Monday's mixed market was not relative to the overall health of the market.
The Dow was down hard at -157 because of nearly 100 points lost by Boeing and Caterpillar on the return of tariff retaliation worries. The S&P was nearly flat and the Nasdaq and Russell 2000 were positive. The tech sector has been leading the market higher and it is still leading. The Russell was up on gains in the chip and biotech sectors.
I expect the markets to continue higher and I warned over the weekend there could be some weakness but I expected gains for the week. The tariff worries are overblown. While there may be some retaliation, the actual announced tariffs were much weaker than expected and contained a significant number of exemptions. It could be weeks or even months before we know the eventual outcome.
Meanwhile 2018 earnings are projected at 18%, GDP at 3+% and tens of billions in buybacks and dividends. If fundamentals matter, the markets should continue higher.
The economic calendar has a lot of reports that should present a mixed picture to the Fed when it meets the following week. This should keep the Fed on its gradual course of three hikes in 2018. However, a couple members have turned slightly more hawkish after the January employment report so it will be interesting to see what they say after the meeting next week. They may have cooled on their hawkish stance. The market typically rallies before a Fed meeting so investors could be taking positions the rest of this week to profit from that bounce.
Thursday is the big day for earnings with Adobe, Broadcom and Ulta Beauty. For the next several weeks, there will only be a handful of companies reporting until we get into April and the Q1 cycle begins.
The S&P declined slightly but held over prior resistance at 2,780. Current resistance is 2,800 and support is 2,750-2,743. Without a significant change in market sentiment I would be surprised to see a material decline. Monday was just minor profit taking, settlement from the short squeeze and the return of some tariff worries that will pass.
The Dow was handicapped by Boeing and Caterpillar and those stocks forced selling in the Dow ETFs and the SPY. I believe the worry is overblown but that does not mean those stocks cannot decline further. However, there were up strongly on Friday so this was just profit taking and investors exiting because they missed this level on the first drop. Support is 25,000.
The Nasdaq set a new record high despite a $10 drop in Netflix. Apple's Eddy Cue said a Netflix acquisition is unlikely and shares declined. I doubt anyone really believed the rumors but they were circulating. Personally, I wish Netflix would drop another $50 so we could buy it again. At $325, the option premiums are out of sight.
The Nasdaq stretched its gains to 84 points over the prior record high from January 26th. If we had a minor pullback in the tech index, it would be a buying opportunity.
The Russell 2000 eased over the 1,600 mark and only 9 points from a new closing high. The Russell is rising on strength in chips and biotechs along with the rest of the tech sector. A breakout over 1,610 could set the broader market on fire.
Any pullback in the market from this level would be a buying opportunity The fundamentals are so strong they should overpower any short term headline selling. While there may be further retracements as the Dow and S&P try to clear the current resistance highs, the indexes should be higher by early April.
Enter passively, exit aggressively!
Send Jim an email
NEW DIRECTIONAL CALL PLAY
IBM - International Business Machines - Company Profile
International Business Machines Corporation operates as an integrated technology and services company worldwide. Its Cognitive Solutions segment offers Watson, a cognitive computing platform that interacts in natural language, processes big data, and learns from interactions with people and computers. This segment also offers data and analytics solutions, including analytics and data management platforms, cloud data services, enterprise social software, talent management solutions, and solutions tailored by industry; and transaction processing software that runs mission-critical systems in banking, airlines, and retail industries. The company's Global Business Services segment offers business consulting services; delivers system integration, application management, maintenance, and support services for packaged software applications; and finance, procurement, talent and engagement, and industry-specific business process outsourcing services. Its Technology Services & Cloud Platforms segment provides cloud, project-based, outsourcing, and other managed services for enterprise IT infrastructure environments. This segment also offers technical support, and software and solution support; and integration software solutions. The company's Systems segment offers servers for businesses, cloud service providers, and scientific computing organizations; data storage products and solutions; and z/OS, an enterprise operating system. Its Global Financing segment provides lease, installment payment plans, and loan financing services; short-term working capital financing to suppliers, distributors, and resellers; and remanufacturing and remarketing services. The company was formerly known as Computing-Tabulating-Recording Co. and changed its name to International Business Machines Corporation in 1924. International Business Machines Corporation was founded in 1911 and is headquartered in Armonk, New York.
Company description from FinViz.com
Earnings April 19th.
This is going to be a simple play. IBM posted its first revenue gain in 14 quarters for Q4. They have a ton of new products and services. Their cloud business is growing and they have a new mainframe server that is in high demand. They are investing in blockchain technologies and they are selling noncore assets and reducing staff in legacy businesses. They are making all the right moves and the stock is showing some good relative strength. Shares were up on Monday when the Dow was down -157 points.
I believe investors are coming back to IBM as a undervalued growth play. The stock has not been able to maintain a positive trend for years but it is rebounding from the market correction .Shares fell from $170 to $145 post earnings when the correction bit and it has rebounded to $160.
With earnings on April 19th, I am recommending we buy a May call and exit on the 17th.
Buy May $165 call, currently $3.70, no initial stop loss with solid support at $156.
Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline. Any items shaded in blue were previously closed.
Current Position Changes
CVX - Chevron
The long call position was entered on Tuesday.
BOTZ - Robotics ETF
The long call position was reentered on Tuesday.
CAT - Caterpillar
The long call position was reentered on Tuesday.
Original Play Recommendations (Alpha by Symbol)
ABBV - AbbVie - Company Profile
No specific news. Shares were recovering until today when they fell $1 with the market.
Original Trade Description: February 6th.
AbbVie Inc. discovers, develops, manufactures, and sells pharmaceutical products worldwide. The company offers HUMIRA, a biologic therapy administered as a subcutaneous injection to treat autoimmune diseases; IMBRUVICA, an oral therapy for the treatment of patients with chronic lymphocytic leukemia; and VIEKIRA PAK, an interferon-free therapy, with or without ribavirin, for the treatment of adults with genotype 1 chronic hepatitis C. It also provides Kaletra, an anti- human immunodeficiency virus(HIV)-1 medicine used with other anti-HIV-1 medications as a treatment that maintains viral suppression in HIV-1 patients; Norvir, a protease inhibitor indicated in combination with other antiretroviral agents to treat HIV-1; and Synagis to prevent RSV infection at-risk infants. In addition, the company offers AndroGel, a testosterone replacement therapy for males diagnosed with symptomatic low testosterone; Creon, a pancreatic enzyme therapy for exocrine pancreatic insufficiency; Synthroid to treat hypothyroidism; and Lupron, a product for the palliative treatment of prostate cancer, endometriosis, and central precocious puberty, as well as for the treatment of patients with anemia. Further, it provides Duopa and Duodopa, a levodopa-carbidopa intestinal gel to treat Parkinson's disease; Sevoflurane, an anesthesia product for human use; and ZINBRYTA, a subcutaneous treatment for relapsing forms of multiple sclerosis. The company sells its products to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies, and independent retailers from its distribution centers and public warehouses. AbbVie Inc. has collaboration agreements with C2N Diagnostics; Calico Life Sciences LLC; Infinity Pharmaceuticals, Inc.; M2Gen; and Principia Biopharma Inc. Company description from FinViz.com.
Next expected earnings April 27th.
A lot of companies have 1-2 real drugs in the pipeline that may be approved. Several companies have one drug that could be a blockbuster and reach $1 billion in sales annually. AbbVie has multiple blockbusters in the pipeline and dozens of other drugs already in the market.
Analysts claim AbbVie's pipeline is the strongest in the industry. The post earnings market drop is a buying opportunity. The company's other drugs are going to be cash cows. Imbruvica generated $1.8 billion in sales in 2016 and could reach $7 billion annually over the next couple of years. Venclexta was approved in 2016 for leukemia and sales could peak at $3.5 billion a year. An experimental cancer drug called Rova-T could hit $5 billion a year when approved. A psoriasis drug called risankizumab could produce $4 billion a year and arthritis drug upadacitinib could peak at $3.5 billion.
AbbVie was a spinoff from Abbott Laboratories in 2012 and they are doing great.
ABBV reported Q4 earnings of $1.48 that beat estimates for $1.45. Revenue of $7.74 billion beat estimates for $7.51 billion. The company guided for 2018 adjusted earnings of $7.33-$7.43, up from $6.37-$6.57 and analysts were expecting $6.66.
The blowout guidance spiked the shares to $125 from $108. We had closed our prior ABBV position the day before the earnings. With the market crash, shares have now declined to $109 and giving us a chance to reenter the position.
Update 2/10/18: AbbVie raised its dividend by 35% to 96 cents and announced a $10 billion stock buyback program.
Long May $115 call @ $3.70, see portfolio graphic for stop loss.
BOTZ - Robotics & AI ETF - ETF Profile
We reentered the BOTZ position at the open on Tuesday.
Original Trade Description: February 26th
The Global X Robotics & Artificial Intelligence ETF seeks to invest in companies that potentially stand to benefit from increased adoption and utilization of robotics and artificial intelligence (AI), including those involved with industrial robotics and automation, non-industrial robots, and autonomous vehicles. The ETF 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 ETF has 28 stocks including NVDA, ISRG, TRMB, BRKS, IRBT, MZOR, Toshiba and Cyberdyne.
The ETF is somewhat slow moving since it just began trading in September. Volume has increased significantly to average 2.55 million shares.
The key to this ETF and this position is that the stock rarely goes down and the options are cheap. There have only been 3 periods of decline in 2017 and each drop was only about 60 cents. The ETF rose steadily since April and hit a new high in January just before the market correction. If this continues, even allowing for some declines, that would equate to a nice gain by the end of the Q1 earnings cycle and that would be our exit target. This is not going to set the world on fire like a Facebook or Netflix but it should be dependable, stable gains. Obviously, past performance is no guarantee of future results.
Long June $26 call @ $.90, see portfolio graphic for stop loss.
CAT - Caterpillar - Company Profile
CAT was crushed by the tariff headlines the prior week on worries that other countries could put import tariffs on CAT equipment to offset the proposed steel and aluminum tariffs. We reentered the position on Monday and CAT rallied all week but gave back nearly $4 on Monday as those worried returned.
Original Trade Description: February 26th
Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives for heavy and general construction, rental, quarry, aggregate, mining, waste, material handling, oil and gas, power generation, marine, rail, and industrial markets. Its Construction Industries segment offers backhoe, compact, track-type, small and medium wheel, knuckleboom, and skid steer loaders; small and medium track-type, and site prep tractors; mini, wheel, forestry, small, medium, and large track excavators; and motorgraders, pipelayers, telehandlers, cold planers, asphalt pavers, compactors, road reclaimers, and wheel and track skidders and feller bunchers. The company's Resource Industries segment provides electric rope and hydraulic shovel, landfill and soil compactor, dragline, large wheel loader, machinery component, track and rotary drill, electronics and control system, work tool, hard rock vehicle and continuous mining system, scoop and hauler, wheel tractor scraper, large track-type tractor, and wheel dozer products; longwall, highwall, and continuous miners; and mining, off-highway, and articulated trucks. Its Energy & Transportation segment offers reciprocating engine powered generator set and engine, integrated system, turbine, centrifugal gas compressor, diesel-electric locomotive and component, and other rail-related products and services. The company's Financial Products segment offers finance for Caterpillar equipment, machinery, and engines, as well as dealers; property, casualty, life, accident, and health insurance; and insurance brokerage services, as well as purchases short-term trade receivables. Its All Other operating segments provides parts distribution and digital investments services. The company was formerly known as Caterpillar Tractor Co. and changed its name to Caterpillar Inc. in 1986. The company was founded in 1925 and is headquartered in Peoria, Illinois. Company description from FinViz.com.
CAT reported their rolling 3-month sales rose 34% globally. There was a 23% rise in North America. Resource segment sales rose 49%, construction sales +30%, rnergy and transportation rose 16%, power generation +8%, industrial sales +13% and oil and gas sales +27%. This company is in the sweet spot of the global economic boom. They report the rolling 3-month average to smooth out the big ticket sales spikes from month to month.
I have had several people email me lately asking why I do not recommend short puts to offset the cost of long calls on stocks with good relative strength. I believe that is a great strategy but got away from recommending it over the last couple years because a lot of readers have smaller accounts and do not have the margin availability. I am going to start recommending it again as an option. Those who want to use it can but it is not a requirement for the position.
Long June $160 call @ $6.25, see portfolio graphic for stop loss.
CVX - Chevron - Company Profile
Multiple energy CEOs stressed the expected shortage of LNG by 2025. That is a big plus for Chevron with the two largest LNG plants in Australia with an estimated 100 Tcf of gas reserves to feed them. Nice $3 rebound from our entry point on Tuesday.
Original Trade Description: March 5th
Chevron Corporation, through its subsidiaries, engages in integrated energy, chemicals, and petroleum operations worldwide. The company operates in two segments, Upstream and Downstream. The Upstream segment is involved in the exploration, development, and production of crude oil and natural gas; processing, liquefaction, transportation, and regasification associated with liquefied natural gas; transportation of crude oil through pipelines; and transportation, storage, and marketing of natural gas, as well as operates a gas-to-liquids plant. The Downstream segment engages in refining crude oil into petroleum products; marketing crude oil and refined products; transporting crude oil and refined products through pipeline, marine vessel, motor equipment, and rail car; and manufacturing and marketing commodity petrochemicals, and fuel and lubricant additives, as well as plastics for industrial uses. It is also involved in the cash management and debt financing activities; insurance operations; real estate activities; and technology businesses. The company was formerly known as ChevronTexaco Corporation and changed its name to Chevron Corporation in 2005. Chevron Corporation was founded in 1879 and is headquartered in San Ramon, California. Company description from FinViz.com
Chevron probably has more new production in the pipeline than any other U.S. company. Most of that production is gas with two monster projects in Australia. The Gorgon project is a $54 billion LNG facility with the export capability of 15.6 million tons per annum (MTPA)(2.184 Bcf/d) of LNG to Asian markets. Demand for gas to Asia is expected to double by 2025. The fields feeding this LNG plant have more than 40 Tcf of gas with new discoveries every month.
The $29 billion Wheatstone project consists of two LNG trains with a combined capacity of 8.9 MTPA (1.25 Bcf/d) with the option to expand to 25 MTPA (3.5 Bcf/d). The first LNG output was in 2016. More than 80% of the gas supplied to Wheatstone will come from Chevron fields. Another 20% will come from an Apache find in the same region. Chevron has made 21 major discoveries of gas in the region since 2009. The initial discovery was 9 Tcf of gas but more is being added every month.
They have been planning/building these facilities for the last 10 years and all the capex expenses are behind them. Now that production is well underway they are producing cash flow rather than burning cash flow.
In the last ten years Chevron has added 13 billion barrels of oil reserves. Chevron said it replaced 161% of what it produced in 2017. They added four barrels of oil for every barrel produced and 6 cubic feet of gas for every one produced. They touted their 1.7 million acres in the Permian as their future production capability. They drilled 310 Permian wells in 2017 compared to 201 in 2016. They have been in the Permian for so long that they pay very little or even zero royalties for their acreage.
Chevron reported Q4 earnings of 73 cents that missed estimates for $1.27. Revenue of $37.62 billion just barely beat estimates for $37.55 billion. They did report a new discovery in the Gulf of Mexico that should be a gusher 7-9 years from now. That is a very long lead time project.
Chevron currently pays a $1.12 quarterly dividend. With the rising cash flows from the LNG facilities, shale reserves in the Permian and offshore production, their dividend is secure.
The monster drop in January is a buying opportunity. Bank of America upgraded them last week from neutral to buy.
Crude prices are normally weak in March/April but rebound sharply in May as the summer driving season begins. Prices typically peak in August. I am recommending we buy the September call and ride it into that August peak.
Long Sept $120 call @ $4.46, see portfolio graphic for stop loss.
HD - Home Depot - Company Profile
No specific news. HD shares cannot seem to maintain a trend. Every big gain is followed by a retracement but at least support is holding. With business strong, shares should eventually rebound once the sellers run out of stock. I considered rolling out of the $190 call and down to the $185 call but it would cost us another $1.50 and i would rather not put more money into this position until a sustained rebound appears.
Original Trade Description: February 12th.
The Home Depot, Inc. operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, and lawn and garden products, as well as provide installation, home maintenance, and professional service programs to do-it-yourself, do-it-for-me (DIFM), and professional customers. The company offers installation programs that include flooring, cabinets, countertops, water heaters, and sheds; and professional installation in various categories sold through its in-home sales programs, such as roofing, siding, windows, cabinet refacing, furnaces, and central air systems, as well as acts as a contractor to provide installation services to its DIFM customers through third-party installers. It primarily serves homeowners; and professional renovators/remodelers, general contractors, handymen, property managers, building service contractors, and specialty tradesmen, such as installers. The company also sells its products through online. It operates through approximately 2,278 stores, including 1,977 in the United States, including the Commonwealth of Puerto Rico, and the territories of the U.S. Virgin Islands and Guam; 182 in Canada; and 119 in Mexico.
The company reported Q3 earnings of $1.84 that rose 15% and beat estimates for $1.81. Revenue rose 8.1% to $25.026 billion, up from $23.154 billion. This beat estimates for $24.523 billion. Same store sales rose 7.9%. HD said the hurricanes added about $282 million in sales but also cost them about $51 million in store damages and inventory shifting costs. The company guided for Q4 revenue growth of 6.3% and same store sales of 6.5%. Those numbers were up from 5.3% and 5.6% in prior guidance. Earnings are expected to grow 14% to $7.36 for the full year, up from prior guidance of $7.29. Full year 2017 sales are expected to be $100.6 billion. They had $8 billion unspent on a $15 billion share repurchase program.
In early December, Home Depot (HD) announced a new $15 billion buyback and raised guidance for annual sales between $114.6-$119.8 billion by the end of 2020. The new repurchase program replaced the existing $15 billion program. The company expects to buy back $8 billion in shares total in 2017 with $2.1 billion in Q4. Since 2002, Home Depot has bought back 1.3 billion shares worth $73 billion.
Home Depot had an effective tax rate of 37% in Q3. Under the new tax plan that would drop to about 23%. Analysts believe this could boost HD's 2018 earnings by as much as 25%. That means their earnings could rise as much as $1.81. They currently have a PE of 25 and that would equate to about a $45 rise in the stock price. However, I would expect that PE to decline somewhat in the conversion.
Shares are already up after their November earnings guidance but I believe they can still go higher. Options are not cheap. In order to get the benefit of the rise in expectations I would like to reach out to May but the options are too expensive but not enough to make a spread worthwhile. I am recommending a March position and hopefully analyst projections will do the work for us.
Earnings are Feb 20th and I would plan to hold over that report because they will give tax guidance at that time.
HD is reportedly talking to XPO Logistics about an acquisition of the $9 billion company. HD uses them to deliver large items like refrigerators and other appliances. There could be a battle with Amazon since that large item shipping is a problem for Amazon.
Option premiums are high because of the correction and rebound. Shares were trading at $210 two weeks ago and now they are trading at $185. With earnings next week, they could be back at $200 or higher very quickly.
Update 2/26/18: HD reported earnings of $1.69 that beat estimates for $1.61. Revenue rose 7.5% to $23.88 billion and beat estimates for $23.66 billion. Same store sales rose 7.5% and beat estimates for 6.5%. Customer transactions rose 2% with the average check rising 5.5%. Business is good! They guided for the full year for earnings of $9.31 but below estimates for $9.73. Earnings will be impacted by a 19 cent hit from the tax reform. The company is planning on investing a lot in new infrastructure and store remodeling and that will weigh on the full year numbers. Analysts will adjust and investors will return. There was a post earnings decline but shares are starting to recover.
Long April $190 call @ $5.30, see portfolio graphic for stop loss.
INGR - Ingredion Inc - Company Profile
No specific news. INGR continues to rebound nicely from support. Good relative strength.
Original Trade Description: February 12th.
Ingredion Incorporated, together with its subsidiaries, produces and sells starches and sweeteners for various industries. The company operates through four segments: North America, South America, Asia Pacific and Europe, and Middle East and Africa. It offers sweetener products comprising glucose syrups, high maltose syrups, high fructose corn syrups, caramel colors, dextrose, polyols, maltodextrins and glucose, and syrup solids, as well as food-grade and industrial starches, and biomaterials. The company also provides animal feed products; edible corn oil; refined corn oil to packers of cooking oil and to producers of margarine, salad dressings, shortening, mayonnaise, and other foods; and corn gluten feed used as protein feed for chickens, pet food, and aquaculture. Its products are derived primarily from processing corn and other starch-based materials, such as tapioca, potato, and rice. The company serves food, beverage, paper and corrugating products, brewing, pharmaceutical, textile, and personal care industries, as well as animal feed and corn oil markets. The company was formerly known as Corn Products International, Inc. and changed its name to Ingredion Incorporated in June 2012. Ingredion Incorporated was founded in 1906 and is headquartered in Westchester, Illinois.
NTGR - Netgear - Company Profile
No specific news. Shares are not moving quickly but they are up 7 consecutive days. I bought a Netgear Nighthawk router over the weekend and it is excellent!
Original Trade Description: January 8th
NETGEAR, Inc. designs, develops, and markets innovative networking solutions and smart connected products for consumers, businesses, and service providers. The company operates in three segments: Retail, Commercial, and Service Provider. The Retail segment offers home WiFi networking solutions and smart connected products. The Commercial segment provides business networking, storage, and security solutions. The Service Provider segment offers made-to-order home networking hardware and software solutions, including 4G LTE hotspots sold to service providers for sale to their subscribers. The company also offers commercial business networking products, such as Ethernet switches, wireless controllers and access points, Internet security appliances, and unified storage products; broadband access products, including broadband modems, WiFi gateways, and WiFi hotspots; and smart home/Internet-of-Things connectivity and products comprising WiFi routers and home WiFi system, WiFi range extenders, powerline adapters and bridges, remote video security systems, and WiFi network adapters. It markets and sells its products through traditional retailers, online retailers, wholesale distributors, direct market resellers, value-added resellers, and broadband service providers worldwide. Company description from FinViz.com
Expected earnings May 8th.
Several weeks ago Amazon bought Blink. You may not have heard about Blink but they launched in 2016 with an inexpensive wireless camera and video doorbell. This is the hot new sector for video surveillance. You have probably heard about Ring video doorbells, which is a different company.
The point to this commentary is that Netgear is making the very popular Arlo security camera and sales are booming. Netgear also has 48% of the market for home routers.
With Amazon likely to go big in this category after the acquisition of Blink, that means Netgear is suddenly a target. Global Equities said Facebook, Google or even Apple could acquire Netgear because that gives them a top position in the space. Google would be the prime candidate because they could link the Arlo system to Google Home. It would also allow Google access to trillions of terabytes of data related to the home routers and networking equipment. Monitoring those devices would be like keeping their finger on the pulse of technology. They would know how many people are watching Netflix, how much data was being consumed by what subset of users, etc. This could be very important in their planning for the future.
Apple is not likely to make a play for Netgear because they do not do big acquisitions and Netgear has too many "common" products for Apple to manage. They would be more likely to buy Tesla or Netflix if they were going to make a big splash.
Arlo is an entirely new category for Netgear and a category that is exploding in sales. In their Q4 earnings they said the Arlo cameras posted record sales that exceeded their already optimistic expectations.
Since I wrote that in the initial play description Netgear has announced a spinoff of the Arlo security cameras. They will spin less than 20% and retain the rest. The cameras are so popular the IPO should be a big success and a good way for Netgear to monetize their investment. This will provide them a significant amount of capital to expand on their other product lines.
In reality, nobody has to buy Netgear for them to succeed. Netgear demonstrated new products at the CES show and the crowd loved them. Apparently, so did investors. They announced the Nighthawk Pro Gaming system of network gear that will cut lag time and enhance multiplayer game play for serious gamers. They also demonstrated the Orbi Wi-Fi system, which has also been very successful. With the rapid ramp of the Arlo video cameras for security, they have completed an entire cloud support system that allows storage of video, multiviewer capability for home monitoring, etc.
They reported Q4 earnings of 71 cents on revenue of $397.1 million,, up 7.9%. They guided for the current quarter for revenue of $330-$345 million. Analysts were expecting $348.2 million. However, Netgear has beaten estimates for six consecutive quarters so they may have been guiding lower so they can beat again.
The combination of the light guidance and the market declined knocked $15 off the stock in February. Shares appear to have bottomed at $56 and have risen for the past two days. This is proving a buying opportunity on a previously strong stock.
Long June $65 call @ $3.26, see portfolio graphic for stop loss.
VXX - Volatility Index Futures - ETF Description
Volatility has declined significantly but it is not over. It normally takes 4-5 weeks for volatility to return to normal after a high volatility event and we could have a couple weeks left. The trade war headlines erased a week of declines but this is temporary. The VXX always moves lower.
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 five 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.
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 new rally into the Q1 earnings cycle 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. There are 34.2 million shares outstanding and ShortSqueeze.com says 44.5 million are short. The shares are out there and being traded because the volume on Monday was 46.5 million. More than 221 million traded on Feb 5th. This ETF is a favorite vehicle for the computer traders so the volume is always high. 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.
Previously: On Feb-5th a reader emailed me saying a friend was short 1,000 shares. When the VXX spiked $21 in afterhours, Ameritrade closed that position for a $35,000 loss. They did not have a protective stop loss.
We are 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 today.
Readers should always assume the potential for the worst possible outcome of a short position. Trade smart!
Short VXX shares @ $49.16, no initial stop loss.
Prices Quoted in Newsletter
At Option Investor, we have a long-standing policy prohibiting the editors and staff from actually trading the individual recommendations in order to conform to SEC rules concerning trades.
The prices quoted in the newsletter are the end of day prices in most cases.
When discussing fills or stops the prices quoted are the bid/ask at the time the entry trigger or exit stop is hit. This is NOT a price that someone on staff actually got using a live order.
For entry/exit points at the market open the prices quoted will be the opening print. The majority of the time readers are able to get a better fill than the opening print because of market maker bias at the open.
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All of these rules normally produce worse prices than an active trader would normally get. Because they are standardized there may be some cases where a price quoted was better than an actual fill. If you received a price that was dramatically different than what was quoted please let us know.