Editors Note:

With a severely negative market, we could have sustained serious injuries but we excaped with only a minor bruise. We lost two positions but we did not los eany money. SFIX posted a nice gain and AOBC posted a nice decline. The stops on SD and INFN took us out for a minor gain.

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

INFN - Infinera
The long stock position was stopped at $9.85 for a breakeven.

SD - Sandridge
The long call position was stopped at $17.25 for a minor gain.

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

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Full updates on all plays on Wednesday and Saturday.
Only closed plays are updated on other days.

BULLISH Play Updates

CSIQ - Canadian Solar - Company Description


No specific news. No material decline in a negative market.

Original Trade Description: July 9th.

Canadian Solar Inc., together with its subsidiaries, designs, develops, manufactures, and sells solar ingots, wafers, cells, modules, and other solar power products primarily under the Canadian Solar brand name. The company operates through two segments, Module and System Solutions, and Energy. Its products include various solar modules that are used in residential, commercial, and industrial solar power generation systems. The company also provides specialty solar products consisting of Andes Solar Home System, an off-grid solar system that provides an economical source of electricity to homes and communities without access to grid; and Maple Solar System, a clean energy solution for families, as well as solar system kits, which are a ready-to-install packages that consist inverters, racking systems, and other accessories. In addition, it develops, builds, and sells solar power projects; performs engineering, procurement, and construction (EPC) work for solar power projects; and offers operation and maintenance services that include inspection, repair, and replacement of plant equipment, site management, and administrative support services. Further, the company generates and sells electricity through its solar plants with an aggregate capacity of approximately 1,211.1 megawatts. Canadian Solar Inc. offers its products to distributors, system integrators, project developers, and installers/EPC companies. The company has operations in North America, South America, Europe, Africa, the Middle East, Australia, and Asia. Canadian Solar Inc. was founded in 2001 and is based in Guelph, Canada. Company description from FinViz.com.

They posted Q1 earnings of 72 cents that blew away estimates of of 38 cents. This wa sup from a loss of 23 cents in the year ago quarter. Revenue of $1.42 billion also beat estimates for $1.38 billion. That was up from $680 million in the year ago quarter.

Solar shipments of 1.374 gigawatts (GW) beat guidance for 1.30-1.35 GW. Their subsidiary Recurrent Energy completed the sale of three solar power plants totaling 544 megawatts to KEPCO, South Korea's largest electric utility.

For Q2 they expect shipments in the range of 1.5-1.6 GW with revenues in the $690-$730 million range and gross margin of 20-22%.

In early June, China cut subsidies to solar providers for regular solar projects. Shares fell $5 on the news. However, now with the 25% tariffs on Chinese panels their business in other countries will more than compensate for the subsidy cut. Shares are rebounding and closed at a 5-week high on Friday.

Earnings August 15th.

Position 7/9/18:
Long CSIQ shares @ $12.92, see portfolio graphic for stop loss.
Alternate position: Long October $14 call @ 85 cents, see portfolio graphic for stop loss.

INFN - Infinera - Company Description


No specific news. Shares fell just enough to stop us out for a breakeven on the stock position.

Original Trade Description: June 30th.

Infinera Corporation provides optical transport networking solutions, equipment, and software and services worldwide. The company's product portfolio consists of Infinera DTN-X Family of terabit-class transport network platforms, including the XTC Series, XTS Series, and XT Series; Infinera DTN-X XTC series multi-terabit packet optical transport platforms that integrate digital OTN switching and optical WDM transmission; and Infinera DTN-X XT series for terrestrial applications and XTS series for subsea applications. It also provides Infinera XTM Series packet-optical transport platform that enables high-performance metro networks with service-aware, application-specific capabilities; and Infinera Cloud Xpress Family designed to meet the varying needs of ICPs, communication service providers, Internet exchange service providers, enterprises, and other large-scale data center operators. In addition, the company offers Infinera FlexILS open line system platform that connects various Infinera and third-party terminal equipment platforms over long-distance fiber optic cable providing switching, multiplexing, amplification, and management channels. Further, it provides software solutions, including Xceed Software Suite that address long-haul, subsea, and metro networks, as well as a range of support services for all hardware and software products. The company also serves telecommunications service providers, Internet content providers, cable providers, wholesale and enterprise carriers, research and education institutions, enterprise customers, and government entities. It markets and sells its products and related support services primarily through its direct sales force. The company was formerly known as Zepton Networks. Company description from FinViz.com.

Infinera suffered a post earnings decline in May when it fell from $12 to $9. It was hit again on May 29th when Jefferies downgraded from hold to underperform. Bad news hit again on June 21st when Goldman downgraded from buy to neutral. However, the shares have shaken off all the negativity and are about to make a new 2-month high. Given the rocky market and the downgrades the stock should be plunging. However, the impending global 5G build out will require massive amounts of fiber switches and routers and that is powering Infinera's future.

Revenue rose 15.5% in Q1. Their operating loss of 17 cents was a major improvement over the loss of 50 cents in the comparison quarter. For Q2, management sees another 15-20% increase in revenue.

Portfolio managers must be expecting the company to turn profitable in the 5G expansion and are taking advantage of the dips.

Earnings August 8th.

Position 7/2/18:
Closed 7/11: Long INFN shares @ $9.85, exit $9.85, breakeven.
Alternate position: Long August $11 call @ 50 cents, see portfolio graphic for stop loss.

SD - Sandridge Energy - Company Description


No specific news. Shares closed at a 5-month high on Monday but a 5% decline in crude prices crushed the energy sector to stop us out.

Original Trade Description: June 16th.

SandRidge Energy, Inc. engages in the exploration, development, and production of oil, natural gas, and natural gas liquids primarily in the Mid-Continent and North Park Basin of the United States. As of December 31, 2017, it had 2,096.8 net producing wells; approximately 643,000 net acres under lease; and two rigs drilling in the Mid-Continent and two rigs drilling in the North Park Basin, as well as total estimated proved reserves of 177.6 million barrels of oil equivalent. The company is headquartered in Oklahoma City, Oklahoma. Company description from FinViz.com.

SandRidge got into trouble before the oil crash in 2015. They were over leveraged and when the crash came the drop in oil and gas prices forced them to file bankruptcy. They were just one of more than 70 energy companies to go bankrupt. They emerged from bankruptcy in late 2016.

Carl Icahn took an interest and accumulated a 13.6% stake in the company. He has been agitating for them to sell the company. He is currently in a proxy war trying to replace the board with directors of his choosing.

In the middle of this fight the company was approached by 17 other potential bidders who have registered to receive confidential financial information and documentation of reserves. Icahn has also entered the bidding process to bring the total to 18. The deadline to fill expressions of interest is June 25th. That means anyone interested in acquiring the company after they received the financial information must so state by the 25th or be left out of the bidding process.

The company has no long-term debt and $418 million in undrawn credit.

In Q1 they produced 3.2 million Boe which was 29% oil, 22% NGLs and 49% natural gas. They claim to have 1.1 billion Boe of proved reserves. In future dollars that represents about $65 billion in value. In present value dollars using 6% interest that is worth $20.2 billion not calculating the cost of production. Basically the company is worth billions, probably in the low single digits, and the market cap today is only $550 Million.

If the company receives more than one bid, the price could be significantly more than the current stock price. If it received no bids, Icahn will assume control but the stock price is likely to decline.

With the June 25th expression of interest date, we should see some activity relatively soon. However, I am recommending an option only position using the October $17.50 call. This is nearly $2 OTM but a material offer for the reserves should be significantly higher. This is a binary trade. We will either make a decent profit if multiple companies bid or we risk seeing the option go to zero if nobody bids. There would still be a chance of an Icahn recovery but initially the stock could decline.

The stock has put in a saucer bottom at $14 and closed at a four month high on Friday.

Update 6/29: Sandridge said it had been approached by 26 potential bidders including a prior suitor in Midstates Petroleum. Their prior offer was rejected by the company despite criticism by shareholders. Now that Carl Icahn is in control of the board, the bidding process should be more robust. Of the 26 bidders, 10 were interested in buying the entire company and 16 were only interested in buying some reserves focused in Colorado.

Position 6/18/18:
Closed 7/11: Long Oct $17.50 call @ $1.15, exit $1.42, +.27 gain.

SFIX - Stitch Fix - Company Description


The Stitch Fix Kids service has launched with brands like Nike, Under Armour, TOMS and Hanna Anderson and others. This will be a giant success and shares rose in an ugly market.

Original Trade Description: June 23rd.

Stitch Fix, Inc. sells a range of apparel, shoes, and accessories through its Website and mobile app in the United States. It offers denim, dresses, blouses, skirts, shoes, jewelry, and handbags for men and women under the Stitch Fix brand. The company was formerly known as rack habit inc. and changed its name to Stitch Fix, Inc. in October 2011. Stitch Fix, Inc. was founded in 2011 and is headquartered in San Francisco, California. Company description from FinViz.com.

Stitch Fix is an online subscription site for clothes. You create a profile with your sizes, likes, dislikes, color favorites, etc. The company will hand pick 5 items just for you from the over 1,000 brands they carry. The clothes are shipped to you to try out. You decide what to keep and checkout online. You return the items you do not want, postage free. Any items you want to exchange for a different size, color, etc are returned at no charge. There is no subscription fee. You can either order on demand or set up monthly automatic shipments.

The service has been so successful they recently announced a children's subscription service, Stitch Fix Kids. Since kids grow out of clothes at a rapid rate, mothers are always open to anything that will make replacing their clothes easier. This could be more popular than the original adult program. It is also more profitable for Stitch Fix because kids clothes are less fashion sensitive and are normally significantly cheaper providing higher profit margins.

The company reported Q1 earnings of 9 cents and three times the 3 cent estimate by analysts. Revenue of $316.7 million beat estimates for $307 million. Active customers rose 30% to 2.7 million.

Earnings September 6th.

There have been repetitive rumors about an acquisition by Amazon. This would be right in Amazon's growth plans for an enhancement of their try and buy apparel program. The Amazon program has not taken off because it gets lost in all the other things happening on their website.

The company had a big IPO in November but the share price fell in January and moved sideways for five months. After their earnings and new product announcement shares have been moving up steadily. Friday was a breakout to a new high.

I am recommending an option only position because the stock price is slightly above my normal upper limit of $30 for positions in this newsletter. If Stitch Fix is the Netflix of apparel there could be a good run ahead as early adopters find the service and sign up.

Position 6/25:
Long Sept $33 Call @ $1.90, stop loss $24.50.

BEARISH Play Updates

AOBC - American Outdoor Brands - Company Profile


No specific news. The Motley Fool published an article negative on AOBC saying it would take them another year to recover from the shakeup in the market. Shares fell to a new low.

Original Trade Description: June 30th.

American Outdoor Brands Corporation designs, manufactures, and sells firearms worldwide. It operates in two segments, Firearms, and Outdoor Products & Accessories. The company offers handguns, long guns, handcuffs, sporting and hunting rifles, black powder firearms, and firearm-related products and accessories. It also provides reloading, gunsmithing, and gun cleaning supplies; cutting tools and accessories; flashlights, tree saws, and related trimming accessories; shooting supplies, rests, and other related accessories; apparel, vault accessories, and laser and laser sights; survival and emergency preparedness products; and field rests, knives, gun vises, hearing protection products, camping gears, and case tumblers. The company sells its products under the Smith & Wesson, M&P, Performance Center, Thompson/Center Arms, Caldwell, Wheeler, Tipton, Frankford Arsenal, Smith & Wesson, M&P, Thompson/Center, Lockdown, Hooyman, BOG-POD, Golden Rod, Non-Typical, Crimson Trace, Imperial, Schrade, Old Timer, UST, and KeyGear brands. In addition, the company sells parts of other brands; operates a private law enforcement training facility; offers tooling, forging, heat treating, finishing, plating, plastic injection molding, and engineering support services to third-party customers; and licenses trademarks to third parties. It serves gun enthusiasts, collectors, hunters, sportsmen, competitive shooters, individuals desiring home and personal protection, and military agencies; and law enforcement and security agencies and officers. It markets its products through dealers, retailers, in-store retail channels, and range operations; social and electronic media; in-store retail merchandising systems and strategies; and Websites and online retail stores. The company was formerly known as Smith & Wesson Holding Corporation and changed its name to American Outdoor Brands Corporation in January 2017. Company description from FinViz.com.

AOBC changed its name from Smith & Wesson in 2017 in an effort to avoid some of the negativity around firearms. With the recent shootings, cities banning guns and signing confiscation laws, the CEO warned last week of future earnings risk.

They reported earnings of 14 cents that beat estimates for 10 cents. Revenue fell from $229 million to $172 million and barely beat estimates for $166 million. For the current quarter they guided for earnings of 10-14 cents and a further decline in revenue to $130-$140 million.

Earnings September 19th.

Position 7/2/18:
Short AOBC shares @ $11.98, see portfolio graphic for stop loss.
Alternate position: Long Sept $11 put @ 60 cents, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


The VXX rebounded a point but this is only temporary. It will eventually be single digits but it could be months in the future since we are entering the summer slowdown period in the market.

Previously: On Feb-5th a reader emailed me saying a friend was short 1,000 shares. When the $21 spike came in afterhours, Ameritrade closed that position for a $35,000 loss. They did not have a protective stop loss.

I wrote in the prior newsletter that we were not using a profit stop in this position because it could be hard to re-short the shares after a volatility event. That is just trade management for a profitable position. In ANY SHORT POSITION, you should have a catastrophe stop loss to avoid the position turning into a major loss. Had this person had a stop loss at their entry point, they would have been closed for a breakeven and they would be sleeping a lot better tonight.

Readers should always assume the potential for the worst possible outcome of a short position. Trade smart!

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.
Position 9/6/18:
Short VXX shares @ $54.27, see portfolio graphic for stop loss.

Average cost = $47.61.

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