Option Investor

Daily Newsletter, Monday, 12/11/2017

Table of Contents

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

Market Wrap

Santa Claus And Central Banks

by Thomas Hughes

Click here to email Thomas Hughes


US indices drift higher in hopes of a Santa Rally while traders await the December FOMC policy statement. Aside from the attempted bombing in NY there was very little in the way of news leaving events scheduled for later in the week to dominate the minds of market participants. Along with the FOMC meeting be on the lookout for key data, both PPI and CPI are due out before policy statement while retail sales, the Empire State manufacturing index and industrial production/capacity utilization will all come after.

Asian markets were up across the board although gains were not evenly divided. With little in the way of data or business news to drive trading markets were focused on the FOMC and other central banks scheduled to release statements this week. China led with advances in the range of 1% while Australia lagged with a gain barely above break even. European markets were muted in the face of central bank risk; the Swiss National Bank, the European Central Bank and the Bank Of England will all release their policy statements within 18 hours of the FOMC. The events are not expected to bring policy change to any region but are likely to induce some volatility in the currency market.

Market Statistics

Futures trading was weakly positive all morning. The trade hovered just above break even going into the opening bell resulting in an opening gain less of less than 1 point for the SPX. The broad market test break even for support within the first 15 minute of tradings and then proceeded to trade up and sideways from there. The early high, near 0.20%, was set just after 10AM and held until early afternoon. Shortly after 1 the broad market moved up to set a new intraday high near the current all time high but that move was rejected. The index resumed its sidewinding until late in the day when a surge put the indices at new highs just before the closing bell.

Economic Calendar

The Economy

Only one economic report today, the JOLTs report. According to the Bureau of Labor Statistics the number of job openings hovered near all time highs last month, near 6.0 million, where it has been trending the last 24 months. The number of hires increased slightly to 5.6 million while separations were little changed at 5.2 million. The number of quits, seen as a measure of workforce confidence, held steady near 2.2% or 3.2 million and also near record levels. The data shows persistently high levels of job openings in the face of strong hiring numbers and supportive of ongoing labor market health. Looking forward, if employers can't fill needed positions they may start paying more or doing other things to attract and retain employees.

Moody's Survey of Business Confidence jumped another 0.7% in the last week to hit 37.2 and a 2 year high. The past month has seen a run up in confidence as US tax reform advances and economic data shows upward momentum. Mr. Zandi says the global economy is going to end 2017 on a strong note, that sentiment is upbeat and strongest in the US. Forward outlook is also positive with growth expected into the spring of 2018 at least.

The 3rd quarter is closed. 100% of S&P 500 companies have reported with an index average 6.4% earnings growth. This is below the 8-10% expected earlier in the year but well above the 1.9% expected at the start of the reporting cycle. The final rate of growth is 4.5% above the 1.9% expected at the start of the season and above expectations in that regard; based on trend a 4% gain was expected. Looking forward, the 4th quarter is expected to post a gain of 10.6% but we can expect that to fall over the next 2 months. Based on the trends it is possible 4th quarter earnings estimate for the whole S&P 500 could fall to 3-4% by the start of the reporting season.

2018 is still expected to be a strong year for earnings growth. The S&P 500 is projected to post double digit quarterly growth all year with the full year coming in at 11.2.%. The first half of the year is expected to average 10.4% with that growing to 11.4% in the second. If tax reform passes it is widely accepted that these numbers will grow with a possibility of doubling.

The Dollar Index

The Dollar Index drift sideways in today's session creating a small doji like candle. It has been trapped within a range over the past 2 to 3 months as the market wound up on central bank expectations and economic data. It is now trading near the mid point of that range and waiting on the central bankers for the next clue to direction. We know, more or less, that the FOMC is going to raise rates, we think the ECB/BOE/SNB will not. In this scenario the dollar should rise but there is risk. The risk is in how the statements may vary from expectations and the net reaction to the dollar. If the dollar is able to rise versus the pound, euro and franc the index will likely rise along with it. Support targets are at $93.35 and $92.50, resistance targets are $94.15 and $95.12.

The Gold Index

Gold shed nearly a half percent in today's action as the dollar held firm. The metal has been under pressure with FOMC expectations on the rise, tax reform at hand and the dollar off its lows. Now that it is below the $1,250 support target there is a chance for a deeper move, perhaps as low as $1,220 or $1,200. The risk is of course the central bank meetings and how they impact the dollar. A stronger dollar will likely lead to lower gold prices while a steady or weaker dollar will not.

The Gold Miners ETF GDX tried to rally in the early portion of the session but fell back under the weight of falling gold prices. The ETF created a small bodied red candle with visible upper shadow indicative of resistance. Today's action is just off the 5 month low and looks poised to test or surpass that low in the near term. The indicators are both bearish and gaining strength in support of such of move with the caveat that longer term trading ranges remain in play. Downside target is near $21 with a possible move down to $20 should gold prices suffer a serious decline.

The Oil Index

Oil prices rose more than 1% in today's session to settle near $57.90. The price was supported by a shut down of the Forties pipeline despite signs US production continues to rise. The last week's rig count rose to a 5 month high in further evidence high prices will bring more supply onto an already flush market. WTI is now trading a mere dollar below the recently set long term high and looking like it might retest that level. Longer term outlook remains tepid; the OPEC production cap is helping but there is still ample supply to cap upside potential for prices. Resistance target is $58.95, a break above there would be bullish.

The Oil Index moved up on today's rise in oil prices but gains were capped at resistance. Resistance appears to be just above the 1,275 level and evidenced by the long upper shadow on today's candle and several candles formed over the past week. The indicators are rolling over into trend following bullish entry signals that suggest resistance will continue to be tested and possibly broken. Even if oil prices should fall from today's close they remain high and consistent with robust earnings growth.

In The News, Story Stocks and Earnings

Bitcoin is all the rage and I must admit I own a little. The cryptocurrency future is now trading live on the CBOE and at a premium to the underlying asset. Many had expected the futures trade to spark correction through short selling but this didn't happen, the futures have no physical tie to BTC and are a pure speculative instrument.

The price quoted for BTC comes from the Gemini Exchange which varies greatly from other exchanges, and those from each other. One of the biggest issues with BTC trading is a lack of order routing and "best execution", when you trade its with the other people using the same exchange as you. Anyway, futures action is suggesting a 10% premium to today's BTC prices with a January settlement, volume is low but steady and did cause circuit breakers to trip.

Shares of Overstock.com surged more than 20% on news Morgan Stanley had taken a stake in the company. SEC filing reveal Morgan Stanley owns more than 11% of the company which announced earlier this year it was investing heavily into the Bitcoin ecosphere. That news sent the stock up more than 200% and will likely drive gains into the future as more businesses make it possible to use the digital tokens in daily life.

The VIX fell more than -1% on today's action. The fear index is moving lower and below the 10 level, poised to retest recent and long term lows. Both indicators are bearish and pointing lower, suggesting support will be tested, but both show signs of support at this level. The stochastic in particular has been trending above the lower signal line and consistent with a trading range. This does not mean reversal, or even really suggest it, but it does give reason to think options have gotten as cheap as we can expect them to be.

The Indices

Today's action was weak but positive in most cases. The one stand out is the Dow Jones Transportation Average which shed roughly -0.50%. The transports created a small red candle just below the all time high and looking like it may move lower in the near term. The indicators are both strongly bullish relative to the current high but showing weakness consistent with consolidation in the nearest term. The index may move down to 10,250 or 10,000 if the first target is broken. Looking to the longer term, the current MACD peak is a multiyear extreme which leads me to believe today's action is consolidation leading to continuation of near, short and long term up trends.

The tech heavy NASDAQ Composite led the gainers with an advance near 0.50%. The index created a small green bodied candle to the side of Friday's small red one and completely erasing it. This action is a continuation of a trend following bounce from support which occurred last week at the short term moving average. The indicators remain weak but have begun to roll over into trend following signals with stochastic in the lead. It is firing the weak/early trend following bullish crossover which often occurs during periods of consolidation. A move higher may find resistance at the current all time high, a break above there would be bullish. If the index falls within the consolidation range first support target is the short term 30 day moving average.

The broad market S&P 500 saw a little late day strength which drove it up to close at the high of the day and at a new all time closing high. The index is currently extending a bounce from the support within an uptrend and likely to go higher. The indicators are a bit mixed but consistent with a trend following entry. MACD is bullish and ticking higher, bullish, while stochastic begins to roll over in confirmation of the signal. There may be resistance at the all time intraday high, a break above there would be bullish. Upside target is still 2,700. First target for support is near 2,625.

The Dow Jones Industrial Average brings up the rear with a gain of 0.23%. The index created a small green bodied candle closing at the high of the day and a new all time closing high. The index is moving higher following a bounce from support and in line with prevailing trends. This may move continue in the near term although the indications are mixed. MACD momentum remains bullish although it is in decline while stochastic is pointing lower with only early signs of support, neither giving firm indication of direction. A break to new all time highs would be bullish, signs of resistance at this level may be bearish.

The indices are in consolidation with a chance of moving higher. Today's action had them trading right at the all time highs and looking like they could go higher. The problem is that the indications are still mixed and there is at least one good reason to sit tight and wait; the FOMC. The bank is not expected to do the unexpected but that doesn't mean it won't. So long as forward outlook remains good, earnings growth is on the table and tax reform is moving forward the market should continue rising in the long term. The near term is a little cloudier; there could be a correction but no real sign of one yet. If there is I'll be ready to buy on the dips. I am cautiously bullish in the near term, firmly bullish in the long.

Until then, remember the trend!

Thomas Hughes



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New Option Plays

Slow and Steady

by Jim Brown

Click here to email Jim Brown

Editors Note:

When stocks have either risen or declined 5% over the last month, it makes slow and steady very appealing. Option premiums on the stock rockets are extremely overpriced and with the potential for a market hiccup over the next 5 weeks, cheap premiums are a good investment.


PGR - Progressive Corp - Company Profile

The Progressive Corporation, through its subsidiaries, provides personal and commercial property-casualty insurance, and other specialty property-casualty insurance and related services primarily in the United States. Its Personal Lines segment writes insurance for personal autos, and recreational and other vehicles. This segment's products include personal auto insurance; and special lines products, including insurance for motorcycles, ATVs, RVs, mobile homes, watercraft, and snowmobiles. The company's Commercial Lines segment provides primary liability, physical damage, and other auto-related insurance for autos, vans, and pick-up trucks, and dump trucks used by small businesses; tractors, trailers, and straight trucks primarily used by regional general freight and expeditor-type businesses, and non-fleet long-haul operators; dump trucks, log trucks, and garbage trucks used by dirt, sand and gravel, logging, and coal-type businesses; tow trucks and wreckers used in towing services and gas/service station businesses; and non-fleet taxis, black-car services, and airport taxis. Its Property segment provides residential property insurance for homeowners, other property owners, and renters, as well as offers personal umbrella insurance, and primary and excess flood insurance. The company also offers policy issuance and claims adjusting services; home, condominium, renters, and other insurance; and general liability and business owners policies, and workers' compensation insurance, as well as sells personal auto physical damage and auto property damage liability insurance in Australia. In addition, it offers reinsurance services. Company description from FinViz.com

Expected earnings January 16th.

Despite the hurricanes in Aug/Sep, Progressive reported earnings of 41 cents that rose 13.9% and beat estimates for 30 cents. Premiums written increased by 18% to $7.1 billion. Premiums earnings rose 14% to $6.5 billion. Premiums written benefitted from a 15% rise in prices. Operating revenues rose 15% to $2.1 billion. Investment income rose 20%, fees and other revenue rose 16% and service revenues rose 22%. These are outstanding numbers despite the impact from the hurricanes on auto losses.

At the end of the quarter there were 5.9 million direct auto policies in force and 5.5 million agency auto policies in force, an 11% overall rise.

In early November, they reported premiums written in October totaled $2.758 billion, up 22% from Oct 2016. Total personal policies in force rose 9% to 15.950 million and commercial policies rose 5% to 643,500.

There is no bad news anywhere in their financial disclosures.

Shares have been rising steadily over the last month and Friday was a new high close. Progressive has completely ignored all the recent market volatility.

Buy Feb $55.00 call, currently @ $1.55, no initial stop loss.


No New Bearish Plays

In Play Updates and Reviews

Inch by Inch

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow and S&P closed at record highs again in a calm market. The market gains came at the open and the close with 6 hours of dormant in the middle. There was no excitement but all the big cap indexes posted gains. The transports, biotechs and the Russell 2000 all posted losses.

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

CGNX - Cognex
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


Barron's put AMAT on its 10 best stocks for 2018 list and shares only rose 19 cents. Seven of the 10 stocks posted decent gains and AMAT was not one of them.

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.

Update 12/7/17: 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.

Position 12/7/17:

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

CGNX - Cognex - Company Profile


No specific news. Shares faded slightly to open the position.

Original Trade Description: December 9th.

Cognex Corporation provides machine vision products that capture and analyze visual information in order to automate tasks primarily in manufacturing processes worldwide. The company offers machine vision products, which are used to automate the manufacturing and tracking of discrete items, such as mobile phones, aspirin bottles, and automobile tires by locating, identifying, inspecting, and measuring them during the manufacturing or distribution process. Its products include VisionPro, a software suite that provides various vision tools for programming; displacement sensors with vision software for use in 3D application; In-Sight vision systems that perform various vision tasks, including part location, identification, measurement, assembly verification, and robotic guidance; In-Sight vision sensors; ID products, which are used for reading codes that are applied on discrete items during the manufacturing process, as well as have applications in logistics automation for package sorting and distribution; DataMan barcode readers; barcode verifiers; vision-enabled mobile terminals for industrial barcode reading applications; and barcode scanning software development kits. The company sells its products through direct sales force, as well as through a network of distributors and integrators. Cognex Corporation was founded in 1981 and is headquartered in Natick, Massachusetts. Company description from FinViz.com.

Cognex is a tech stock where growth is booming. Every manufacturer is looking to automate as many tasks as possible and Cognex provides them the opportunity with robotic vision equipment that can inspect and track items much faster than humans.

For Q3 they reported earnings of $1.14 that beat earnings for $1.05. Revenue of $259.7 million beat estimates for $256.8 million. They guided for the current quarter for revenue of $170-$180 million and analysts were expecting $155 million. That was a major guidance beat.

Expected earnings Jan 29th.

They announced a 2:1 split that was effective on December 4th. Shares immediately sank $7 on post split depression and Nasdaq rotation but have rebounded the past two days. The 50% decrease in the stock price also reduced the option premiums by 50% and made them cheap enough to buy.

Position 12/11/17:

Long Feb $67.50 call @ $3.20, see portfolio graphic for stop loss.

DXCM - Dexcom Inc - Company Profile


No specific news. Big $3 drop on no news. This was puzzling. Volume of 1.77 million was below the average of 2.26 million. Friday was a 2-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.

DXCM 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


Two different articles suggested Gilead would benefit from the tax bill. They have $32 billion in cash overseas that could come home when the repatriation tax rate declines from 35% to 10-14%. The company also got a boost after its presentation on CAR-T therapies at the American Society of Hematology conference. Juno presented at the same conference on the same topic and shares fell 12% today.

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.

Update 12/7/17: 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.

Position 11/8/17:

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

MCK - McKesson - Company Profile


No specific news. New 6-week high.

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.

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


No specific news. Only a minor gain in the chip sector. Somebody is still taking profits.

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. Holding at 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


The Dow posted another minor gain to close at a new high. The Dow is determined to hit 25,000 by the end of December.

I have considered closing the position but the potential for a negative tax headline, government shutdown, January market crash, etc is too strong to be unprotected.

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.

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