market crash. Since the beginning of May, the VIX has been under 10 nearly 60 times and closed at a historic low. The VIX is not a trigger indicator that warns of market crashes but it does tell us when the investors are over confident and a market crash could happen. It is telling us over the last two months that investors are complacent and warning of a potential correction to this condition.

For the last couple months, the FANG stocks have lost their correlation. They were in lock step in July but deviated in Aug/Sep. Last week they all spiked back into lock step. This would be ok if it continues to the upside but we do not want them to be arm in arm if they begin to decline.

The semiconductor sector has been leading the Nasdaq higher and the new high on the $SOX on Friday is also looking very overextended. The chip sector is important and I do not expect a major decline but it could do with a retracement to relieve some of the pressures. Unfortunately, that would lead the Nasdaq lower as well.

Market risk is rising. As each index and sub index makes new highs and becomes even more overbought, the risk increases. Earnings should continue to provide some support this week along with the tax plan announcement and the new Fed chair announcement. However, both of those events also contain risk if the details are not market friendly. I would be cautious about being overly long this week. Keep your stop losses in place and some cash in your account in case we get a buying opportunity.

The trend is our friend until it ends but there is rarely any warning.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Leading the Sector

by Jim Brown

Click here to email Jim Brown

Editors Note:

The post earnings decline of $10 has given us a buying opportunity for Boeing. This stock was the biggest gainer on the Dow in 2017 and it is not likely to slow down.


BA - Boeing - Company Profile

The Boeing Company, together with its subsidiaries, designs, develops, manufactures, sells, services, and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight, and launch systems and services worldwide. It operates in five segments: Commercial Airplanes, Boeing Military Aircraft, Network & Space Systems, Global Services & Support, and Boeing Capital. The Commercial Airplanes segment develops, produces, and markets commercial jet aircraft for various passenger and cargo requirements; and provides related support services to the commercial airline industry. This segment also offers aviation services support, aircraft modifications, spare parts, training, maintenance documents, and technical advice to commercial and government customers. The Boeing Military Aircraft segment researches, develops, produces, and modifies manned and unmanned military aircraft, and weapons systems for global strike, vertical lift, and autonomous systems, as well as mobility, surveillance, and engagement. The Network & Space Systems segment researches, develops, produces, and modifies strategic defense and intelligence systems, satellite systems, and space exploration products. The Global Services & Support segment provides integrated logistics services comprising supply chain management and engineering support; maintenance, modification, and upgrades for aircraft; and training systems and government services that include pilot and maintenance training. The Boeing Capital segment offers financing services and manages financing exposure for a portfolio of equipment under operating and finance leases, notes and other receivables, assets held for sale or re-lease, and investments. The company was founded in 1916 and is headquartered in Chicago, Illinois. Company description from FinViz.com.

Business is booming. Boeing finalized a $13.8 billion order with Singapore Airlines last week. The order is for (20) 777-9 and (19) 787-10 planes. The rumor that will never die surfaced again and that being an Amazon order for (100) 767 freighters. This first appeared in March and keeps resurfacing. Amazon's leases for its current (40) 767 freighters do not expire until 2023. That means there is no rush to order more since it would take years for Boeing to make them but still deliver before 2023. There is another rumor that surfaced last week that Amazon is shopping for financing/lease arrangements for (400) 767s to be delivered over the next ten years. Boeing went to its managers and workers last week to see what would be needed to "significantly" boost production rates for a large and important customer. Boeing is rumored to be looking at a doubling of the production rate. They currently produce (2) 767s per month and they are planning on raising this to 4 per month from January 2020 through January 2021 then slowly scale back to 2 per month by 2025. This would seem to indicate a 40-60 plane order from a single customer for delivery in 2021. Shares closed at a new high.

Boeing got another windfall when Trump was elected and suddenly took an interest in producing more F-18 Hornet's than F-35s. Boeing was only expected to produce 5 Hornets this year with a big order for F18 Growlers filling out the production line. The Growlers are the radar jamming planes that protect a flight of fighters. In the budget that was just passed, an additional $1.1 billion was allocated for 14 additional F-18s in this year. Trump had asked for 24 but Congress only approved 14. There will be a lot more in the budget for 2018. The F-18 is the workhorse of the Navy and many of their older planes are reaching the 6,000 flight hour maximum threshold. That means the Navy will need hundreds over the next several years to replace the aging aircraft. Boeing expects the production line to increase to 3-4 per month starting in 2020. Boeing expects another 100 planes to be ordered over the next five budget cycles and possibly more as the military scales down requests for F-35s in favor of the much cheaper F-18s. Boeing has an enhancement called Block III that basically gives the F-18 the networking capability of the F-35. They envision a stealthy F-35 entering hostile airspace and doing reconnaissance and then transmitting back threat and target information to the heavily armed F-18s to actually carry out the attacks. Over the last five years, the Navy has requested five times as many F-18s as F-35s. A F-18 costs $75 million and F-35 $121 million.

Boeing said on any given day 2 out of every three F-18 planes are out of commission waiting for repairs. Planes have been flown hard in the post 9/11 world with multiple theaters of war and planes down for a single part end up getting cannibalized for other parts to keep the remaining planes flying.

All of this means Boeing is going to remain highly profitable for a very long time and this is just two production lines of the dozens of products being manufactured by the company.

Boeing recently upgraded their forecast for plane demand from China. The company now predicts China will buy 7,240 planes, up from 6,810 in the prior forecast. The value of these planes will be more than $1.1 trillion. The period covered is 2016 to 2036. China is expected to be 20% of the global demand for aircraft over the next 20 years. Boeing said the rapidly growing middle class and the continued economic growth in China would fuel the growth of airline travel.

Boeing raised its 20 year target on deliveries to Southeast Asia by 460 planes saying demand should exceed 4,210 new planes worth $650 billion. Boeing said Southeast Asia was the fastest growing market in the world and 10% of the global market.

Boeing reported a 7.4% rise in Q3 deliveries due to the high demand for the 737 jetliners. Boeing delivered 202 planes in Q3 compared to 188 in the year ago quarter. Of that total 145 were 737s, up from 120 last year. The 787 Dreamliners slipped 1 to 35 and 777s fell from 22 to 16. Boeing has delivered 554 planes in 2017 and expects to deliver 760-765 for the year. They received 127 new orders in Q3.

For Q3 they reported earnings of $2.72 per share that beat estimates by 7 cents. Revenue was $24.31 billion, which also beat estimates. They guided for the full year for earnings of $9.90-$10.10, ten cents higher than prior guidance. They repurchased $2.5 billion in shares in Q3. Their order backlog is $474 billion for nearly 5,700 commercial planes.

The Commerce Department said orders for commercial aircraft surged 30% in September.

Shares declined with the Dow after earnings. Since they are up roughly 80% for the year, it is understandable they needed to rest. There is support at $253 and again at $234. If the Dow declines next week I would like to enter this position on a touch of initial support.

With a BA trade at $253.00

Buy Dec $260 call, estimated premium $3.50, initial stop loss $248.50.


No New Bearish Plays

In Play Updates and Reviews

Monster Move

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Nasdaq Composite gained 144 points on a massive short squeeze in the big cap tech stocks. The major indexes reversed an overnight drop in the futures to explode higher at the open on strong earnings from the big four tech stocks. AMZN, GOOGL, MSFT and INTC led a surge in the techs that lifted the entire index. Thank goodness for ETFs. Monster gains in those big stocks caused short covering in the Nasdaq ETFs and corresponing buying in the ETF components.

Unfortunately, the Dow fought most of the day just to remain positive and closed with only a 33-point gain and still under resistance. Since the Dow only has five components left to report over the next three weeks, the earnings surges are going to be absent. Secondarily, the big gains in the tech stocks are going to see some selling when the post earnings depression phase appears.

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

FMC - FMC Corp
The long call position was stopped at $91.85.

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

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor

BULLISH Play Updates

AABA - Altaba - Company Profile


No specific news. Alibaba shares spiked with the Nasdaq after the tech earnings.

Alibaba's singles day is coming on November 11th and that will produce a lot of headlines in the two weeks ahead of the event. In 2016, they sold $17.7 billion on that day, up 32% from the prior year. With 466 million active customers, they could do well over $20 billion this year.

Original Trade Description: October 18th.

Altaba Inc. operates as a non-diversified, closed-end management investment company in the United States. Its assets consist primarily of equity investments, short-term debt investments, and cash. The company was formerly known as Yahoo! Inc. and changed its name to Altaba Inc. in June 2017. Altaba Inc. was founded in 1994 and is based in New York, New York. Company description from FinViz.com

Altaba owns a 15% stake in Alibaba, currently worth about $70 billion. They hold a stake in Yahoo Japan currently worth $7.7 billion. They have $130 million in investments. They have a $740 million stake in Excalibur, a unit of the new company that holds all the Yahoo patents that were not sold to Verizon. The company has $12 billion in cash. They recently announced a $5 billion stock buyback and the company has committed to returning nearly all the cash in the bank plus any thrown off by the investments, to the shareholders.

Owning Altaba is just like owning Alibaba only without the expensive options and a lot less volatility. We get the other parts for free. Obviously Altaba is reactive to Alibaba movement so there will still be some volatility, it is just comes with a lower risk.

Alibaba is growing much faster than Amazon and they have a larger market with 4.5 billion consumers in Asia.

Alibaba reports earnings on Nov 2nd and Altaba reports on Nov 29th. Because of the lower volatility and cheaper option prices, we can own AABA over the BABA earnings and profit from any post earnings gains.

Last week Alibaba said it was going to spend an additional $15 billion over the next three years on research. They already spend $3 billion and have more than 25,000 engineers on the payroll.

The new effort will create the Alibaba DAMO Academy, short for Discovery, Adventure, Momentum and Outlook. The academy will set up labs in China, USA, Russia, Israel and Singapore and fund collaborations with universities. They plan to explore AI, IoT, quantum computing, visual computing, machine learning and network security.

BABA shares fell $6 on the announcement because of the impact to profits. AABA shares followed Alibaba shares down and they bounced today off the 30-day average, which has been strong support. If the trend holds, this should be a buying opportunity.

I am using the Jan options so there will still be earnings expectations in the premium when we exit.

Position 10/19/17:

Long Jan $70 call @ $3.10, see portfolio graphic for stop loss.

ADI - Analog Devices - Company Profile


No specific news. New closing high.

Original Trade Description: Sept 30th.

Analog Devices, Inc. designs, manufactures, and markets a portfolio of solutions that leverage analog, mixed-signal, and digital signal processing technology, including integrated circuits (ICs), algorithms, software, and subsystems. It offers data converter products, which translate real-world analog signals into digital data, as well as translates digital data into analog signals; high-performance amplifiers to condition analog signals; and radio frequency ICs to support cellular infrastructure. The company also provides MEMS technology solutions, including accelerometers used to sense acceleration, gyroscopes to sense rotation, and inertial measurement units to sense multiple degrees of freedom. In addition, it offers isolators for various applications, such as universal serial bus isolation in patient monitors; and smart metering and satellite applications. Further, the company provides power management and reference products; and digital signal processing products for high-speed numeric calculations. Its products are used in electronic equipment, including industrial process control systems, medical imaging equipment, factory automation systems, patient monitoring devices, instrumentation and measurement systems, wireless infrastructure equipment, energy management systems, networking equipment, aerospace and defense electronics, optical systems, automobiles, and portable electronic devices. The company serves clients in industrial, automotive, consumer, and communications markets through a direct sales force, third-party distributors, and independent sales representatives in the United States, rest of North/South America, Europe, Japan, China, and rest of Asia, as well as through its Website. It has a collaboration with TriLumina Corp. to provide illuminator modules for automotive flash LiDAR systems. Analog Devices, Inc. was founded in 1965. Company description from FinViz.com.

Expected earnings Nov 29th.

ADI is a 52-year-old chip company. Yes, they had chips in 1965. The company is doing great and tends to make chips nobody else is making and that gives them an edge. They reported Q2 earnings of $1.26, which rose 54% snf beat analyst estimates at $1.15. Revenue of $1.43 billion rose 65% and beat estimates for $1.40 billion.

They guided for the current quarter for earnings of $1.29-$1.43 and analysts were only expecting $1.25. Revenue guidance was $1.45-$1.55 billion and analysts were expecting $1.46 billion.

Shares gapped up on the late August earnings then worked through the post earnings depression cycle before moving higher. They closed at a new high on Friday.

Last week IBD raised their composite rating from 93 to 96, which means ADI is outperforming 96% of all stocks in terms of fundamental and technical stock ranking criteria. The stock has an EPS rating of 97 with moderate institutional buying over the last several weeks.

I believe the breakout will continue and we could see $90+ before earnings in November. Options are still cheap because ADI is not a high profile stock.

Position 10/2/17:

Long Dec $90 call @ $1.95, see portfolio graphic for stop loss.

CCL - Carnival Corporation - Company Profile


No specific news. Moving up steadily.

Original Trade Description: October 16th.

Carnival Corporation operates as a leisure travel and cruise company. It offers cruises under the Carnival Cruise Line, Princess Cruises, Holland America Line, and Seabourn brands in North America; and Costa, AIDA, P&O Cruises (UK), Cunard, and P&O Cruises (Australia) brands in Europe, Australia, and Asia. The company operates approximately 100 cruise ships. It also owns Holland America Princess Alaska Tours, a tour company in Alaska and the Canadian Yukon, which owns and operates hotels, lodges, glass-domed railcars, and motor coaches. In addition, the company is involved in the leasing of cruise ships. It sells its cruises primarily through travel agents and tour operators. Company description from FinViz.com.

Earnings December 26th.

Carnival shares had been on a steady path higher since last October but were derailed by the hurricanes. Many of the cruise destinations, including Puerto Rico, saw significant damage. Carnival had to cancel a couple cruises but continued running a full schedule almost without interruption. Shares have recovered from their decline and are moving towards pre hurricane levels.

More than 40 islands visited by cruise ships are open, fully operational and welcoming cruise ships on a daily basis. The majority of the 48 cruise ports in the Caribbean were not impacted at all by the storms. In places such as Jamaica, Belize and Cozumel in the Western Caribbean, and Aruba, Bonaire and Curacao in the Southern Caribbean, and Antigua and St. Kitts in the Eastern Caribbean, it's business as usual. Ports in the Bahamas, including Nassau and the popular private islands of Half Moon Cay and Princess Cays, are also open for business.

The only ports out of the normal 48 that are not yet operational are St. Thomas, St. Maarten, Grand Turk, Dominica, Puerto Rico and St. Croix.

The beauty of the cruise ship industry is that they can change itineraries very quickly if a normal destination is out of service.

Carnival reported Q3 earnings of $2.29 beating estimates for $2.20. Revenue of $5.52 billion beat estimates of $5.39 billion. The temporary port closures are expected to cause a 10-12 cent reduction in Q4 earnings. They guided for a range of 44-50 cents and analysts had been expecting 63 cents before the storms hit.

Based on the rebound it appears investors are not worried about the storm impact.

Update 10/20/17: Carnival posted only a minor gain but we may have found out why the cruise sector was down last week. It appears a lot of ships going to China have been takes off that route. China was once touted as the new Caribbean with companies adding ships for Chinese customers. There is no confirmation but maybe taking a cruise was not on the bucket list for most Chinese. Analysts claim it would not be a material impact to cruise earnings but it would reduce suspected growth targets for the coming years. I tightened the stop loss in case the decline continues.

Position 10/17/17:

Long Jan $70 call @ $1.90, see portfolio graphic for stop loss.

COST - Costco - Company Profile


No specific news. No movement as tech stocks ruled the Nasdaq on Friday.

They will report comp sales for October next week and expectations are for +7% same store sales and +9% total sales. That should give the stock a boost.

Original Trade Description: October 14th.

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

We all know the story. Amazon bought Whole Foods and Costco shares lost over $30. Fast forward three months and Costco reported strong earnings but analysts still believed Whole Foods was going to kill them. Shares fell $13.

Let me put this in caps. IGNORE WHOLE FOODS. They are an entirely different business model and even with Amazon behind them, they are no threat to Costco. Costco operates 741 retail warehouses, each 4 times bigger than a Whole Foods store. Whole Foods only has 346 stores. At Costco you can buy food, diamond rings, cameras, large screen TVs, clothing, drugs, discount eye glasses, GE appliances, cruises to anywhere in the world and caskets among thousands of other items. Whole Foods has food.

Costco reported earnings of $2.08 that beat estimates for $2.02. Revenue of $42.3 billion beat estimates for $41.55 billion. Those numbers were up from $1.77 and $36.56 billion in the year ago quarter. US same store sales were up 6.5% and online sales were up 30%. There was NO weakness from the Whole Foods acquisition.

Paid memberships rose 274,000 to 18.5 million. That equates to an addition of 16,000 per week. Business members had a 94% renewal rate and Gold Star members an 89.3% renewal rate. They ended the quarter with $5.78 billion in cash, up more than $1 billion from the year ago quarter.

Costco rolled out a free two-day delivery service for orders over $75 with same day delivery at 376 stores through Instacart.

Shares were knocked for a loss despite the strong results because analysts are still only looking at the surface comparisons between Whole Foods and Costco. The decline stopped at $155 and did not even come close to strong support at $155. The weakness lasted five days.

On Friday, JP Morgan released the results of a recent survey showing Costco grocery prices were a whopping 58% cheaper than Whole Foods. JP Morgan said Whole Foods and Costco actually have very little in common other than a few grocery items and Costco wins hands down.

That report lifted Costco shares by $2.63 on Friday but the stock has a long way to go to recover lost ground.

I looked at the December option with only 48 days left because it was cheaper but I chose the January option with 97 days left because it expires after their January 4th earnings and will retain its premium better. We can always buy time but we do not have to use it.

Update 10/18: Reuters released a survey of 8,600 online shoppers and 75% said they never or rarely by groceries online. While that should have been negative to Amazon and the Whole Foods purchase, it weighed on COST as well because of their efforts to accelerate their online business. Amazon fell $12 on the news.

Update 10/20: Oppenheimer reiterated an outperform rating and $185 price target. They listed 5 reasons why Costco is still a buy. Management optimism, credit card change is over, the new delivery options are just starting, IT investments over the last several years are paying off and costs are declining, improved advertising showing the extended benefits of being a member.

Position 10/16/17:

Long Jan $165 call @ $3.85, see portfolio graphic for stop loss.

DLTR - Dollar Tree - Company Profile


No specific news. Two cents below the new closing high from Thursday.

Original Trade Description: October 21st.

Dollar Tree, Inc. operates variety retail stores in the United States and Canada. It operates in two segments, Dollar Tree and Family Dollar. The Dollar Tree segment offers merchandise at the fixed price of $1.00. It provides consumable merchandise, including candy and food, and health and beauty care products, as well as everyday consumables, such as household paper and chemicals, and frozen and refrigerated food; various merchandise comprising toys, durable housewares, gifts, stationery, party goods, greeting cards, softlines, and other items; and seasonal goods, which include Valentine's Day, Easter, Halloween, and Christmas merchandise. This segment operates under the under the Dollar Tree and Dollar Tree Canada brands, as well as 11 distribution centers in the United States and 2 in Canada, and a store support center in Chesapeake, Virginia. The Family Dollar segment operates general merchandise discount retail stores that offer consumable merchandise, which comprise food, tobacco, health and beauty aids, household chemicals, paper products, hardware and automotive supplies, diapers, batteries, and pet food and supplies; and home products, including housewares, home decor, and giftware, as well as domestics, such as blankets, sheets, and towels. It also provides apparel and accessories merchandise comprising clothing, fashion accessories, and shoes; and seasonal and electronics merchandise, which include Valentine's Day, Easter, Halloween, and Christmas merchandise, as well as personal electronics that comprise pre-paid cellular phones and services, stationery and school supplies, and toys. This segment operates under the Family Dollar brand, 11 distribution centers, and a store support center in Matthews, North Carolina. As of January 28, 2017, the company operated 14,334 stores in 48 states and the District of Columbia, and 5 Canadian provinces. Company description from FinViz.com

Dollar Tree reported earnings in late August that rose 36.1% to 99 cents and beat estimates for 87 cents. Revenue of $5.28 billion rose 5.7% and beat estimates for 5.24 billion. Same store sales rose 2.4%. They guided for the full year for revenue of $22.07-$22.28 billion, up from $21.95-$22.25 billion. Earnings guidance of $4.44-$4.60 rose from $4.17-$4.43.

Shares spiked $6 on the earnings and then went through a week of post earnings depression then began a steady hike higher.

Next earnings Nov 23rd.

After earnings Raymond James upgraded them from market perform to strong buy. Bernstein upgraded from underperform to market perform. Telset Advisory reiterated an outperform.

Dollar Tree is Amazon proof. With everything in the store $1 or less even Amazon cannot sell and ship items that cheap. Since their acquisition of Family Dollar, they now operate 14,334 stores. This is a retail powerhouse and even if the economy weakens, their business will thrive because of the low price point.

Shares have traded sideways for the last 7 days but they moved up on Friday to close at a new 52-week high. Their historic high in August 2016 was $99 and that is the next resistance level.

In September they promoted the past VP of stores since 2001 who became COO in 2007, president in 2013 and now to CEO. He has a ton of experience in every phase of the business. He oversaw the acquisition of Family Dollar in 2015 as president and COO of Family Dollar during the transition. This is very positive for DLTR and the rise in the stock suggests investors like the choice.

The November options expire several days before earnings so I am going with the December strikes so there are some earnings expectations in the premium when we exit before the event.

Position 10/23/17:

Long Dec $95 call @ $2.70, see portfolio graphic for stop loss.

FMC - FMC Corp - Company Profile


No specific news. Shares fell $1.65 intraday to stop us out at $91.85.

Original Trade Description: October 11th.

FMC Corporation, a diversified chemical company, provides solutions, applications, and products for the agricultural, consumer, and industrial markets worldwide. The company operates through three segments: FMC Agricultural Solutions, FMC Health and Nutrition, and FMC Lithium. The FMC Agricultural Solutions segment develops, manufactures, and sells crop protection chemicals, such as insecticides, herbicides, and fungicides that are used in agriculture to enhance crop yield and by controlling a range of insects, weeds, and diseases, as well as in non-agricultural markets for pest control. The FMC Health and Nutrition segment offers microcrystalline cellulose for use in drug dry tablet binders and disintegrants, and food ingredients; carrageenan for use in food ingredients for thickening and stabilizing, pharmaceutical, and nutraceutical encapsulates; alginates for food ingredients, pharmaceutical excipients, healthcare, and industrial uses; natural colorants for use in foods, pharmaceutical, and cosmetics; and omega-3 EPA/DHA for nutraceutical and pharmaceutical uses. The FMC Lithium segment offers lithium for use in batteries, polymers, pharmaceuticals, greases and lubricants, glass and ceramics, and other industrial uses. FMC Corporation was founded in 1884 and is headquartered in Philadelphia, Pennsylvania. Company description from FinViz.com.

Expected earnings Nov 6th, unconfirmed.

FMC is riding the lithium wave. The once ignored mineral is now becoming a very important part of FMC's future. In the first half of 2017, lithium accounted for 11% of total revenue and 20% of earnings. The rush to find more lithium so companies like Tesla can produce 500,000 battery operated cars a year, has turned the mining of this material into a race to the future. FMC is in the process of tripling capacity from 2016-2019 and that may not be enough to satisfy battery demand by 2020. Because of the fast growth in this segment, FMC is planning on spinning off FMC Lithium at some point in the future.

Also, around November 1st, FMC is expected to get approvals to buy the crop protection assets from DuPont. Dow and DuPont were forced to sell some of those agricultural assets as terms for their merger approvals. Once the sale to FMC is approved, FMC will become the fifth largest crop=protection chemical company in the world. With global food demand skyrocketing, the demand for fertilizer and weed/pest killer is also ramping higher.

The business being bought from DuPont generates $1.4 billion in annual revenue and the segment will jump to $3.8 billion after the acquisition. Also a part of the deal, DuPont will acquire FMC's Health & Nutrition business.

Shares have rebounded from the late September dip and should breakout to a new high in the days ahead.

Position 10/12/17:

Closed 10/27: Long Nov $95.00 call @ $2.25, exit $1.43, -.82 loss.

MU - Micron Technology - Company Profile


No specific news. Shares still consolidating their two months of gains.

Original Trade Description: October 9th.

Micron Technology, Inc. provides semiconductor systems worldwide. The company operates through four segments: Compute and Networking Business Unit, Storage Business Unit, Mobile Business Unit, and Embedded Business Unit. It offers DDR3 and DDR4 DRAM products for computers, servers, networking devices, communications equipment, consumer electronics, automotive, and industrial applications; mobile low-power DRAM products for smartphones, tablets, automotive, laptop computers, and other mobile consumer device applications; DDR2 and DDR DRAM, GDDR5 and GDDR5X DRAM, SDRAM, and RLDRAM products for networking devices, servers, consumer electronics, communications equipment, computer peripherals, automotive and industrial applications, and computer memory upgrades; and hybrid memory cube semiconductor memory devices for use in networking and computing applications. The company also provides NAND Flash products, which are electrically re-writeable, non-volatile semiconductor memory devices; client solid-state drives (SSDs) for notebooks, desktops, workstations, and other consumer applications; enterprise SSDs for server and storage applications; managed multi-chip package products; digital media products, including flash memory cards and JumpDrive products under the Lexar brand name. In addition, it manufactures products that are sold under other brand names; and resells flash memory products that are purchased from other NAND Flash suppliers. Further, the company provides 3D XPoint memory products; and NOR Flash, which are electrically re-writeable and semiconductor memory devices for automotive, industrial, connected home, and consumer applications. Company description from FinViz.com.

Micron is on a roll. Analysts are targeting $50 by the end of December despite the monster gain so far in 2017. Memory is in short supply and prices are rising monthly. The rapid escalation of cloud technology is demanding hundreds of thousands of servers per quarter, millions of disk drives and untold numbers of PCs, phones, tablets and IoT devices.

For Q2, they reported earnings of $2.02 compared to estimates for $1.84. Revenue rose 90% to $6.14 billion and analysts were expecting $5.97 billion.

For the current quarter, analysts are expecting $2.14 in earnings on a 60% increase in revenue. They are likely to beat those estimates.

Despite the strong earnings and forecasts, the company trades at a PE of 8.7 when the S&P is trading at 18.0. This is a monumental mismatch and suggests investors will be racing to buy this undervalued stock.

Shares spiked on earnings and ran up to $40.50. There was a three-day decline of about $1 to consolidate those gains and the stock surged again to close at a new high on Monday. I was hoping for a deeper pullback to buy but it never happened. If we do not buy this breakout, we could still be waiting after it runs up another $5.

I am using January options to capture the earnings expectations in December.

Update 10/10/17: Shares of Micron rallied more than $1 in the regular session but fell $2 in afterhours. The company announced a $1 billion secondary offering after the close. The proceeds will be used to pay off debt including $476 million of 7.5% secured notes and various other notes and credit lines. This should be positive for Micron because interest costs will decline but it will add approximately 25 million shares to the float.

Update 10/11/17: Shares rebounded from the $2 selloff in afterhours to close down only 37 cents. Summit Redstone said buy the dip because the secondary offering to pay off debt was an exercise in value creation. The analyst has a $51 price target. Instinet reiterated a buy rating and $45 target. Wells Fargo reiterated a buy rating and $45 target. Credit Suisse reiterated an outperform rating and $50 target.

Update 10/12/17: Micron priced its $1.2 billion, upsized secondary, at $41 after the close on Wednesday. Shares had closed at $41.61 and dipped today to close at $40.50. Barclay's boosted their target price from $40 to $60 saying DRAM demand looks good through 2018. Demand should remain high and supply should remain tight. Needham, Rajvinda Gill has a price target of $76. Let's hope he is right.

Update 10/18/17: Micron said it was retiring $2.25 billion in debt that carried interest rates of 7.5% and 5.25%. The secondary offering last week will provide most of the funds with the rest paid out of cash on hand. Shares posted a nice gain on the news and have almost recovered the $42 highs before the secondary was announced.

Update 10/20/17: Deutsche Bank reiterated a buy rating. UBS reiterated a buy rating and raised his price target from $39 to $53. UBS said Micron would be cash positive in 2018. The analyst no longer sees DRAM prices declining in 2018 as previously forecast.

Update 10/24/17: David Einhorn's Greenlight Capital took a new position in Micron saying investors are under appreciating the dynamics of the current memory cycle.

Position 10/10/17:

Long Jan $43 call @ $3.05, see portfolio graphic for stop loss.

PYPL - PayPal - Company Profile


No specific news. Only a minor decline from Thursday's new closing high.

Original Trade Description: October 25th.

PayPal Holdings, Inc. operates as a technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. It enables businesses of various sizes to accept payments from merchant Websites, mobile devices, and applications, as well as at offline retail locations through a range of payment solutions, including PayPal, PayPal Credit, Braintree, Venmo, Xoom, and Paydiant products. The company's platform allows consumers to shop by sending payments, withdraw funds to their bank accounts, and hold balances in their PayPal accounts in various currencies. Company description from FinViz.com.

They reported Q3 earnings of 46 cents, up 32%, that beat estimates for 44 cents. Revenue of $3.24 billion, up 21% and beat estimates for $3.17 billion. They guided for the current quarter for earnings of 50-52 cents and full year earnings of $1.86-$1.88. Mobile payment volume rose 54% to about $40 billion. Total payments rose 31% to $114 billion. Free cash flow rose 36% to $841 million and they have $7.1 billion in cash. They added 8.2 million active accounts with net new actives up 88%. They now have 218 million active customer accounts with 17 million merchants. They processed 1.9 billion payments, up 26%.

Q4 revenue is expected to rise 20-22% to $3.570-$3.630 billion. Paypal said payment platform Venmo was on track with expectations. The platform processed $9.1 billion in payment volume, a 93% YoY increase.

Expected earnings January 18th.

The company recently announced partnership deals with Baidu, Bank of America, Visa, JP Morgan, Facebook and Apple. They have changed their focus from disruptor to partner where they can process more transactions through the partners. The Baidu partnership will connect them to 700 million Chinese shoppers and 17 million Paypal merchants. The deal with Apple to allow Paypal in the iTunes store, AppStore and Apple Music will connect them to more than 1 billion IOS devices worldwide. The Facebook partnership gives them access to 2.01 billion users.

Pacific Crest Securities said their market cap of $85 billion does not make them too big to be acquired by a larger bank. Even Amazon has been mentioned as a possible acquirer.

In mid August Paypal said it was acquiring Swift Financial, a small business lender and the transaction would close by the end of 2017. No terms were given. This will extend Paypal's reach for financing services. Paypal already has a working capital unit since 2013 and they have loaned more than $3 billion to small businesses.

Thanks to recent agreements with MC/V, users will be able to transfer money directly from their accounts to credit/debit cards, which will become a big selling point. The new "Pay with Venmo" platform that will allow users to make purchases at retail locations is in test mode with Lululemon, Athletica and Forever 21 already accepting those payments. This is turning into another big revenue stream for Paypal.

Shares posted an 81% gain on Wednesday when the market was down on much needed profit taking. Investors looking for a buying opportunity are going to be left behind.

Position 10/26/17:

Long Jan $72.50 call @ $2.95, see portfolio graphic for stop loss

VIX - Volatility Index - Index Profile


The VIX collapsed with a 1.50 drop in a positive market.

If we ever hit that exit target at 16 it means we are probably going to lose other long positions. This is insurance against that potential decline.

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. It has been 482 days since a 5% decline.

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.

BEARISH Play Updates (Alpha by Symbol)

DIA - Dow SPDR ETF - ETF Profile


The tables were turned with the Nasdaq up 144 points and the Dow barely positive at 33 points. Dow earnings are over with only 5 components left to report over the next three weeks. We could see a different direction next week.

Original Trade Description: October 21st.

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 DJIA is the oldest continuous barometer of the U.S. stock market, and the most widely quoted indicator of U.S. stock market activity.

I am going to make this as simple as possible. The Dow is extremely overbought. It is due for a rest. There are 12 Dow components reporting earnings this week. Volatility will occur but we do not know in which direction. Since all the Dow gainers are already up strongly over the last several weeks, there is a good chance we could see some declines.

This is highly speculative. I am using November options because they are cheap but they will require a substantial move in the next ten days or they will decay quickly. This will be a quick trade.

Buy Nov $232 put, currently $1.86, no initial stop loss.

SLB - Schlumberger - Company Profile


No specific news. Only an 18 cent gain despite a $1.50 jump in oil prices.

Original Trade Description: October 23rd.

Schlumberger Limited supplies technology products and services to the oil and gas exploration and production industry worldwide. Its Reservoir Characterization Group segment provides reservoir imaging, monitoring, and development services; wireline technologies for open and cased-hole services; slickline services; exploration and production pressure and flow-rate measurement services comprising surface and downhole services; software integrated solutions, such as software, consulting, information management, and IT infrastructure services; consulting services for reservoir characterization, field development planning, and production enhancement; and petrotechnical data services and training solutions, as well as integrated management services. Its Drilling Group segment designs, manufactures, and markets roller cone and fixed cutter drill bits; supplies drilling fluid systems; provides pressure drilling and underbalanced drilling solutions, and environmental services and products; mud logging services; land drilling rigs and support services; and well planning and drilling, engineering, supervision, logistics, procurement, contracting, and drilling rig management services, as well as bottom-hole-assembly, borehole-enlargement technologies, impact tools, tubulars, and tubular services. Its Production Group segment provides well services comprising pressure pumping, well cementing, and stimulation services; coiled tubing equipment; well completion services and equipment that include packers, safety valves, and sand control technology, as well as completions technology and equipment; artificial lifts; and integrated production and production management services. Its Cameron Group segment offers integrated subsea production systems; surface systems; drilling equipment and services; and valve products and measurement systems. Company description from FinViz.com.

The company said the already week offshore sector was also declining because offshore drilling/production is not profitable at $50 oil. This sector will continue to decline until oil prices rebound over $75 sometime in 2019 according to best estimates.

Schlumberger said production growth was slowing faster than expected. That means less cash flow for producers and another decline in rig counts. The company said customers were reducing their forecasts for prices and activity for 2018 and future revenue and profitability was likely to decline.

Shares fell $2 post earnings to $62 but the odds are very good we are going to see lower lows as the energy companies report disappointing earnings and guidance in the weeks ahead.

Earnings January 19th.

Position 10/24/17:

Long Jan $60 put @ $1.42, see portfolio graphic for stop loss.

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now