Option Investor

Daily Newsletter, Thursday, 5/4/2017

Table of Contents

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

Market Wrap

The Fed, Healthcare, Data... Oh My!

by Thomas Hughes

Click here to email Thomas Hughes


The market was hit with a powerhouse of events that induced volatility but did not spark correction. The surprise news of the morning was apparent consensus on healthcare reform and vote planned for today, the house passed with a single vote to spare. This is of course on top of yesterday's FOMC meeting, their policy did not change but the tone did. The committee has rounded the corner from iffy on the economy to hawkish saying first quarter weakness was transitory and unlikely to sway decisions.

Asian indices were flattish, led by a 0.70% gain in the Nikkei, as traders digested the FOMC news. Also impacting sentiment was a surprise jump in Chinese copper inventories which raised speculation of economic sluggishness. European indices were much more positive. Indices across the region were lifted on earnings and the results of debate between Macron and Le Pen. Macron, who was not characterized as a good debater, came out looking fine reinforcing his lead in the polls. The DAX gained nearly a full percent and closed at a new all-time high, the FTSE MIB gained nearly 2%.

Market Statistics

Futures trading indicated a positive open all morning. Indications for a gain near 6 points on the SPX held steady through the releases of economic data and earnings and into the opening bell. The open was as expected only the gains did not last more than a few minutes. Selling took over right from the start, sending the indices down to break-even levels within the first half hour of trading. Stocks held in a tight range between the open and early low for the first half of the day but broke to the downside just before lunch. At this point selling picked up momentum, the index hit a low about -5 points from yesterday's close and then bounced right back up to near break-even where it remained into the close of the day.

Economic Calendar

The Economy

The calendar was full today but much of the data is rear looking. First up is the Challenger, Grey & Christmas report on planned lay-offs. The March total of planned lay-offs fell -15% month-to-month to 36,602 and is down more than -43% from March of last year. The retail sector led with the most planned lay-off's due to the ongoing shift from brick-and-mortar to online sales. The energy sector, which led job losses last year, reported 87% less cuts this month over the same time last year. On a year-to-date basis job cuts are down -35% from last year, the lowest 1st quarter since 2014. Adding to the bullish spin, hiring in March and the first four months of the year is the strongest its been in at least 5 years.

Initial claims for unemployment echoes the signal sent by the Challenger report, job losses and unemployment are trending lower. First time claims fell -19,000 to hit 238,000, well ahead of expectations and consistent with declining lay-offs. The four week moving average of claims rose by 750 to hit 243,000, last week's data was not revised. On a not-adjusted basis claims fell -12.6% versus an expected -5.5% and are down -13% YOY. There has been some volatility in the data over the past couple of months but the figures remain low and in-line with ongoing labor market improvement.

Continuing claims fell -23,000 to 1.964 million, a new low dating back to April, 2000. The four week moving average of continuing claims fell -1,750 to 1.989 million, a new low dating back to November of 1988. Not much more to say other than these numbers are bullish for the economy, consistent with labor market health and a continuation of ongoing labor market improvement.

The total number of Americans receiving unemployment fell -29,047 to hit 2.052 million. This is consistent with seasonal expectations and long-term labor market trends, and the lowest level since the first week of December 2016.

Productivity and Unit Labor Costs were released alongside jobless claims but come with a caveat; this is 1st quarter data and is of little importance now. Productivity fell -0.6% in the 1st quarter as hours worked outpaced output. Output increased by 1.0%, hours worked rose by 1.6%. Despite this productivity is up on a YOY basis, 1.1%. Unit labor costs also rose and came in a bit hotter than expected at 3.0% driven by a 2.4% increase in wages. The increase in wages is good for the consumer and hints at increasing upward pressure within the labor force, and the specter of rising inflation. PPI and CPI data come out next week. Tomorrow's NFP may not be strong but I still don't think it matters. All the other labor data shows high levels of job openings, declining job losses, increased hiring, rising wages and healthy labor markets.

Factory Orders for March was released at 10AM and is another bit of rear looking data. Orders rose 0.2%, half of the consensus expectations. Orders have been up 9 of the past 12 months. Shipments fell for the first time in 8 months, -0.1%, while unfilled orders rose 0.3% the third month of increases. New orders for durable goods rose 0.9% and have been growing for 9 months.

The Dollar Index

The Dollar Index saw some volatility today as well. The index was first up on the hawkish FOMC tone and then later down as the the Euro gained strength from Macron's debate win. The index fell -0.35% in today's action creating a long black candle but doing little more than extending the near-term congestion band to an 8th day. The index is sitting on support at the $99 level and balanced on a fine point between FOMC expectations and ECB expectations. Tomorrow's NFP is the next bit of data that may sway the balance. Strong NFP or other indications the FOMC will move forward with rate hiking would help strengthen the dollar. A bounce from this level will be bullish in the near-term with upside target near $100 and then $101. A break below $99 would be bearish in the near-term with downside target near $98.

The Gold Index

Gold moved lower today regardless the dollar's mid-day reversal. Spot gold fell more than -1.5% on a combination of hawkish FOMC and deflating geopolitical tensions. Gold is now trading at a 6 week low below $1230 with a chance of moving lower. Current levels are a support target, if it fails the next target is near $1220 with a chance of moving down to $1,200.

The Gold Miners ETF GDX fell to a four month low and moved below the bottom of the near-term trading range. The ETF is now trading near $21 with a chance of moving lower. The indicators are bearish and consistent with at least a test of support at this level, if not a break to new lows. This if of course dependent on gold prices, and the dollar, both of which could be moved by tomorrow's NFP and if not then, then next week with CPI and PPI data.

The Oil Index

Oil prices are slip sliding away to new 5 month lows. High levels of global production, rising US and global rig counts, record levels of US storage and the restart of Libyan fields has overcome the OPEC production cap and any hopes they may increase or prolong it. WTI fell more than -4.5% today and is now trading with a $45 handle. This level may prove to be support but I think it too soon to say for sure. If selling gains momentum a break to lower lows with a target near $40 is very possible.

The Oil Index fell in response to oil's fall and is testing my resolve. The index fell -1.75% and created a medium sized red candle deep inside my support zone. The support zone is the trading range of last year, a range that persisted for at least 7 months and was only broken when the OPEC production cap lifted oil prices. The indicators are consistent with a move lower in the near-term but persist with divergence in the long. Price action combined with support targets, the indicators and forward outlook for earnings growth make this chart look over-extended to the downside. That being said, I remain bullish on the sector for the long-term but cautious in the near and short.

In The News, Story Stocks and Earnings

The health care sector was surprisingly calm in the face of the health care reform vote. The Health Care SPDR XLV gained a half percent at the open and then moved a little higher from there. The ETF is hanging just below 1 year highs and looks as if it could move higher. Price action suggests a weak near-term uptrend with consolidation near the March highs. The indicators are both bullish and also beginning to show strength. Resistance is in the range of $76 to $77, a break above that would be bullish near-term. Support targets are $75 and $72.50 in the near-term.

Kellogg reported earnings this morning beating EPS but missing revenue estimates. EPS beat by 6.5%, revenue missed by less than 1% as the company weathers what the CEO called an unusually challenging environment for packaged foods. Despite the challenges the company says it is on track to meet 2017 goals as cost reduction initiatives offset weak comparable sales. Shares of the stock gained nearly 3% on the news, moving up from and confirming support at the 1 year low.

The VIX held steady during today's session, moving within a tight range and forming a doji candle. The fear index topped out at new near-term resistance of 11 and looks like it may continue to trend sideways from here. The indicators are both bearish and consistent with a touch to support, no indications of reversal are present just yet.

CBS reported after the bell beating on the top and bottom lines. Increases in revenue from retransmission and content licensing led strong performance across most operating segments. Shares of the stock gained 2% in after hours trading.

The Indices

The indices all closed within a few hundredths of point from 0.00% and almost all in the green. Starting with the Dow Jones Transportation Average, the index gained a little more than 0.05% to create a doji candle sitting on the short-term moving average. This candle is a sign of indecision but one with a positive bias in this instance. It is above the long and short-term moving averages within an uptrend with indicators in confirmation of support. The caveat is that the index is still trapped within a trading range with significant resistance just above today's close. Resistance is near 9,325, a break above here would be bullish.

The NASDAQ Composite closed with a gain of 0.04% creating the second of two small doji candles just below the recently set all-time high. The index looks like it may have crested a near-term peak and the indicators concur. Both MACD and stochastic have begun to roll over in confirmation of resistance but do not indicate correction or reversal. Near-term support is near 6,075 and then 6,000, a move below there could go as low as 5,900 before hitting next support.

The Dow Jones Industrial Average closed with a small loss, and created a small bodied candle with long lower shadow. The index has confirmed support at an up trend line, just above the short-term moving average and is confirmed by the indicators. Both MACD and stochastic are bullish and moving higher with room to run suggesting the index could continue to move higher as well. Resistance is at 21,000, a break above here would be bullish in the near and short-term with upside target near 21,600.

The S&P 500 closed with a gain of 0.06% and created a small doji candle. Today's action was not too strong but nonetheless tested and confirmed support along my up trend line and just above the short-term moving average. The index appears to be drifting higher with an eye toward new all-time highs although resistance is yet to be really tested. The indicators are consistent with higher prices, stochastic at least showing some strength by crossing above the upper signal line. A break above resistance at the current all-time high would be bullish with upside target near 2,475 and 2,550.

The indices have proven to be resilient once again. Today's action was rocked by the FOMC decision, politics in Europe, sluggish data and the health care vote but did not succumb to fear. The market looks like it wants to move higher and now that the FOMC has given the green light it can, providing the data and earnings outlook supports it. Earnings are so far doing their part, economic data not as much but tomorrow is a chance for that to change. I remain bullish in the long term and cautious for the near and short, waiting on the NFP.

Until then, remember the trend!

Thomas Hughes

New Plays

Fork in the Road

by Jim Brown

Click here to email Jim Brown
Editor's Note

The market has come to a fork in the road and cannot decide which direction to take. The indexes have moved sideways for 8 days with no indications of future direction. Any new position would simply be a coin toss for direction. With the payrolls on Friday and the French election on Sunday, there is no reason to add a play in a flat market just because it is a newsletter day. We should have reasonable confidence in a market direction before we invest. The market is not giving us that confidence until it goes directional again. We have moved into the "Sell in May and go away period." So far, that has not happened but it can take weeks to develop. We should be patient until there is a direction.

Despite heavy volume of 7.84 billion shares, the indexes still closed nearly flat. Without any material catalysts scheduled for next week this appears to be a distribution cycle. Funds are "distributing" their stock at a market top and patiently waiting for retail traders to push the prices up to their sell triggers. As long as traders continue to try and push higher this could continue for days or even weeks. Once traders get tired of banging their heads on resistance and pull their bids, the house of cards could come tumbling down.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Dip Buyers Alive

by Jim Brown

Click here to email Jim Brown

Editors Note:

The intraday dip was bought with just enough energy to return the indexes to the flat line. All the major indexes closed within single digits of zero with the Dow and Russell 2000 finishing negative and the S&P and Nasdaq slightly positive.

There was a decent dip around noon that knocked -100 points off the Dow in about 40 min and it only took a little bit longer for the rebound to erases that drop. That was the most intraday volatility in the last six days. The markets have gone dormant and nothing is happening. The dip buyers are still there but the sellers are still camped out at resistance and waiting for prices to come to them. Volume was actually high at 7.84 billion shares.

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

WLB - Westmoreland Coal
The short stock position was entered at the open.

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BULLISH Play Updates

BBRY - Blackberry - Company Profile


TechCrunch reviewed the new BlackBerry phone and said it was the one they should have introduced 10 years ago. CNBC also did an article on it. Read it Here

Original Trade Description: April 28th.

Research In Motion Limited designs, manufactures, and markets wireless solutions for the mobile communications market worldwide. The company was renamed Blackberry Ltd in an effort to change its public identity. The company's products include BlackBerry smartphones and accessories, including bundles, cases, audio and memory products, Bluetooth, chargers, batteries and doors, and card readers; SureType, a keyboard technology, which allows users to compose messages using single-handed operation or two-handed thumb-typing; and SurePress, a touch screen that helps in navigation and typing. Its products provide access to time-sensitive information, including email, phone, short messaging service, and Internet and intranet-based applications. The company's products also enable third party developers and manufacturers to enhance their products and services with wireless connectivity to data. Blackberry Limited markets and sells its products directly, as well as through strategic partners and distribution channels. It has a strategic alliance with Hewlett-Packard Company to deliver a portfolio of solutions for business mobility on the BlackBerry platform. Company description from FinViz.com.

Blackberry has evolved from a hardware vendor to a software company. They no longer produce their own phones and their main product is a secure software interface that is used by security conscious governments and firms everywhere.

Blackberry has moved from just a phone company to multiple product lines including software packages for automobiles. Blackberry just signed a new deal with Ford to use the Blackberry QNX software. The software has been deployed in more than 60 million vehicles. BlackBerry is a mobile-native security software and services company dedicated to securing people, devices, processes and systems for today's enterprise.

The Blackberry phones now run an Android operating system. The Blackberry KeyONE was just launched in the UK with a 4.5 inch screen above a traditional Blackberry keyboard. The device will go on sale in May in the rest of the world. The phone has a Qualcomm Snapdragon 625 chipset, 3gb of RAM, 12MP rear camera, 8MP front camera, Android 7.1 and a 3,505mAh battery for long life. Blackberry phones fill a niche for those who want an actual keyboard and/or greater security than you can get in other phones.

In their recent earnings the CEO said Blackberry was looking at opportunities for branded tablets, wearables, medical devices, appliances, point of sale terminals and other smartphones. The key point is that Blackberry security software will be integrated into all Blackberry branded items even though they will be made by over companies. That makes them low risk, all reward, opportunities.

They announced a couple weeks ago they had been awarded $814 million in royalty overpayments plus attorney's fees and interest from Qualcomm. The arbitration proceeding has been in process for a long time. This is a major infusion of cash for Blackberry.

Shares spiked to $9 on the award. After some initial profit taking they have started to rise again and closed at a new 52-week high on Friday.

Update 5/1/17: CEO was on CNBC this morning talking about accelerating transition to a software service company. Video of interview

Earnings June 30th.

Position 5/1/17:

Long BBRY shares @ $9.34, see portfolio graphic for stop loss.

Optional: Long July $10 call @ 35 cents. No stop loss.

FNSR - Finisar Corp - Company Profile


No specific news. Up day to reverse Wednesday's loss.

Original Trade Description: April 24th.

Finisar Corporation provides optical subsystems and components for data communication and telecommunication applications in the United States, Malaysia, China, and internationally. Its optical subsystems primarily consist of transmitters, receivers, transceivers, transponders, and active optical cables that provide the fundamental optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in communication networks, including the switches, routers, and servers used in wireline networks, as well as the antennas and base stations used in wireless networks. The company also offers wavelength selective switches, which are used to switch network traffic from one optical fiber to multiple other fibers without converting to an electronic signal. In addition, it provides optical components comprising packaged lasers, receivers, and photodetectors for data communication and telecommunication applications; and passive optical components for telecommunication applications. Finisar Corporation markets its products through its direct sales force, as well as through a network of distributors and manufacturers' representatives to the original equipment manufacturers of storage systems, networking equipment, and telecommunication equipment, as well as to their contract manufacturers. Company description from FinViz.com.

We played Finisar several weeks ago and got caught in the downdraft on China worries. Reports out of the sector suggested orders from China had slowed. Shares crashed from $35 to $21 over the period of about six weeks. Raymond James said the selloff is overdone and the worries over China are overblown.

China is on track to network 120 major cities with populations of more than one million. That will take a lot of networking gear. The directives have been given from the governmental level but the actual orders will come from the provincial level. Bids for routing and wireless components have already been submitted and optical equipment is expected to be next in line.

Raymond James said Finisar has the most upside potential with a target of $39 and is cheap with a PE of only 9 times 2018 earnings estimates.

Shares have rebounded the last two days after the Raymond James note to investors.

Earnings June 8th.

Update 4/26/17: The U.S. government expanded its investigation regarding compliance with sanctions programs against Iran, Cuba, Sudan and Syria. The target is China-based Huawei but OCLR, ACIA, LITE and FNSR have similar operations. Last month ZTE, a peer to these companies, pleaded guilty and faces fines of $1.2 billion. If the government is going name by name in their investigation, investors may reconsider their ownership of these companies. At least one analyst said today's dip on sector related news rather than company specific, was overdone.

Update 4/28/17: Stifel Nicolaus lowered their price targets on LITE, FNSR, FN and OCLR but maintains a buy rating. The new target on FNSR declined from $39 to $33 with shares at $23. The analyst cut the targets based on the slowness in bid requests from China's governments on the 120 city networking project.

Position 4/25/17:

Long FNSR shares @ $23.10, see portfolio graphic for stop loss.


Long June $25 call @ $1.20, see portfolio graphic for stop loss.

PTCT - PTC Therapeutics - Company Profile


No specific news. Waiting on market to pick a direction.

Original Trade Description: April 19th.

PTC Therapeutics, Inc., a biopharmaceutical company, focuses on the discovery, development, and commercialization of orally administered, small molecule drugs that target post-transcriptional control processes. The company's lead product is Translarna (ataluren), for the treatment of nonsense mutation Duchenne muscular dystrophy in ambulatory patients; and which is in phase III clinical trials to treat cystic fibrosis caused by nonsense mutations. It also develops Translarna, which is in Phase II clinical trials for the treatment of mucopolysaccharidosis type I caused by nonsense mutation, nonsense mutation aniridia, and nonsense mutation Dravet syndrome/CDKL5; and RG7916 that is in Phase I clinical trials to treat spinal muscular atrophy. In addition, the company's product candidate in cancer stem cell program include PTC596, an orally bioavailable and potent small molecule, which has completed phase I clinical trials that targets tumor stem cell populations by reducing the activity and amount of a protein called BMI1. PTC Therapeutics, Inc. has collaborations with F. Hoffman-La Roche Ltd and Hoffman-La Roche Inc., and the Spinal Muscular Atrophy Foundation to develop and commercialize compounds identified under its spinal muscular atrophy sponsored research program; and research collaboration with Massachusetts General Hospital for the treatment of rare genetic disorders resulting from pre-mRNA. Company description from FinViz.com.

PTC suffered two hits in March. The first was a failed drug trial on a Cystic Fibrosis drug. That drop knocked shares down from $13 to $10. Drug trials fail all the time and that is just the risk of owning a drug company.

On March 15th, the company announced it was buying a Duchenne Muscular Dystrophy (DMD) drug named Emflaza from Marathon for cash and stock. Companies buy rare drugs from other companies all the time. This particular drug had just created a hornet's nest of controversy after Marathon priced it at $89,000 per year. There had been a monster uproar over the pricing and even Bernie Sanders got into the act saying it should be $1,000 a year. For PTC to jump into the hornet's nest with a $140 million upfront purchase before the drug even succeeds in the market caused investors to flee the stock.

Here is the key point. The drug is in a class called corticosteroids that are anti inflamatories used all around the world to treat DMD as well as other diseases. The drug can be cross marketed and sold for multiple applications besides DMD.

The drug is new and was just approved by the FDA in February. When Marathon priced it at $89,000 right in the middle of the drug price happenings in Washington, they were forced to pause the launch to re-evaluate the price. PTC arrived on the scene and solved their problem.

Now PTC is evaluating the "correct" pricing for the drug and shares are rebounding from their headline induced crash.

Update 4/20/17: The company announced they had completed the acquisition of Emflaza earlier than expected.

Earnings June 15th.

PTC shares broke through resistance on Wednesday to close at a two month high at $11.39. Resistance is now $14 to give us a potential $2 window.

Position 4/20/17:

Long PTCT shares @ $11.43, see portfolio graphic for stop loss.

No options due to prices and wide spreads.

USO - US Oil Fund ETF - ETF Profile


Boom! Another massive decline in crude prices probably killed this position. No specific news, just concentrated selling.

It is only a matter of time before we begin to see dramatic inventory declines as we approach the summer driving season. Hopefully those declines will begin next week and the repair process can begin.

Original Trade Description: April 22nd.

The United States Oil Fund LP (USO) is an exchange-traded security designed to track the daily price movements of West Texas Intermediate ("WTI") light, sweet crude oil. USO issues shares that may be purchased and sold on the NYSE Arca.

The investment objective of USO is for the daily changes in percentage terms of its shares NAV to reflect the daily changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the daily changes in price of USO's Benchmark Oil Futures Contract, less USO's expenses.

USO's Benchmark is the near month crude oil futures contract traded on the NYMEX. If the near month futures contract is within two weeks of expiration, the Benchmark will be the next month contract to expire. The crude oil contract is WTI light, sweet crude oil delivered to Cushing, Oklahoma.

USO invests primarily in listed crude oil futures contracts and other oil-related futures contracts, and may invest in forwards and swap contracts. These investments will be collateralized by cash, cash equivalents, and US government obligations with remaining maturities of two years or less.

Oil prices fell -6% last week after Wednesday's inventory report failed to show a significant decline in crude inventories. Complicating the problem was the expiration of crude futures on Thursday. That means everyone long for the EIA report had to dump their position immediately to avoid expiration.

I expect the price of crude to return to $54 over the next several weeks. That equates to $11.25 or higher on the USO ETF. The ETF closed at $10.32 on Friday. I am recommending we buy the $10.50 call, currently 42 cents and plan to double our money and exit.

Oil prices will rise because refineries are restarting production after their normal two-month maintenance period centering on March. Oil inventories will begin to decline sharply in the coming weeks as they begin to fill the system with summer blend fuels before Memorial Day.

You could also just buy the USO ETF for $10.32 but you will get a better return using the option. I would not recommending buying a $10 stock with the intention of making 75 cents.

Position 4/24/17:

Long Jun $10.50 call @ 40 cents, no stop loss.

WLL - Whiting Petroleum - Company Profile


No specific news. Shares fell on another $2 drop in oil prices. The energy sector is getting crushed and there really are no headlines causing the decline.

Original Trade Description: May 1st.

Whiting Petroleum Corporation, an independent oil and gas company, engages in the development, production, acquisition, and exploration of crude oil, natural gas liquids, and natural gas primarily in the Rocky Mountains region of the United States. It sells oil and gas to end users, marketers, and other purchasers. As of December 31, 2016, the company had total estimated proved reserves of 615.5 million barrels of oil equivalent; and interests in 1,917 net productive wells on approximately 517,200 net developed acres. Whiting Petroleum Corporation was founded in 1980 and is based in Denver, Colorado. Company description from FinViz.com.

Whiting reported an adjusted loss of 15 cents and analysts were expecting a loss of 22 cents. Revenue of $371.3 million beat estimates for $361.4 million. Production of 10.6 million Boe beat guidance of 10.4 million Boe. Lease operating expenses declined from $9.00 to $8.56. General and administrative expenses declined from $3.15 to $2.34 and interest expenses declined from $4.80 to $3.83 per share.

Earnings July 26th.

The company raised guidance for the year for multiple reasons. They just completed a three-well Loomer pad in North Dakota using advanced completion models with longer laterals and 8.9 million pounds of sand in each well. The resulting production suggests each well will produce 1.5 million Boe over their productive life. That is 50% higher than other wells in the area. That equates to roughly $75 million in revenue from each well with an initial cost of about $9 million each.

Whiting plans to apply this completion method to all its 2017 wells while continuing to test and improve on the model.

Also helping Whiting is the recently completed Dakota Pipeline that President Trump approved a couple months ago. That makes it considerably easier to transport oil out of the Bakken and at a lower cost.

Whiting raised full year guidance to 45.2 to 46.2 million Boe but did not raise the capex expectations. The production guidance was raised because of the better completion methods. This will be a 23% increase in production from Q1 start to Q4 end.

Energy companies have been hammer recently with oil prices falling back under $50. This is a temporary situation. The refinery maintenance cycle was longer than normal and the restart just accelerated over the last two weeks. Inventories last week declined -3.6 million barrels and they should continue to decline sharply over the next four months. Prices will rise as the summer driving season begins.

I think the September $9 option is too expensive at $1.13 and the $10 option is expensive as well. The June options are a short fuse with earnings after expiration. The tradeoff suggests the short term June would be the best play.

Position 5/2/17:

Long WLL shares @ $8.55, see portfolio graphic for stop loss.
Optional: Long June $9 call @ 60 cents, see portfolio graphic for stop loss.

BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description


New historic low close. If the market bullishness continues, the VXX should continue to bleed points. Long term, the VXX always goes down.

Original Trade Description: April 12th.

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 done 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.

The VXX has rebounded $3 over the last week as the volatility returned. The VIX traded over 16 today and could hit 18 if there are any geopolitical events over the Easter weekend.

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 market 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 know from experience that the VXX always declines. The last time we shorted this ETF we had a $7.23 gain.

Position 4/13/17:

Short the VXX @ $17.98, no stop loss because it always declines eventually.

WLB - Westmoreland Coal - Company Profile


No specific news. Nice 54 cent loss to open our new short position.

Original Trade Description: May 3rd.

Westmoreland Coal Company, through its subsidiaries, operates as an energy company. The company operates through Coal - U.S., Coal - Canada, Coal - WMLP, and Power segments. It produces and sells sub-bituminous coal and lignite to power plants. The company owns and operates coal mines in Montana, North Dakota, Ohio, and Texas, the United States; and Alberta and Saskatchewan, Canada. It has total proven or probable coal reserves of approximately 888,202 thousands of tons. The company is also involved in the production of electricity. It operates two coal-fired power generating units with a total capacity of approximately 230 megawatts in Weldon, North Carolina. Westmoreland Coal Company was founded in 1854. Company description from FinViz.com.

Westmoreland shares spiked from $8 to $20 post election and the excitement has left the stock in the recent months. Westmoreland was trading below $4 when Trump began his rise in the polls talking about putting coal miners back to work. Now that the excitement is fading I would not be surprised to see shares return to $4.

The coal sector is on life support. Cheap natural gas burns cleaner, is easier to transport and there is no storage required. Coal is dirty, requires long trains traveling halfway across the country and large rail yards and storage yards to hold the inventory. As long as gas remains under $5, currently $3.22, that will be the fuel of choice.

Westmoreland has a little more going for it because it owns two power plants but it is still losing money on coal.

They recently reported a loss of 41 cents on revenue of $392.7 million. For the full year they lost -$1.47 per share. They are being forced to restate earnings because of past problems.

They guided for a weak 2017 and said two supply contracts had expired. Warmer weather was also weakening demand.

Earnings June 27th.

Shares are $10.25 with support at $8.50 but that support was based on expectations for Trump to win the election. The expectations that coal use would somehow miraculously rebound have now evaporated.

Position 5/4/17:

Short WLB shares @ $10.16, see portfolio graphic for stop loss.

I am not recommending the put options because of wide spreads but the June $10 put is 90 cents, $9 put is 50 cents.

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