Option Investor

Daily Newsletter, Thursday, 12/14/2017

Table of Contents

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

Market Wrap

Growth Forecasts Raised, Market Holds Steady

by Thomas Hughes

Click here to email Thomas Hughes


The FOMC and ECB up their forward growth estimates but toned down their statements, and the market held steady. Counter intuitive as that may be it is consistent with economic trends; the data isn't quite as good now as we thought it would be a few months ago, but it still suggests growth is expanding ahead of us.

International indices closed the day lower on the FOMC, BOE and ECB policy statements. Losses in Asia were minor and in the range of -0.25%. Losses in the EU and UK were more substantial but still only in the range of -0.5% to -0.75%. The statement were more or less as expected, as were comments made by Janet Yellen and Mario Draghi, and did not provide stimulus for higher prices.

Market Statistics

Futures trading was flat to positive all morning. The trade held fairly steady through the data, 2 central bank statements (3 counting the SNB), and right into the opening bell. The open was calm, quiet and without remarkable event. Trading was flat until about 11AM when the market turned lower and then downward pressure persisted into the close. Losses were not great but the indices did close at or near the lows of the day.

Economic Calendar

The Economy

There was a fair amount of economic data released today and it was good. Starting with Retail Sales sales jumped 0.8% and more than 0.5% better than expected. Sales are up 5.8% YOY and 5.2% YTD driven by rising employment. The October figure was revised higher to 0.5% from 0.2%.

Initial claims for unemployment fell -11,000 to 225,000 and very near the historic low. The last week's figure was not revised. The four week moving average of claims fell -6,750 to 234,750 and is also just above the historic low. On a not adjusted basis claims fell by -13.7% versus an expected -9.10% and are down -7.7% from last year. Claims taking from Puerto Rico and the Virgin Islands has still not returned to normal but we've past the point at which they are expected to have noticeable impact. Regardless, claims continue to trend at the historic lows and are consistent with ongoing labor market health if not improvement.

Continuing claims fell -27,000 to 1.886 million from last week's upwardly revised figure. Last week's figure was revised higher by 5,000. The four week moving average of claims rose by 4,500 to 1.918 million but remains low and trending near the historic low, consistent with labor market health.

The total number of Americans filing for unemployment benefits jumped 346,039 in this week's data, remembering that this figure lags initial claims by 2 weeks. This figure would be a shock if not for the fact it is seasonally expected and well within trend. We can now expect total claims to trend sideways for a few weeks before spiking again in the first half of January. So long as the peak is lower than last years the labor market will still be in recovery mode. Total claims are down -5.8% over the same week last year and are expected to continue trending lower into the foreseeable future.

Flash PMI readings for both manufacturing and services were released by Markitt at 9:45AM. The manufacturing index came in at 55, above expectations and the previous month's 53.9. The services index came in at 52.4, expansionary but well below expectations of 54.6 and the previous month's 54.5.

Business Inventories fell -0.1% and as expected and consistent with the -0.1% drop in the previous month. On a year over year basis inventories are up 3.5%.

The Dollar Index

The Dollar Index steadied after yesterday's fall. The fall was due to a dovish tone in the Fed statement, concern over low inflation and a relaxed view of rate hikes in 2018. Today's bounce is due to a similarly dovish tone to the ECB and BOE meetings which consequently weakened the euro and pound. The index is still trapped within the near term trading range, near the middle of a short term trading and looking like it will remain near these levels for the foreseeable future. Now it's back to the data for hints, signs and portents of what the bankers will do in January.

The Gold Index

Gold prices edged up even as the dollar regained ground. The metal gained about $8 to trade near $1,255 to close at a 5 day high. Even so, the metal remains below resistance targets just above $1,263 and poised to move lower. Now that the central bank meetings are past with no unexpected changes to policy the market can focus on the data and tax reform. The combined House/Senate tax bill is expected to pass very soon, possibly tomorrow, and is potential catalyst for gold. Support target is near $1,240, a break below there would be bearish. A move higher will face resistance at $1,260-$1,265, a break above there would be bullish.

The Oil Index

Oil prices had a volatile day moving up sideways and down in turn. The day's action is a result of conflicting signals that show some signs of tightening with an otherwise well supplied market. WTI end the session with a gain near 0.75% as traders chose to focus on yesterday's surprise draw of crude, OPEC's production cap and pipeline outages. The EIA's upward revision to US production growth did little to dampen spirits although it is another indication of high capacity. According to both the EIA and IEA oil prices are expected to trend near $57.50 over the next few months and then fall sharply in the second half of 2018 as global supply outpaces demand.

The Oil Index tried to move higher but the gains were capped. Today's candle is a small green with visible upper shadow just to the side of yesterday's candle. Prices have been consolidating over the past 6 weeks as oil prices top out near $57.50 but look like they are heading higher now. The index has bounced from the short term moving average in line with the prevailing trend and that move is now confirmed by the indicators. Today's action looks like a small flag consolidation within the 6 week range with target near 1,290 to 1,300. Looking forward the sector is still expected to see substantial earnings growth over the next few quarters. I expect this to support prices if not drive them higher in the near to short term.

In The News, Story Stocks and Earnings

Disney confirmed it would be buying assets of Fox spun-off of the parent company. The deal include movie and TV studio properties alongside cable and international TV. According to the deal shareholders of FOX will receive 0.2745 shares of Disney in return for the assets. This values the deal at over $66 billion. Bob Eiger, also as part of the deal, will remain at the helm of Disney until the end of 2021. Shares of Disney gained more than 3% to close at a 7 month high.

The retail sector got a boost from today's Retail Sales data but the gains did not hold. The Retail Sector SPDR created a long red candle engulfing nearly two week's of trading and forming a potentially bearish dark cloud cover. There some signs of support within the candle but the indicators both show divergences consistent with lower prices. Support may be near $43.50 to $44.00, a break of which may go as low as the long term moving average before finding support again. A bounce from or near current levels would confirm the near term up trend with a possibility of moving higher. Resistance is at the top of the near term consolidation range, near $45, a break of which would be bullish.

Owners of Snyder's-Lance got a tasty treat today, the company is looking into a possible sale to Campbell's. An anonymous source leaked news that the company had hired investment bankers to assess the merits of such a sale and that there were possibly two companies interested. No terms were disclosed which left imagination to drive prices. Shares of Snyder's-Lance jumped more than 12% to hit a new all time high.

The after hours were active as well with several earnings releases from early reporters. Adobe, Oracle and Costco all reported better than expected top and bottom line results.

The Indices

The indices moved lower but action was weak. The Dow Jones Transportation Average led with a loss of -0.64% creating a red bodied with potentially bearish implications. The candle is technically a dark cloud cover but a very small one and within a near term consolidation range, more consistent with continuation of consolidation than reversal. Support may be found near 10,250 or just below at the short term moving average, a break below there would be bearish. The indicators are weakening after hitting bullish peaks, MACD a multiyear extreme peak, and setting up bullish continuation signals although those signals have not fired yet.

The tech heavy NASDAQ closed with a loss of -0.38% forming a small red bodied candle above the short term moving average. Today's action may indicate further downside but if so I expect it to be limited. The index is bouncing higher in the nearest term, within a near term consolidation range with mixed indicators. This combination is consistent with consolidation within an uptrend with no reason to end. MACD remains bearish but is very weak, if there is a move lower support is likely to be found near 6,800 and the short term moving average. A break below the moving average may be bearish but also likely to find support relatively quickly. A bounce from the moving average would be bullish and trend following.

The S&P 500 also created a small red candle and looks like it may move lower in the near term. The indicators are mixed but showing divergences that could lead to correction. A move lower may find support near 2,620 and the short term moving average. A break below the moving average would be bearish with targets near 2,600 and 2,550. The caveat is good news; good news could firm support and send the index up to set new highs. That would be bullish with target near 2,700.

The Dow Jones Industrial Average also created a small red candle just at the all time high and forming a weak dark cloud cover. The candle signal is weak but the indicators concur, both of which are showing divergences from the freshly set all time high. A pull back from this level may find support at 24,000, a break below there would be bearish.

Price action is looking a little tepid and no wonder; the market is trading at all time highs and is extended on earnings hope and tax reform. The candles and the indicators suggest a small pull back or consolidation is in the making but there is risk; earnings after the bell suggest strength in the upcoming cycle, tax reform news could hit the wires before the open tomorrow and GDP outlook is on the rise. The charts make me nervous for the near term because there could be correction. The underlying conditions make me nervous to be nervous because I just don't see a reason to sell other than rotation. I may be adding a brick to my wall of worry but I am cautious for the near term, still firmly bullish for the long.

Until then, remember the trend!

Thomas Hughes



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New Option Plays

Turnaround Thursday

by Jim Brown

Click here to email Jim Brown

Editors Note:

We have had a lot of weak Thursdays recently but today was still painful. As investors, we know the market does not go up in a straight line. Retracements happen. Today was worrisome because everything seemed to be lining up for a run to Dow 25,000 and 7,000 on the S&P by the end of December. The tax bill is getting closer to passage and most of the warts have been removed. The FIFO and corporate AMT have been dropped. Today could have been a sell the news event after months of run-up. There are still challenges. There are multiple senators still on the fence or a solid no and two senators are in the hospital. That makes Monday's expected vote questionable. They cannot put it off too long or the new democrat senator from Alabama will reduce their margin of victory to only 1 vote and with people still on the fence it could be touch and go. The next 3-5 days could be very volatile depending on events in Washington.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

A Revolting Development

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow gained 87 points at the open but lost 77 points at the close for a -164 point decline. The market, other than the Dow, had been struggling for the last several days. The Dow was the leader thanks to 2-3 big gainers every day. Today that tide turned and the 24 of the Dow components posted losses. Declining -164 points from the intraday high, in almost a straight line, suggests there was a change in market sentiment. Volume was moderate at 6.7 billion shares. With the tax bill still facing some challenges in getting passed in the senate and the democrats saying they will not go along with another temporary funding resolution, the next several days could be rocky.

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

TGT - Target
The long call position was entered at the open.

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BULLISH Play Updates

AMAT - Applied Materials - Company Profile


No specific news. No material movement but positive in a down market.

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. Down with the weak tech sector.

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.

GILD - Gilead Sciences - Company Profile


Down on news their breakthrough cancer treatment Yescarta had only been given to 5 patients despite long waiting lists. The $373,000 treatment is not yet approved by Medicare, Medicaid or any private insurance. There is a long list of people who want to take it but until it is approved for payment, they are out of luck. Numerous candidates on the lists have already died because they could not afford it.

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.

PGR - Progressive Corp - Company Profile


No specific news. Down with the market.

Original Trade Description: December 11th.

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.

Update 11/13: Progressive reported results for November. Premiums written rose 20% to $2.022 billion. Premium earned rose 17% to $2.113 billion. Policies in force for autos rose 11%, business policies +20%. It was a very good month for Progressive. Shares closed at a new high.

Position 12/12/17:

Long Feb $55.00 call @ $1.80, see portfolio graphic for stop loss.

PYPL - PayPal - Company Profile


Nomura raised their price target to $82 saying the $20 billion in liquidity and cash on hand could fund a major buyback or a serious acquisition.

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.

Update 12/13: BMO Capital raised their price target from $80 to $85 saying the sale of the credit business will reduce expenses and increase earnings per share. The sale will free up $1.0 billion in cash for 2018 and $2.5 billion in 2019.

Position 11/30/17:

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

SMH - Semiconductor ETF - ETF Profile


No specific news. The Semiconductor Index was flat again for the day. No rush back into chips yet.

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.

Update 12/12: The industry group, Semi, said at the annual Semicon Japan exposition today that sales of semiconductor manufacturing equipment would rose 35.6% in 2017 to a record high of $55.9 billion. The forecast for 2018 is for a 7.5% rise to $60.1 billion and another record.

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. Shares retreated with the market.

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.

Update 12/12: Trinity announced a plan to spin off the company's infrastructure related businesses to shareholders. The tax free spin will occur in late 2018. The infrastructure businesses are leaders in their respective sectors with construction, energy and marine markets. Trinity manufacturers highway guard rails, crash cushions and other barriers. It supplies various aggregates including sand, stone, shale, clay, asphalt and steel products for infrastructure projects. Read the description below for the full list.

This will allow Trinity to concentrate on its highly profitable rail business where it manufactures, sells and leases railroad cars.

The company also announced a $500 million share repurchase program.

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 broke its string of positive gains after five. The 77 point decline came after an 87 point gain at the open, which means the index closed 164 points below the intraday high. That is not a good sign.

I had considered closing the position but the potential for a negative tax headline, government shutdown, January market crash, etc is too strong to be unprotected. If we were not in this position, I would be adding it this week.

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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