Option Investor

Daily Newsletter, Tuesday, 11/15/2016

Table of Contents

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

Market Wrap

What a Difference a Week Makes

by Jim Brown

Click here to email Jim Brown

We moved from extreme election uncertainty and 4-month lows to new highs only 6 days later.

Market Statistics

We saw extreme volatility with the Dow futures falling -976 points from their intraday high late Tuesday night followed by a 1,453 point rebound into today's close at 18,870. The S&P and Nasdaq futures hit their circuit breakers with 5% declines in the overnight session and then rebounded with the cash indexes near new highs. The Volatility Index ($VIX) hit 20 and now it is back to 13.

Today was a nearly perfect day in the market. The Dow, which has been leading the big cap indexes higher, pulled back at the open after two prior days of small gains and then rallied again into the close at another new high.

We have seen three days of muted gains but they were still gains as the Dow has now completed 7 consecutive days of gains. This consolidation after three days of monster gains allowed the markets to pause and traders to rotate into new positions.

The Dow and Russell 2000 closed at new highs and the Nasdaq shook off some significant declines to post solid gains. It was a good day for the market.

The economic reports were market neutral. The NY Empire State Manufacturing Survey struggled back into positive territory at 1.5 for November. The reading for October was -6.8 and the Moody's forecast was -8.8 for November so this was a surprise. This was the first positive reading since July. Despite the positive headline number there was still a lot of red in the internal components. This report was ignored.

Retail Sales for October surprised with a +0.8% gain compared to estimates for +0.6% and a revised +1.0% gain in October. Excluding autos and fuel there was a +0.6% gain. Vehicles and parts, building materials, gas stations, sporting goods and nonstore retailers were the biggest gainers.

Business Inventories for September rose +0.1% and the sixth gain out of the last seven months. Manufacturing inventories declined -0.03% while retail inventories rose +0.22%. Autos and parts rose +0.7% for the largest gain. Business sales rose +0.7% and helped to keep the rise in inventories to a minimum. This report was ignored.

The calendar for the rest of the week is heavily weighted with Fed speeches. With the chance for a rate hike now at more than 81% every speech will be setting the stage and preparing investors for the event. At that high of a percentage, it is already priced into the market.

The most important economic report is the Philly Fed Manufacturing Survey on Thursday. However, everyone is focused on the market and not on economics so unless it is a disaster it will also be ignored.

Dow component Home Depot (HD) reported earnings of $1.60 that beat estimates for $1.58. Revenue rose 6.1% to $23.2 billion and beat estimates for $23.0 billion. Same store sales rose 5.9%. The company guided for full year revenue rising +6.3% and earnings to rise +15.9% to $6.33 per share. Same store sales are expected to rise 4.9%. Analysts were expecting a 6.4% rise in revenue and earnings of $6.33 so the affirmed guidance was slightly disappointing. Shares declined on the news and they were the biggest loser on the Dow.

I had expected HD earnings to be slightly better along with Q4 guidance because of all the repair work that is required after Hurricane Matthew. The company said they estimated sales rose $100 million as a result of the hurricane. While it was not a bad earnings report it did fail to impress. Home Depot does have a record of trying to keep expectations low and that may be why their guidance did not grow.

They did say the number of transactions rose 2.4% and transactions over $900 were up 11.3% in Q3.

Advance Auto Parts (AAP) reported earnings of $1.73 that beat estimates for $1.72. Revenue declined -2% to $2.25 billion but still beat estimates for $2.20 billion. Same store sales declined -1%. On the surface that would seem to be an uninspiring report but the shares spiked 15% on the news. Management said the increasing number of miles being driven and the aging vehicle fleet will be positive in future quarters. They are trying to improve operating margin by 500 basis points starting in 2017. The commentary did not excite me but there was enough meat that investors raced to cover their shorts.

3D printer maker Stratasys (SSYS) reported adjusted earnings of less than one cent compared to estimates for 4 cents. Revenue of $157.2 million missed estimates for $174.2 million by a wide margin. They guided for full year earnings of 13-21 cents on revenue of $662-$673 million. Traders were not impressed and shares fell -12%.

Dicks Sporting Goods (DKS) reported earnings of 48 cents that beat estimates for 42 cents. Revenue of $1.81 billion beat estimates for $1.77 billion. Dicks acquired numerous Sports Authority stores out of their bankruptcy and they just completed the acquisition of Golfsmith Holdings and they are going to retain 30 of the Golfsmith stores and rebrand them to their own Golf Galaxy name.

Dicks guided for Q4 earnings in the range of $1.19 to $1.31 and analysts were expecting $1.32. The expenses related to the acquisitions are taking their toll. Shares fell -7% on the news.

Teva Pharmaceuticals (TEVA) reported earnings of $1.31 on a 15% rise in revenue to $5.6 billion. Analysts were expecting $1.28 and $5.7 billion. They guided for Q4 to earnings of $1.34-$1.44 on revenue of $6.2-$6.5 billion. For the full year, they projected $5.10-$5.20 and revenue of $21.75 billion. Analysts were expecting $5.17 and $22.31 billion. Shares fell 8% on the news.

Zebra Technologies (ZBRA) reported adjusted earnings of $1.43 compared to estimates for $1.41. Revenue of $904 million missed estimates for $906.4 million. The company guided for the current quarter for earnings of $1.65-$1.85. Shares surged 13% after they announced Olivier Leonetti, formerly WDC CFO, as the new CFO for Zebra. He is known to the investing public as very shareholder friendly due to his efforts to return capital to shareholders. The CEO said Leonetti will be instrumental in developing a capital return program for Zebra.

Dow component Cisco Systems (CSCO) reports earnings after the bell on Wednesday followed by Walmart (WMT) before the open on Thursday. The combination of these two could cause some volatility on Thursday morning. Those are the last two Dow components to report for Q3.

Be careful what you short. Shares of Dryships (DRYS) were trading at $5 last Wednesday. They reported a larger than expected loss of $7.70 per share on revenue of $12.1 million. Nobody paid any attention. When the market continued to rise after the election the small cap sector was seeing a lot of buyers. Shares started to tick up and suddenly a short squeeze was born.

The company has been in trouble with the decline in shipping rates over the last two years. They did a 1 for 4 reverse split when the stock was trading at $1 in August. Shortly thereafter they engineered another 1 for 15 reverse split at the start of November. A reverse split removes shares from the market and doing two so close together removed about 90% of the float to leave only about one million shares available to trade. At the end of October there were 1.7 million shares sold short, up from 300,000 six months ago.

On Tuesday, more than 10 million shares changed hands compared to the daily volume before the reverse split of 500,000 shares. A monster short squeeze was born because traders did not take into account the dramatic reduction in the share count. That $5 stock last Wednesday hit $102 today. Clearly, there will be a massive decline eventually but this was the biggest short squeeze I can remember. A lot of money was lost over the last three days.

After the bell, the API oil inventory report showed a gain of 3.6 million barrels for the week ended on Friday. Crude prices had risen more than $2 during the regular session on positive comments out of OPEC about the potential for a production cut at the November 30th meeting. Those guys know how to play the media even better than Trump. Nothing changed. They just talked about a potential agreement again. The Saudi Arabian energy minister was quoted as saying "it is imperative that OPEC reach an agreement on curbing production" at the November 30th meeting. There were even "rumors" that Iraq and Iran were considering "restraining production." Just a week ago, they were adamant they would not participate. This is just a big con game. The IEA said on Tuesday that OPEC produced 33.8 million bpd last week. That was even higher than the prior estimate at 33.64 million. Actual production is rising rapidly at the same time they claim they want to cut it back to 32.5 mbpd.

Crude rallied to $45.76 intraday and declined slightly in afterhours on the API news. Since the API and EIA reports rarely agree, most traders are keyed into the EIA report on Wednesday morning.


It has been a great rally but not all stocks are in rally mode. Arthur Cashin reported that 300 stocks on the NYSE hit new highs on Monday at the same time that 300 stocks hit new lows. There is tremendous divergence between sectors and even individual stocks in those sectors.

Quite a few small cap stocks are up more than 15% or even 20% as the Russell 2000 hits new highs. The Russell has 19% of its weighting in financial services. That is the largest Russell sector followed by information technology 17%, industrials 15% and healthcare 13%. With the banks, industrials and biotech stocks in solid rally mode they are pushing the Russell to new highs.

However, it is either feast or famine in the small cap sector. For every stock with a 15% or more gain, there is another one testing its 52-week lows. The key is that the strong stock gains are outweighing the minor losses on the weak stocks.

Despite all the good news and the new highs, we are due for a decent bout of profit taking. I am happy to see the Dow waffle for three days but still continue its gains at a slower pace. That is the perfect way to keep the rally going.

I do not know if that is going to work on the small caps. The Russell is totally unsupported at the current level and the recent spike is totally out of character for the index.

The S&P had a great day with a 16-point gain that allowed the index to push through resistance at 2,175 and close at 2,178. The next hurdle is 2,188 and the historic high at 2,190. If the S&P can break out to a new high, it would cause an entirely new round of short covering and price chasing.

Today was a good day for the S&P because the Dow was negative for most of the day. For the S&P to shake off the Dow weakness and post a solid gain suggests there are more gains ahead. I would love to see that S&P streak continue to surge to new highs like the Russell and the Dow.

The Dow is closing in on 19,000 for the first time and the trader talk around the web is already focused on 20,000. That could be the mother of all sell signals when/if the Dow reaches that level.

The banks have been leading the Dow higher with Goldman Sachs up 20% since the day before the election. In what universe can Goldman rally 20% in seven days and not get hit by a huge decline on profit taking? We are way over due for a decent decline but I do think it will be a buying opportunity.

The Goldman chart looks like an Internet stock from the Nasdaq bubble in 2000.

The Nasdaq Composite never sold off as hard as the Nasdaq 100 and it closed at a three week high today at 5,275. The index is closing in on its prior high at 5,339 but it may not be accomplished in a straight line. That does represent significant resistance.

The 5,200 level has returned as support.

The Nasdaq 100 found support at 4,700 and it appears the big cap tech stocks have finally found some buyers. There are quite a few investors that wait for big events like we saw last week as buying opportunities and they came back in volume today.

The NDX has a long way to go before making at new high over 4,909 and we need the big caps to maintain a positive bias for a couple weeks if that is going to happen.

The Dollar Index broke over 100 intraday and that is a definite warning sign. The dollar will depress commodities but it also provides buying power overseas. This is a good news, bad news event but the bad news will eventually be the driver.

I believe the rally will continue but it should moderate in velocity. In reality, it should take several days off to rest. I would be very careful about buying any stocks with big gains because the eventual profit taking dip could be painful. Trees do not grow to the sky and rallies always see profit taking. Be prepared to buy the dips rather than chase prices higher.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Acquisition Target

by Jim Brown

Click here to email Jim Brown
Editor's Note

GNC has had buyers circling for a while and after the recent post earnings decline the price is cheaper and the reason to buy still exists.


GNC - GNC Holdings - Company Profile

GNC Holdings, Inc., operates as a specialty retailer of health, wellness, and performance products. The company operates through three segments: Retail, Franchise, and Manufacturing/Wholesale. Its products include vitamins, minerals, and herbal supplement products; and sports nutrition products, diet products, and other wellness products. The company sells its products under the GNC proprietary brands, including Mega Men, Ultra Mega, Total Lean, Pro Performance, Pro Performance AMP, Beyond Raw, GNC Puredge, GNC GenetixHD, and Herbal Plus, as well as under third-party brands. It operates a network of approximately 9,000 locations under the GNC brand worldwide. The company sells its products through company-owned retail stores; Websites, including GNC.com and LuckyVitamin.com, as well as Drugstore.com; domestic and international franchise activities; third-party contract manufacturing; and e-commerce and corporate partnerships. Company description from FinViz.com.

Just over a month ago there was a contingent of Chinese buyers circling GNC when it had a market cap of about $4 billion. When they reported earnings and lowered guidance that market cap fell to about $1 billion. Shares fell from $22 to $13 making the company even more attractive for the Chinese buyers.

The key here is not the U.S. or European business. The key point in a Chinese acquisition is the health conscious Chinese consumer. In China there are plenty of health products but most are scams or poorly processed with large amounts of unknown fillers. The health food and vitamin market is not well managed and all sorts of scary products exist.

GNC as a global brand is the answer. Chinese consumers would feel comfortable buying the brand and knowing there were no harmful ingredients.

Over the last several days, GNC shares have started ticking up again. GNC has hired Goldman Sachs to find a buyer and it is only a matter of time before that happens. The uptick in the shares could be due to rumors leaking out about a potential transaction. Option prices have also escalated suggesting something in progress.

Earnings Jan 26th.

Buy GNC shares, currently $14.80, initial stop loss $13.25

No options recommended because of price.


No New Bearish Plays

In Play Updates and Reviews

Another New High

by Jim Brown

Click here to email Jim Brown

Editors Note:

While the Dow lost ground early, the Russell 2000 continues to make new highs. The Dow recovered its lost ground to also close at a new high. The S&P was the best performer in my book after it pushed through resistance at 2,175 to close at 2,180 and a two-month high.

In a perfect world one of the major indexes would retrace its steps each day and then rebound the next while another index retraces its steps. The Dow decline this morning was perfect with a minimal drop, weak most of the day and then a rally into the close to add 54 points.

The Nasdaq indexes also recovered from their multiday losses with a 57 point gain on the composite and 62 point gain on the Nasdaq 100. It was a good day for investors.

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

IDTI - Integrated Device Technology
Long stock position entered at the open.

MENT - Mentor Graphics
The long position was closed at the open.

RCII - Rent a Center
The long position was stopped at $11.25.

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Short term Calls and Puts on equities = Option Investor Newsletter

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BULLISH Play Updates

FTK - Flotek - Company Profile


No specific news. Shares spiked 6% on the ris ein oil prices.

Original Trade Description: November 12th.

Flotek Industries, Inc. develops and supplies oilfield products, services, and equipment to the oil, gas, and mining industries in the United States and internationally. The company's Energy Chemistry Technologies segment designs, develops, manufactures, packages, and markets chemistries under the Complex nano-Fluid brand for use in oil and gas well drilling, cementing, completion, stimulation, and production activities, as well as for use in enhanced and improved oil recovery markets. This segment also constructs and manages automated material handling facilities; and manages loading facilities and blending operations for oilfield services companies. The company's Drilling Technologies segment inspects, manufactures, sells, markets, and rents down-hole drilling equipment that are used in energy, mining, and industrial drilling activities through direct and agent-based sales. Company description from FinViz.com.

In the Q3 cycle they reported a loss of 5 cents on revenue of $73.7 million. That was slightly more than the estimates for a 3-cent loss. Revenue estimates were for $79.5 million. The company explained their 16.2% decline in revenue saying there was a 43.2% reduction in the active rig count in Q3 compared to Q3-2015. In other words, their available business was cut nearly in half but they only recorded a 16% decline in revenue. That was actually a 1.0% increase sequentially from Q2.

Flotek services oil wells and especially new wells with their down hole products including their patented Complex nano-Fluid (CnF) technology that is used in fracking wells. Unlike fracking chemicals used by others, the Flotek CnF chemicals are completely non-toxic and have been proven to provide a slippery surface in the reservoir so that oil flows freely. This nontoxic chemical mix made from citrus oils is seen as a plus for producers constantly under fire for potential ground water contamination.

With rigs going back to work and drilled but uncompleted wells being brought online, the company said they were seeing signs of recovery in the sector. The drop in crude prices to $43 last week failed to depress the stock.

FTK has put in a bottom at $11 and could be ready to move towards the September highs at $16.

If OPEC actually announces some kind of production agreement on Nov 30th, the sector could respond aggressively.

Earnings Feb 1st.

Position 11/14/16:

Long FTK shares @ $11.72, see portfolio graphic for stop loss.

No options recommended because of price.

IDTI - Integrated Device Technology - Company Profile


No specific news. Shares are moving over resistance and we could see a short squeeze begin any day.

Original Trade Description: November 14th.

Integrated Device Technology, Inc. designs, develops, manufactures, and markets a range of semiconductor solutions for the communications, computing, consumer, automotive, and industrial end-markets worldwide. It operates in two segments, Communications; and Computing, Consumer, and Industrial. The Communications segment offers communication timing products, such as clocks and timing solutions; flow-control management devices comprising Serial RapidIO switching solutions; multi-port products; telecommunications products; static random access memory products; first in and first out memories; digital logic products; radio frequency products; and frequency control solutions. The Computing, Consumer, and Industrial segment provides clock generation and distribution products, programmable timing devices, computing timing solutions, high-performance server memory interfaces, PCI Express switching solutions, power management solutions, and signal integrity products, as well as sensing products for mobile, automotive, and industrial solutions. Company description from FinViz.com.

IDTI reported earnings of 34 cents that beat estimates for 33 cents. Revenue of $184.1 million barely edged ahead of estimates for $184.0 million. Revenue rose 8% making the 12th consecutive quarter of revenue growth.

They announced multiple new products for the quarter including a new 5G product in corporation with IBM for the connected car. They also obtained certification for their second production facility for automotive capabilities.

Earnings Jan 30th.

Shares spiked from $21 to $24 on the earnings then settled in for two weeks of post earnings depression. Over the last two days shares has ticked higher again and closed at $23.60 on Monday. This has been resistance from early October and from back in June. With the positive earnings and a positive market I expect the stock to breakout this time.

Position 11/15/16:

Long IDTI shares @ $23.69, see portfolio graphic for stop loss.

No options recommended because of price.

MENT - Mentor Graphics - Company Profile


The position was closed for a nice $5.55 gain this morning.

Original Trade Description: October 13th.

Mentor Graphics Corporation provides electronic design automation software and hardware solutions to design, analyze, and test electro-mechanical systems, electronic hardware, and embedded systems software worldwide. It offers printed circuit boards; Mentor Graphics Scalable Verification tools; Questa platform to verify systems and integrated circuits (ICs); FastSPICE, Eldo, and ADVance MS analog/mixed signal simulation tools; and Veloce hardware emulation system. Further, the company provides software, tools, and professional engineering services; and methodology development, enterprise integration, and deployment services. It sells and licenses its products through direct sales force, distributors, and sales representatives to the communications, computer, consumer electronics, semiconductor, networking, multimedia, military and aerospace, and transportation industries. Company description from FinViz.com.

Billionaire Paul Singer, head of Elliott Management, announced on Sept 29th his firm was taking an active 8.1% stake in Mentor Graphics. In the SEC filing Elliott said there are "strategic opportunities" available at MENT and he is going to force a sale. Singer is no stranger to activist investing. Since 1994 he has launched 114 campaigns and 14 proxy fights when companies do not take his advice and get the M&A ball rolling. Elliott has $27 billion under management and Mentor only has a $3 billion market cap. If the board does not take action quickly, Elliott could launch a proxy fight to get enough people on the board that will take action. As a relatively small company, Mentor is in the crosshairs and there is very little chance for escape.

Shares spiked in the middle of the day on Thursday after TheStreet posted an article explaining Elliott's game plan. The close at $27.92 was a 15-year high. Since Elliott announced his position at $24.69 the shares have risen about $3.50 with $2 of that the first day. Elliott is in for the long term and they will not be bailing on a $3 gain. They have a much larger goal in mind.

Earnings Nov 17th.

A lot of investors follow these activist funds and I would expect the stock to continue to rise as the headlines appear. More than 7,000 Jan $30 calls were bought today against an open interest of only 3,944.

Because of the afternoon spike I was going to put an entry trigger on the position just over the afternoon high. However, the S&P futures are down hard again tonight and maybe we will get an opportunity to buy the stock lower so I did not add the trigger. Support is $26.

Position 10/14/16:

Closed 11/15/16: Long Jan $30 call @ $1.35, exit $6.90, +$5.55 gain.

Previously Closed 11/1/16: Long MENT shares @ $28.54, exit $28.25, -.29 loss

RCII - Rent a Center - Company Profile


No specific news. Shares fell -9% intraday to $10.88 and we were stopped out for a breakeven on the shares and a 10 cent loss on the option.

Original Trade Description: November 9th.

Rent-A-Center, Inc., leases household durable goods to customers on a rent-to-own basis. The company operates through four segments: Core U.S., Acceptance Now, Mexico, and Franchising. It offers durable products, such as consumer electronics; appliances; computers, including tablets; smartphones; and furniture, including accessories under rental purchase agreements. The company also provides merchandise on an installment sales basis; and offers the rent-to-own transaction to consumers who do not qualify for financing from the traditional retailer through kiosks within retailer's locations. It operates retail installment sales stores under the Get It Now and Home Choice names; and rent-to-own and franchised rent-to-own stores under the Rent-A-Centre, ColorTyme, and RimTyme names. As of December 31, 2015, the company owned and operated approximately 2,672 stores in the United States, Canada, and Puerto Rico, including 45 retail installment sales stores; 1,444 Acceptance Now kiosk locations in 40 states and Puerto Rico; 532 Acceptance Now direct locations; and 143 stores in Mexico, as well as franchised 227 rent-to-own stores in 31 states under the Rent-A-Center, ColorTyme, and RimTyme names. Company description from FinViz.com.

For Q3, the company posted earnings of 11 cents compared to estimates for 9 cents. Revenue of $693.9 million missed estimates for $698.4 million. Same store sales fell -8.4% but that was actually better than the 9.8% estimates. For the full year they guided to earnings of $1.05-$1.15 and revenue of $2.07 to $2.10 billion.

On the surface those results were terrible. The CEO said the "Q3 earnings were negatively impacted by unexpected capacity-related system outages following the full implementation of our new store information management system within our core U.S. stores" and he was "terribly disappointed." Fortunately, the problem is now behind them and Q4 is normally a strong quarter.

Earnings Jan 25th.

Shares crashed from $13 to $8 on the earnings and have now rebounded over the last four weeks to $11. The trend over the last month has been steady and there is no reason to expect that to change over the next month. If the market is going to be positive now that the election uncertainty has passed, then the stock should do well.

Position 11/10/16 with a RCII trade at $11.25

Closed 11/15/16: Long RCII shares @ $11.25, exit $11.25, breakeven.

Closed 11/15/16: Long Dec $12.50 call @ 20 cents, exit .10, -.10 loss.

BEARISH Play Updates

EBAY - Ebay Inc - Company Profile


No specific news. Shares reversed direction for the sixth consecutive day.

Original Trade Description: October 31st.

eBay Inc. operates e-commerce platforms that connect various buyers and sellers worldwide. Its platforms enable sellers to organize and offer inventory for sale; and buyers to find and buy it virtually anytime and anywhere. The company's Marketplace platforms include its online marketplace at ebay.com and the eBay mobile apps; and StubHub platforms comprise its online ticket platform at stubhub.com and the StubHub mobile apps, which enable fans to purchase tickets to the games, concerts, and theater shows. Its Classifieds platforms include a collection of brands, such as Mobile.de, Kijiji, Gumtree, Marktplaats, eBay Classifieds, and others that offer online classifieds and help people find whatever they are looking for in their local communities. The company platforms enable users to find, buy, sell, and pay for items through various online, mobile, and offline channels, which include retailers, distributors, liquidators, import and export companies, auctioneers, catalog and mail-order companies, classifieds, directories, search engines, commerce participants, shopping channels, and networks. Company description from FinViz.com.

For more than a decade Ebay has been the primary sales hub on the web but as Amazon and others grew, Ebay fell out of favor. There are very few new items left for sale on Ebay because you can buy they cheaper from Walmart, Target or Amazon. That left Ebay to struggle to increase sales on mostly used items.

In Q3 Ebay earnings fell from $545 million and 45 cents to $418 million and 36 cents. For Q4 they expect revenue of $2.36-$2.41 billion and earnings of 52-54 cents. Analysts were expecting $2.4 billion and 54 cents. For the full year, they are now guiding for $1.85-$1.90 and $8.95 to $9.0 billion. Analysts were expecting $1.89 and $8.95. For both Q3 and the full year analysts were expecting more than the Ebay guidance.

Shares fell 18% on the news to $28.61 then rebounded two days later to $29.71. That rebound has faded and EBAY closed at $28.51 on Monday with support well below at $24.

There is just no excitement surrounding EBAY today. Since they spun off PayPal they have been struggling to grow the business. I believe shares will retest the $24 level unless we get a runaway tech rally after the election. I am not holding my breath.

Position 11/1/16:

Long Dec $28 put @ .72, see portfolio graphic for stop loss.

Previously closed 11/10/16: Short EBAY shares @ $28.51, exit $28.75, -.24 loss.

VXX - Volatility Index Futures - ETF Description


New closing low after a -4.3% decline.

Since this is a long-term play, I am not going to comment on it every day. Just forget it is in your portfolio and hope for a strong market rally in Q4.

Original Trade Description: September 6th.

The VXX is a short term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now down four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

After the August split the ETF moved sideways for four weeks at $36. I think everyone was waiting for the typical August volatility. When it did not show up and the market rallied on Friday that support broke. And the decline has begun.

Because there may be some September volatility, anyone in this position must understand that it may move higher before it moves lower BUT it will always move lower. We just have to wait it out. Volatility never lasts forever.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally as some are expecting we could see strong gains in the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in. We could keep this play in the portfolio on a trading basis permanently.

Position 9/7/16:

Short VXX shares @ $33.88, no initial stop loss.

No options recommended because of price.

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