Editors Note:

The major indexes showed only minor concern over the potential for a government shutdown. Apparently, investors were expecting a last minute reprieve or the administrations assurances that it would not be "weaponized" set their minds at ease. After some early morning declines, the major indexes posted decent gains to end the week. The S&P, Nasdaq and Russell 2000 closed at new highs but the Dow was the laggard.

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

ARNC - Arconic
The long call position was stopped at $29.85.

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

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BULLISH Play Updates

ARNC - Arconic Inc - Company Profile


The company announced a 6 cent dividend payable Feb 25th to holders on Feb 2nd. Shares dipped on the announcement to stop us out for a small gain. Apparently, investors were hoping for a larger dividend.

Original Trade Description: December 27th.

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 information from Arconic.

Earnings January 22nd.

Arconic was the original Alcoa. They spun off the aluminum business then changed their name to Arconic. This company makes precision aluminum parts for aircraft and transportation equipment. Eliott management has been agitating for change and managed to get the long term CEO Klaus Kleinfeld kicked out and oversaw the five-month process to get 24-year GE veteran Charles Blankenship installed as the new CEO.

Elliott has seen their investment lag for the last year as the spinoff and CEO hunt took the wind out of Arconic's sales. Now they could be reaching the end of their struggle with a potential buyout on the horizon.

One analyst got the fire started a couple weeks ago when he suggested Honeywell was on the prowl and would eventually buy Arconic. Honeywell lost out on Rockwell Collins (COL) when United Technologies bought them for $30 billion or 14 times EBITDA.

Honeywell was under pressure by Dan Loeb to spin off its aerospace unit. Instead, they agreed to spin off the homes and global distributions unit and the transportation business leaving (by the end of 2018) the aerospace unit intact and the surviving business. Now Honeywell needs to bulk up its aerospace business of they will be the nex company acquired.

With Dan Loeb on one side urging Honeywell to build aerospace and Elliott Management on the other side urging Arconic to sell itself, this is a match made in heaven and could happen in early 2018 according to the analyst.

Shares have sprinted higher since the news story broke a couple weeks ago. They are very close to a 52-week high over $28 and a move over that level could trigger additional buying and short covering.

I am using a July option to get well past the January and April earnings. We will not hold it that long but the uncertainty surrounding those events should keep the premium up if we have a market drop in January.

Update 1/8/17: Arconic said it was freezing the pension plans at current levels for 7,900 employees and would make contributions to 401K plans instead. This will save them $140 million.

Position 12/28/17:

Closed 1/19: Long July $30 call @ $1.50, exit $2.62, +$1.12 gain.

CGNX - Cognex - Company Profile


No specific news.

Original Trade Description: December 9th.

Cognex Corporation provides machine vision products that capture and analyze visual information in order to automate tasks primarily in manufacturing processes worldwide. The company offers machine vision products, which are used to automate the manufacturing and tracking of discrete items, such as mobile phones, aspirin bottles, and automobile tires by locating, identifying, inspecting, and measuring them during the manufacturing or distribution process. Its products include VisionPro, a software suite that provides various vision tools for programming; displacement sensors with vision software for use in 3D application; In-Sight vision systems that perform various vision tasks, including part location, identification, measurement, assembly verification, and robotic guidance; In-Sight vision sensors; ID products, which are used for reading codes that are applied on discrete items during the manufacturing process, as well as have applications in logistics automation for package sorting and distribution; DataMan barcode readers; barcode verifiers; vision-enabled mobile terminals for industrial barcode reading applications; and barcode scanning software development kits. The company sells its products through direct sales force, as well as through a network of distributors and integrators. Cognex Corporation was founded in 1981 and is headquartered in Natick, Massachusetts. Company description from FinViz.com.

Cognex is a tech stock where growth is booming. Every manufacturer is looking to automate as many tasks as possible and Cognex provides them the opportunity with robotic vision equipment that can inspect and track items much faster than humans.

For Q3 they reported earnings of $1.14 that beat earnings for $1.05. Revenue of $259.7 million beat estimates for $256.8 million. They guided for the current quarter for revenue of $170-$180 million and analysts were expecting $155 million. That was a major guidance beat.

Expected earnings Feb 15th.

They announced a 2:1 split that was effective on December 4th. Shares immediately sank $7 on post split depression and Nasdaq rotation but have rebounded the past two days. The 50% decrease in the stock price also reduced the option premiums by 50% and made them cheap enough to buy.

Position 12/11/17:

Long Feb $67.50 call @ $3.20, see portfolio graphic for stop loss.

FLIR - FLIR Systems - Company Profile


No specific news. Nice gain to a new closing high.

Original Trade Description: January 10th.

FLIR Systems, Inc. develops, designs, manufactures, and markets thermal imaging systems, visible-light imaging systems, locater systems, measurement and diagnostic systems, and threat-detection solutions worldwide. The company operates in six segments: Surveillance, Instruments, Security, OEM and Emerging Markets, Maritime, and Detection. The Surveillance segment provides enhanced imaging and recognition solutions for various military, law enforcement, public safety, and other government customers for the protection of borders, troops, and public welfare. This segment also develops hand-held and weapon-mounted thermal imaging systems for use by consumers. The Instruments segment offer devices that image, measure, and assess thermal energy, gases, electricity, and other environmental elements for industrial, commercial, and scientific applications. The Security segment develops and manufactures cameras and video recording systems for use in commercial, critical infrastructure, and home monitoring applications. The OEM and Emerging Markets segment provides thermal and visible-spectrum imaging camera cores and components that are utilized by third parties to create thermal, industrial, and other types of imaging systems. The segment also develops and manufactures intelligent traffic systems; imaging solutions for the smartphone and mobile devices market; and thermal imaging solutions for commercial-use unmanned aerial systems. The Maritime segment develops and manufactures electronics and imaging instruments for the recreational and commercial maritime market under the FLIR and Raymarine brands. The Detection segment offers sensors, instruments, and integrated platform solutions for the detection, identification, and suppression of chemical, biological, radiological, nuclear, and explosives threats for military force protection, homeland security, first responders, and commercial applications. The company was founded in 1978 and is headquartered in Wilsonville, Oregon. Company description from FinViz.com.

The short description is that FLIR makes night vision equipment for the military. They are the primary provider of these high tech night vision systems and they are very expensive. With the military budget being greatly expanded in 2018 and probably 2019, FLIR is going to be getting a lot more contracts for new equipment and for replacement equipment and parts.

For Q3, FLIR reported earnings of 52 cents that beat estimates for 48 cents. Revenue of $464.7 million rose 14.7% and easily beat estimates for $446 million. The surveillance segment revenues rose 7.6%, instruments rose 10.5% and OEM and emerging markets revenues rose 39.1%. Detection systems revenues rose 18.9%. The security segment sa revenues rise 16.5%. The marine segment was the slacker with only a 4.2% increase. Order backlogs rose 10.1% to $709 million.

The company guided for full year earnings of $1.83-$1.88 up from $1.81-$1.91 with revenue of $1.78-$1.83 billion.

Earnings February 14th.

Shares rallied last week to close at a new high at $48.25 and just over two-month resistance at $47.90. They spiked again on Monday when they announced a high-resolution camera kit for self-driving cars. If this breakout continues, it should produce some short covering given the long period of consolidation after the spike from Q3 earnings in October.

I am recommending an inexpensive February ATM option with earnings on the 13th. I intend to hold this position over earnings unless we have profits to protect by that date.

This is also a longer-term position in the LEAPS newsletter.

Position 1/11/118:
Long Feb $50 call @ $1.55, see portfolio graphic for stop loss.

PLAY - Dave & Busters - Company Profile


No specific news. Excellent rebound to a 2-week high close.

Original Trade Description: January 13th.

Dave & Buster's Entertainment, Inc. owns and operates venues that combine dining and entertainment in North America for adults and families. It offers food and beverage items combined with an assortment of entertainment attractions, including skill and sports-oriented redemption games, video games, interactive simulators, and other traditional games. The company operates its venues under the names Dave & Buster's and Dave & Buster's Grand Sports Caf. As of June 17, 2014, it had 69 company-owned locations in the United States and Canada. The company was founded in 1982 and is based in Dallas, Texas. Company description from FinViz.com.

On Monday January 8th, Dave & Busters revised earnings guidance for fiscal 2017 from $110-$112 million to $108-$110 million. That $2 million adjustment caused the stock to drop from $56 to $44. They also lowered revenue slightly from $1.148-$1.155 billion to $1.138-$1.142 billion. Same store sales was reduced to -1.0%-0.7%, down from +0.75%.

They had previously warned in the Q3 conference call that Q4 started slow. They expected it to pick up in December, which is normally a busy month but revenue never caught up with the slow start in October. Quarter to date through Jan 6th, same store sales were down -5.1% with the end of year bad weather causing people to stay home. They also suffered from the lack of interest in the NFL games in Q4.

They were positive on their new format stores. They expect to open 14-15 new stores in 2018 and the same class of store in 2016 returned 54% one-year cash on cash returns in 2017. This was an improvement on the returns on their 2014-2015 class of stores. With each generation they are improving the returns.

Expected earnings March 6th.

The sharp decline last week was very overdone for the minimal decline in earnings expectations. Shares are already rebounding and with two months before earnings they have plenty of time for a decent rebound. For Q3 they reported earnings of 29 cents that beat estimates for 23 cents and shares were on an upward trajectory until Monday's guidance warning.

With so many stocks in blowout mode and not currently buyable, investors are going to be looking for less risky buying opportunities and PLAY could be the perfect answer.

Position 1/16/18:
Long April $50 call @ $3.40, see portfolio graphic for stop loss.

RHT - Red Hat - Company Profile


No specific news. Consolidating at the $126 level.

Original Trade Description: January 11th.

Red Hat, Inc. provides open source software solutions to develop and offer operating system, virtualization, management, middleware, cloud, mobile, and storage technologies to various enterprises worldwide. It offers infrastructure-related solutions, such as Red Hat Enterprise Linux, an operating system platform that runs on hardware for use in hybrid cloud environments; Red Hat Satellite, a system management offering that helps to deploy, scale, and manage in hybrid cloud environments; and Red Hat Enterprise Virtualization, a software solution that allows customers to utilize and manage a common hardware infrastructure to run multiple operating systems and applications. The company offers application development-related and other technology solutions, such as Red Hat JBoss Middleware, a solution for developing, deploying, and managing applications; integrating applications, data, and devices; and automating business processes in hybrid cloud environments; Red Hat cloud offerings, a software solution that enables customers to build and manage various cloud computing environments; Red Hat Mobile, a software development platform that enables customers to develop, integrate, deploy, and manage mobile applications for enterprises; and Red Hat Storage, a software solution that enables customers to manage large, unstructured, or semi-structured data in hybrid cloud environments. It also provides consulting, support, and training services; and real-time operating system, distributed computing, directory services, and user authentication. Red Hat, Inc. has a collaboration with Wipro Limited to set up a cloud application factory that offers developers and IT teams a methodology for application modernization across public, private, and hybrid clouds. The company was formerly known as Red Hat Software, Inc. and changed its name to Red Hat, Inc. in June 1999. Red Hat, Inc. was founded in 1993 and is headquartered in Raleigh, North Carolina. Company description from FinViz.com.

Linux has always been immune to most of the attacks on the internet but Red Hat has taken that to a new level. There are multiple versions of free Linux versions but free means little support and questionable fixes. Red Hat has taken their Linux product and built it into multiple enterprise versions for individual applications and cloud use on virtual machines with an entire suite of applications.

In the Q3 earnings the company reported 73 cents that beat estimates for 70 cents. Revenue of $748 million beat estimates for $734.4 million. They guided for Q4 for revenue of $758-$763 million and that beat estimates for $754.7 million. They guided for $2.88 for full year earnings and revenue of $2.91 billion. Deferred revenues rose 23% to $2.11 billion and subscription revenue from infrastructure offerings rose 15% to $495 million.

The good news on all fronts was not enough and shares dropped $9 intraday after the report. $120 appeared as support and shares have been rising steadily.

Deutsche Bank reiterated a buy with a $150 target saying the new Amazon Linux product was no threat and they were only targeting a fraction of the market for test systems before eventually going live on the Amazon cloud. The analyst said the Amazon Linux competes with Ubuntu/CentOS and not Red Hat. Finally an analyst that actually understands what he is analyzing.

Expected earnings March 20th.

I am picking a March option even though it expires a week before earnings. Those after earnings are far too expensive. I am expecting some serious profit taking in the market after the majority of Q4 earnings are over, probably around the February expiration. That should take us out of this position before well before RHT earnings.

Options are still expensive so I am turning this into an optional spread to reduce the net debit.

Position 1/12/18:
Long Mar $130 call @ $3.40, see portfolio graphic for stop loss.
Optional: Short Mar $140 call @ 90 cents, see portfolio graphic for stop loss.
Net debit $2.50, maximum gain $7.40.

TGT - Target Corp - Company Profile


No specific news. New 52-week high.

Original Trade Description: December 13th.

Target Corporation operates as a general merchandise retailer. It offers household essentials, including pharmacy, beauty, personal care, baby care, cleaning, and paper products; dry grocery, dairy, frozen food, beverages, candy, snacks, deli, bakery, meat, produce, and pet supplies; and apparel for women, men, boys, girls, toddlers, infants, and newborns, as well as intimate apparel, jewelry, accessories, and shoes. The company also provides home furnishings and decor, such as furniture, lighting, kitchenware, small appliances, home decor, bed and bath, home improvement, and automotive products, as well as seasonal merchandise, such as patio furniture and holiday decor; music, movies, books, computer software, sporting goods, and toys, as well as electronics, such as video game hardware and software. In addition, it offers in-store amenities, including Target Cafe, Target Photo, Target Optical, Starbucks, and other food service offerings. Target Corporation sells products through its stores; and digital channels, including Target.com. As of September 13, 2017, the company operated 1,816 stores in the United States. Target Corporation was founded in 1902 and is headquartered in Minneapolis, Minnesota. Company description from FinViz.com.

I would not normally recommend a retailer only two weeks before Christmas but I expect Target to overcome the normal post holiday depression.

Earnings Feb 14th.

Target announced on Wednesday they were buying grocery delivery platform Shipt Inc for $550 million in cash. The company said they would be offering same day delivery across all major product categories by the end of 2019. They will be offering same day delivery for groceries, essentials, home products, electronics and other items by mid 2018.

Shipt's services cost $99 a year for unlimited deliveries. Shipt already has a network of more than 20,000 personal shoppers to fulfill orders from various retailers and deliver within hours in more than 72 markets. Shipt partners include stores like Costco, Whole Foods, Meijer, etc.

Target is going to continue letting Shipt deliver for their other customers. The more widely recognized the brand is the larger it will grow and Target will be able to benefit from their ability to scale deliveries all over the country. Plus, they will profit from the fees received for those other deliveries.

This is a great deal for Target as it ramps up competition against Amazon.

I wrote last week that shippers were noting the increase in packages from Target. They were the second largest volume in UPS trucks after Amazon. They should have a great Q4.

Update 1/2/18: Influential tech analyst Gene Munster said he believes Amazon will buy Target in 2018. Target has a market cap of $37 billion but it would require a huge premium to get a deal done, probably something in the $50 billion range. Amazon has a market cap of $573 billion. The deal makes sense in the long run because it would give Amazon 1,802 major store outlets with a huge warehousing system that Amazon could use to its advantage. The addition of Amazon specific products to the already broad range of products offered by Target, would be a major boost to Amazon sales. The stores would function as customer delivery points for Amazon packages and because of the large store footprint it would allow Amazon to expand its same day, next day delivery offering to most of the US.

While it might make sense on paper, I would not hold my breath expecting a deal to be done. That would be a big bite for Amazon and there may be a problem getting regulatory approval. President Trump already believes Amazon is a monopoly with too much power and that could keep a deal from completing.

Update 1/9/18: Target raised Q4 earnings guidance from $1.05-$1.25 to $1.30-$1.40. Same store sales are expected to rise 3.4% and well above analyst expectations for 1.25%. They guided for 2018 earnings of $5.15-$5.45 and well above estimates for $4.36.

Update 1/13/18: MKM Partners reiterated a buy rating and shares gained another $2.80 to a new 52-week high.

Position 12/14/17:

Long March $65 call @ $2.90, see portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

DIA - Dow SPDR ETF - ETF Profile


Once we see what happens to the potential government shutdown this weekend, I will either close this position or turn it into a spread. If a shutdown lasted a week, the market could decline significantly.

Original Trade Description: November 16th

The SPDR Dow Jones Industrial Average ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average. The DJIA is the oldest continuous barometer of the U.S. stock market, and the most widely quoted indicator of U.S. stock market activity.

I am going to make this as simple as possible. The Dow is still extremely overbought. It is due for a rest. The earnings cycle is over. Post earnings depression is here. The short squeeze is likely to fail. The tax plan faces an uphill battle and January could see a major market decline. It has been over 500 days since the market had a 5% decline and we average twice a year. We are due.

This is highly speculative. I am using March options because I want to have as much time as possible for this scenario to play out.

Update 12/18/17: The Dow is moving ever closer to 25,000, which could end up being a monster sell the news trigger. The Dow is up 6,900 points since the election. That is 38.5% in 13 months. There is a 100% chance there will be a correction in the future. The only unknown is when.

I am recommending we close the short put side of the spread. That captures that portion of the trade and once the Dow rolls over we do not have to deal with the rise in value in the short put. Secondly, that gives us other options to raise additional premium in the future, including selling a higher put if the index does not decline.

Position 11/17/17:

Long March $230 put @ $5.16, see portfolio graphic for stop loss.

Closed 12/19: Short March $210 put @ $1.71, exit .43, +1.28 gain.

Monte Gore, Mike Brown, Steve Spodyak, Gary Rhoads, John Tighe, Thomas McGraw

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