Option Investor

Daily Newsletter, Tuesday, 1/19/2016

Table of Contents

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

Market Wrap

Hostage to Oil

by Jim Brown

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Oil prices declined again after the Iranian oil minister said they would accelerate production and they were going to discount their oil to some European countries. The price war is now in full swing.

Market Statistics

Brent crude traded down to $28.60 intraday after Iran began rattling the market with claims they were going to win back market share stolen by Saudi Arabia and others by lowering prices to customers in Europe. This comes only about a month after Saudi Arabia cut prices sharply to Europe to undercut prices for Russian oil. Saudi said they will not be undersold and they plan on not only holding onto existing market share but will aggressively pursue gaining additional market share.

This is the end of the world for those producers hoping for a rebound to higher prices. With Saudi Arabia, Iran and Russia all competing to be the lowest price to Europe we should see Brent crude prices continue to decline. That will drag WTI lower as well and the equity markets will follow suit. It is almost inconceivable that we will not test $25 in the days ahead and that may not be the lows since the inventory build season continues until the end of April.

Crude prices had risen slightly after the Chinese economic data on Monday night was not bearish. China reported Q4 GDP at 6.8% and slightly missing estimates for 6.9%. Retail sales for December rose +11.1% and missing estimates for 11.3%. Industrial production rose +5.8% and also a miss. Fixed asset investment rose +10.0% and missing estimates for 10.2%. All of the misses were minor and the Chinese markets gained on the news. The GDP for all of 2015 was 6.9% and the slowest growth since 1990. U.S. futures rallied after the Chinese numbers and caused a huge gap open this morning with the S&P rising +20 points in the first few minutes.

The U.S. economics were limited today with the NAHB Housing Market Index the only major report. The headline number for January declined from 61 to 60 and well off the high of 65 in October. Potential buyer traffic declined from 46 to 44 after a high of 48 in November. The Midwest was the only region that posted a gain with a jump from 54 to 58.

This was still a decent report because conditions normally decline in the winter months. Cold weather and snow tends to keep people at home in front of the TV rather than trudging through the slush to look at a dozen new homes. Higher home prices and slowly rising interest rates also slowed buyer interest.

The calendar for tomorrow is highlighted by the new residential construction and the consumer price index (CPI). The CPI is expected to be flat but odds are good that we could see a miss to the downside.

The big report for the week is the Philly Fed Manufacturing Survey on Thursday. With the manufacturing sector in a recession, it will be interesting to see if the Philly estimates for a +2 will come true after a -10.2 last month.

There were some notable earnings today starting with Bank of America (BAC) this morning. BAC reported adjusted earnings of 29 cents ($3.01 billion) compared to estimates for 26 cents. Revenue rose +4.3% to $19.53 billion. The bank had to increase loan loss reserves by $264 million due to exposure to energy loans. They said they had $21.3 billion in total energy exposure. They warned if oil prices continued lower they could see loss reserves rise another $900 million. JPM and WFC also warned they had raised loss reserves due to energy exposure and those losses could rise. Shares declined slightly on the report.

Morgan Stanley (MS) reported earnings of 43 cents compared to estimates for 33 cents. That was a huge beat but it only managed to produce a 29-cent gain in the stock. Revenue was $7.7 billion compared to estimates for $7.59 billion. Total non-interest costs fell -41% for the quarter. Trading revenue rose +1% to $1.47 billion.

UnitedHealth Group (UNH) reported adjusted earnings of $1.40 that beat estimates for $1.36. However, that was a 19% decline from the year ago quarter and the company blamed it on Obamacare. Revenue was $43.6 billion, up +30%. The company is still considering withdrawing from the Obamacare exchanges at the end of 2016. They said the people enrolled in the plans were sicker and tended to use a lot more medical care than those in the general population. In order to remain in the exchanges UnitedHealth will have to raise premiums dramatically to match the risk profile of the enrollees. Shares gained $3.30 on the news.

After the bell, IBM reported earnings of $4.84 compared to estimates for $4.81. Revenue of $22.06 billion narrowly beat estimates for $22.02 billion. The strong dollar reduced IBM revenue for the full year by -$7 billion, with a -$300 million hit in Q4. That is a monster number to overcome and still beat on earnings. Revenue from "strategic imperatives" including cloud, data analytics, social and security software rose about 10%. Given the negative expectations for IBM over the last year, this was still a decent earnings report.

On the downside IBM warned that revenue could continue to slide. This was the 15th consecutive quarter of revenue declines. Shares declined -$5 in afterhours.

Netflix (NFLX) reported earnings of 7 cents compared to estimates for 2 cents. Revenue of $1.82 billion missed estimates for $1.83 billion. In the more important subscriber metric, they reported 5.59 million new subscribers with 4 million of those overseas to push their total subscribers close to 75 million with 30 million outside the USA. U.S. subscriber growth fell short at 1.56 million compared to estimates for 1.62 million. The company is predicting the addition of 6.1 million in Q1.

Netflix said the average subscription price rose between 4-5% and they were seeing increased adoption of the $12 plan. The price freeze on the 22 million U.S. subscribers at $8 expires in May. They are going to show 600 hours of new original content in 2016 compared to 450 hours in 2015. They streamed 42.5 billion hours of content in 2015 compared to 29 billion hours in 2014. The company plans to spend about $5 billion on content licensing in 2016 in addition to the $9 billion they have previously committed to pay studios by September 2018. Netflix ended the year with $2.3 billion in cash.

They expanded from 60 countries to 190 countries in the first week of 2016 but they are not open in China. They said they were working hard to move into China but it may not happen in 2016. Shares rallied $8 in afterhours to $115 after gaining nearly $4 in regular trading.

Goldman Sachs (GS) is the big dog out with earnings on Wednesday and they are trading at a 52-week low. Expectations are not high so there is the potential for an upside surprise. However, legal fees are likely to weigh on results.

Tiffany (TIF) warned this morning that holiday sales disappointed. The company said the important gifting season of November and December were hit by "weak tourist spending" in multiple markets. Global net sales declined -3% with same store sales down -5%. In constant dollars worldwide sales fell -6%. They said sales were constrained by challenging global economic conditions and events that slowed tourist travel between countries.

Tiffany guided for a 10% decline in earnings for 2015, down from the prior outlook for a 5% to 10% decline. New guidance is for earnings of $3.78 compared to analyst estimates for $3.88. The company said it expects minimal growth in net sales and earnings in 2016. Earnings are due out on March 18th.

McDonalds (MCD) was upgraded by BTIG from neutral to buy with a $130 price target. The analyst said the all day breakfast, Game Time Gold and the new McPick 2 value menu should generate "meaningful improvement" in the U.S. business. Shares rose +$2.32 on the upgrade.

Procter & Gamble (PG) rallied +1.75 after Stifel upgraded the consumer products company from hold to buy with a price target at $85. The analyst said improving year over year comparisons, rising market share and improving execution would power the stock higher. P&G currently has a 3.5% dividend yield.

Goldman Sachs reiterated a buy rating on Apple (AAPL) with a $155 price target despite deteriorating sales expectations. The analyst said the declining expectations have provided a buying opportunity in the shares given that the low guidance is now priced into the stock. The analyst expects revenues for the December quarter of $76.8 billion and EPS at $3.28. That is just over the consensus estimates. For the March quarter, Goldman expects $57.1 billion and $2.30 in earnings. They expect Apple to guide lower (conservatively) for the March quarter in order to reduce expectations while they clean up their excess inventory problem. I would be a buyer of Apple only after the Q4 earnings, which could be very volatile.

Helping to depress oil prices today was an update from the IEA saying the world might "drown" in oil in 2016. The IEA said oil demand growth slowed significantly in Q4 due to weak economic conditions in Russia, China and Brazil. The agency said crude inventories could rise another 285 million barrels ahead of the summer demand season. That is in addition to the more than 1 billion barrel increase in 2015 to more than 3 billion barrels.

In addition, a new report using satellite imagery showed that Iran had significantly more oil in storage on tankers in the Persian Gulf. New estimates put the total at 50 million barrels, up from 30-36 million in prior estimates. As of January 18th, none of the tankers had moved so the oil remains unsold. An Iran official said "Iran is not interested in entering the market in a disorderly manner, which is self defeating. However, it is also not interested in sacrificing further, to benefit those who gained from its absence" from the market. "It will require a delicate balance." Those comments came on the same day Iran said it was cutting prices to Europe so it appears the calming talk is just talk.

As long as oil prices continue lower we should expect to see equity markets continue lower as well.


The Dow gapped up about +185 points at the open to 16,171 and almost immediately began to fade. The index went negative in late afternoon but was rescued with a buy program that triggered with the drop to 15,900. That added +174 points in the closing hour but that also faded at the close to end with only a 28-point gain.

The S&P rebounded at the open to 1,900 and came to an immediate stop. The afternoon decline knocked it back to the August lows at 1,867 before the buy program lifted the index back into positive territory with a 1-point gain.

Needless to say it was a very volatile day and there was no direction. However, we may have traded to a stalemate. The bulls tried to manage some gains and failed. The bears tried to sell it off again and failed. In the end the indexes closed near neutral territory with no clear winner.

This was the day after a three-day weekend, which is normally bullish. It was also the day after option expiration, which is normally flat as traders square positions, resell stock that was put to them and launch new positions for the next option cycle. Post expiration Monday rarely has any direction because of the option settlement process.

Basically the day was a draw and tomorrow will be the directional day. The S&P needs to continue holding above that 1,867 level from August or the next target is 1,820. Resistance is now 1,900 and 1,950.

The Dow was helped by the stocks making the news today. UnitedHealth on earnings and McDonalds and Procter & Gamble on analyst upgrades. Chevron and Exxon were the big losers as oil prices fell back below $29. In after hours tonight crude is down to $27.97.

Goldman's earnings on Wednesday could be detrimental to the Dow but falling oil prices and the -$5 drop in IBM in afterhours are going to be the biggest drags.

The Dow is the weakest of the three major indexes and has already broken below 16,000 twice in the last two days only to recover that level at the close. The next dip is not likely to repeat that feat. The Dow's target is the 15,370 low from August and the 15,350 low from February 2014.

Resistance would be today's high at 16,171 but that may be wishful thinking.

The Nasdaq struggled valiantly to remain positive after the morning gap open but it was not to be. The index ended with a loss of -11 after being up +60 at the open. Netflix will be a big help at the open with its +8 gain in afterhours trading. However, sellers are still piling on any rebound in tech stocks. Without any material tech earnings on Wednesday, it will be tough to maintain any positive sentiment.

Support is 4,432 and the lows from the last two days of trading. A break below that level targets 4,292 and the August flash crash low followed by 4,130 from October 2014.

The Russell 2000 returned to Friday's lows and failed to penetrate but the rebound was lackluster and the Russell lost -13 points for the day or -1.27% and the biggest loss for the major indexes. The small cap rout is still in progress and this suggests the market will continue lower.

The index closed well under the 1,000 level at 994.84 and the next material support is around 900 and then 800.

The Biotech sector was the biggest sector loser with a -2.7% decline. This dragged the Nasdaq and the Russell lower. Until the biotechs find a bottom, they will compete with oil prices as the biggest drag on the market.

With crude oil at $27.97 tonight the market has very little chance of a material rally. Futures were up +5 early in the session and then suddenly dropped to -8 around 7:15 ET on no news. Something happened but it has not hit the newswires yet. It may be due to the drop in oil prices but without a headline we just do not know.

I would continue to be cautious about new long positions until it appears the market has found a bottom. The lack of a strong short squeeze suggests traders are willing to let their shorts ride instead of race to cover on every little bounce.

It is ok not to be in the market. You do not have to trade. Being bored is a lot better than being broke.

The advertising for the EOY subscription special is over. However, we still have some mouse pads and books left over so I will leave the link open for a few days in case anyone wants to take advantage of the savings.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Trader Discretion

by Jim Brown

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Editor's Note

The S&P futures are down -29 points as I write this commentary. The Asian markets are imploding with Japan down -3% and the Hang Seng Index down -3.4%. WTI crude has fallen to $27.60 and still declining.

I was going to add the Oil Service Index (OIH) as a short today but with the market in free fall we could be filled at the low of the day at the open. I will wait for a calmer market to launch that trade.

We need to remember that we should not trade just to trade and it is better to wait for the right trade rather than try to force a trade in a crazy market. We have some great shorts in the portfolio and they should decline again on Wednesday if the futures remain this low.

Be patient. It is better to be bored than broke.


No new plays


No new plays

In Play Updates and Reviews

Lookout Below!

by Jim Brown

Click here to email Jim Brown
Editors Note:

S&P futures are down -29 late Tuesday with Asian indexes deep in the red. Japan's Nikkei is down -3% and the Hang Seng Index is down -3.4%. Wednesday's open may be ugly.

Current Portfolio

Current Position Changes

Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

CHUY - Chuys Holdings

CHUY was triggered as a long position with the trade at $36.15.

BULLISH Play Updates

CHUY - Chuy's Holdings


CHUY spiked at the open to trigger our entry at $36.15. The relative strength in the market is encouraging.

Original Trade Description: January 14, 2016:
Small cap stocks underperformed last year with the small cap Russell 2000 index falling -5.9% in 2015. CHUY is one small cap that bucked the trend with shares surging +59% in 2015. That relative strength continues in 2016. The Russell 2000 index is already down -9.7% this year. Meanwhile CHUY is up +14% year to date and looks poised to hit new highs.

CHUY is in the services sector. According to the company, "Founded in Austin, Texas in 1982, Chuy's owns and operates 69 full-service restaurants across fourteen states serving a distinct menu of authentic, made from scratch Tex Mex inspired dishes. Chuy's highly flavorful and freshly prepared fare is served in a fun, eclectic and irreverent atmosphere, while each location offers a unique, 'unchained' look and feel, as expressed by the concept's motto 'If you've seen one Chuy's, you've seen one Chuy's!'."

CHUY's earnings and revenues have been hotter than a jalapeno. The company has beaten Wall Street's earnings estimates the last four quarters in a row. They have beaten analysts' revenue estimates in three of the last four quarters. Management has raised guidance three quarters in a row.

Check out their revenue growth: Q4 2014 revenues +21.7%, Q1 2015 +19%, Q2 2015 +19%, and Q3 2015 saw revenues +15%. That's on top of a tough comparison to Q3 2014 where revenues rose +20%.

Technically shares appear to be in breakout mode. The surge on January 12th lifted CHUY out of a five-month consolidation and on big volume. Traders bought the dip today exactly where they should have near $34.00, which as prior resistance is now new support. If this rally continues CHUY could see a short squeeze. The most recent data listed short interest at 21% of its small 16.0 million share float. The point & figure chart is bullish and forecasting at $44.00 target.

Today's intraday rebound lifted CHUY back to the $36.00 level. Tonight we are suggesting a trigger to launch bullish positions at $36.65.

Position 1/19/16:
Long CHUY shares @ $36.15, initial stop loss $33.40
Long April $37.50 call @ $2.86, initial stop loss $33.40

KRE - SPDR S&P Regional Banking ETF


KRE shares closed near the low of the day at $36.29. Out entry trigger is $35.50.

I am changing the optional call play to use the March $38 strike. I am also lowering the stop loss to $34.25.

Original Trade Description: January 13, 2016:

Many people thought banks would be winners after the Federal Reserve hiked rates in December. While the Fed did raise rates (barely) the financial stocks didn't see much progress.

The Fed is still talking about raising rates multiple times in 2016. There is a growing camp of market watchers who believe the Fed will be forced to back track. Deteriorating economic conditions both in the U.S. and abroad may force the Fed to pause their rate hike plans or even cut rates again.

Even if the Fed does try to raise rates the yield curve, where many banks make their money, could struggle. If the stock market remains sour throughout 2016 it will drive money into the perceived safety of U.S. bonds and that will keep yields on the 10-year low. So now that I have painted a rather unappetizing picture for the banks I'm adding a new bullish play.

All of the issues above are long-term troubles that could plague financials throughout 2016. On a short-term basis the banks are oversold and due for a bounce. Tonight's trade is a short-term technical one. The KRE is nearing major support and should rebound.

If you are not familiar with the KRE it is an ETF that tracks the S&P regional banks select industry index. The top ten holdings in this ETF are: PNC, BBT, KEY, STI, HBAN, CIWV, RF, FITB, MTB, ZION,

You can see on the daily chart below the KRE is plunging. On the weekly chart I have highlighted long-term support at the $35.00 level. Odds are good that if the KRE is going to bounce that is the spot to watch. Tonight I am listing a buy-the-dip trigger at $35.50. We will start this trade, if triggered, with a stop loss at $34.40. Remember, this is a short-term trade. We want to get in, catch a bounce, and get out.

Buy KRE shares, currently $36.31 with a trade at $35.50. stop loss $34.25


Buy March $38 call, currently 94 cents, stop loss $34.25.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

BEARISH Play Updates

CF - CF Industries


CF is the gift that keeps on giving with another -$1.32 drop today. Next support is $25.68.

More conservative investors may want to take some money off the table early, especially if you're trading the option.

Original Trade Description: January 5, 2016:

CF underperformed the broader market and its sector in 2015. The S&P 500 lost -0.7% for the year while the IYM basic materials ETF lost -14.4%. Shares of CF returned a -25% loss last year. Momentum remains to the downside.

According to the company, "CF Industries Holdings, Inc., headquartered in Deerfield, Illinois, through its subsidiaries is a global leader in the manufacturing and distribution of nitrogen products, serving both agricultural and industrial customers. CF Industries operates world-class nitrogen manufacturing complexes in Canada, the United Kingdom and the United States, and distributes plant nutrients through a system of terminals, warehouses, and associated transportation equipment located primarily in the Midwestern United States. The company also owns a 50 percent interest in an ammonia facility in The Republic of Trinidad and Tobago."

It is important to note that CF is currently in the process of merging with OCI. Here's a brief description, "OCI N.V. is a global producer and distributor of natural gas-based fertilizers and industrial chemicals based in the Netherlands. The company produces nitrogen fertilizers, methanol and other natural gas based products, serving agricultural and industrial customers from the Americas to Asia. The company ranks among the world's largest nitrogen fertilizer producers, and can produce more than 8.4 million metric tons of nitrogen fertilizers and industrial chemicals at production facilities in the Netherlands, the United States, Egypt and Algeria."

Once the merger is completed they plan to move the new company's headquarters to the Netherlands to reduce their tax burden. Last year some U.S. government officials voiced their displeasure at these tax-inversion mergers to avoid paying U.S. taxes. There is a chance (albeit a small one) that the U.S. tries to stop this merger before it's completed.

Meanwhile the company continues to struggle with weak prices for nitrogen fertilizer. Looking at CF's last four quarterly earnings reports they have missed Wall Street's earnings estimates three of the last four quarters (and two quarters in a row). Revenues were down -8.3%, -15.8%, -10.9%, and -0.7% in the most recently reported quarter.

CF faces tough competition from fertilizer producers in China and in Russia and the Ukraine. It is worth noting that Bank of America just recently came out with a bullish call on CF. The BoA analyst suggested that fertilizer prices are too low and will bounce and CF's stock price should bounce with it. CF claims demand remains strong but that doesn't help if prices keep falling (obviously demand isn't strong enough or prices would rise).

Technically the path of least resistance is down and CF just broke support near $40.00. These are new two-year lows. Tonight we are suggesting a trigger to launch bearish positions at $38.85. Plan on exiting prior to CF's earnings report in mid February.

Position 1/6/16:

Short CF shares @ $38.65, initial stop loss $38.75


Long Feb $35 put @ $1.20, initial stop loss $38.75

Trade History:
01/16/16 new stop @ 33.25
01/13/16 new stop @ 33.60
01/11/16 new stop @ 34.15
01/09/16 new stop @ 35.75
01/07/16 new stop @ 37.05
01/06/16 new stop loss @ 38.75
01/06/16 triggered on gap down at $38.65, suggested entry was $38.85

ETN - Eaton Corp


ETN gapped open to resistance at $48.65 but immediately came to a dead stop. I lowered the stop loss to $49.25 just in case resistance fails.

More conservative investors may want to take some money off the table early, especially if you're trading the option.

Original Trade Description: January 9, 2016:

Industrial stocks did not have a good 2015. The XLI industrials ETF and the Dow Jones Industrial Average both fell more than -6% last year. ETN significantly underperformed its peers with a -23% decline for 2015. Part of the problem is weak demand overseas compounded by a stronger dollar. Plus, the manufacturing sector in the U.S. is in recession.

ETN is in the industrial goods sector. According to the company, "Eaton is a power management company with 2014 sales of $22.6 billion. Eaton provides energy-efficient solutions that help our customers effectively manage electrical, hydraulic and mechanical power more efficiently, safely and sustainably. Eaton has approximately 99,000 employees and sells products to customers in more than 175 countries."

Earnings and revenue growth for ETN was challenging last year. The company lowered guidance four times in 2015. Their most recent earnings report (Q3 results) from October 30th showed revenues were down -9.2% from a year ago. Earnings were down -25%.

ETN management is trying to be proactive. They plan to expand their restructuring efforts into 2016. Hopefully they will be able to cut costs by another $190 million if all goes as planned. The one positive side of ETN's slide has been the surge in its dividend. The stock just closed at three-year lows, which as boosted the dividend yield to 4.2%. Although I don't know why you'd buy ETN for the dividend if you are in jeopardy of losing more than 4% in the stock. The point & figure chart is forecasting a $42.00 target.

The ISM index measures manufacturing activity in the United States. December's ISM reading was negative for the second month in a row and marked the sixth monthly decline in a row. Numbers under 50.0 on the ISM index represent contraction. November's was 48.6. December's slipped to 48.2. Odds are it will be under the 50.0 again this month.

With the industrial sector in recession, revenues and earnings falling, the bearish momentum in ETN should continue. Last week's market decline has pushed ETN below round-number, psychological support at the $50.00 level. Now shares are poised to accelerate lower. Tonight we are suggesting a trigger to launch bearish positions at $48.85. My only caution is our time frame. ETN has earnings coming up in early February (no confirmed date yet). This could be a short-term three-four week play.

Position 1/11/16:
Short ETN shares @ $48.85, stop loss $49.25


Long Feb $47.50 put @ $1.55, stop loss $49.25

Trade History
01/13/16 new stop @ 50.75
01/11/16 triggered @ $48.85

HOG - Harley Davidson


HOG may be trying to form support at $40. Our stop is $41.25.

More conservative investors may want to take some money off the table early, especially if you're trading the option.

Original Trade Description: December 9, 2015:

HOG was a big winner during the market's rally off the 2009 bear-market low. Shares surged from about $8 in early 2009 to over $74.00 in 2014. Unfortunately that bullish momentum is long gone.

HOG is in the consumer goods sector. According to the company, "Harley-Davidson, Inc. is the parent company of Harley-Davidson Motor Company and Harley-Davidson Financial Services. Since 1903, Harley-Davidson Motor Company has fulfilled dreams of personal freedom with custom, cruiser and touring motorcycles, riding experiences and events and a complete line of Harley-Davidson motorcycle parts, accessories, general merchandise, riding gear and apparel. Harley-Davidson Financial Services provides wholesale and retail financing, insurance, extended service and other protection plans and credit card programs to Harley-Davidson dealers and riders in the U.S., Canada and other select international markets."

The company has seen sales slow down. Their most recent earnings report was October 20th. Q3 earnings growth was flat (+0%) from a year ago at $0.69 a share. That missed estimates by 8 cents. Revenues only rose +0.9% to $1.14 billion, which also missed estimates. The company said their dealer new motorcycle sales were down -1.4% worldwide from a year ago. Their U.S. sales fell -2.5%. Shipments came in below guidance.

Matt Levatich, President and Chief Executive Officer, said, "We expect a heightened competitive environment to continue for the foreseeable future." The company lowered their shipment guidance for 2015. They also lowered their margin guidance. The stock reacted with a big drop on the earnings miss and lowered guidance. Multiple analyst firms downgraded the stock in response to the news.

Technically HOG is in a bear market. Shares have a bearish trend of lower highs and lower lows. HOG spent most of November struggling with resistance at $50.00. The recent weakness has pushed shares to new two-year lows. The next drop could push HOG toward $40 or lower. Tonight we are suggesting a trigger to launch bearish positions at $45.75.

My biggest concern is some analyst deciding that HOG looks "cheap" on valuation. At this point HOG could be a value trap. Cheap stocks can always get cheaper.

Position 12/11/15:
Short HOG shares @ $45.75, stop loss $41.25


Long Feb $45 put @ $2.59, stop loss $41.25

Trade History:
01/16/16 new stop @ 41.25
01/11/16 new stop @ 44.15
01/06/16 new stop @ 44.55
12/16/15 new stop @ 47.35
12/11/15 triggered @ $45.75

VXX - VIX Futures ETF


We are headed for another crash at the open on Wednesday with the S&P futures down -29 as I type this. Volatility this high never lasts long and only a few weeks at most. Be patient. The volatility will eventually die.

Trade Description: August 24, 2015

The U.S. stock market's sell-off has been extreme. Most of the major indices have collapsed into correction territory (-10% from their highs). The volatile moves in the market have investors panicking for protection. This drives up demand for put options and this fuels a rally in the CBOE volatility index (the VIX).

You can see on a long-term weekly chart that the VIX spiked up to levels not seen since the 2008 bear market during the financial crisis. Moves like this do not happen very often. The VIX rarely stays this high very long.

How do we trade the VIX? One way is the VXX, which is an ETN but trades like a stock.

Here is an explanation from the product website:

The iPath® S&P 500 VIX Short-Term Futures® ETNs (the "ETNs") are designed to provide exposure to the S&P 500 VIX Short-Term FuturesTM Index Total Return (the "Index"). The ETNs are riskier than ordinary unsecured debt securities and have no principal protection. The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC, and are not, either directly or indirectly, an obligation of or guaranteed by any third party. Any payment to be made on the ETNs, including any payment at maturity or upon redemption, depends on the ability of Barclays Bank PLC to satisfy its obligations as they come due. An investment in the ETNs involves significant risks, including possible loss of principal and may not be suitable for all investors.

The Index is designed to provide access to equity market volatility through CBOE Volatility Index® (the "VIX Index") futures. The Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants' views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index. Owning the ETNs is not the same as owning interests in the index components included in the Index or a security directly linked to the performance of the Index.

I encourage readers to check out a long-term chart of the VXX. This thing has been a consistent loser. One market pundit said the VXX is where money goes to die - if you're buying it. We do not want to buy it. We want to short it. Shorting rallies seems to be a winning strategy on the VXX with a constant trend of lower highs.

Today the VXX spiked up to four-month highs near $28.00 before fading. We are suggesting bearish positions at the opening bell tomorrow. The market volatility is probably not done yet so we are not listing a stop loss yet.

Position 8/25/15:
Short VXX @ $21.82, no stop loss.

Position 9/2/15:
Short VXX @ $29.01, no stop loss.

Trade History
11/07/15 adjust exit target to $16.65
11/02/15 adjust exit target to $16.50
10/19/15 add an exit target at $16.25
10/15/15 planned exit for the October puts
10/14/15 if you own the options, prepare to exit tomorrow at the close
09/02/15 2nd position begins. VXX gapped down at $29.01
09/01/15 Double down on this trade with the VXX's spike to 6-month highs
08/25/15 trade begins. VXX gaps down at $21.82

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