Option Investor

Daily Newsletter, Tuesday, 8/8/2017

Table of Contents

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

Market Wrap

Streaks Eventually Fail

by Jim Brown

Click here to email Jim Brown

The Dow was well on its way to another record close when a headline appeared to dash those hopes.

Market Statistics

The Dow started negative but quickly reversed direction to move sharply higher. The index hit 22,179 and +63 points before crashing back -122 points to 22,057 and the low of the day. Somebody bought the dip at the close but the rebound was lackluster.

The headline credited with reversing the market was a statement from President Trump that further threats from North Korea would be "met with fire and fury." Earlier in the day a headline broke saying North Korea had successfully created a miniaturized nuclear warhead that would fit on its ICBMs. If that is the case, the time for critical decisions has arrived. People claim Kim Jong-un could not be stupid enough to actually attack the USA. They are uninformed because many times, he has displayed irrational behavior and refugees have said he would carry it out if provoked. While all his bluster today is calculated to create a nuclear defense to prevent his reign from coming to an untimely end, he is rapidly reaching a point where that risk could come true. If attacked, he could retaliate much like a cornered animal.

We should not be worried about his missile borne nukes. They are a long way off, he could only have a handful and we can shoot them down. We should be worrying about the two Korean satellites that cross the U.S. every 94 minutes. If those satellites have nuclear weapons, he could cause extreme damage with an EMP attack on the U.S. where tens of millions would die. Details Here

I personally believe the Trump comments were blamed but they were just a convenient excuse. Many times when markets are overbought, traders are looking for a reason to take profits. They are constantly pushing up their stop losses and they are nervous about the potential for a decline. They seize on the first headline that appears and the initial selling begets more selling. The lack of a material rebound at the close is troubling. The candles lengthened as volatility increased but buyers were unable to cause a rebound.

There were only two economic reports on Tuesday. The NFIB Small Business Optimism Index for July rose from 103.6 to 105.2 and the highest level since February. This was the first increase since February and suggests optimism is rebounding despite the lack of any major legislation in Washington. The percentage of businesses that expect better economic conditions ahead rose from 33% to 37%. The current job openings component rose from 30% to 35% and those planning on hiring rose from 15% to 19%. Those expecting higher sales rose from 17% to 22%. Those planning on raising prices rose from 19% to 23% and that should please the Fed.

The Job Openings and Labor Turnover Survey for June (JOLTS) showed a surge in new job openings from 5.702 million to 6.163 million. Those actually getting new jobs declined from 5.459 million to 5.356 million. Separations declined from 5,245 million to 5.224 million. Layoffs increased slightly from 1.673 million to 1.701 million. This confirms the robust job market where there are 15% more jobs than hires and it is difficult to find qualified workers. This is a lagging report for the June period and it was ignored.

The calendar for Wednesday has no reports that are likely to move the market. The oil inventory report would be as important as the others because of the decline in the API inventory tonight.

The earnings on Wednesday will be led by Jack in the Box, Mylan and Netease. Thursday is the big day with Nvidia and a flurry of retailers. Blue Apron and Snap Inc will also confess and those will be watched out of curiosity rather than investment potential.

After the bell, the API inventory report showed a whopping decline of -7.839 million barrels compared to estimates for a 2.27 million barrel decline. Despite the big decline, oil prices were stable at $48.95. If the EIA report on Wednesday shows a similar decline then prices should retest $50.

Internet retailer Wayfair (W) reported a loss of 26 cents that beat estimates for a loss of 46 cents. Revenue of $1.12 billion, up from $786.9 million, rose 42% and beat estimates for $1.06 billion. Active users rose 43.1% to 9.5 million and the average order rose from $244 to $258. I do not understand why Amazon has not bought them yet. With a $4 billion market cap, they would be pocket change for Amazon. They are growing so fast they are carving out a niche where Amazon does not currently compete.

Retailer Michael Kors (KORS) reported earnings of 90 cents that beat estimates for 62 cents. Revenue of $952.4 million beat estimates for $919.0 million. The only fly in the soup was a decline in same store sales of -5.9% but analysts were expecting -9.2% so it was still a beat. The company guided for the current quarter for revenue of $1.04-$1.06 billion with same store sales in the mid-single digit range. Earnings are expected to be 80-84 cents. Analysts were expecting $1.01 billion and 78 cents. They guided for the full year for revenue of $4.28 billion and earnings of $3.62-$3.72. Analysts expected $4.19 billion and $3.54. Shares spiked 21% on the news.

Retailer Ralph Lauren (RL) reported earnings of $1.11 and beat estimates for 96 cents. Revenues fell 13% to $1.347 billion and missed estimates for $1.349 billion. They blamed the decline on exiting a brand, promotional activity and soft consumer demand. North American revenue dropped -17% with Europe down -14%. They guided for the full year for 8-9% decline in net revenues. For the current quarter, they expect a decline of 9-10%. Given all the gloom and doom, you would have expected shares to trade lower. Instead, they rallied 13%.

Valeant Pharmaceuticals (VRX) reported earnings of $1.05 compared to estimates for 97 cents. Revenue of $2.23 billion missed estimates for $2.24 billion. The company cut full year revenue guidance from $8.9-$9.1 billion to $8.7-$8.9 billion. The company said it was on track to reduce debt by $5 billion. Unfortunately, they still have $25 billion to go. If they succeed in paying off that $5 billion by February 2018, they have no significant maturities remaining before 2020 and that gives them a couple years to restructure and raise cash. Shares rallied fractionally on the debt news rather than the earnings beat.

Avis Budget Group (CAR) reported earnings of 30 cents that missed estimates for 42 cents. Revenues were $2.238 billion, which beat estimates for $2,227 billion. They said revenue in the U.S. declined due to a 4% reduction in time and mileage revenue per day. International revenues rose 4% mostly due to a 6% benefit from the FranceCars acquisition in December. They guided for full year revenues of $8.8-$8.95 billion with earnings of $2.40-$2.85, down from prior guidance of $2.85-$3.50.

Disney (DIS) reported earnings of $1.58 compared to estimates for $1.55. Revenue of $14.2 billion missed estimates for $14.4 billion. Shares fell $4 in afterhours.

The company said it was cancelling its licensing deal with Netflix (NFLX) and would launch its own streaming service that would launch in 2019. They will also launch a streaming service for ESPN videos in 2018 that will feature about 10,000 events a year. The service will have content from MLB, NHL, MLS, collegiate sports and tennis Grand Slam events. Disney will acquire a majority interest in BAM Tech for $1.58 billion. They bought a 33% stake in the company in 2016. BAM was spun off from MLB Advanced Media in August 2016. Netflix shares fell -5% in afterhours.

Priceline (PCLN) reported earnings of $15.15 that beat estimates for $14.25. Revenue of $3.02 billion beat estimates for $3.0 billion. Unfortunately, they guided for full year earnings of $32-40-$34.10 and analysts were expecting $34.42. Bookings were $20.8 billion and analysts were expecting $21.05 billion. Shares fell 6% (-$135) on the news.

Fossil Group (FOSL) reported an adjusted loss of 61 cents that missed estimates for 28 cents. However, revenue of $596.8 million missed estimates for $619.5 million. They guided for the current quarter for a loss of 26 cents to earnings of 7 cents. For the full year, they guided for earnings of 35 cents to $1.15. Revenue is expected to decline 4.5% to 8.5% with a GAAP loss of $6.62-$7.42 in Q3. They also announced the resignation of their CFO. Shares fell 23% in afterhours.


Despite the midday reversal in the indexes, the markets were fairly quiet today. With earnings slowing there is little to interest traders. The very low volume of 5.3 billion shares on Monday was a symptom of August trading. Investors are busy cramming in last minute vacations and getting kids ready to go back to school. Volume would have been low today as well except for the sharp midday reversal. Volume rose to 6.3 billion shares, which is still only moderate. Tomorrow could be significantly different.

The S&P futures are down -9 as I type this with the Nasdaq futures down -31 and Dow futures -48. The combination of declines in Disney, Netflix and Priceline are going to be a toxic mix for Wednesday.

The S&P spiked to 2,490 intraday after starting the day with a minor loss to 2,475. The afternoon decline knocked it back to 2,479 and it lost 6 points for the day. This outside reversal day is a negative indicator. Even without the hits from those three stocks I mentioned, we would have probably traded lower on Wednesday. With those hits, the severity of the potential decline should be worse.

Traders have wanted a real market drop as a buying opportunity. We may just get one. Since Aug/Sept are typically weak, the traders have been looking for a short opportunity to carry them into that weakness. This could be it. The key will be whether dip buyers appear in volume on Wednesday. If they rush into the gap then the damage could be minimal. If they step back to see where the market goes, then the August decline may have begun.

The closing level on the S&P is not a problem. That is right in the middle of the recent consolidation range. We could easily muddle around at the 2,470 level for a couple days and then make another run at the top. The real directional indicator would be a close under 2,465. That could trigger additional selling.

The Dow only had one major gainer today and that was a break in the recent trend. Apple rallied because a rumor site showed actual pictures of an iPhone 8 and said it would be announced in September with the model 7s. This is the iPhone 8 below. The pictures are copies of copies and are not to scale.

The Dow could be challenged on Wednesday because of the magnitude of its recent gains. There are a lot of uncaptured profits and support is well back at 21,500.

The Nasdaq broke through resistance at 6,395 to hit 6,423 but crashed back to close at 6,370. Critical support remains 6,335. If the Priceline/Netflix combo poisons sentiment on Wednesday, we could easily crash through that support level. The next logical target for any continued decline is 6,100.

The Russell 2000 had a similar chart but minimal damage with only a 4-point loss. However, the Russell futures are down -9 tonight and any material drop in the big cap indexes is likely to worsen in the small caps.

Doubleline Capital's Jeffrey Gundlach said on CNBC today, "Being long the VIX is free money" because there will be at least a 3-5% decline between now and November. I completely agree on the decline. We are really stretching our luck without any extended decline since Q3. We have had some one-day wonders with follow up volatility but most of the damage was done in the first drop.

The S&P has now traded 75 sessions without a 1% gain. That is also very rare. This is part of the low volatility environment. Gundlach offered as an analogy the height of Nevada's Telescope Peak at 11,331 and Death Valley at -282 feet below sea level. They sit right next to each other. He said that was the same with the VIX. A period of very low volatility often ends with a period of very high volatility. They go hand in hand. If volatility were normal, the peaks would be minimal. Very low, as we have today, tends to end with a very high volatility event.

I would not be a buyer of the first dip on Wednesday. I would recommend waiting until we see where the day takes us. Actually, it could take several days to settle out since we are in August and the sentiment is turning bearish.

Do not forget this is National Sneak Some Zucchini Into Your Neighbor's Porch Day. Google it.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Don't Play in Traffic

by Jim Brown

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Editor's Note

The S&P futures are warning that Wednesday could see additional volatility. The S&P futures are -9 as I type this, Dow futures -41, Nasdaq futures -30 and Russell -9. If these levels hold overnight, the open is going to be rocky. There is nothing I could recommend today that would work in a large gap lower at the open.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews


by Jim Brown

Click here to email Jim Brown

Editors Note:

All the indexes posted strong gains in the morning and losses at the close. After making a record high on Monday on the lowest non-holiday volume since 2007, the indexes spiked again at the open but rolled over sharply in the afternoon. The decline was blamed on Trump comments about North Korea. Personally, I think the market was looking for a reason to take profits and Trump appeared. This happens a lot in the market when it is overbought.

The Nasdaq rallied through resistance at 6,395 but fell back to 6,370 at the close. The Russell rallied to resistance at 1,425 and fell back to 1,410. The Dow consecutive streak is now broken, Disney disappointed after the close and S&P futures are down -5 as I type this.

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

DDD - 3D Systems
The short position was entered at the open.

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Short term Calls and Puts on equities = Option Investor Newsletter

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BULLISH Play Updates

GIII - G-III Apparel - Company Profile


No specific news. Positive earnings from KORS and RL lifted GIII to another minor gain but a new 5-month high.

Original Trade Description: June 29th.

G-III Apparel Group, Ltd. designs, manufactures, and markets men's and women's apparel. It operates in two segments, Wholesale Operations and Retail Operations. The company's products include outerwear, dresses, sportswear, swimwear, women's suits, and women's performance wear; and women's handbags, footwear, small leather goods, cold weather accessories, and luggage. It markets swimwear, resort wear, and related accessories under the Vilebrequin brand; footwear, apparel, and accessories under the G.H. Bass brand; and proprietary products under the DKNY, Donna Karan, Andrew Marc, Marc New York, Black Rivet, Wilsons, Eliza J, Jessica Howard, G-III Sports by Carl Banks, and G-III for Her brands. G-III Apparel Group, Ltd. also licenses its products under the Calvin Klein, Tommy Hilfiger, Karl Lagerfeld Paris, Guess?, Kenneth Cole NY, Cole Haan, Levi's, Vince Camuto, Ivanka Trump, Ellen Tracy, Kensie, and Jessica Simpson brands, as well as has licenses with the National Football League, National Basketball Association, Major League Baseball, National Hockey League, Hands High, Touch by Alyssa Milano, Collegiate Licensing Company, Major League Soccer, Starter, and Warrior by Danica Patrick, as well as approximately 140 U.S. colleges and universities. The company offers its products to department, specialty, and mass merchant retail stores in the United States and internationally. As of January 31, 2017, it operated 411 leased retail stores, which included 190 Wilsons Leather stores, 163 G.H. Bass stores, 50 DKNY stores, 5 Calvin Klein Performance stores, and 3 Karl Lagerfeld Paris stores. The company also operates Wilsons Leather, G.H. Bass, and DKNY branded online stores. Company description from FinViz.com.

G-III shares were pressured in May by the weakness in the retail sector in general. They rebounded in early June on better than expected earnings but were hit again in early July by the next wave of retailer warnings.

In the last quarter, G-III saw sales rise 16% to $529 million. Because of costs associated with the acquisition of Donna Karan they posted a loss of 18 cents but analysts were expecting a loss of 37 cents. Wholesale sales are growing by double digits in most brands. The Wilsons Leather and Bass Stores are the exception and they said they were closing some stores and repurposing some others. The Donna Karan brand is rapidly expanding with new merchandise and G-III thinks it could eventually be their biggest brand. The company is expected to earn $1.27 in 2017 and $1.72 in 2018.

Expected earnings September 5th.

Shares have risen over the last three weeks despite the market volatility. They closed only 20 cents below a five-month high on Friday. A breakout could trigger short covering and additional buying.

Position 7/31/17:

Long GIII shares @ $26.10, see portfolio graphic for stop loss.
Alternate position:
Long Sept $30 call @ 72 cents, see portfolio graphic for stop loss.

KR - Kroger - Company Profile


No specific news. Shares retraced Monday's gains in a weak market.

Original Trade Description: July 31st.

The Kroger Co., together with its subsidiaries, operates as a retailer in the United States. It also manufactures and processes food for sale in its supermarkets. The company operates retail food and drug stores, multi-department stores, jewelry stores, and convenience stores. Its combination food and drug stores offer natural food and organic sections, pharmacies, general merchandise, pet centers, fresh seafood, and organic produce; multi-department stores provide general merchandise items, such as apparel, home fashion and furnishings, outdoor living, electronics, automotive products, toys, and fine jewelry; and price impact warehouse stores offer grocery, and health and beauty care items, as well as meat, dairy, baked goods, and fresh produce items. The company's marketplace stores comprise full-service grocery, pharmacy, health and beauty departments, and perishable goods, as well as general merchandise, including apparel, home goods, and toys. It operates under the banner brands, such as Kroger, Ralphs, Fred Meyer, King Soopers, etc., as well as Simple Truth and Simple Truth Organic brands. As of January 28, 2017, the company operated 2,796 retail food stores, including 1,445 fuel centers; 784 convenience stores; and 319 fine jewelry stores and an online retail store, as well as franchised 69 convenience stores. The Kroger Co. was founded in 1883. Company description from FinViz.com.

Expected earnings September 14th.

Shares crashed from $30 to $20 on the Amazon announcement but over the last week a strong rebound has begun. Whole Foods has 340 stores. Kroger has 2,796 stores. Whole Foods sells to a high dollar consumer, thus the nickname Whole Paycheck Foods. They have an estimates 12 million potential customers. Kroger sells to everyone with a potential customer base of more than 200 million. Amazon is not going to be a threat to Kroger for a long time even if the acquisition gets approved and that is still an unknown with multiple committees researching antitrust issues and the current administration clearly anti-Amazon.

I am recommending we ride the stock back up until reality returns to the price.

Position 8/1/17:

Long KR shares @ $24.50, see portfolio graphic for stop loss.
Alternate position: Long Sept $25 call @ $.98, see portfolio graphic for stop loss.

RCII - Rent A Center - Company Profile


No specific news. Shares posted a minor gain.

Original Trade Description: August 2nd.

Rent-A-Center, Inc., together with its subsidiaries, 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, 2016, the company owned and operated approximately 2,463 stores in the United States, Canada, and Puerto Rico, including 45 retail installment sales stores; 1,431 Acceptance Now kiosk locations in 40 states and Puerto Rico; 478 Acceptance Now virtual (direct) locations; and 130 stores in Mexico, as well as franchised 229 rent-to-own stores in 31 states under the Rent-A-Center, ColorTyme, and RimTyme names. Company description from FinViz.com.

Earnings were not good. The company posted a loss of 1 cents compared to estimates for earnings of 7 cents. Revenue of $677.6 million did beat estimates for $664.7 million. The problem was a number of new initiatives that take time to manifest into gains. This is a company with a portfolio of loans on household goods and there is not much they can do to change that on a qtr to qtr basis. The new initiatives only apply to new business so it takes a while to generate a large portfolio under the new rate plan. Core U.S. sales rose 230 basis points in Q2. Acceptance Now, a new initiative, saw sales rose 380 basis points. The average monthly rate of new finance agreements rose 5.7%. Higher end products now compromise 65% of store inventory. Same store sales in existing stores rose 6.7%.

Expected earnings Oct 25th.

Hedge fund Marcato Capital Management demanded the company sell itself or it would start a proxy war to replace the entire board. Hedge fund Engaged Capital has already been demanding a company sale arguing that a restructuring could best be done by new owners. Engaged won a proxy fight and now has 3 board members. RCII turned down offers from HIG Capital, Lone Star Funds and Vintage Capital over the last several months. Marcato said the $15 offer from Vintage was the opening offer and would rise if RCII would negotiate with Vintage and open its books.

The stock appears to be rising on takeover interest. Resistance is $16 and the stock traded as high as $37 in the last couple of years. If Vintage does raise their offer it would probably be in the $16-$16.50 range. Whether RCII would accept it is unknown.

With multiple sharks circling and two hedge funds demanding a sale, there could actually be competing offers once RCII decides to negotiate. The downside would appear limited.

Position 8/3/17:

Long RCII shares @ $13.63, see portfolio graphic for stop loss.
Alternate position: Long Sept $15 call @ 30 cents, see portfolio graphic for stop loss.

BEARISH Play Updates

DDD - 3D Systems - Company Profile


No specific news. SSYS has earnings on Wednesday and that could move DDD shares. Zacks pointed out that DDD estimates have been cut -19.8% over the last 30 days.

Original Trade Description: August 7th.

3D Systems Corporation, through its subsidiaries, provides 3D printing products and services worldwide. The company's 3D printers transform data input generated by 3D design software, CAD software, or other 3D design tools into printed parts using a range of print materials, including plastic, nylon, metal, composite, elastomeric, wax, polymeric dental materials, and Class IV bio-compatible materials. It offers various 3D printing technologies, such as stereolithography, selective laser sintering, direct metal printing, multijet printing, and colorjet printing. The company also develops, blends, and markets various print materials, such as plastic, nylon, metal, composite, elastomeric, wax, polymeric dental materials, and Class IV bio-compatible materials. It offers its printers under the Accura, DuraForm, LaserForm, CastForm, and VisiJet brand names. In addition, the company provides digital design tools, including software, scanners, and haptic devices, as well as products for product design, mold and die design, 3D scan-to-print, reverse engineering, and production machining and inspection. Further, it offers proprietary software and drivers that provide part preparation, part placement, support placement, build platform management, and print queue management; and 3D virtual reality simulators and simulator modules for medical applications, as well as digitizing scanners for medical and mechanical applications. Additionally, the company provides warranty, maintenance, and training services; on-demand solutions; and software and healthcare services. Company description from FinViz.com.

3D reported adjusted earnings of 8 cents compared to 12 cents in the year ago quarter. Revenue rose less than 1% to $158.4 million but sales of 3D printers declined -4%. Analysts were expecting 12 cents and $162.5 million.

The company guided for the full year for revenue of $643-$671 million, down from $643-$684 million. They guided for earnings of 46 cents, down from 51-55 cents.

3D keeps talking about new products adding to revenue in 2018 but that is a long way off and could be wishful thinking.

Expected earnings November 1st.

Shares fell $5 on the earnings and guidance miss but I expect them to fall further. If shares break support at $12, they could fall to $6 and a 7-year low.

Position 8/8/17:

Short DDD shares @ $13.00, see portfolio graphic for stop loss.
Alternate position: Long Sept $12 put @ 44 cents, see portfolio graphic for stop loss.

SABR - Sabre Corp - Company Profile


No specific news. Shares declined 2%.

Original Trade Description: August 5th.

Sabre Corporation, through its subsidiary, Sabre Holdings Corporation, provides technology solutions to the travel and tourism industry worldwide. It operates through two segments, Travel Network, and Airline and Hospitality Solutions. The Travel Network segment operates as a business-to-business travel marketplace that offers travel content, such as inventory, prices, and availability from a range of travel suppliers, including airlines, hotels, car rental brands, rail carriers, cruise lines, and tour operators with a network of travel buyers comprising online and offline travel agencies, travel management companies, and corporate travel departments. The Airline and Hospitality Solutions segment provides a portfolio of software technology products and solutions through software-as-a-service and hosted delivery models to airlines, hoteliers, and other travel suppliers. This segment offers SabreSonic Customer Sales & Service, a reservation system that provides capabilities around managing sales and customer service across an airline's diverse touch points; Sabre AirVision Marketing & Planning, a set of airline commercial planning solutions; and Sabre AirCentre Enterprise Operations, a set of solutions for planning and management of airline, airport, and customer operations. The Airline and Hospitality Solutions segment also provides software and solutions to hoteliers through SynXis, a central reservation system; SynXis Property Manager Solution for property management; and marketing, professional, and revenue management services. Company description from FinViz.com.

American Airlines founded the company in 1960 and spun it off in 2000. Texas Pacific Group and Silver Lake Partners acquired it in 2007. They listed on the Nasdaq in 2014. Sabre is the largest global distributions systems provider for air bookings in North America.

Sabre closed its first week of trading at $16.50 in April 2014. The odds are good we are going to see that level again soon. They recently reported earnings of 35 cents that matched estimates. Revenue rose 6.6% to $900.7 million and beat estimates for $895 million.

The company announced a new "cost reduction and business alignment program" with the goal of saving $110 million a year in expenses. They are going to reduce global headcount by 9%. They reiterated their full year guidance of $3.54-$3.62 billion and earnings of $1.31-$1.45. However, they said earnings would likely come in at the lower half of guidance. Think about that for a minute. We are going to affirm our guidance but earnings will be at the low end of that guidance. Did they actually affirm guidance of lower guidance?

They said the poor results were related to multiple factors. They halted work on the implementation of their new SabreSonic reservation system, no reason given but clearly it was not going well. They said they were seeing higher stability, security and technology costs related to a "security incident" in their Sabre Hospitality central reservation system during the quarter. Were they hacked? They did not say. Lastly, they said they were dealing with accounting changes for revenue collected from customer Alitalia, which is going through a bankruptcy process. Typically that means you get pennies on the dollar for receivables. The guidance was not good. Shares crashed from $22 to $19.50.

There was a dead cat bounce over the next couple days and now they are heading lower again. I do not see any reason why anyone would want to own Sabre when there are much better companies like Priceline, Tripadvisor, Trivago, Expedia, etc.

Expected earnings Oct 31st.

Shares closed at a two-year low on Friday at $19.73 and could be headed for a retest of the post IPO low at $15.

In addition to the short on the shares we have two ways to play the option. We can buy the October $17.50 put for 10 cents and forget about it. It will expire before earnings so it will have to be in the money at some point in the future to make any money. It is $2 OTM now and October has 75 days until expiration. If we want to roll the dice, the January $17.50 put is only 45 cents. That lets us hold over the October earnings, which should be disappointing. And gives us an extra 90 days to profit. The difference is $35 in cost. The key here is that January is well out of our normal 30-45 day play scenario. I am going to recommend the October option but you should choose the one that best suits your risk reward profile.

Update 8/7/17: Bank of America downgraded the stock from neutral to underperform (sell) and shares fell sharply at the open. It would have been nice if they had waited until after we were in the position. Shares fell about $1 at the open, rebounded slightly and then rolled over again in the afternoon. I think BAC helped us overall since it will put added pressure on the stock.

Position 8/7/17:

Short SABR shares @ $19.02, see portfolio graphic for stop loss.
Alternate position: Long Oct $17.50 put @ 40 cents, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


Only a minor gain despite the negative indexes. Not enough downward velocity to raise volatility.

The CBOE's Russell Rhoads, said this is the least volatile market since the 1960s. The VIX historical low close was 9.31 on Dec 22nd, 1993. We are at those levels now.

Fundstrat said "go long volatility" because there is a 50% chance of a 10% correction in the S&P over the next three months.

We are nearing the point where the ETF will do a 1:4 reverse split. That will be an excellent opportunity for us to get short again at a higher level.

Shortsqueeze.com is reporting current short interest at 63 million shares out of 88 million outstanding.

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.

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.

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