Option Investor

Daily Newsletter, Thursday, 12/7/2017

Table of Contents

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

Market Wrap

Market Up Ahead Of Jobs Report

by Thomas Hughes

Click here to email Thomas Hughes


The market staged a rebound in today's trading as tax reform, a government shutdown, economic data, the FOMC and earnings outlook vie for dominance. In the near term attention is fixed on tax reform and a possible government shutdown, in the longer term economic and earnings trends are supporting the market. There was no new news on tax reform although that is a major theme on the minds of investors. The government shut down has gripped attention but is largely expected to be resolved, and will likely be quickly forgotten in light of data and next week's FOMC meeting. Today's data was good, points to strong labor markets and is consistent with expected FOMC tightening.

Asian stocks were wildly mixed. The Nikkei surged nearly 1.5% as a weakening yen helped boost valuations while elsewhere in the region moves were muted in comparison. Shares in China and Korea both fell on weakness in blue chips and tech while Hong Kong was able to post modest gains. European indices were able to closely mostly positive. Trading was subdued in light of tax reform uncertainty, political instability and next week's quadruple shot of central bank meetings. The FOMC is scheduled to release its policy statement Wednesday afternoon, the ECB, BOE and SNB will all release theirs within the next 18 hours.

Market Statistics

Futures were flat and mixed for most of the morning. The SPX hovered around break even drifting above and below fair value up to and into the opening bell. The opening was more or less as expected; the index began the day down by a point, extended that to 2 points, and then moved higher to hover just above break even for most of the day. The day's high was just above 2,640, about +0.50%, and was tested twice before sending the index back to trend within the daily range up to and into the close of trading.

Economic Calendar

The Economy

The Challenger, Gray&Christmas report on planned layoff's rose from the last month but is still indicating strong labor market in 2017. The bad news is that planned layoffs rose 17% in November to hit an 8 month high and are up 30% over the same time last year. The good news is that on a year to date basis 2017 job cuts are -22% from last year and sitting at a 20 year low. Adding to the good news is other data which shows the number of planned hires hit an all time high.

Initial claims rose a marginal 2,000 from last week's unrevised figure to hit 236,000. The four week moving average of claims fell -750 to hit 241,500. On a not adjusted basis claims rose a smaller than expected 44.9% and remain down on a year over year basis. The seasonal factors had expected a gain of 46.2% this week, claims are down -7.3% YOY and remain consistent with ongoing labor market recovery.

Continuing claims fell -52,000 from last week's upwardly revised figure. Last week's figure rose by 3,000 putting this week's number at 1.908 and better than expected. The four week moving average rose by 1,000 to 1.912 and remains low relative to long running trends. While still elevated in the post hurricane environment the figures remain consistent with long term labor market health.

The total number of claims fell by -113,775 to hit 1.647 million. This decline is not unexpected and is in fact seen in previous year's data. On a year over year basis total claims are down -7.7% and remain consistent with ongoing labor market recovery. Looking forward we can expect to see the total number of Americans receiving benefits begin to jump beginning as soon as next week. If the trends hold up the year end spike in claims should top out toward the end of the year and around 2 million.

The Dollar Index

The Dollar Index firmed in today's trading. Yesterday's ADP and today's Challenger/jobless claims reports have reinforced the dollar's dominance in the minds of traders. Today's action added 0.25% to the index and confirms the move above the short term moving average. The index looks like it will continue higher although it remains within the short term trading range. Upper target for resistance is near $95.

While positive, the data was not definitive and did little to alter forward FOMC outlook. The current range is likely to persist into next week, up to and until the central bank policy announcements Wednesday afternoon and Thursday morning. If all banks report as expected the range may persist into the end of the year although policy is currently skewed in the dollar's favor. The FOMC is expected to continue raising rates in 2018 while no other bank is expected or likely to do the same. A break above $95 would be bullish and could take the index back up to test long term highs.

The Gold Index

Gold prices succumbed to the weigh of tax reform, economic outlook, expected rate hikes and strengthening dollar. The metal shed nearly -1.5% to fall below the $1,250 mark in a move that looks set to continue further. Now that $1,250 has been broken downside targets near $1,235, $1,220 and $1,200 come into play. Tomorrow's NFP could extend the move, as could next week's FOMC/ECB/BOE meetings, or tax reform news.

The Gold Miners ETF GDX shed another percent on today's drop in gold. The ETF is moving down toward the bottom of a long term trading range and fast approaching potential support. Support targets are near $21 and then $20 should the first target break. The indicators are both bearish and consistent with such a move.

The Oil Index

Oil prices were able to rebound from yesterday's lows on short covering and news from Nigeria. There is a possible strike brewing in the Nigerian oil sector. The nations largest union says it is trying to stop mass firings and may disrupt supply from African's largest exporter. This news sparked short covering following yesterday's sharp decline. WTI closed the day near $56.70 and at levels we can expect to see US and global production continue to rise. Bottom line, capacity and availability remain high relative to demand and will likely cap gains in the short to long term.

The Oil Index rose in today's session, gaining 0.25% in a move confirming support at the short term moving average. The index remains within the near term consolidation range, close to recent highs, and likely to remain there into the near term. This consolidation/rotation may continue into the onset of next earnings cycle bar the emergence of bullish catalyst. Looking forward earnings growth outlook remains bullish, robust and supported by oil prices so I remain bullish for the long term.

In The News, Story Stocks and Earnings

Bitcoin, I had to bring it up, I couldn't help it. The worlds first, largest and most widely accepted digital currency gained another 15% or $2,000 to trade at $16,0000 today. That brings the YTD gains to just over 1500%. Bubble or not it's hard to not be interested in a trading vehicle making such gains. Whether Bitcoin stands the test of time is yet to be seen but I do believe we are witnessing the emergence of a new, global asset class. The CME's listing of BTC futures is only one example of how BTC and blockchain are gaining mainstream acceptance. Looking at if from that perspective I think the huge gains we have been seeing, and the equally huge corrections that follow them, will be commonplace until the market flushes out. That is of course assuming BTC doesn't fail, crash or get outlawed. Regardless of what happens to Bitcion, I am pretty sure blockchain is here to stay.

Dollar General reported before the bell and beat expectations. The company reported a 10.9% increase in YOY revenue, beating by $100 million, on strong comp store sales. The company reports comps at 4.3%, well ahead of expectations, as well as increased customer traffic and higher ticket averages. Improved margins were offset by higher expenses but guidance was maintained within the previously issued range. Shares of the stock jumped more than 6% in the premarket to gap up at the open just shy of the current all time high. Sellers stepped in at that point and pushed prices down to close with a gain of only 2.77%.

Shares of materials stocks got a lift in the afternoon portion of the session rumors Trump would begin his infrastructure push in January. The details are rumored to be released before the State of the Union Address and could provide additional tailwind for an already bullish market. Shares of Vulcan Materials, Martin Marietta Materials and Eagle Materials all jumped more than 3% on the news. The XLB Materials Sector SPDR gained 0.67% in response and is bouncing on the short term moving average. The indicators are mixed in the near term but are consistent with a rising market in the longer term. Resistance is at $60, a break above there would be bullish.

The Indices

Today's action was positive but the near term outlook remains mixed. The indices remain near all time highs and in consolidation, the question is what comes next? Today's leader is the Dow Jones Transportation Average with a gain of 1.30%. This index is looking strong and forming what could become a bullish flag pattern. The indicators are both strongly bullish if showing near term weakness and consistent, consistent with consolidation within an uptrend and setting up for a trend following bullish signal. Resistance is at the all time high, near 10,500, a break of which would be bullish and trend following. A fall below the bottom of my theoretical flag near 10,250 may be bearish but likely find support near 10,000 or just below that at the short term moving average.

The NASDAQ Composite posted the second largest gain, 0.53%, and formed a small green candle just above the short term moving average. The index remains in consolidation near recently set all time highs and above near, short and long term support levels with positive forward earnings outlook. The indicators remain weak in the near term, consistent with consolidation, but do not yet give sign of major correction. A break below the moving average may be bearish but likely find support near my long term up trend line in the region of 6,650. A move higher would trend following with first target at the all time high, a break above there would be bullish with target near 7,100.

The S&P 500 and Dow Jones Industrial Average closed with equal gains, 0.29%, and very similar looking charts. Starting with the broad market SPX the index created a small green candle moving up from yesterday's close/near term support. The move is trend following but weak and not supported by the indicators. Both MACD and stochastic persist in showing near term weakness consistent with ongoing consolidation within the long running bull market. Support is currently near 2,630, a break below there may find support near 2,600 and the short term moving average.

The Dow Jones Industrial Average also created a small green candle inside what is becoming a near term consolidation range/potential flag pattern. The candle is to the side of yesterday's red candle and fully engulfs it, suggesting prices may move higher in tomorrow's session. The indicators remain mixed but generally consistent with consolidation within an uptrend and set up for a bullish trend following signal. A break above resistance at the all time high would be bullish with target near 25,000 in the near term.

This week's price action has been a little worrisome but not overly alarming. Traders have a lot to think about with tax reform, economic data and the FOMC meeting at hand and that has given the market reason to pause. This pause is good for the market and may continue into the next week or longer, unless some catalyst emerges to drive it higher.

Tomorrow's NFP could be the catalyst to drive the market higher. Strong job gains is always a good thing for the economy, the consumer and forward earnings. After that tax reform could be the ticket to new highs, or the FOMC meeting, or a boost to earnings outlook or a combination of it all. Even without said catalyst the underlying conditions remains bullish and so do I. Will there be a Santa Rally into the end of the month? Maybe so. Will the bull market persist? By all indications, yes. I am cautiously bullish in the near term and firmly bullish for the long.

Until then, remember the trend!

Thomas Hughes



Don't forget to reward yourself with our 2017 End-of-Year Annual Subscription Sale!  You’ll save $1,147 when you renew now.

The options market isn’t waiting for you.  And you shouldn’t wait to keep Option Investor coming at the lowest prices you’ll see for at least a year! There isn’t a minute to spare. 
Order now.

Renew for as little as $495,
ONLY $1.35 per day

New Option Plays

Avoiding Risk Again

by Jim Brown

Click here to email Jim Brown

Editors Note:

Avoid indecisive markets with low volume. Thursday was a lackluster day where all the gains came at the open and the indexes traded flat to down the rest of the day. Investors are waiting on further clarification from the conference committee on the tax bill. That is going to be the cloud over the market until we know if the warts have been removed. Friday could be a risk off day ahead of potential weekend headlines.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Minor Rebound

by Jim Brown

Click here to email Jim Brown

Editors Note:

After several days of declines from rotation and tax worries, the indexes rebounded slightly. We were due for a minor rebound to ease the bearish pressures that were building in the market. There was not a major short squeeze but just a minor bounce at the open that traded sideways to down the rest of the day. There was no real pressure from either buyers or sellers. Volume was mediocre at 6.4 billion shares and only slightly higher than the 6.3 billion yesterday. Investors are still waiting for the outcome of the conference committee on the tax bill. That will be the market driver when it occurs. For tomorrow, nothing has changed in the market outlook.

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

AMAT - Applied Materials
The long call position was entered at the open.

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

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor

BULLISH Play Updates

AMAT - Applied Materials - Company Profile


Shares gapped up slightly at the open to inflate the option premium. The IBD raised their relative strength rating to 96 and earnings rating to 98. That puts them in the very top of the entire IBD stock universe. That means their relative strength is better than 95% of all stocks and earnings strength better than 97% of all stocks.

Original Trade Description: December 4th.

Applied Materials, Inc. provides manufacturing equipment, services, and software to the semiconductor, display, and related industries worldwide. It operates through three segments: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. The Semiconductor Systems segment develops, manufactures, and sells a range of manufacturing equipment used to fabricate semiconductor chips or integrated circuits. It offers products and technologies for transistor and interconnect fabrication, including epitaxy, ion implantation, oxidation and nitridation, rapid thermal processing, chemical vapor deposition, physical vapor deposition, chemical mechanical planarization, and electrochemical deposition; patterning, selective removal, and packaging products and systems that enable the transfer of patterns onto device structures; and metrology, inspection, and review systems for front- and back-end-of-line applications. The Applied Global Services segment provides integrated solutions to optimize equipment and fab performance and productivity, including spares, upgrades, services, remanufactured earlier generation equipment, and factory automation software for semiconductor, display, and other products. The Display and Adjacent Markets segment offers products for manufacturing liquid crystal displays, organic light-emitting diodes, and other display technologies for TVs, personal computers, tablets, smart phones, and other consumer-oriented devices, as well as equipment for flexible substrates. The company serves manufacturers of semiconductor wafers and chips, liquid crystal and other displays, and other electronic devices. Applied Materials, Inc. was founded in 1967 and is headquartered in Santa Clara, California. Company description from FinViz.com.

Expected earnings Feb 15th.

Wells Fargo initiated coverage on AMAT today with an outperform rating and $65 price target. Chips run the world and with new and faster chip types being announced almost monthly, the chip makers have to continually buy new manufacturing equipment from Applied Materials.

AMAT reported Q3 earnings of 93 cents on revenue of $3.97 billion. Analysts were expecting 91 cents and $3.94 billion. The company guided for the current quarter for earnings of $.94-$1.02 on revenue of $4.0-$4.2 billion.

Flash memory equipment sales surged 38%. Semiconductor revenue rose 14.2%. Sales of equipment to make display screens for phones and TVs rose 50%. Their order backlog rose 32% to $6.03 billion. The CEO said AMAT will see strong double digit growth in 2018 for all their lines of business.

"This is the most exciting time in the history of the electronics industry," said Dickerson. "AI will transform entire industries over the coming years, creating trillions of dollars of economic value, and Applied is uniquely positioned to deliver the innovative materials needed to enable next-generation memory and high-performance computing."

Shares had declined to $50 in the chipwreck over the last week. This is the 100-day average, which has been support since early 2016.

Position 12/7/17:

Long Feb $52.50 call @ $3.00, see portfolio graphic for stop loss.

DXCM - Dexcom Inc - Company Profile


No specific news. Nice gain to a two-month high.

DXCM will present an update on the company to be presented at 11:AM ET on Dec 14th at the BMO healthcare conference.

Original Trade Description: November 25th

DexCom, Inc., a medical device company, together with its subsidiaries, focuses on the design, development, and commercialization of continuous glucose monitoring (CGM) systems in the United States and internationally. The company offers its systems for ambulatory use by people with diabetes; and for use by healthcare providers in the hospital for the treatment of patients with and without diabetes. Its products include DexCom G4 PLATINUM system for continuous use by adults with diabetes; DexCom G4 PLATINUM with Share, a remote monitoring system; and DexCom G5 Mobile, a CGM system that directly communicates to a patient's mobile and its data can be integrated with DexCom CLARITY, which is a next generation cloud-based reporting software for personalized, easy-to-understand analysis of trends to improve diabetes management. The company also offers sensor augmented insulin pumps. It has a collaboration and license agreement with Verily Life Sciences LLC to develop a series of next-generation CGM products. The company markets its products directly to endocrinologists, physicians, and diabetes educators. Company description from FinViz.com.

DSCM was slammed for a $22 loss at the open on Sept 28th on news that Abbott Labs had made a glucose monitoring system that did not require the daily pinprick to draw a drop of blood. Shares fell from $67.50 to $44.50 and stayed there for a month. Investors feared diabetics would drop the DexCom monitoring products in a heartbeat and move to Abbott's system.

On November 1st, the company posted better than expected earnings and revenue and the stock began to rise again.

Expected earnings January 31st.

The DexCom CEO gave an interview on CNBC last week and he said the Abbott system will not have a dramatic impact to DexCom sales. He pointed out that they had been competing against the Abbott Libre system in Europe for three years and growth has continued to rise. It wa sup 80% in Q3 alone.

The CEO said the DexCom system does much more than the Abbott system. "Our system connects to phones. We share data with people who watch patients. We offer performance and accuracy that others do not. He said DexCom could release its own blood-free glucose monitoring device by the end of 2018. DexCom is also in a venture with Apple to monitor glucose through the Apple Watch. The data will go straight to the cloud for monitoring and there will be no need to communicate through a daily phone call. The watch will become your monitoring device.

The $20 drop was serious overkill and the stock is rebounding now that investors understand there is no immediate impact and there are new devices on the horizon.

We have to reach out to the March strikes because the February series has not yet been added. With earnings January 31st we need to hold an option dated after the earnings to avoid the rapid decline in premium in pre-dated options.

Position 11/27/17:

Long Mar $60 call @ $3.30, see portfolio graphic for stop loss.

GILD - Gilead Sciences - Company Profile


Gilead said it was buying privately-held startup Cell Design Labs for $567 million to boost its CAR-T cancer drug pipeline. Gilead will make an initial payment of $175 million and additional payments of $322 million upon meeting certain milestones. Shares dropped 57 cents on the news.

Original Trade Description: November 7th

Gilead Sciences, Inc. discovers, develops, and commercializes medicines in the areas of unmet medical needs in Europe, North America, Asia, South America, Africa, Australia, India, and the Middle East. The company's products include Descovy, Odefsey, Genvoya, Stribild, Complera/Eviplera, Atripla, Truvada, Viread, Emtriva, Tybost, and Vitekta for the treatment of human immunodeficiency virus (HIV) infection in adults; and Vemlidy, Epclusa, Harvoni, Sovaldi, Viread, and Hepsera products for treating liver diseases. It also offers Zydelig, a PI3K delta inhibitor, in combination with rituximab, for the treatment of certain blood cancers; Letairis, an endothelin receptor antagonist for the treatment of pulmonary arterial hypertension; Ranexa, a tablet used for the treatment of chronic angina; Lexiscan/Rapiscan injection for use as a pharmacologic stress agent in radionuclide myocardial perfusion imaging; Cayston, an inhaled antibiotic for the treatment of respiratory systems in cystic fibrosis patients; and Tamiflu, an oral antiviral capsule for the treatment and prevention of influenza A and B. In addition, the company provides other products, such as AmBisome, an antifungal agent to treat serious invasive fungal infections; and Macugen, an anti-angiogenic oligonucleotide to treat neovascular age-related macular degeneration. Further, it has product candidates in various stages of development for the treatment of HIV/AIDS and liver diseases, such as hepatitis C virus and hepatitis B virus; hematology/oncology; cardiovascular; and inflammation/respiratory diseases. The company markets its products through its commercial teams and/or in conjunction with third-party distributors and corporate partners. Gilead Sciences, Inc. has collaboration agreements with Bristol-Myers Squibb Company, Janssen R&D Ireland, Japan Tobacco Inc., Galapagos NV., and Spring Bank Pharmaceuticals, Inc. Company description from FinViz.com.

Earnings January 25th.

Shares of Gilead surged in late August after the company raised guidance on drug sales. Those gains faded as they approached the Q3 earnings date. The declined even further after the company lowered guidance on sales because of increased competition. However, producing $25 billion a year in revenue and having multiple drugs in the pipeline with one of them expected to produce $3.5 billion in 2018, is a reason to buy this stock on a dip to support.

The company reported earnings of $2.27 compared to estimates for $2.13. Revenue of $6.5 billion also beat estimates for $6.4 billion. Net income was $2.7 billion.

Gilead bought Kite Pharma for $12 billion earlier this year to gain access to their cancer immunotherapy drugs. The company is working on logistics for for launching sales of the newly approves non-Hodgkin lymphoma drug Yescarta developed by Kite. The drug costs $373,000 for a one-time treatment.

Gilead warned that Hep-C revenue was declining as fewer patients were deemed eligible for treatment and there was higher competition from companies like AbbVie. Sales of their Hep-C drugs declined from $3.3 billion to $2.2 billion in Q3. They lowered full year guidance for Hep-C from $9.5 billion to $9.0 billion.

At the same time they raised full year guidance on all sales from $24.0 billion on the low side to $24.5 billion with the upper rage at $25.5 billion.

While Hep-C sales may be slowing thanks to a 95% cure rate there are plenty of other drugs in the pipeline. Gilead has plenty of cash to develop and market new drugs. This is a good company and the drop to support is a buying opportunity.

Update 11/8/17: Mizuho raised the price target to $83. The analyst said Gilead did not overpay for Kite given the strength of the drug pipeline. Recent trial results have been positive on multiple drugs. The analyst reminded that Gilead paid $11 billion for Pharmasset in 2011 that enabled them to corner the Hep-C market for 5 years.

Update 11/30/17: Maxim Group upgraded Gilead from hold to buy with a $94 price target. Gilead closed at $75 giving it plenty of room to run.

Position 11/8/17:

Long Feb $75 Call @ $3.45, see portfolio graphic for stop loss.

MCK - McKesson - Company Profile


No specific news. Shares retraced another 46 cents of the nearly $7 gain on Monday.

Original Trade Description: November 15th

McKesson Corporation provides pharmaceuticals and medical supplies in the United States and internationally. The company operates in two segments, McKesson Distribution Solutions and McKesson Technology Solutions. The McKesson Distribution Solutions segment distributes branded and generic pharmaceutical drugs, and other healthcare-related products; and provides practice management, technology, clinical support, and business solutions to community-based oncology and other specialty practices. This segment also provides specialty pharmaceutical solutions for pharmaceutical manufacturers; and medical-surgical supply distribution, logistics, and other services to healthcare providers. In addition, this segment operates retail pharmacy chains in Europe and Canada, as well as supports independent pharmacy networks in North America and Europe; and supplies integrated pharmacy management systems, automated dispensing systems, and related services to retail, outpatient, central fill, specialty, and mail order pharmacies. This segment serves retail national accounts, including national and regional chains, food/drug combinations, mail order pharmacies, and mass merchandisers; and institutional healthcare providers, such as hospitals, health systems, integrated delivery networks, and long-term care providers, as well as offers its services to pharmaceutical manufacturers. The McKesson Technology Solutions segment provides clinical, financial, and supply chain management solutions to healthcare organizations. McKesson Corporation was founded in 1833 and is headquartered in San Francisco, California. Company description from FinViz.com.

Earnings Jan 25th.

McKesson reported earnings of $3.28 that beat estimates for $2.80. Revenue of $52.06 billion beat estimates for $51.73 billion. So far, so good. However, they lowered 2018 guidance from $7.10-$9.00 to $4.80-$6.90. There were multiple reasons for the lowered guidance and none of them were sales related.

Amortization of acquisition related intangibles of $2.40-$2.70. Acquisition related expenses and adjustments of $.90-$1.10. Inventory related charges for LIFO adjustments of up to 20 cents. Restructuring charges of $1.10 to $1.40. "Other" adjustments of $1.40-$1.60. Given all those charges it is amazing they had any earnings left.

However, the line everyone overlooked was the guidance for "adjusted" earnings without those charges and that was $11.80-$12.50 for 2018. If you put a market PE of 18 on earnings of $12, you get a $216 share price. MCK shares were $138 today.

Shares have been holding over support at $135 for three weeks and suddenly rebounded $2.69 today in a very weak market. This relative strength should protect us against a further market decline.

Options are expensive so you can use the optional short call to make it a spread.

Position 11/16:

Long Feb $145 call @ $4.90, see portfolio graphic for stop loss.
OPTIONAL: Short Feb $160 call @ $1.59, see portfolio graphic for stop loss.

PYPL - PayPal - Company Profile


No specific news. If Paypal announced you could now buy bitcoins from your Paypal balance, the stock would gain 25% in a single day. With Square moving in that direction I would not doubt we will get a Paypal announcement like that soon.

Original Trade Description: November 29th

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.

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.

PayPal just launched domestic payment services in India with 1.324 billion people.

Paypal signed a deal to sell $5.8 billion in its credit card portfolio to Synchrony Financial. The company said that would free up cash for acquisitions and expansion. The company raised its revenue forecast to $3.64-$3.70 billion for the current quarter. They raised earnings guidance from 37-39 cents to 52-59 cents.

Paypal closed exactly on horizontal support and the 30-day average, which has been support since February. The company is more of a bank than a tech stocks and should benefit from any further rotation into banks.

The original PYPL position was stopped out in the Nasdaq crash on Nov 29th and we rentered this new position on Nov 30th.

Update 12/2: Keybanc believes the Venmo payment app is going to be a breakout hit in 2018 and raised his price target for Paypal from $85 to $90. In a recent survey of 500 consumers, Venmo was the preferred payment option for 76% of respondents. Paypal is forecasting $75 billion in Venmo payments in 2018 and they get an estimated 4 cent EPS boost for every $10 billion.

Position 11/30/17:

Long Feb $75 call @ $3.75, see portfolio graphic for stop loss.

SMH - Semiconductor ETF - ETF Profile


Thank you Broadcom for reenergizing the chip sector. The SMH gained 1% for the day.

Original Trade Description: December 2nd.

VanEck Vectors Semiconductor ETF (SMH) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS US Listed Semiconductor 25 Index (MVSMHTR), which is intended to track the overall performance of companies involved in semiconductor production and equipment. The index seeks to track the most liquid companies in the industry based on market capitalization and trading volume. Industry Leaders: Index methodology favors the largest companies in the industry. Global Scope: Portfolio may include both domestic and U.S. listed foreign companies allowing for enhanced industry representation.

The semiconductor sector leads the Nasdaq because chips affect every tech product and service. The semiconductor sector was down -8% at the low on Friday in only four days. The decline stopped at the 50-day average, which has been support several times over the last year.

If the Nasdaq is going to move higher the chip sector will lead it.

Position 12/4/17:

Long Feb $100 call @ $3.50, see portfolio graphic for stop loss.
Short Feb $105 call @ $1.30, see portfolio graphic for stop loss.
Net debit $2.20.

TRN - Trinity Industries - Company Profile


No specific news. Minor rebound back to the 3-year highs.

Original Trade Description: December 4th.

Trinity Industries, Inc. provides various products and services to the energy, chemical, agriculture, transportation, and construction sectors in the United States and internationally. Its Rail Group segment offers railcars, including autorack, box, covered hopper, gondola, intermodal, tank, and open hopper cars; and tank cars, as well as railcar maintenance services. This segment serves railroads, leasing companies, and industrial shippers of various products. The company's Railcar Leasing and Management Services Group segment leases tank and freight railcars to industrial shippers and railroads; and provides management, maintenance, and administrative services. As of December 31, 2016, this segment had a fleet of 85,110 owned or leased railcars. Its Construction Products Group segment offers highway products, such as guardrail, crash cushions, and other barriers; aggregates, including expanded shale and clay, crushed stone, sand and gravel, asphalt rock, and other products, as well as other steel products for infrastructure-related projects; and trench shields and shoring products for the construction industry. This segment offers aggregates to concrete producers; commercial, residential, and highway contractors; manufacturers of masonry products; and state and local municipalities. The company's Energy Equipment Group segment manufactures structural wind towers; utility steel structures for electricity transmission and distribution; storage and distribution containers; cryogenic tanks; and tank heads for pressure and non-pressure vessels. Its Inland Barge Group segment provides deck barges, and open or covered hopper barges to transport grain, coal, and aggregates; and tank barges to transport chemicals and various petroleum products, as well as fiberglass reinforced lift covers for grain barges. Trinity Industries, Inc. was founded in 1933 and is headquartered in Dallas, Texas. Company description from FinViz.com.

More than 11,500 January $35 calls traded on Monday against an open interest of only 325. The excitement was generated by activist shareholder ValueAct Holdings, which has acquired 1.3 million shares since October and now owns 18.595 million and more than 12% of the company. Their last purchase was 43,000 shares on November 16th.

In October, the courts reversed a $663 million judgment against Trinity. The claim was for fraud after the company changed its formula for the steel in highway guardrails in 2005 and did not tell the Federal highway system. Billions of dollars of these rails have been installed around the country and after extensive testing the government found nothing wrong but complained anyway. A Texas court in 2015 awarded the judgment and Trinity appealed. The appeals court wrote a 42-page opinion tossing the case and reversing the judgment.

Earnings estimates for Trinity for Q4 have risen 31 cents to 42 cents per share over the last two months. That is a 300% rise. For the full year estimates have risen from $1.25 to $1.44.

Earnings January 24th.

Shares closed at a new 52-week high on Monday and appear destined to make higher highs. That massive amount of option volume at the money at $1.25-$1.50 per share represents $1.6 million in premium at an average of $1.40 per share. I am recommending we follow this trade only buy a higher strike.

Position 12/5/17:

Long Jan $37 call @ $1.20, see portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

DIA - Dow SPDR ETF - ETF Profile


Minor rebound after a couple days of weakness. Lots of volatility ahead.

Original Trade Description: November 16th

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 still extremely overbought. It is due for a rest. The earnings cycle is over. Post earnings depression is here. The short squeeze is likely to fail. The tax plan faces an uphill battle and January could see a major market decline. It has been over 500 days since the market had a 5% decline and we average twice a year. We are due.

This is highly speculative. I am using March options because I want to have as much time as possible for this scenario to play out.

Position 11/17/17:

Long March $230 put @ $5.16, see portfolio graphic for stop loss.
Short March $210 put @ $1.71, see portfolio graphic for stop loss.
Net debit $3.45.

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