The afterhours market today is night and day different than the market at the close.
The Dow rallied 440 points intraday but gave back 400 of that at the close after news broke the FBI had raided the office of President Trump's personal lawyer and confiscated documents and emails related to the Stormy Daniels case. Initially investors thought it was on the Russia investigation and that is why they panicked.
Regardless of the reason the Dow dropped 400 points but all the indexes remained positive. Most stocks declined from their highs but remained positive. That was slightly bullish for Tuesday.
Late after the bell the president of China, Xi Jinping, gave a speech at the Asian Davos conference on "opening up China." In that speech hs pledged to reduce import tariffs on items like cars, which have a 25% tax and vowed to enforce intellectual property for foreign firms while improving the rules on investment for foreign companies. The sudden turnabout from the previously very restrictive trade rules caught everyone off guard.
Xi presented a vision of China as a benevolent leader of the global economy and emphasizing open trade as the best course of action for the world. Coming after two weeks of heated tit for tat trade threats, this caught the shorts leaning the wrong way.
The futures exploded higher with the S&P gaining as much as 30 points. The market should be poised to explode higher on Tuesday, assuming there are no further unexpected headlines. This could be an all clear signal for the markets. I am sure President Trump is high fiving everybody in the White House tonight.
The calendar for the rest of the week is headlined by the FOMC minutes of the first meeting chaired by Jerome Powell as the new Fed chair. While there may not be any surprises, there are always some bits of trivia for analysts pour over.
The two price indexes will be scoured for hints of inflation, which could lead to more or less rate hikes. Nothing should be market moving unless inflation took a sudden turn higher.
The Q1 earnings cycle begins this week with three of the big banks reporting on Friday. Some 26 S&P companies have already reported but Friday is considered the official kickoff.
With the S&P futures at 2,650 overnight, this would put the cash index just below resistance at 2,675 at the open. We really need the index to push through that level to convince cautious traders to come off the sidelines. The S&P has been vacillating between 2,580 and 2,675 for more than two weeks.
On the bearish side the 50-day average is about to cross below the 100-day and that is normally a bearish sell signal. However, since the market has given a dozen sell signals over the last two months the cross is likely to be ignored.
The Dow settled almost exactly on the 10% correction level where it has been spending most of its time over the last two weeks. The advancers and decliners were almost evenly split. Boeing and Caterpillar could be big winners on Tuesday if the China news is not diluted overnight. The 24,500 level is current resistance followed by the 100-day at 24,746.
The Nasdaq remains well above the 10% correction level with 7,111 the current resistance along with the 100-day at 7,107. Despite the big decline from the March highs, the Nasdaq is still slightly higher on a relative basis than the Dow/S&P. The big cap tech stocks were positive but only barely in most cases. With the Nasdaq futures up nearly 100 points tonight, we could see a serious short squeeze on Tuesday. The index closed -124 points off its intraday high but still managed a 35-point gain. If we can just recover those 124 points on Tuesday, I would be thrilled.
The small cap Russell 2000 is trading almost exactly in the middle of its six-month range. The 50/100 average cross will happen on Tuesday even if the index gained 50 points. The Russell closed 19 points below its intraday high and just barely in positive territory. The small caps could have some trouble if the tariff headlines are dead because money will rush back into big cap international stocks and small cap U.S. focused stocks could see some investor flight.
There is nothing readers can buy at the open on Tuesday where option premiums will be reasonable. With the S&P futures up 30 points everything will gap open and a fill on that gap could be at the high of the day. Even if the markets continue higher it could be days before the premiums begin to rise again. I know it will be hard to resist but waiting for the next market dip would be a wise move. There will be a dip. Simply pick the stock you want to play and the option you want to use. When the dip comes it could be short lived so either be ready to enter the trade or put in a limit order on the option at a price you are willing to pay. When a dip appears, the option premiums typically dip faster than the stock price, especially if they have a lot of gap premium in them from Tuesday's open.
Enter passively, exit aggressively!
Send Jim an email
NEW DIRECTIONAL CALL PLAY
With the S&P futures up +30 points as I type this, we cannot expect to get any reasonable fill on an individual stock. I elected to go with the SMH because it is still in a downtrend and we might get lucky and snag a cheap option before the bullishness translates into significantly higher option prices. If the SMH gaps up more than $1.50, I would be cautious about entering the position.
SMH - Semiconductor ETF - ETF Profile
VanEck Vectors Semiconductor ETF (SMH) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS US Listed Semiconductor 25 Index (MVSMHTR), which is intended to track the overall performance of companies involved in semiconductor production and equipment. ETF description from VanEck.com.
The chip sector peaked in early March with the SMH at $114.50 and it has since declined to $100. The world runs on chips. The sector has been crushed by several analysts calling for an end to the shortage of memory chips although the actual companies claim demand remains strong. The sector also fell last week on worries about tariffs on chips coming out of China. With President Xi Jinping putting an end to the tariff worries on Tuesday after the bell, the chip stocks should return to rally mode.
The world runs on chips and with IoT devices expected to grow by the tens of billions and AI becoming a potential blockbuster technology, the demand for chips will continue to grow.
The SMH closed at $100 with the 200-day average at $97. If we do not get a rally on Tuesday, support is only $3 away.
Buy June $105 call, currently $3.10, stop loss $94.85.
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
MCD - McDonalds
The long call position was entered on Tuesday.
Original Play Recommendations (Alpha by Symbol)
BOTZ - Robotics & AI ETF - ETF Profile
It was a bad week for the chip sector with semiconductors from China expected to go up in price because of tariffs. Hopefully with the news after the bell today the market is going to reverse to the upside.
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
The continued tariff worries held CAT back all week but the news after the bell today should lift it significantly higher.
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
No specific news. Shares holding at the top of their recent range while waiting for the market to pick a direction.
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.
Update 3/26/18: The Chevron CEO said deepwater oil is coming back thanks to new technologies that pump the oil for miles underwater to existing topside platforms rather than building new platforms for each new discovery. Chevron is currently bringing online the 170,000 bpd Jack/St Malo with a distributed well system. Transocean's CEO saif all but a handful of the current 29 deepwater projects have breakeven costs in the low $40 a barrel range. This is great because Chevron has a lot of reserves they have not even started to develop.
Long Sept $120 call @ $4.46, see portfolio graphic for stop loss.
IBM - International Business Machines - Company Profile
IBM held over support at $150 all week while we wait for the market to recover. No specific news.
Original Trade Description: March 13th
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.
Long May $165 call @ $3.70, see portfolio graphic for stop loss.
INTC - Intel - Company Profile
Shares fell the prior week on news Apple might make their own chips for their products. This week shares fell again on worries about chip costs out of China.
Original Trade Description: March 26th
Intel Corporation designs, manufactures, and sells computer, networking, and communications platforms worldwide. The company operates through Client Computing Group, Data Center Group, Internet of Things Group, Non-Volatile Memory Solutions Group, Intel Security Group, Programmable Solutions Group, and All Other segments. Its platforms are used in notebooks, 2 in 1 systems, desktops, servers, tablets, smartphones, wireless and wired connectivity products, and mobile communication components; enterprise, cloud, and communication infrastructure; and retail, transportation, industrial, video, buildings, and other market segments. The company offers microprocessors that processes system data and controls other devices in the system; chipsets, which send data between the microprocessor and input, display, and storage devices, such as keyboard, mouse, monitor, hard drive or solid-state drive, and optical disc drives; and system-on-chip and multichip packaging products that integrate its central processing units with other system components onto a single chip. It also offers NAND flash memory products primarily used in solid-state drives; security software products that secure computers, mobile devices, and networks; programmable semiconductors and related products for communications, data center, industrial, military, and automotive market segments. In addition, the company develops computer vision and machine learning-based sensing products, mapping and driving policy technology solutions for advanced driver assistance systems, and autonomous driving technologies. It serves original equipment manufacturers, original design manufacturers, cloud and communications service providers, and industrial, communications, and automotive equipment manufacturers. The company was founded in 1968 and is based in Santa Clara, California. Company description from FinViz.com.
Intel has shows excellent relative strength over the last couple weeks of market volatility. Monday's close was a new high and there is nothing to keep it from moving higher. Long term support is $43 but I seriously doubt we will see that again.
Intel does not need a lot of play description. It is a big cap tech stock in a chip driven world.
Long June $55 call @ $2.07, see portfolio graphic for stop loss.
MCD - McDonalds - ETF Profile
No specific news. Telsey Advisory Group said McDonald's same store sales were rising based on a recent survey. Shares rebounded on the news back to resistance at $164.
Original Trade Description: April 2nd
McDonald's Corporation operates and franchises McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, Latin America, and internationally. The company's restaurants offer various food products, soft drinks, coffee, and other beverages. As of December 31, 2016, it operated 36,899 restaurants, including 31,230 franchised restaurants comprising 21,559 franchised to conventional franchisees, 6,300 licensed to developmental licensees, and 3,371 licensed to foreign affiliates; and 5,669 company-operated restaurants. Company description from FinViz.com.
McDonalds has revitalized their menu and now offers fresh burgers rather than frozen, all day breakfasts, inexpensive drinks, healthier sides and reasonable prices. This is not your father's McDonalds.
Same store sales in the last quarter rose 5.5%, which is unheard of for a fast food chain the size of McDonalds. The CEO said, "We're building a better McDonald's and more customers are noticing. Our relentless commitment to running great restaurants and keeping the customer at the center of everything we do is generating broad-based strength and momentum across our entire business."
Their latest surprising innovation is food delivery. They have partnered with multiple mobile delivery services and business is booming. McDonalds said delivery orders were significantly larger than dine in or take out because people now realize they can order for parties, football games, family dinners, etc. They order multiples of everything and the average check is significantly higher than a dine in order.
They are also implementing mobile ordering and payment with the order. You just show up and pick up your meal and it is ready to go. No lines to pay, no waiting for your food. They will have mobile order/pay in more than 20,000 stores by the end of 2017. The CEO said they were also seeing higher check sizes of 1.2x to 2.0x when mobile ordering is used.
McDonalds said it was selling some of the McCafe beverages in supermarkets in 2018 through a partnership with Coca Cola. The company also announced three new espresso drinks for its own stores. They are Carmel Macchiato, Cappuccino and Americano. They are going to rebrand the McCafe offerings with a new logo and packaging. They are rolling out new coffee makers to nearly all of their 14,000 stores.
A consumer research company said sales at McDonalds were soaring in states that had legalized marijuana. They said 43% of users were eating at McDonalds, 18% Taco Bell, 17.8% Wendy's and 17.6% Burger King in order to satisfy their munchies after smoking pot. A side effect of marijuana is increased appetite.
Jefferies upgraded McDonalds (MCD) saying the partnership with Uber Eats will continue to push sales higher. McDonalds has said their delivery orders have a higher average ticket than traditional on site orders. Jefferies raised the price target from $150 to $200. The company restarted its dollar menu in January and there are $1, $2 and $3 items on the menu. An example would be any size drink or cheeseburger for $1, McDoubles and small McCafe drinks for $2 and Happy Meals and triple cheeseburgers for $3.
In their Q4 earnings, sales for all stores rose 8%, up from 7% in Q3. Same store sales rose from 2.7% to 5.5%. That was down slightly from Q3 at 6.0% but still very respectable. Starbucks only posted 2% same store sales and Wendy's 3.4%. Earnings per share rose 19%. Capex spending in 2018 will be $2.4 billion with the majority going to update 4,000 restaurants and update marketing signage. They plan to open 1,000 new stores in 2018.
Earnings April 29th.
MCD shares crashed with the market in January and then fell again in late February after JP Morgan said the company did not have a "hero" item on the menu to draw people into the stores. Shares rebounded quickly and then ran into the second market correction. Shares were flat over the last two weeks despite the Dow trending lower in a high volatility market.
The burger joint was actually positive in Monday's market crash.
Long May $165 call @ $2.40, see portfolio graphic for stop loss.
NTGR - Netgear - Company Profile
No specific news. The company announced an earlier earnings date on April 25th.
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.
QQQ - Powershares QQQ - ETF Profile
The Nasdaq is holding above support at $155. With the futures up so strongly tonight, we could be back in rally mode on Tuesday.
Original Trade Description: March 26th
PowerShares QQQ, formerly known as "QQQ" or the "NASDAQ-100 Index Tracking Stock", is an exchange-traded fund based on the Nasdaq-100 Index. The Fund will, under most circumstances, consist of all of stocks in the Index. The Index includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization. The Fund and the Index are rebalanced quarterly and reconstituted annually.
The Nasdaq crashed along with the Dow but did not retest the February lows. The Nasdaq actually set a new high two weeks ago before the second drop arrived. The tech stocks led out of th einitial correction and I believe they will lead through the Q1 earnings cycle. Even though the Nasdaq gained 3% on Monday, there could be a lot more to go and the index should make another new high before the Q1 earnings cycle is over.
I am going to offset the call with an optional short put to reduce our cost significantly just in case the expected rally does not appear.
Long June $170 call @ $4.31, see portfolio graphic for stop loss.
Position 4/3: Short June $140 put @ $2.36, see portfolio graphic for stop loss.
Previously Closed 3/28: Short June $150 put @ $1.47, exit $4.49, -3.02 loss.
VXX - Volatility Index Futures - ETF Description
Volatility fell at the open as the market rallied but then spiked at the close as the Dow fell -400 points from its highs. With the S&P futures up +26 tonight we could see a major decline in the VXX on Tuesday.
The VXX always moves lower eventually.
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.
For trades with an opening qualification the prices quoted will be the bid/ask at the time the qualification was met.
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.