Option Investor

Daily Newsletter, Thursday, 11/9/2017

Table of Contents

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

Market Wrap

Tax Talk Tanks Stocks, Again

by Thomas Hughes

Click here to email Thomas Hughes


The Senate version of Trump's Tax plan would delay corporate tax cuts until 2019. The news was not well received by a market eagerly awaiting tax reform and sent the indices down by -1% in intraday trading. While a delay to tax cuts is not ideal the cuts are still in the plan and would lead to significant gains in earnings down the road, a realization that may have led traders to buy today's dip. Today's move took the broad market down to its 30 day EMA where buyers stepped in to support prices.

Asian indices were mixed in today's trading as earnings season winds up and Chinese inflation data came in ahead of expectations. Chinese consumer level inflation increased 1.9%, a tenth hotter than expected, while producer level inflation increased by 6.9% and three tenths hotter than expected. The Shang Hai Composite gained nearly 0.4% on the news while the Heng Seng nearly doubled that. The Japanese Nikkei had been up in early trading but fell in the later portion of the session to close with a small loss. Markets in Europe were not so buoyant, falling hard on mixed earnings and today's fall in US equities.

Market Statistics

Futures trading was weak right from the start. Aside from earnings the market was focused on today's expected release of the Senate version of tax reform. The SPX was indicated to open with a loss near -0.35% in the earliest hours and weakened to near -0.5% by the opening bell. The open was as expected, the SPX began the day with a loss near -10 points and then quickly extended to that to about -18 points in the first 20 minutes of trading. There was a small bounce before 10AM that left the index trending sideways near the early low but by 11:30 it was moving lower again. The day's low was hit just after 12:30 with the SPX down nearly 30 points. A rally began from that point that left the index trending upward the remainder of the afernoon.

Economic Calendar

The Economy

Weekly jobless claims rose by 10,000 this week as back logs of Puerto Rican and Virgin Island claims begin to be processed. This brings the total to 239,000 and still well within expectations. The four week moving average of claims fell by 1,250 to hit 231,3350 and a new low dating back to March of 1973. On a not adjusted basis claims rose 12% versus an expectation of 7.5% but remain down on a YOY basis. YOY they are down -6.5% and trending in line with long term labor market trends.

Continuing claims rose by 17,000 from last week's unrevised numbers to hit 1.901 million. The four week moving average fell -750 to hit 231,250 and a new low dating back to January of 1974. The total number of Americans receiving unemployment benefits rose 1,492 to hit 1.639 million. This gain is in line with expectations and seasonal trends in the work force. YOY total claims are down -8.1% and consistent with long term labor market improvement.

The Dollar Index

The Dollar Index fell in today's action as tax reform angst and data out of the EU weigh on the market. The good news for dollar bulls is that tax reform issues and today's EU data are not likely to affect central bank outlook, leaving the FOMC in divergence with the ECB, BOE and BOJ. Today's data included the German Trade Balance, better than expected with mixed indications within the report, and the latest EU Economic Forecast. The forecast upped current outlook for real GDP to 2.2% but forward outlook remains weak with growth slowing over the next two years. The Dollar Index is now moving lower within a near trading/consolidation range and looks like it will retest support at the $94.15 level. This level is the neckline of head&shoulders reversal and will be important to watch over the next few days. Longer term I remain bullish on the dollar.

The Gold Index

Gold prices moved higher to hit a 3 week high on today's dollar weakness. The caveat is that, like the dollar, spot gold prices are trapped within a near term trading range and winding up on tax news, economic data and shifting central bank outlook. The is range could persist into the near term until something emerges to provide a clearer direction for the dollar and/or US economy. Should the price of gold continue higher it is likely to meet resistance at or near $1,300.

The Gold Miners ETF GDX fell on today's rise in gold. This move is contrary to expectations and raises concern over the sustainability of current spot price, it may confirm a general expectation for lower gold prices in the short to long term. Regardless, the ETF is still within near, short and long term trading ranges and winding up ahead of its next big move. Today's resistance is just below the pair of moving averages with support target just below today's close near the mid point of the longer term trading range. A break beyond either will be significant and may lead to tests of upper resistance target near $24 and lower support target near $21.

The Oil Index

Oil prices closed with a gain near 0.35% after a day of volatile trading. Prices moved both higher and lower than yesterday's close, setting a new long term intraday high, but closed near the open creating a medium sized doji candle to the side of yesterday's candle. The move was driven by signs of market tightening, hopes OPEC will extend its production cap and more importantly, on turmoil within Saudi Arabia. Today's move helps confirm resistance near $57.50, a level that may prove important over the next few weeks.

The Oil Index opened with a loss but worked its way up throughout the day to close with a small gain and create a bullish looking green candle. This candle confirms support near the midpoint of Monday's long green marubozu candle. This action is a positive for the rally as it represents backing and filling of orders and positions not created during the Monday push higher. It also confirms support at the 1,275 level, consistent with the mid point of last years congestion band and market peak. I remain bullish on the sector and looking for this index to reach my 1,300 target.

In The News, Story Stocks and Earnings

Earnings were also on the minds of traders today. Early morning action was impacted by results from Perrigo, Time Magazine and Macy's. Macy's beat on the bottom line as cost savings activities bear fruit but revenue continues to decline and missed expectations. Despite the poor showing investors cheered the news as signs of turnaround are present in the data. Shares jumped in premarket trading, gapped at the open and closed with a gain of 10%.

Perrigo, maker of private label pharma products, reported a decline in revenue that came in much better than expected with earnings up 13% in the same time. The gains were driven on improvements in margins that are expected to drive future earnings gains. Guidance for full year 2017 earnings was raised to a range above consensus which led to a 13% gain premarket trading.

Time Magazine reported a 10% decline in YOY revenues as sales of print ads continue to be impacted by online. Revenue also missed expectations but the miss was offset by better than expected EPS. EPS beat by 16% and led management to maintain current outlook on strength in digital and brand extension revenues. Shares of the stock gained 10% in a day of volatile trading and may have put in a bottom.

After hours earnings include Disney, Hertz and NVIDIA. Disney reported a miss on the top and bottom lines on weakness in studio and broadcast revenues. ESPN, the usual drag on earnings, was able to hold steady. Shares fell -3% on the news.

Hertz beat on the top and bottom lines as global sales came in above expectations. Total revenues were down but much better than expected on strength in US pricing which offset weakness in storm affected areas. Shares of the stock jumped more than 10% on the news.

NVIDIA beat EPS and revenue estimates soundly. The company reports revenue is up 32% from last year with EPS nearly 25% better than projected. Gains are driven on gaming and datacenter growth and expected to continue into the future. Results were strong enough to lead to an upward revision in guidance which led in turn to a 10% jump for the stock in after hours trading.

The Indices

The indices moved lower in today's session, driven more by fear of tax reform than anything else. The positive within today's action is that in all cases support is evident, even in the Transports which led today's decline. The Dow Jones Transportation average closed with a loss near -1.10% after moving lower to create a medium sized red candle. Today's move was halted at the dual support of my long term up trend line and an all time high dating back to last year's post-election rally. The indicators remain bearish so I would expect to see support tested further but the longer term indications remain bullish, I think this is a buyable dip for the sector.

The next largest decline was set by the NASDAQ Composite. The tech heavy index closed with a loss near -0.60% after moving down to test support at the 6,700 level. Today's action formed a small doji candle within a near term trading range in evidence of that support. The indicators have weakened but remain consistent with an index in up trend so deeper decline is not expected at this time. A break below 6,700 would be bearish but near term only due to the closeness of moving average support.

The Dow Jones Industrial average comes in a close third with a decline of -0.43%. The blue chips created a small hammer doji testing support within the near term consolidation range. Support is at 23,300 and likely to be tested again. The indicators continue to weaken and have diverged from the recently set all time high which may indicate correction is at hand. A drop below 23,300 would be bearish but likely to meet support at the 30 day moving average. A drop below there could lead the market down to 22,500 and a long term up trend line.

The broad market S&P 500 closed with a loss of -0.37% and created a medium sized doji candle. The index moved down to test support at the bottom of a near term congestion range and just above the 30 day moving average. Today's action confirms the uptrend but comes with a caveat, the indicators continue to weaken and diverge from recently set highs. This may lead to further testing of support with a possible move to new lows. A break below the 30 day moving average would be bearish but likely to find support quickly provided no unbearably bearish news develops. A bounce from support would be trend following.

Today's moves were alarming at first but as the day wore on suggest that the market is still ready to buy on the dips. Now that the tax news is out and the market has reacted it can get back to the business of earnings. Earnings are coming in better than expected but are not fantastic, in a general broad market kind of way. That, along with the fact earnings season is drawing to a close, could lead the market into another period of rotation and consolidation as it has in the past. The long term outlook remains positive and in many cases improving which is something I expect will drive the market higher. I am cautious for the near term, tightening stops in preparation for potential declines, but remain firmly bullish for the short and long term.

Until then, remember the trend!

Thomas Hughes

New Plays

Futures Weak

by Jim Brown

Click here to email Jim Brown
Editor's Note

We saw a major intraday rebound but the overnight futures are weak. This may have been a one-day wonder or it could be the start of some actual profit taking. The weight on the market intraday came from news the corporate tax cuts may not happen until 2019. While it is far from settled, that was not the news the market wanted to hear. The S&P futures are negative and I am recommending we wait until Monday to enter any new positions.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Small Caps Weak

by Jim Brown

Click here to email Jim Brown

Editors Note:

The big cap stocks rebounded somewhat but the small caps remained weak. The Dow rebounded 152 points to close with a -101 loss and the Nasdaq rebounded 73 to close with a loss of -39. The Russell 2000 rebounded 11 points to lose -7 at the close. The Russell chart made another lower high, lower low and remains negative.

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

GEO - GEO Group
The long position was entered at the open.

BBBY - Bed, Bath & Beyond
The short stock position was stopped at $20.25.

If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

BULLISH Play Updates

AMD - Advanced Micro Devices - Company Profile


No specific news. The semiconductor sector was crushed today after weeks of steady gains. Pure profit taking.

Original Trade Description: November 4th

Advanced Micro Devices, Inc. operates as a semiconductor company worldwide. Its primarily offers x86 microprocessors as an accelerated processing unit (APU), chipsets, discrete graphics processing units (GPUs), and professional graphics; and server and embedded processors, and semi-custom System-on-Chip (SoC) products and technology for game consoles. The company provides x86 microprocessors for desktop PCs under the AMD A-Series, AMD E-Series, AMD FX CPU, AMD Athlon CPU and APU, AMD Sempron APU and CPU, and AMD Pro A-Series APU brands; and microprocessors for notebook and 2-in-1s under the AMD A-Series, AMD E-Series, AMD C-Series, AMD Z-Series, AMD FX APU, AMD Phenom, AMD Athlon CPU and APU, AMD Turion, and AMD Sempron APU and CPU brand names. It also offers chipsets with and without integrated graphics features for desktop, notebook PCs, and servers, as well as controller hub-based chipsets for its APUs under the AMD brand; and AMD PRO mobile and desktop PC solutions. In addition, the company provides discrete GPUs for desktop and notebook PCs under the AMD Radeon brand; professional graphics products under the AMD FirePro brand name; and customer-specific solutions based on AMD's CPU, GPU, and multi-media technologies. Further, it offers microprocessors for server platforms under the AMD Opteron; embedded processor solutions for interactive digital signage, casino gaming, and medical imaging under the AMD Opteron, AMD Athlon, AMD Sempron, AMD Geode, AMD R-Series, and G-Series brand names; and semi-custom SoC products that power the Sony Playstation 4, Microsoft Xbox One, and Xbox One S game consoles. Company description from FinViz.com.

Expected earnings Jan 23rd.

Nvidia (NVDA) shares were rocked again last week after news broke that Tesla was looking at options other than Nvidia for the chips to power the autonomous driving functions. The initial headline saw AMD spike and Nvidia decline. The actual story is that AMD and Nvidia are partnering on creating a chip solution for Tesla. It is no surprise that AMD is in the mix because Tesla hired Jim Keller to lead development of Autopilot. Keller previously worked at AMD and led the development of the Zen architecture and the new Ryzen processors.

AMD announced a new embedded GPU requiring less power and capable of driving five simultaneous 4K displays. The GPU requires less than 40 watts TDP and comes in a smaller, thinner package. The chip has a 1.25 TFLOPS speed and comes in three form factors including MCM, MXM and PCI Express. The 4K and 3D support works for games, medical imaging, advertising signage and industrial uses. The GPU has 4 GB of GDDR5 memory.

AMD reported earnings of 10 cents compared to analyst estimates for 8 cents. Revenue of $1.64 billion rose 25.7% and beat estimates for $1.51 billion. Shares collapsed in afterhours after the company guided for a 12% to 18% decline in Q4 revenue to around $1.34-$1.44 billion and analysts were expecting $1.34 billion. Based on analyst expectations that lower guidance was not that bad but it is the principle of lower guidance that sends investors running for the exits.

The new CEO for AMD, Lisa Su, said in an interview last week that with 10 major product launches this year, AMD has completely restructured its product portfolio. "This shift is perhaps one of the most ambitious product ramps that has been done, certainly in AMD's lifetime."

The new Ryzen Mobile combines the best points of the Zen processor and the best of the Vega product and the most recent graphics architecture into a single product. No other company has been able to combine premium processor cores from both categories and merge them into a single chip that runs in an ultra-thin notebook.

HPQ, Lenovo and Acer have announced products that will ship this quarter in time for holiday shopping. AMD products have found new popularity in the key retailer market. Su said they had captured 50% of sales at Amazon and Newegg, the two biggest online computer marketplaces. Processor revenue rose 74% in the latest quarter. Their new AI product, MI25, is already shipping in quantity to data centers around the world and acceptance was accelerating.

I think analysts were wrong on the Q3 earnings. I believe AMD is right on the edge of a resurgence that will make the company a real competitor again.

I am using the April options to get us past their January earnings. When we exit before the event the options will still have an expectation premium.

Update 11/6/17: AMD and Intel could have waited one more day before announcing a partnership to combine AMD's graphics chip with an Intel processor and High Bandwidth Memory to create a thinner and lighter chip for laptops with top tier visual performance. This was rumored several weeks ago but Intel denied it at the time. On Oct 10th, I wrote this.

AMD shares rallied after a processor conference and upgrade to Nvidia. Yesterday there was an article with a picture of a new Intel processor with "Vega Inside" but it has disappeared today. Intel has previously denied any licensing with AMD but the picture showed a mobile processor with Intel Outside, Vega Inside, which would mean AMD's Vega graphics on an Intel chip. This was for a mobile processor for a notebook or tablet. Apparently, Intel was not ready for the world to see that internal graphic and the article was removed from circulation. If/when Intel does announce a deal with AMD the stock is going to soar.

Update: I was able to go back and find the link I had saved even though it was no longer referenced on the website. Vega Inside

Update 11/8/17: AMD's head of the graphics chip unit, Raja Kordui, announced his resignation. This creates big sentiment problems for AMD. He said he was leaving to spend more time with his family but why would a highly successful department head exit right on the eve of a major product expansion? Of course AMD said this would not impact their direction and future goals but Kordui was credited with making AMD GPUs competitive with Nvidia and kept Nvidia from dominating the space. CEO Lisa Su will assume Kordui's role until a replacement is named. She is by far the most intelligent and dynamic CEO the company has ever had and she is more than capable of occupying both positions.

Position 11/6/17:

Long AMD shares @ $12.04, see portfolio graphic for stop loss.
Alternate position: Long April $12 call @ $1.50, see portfolio graphic for stop loss.

ARNC - Arconic - Company Profile


No specific news. Shares fell with the market on no news.

Original Trade Description: October 28th

Arconic creates breakthrough products that shape industries. Working in close partnership with our customers, we solve complex engineering challenges to transform the way we fly, drive, build and power. Through the ingenuity of our people and cutting-edge advanced manufacturing techniques, we deliver these products at a quality and efficiency that ensure customer success and shareholder value. Company description from Arconic.

Arconic is the old Alcoa. The aluminum mining company was split off as Alcoa Corp and the original Alcoa was renamed Arconic. This company manufactures parts and complicated assemblies from aluminum. They take the raw aluminum and add value to it by creating high tech, high value parts like turbine blades for engines and gas turbines. They are moving into 3D printing of aluminum parts. They have dozens of remote offices close to large industrial clusters where they can provide immediate service to large manufacturing companies.

Shares fell after earnings because they announced the appointment of a new CEO with their earnings report. Charles Blankenship will replace David Hess on January 15th.

The company reported earnings of 25 cents that missed estimates for 27 cents. Revenue of $3.24 billion beat estimates for $3.09 billion. The company guided for the full year for revenue of $12.6-$12.8 billion, up from prior guidance of $12.3-$12.7 billion. Full year earnings are now expected to be $1.15-$1.20 per share.

Expected earnings January 22nd.

Shares fell $3 on the earnings miss and CEO change. After bottoming at $24, they are trying to move higher with resistance at $25.15. I believe ARNC will return to pre earnings levels at $28.

Position 10/31/17:

Long ARNC shares @ $24.76, see portfolio graphic for stop loss.
Alternate position: Long Jan $26 call @ 95 cents, see portfolio graphic for stop loss.

BOTZ - Global X Robotics AI - Company Profile


Since this is a long-term slow moving ETF position, there will not be daily commentary.

Original Trade Description: October 4th.

The investment seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Indxx Global Robotics & Artificial Intelligence Thematic Index. The fund invests at least 80% of its total assets in the securities of the underlying index. The underlying index is designed to provide exposure to exchange-listed companies in developed markets that are involved in the development of robotics and/or artificial intelligence as defined by Indxx, the provider of the underlying index. The fund is non-diversified. Company description from FinViz.com.

Robots of every description are taking over the manufacturing sector, service sector, etc. Drones are automated. Autos are becoming autonomous.

Even more important to this ETF is the sudden arrival of Artificial Intelligence or AI. That is the buzzword for everything. Everybody is trying to get into the AI business.

This ETF took off last January and while there have been several mild hiccups along the way, the chart is nearly vertical as investors become aware of it.

I am going to lag back on the stop loss because this could be a long-term position.

Update 10/26: Shares of BOTZ fell 50 cents for the biggest one-day drop since the ETF began in September 2016. There was no news but volume of 4.16 million shares was the largest ever and well over the 964,000 historical average.

Position 10/5/17:

Long BOTZ shares @ $22.10, see portfolio graphic for stop loss.
Alternate position: Long Mar $23 call @ 80 cents, see portfolio graphic for stop loss.

GEO - GEO Group Inc - Company Profile


No specific news. Only a 19 cent decline after a week of gains.

Original Trade Description: November 8th

The GEO Group, Inc. is a real estate investment trust. The firm invests in real estate markets of the United States, Australia, South Africa and the United Kingdom. It specializes in the ownership, leasing and management of correctional, detention and reentry facilities and the provision of community-based services and youth services. The firm own, lease and operate a broad range of correctional and detention facilities including maximum, medium and minimum security prisons, immigration detention centers, minimum security detention centers, as well as community based reentry facilities. It was formerly known as Wackenhut Corrections Corp. Company description from FinViz.com.

Earnings Jan 30th.

The company reported earnings of 31 cents on revenue of $566.8 million. Analysts were expecting $556 million. They guided for revenue of $557-$562 million for Q4. Funds from operations for the full year are expected to be $2.52-$2.54 with revenue of $2.25 billion. The funds from operations are a key metric for REITs and their ability to pay dividends. They declared a dividend of 47 cents in October and it was paid on Oct 30th.

GEO is the world's leading provider of diversified correctional, detention, community reentry and electronic monitoring services to government agencies around the world. They have 140 facilities with 96,000 beds.

Shares declined in August 2016 as President Obama was moving away from the private prison concept. When Trump won in November shares gapped open and rallied for six months. In May civil rights groups sued the government over private prisons for housing immigrants. Private pension funds withdrew investments from private prison companies. Shares declined for six months despite receiving new contracts from the government for multiple types of detention operations. The declines ended in August and a rebound began with the Oct 31st earnings.

There is resistance at $27.75 but based on the positive guidance and new Federal contracts, I believe that will be broken and we could see a return to $31-$32.

Position 11/9/17:

Long GEO shares @ $26.90, see portfolio graphic for stop loss.
Alternate position: Long Mar $30 call @ 85 cents, see portfolio graphic for stop loss.

ON - ON Semiconductor - Company Profile


No specific news. Chip sector was crushed after weeks of gains. The decline was not stock related.

Original Trade Description: November 7th

ON Semiconductor Corporation manufactures and sells semiconductor components for various electronic devices worldwide. It operates through three segments: Power Solutions Group, Analog Solutions Group, and Image Sensor Group. The Power Solutions Group segment offers discrete, module, and integrated semiconductor products for various applications, such as power switching, power conversion, signal conditioning, circuit protection, signal amplification, and voltage reference. The Analog Solutions Group segment designs and develops analog, mixed-signal, and logic application specific integrated circuits and standard products, as well as power solutions for a range of end-users in the automotive, consumer, computing, industrial, communications, medical, and aerospace/defense markets. This segment also provides trusted foundry, trusted design, and manufacturing services, as well as integrated passive devices technology. The Image Sensor Group segment offers complementary metal oxide semiconductors and charge-coupled device image sensors, as well as proximity sensors, image signal processors, and actuator drivers for autofocus and image stabilization for a range of customers in automotive, industrial, consumer, wireless, medical, and aerospace/defense markets. The company serves original equipment manufacturers, distributors, and electronic manufacturing service providers. Company description from FinViz.com.

Earnings Feb 6th.

ON continues to power higher on a surge of new products as the IoT boom continues. The company completed the acquisition of Fairchild Semiconductor in September.

A major factor in the boom is the Advanced Driver-Assistance Systems. This market is expected to reach $42 billion by 2021 according to MarketsandMarkets. This is giving ON a tremendous boost in earnings and forecasts.

In October ON and Fujitsu announced an agreement where ON will purchase 40% of Fujitsu's 8-inch wafer fabrication plant in Aizu-Wakamatsu. The purchase will be completed by April 1st. ON already had a 10% share and will acquire another 30%. ON said it planned to increase ownership to 80% in the second half of 2018 and 100% in the first half of 2020. By scaling into the ownership it will allow ON to add capacity as demand increases.

The company reported earnings of 30 cents that missed estimates for 40 cents. Revenue of $1.39 billion beat estimates for $1.37 billion. They guided for the current quarter for revenue of $1.33-$1.38 billion. They missed the estimates but that was a 976% rise in profits and 46% increase in revenue. Shares fell sharply at the open to stop us out but rebounded sharply in the afternoon. I am recommending we reenter this position using only the April option. This is the first available option series after their Feb 6th earnings. We will not hold it until April but being after their earnings the option will retain its premium better for when we do decide to exit. I am also listing the December $20 put because it is cheap and ON has been rising for 2 months. If the rally dies this would be cheap insurance.

Position 11/8:

Long Apr $22 call @ $1.60, see portfolio graphic for stop loss.
Optional position: Long Dec $20 put @ 20 cents, see portfolio graphic for stop loss.

BEARISH Play Updates

BBBY - Bed, Bath and Beyond - Company Profile


Big rebound from the new 8-yr closing low on Tuesday. We were stopped on the short stock position but we still have a long put. That position will move to the Lottery Play section this weekend.

Original Trade Description: October 14th.

Bed Bath & Beyond Inc., together with its subsidiaries, operates a chain of retail stores. It sells a range of domestics merchandise, including bed linens and related items, bath items, and kitchen textiles; and home furnishings, such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings, consumables, and juvenile products. It also provides various textile products, amenities, and other goods to institutional customers in the hospitality, cruise line, healthcare, and other industries. As of February 25, 2017, the company had a total of 1,546 stores, includes 1,023 Bed Bath & Beyond stores in 50 states, the District of Columbia, Puerto Rico, and Canada; 276 stores under the names of World Market, Cost Plus World Market, or Cost Plus; 113 buybuy BABY stores in 35 states and Canada; 80 stores under the CTS name; and 54 stores under the Harmon name. It also offers products through various Websites and applications, such as bedbathandbeyond.com, bedbathandbeyond.ca, harmondiscount.com, christmastreeshops.com, buybuybaby.com, buybuybaby.ca, harborlinen.com, t-ygroup.com, and worldmarket.com. In addition, the Company operates Of a Kind, an e-commerce Website that features specially commissioned limited edition items from emerging fashion and home designers; One Kings Lane, an online authority in home decor and design that offers a collection of selected home goods, and designer and vintage items; PersonalizationMall.com, an online retailer of personalized products; Chef Central, an online retailer of kitchenware, cookware, and homeware items catering to cooking and baking enthusiasts; and Decorist, an online interior design platform that provides personalized home design services. Company description from FinViz.com.

It is a tough world when nearly every one of your products is listed on Amazon along with a dozen competitive products with free 2-day delivery. Bed, Bath and Beyond is stuck in that rut and it is painful.

In their recent earnings they reported 67 cents, down from $1.11 in the year ago quarter and missed estimates for 93 cents. Revenue of $2.9 billion also missed estimates for $3 billion. Same store sales declined -1.7%. The retailer said it was undertaking a number of "transformational initiatives." One of those initiatives was the termination of 880 manager positions. Shares fell 18% on the earnings.

With Toys-R-Us filing bankruptcy, there are now concerns about other stores possibly following suit. BBBY is in trouble even though they are buying back shares and paying a dividend. With sales and earnings declining those shareholder friendly efforts may have to be curtailed. They have 65,000 employees and 1,550 stores.

This is simply a case of a large brick and mortar retailer trying to compete with an all powerful Amazon and we know who is going to win this battle in the long run.

Expected earnings Dec 19th.

I am reaching out to January on the option because we can buy an extra 40 days of time for 21 cents. We can buy time but we do not have to use it.

Position 10/16/17:

Closed 11/9: Short BBBY shares @ $21.20, exit $20.25, +$.95 gain.
Alternate position: Long Jan $20 put @ $1.10, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


Since this is a long-term slow moving ETF position, there will not be daily commentary.

Original Trade Description: September 18th.

The VXX is a short-term volatility ETF 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 five reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16), $12.77 (8/22/17). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

We know from experience that the VXX always declines. The last two times we shorted this ETF we had a $7.23 and $5.98 gain.

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 into year-end we could see a sharp decline in the VXX over 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.

The VXX is hard to short. Shortsqueeze.com says there are 19.9 million shares short out of 26.7 million shares outstanding. The shares are out there and being traded because the volume on Monday was 29.6 million. You have to tell your broker you really want to short it and make them find the shares. Sometimes it takes days or even a week before your broker will find you the shares. Trust me, be persistent and it will be worth the effort.

I had held off after the 1:4 reverse split because the options were expensive and I was expecting volatility in September from the budget battle and debt ceiling hurdle. With those issues pushed out into December, the volatility is dropping like the proverbial rock. Several readers have already emailed me asking when I was going to put this position back in the portfolio.

Position 9/19/17:

Short VXX shares @ $40.95, see portfolio graphic for stop loss.

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