Option Investor

Daily Newsletter, Thursday, 4/14/2016

Table of Contents

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

Market Wrap

Drifting Higher

by Thomas Hughes

Click here to email Thomas Hughes


The market drifted higher on mixed data and mixed earnings reports. The data seems to edge us closer to a rate hike with one hand while keeping those same rate hikes at bay with the other; bank earnings are better than a expected, a little, but beg the question; in the face of year-over-year earnings decline are they better enough?

International markets were buoyed by earnings, data and oil prices. Asian indices were led by the Japanese Nikkei which gained nearly 3.25%, aided by a mildly softer yen. European indices were also able to close in the green after a morning spent hugging break-even. Late day trading got a boost following the release of US data and earnings from Bank of America and Wells Fargo.

Market Statistics

Futures trading indicated a flat-to-positive open all morning with little affect from either earnings or economic data. There was a little fluctuation during the early morning session but nothing major. At the open indices posted small gains, less than a tenth of a percent, and after a few minutes trading in the green quickly retreated below yesterday's closing prices. The market fell for the next half hour, reaching a low of about -0.17% for the SPX. Bottom was reached by 10AM, by 11:30 the market had returned to break-even level and pushed through to make a new high for the day, about +0.15%. This high was followed by another an hour later, about 0.30% for the SPX, after which the indices returned to break-even. The rest of the day saw more of the same sidewinding around break-even levels, leaving most of the indices in the green at the close of the session.

Economic Calendar

The Economy

CPI was released simultaneous to jobless claims, which dropped unexpectedly. Initial claims for unemployment fell -13,000 to 253,000, just above the 43 year low set last year. Two factoids; last weeks figure was revised lower by -1,000, this week makes the 58th week of jobless claims below 300,000, the longest streak since 1973. The four week moving average also fell, by -1,500, to 265,000. On a not adjusted basis claims rose by +10.4%, less than the +16.2% predicted by the seasonal factors, and are down -12% over this same time last year. On a state by state basis New York and New Jersey had the largest increases in claims, 4,511 and 3,836. California and Arkansas had the largest decreases in claims, -7,118 and -1,249. Simply put, initial claims data remains consistent with labor market health.

Continuing claims also fell, shedding -18,000 to hit 2.171 million, just above the long term 43 year low set last year. Last week's figure was revised lower by -2,000, the four week moving average fell by -10,250 to 2.178 million and is now at a 16 year low. Based on this week's data and long term trends continuing claims remains consistent with a health labor market.

Total claims also fell, -34,920, and are now 2.40 million. This is the lowest level since December 19th and down -4.25% year over year. Total claims continues to decline in line with seasonal trends and should continue to do so into June at least. Based on historical data total claims may shed as much as 35% in that time, falling to 1.85 million from the January high of 3.049 million, matching the long term low set last year, consistent with a healthy labor market.

The Consumer Price Index offered a mixed bag of results. Headline CPI rose only 0.1% versus an expected gain +0.3%, indicating some inflation growth but not much. Over the past 12 months not-adjusted CPI has risen 0.9%, better but still not nearly matching FOMC targets for a healthy economy. Within the report food inflation fell by -0.2%, offset by gains in energy, the first since November of last year. The core ex-food and energy CPI also rose only 0.1%, below expectations. Core CPI is up 2.2% year-over-year and it at least is trending at levels desirable for the FOMC. The low levels of growth helped remove any lingering expectation there would be a rate hike at the next meeting.

The Oil Index

Oil prices were choppy today but WTI held above $41.50. A new report from the IEA has lowered expectations for 2016 demand but at the same time the expected drop-off of US production is beginning to gain momentum. This is on top of anticipation of the Doha meeting and possible production caps, scheduled for Sunday. In the near term, prices are supported more by rumor and hope than anything else as fundamentals remain bearish. In the longer term prices may be supported by an evolving supply/demand outlook scenario that may be coming back into alignment. Risk over the next few days is firmly centered on the Doha meeting, most likely a buy-the-rumor-sell-the-news types of event.

The Oil Index continues to struggle with resistance at 1,120. The index has moved to the top of its range and, like the underlying commodity, not yet able to break above it. The current move higher is supported by hope and rumor, once the Doha meeting comes and goes there will be only the reality of production at current, high, levels. Since this reality is likely already priced into the market there is little reason to expect oil prices to move higher without some other fundamental change. If the index is able to break out next resistance target is near 1,150. If not, the index is likely to remain range bound with possible support along the short term moving average and/or the 1,000 levels. In either event oil prices remain the number one driver of this index.

The Gold Index

Gold prices retreat today on a stronger dollar, even though today's gains in the dollar were capped. Spot gold fell about -1.5% to trade near $1,228 and the middle of a three month trading range. The price of the metal, and the dollar, are winding up on central bank speculation with longer term direction in doubt. This wind-up is will likely continue until the next FOMC meeting, in just 2 weeks, driven by data and affected by the ECB meeting next week.

The Gold Miners ETF GDX fell a little more than -3.35% in today's action. Today's move is the first test of support at the $21 level and may not be the last. The sector made a major break out last week, so a test of support such as this is to be expected in order to confirm its strength. The indicators are mixed, bullish but divergent, so the strength of the break out is questionable. If support holds a move higher with near to short term target near $25 is very possible but whipsaw is another possibility. $22.50 has been significant resistance within the past 2 years and could mark a top. The next two weeks could be volatile while the market waits for the Fed meeting.

In The News, Story Stocks and Earnings

The Dollar Index moved up to make a one week high on today's data, and then confirmed resistance by pulling back from the short term moving average. Price action created a potential shooting star with the short term moving average as resistance, confirming the 4.5 month downtrend in dollar value. The data shows labor data is strong and trending healthy, supporting the longer view that interest rate hikes are coming, countered by CPI which shows consumer level inflation is tame with no indication an immediate rate hike is likely. With little left in the way of data to support the dollar before the FOMC meeting, and a low likelihood the ECB will weaken the euro, it looks like the index will retest the recent low near $94.

More bank earnings today. All in all, they are reporting better than expected but they are also reporting significant declines in year over year earnings. They are also reporting a troubled environment with uncertain outlook that helped to cap today's gains. Comments from the reports include things like uncertain FOMC outlook, volatile operating environment and negative market performance. Bank of America and Wells Fargo both beat by a penny, both impacted by near term hurdles including low interest rates. Bank of America saw a sharp decline in revenue from trading, Wells Fargo an impact from higher reserve requirements linked to energy exposure. Bank of America closed with a gain of 2.61% and a new 3 month high.

Wells Fargo was not able to close with a gain today. The stock opened with a loss and tried to move higher but was not able to do so. It looks like WFC is stuck in a near term trading range but was at least able to close above the short term moving average. The indicators are rolling into a bullish signal as well so a move to test resistance between $50 and $51 may be brewing.

The financial sector was able to move higher on the earnings news although the move was hesitant. The Financial SPDR XLF gained only a quarter percent in a move that indicates resistance at $23, consistent with a gap opened at the beginning of the year. The indicators are confirming today's new high so resistance could be broken with an upside target between $24 and $25. Support is near $22 and the short term moving average. Tomorrow Citigroup reports and could provide additional support for the sector.

The Indices

The indices, save one, crept higher in today's session led by the Dow Jones Transportation Average. The index made a gain of 0.25% and created a small spinning top candle just below 8,000. This is the third time the index has tested this level over the past month so it could provide resistance going into options expiration tomorrow. The indicators are mixed with bullish bias, stochastic is pointing higher while MACD approaches the zero line, so resistance may be tested or even broken. Next resistance target above 8,000 is close, near 8,125, a break above that could take it up to 8,400. Support is near 7,750.

The Dow Jones Industrial Average is the next biggest gainer in today's session, about 0.10%. Today's candle is a small spinning top, just below resistance at 18,000, with weakly bullish indicators. The indicators are moving up in the near term but persist in diverging from new highs in indication of weakness. Now that the index is back to 18,000 it will need to break through else risk a fall back to strong support levels. Support target is near 17,500.

The S&P 500 made the smallest gain in today's session, only 0.02%. The broad market created a small spinning top candle at 2,082 level. Price action over the past two days has negated any thoughts a head & shoulder were forming although signs of weakness persist. The indicators are both divergent from the newest high and consistent with a weakening market. A break above 2,082 could move up to test resistance near 2,100 or 2,020 but without a definitive break above the all time high this rally looks like it is cresting a peak.

The only index to post a loss in today's session was the NASDAQ Composite. The tech heavy index shed -0.03% in a move that indicates indecision. The candle is a spinning top, just below resistance, accompanied by rapidly weakening and divergent indicators. A break above 4,950 is possible but without some indication of strength or market conviction is would be questionable.

The market continues to move higher but signs the rally is tiring persist. The indices may not fall tomorrow but there are some things to consider before giving the all clear for rally, especially with options expiration day tomorrow. One is earnings. Earnings are mildly better than expected, reason to breath a sigh of relief but not to shout for joy, and it is still very early in the season. Another is oil prices. The indices are approaching all time highs driven primarily on oil prices. Oil prices are up on the hopes there will be an agreement to cap global production. These hopes are centered on a meeting scheduled to occur this weekend with an outcome likely to do little to change market outlook but a huge potential to drive oil prices on Monday morning. A sharp drop in oil prices could drag the broad market down with it, reason to close out positions going into the weekend. I remain bullish for the long term but wary of pull backs and correction in the near.

Until then, remember the trend!

Thomas Hughes

New Plays

Strong Resistance

by Jim Brown

Click here to email Jim Brown
Editor's Note

Wednesday's short squeeze powered this ETF right to major resistance where it came to a dead stop. The 200-day average on the Russell 2000 is 1,132 and the Russell closed at 1,128. The Russell IWM ETF is facing the same average at 112.56 and the ETF closed at 112.20. This is a classic case of resistance held.


No New Bullish Plays


IWM - Russell 2000 ETF - ETF Profile

This is a simple play. The markets have rallied to resistance and could face a significant challenge in moving higher. The Russell broke over at 1,110 (111 on the ETF) and rallied right to downtrend resistance and the 200-day average. It is entirely possible the market will continue higher but there is a good chance it will roll over as well. The next few days will be critical.

The two-day short squeeze faded on Thursday and the markets did not sell off. They held their gains, which is bullish. However, we have a potentially negative event on Sunday with the OPEC meeting in Doha, Qatar. If those bozos fail to produce some kind of agreement that will satisfy the market we are going to see a crash in oil prices that could knock the market significantly lower.

We are also going to see a deluge of earnings next week and the earnings warnings are thicker than flies at a picnic. If the first few companies miss estimates it could sour the market.

On the positive side, when the major indexes near historic highs those highs tend to turn into price magnets. The Dow is only about 425 points from its historic high. That is a powerful market dynamic. The S&P is 50 points below its high.

We have multiple forces pushing and pulling the market and those will increase next week. I am recommending we enter a bearish position at $111.50 on the ETF, currently $112.20.

I do not want to be short unless the market rolls over.

With an IWM trade at $111.50

Buy June $109 put, currently $2.24. Initial stop loss $113.50.

In Play Updates and Reviews

Pause Before the Storm

by Jim Brown

Click here to email Jim Brown

Editors Note:

After two days of strong short squeeze gains the markets rested on Thursday but the major indexes did not decline. This was a consolidation day after strong gains. The markets were lackluster on low volume as the indexes tried to navigate through their respective resistance levels.

The Dow stopped exactly at the upper resistance level at 17,925. At this point, we may need another catalyst to power us higher. Citigroup reports earnings at the open on Friday and that could be a determining factor for market direction.

The Dow jumped completely over the resistance zone because of the short covering but moving higher from here could be a challenge. The next resistance zone runs from 18,125 to 18,165 and then the historic high at 18,351 from last May. We are very close and a failure at that historic high as we approach May this year would produce a monster double top formation ahead of the summer doldrums.

Friday could be driven by oil prices as well since the Sunday production freeze meeting in Doha is already falling apart. The Russian energy minister said it would only be a "loose agreement" or a "gentlemen's agreement" without any formal rules or specific details. Since the OPEC countries are some of the least reliable countries in the world when it comes to oil production, a deal has no chance of being reliable. OPEC cannot even depend on each country to supply accurate production numbers. OPEC contracts with tanker trackers and pipeline operators to calculate production info. There could be a sell the news event in crude oil on Friday. OR, gullible traders could buy it thinking there will be a miracle. WTI futures expire on Wednesday so that is another incentive for current holders to sell early next week.

Current Portfolio

Current Position Changes

ORBC - Orbcomm

The long position remains unopened until ORBC trades at $10.50.

LGF - Lions Gate Entertainment

The short position remains unopened until LGF trades at $19.65.


The long position was closed at the target price of $16.65.

Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.

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.

BULLISH Play Updates

CLDX - Celldex Therapeutics - Company Profile


No specific news.

Original Trade Description: April 5th.

Celldex Therapeutics is a biopharmaceutical company that develops, manufactures, and commercializes novel therapeutics for human health care in the United States.

That could be the opening sentence for almost any biotech company in the USA. They have multiple cancer drugs in trials and they have a drug for breast cancer in a registration trials after already passing through the gauntlet of multiple clinical trials.

Earnings are May 4th.

The stock was starting to recover from a long-term decline until a brain cancer drug failed a clinical trial and shares collapsed from $8 to $3. Now after a month of consolidation shares are starting to move higher again.

In biotech stocks with bad news, traders tend to over sell the news. The stock crashes to some ridiculous low and then languishes there for a while until all the existing owners get fed up due to the lack of a bounce and leave. New investors seeing a bargain and the opportunity to get in at a ridiculous low begin to accumulate the stock. I believe that is what we are seeing now.

This is really a play on the potential for a rebound in the biotech sector rather than some outstanding CLDX quality. I believe the stock is oversold and it has been rising for the last four days along with the biotech sector. If the sector continues to rise as I expect we should see CLDX rise as well as the penny stock investors begin to load up on an oversold opportunity.

Shares hit $4.65 today before fading with the market. I am recommending we buy a trade at $4.75 with a stop at $3.25. I will raise that stop rapidly if the trade begins to stall.

Position 4/6/16 with a CLDX trade at $4.75

Long CLDX shares @ $4.75, see portfolio graphic for stop loss.


Long May $5 call @ 50 cents. No stop loss.

DDD - 3-D Systems Corp - Company Profile


Bank of America upgraded DDD from underperform to buy, skipping neutral in the process. Their new price target jumped from $11 to $21. Shares rallied 10% on the news. The analyst said the company had been able to further reduce costs despite weak demand. New nine-month high. I am not raising the stop loss until I see what happens on Friday.

Target $20 for an exit.

Original Trade Description: March 29th.

3D Systems provides 3D printing products and services worldwide. The printers use input from 3D design software, CAD software and other design tools using a range of print materials including plastic, metal, nylon, rubber, wax and composite materials.

3D crashed and burned after a couple of horrific earnings reports in 2015 and shares declined from $33 to $7 at the January lows. The entire sector saw a reset of stock prices and expectations.

For Q4 3D posted earnings of 16 cents that blew away estimates for 3 cents. 3D is the industry leader and appears to be roaring out of the darkness that enveloped the sector in 2015. Three-dimensional printing revenues are expected to grow from $3.07 billion annually in 2013 to $12.8 billion in 2018 and $21 billion by 2020 with a consolidated average growth rate of 34%.

On Monday 3D Systems announced several new software products that overcome prior limitations weighing on all printer companies. The product suite called Geomagic Freeform has multiple products that will power a jump forward in the 3D technology capability and greatly reduce the time needed to go from concept to printed article.

Under Armour (UA) just announced it used 3D Systems selective laser-sintering technology to produce the UA Architech shoe. This is the world's first performance training shoe with a 3D-printed midsole that is available to the general consumer market. Under Armour plans to release an entire line of 3D printed shoes in 2016. Late last year New Balance also partnered with 3D to make a commercially available running shoe with a 3D-printed midsole.

DDD shares are rallying on the multiple announcements and the appearance that all is well in 3D land. Resistance is $15.45.

Earnings are May 5th.

Position 3/30/16 with a DDD trade at $15.60

Long DDD shares @ $15.60, See portfolio graphic for stop loss.

Long May $17 call @ $1.05, See portfolio graphic for stop loss.

HALO - Halozyme Therapeutics - Company Profile


No specific news.

Original Trade Description: April 13th.

HALO is a biotechnology company that researches, develops and commercializes human enzymes. Its human enzymes are used to facilitate the delivery of injected drugs and fluids, enhancing the efficacy and the convenience of other drugs or can be used to alter tissue structures for clinical benefit. The company is also developing PEGylated recombinant human hyaluronidase (PEGPH20) for the treatment of metastatic pancreatic cancer, non-small cell lung cancer, gastric cancer, metastatic breast cancer, and other cancers in combination with various cancer therapies.

This is an easy play. The company is presenting data from multiple trials at the American Association of Cancer Research meeting that will take place April 17-20th. They will release five different abstracts detailing drug interactions at this conference. At the same time they will host an investor/analyst meeting on April 18th at 4:PM.

They reported earnings of 3 cents compares to expectations for a loss of 11 cents. Revenue was $52.2 million.

HALO has partnerships with Roche, Baxalta, Pfizer, Janssen, AbbVie and Lilly. This is not a pipsqueak company.

HALO broke over recent resistance at $11.25 on Wednesday and could run if the data presented is positive. I am recommending we take a long position with a tight stop at $10.50.

Position 4/14/16

Long HALO shares @ $11.99 initial stop loss $10.50.

No options recommended.

ORBC - Orbcomm Inc - Company Profile


No specific news.

The position remains unopened until ORBC trades at $10.50.

Original Trade Description: April 5th.

Orbcomm provides machine-to-machine (M2M) and internet of things (IoT) solutions in the U.S., South America, Japan, Europe and internationally. Customers are able to track and manage fixed and mobile assets. They also provide satellite automatic identification service (AIS) for vessel navigation. Orbcomm has its own constellation of 41 low earth orbit satellites. Communication can also be handled through terrestrial based cellular network services.

Basically, Orbcomm can track anything and communicate with anything that is Internet, Cellular or GPS enabled. Companies use Orbcomm devices to track refrigerated trucks and trailers while monitoring temperatures of those vehicles. Orbcomm can track and monitor engine performance, locations, operating time, etc on over the road trucks, earth moving equipment, trailers on trains, containers on ships, etc.

Orbcomm added 239,000 connected devices in Q4 alone. Total installed and billable communicators rose from 976,000 at the end of 2014 to 1,569,000 at the end of 2015. On December 21st Orbcomm successfully launched 11 second generation OG2 satellites from Cape Canaveral and after testing all satellites went live on March 1st.

Large fleet customers are signing up for the Orbcomm service faster than the devices can be installed. Growth is accelerating faster than the 61% increase in 2015. Current high profile customers include Caterpillar, Hitachi Construction, John Deere, Komatsu, Volvo, C&S Wholesale, Canadian National Railway, Hub Group, KLM Transport, Marten Transport, Swift Transportation, Target, Tropicana, Tyson Foods, Walmart, Union Pacific Railroad, Werner Enterprises and hundreds more.

Earnings last quarter were only a penny because of the high cost of satellite launches. They also acquired three companies, Skywave, InSync and WAM Technologies.

Earnings are May 5th.

Shares of ORBC have been erratic over the last four months. As they announce successful satellite launches, new Fortune 100 customers, etc the stock spikes and then goes dormant for a week or two until the next announcement. Most traders have never heard of the company so every press release introduces ORBC to a new segment of investors. I know the stock looks over extended but I believe they are in a growth phase that will continue.

I am recommending we buy ORBC on a breakout over $10.50 with a stop loss at $8.75. One analyst last week was talking about $25 now that the satellite expansion phase was complete and the M2M and IoT applications were becoming a reality.

With ORBC trade at $10.50

Buy ORBC shares, initial stop loss $8.75

No options because of wide spreads.

SPXC - SPX Corporation - Company Profile


Another new 7 month high. The position was closed when shares hit our exit target at $16.65 intraday.

Original Trade Description: March 30th

SPX provides specialized heating, ventilation and air conditioning (HVAC) solutions worldwide. They also provide instrumentation, detection and measurement for industrial markets. They offer detection and inspection equipment for underground pipes and cables, specialty lighting products, communications technologies and bus fare collection systems. Their power segment provides all types of equipment and technology for the power generation, transmission and distribution market.

As part of a companywide restructuring process in December they agreed to sell their dry-cooling tower business. On the Q4 conference call they also announced plans to sell portions of the power division. They hired an outside advisor to provide strategic alternatives as they sell off the low margin and poorly performing portions of the business. They spun off the flow food and power portion into a new company SPX Flow (FLOW) in September.

They reported earnings of 52 cents that missed estimates of 57 cents. However, shares rebounded on the news of the various restructuring efforts. Shares rallied to resistance at $14.85 at the close today. A break over that resistance could hit $17 in the days ahead.

Earnings are May 5th.

Position 3/31/16 with a trade at $15.05

Closed 4/14/16: Long SPXC shares @15.05, exit $16.65, +1.60 gain.

TRN - Trinity Industries - Company Profile


Minor dip after three days og gains. We will not be exiting before earnings. We have a July call option so plenty of time.

Original Trade Description: March 18th

Trinity Industries manufacturers rail cars, highway guard rails and steel beams for infrastructure projects, structural towers for wind turbines and electrical distribution grids, oil and chemical storage tanks, barges to transport grain, coal, aggregates, tank barges to transport oil, chemicals and petroleum products. The company was founded in 1933.

Shares crashed in mid February after they reported earnings that beat the street but guidance that disappointed. Earnings of $1.30 easily beat estimates for $1.07 but revenue of $1.55 billion missed estimates for $1.61 billion. They had full year earnings of $5.08 per share.

They guided for 2016 to earnings of $2.00 to $2.40 per share. The challenge is the slowdown in orders for railroad tank cars and barges to transport oil. With oil prices crashing the producers and refiners are cutting back on capex spending until prices recover. Trinity said revenue in 2016 could decline -32%. Shares declined -35% over two days on the news.

The key here is that Trinity is now trading at a PE of 3. Yes 3.74 to be exact. With earnings in the middle of their range at $2.20 and a PE of 10 that would equate to a $22 stock price.

Here is the good news. The company has $2.12 billion in cash and undrawn credit. They are not in financial trouble. They authorized a $250 million share buyback starting January 1st. They have an order backlog of $5.4 billion in orders for 48,885 railcars. They received orders for 2,455 cars in Q4 and their backlog stretches out to 2020. The barge division received orders for $190.1 million in Q4 and had a backlog of $416 million as of December 31st. The structural tower segment has $371.3 million in order backlogs.

They recognize that tankcar and barge orders are going to remain slow until oil prices recover, which should happen later this year.

This stock was extremely oversold but began recovering in early March. Trinity produces a lot of railcars for carrying all types of products other than oil. That demand is not going to disappear and they already have order backlogs stretching into 2020.

At their current valuation they could also be an acquisition candidate. This is a great business that has been overly punished by the oil crash.

Earnings April 21st.

Position 3/21/16:

Long July $20 call @ $1.50, no stop loss.

Previously Closed 4/5/16: Long TRN shares @ $19.15, exit $17.50, -1.65 loss.

WIN - Windstream Holdings - Company Profile


No specific news. Doubling down on the option did us no good since the option spiked to 35 cents at the open. That reduced our cost a whopping -2 cents.

Original Trade Description: March 11th

Windstream provided network communications and technology solutions for consumers, businesses and enterprise organizations. They provide high-speed internet access, hosted web services and cable TV to a combined total of 1.6 million residential and business customers. They have more than 125,000 miles of high-speed fiber optic cable with speeds up to 500 gbps along their main corridors. They have 11 major data centers providing web hosting, cloud services, etc.

In the Q4 earnings, WIN reported adjusted earnings of $1.41 that crushed estimates for a loss of 48 cents. Revenue of $1.427 billion missed estimates slightly for $1.433 billion. The major earnings beat came from a spinoff of some of its telecom assets into a REIT. The cash received from the spinoff will allow some major network improvements in the months ahead.

The company declared a 15-cent quarterly dividend payable April 15th to holders on March 31st. That equates to a 7.3% annual yield.

WIN shares have been moving higher since they reported earnings on February 25th. Shares are at resistance at $8.25 and could breakout this week. The next resistance would be $11.85.

While we are not playing the stock for a takeover there is always the chance that somebody like Verizon or even Google could decide the $750 million market cap was chump change for 125,000 miles of high-speed fiber, cable TV and data center business.

I am going way out on the option to August because it is cheap and it will make a good lottery play even if we close the stock position early.

Position 3/11/16

Long August $9.00 call @ .38 cents.(Adjusted) NO STOP LOSS

Previously closed 3/29/16: Long WIN shares @ $8.22, exit $7.10, -1.12 loss.

BEARISH Play Updates

LGF - Lions Gate Entertainment - Company Profile


LGF continued to rebound but we are still not in this position so we can watch for free.

This position remains unopened until LGF trades at $19.65.

Original Trade Description: April 12th.

Lions Gate Entertainment engages in motion picture production and distribution, television programming and syndication, home entertainment, digital distribution and sales activities. They produced the series Twilight, Hunger Games and Divergent along with dozens of other films.

Shares have been falling since the Hunger Games and Divergent movies have run their course. The last Divergent movie, "Allegiant" only produced $137 million in worldwide ticket sales and was considered a disappointment.

The company has other films in progress but none are expected to be the box office draws like the ones mentioned above. There was a report last week that Lions Gate may be looking to partner with another studio and may be looking at buying a minority interest in Paramount. That would be a good deal for Lions Gate since Paramount owns Transformers, Mission Impossible and Star Trek. However at the 25-35% stake being discussed that would be roughly $2 billion and a big bite for Lions Gate at a time when future cash flows may be shrinking.

Lions Gate has not been one to shy away from acquisitions. They have done several in the past and that is how they got the Hunger Games and Twilight franchises when they purchased Summit Entertainment. They even tried to buy MGM in 2010 but failed.

Knowing that Lions Gate is on the prowl for an acquisition and has no major movies in the pipeline has put the stock into a slide.

Earnings are May 10th.

I am recommending we short LGF with a trade at $19.65 and look for them to set a new low on any acquisition announcement. Normally the acquirer shares go down. Even if they do not make an acquisition we know they are looking so investors are getting out of the way now.

With a LGF trade at $19.65

Short LGF shares, initial stop loss $20.65


Buy May $19 put, currently 80 cents, stop loss $20.65.

VXX - VIX Futures ETF - ETF Profile


Very close to our stop loss. I am tempted to lower it but I will wait and see what happens on Friday.

Original Trade Description: April 9th.

The VXX ETF tracks one-month futures contracts on the Volatility Index of $VIX. The VXX is actually less volatile than the VIX but travels in the same direction. The VXX is highly liquid with average volume of roughly 75 million shares.

The VXX or any volatility ETP or leveraged ETF should not be held for long periods of time because the futures roll over every month will reduce the value of the position. However, it is suitable for short-term tactical trades. We closed a short on the VXX a couple weeks ago for a decent profit.

With the potential for another bout of market volatility I am recommending we go long the VXX this time. Long the VXX is the equivalent of a short position since it rises with a decline in the market.

The VXX touched 17 last Monday and that was a seven-month low. I think the odds of the VXX returning to 21-22 are excellent and returning to 25 reasonably good. Going long the VXX will be a hedge against out long stock positions.

Position 4/11/16

Long VXX shares @ $18.15. Initial stop loss $16.75.

No options because of high premiums.

XLF - Financial ETF - ETF Profile


Bank of America and Wells Fargo reported earnings that were not as good as JPM. Citigroup reports on Friday and Goldman Sachs next week. That could spike the sector if they are positive.

Original Trade Description: April 11th.

The XLF is commonly referred to as the banking ETF. However, it is actually a Financial Sector ETF. Banks account for 33% of the holdings with WFC, JPM, BAC, C, USB and GS six of the top ten holdings. Insurance, brokers, diversified financial services and REITs make up the rest of the ETF.

We are playing it to capitalize on the movements in those six top banks as they report earnings. The ETF normally moves slowly and I would not recommend it as a stock holding ahead of those earnings simply because we do not know which way it will move.

I am recommending a short-term option strategy called a strangle using very inexpensive options. We only care about catching the post earnings move in what could be a rocky quarter. Since estimates are already very low there is the potential for an upside surprise and that could cause some short squeezes with the banks.

I looked at playing the weekly puts but the premiums were in some cases higher than the May premiums so we will buy the time even though we will not use it.

Position 4/12/16

Long May $23 call, @ 19 cents, no stop loss.
Long May $22 put @ 47 cents, no stop loss.
Net debit 66 cents.

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