Option Investor

Daily Newsletter, Thursday, 1/25/2018

Table of Contents

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

Market Wrap

Peak Earnings, New All Time Highs

by Thomas Hughes

Click here to email Thomas Hughes


The indices moved set new all time highs on strong earnings from big names. Caterpillar was the star of the show delivering blow out earnings and positive forward outlook. Along with the earnings are economic reports pointing to continued expansion. President Trump's visit to Davos is also helping to support the market. He's made some positive comments on the economy, growth, the dollar and trade that have helped to reassure the market.

International markets were largely down in the overnight session. Asian indices shed -0.25% to -1.00% as the dollar fell and currencies throughout the region gained strength. Adding to angst were a basket of mixed earnings reports. Exporters were hit the hardest as they have the most exposure to currency exchange.

European markets were focused on earnings, but also on the ECB, and finished their day in negative territory as well. The DAX led with a loss near -0.90% on ECB uncertainty. The bank held their rates unchanged and made no alterations to outlook or statement as had been expected. Mr. Draghi did little to indicate a change in policy was at hand but traders remain convinced there is. Data from the region has been positive and trending higher although target inflation rates have not been reached.

Market Statistics

Futures were flattish in the earliest portion of the pre-opening session. The trade began to gain strength throughout the morning as data and earnings were released eventually hitting a peak on news from Caterpillar. The Dow jumped more than 100 points on the news and opened with a small gain. The blue chip and broad market indices both set new all time highs in today's action but closed off of their highs. Price action was light in most cases, daily ranges were small and volumes were low. Advancers and decliners were evenly matched while those making new highs outpaced those making new lows by 5:1.

Economic Calendar

The Economy

Initial jobless claims rose by a smaller than expected 17,000 from last week's downwardly revised figure to hit 233,000. The four week moving average of claims fell -3,500 to hit 240,000. On a not adjusted basis claims fell -25.9% versus an expected -31.4% and are down -7.65% from last year. Looking to the chart it is easy to see there has been volatility in the data, it is also easy to see that the overall trend remains down. Recent volatility is due to the storms last fall as well as seasonal shifts in labor forces. Regardless, claims remain at/near long term 45 year lows and consistent with labor market health.

Continuing claims fell -28,000 from an upwardly revised figure to hit 1.937 million. The four week moving average of claims fell -3,500 to hit 1.920 million, the previous week's average was revised up by 2,500. This figure has also shown some volatility over the past few months as well as a flattening that may indicate the down trend is over.

The total number of American's receiving unemployment benefits jumped 116,813 to 2.453 million. My first reaction to this was "whoa, that's a big number" and it is. It is consistent with season and long term trends but well above expected. This spike, along with the flattening continuing claims, is a potential red flag that labor market tightening is coming to an end. If so we could begin to see a pick up in the pace of wage inflation as employers work harder to find, attract and retain employees.

New Homes Sales fell as expected but well above what analysts had predicted. The December read shows a -9.3% decline in sales from the previous month but the year over year and full year figures are still positive. December 2017 is 14.1% above December 2016 and full year 2017 is up 8.3% over the full year 2016. Decembers sales are hurt by the persistent problem of low inventory/high prices and by the bad weather seen across the nation.

The Index Of Leading Indicators points to continued strong expansion in the US. The headline index gained 0.6% with positive revisions to the previous two months. Along with this the Coincident Index rose 0.3% while the Lagging Index rose 0.7%. All three indices have been positive for more than a year and, according to economists at the Conference Board, "The passing of the tax plan is likely to provide even more tailwind to the current expansion. . . The gains among the leading indicators have been widespread, with most of the strength concentrated in new orders in manufacturing, consumers' outlook on the economy, improving stock markets and financial conditions."

The Dollar Index

The dollar went on a wild ride today; it first shot higher on Mnuchin's comments and the ECB and then later fell on comments from President Trump. The president refuted Mnuchin's comments, specifically the media's coverage of the comments, saying that the administration does not want a weaker dollar and that the dollar is going to strengthen along with the US economy. He also said, and this is my interpretation, theat he didn't want people to be talking about the dollar so it could float freely on the open market. The Dollar Index fell to test support at $89 and looks like it is confirming. Today's candle is a large hammer doji at support that may lead to a reversal within the long term trading range.

The Gold Index

Gold went on a wild rise as well. After the ECB meeting and press conference and before the Trump comments it moved up to test 2016 highs. After the Trump comments spot prices fell to break even and below, giving up a half percent by settlement time. The metal is indicating resistance at the previous high and top of a long term trading range although more evidence is needed. If resistance is confirmed a move lower should be expected. If the dollar does indeed strengthen as Trump says it will gold prices are likely to fall. Tomorrow's 4th quarter GDP read could spark such a move, or perhaps the FOMC next week, but global economies are improving as well. Tightening from the ECB, BOE, BOJ and others is likely to undermine dollar strength and keep it and gold within their current ranges.

The Gold Miners ETF GDX tried to extend yesterday's gains but the move was cut short by Trump's comments. The ETF fell hard on the news creating a large red candle and confirming resistance in the upper half of a long term trading range. The indicators are both bearish, showing wicked divergence and pointing lower in confirmation of lower prices. Today's action was halted at $24 and a potential support level, a break below there would be bearish within the range with a target near $23.50 and then $23.00.

The Oil Index

Oil prices fell to close the day with a loss near -0.50%. Prices had been up in the early session, setting a 4 year high, but fell later in the day following Trump's comments from Davos. This move is due to today's reversal in the dollar more than anything else as US storage data and OPEC's production cap continue to support the market.

The Oil Index fell about -0.40% on the fall in oil prices and may have hit a peak. The index has been trending strongly higher on the rise in oil prices but with those in question for the longer term a correction is due. The indicators are both consistent with possible or imminent correction showing significant divergence from freshly set long term highs. A fall fro this level could go to 1,400 or 1,375 in the near term.

In The News, Story Stocks and Earnings

Caterpillar reported in the early morning and blew past estimates. The company says improving global economics have led to strong sales, increased back logs and improved forward outlook for business. Both revenue and earnings came in above expectations, earnings more than doubling from the year ago period, driving shares up more than 3.5% in the pre-market session. The gains were short lived however as concern growth was already discounted and fears over a probe into its Swiss operations weighed on shares. By end of day the stock had formed an alarming red bodied candle with long lower shadow that may be confirming a top. Both indicators are currently bearish and moving lower suggesting lower prices to come. Support may be at the moving average, a break below there would be bearish.

Kroger is reported to be in talks with Alibaba. The goal is to form some kind of alliance with which to battle the new Amazon/Whole Food's conglomerate. Neither company commented on the report but analysts agree it is likely in response to the recently opened flagship AmazonGo store. Shares of the stock jumped in the pre market and are now trading at a 7 month high.

After hours action was hot with dozens of big name reports hitting the market. Starbuck's reported net revenue up 6% on strong global comp increases but did not meet analyst expectations. Earnings of $0.65 beat by $0.08 but were not enough to buoy share prices. Global comp sales rose by 2% driven by strong increases in China. China net revenue grew by 30% on a 6% increase in same store sales. Forward guidance is unchanged, shares of the stock fell -2.5%.

Intel also reported after the bell. The difference is that it beat on the top and bottom lines driving shares to new highs. The company reported a 4.3% gain in net revenue driving a $0.21 (25%) beat on the EPS end. Gains were driven by strong demand that is expected to persist into the new year resulting in increased guidance and a hike to the dividend. Considering the number of IoT connected devices is expected to more than triple to over 50 billion in the next decade I'd say strong demand should continue for some time.

The Indices

The indices had another day of indecision but most were able to hold their ground. The Dow Jones Transportation Average unsurprisingly led with losses near -1.60%. The transports are in near term correction and heading down to test support at the short term moving average. The indicators are both moving lower following bearish crossovers and consistent with such a move. A break below the moving average would be bearish and could take the index down to 10,500 or lower. A confirmation of support at or near the moving average would be bullish and trend following.

The NASDAQ Composite is the 2nd of two indices to close with losses although losses for the tech heavy index were far less than for the transports. The index closed with a loss of only -0.05% but created a small red candle. Today's candle is to the side of the previous two and at all time highs so looks like a consolidation at this point. The indicators remain bullish and consistent with consolidation within an uptrend so no change to outlook at this time.

The S&P 500 made the smallest gain, 0.06%, but created a red bodied candle in the process. The broad market index opened at what would have been an all time closing high but fell during the day. The candle is to the side of the previous two and consistent with near term consolidation within the current up trend. Both indicators are showing near term weakness consistent with such a move but neither show signs of reversal just yet. If the index were to move down support may be found at 2,800 or just below at the short term moving average.

The Dow Jones Industrial Average posted the largest gains and looks the most bullish of the indices. The blue chips closed with an advance of 0.53% creating a small green bodied candle and setting new all time intraday and closing highs. The index is drifting higher in lie with the prevailing trend and supported by the indicators. Both MACD and stochastic are bullish although there are some signs of weakness. A move up from here would be trend following and bullish, a move lower may find support at 26,000 in the near term.

The indices continue to hold their ground at or near all time highs. These highs are supported by long term trends, current earnings and forward outlook although there are some near term hurdles holding them back. The hurdles, mostly sentiment driven, may lead to market correction but there is no firm sign of that yet.

Tomorrow's GDP release is going to be important, especially ahead of next week's Fed meeting. Analysts are expecting growth in the range of 3%, any deviation from that will impact growth and interest rate outlook if not stock prices. A beat, especially a solid beat, will be further indication Trump's pro-growth policy and business friendly stance will spur earnings growth into the next several years. I remain bullish for the long term but cautious for the near, waiting on data. If a correction does develop I expect it will lead to another great entry point for bullish positions.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Swimming against the Tide

by Jim Brown

Click here to email Jim Brown

Editors Note:

Not all companies have been lifted by this rally. Canadian National is heading south at a high rate of speed.


No New Bullish Plays


CNI - Canadian National - Company Profile

Canadian National Railway Company engages in rail and related transportation business. The company transports cargo, serving exporters, importers, retailers, farmers, and manufacturers. It operates a network of approximately 20,000 route miles of track spans Canada and mid-America connecting the Atlantic, the Pacific, and the Gulf of Mexico. The company serves the cities and ports of Vancouver, Prince Rupert (British Columbia), Montreal, Halifax, New Orleans, and Mobile (Alabama), as well as the metropolitan areas of Toronto, Edmonton, Winnipeg, Calgary, Chicago, Memphis, Detroit, Duluth (Minnesota)/Superior (Wisconsin), and Jackson (Mississippi) with connections to various points in North America. Canadian National Railway Company was founded in 1919 and is headquartered in Montreal, Canada. Company description from FinViz.com.

CN reported Q4 earnings of 94 cents that missed estimates for 98 cents. Revenue of $2.57 billion also missed estimates for $2.61 billion. Earnings rose only 1.1%. Rail freight revenues per carload declined -4%, petroleum and chemicals declined -4%, grain and fertilizer -1% and intermodal volumes declined -5%. Operating income declined -7%. Higher fuel and labor costs were blamed. Free cash flow declined from $777 million to $457 million Canadian. Debt declined slightly to $11.306 billion. They did hike the dividend by 10% to 45.5 cents Canadian payable March 29th to holders on March 8th. They plan to spend $3.2 billion in 2018 on track repair and upgrades and 60 new locomotives and increase that to 200 over the next three years.

Next earnings are April 24th.

Earnings were Jan-23rd and shares began to decline immediately. They have broken support at $78.75. I am recommending we buy an April put option with a wide stop loss.

Buy Apr $75 put, currently $1.55, initial stop loss $82.25.

In Play Updates and Reviews

Another Record Close

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow shook off Wednesday's strong volatility and rose sharply to a new record high. The -285 point intraday decline on Wednesday was forgotten and the Dow took off to new highs once again. The index declined -165 points from its intraday high but buyers came rushing in at the close to lift it +105 points in the final minutes and a +140 gain for the day. The volatility has not disappeared but the dip buyers are alive and well.

Boeing was the biggest contributor with 3M beating on earnings and adding 32 points. There were 21 advancers and only 9 decliners.

The Nasdaq continued to lag but the -4 point decline was minimal.

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 Group
The long call position was stopped at $66.85.

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

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor

BULLISH Play Updates

BITA - BitAuto Holdings - Company Profile


No specific news. Shares posted a minor decline in a weak market.

Original Trade Description: January 22nd.

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.

Position 1/23:
Long March $40 call @ $2.95, see portfolio graphic for stop loss.

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

CGNX - Cognex - Company Profile


No specific news. Shares fell again, intraday and just enough to stop us out.

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:

Closed 1/25: Long Feb $67.50 call @ $3.20, exit $2.60, -.60 loss.

FLIR - FLIR Systems - Company Profile


No specific news. Minor gain in a weak market.

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


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


Nomura said Red hat could see a total addressable market of $66 billion by 2020. The company initiated coverage with a buy rating and $152 price target. The analyst was very positive. Here is the recommendation. LINK

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


Target announced same day delivery using Shipt from multiple locations in Florida beginning on Feb 1st. More than 6.3 million Florida residents will be in the covered areas. Shipt, which Target is buying for $550 million, serves more than 30 million households in 70 markets across the country. Customers pay an annual fee of $49 to $99 and shipping is free from multiple vendors in their coverage area.

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


No specific news. Only a minor 14 cent rebound after the $2.56 drop on Wednesday.

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.

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