Option Investor
Newsletter

Daily Newsletter, Monday, 1/22/2018

Table of Contents

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

Market Wrap

Government Shuts Down, Market Rallies

by Keene Little

Click here to email Keene Little
The Senate was unable to pass a budget over the weekend, which has resulted in a government shutdown. The stock market reacted with a gap up this morning and buyers then added to the rally, finishing the day on a high note. Perhaps the market is telling us we're all better off with the government shut down.

Today's Market Stats

Tom and I (Keene) have swapped Market Wraps this week so he'll be back with you on Wednesday.

The government shutdown is temporary and everyone knows it. The only ones trying to create theatrics around this are the senators themselves and their incessant sound bites. Between that and the filibusters it's amazing any of the senators have any time to work. The market ignored all of the fanfare and worries and simply kept doing what it's been doing -- rallying to the moon. The parabolic rally continues today with the Dow up another 143 points and it was the weaker index today. Hold on tight for this ride up and for what assuredly be just as quick back down.

Other than the noise surrounding the government shutdown it was a very quiet news day. There were no major economic reports and therefore there was little for the market to chew on or to knock it off track. The northbound train remains on track and the only question on the minds of many traders is what could derail this rally. At the moment there's not much out there that's scaring investors and the only thing we appear to vulnerable to is the unknown, the Black Swan, the Minsky Moment, the final snow flake that creates the avalanche. Since those events are unpredictable we have to remain aware of the potential for a surprise bear attack but the path of least resistance is clearly to the upside and that's the way traders should be looking. Just keep the exit door propped open with your foot so that you can be one of the first ones out when someone yells "SELL!"

Since there's very little news to discuss I'm going to jump right into the review of the charts, starting with the Nasdaq since it's close to what could be strong resistance.


Nasdaq Composite index, COMPQ, Weekly chart

There was a little short-covering spurt into the close today and that had the indexes closing at the day's highs. It looked like some bears still can't believe the market's not going to at least pull back some and they are forced to cover into the close. That little spurt higher for the Nasdaq got it close to trendline resistance near 7420 (the day's high and close was 7408). On its weekly chart you can see how it has pressed up near its trend line along the highs since April 2010, which fits well as the top of a parallel up-channel since then. Through 2014-2015 the top of the channel was resistance and now it's back up to try again to bust through.

At the same level is the trend line along the highs from September 2016 - June 2017 so the trendline cross near 7420 has been a good upside target and we'll soon find out if it's also going to be tough resistance. But if the buyers keep coming, like the Ice Walkers from the North, the next level of resistance is the top of a parallel up-channel for the rally from February 2016, which could mean the Naz is heading for 8000.

The weekly oscillators are now more overbought than they've been since 2000 but we know they can get more overbought and so far there's no bearish divergence. There was a bearish divergence on RSI (not MACD) at the March 2000 high. Trendline resistance here could cause price to pause but I don't see anything yet that says the bears are cleared in hot (cleared to shoot).


Nasdaq Composite index, COMPQ, Daily chart

The daily chart shows a little closer view of the trendline resistance mentioned above. Ideally, from a pattern perspective, we'll see a little larger pullback correction and then another push higher and then each new high will have to be evaluated for its potential importance. Right now I don't expect to see anything more than a pullback correction.

Key Levels for COMPQ:
- bullish above 7290
- bearish below 7003


Nasdaq Composite index, COMPQ, 60-min chart

The 60-min chart does not show the trend line along the highs from April 2010 - July 2015 but it does show the one from December. On the 60-min chart the line looks closer to 7430 so we have a 7420-7430 target zone for Tuesday to watch. A break of the uptrend line from December 29th, currently near 7345, would tell us a larger pullback/consolidation is in progress. In the meantime we can watch to see if it will continue to chop its way higher inside the rising wedge (some bearish divergence is starting to show up).


S&P 500, SPX, Daily chart

SPX is in a similar position as the Naz as it approaches the top of its narrow up-channel from December 29th and its broken uptrend line from November 2016 - April 2017 (gray line). The two lines cross on Tuesday near 2840-2850. As with the Nasdaq, the price pattern would look best with a pullback correction (potentially into the end of the month) and then another leg higher. That would relieve some of the daily overbought condition and set up a new high with bearish divergence (if the subsequent high is going to be an important one).

Key Levels for SPX:
- bullish above 2775
- bearish below 2736


Dow Industrials, INDU, Daily chart

The Dow's squished chart shows clearly the increasing steepness of the uptrend lines since last August, with the steepest one being from December 29th and currently near 26000. Stay bullish above that line since the rally could continue to steepen as it seeks to escape the earth's gravity pull. Once the uptrend line from December 29th is broken it will be our clue to look for at least a choppy consolidation although we could see a sharp retracement before starting the next rally leg.

Key Levels for DOW:
- to the moon Alice!
- bearish below 24,700


Russell-2000, RUT, Daily chart

The RUT is also nearing potentially strong resistance at 1610 (today's closing high was 1605). A trend line across the highs from October 2017 - January 2018 crosses a price projection at 1610, which is where the move up from November 15th has two equal legs up. That in turn could be the completion of an a-b-c move for the 3rd wave of a large rising wedge pattern from August. This pattern calls for a large choppy pullback into the end of the month/early February and then another rally into the end of February.

Key Levels for RUT:
- bullish above 1610
- bearish below 1535


20+ Year Treasury ETF, TLT, Weekly chart

The Treasury market has reached an inflection point when viewed with TLT, the 20+ year Treasury bond ETF. TLT has worked its way down/over to its uptrend line from February 2011 - December 2013, which held the pullback into the December 2016 and March 2017 lows. A break of the uptrend line (for more than a week) would obviously be bearish and that would likely spike yields even higher. A spike in yields would make it a lot more difficult to service the huge amount of debt that individuals, corporations and governments have accumulated.


U.S. Dollar contract, DX, Daily chart

The US$ has been consolidating for the past week near the bottom of its large expanding triangle pattern that it's been in since 2015, which is the trend line along the lows since February 2015 and currently near 89.80. A sustained drop below that level would be a bearish move for the dollar but at the moment I think we'll see the dollar bottom and then start to head back up.


Gold continuous contract, GC, Weekly chart

Gold's next direction can be determined by a flip of the coin, although you'll then have a 50% chance of being wrong. That's about the best I can do with its chart right now. I'm not seeing enough evidence in its bounce to suggest a continuation of its rally and it's going to be somewhat dependent on what the dollar does. Gold looks bullish with its bounce off the 200-week MA and broken downtrend line from 2011-2016 in December but I remain unconvinced it will be able to make it much further.


Oil continuous contract, CL, Weekly chart

Oil's daily chart looks short-term bullish with the choppy consolidation over the past week, especially since it's consolidating on top of the broken trend line along the highs from June 2016 - January 2017, currently near 62.60. As long as oil holds above this price it will remain bullish but a drop below the uptrend line from August, currently near 60.65, would be confirmation a top is likely in place.


Economic reports

There were no important economic reports today and there won't be any tomorrow. The rest of the week remains relatively light with existing home sales on Wednesday, new home sales on Thursday and then GDP and durable goods orders on Friday.


Conclusion

The party for the bulls doesn't show any sign of aging yet as more money pours into the market, much of which is going into ETFs and that drives up all stocks, which in turn keeps the advance-decline line looking strong. The uptrend has turned into a parabolic rise and that's always dangerous but it can go much higher and much longer than anyone thinks possible. It's clearly not a time for bears to be even thinking about trying the short side -- death by a 1000 paper cuts or death by getting stabbed in the heart, take your pick.

A lot of money is chasing this market higher and my fear is that it's a lot of retail money, the ones who get the most hurt when the market turns. But if you're long you're doing very well and I'm sure it's tempting to leverage up and get more out of the rally. That would be like borrowing money to invest in crypto currencies and not recommended. If you're on the sidelines wondering how to get in and enjoy the ride, take it slow, leg in with small positions/known risk (such as an option play), and watch it carefully. I still worry about waking up to find we put in a v-top reversal with a big gap down and sharp selloff.

But unlike bottoms, v-top reversals are not common in the stock market. There were sharp reversals off the March 2000 and July 2007 highs but both were tested months later (September 2000 and October 2007), something you don't often see with v-bottom reversals. That's not to say it will happen again that way but it will be a reason not to get immediately bearish on the next big spike down. After a big bounce correction it would be time to get more aggressive on the short side. So if you're a bear itching to get short, you'll likely have plenty of time to think about that after we see an important high get put in place. For now the bulls rule and the bears drool and I don't see that changing anytime soon.

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

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying


New Option Plays

Back to the Well

by Jim Brown

Click here to email Jim Brown

Editors Note:

We just exited this position a couple weeks ago and the stock has turned around again. BitAuto dropped on no news on the 10th of January to stop us out. It has rebounded and on the move up again.



NEW DIRECTIONAL CALL PLAYS

BITA - BitAuto Holdings - Company Profile

Bitauto Holdings Limited provides Internet content and marketing, and transaction services for the automotive industry in the People's Republic of China. The company operates in three segments: Advertising and Subscription Business, Transaction Services Business, and Digital Marketing Solutions Business. The Advertising and Subscription Business segment provides advertising services, including new automobile pricing and promotional information, specifications, reviews, and consumer feedback to automakers through its bitauto.com and taoche.com Websites, as well as mobile applications. It also provides Web-based and mobile-based integrated digital marketing solutions to automobile dealers. The Transaction Services Business segment operates automotive transaction services platform that provides e-commerce transaction services to automobile dealers; and offers online automotive financial platform services to consumers and financial institutions, including banks, auto finance companies, and insurance companies. The Digital Marketing Solutions Business segment provides one-stop digital marketing solutions, such as Website creation and maintenance, online public relations, online marketing campaigns, and advertising to automakers. The company also distributes its dealer customers' automobile pricing and promotional information through its Internet service provider partners. Bitauto Holdings Limited was founded in 2000 and is headquartered in Beijing, the People's Republic of China. Company description from FinViz.com.

For Q3 BITA reported earnings of 23 cents that missed estimates for 33 cents. Revenue of $352.4 million rose 54% and beat estimates for $334 million. They guided for Q4 revenue of $360.7 to $368.3 million, a 51% increase, and that was well above estimates at $331 million.

Shares were crushed on the earnings miss despite the 54% increase in revenue and strong guidance. Their Yixin website generated approximately 140,000 automobile transactions in Q3. Active monthly users rose to 51 million and they have more than 15,000 dealerships in the network. Transaction services rose 145.7% in Q3. Advertising and subscription service businesses saw revenue rise 19.3%. The company ended the quarter with $487 million in cash.

Their Yixin subsidiary IPOed on the Hong Kong exchange on Nov 15th and that raised a significant amount of money that will allow them to rapidly expand that portion of the business. The perceived dilution was also a factor in the stock decline.

The company is growing rapidly and guidance was very strong. There is no reason why the shares should not continue rebounding. There is strong support at $35.50.

Expected earnings Feb 19th.

Shares peaked at $38.25 on the 9th and then dropped sharply. They have rebounded and closed slightly over that level at $38.50 today. I am expecting a breakout and a resumption of the prior trend.

Buy March $40 call, currently $2.85. Initial stop loss $34.85.

Low open interest because the March strikes are new this week.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Don't Blink

by Jim Brown

Click here to email Jim Brown

Editors Note:

If you blinked, you probably missed the impact from the government shutdown. The major averages opened slightly lower but only for a very few minutes. As it became clear the democrat opposition to a vote was fading, the markets began to rally. All the major indexes finished at new highs.



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


AMBA - Ambarella
The long put 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

CGNX - Cognex - Company Profile

Comments:

No specific news.

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 Feb 15th.

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.


FLIR - FLIR Systems - Company Profile

Comments:

No specific news. Shares were due for a rest and a 50 cent decline appeared.

Original Trade Description: January 10th.

FLIR Systems, Inc. develops, designs, manufactures, and markets thermal imaging systems, visible-light imaging systems, locater systems, measurement and diagnostic systems, and threat-detection solutions worldwide. The company operates in six segments: Surveillance, Instruments, Security, OEM and Emerging Markets, Maritime, and Detection. The Surveillance segment provides enhanced imaging and recognition solutions for various military, law enforcement, public safety, and other government customers for the protection of borders, troops, and public welfare. This segment also develops hand-held and weapon-mounted thermal imaging systems for use by consumers. The Instruments segment offer devices that image, measure, and assess thermal energy, gases, electricity, and other environmental elements for industrial, commercial, and scientific applications. The Security segment develops and manufactures cameras and video recording systems for use in commercial, critical infrastructure, and home monitoring applications. The OEM and Emerging Markets segment provides thermal and visible-spectrum imaging camera cores and components that are utilized by third parties to create thermal, industrial, and other types of imaging systems. The segment also develops and manufactures intelligent traffic systems; imaging solutions for the smartphone and mobile devices market; and thermal imaging solutions for commercial-use unmanned aerial systems. The Maritime segment develops and manufactures electronics and imaging instruments for the recreational and commercial maritime market under the FLIR and Raymarine brands. The Detection segment offers sensors, instruments, and integrated platform solutions for the detection, identification, and suppression of chemical, biological, radiological, nuclear, and explosives threats for military force protection, homeland security, first responders, and commercial applications. The company was founded in 1978 and is headquartered in Wilsonville, Oregon. Company description from FinViz.com.

The short description is that FLIR makes night vision equipment for the military. They are the primary provider of these high tech night vision systems and they are very expensive. With the military budget being greatly expanded in 2018 and probably 2019, FLIR is going to be getting a lot more contracts for new equipment and for replacement equipment and parts.

For Q3, FLIR reported earnings of 52 cents that beat estimates for 48 cents. Revenue of $464.7 million rose 14.7% and easily beat estimates for $446 million. The surveillance segment revenues rose 7.6%, instruments rose 10.5% and OEM and emerging markets revenues rose 39.1%. Detection systems revenues rose 18.9%. The security segment sa revenues rise 16.5%. The marine segment was the slacker with only a 4.2% increase. Order backlogs rose 10.1% to $709 million.

The company guided for full year earnings of $1.83-$1.88 up from $1.81-$1.91 with revenue of $1.78-$1.83 billion.

Earnings February 14th.

Shares rallied last week to close at a new high at $48.25 and just over two-month resistance at $47.90. They spiked again on Monday when they announced a high-resolution camera kit for self-driving cars. If this breakout continues, it should produce some short covering given the long period of consolidation after the spike from Q3 earnings in October.

I am recommending an inexpensive February ATM option with earnings on the 13th. I intend to hold this position over earnings unless we have profits to protect by that date.

This is also a longer-term position in the LEAPS newsletter.

Position 1/11/118:
Long Feb $50 call @ $1.55, see portfolio graphic for stop loss.


PLAY - Dave & Busters - Company Profile

Comments:

No specific news.

Original Trade Description: January 13th.

Dave & Buster's Entertainment, Inc. owns and operates venues that combine dining and entertainment in North America for adults and families. It offers food and beverage items combined with an assortment of entertainment attractions, including skill and sports-oriented redemption games, video games, interactive simulators, and other traditional games. The company operates its venues under the names Dave & Buster's and Dave & Buster's Grand Sports Caf. As of June 17, 2014, it had 69 company-owned locations in the United States and Canada. The company was founded in 1982 and is based in Dallas, Texas. Company description from FinViz.com.

On Monday January 8th, Dave & Busters revised earnings guidance for fiscal 2017 from $110-$112 million to $108-$110 million. That $2 million adjustment caused the stock to drop from $56 to $44. They also lowered revenue slightly from $1.148-$1.155 billion to $1.138-$1.142 billion. Same store sales was reduced to -1.0%-0.7%, down from +0.75%.

They had previously warned in the Q3 conference call that Q4 started slow. They expected it to pick up in December, which is normally a busy month but revenue never caught up with the slow start in October. Quarter to date through Jan 6th, same store sales were down -5.1% with the end of year bad weather causing people to stay home. They also suffered from the lack of interest in the NFL games in Q4.

They were positive on their new format stores. They expect to open 14-15 new stores in 2018 and the same class of store in 2016 returned 54% one-year cash on cash returns in 2017. This was an improvement on the returns on their 2014-2015 class of stores. With each generation they are improving the returns.

Expected earnings March 6th.

The sharp decline last week was very overdone for the minimal decline in earnings expectations. Shares are already rebounding and with two months before earnings they have plenty of time for a decent rebound. For Q3 they reported earnings of 29 cents that beat estimates for 23 cents and shares were on an upward trajectory until Monday's guidance warning.

With so many stocks in blowout mode and not currently buyable, investors are going to be looking for less risky buying opportunities and PLAY could be the perfect answer.

Position 1/16/18:
Long April $50 call @ $3.40, see portfolio graphic for stop loss.


RHT - Red Hat - Company Profile

Comments:

No specific news. Nice $2 gain to break over the consolidation pattern.

Original Trade Description: January 11th.

Red Hat, Inc. provides open source software solutions to develop and offer operating system, virtualization, management, middleware, cloud, mobile, and storage technologies to various enterprises worldwide. It offers infrastructure-related solutions, such as Red Hat Enterprise Linux, an operating system platform that runs on hardware for use in hybrid cloud environments; Red Hat Satellite, a system management offering that helps to deploy, scale, and manage in hybrid cloud environments; and Red Hat Enterprise Virtualization, a software solution that allows customers to utilize and manage a common hardware infrastructure to run multiple operating systems and applications. The company offers application development-related and other technology solutions, such as Red Hat JBoss Middleware, a solution for developing, deploying, and managing applications; integrating applications, data, and devices; and automating business processes in hybrid cloud environments; Red Hat cloud offerings, a software solution that enables customers to build and manage various cloud computing environments; Red Hat Mobile, a software development platform that enables customers to develop, integrate, deploy, and manage mobile applications for enterprises; and Red Hat Storage, a software solution that enables customers to manage large, unstructured, or semi-structured data in hybrid cloud environments. It also provides consulting, support, and training services; and real-time operating system, distributed computing, directory services, and user authentication. Red Hat, Inc. has a collaboration with Wipro Limited to set up a cloud application factory that offers developers and IT teams a methodology for application modernization across public, private, and hybrid clouds. The company was formerly known as Red Hat Software, Inc. and changed its name to Red Hat, Inc. in June 1999. Red Hat, Inc. was founded in 1993 and is headquartered in Raleigh, North Carolina. Company description from FinViz.com.

Linux has always been immune to most of the attacks on the internet but Red Hat has taken that to a new level. There are multiple versions of free Linux versions but free means little support and questionable fixes. Red Hat has taken their Linux product and built it into multiple enterprise versions for individual applications and cloud use on virtual machines with an entire suite of applications.

In the Q3 earnings, the company reported 73 cents that beat estimates for 70 cents. Revenue of $748 million beat estimates for $734.4 million. They guided for Q4 for revenue of $758-$763 million and that beat estimates for $754.7 million. They guided for $2.88 for full year earnings and revenue of $2.91 billion. Deferred revenues rose 23% to $2.11 billion and subscription revenue from infrastructure offerings rose 15% to $495 million.

The good news on all fronts was not enough and shares dropped $9 intraday after the report. $120 appeared as support and shares have been rising steadily.

Deutsche Bank reiterated a buy with a $150 target saying the new Amazon Linux product was no threat and they were only targeting a fraction of the market for test systems before eventually going live on the Amazon cloud. The analyst said the Amazon Linux competes with Ubuntu/CentOS and not Red Hat. Finally an analyst that actually understands what he is analyzing.

Expected earnings March 20th.

I am picking a March option even though it expires a week before earnings. Those after earnings are far too expensive. I am expecting some serious profit taking in the market after the majority of Q4 earnings are over, probably around the February expiration. That should take us out of this position before well before RHT earnings.

Options are still expensive so I am turning this into an optional spread to reduce the net debit.

Position 1/12/18:
Long Mar $130 call @ $3.40, see portfolio graphic for stop loss.
Optional: Short Mar $140 call @ 90 cents, see portfolio graphic for stop loss.
Net debit $2.50, maximum gain $7.40.


TGT - Target Corp - Company Profile

Comments:

No specific news. New 52-week high.

Original Trade Description: December 13th.

Target Corporation operates as a general merchandise retailer. It offers household essentials, including pharmacy, beauty, personal care, baby care, cleaning, and paper products; dry grocery, dairy, frozen food, beverages, candy, snacks, deli, bakery, meat, produce, and pet supplies; and apparel for women, men, boys, girls, toddlers, infants, and newborns, as well as intimate apparel, jewelry, accessories, and shoes. The company also provides home furnishings and decor, such as furniture, lighting, kitchenware, small appliances, home decor, bed and bath, home improvement, and automotive products, as well as seasonal merchandise, such as patio furniture and holiday decor; music, movies, books, computer software, sporting goods, and toys, as well as electronics, such as video game hardware and software. In addition, it offers in-store amenities, including Target Cafe, Target Photo, Target Optical, Starbucks, and other food service offerings. Target Corporation sells products through its stores; and digital channels, including Target.com. As of September 13, 2017, the company operated 1,816 stores in the United States. Target Corporation was founded in 1902 and is headquartered in Minneapolis, Minnesota. Company description from FinViz.com.

I would not normally recommend a retailer only two weeks before Christmas but I expect Target to overcome the normal post holiday depression.

Earnings Feb 14th.

Target announced on Wednesday they were buying grocery delivery platform Shipt Inc for $550 million in cash. The company said they would be offering same day delivery across all major product categories by the end of 2019. They will be offering same day delivery for groceries, essentials, home products, electronics and other items by mid 2018.

Shipt's services cost $99 a year for unlimited deliveries. Shipt already has a network of more than 20,000 personal shoppers to fulfill orders from various retailers and deliver within hours in more than 72 markets. Shipt partners include stores like Costco, Whole Foods, Meijer, etc.

Target is going to continue letting Shipt deliver for their other customers. The more widely recognized the brand is the larger it will grow and Target will be able to benefit from their ability to scale deliveries all over the country. Plus, they will profit from the fees received for those other deliveries.

This is a great deal for Target as it ramps up competition against Amazon.

I wrote last week that shippers were noting the increase in packages from Target. They were the second largest volume in UPS trucks after Amazon. They should have a great Q4.

Update 1/2/18: Influential tech analyst Gene Munster said he believes Amazon will buy Target in 2018. Target has a market cap of $37 billion but it would require a huge premium to get a deal done, probably something in the $50 billion range. Amazon has a market cap of $573 billion. The deal makes sense in the long run because it would give Amazon 1,802 major store outlets with a huge warehousing system that Amazon could use to its advantage. The addition of Amazon specific products to the already broad range of products offered by Target, would be a major boost to Amazon sales. The stores would function as customer delivery points for Amazon packages and because of the large store footprint it would allow Amazon to expand its same day, next day delivery offering to most of the US.

While it might make sense on paper, I would not hold my breath expecting a deal to be done. That would be a big bite for Amazon and there may be a problem getting regulatory approval. President Trump already believes Amazon is a monopoly with too much power and that could keep a deal from completing.

Update 1/9/18: Target raised Q4 earnings guidance from $1.05-$1.25 to $1.30-$1.40. Same store sales are expected to rise 3.4% and well above analyst expectations for 1.25%. They guided for 2018 earnings of $5.15-$5.45 and well above estimates for $4.36.

Update 1/13/18: MKM Partners reiterated a buy rating and shares gained another $2.80 to a new 52-week high.

Position 12/14/17:

Long March $65 call @ $2.90, see portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)

AMBA - Ambarella - ETF Profile

Comments:

No specific news. Shares up slightly in a bullish market.

Original Trade Description: January 20th.

Ambarella, Inc. develops semiconductor processing solutions for video that enable high-definition (HD) video capture, sharing, and display worldwide. The company??s system-on-a-chip designs integrated HD video processing, image processing, audio processing, and system functions onto a single chip for delivering video and image quality, differentiated functionality, and low power consumption. Its solutions enable the creation of video content for wearable sports cameras, automotive aftermarket cameras, and professional and consumer Internet Protocol (IP) security cameras, as well as cameras incorporated into unmanned aerial vehicles in the camera market; and manage IP video traffic, broadcast encoding and transcoding, and IP video delivery applications in the infrastructure market. The company sells its solutions to original design manufacturers and original equipment manufacturers through its direct sales force and logistics providers. Ambarella, Inc. was founded in 2004 and is headquartered in Santa Clara, California. Company description from FinViz.com.

Ambarella was a big manufacturer in the action camera sector. Last week GoPro said it had cut prices significantly on the Hero line of cameras and the company announced it was exiting the drone business. This is especially bad for Ambarella since the drones had multiple cameras, some as many as a dozen. GoPro also indicated they were going to explore strategic alternatives including the sale of the company.

GoPro represents more than 20% of Ambarella's business. That means the dramatic reduction in GoPro products will mean an equal reduction in Ambarella sales.

Ambarella has been rapidly diversifying into other areas including security cameras and cameras for self driving vehicles. That will protect them in the long term but in the short term sales are going to stumble because of GoPro.

Earnings are March 1st.

Shares fell sharply on Jan 10th after the GoPro announcement that earnings would be significantly below expectations. Ambarella had posted a big earnings beat in Q3 of 75 cents compared to estimates for 66 cents. However, without reorders from GoPro in Q4, they could be facing lower guidance and a possible earnings miss when they report March 1st. Investors are selling the stock ahead of the potential lowered guidance, which could appear at any time.

There are no March options yet and May strikes are too expensive. I am using the February strike even though there are only 4 weeks left. It is only $1.36 OTM so we should be ok as long as the stock continues to decline.

Position 1/22:
Long Feb $50 put @ $1.40, see portfolio graphic for stop loss.


DIA - Dow SPDR ETF - ETF Profile

Comments:

I am going to write this position off as a loss but I am not recommending we close it for the 34-cent premium today. This is a March position and mid February could be volatile. I am going to drop it from the daily portfolio updates unless the market direction changes.

However, you could turn it into a spread by selling the March $245 put short against our long $230 put. The premium at today's close was $1.32 which would reduce our loss by one-third. Unless the Dow suddenly declined -1,500 points, both puts would expire worthless. If we did suddenly see a correction in late February, this would also limit your gain.

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.

Update 12/18/17: The Dow is moving ever closer to 25,000, which could end up being a monster sell the news trigger. The Dow is up 6,900 points since the election. That is 38.5% in 13 months. There is a 100% chance there will be a correction in the future. The only unknown is when.

I am recommending we close the short put side of the spread. That captures that portion of the trade and once the Dow rolls over we do not have to deal with the rise in value in the short put. Secondly, that gives us other options to raise additional premium in the future, including selling a higher put if the index does not decline.

Position 11/17/17:

Long March $230 put @ $5.16, see portfolio graphic for stop loss.

Closed 12/19: Short March $210 put @ $1.71, exit .43, +1.28 gain.




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