It is always the problems we do not expect that cause the most trouble.

Donald Rumsfeld once said, "There are known knowns. There are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know."

One of those unknown unknowns jumped up to bite us in the back last week. The economic crisis in Turkey that turned into a currency crisis, was not something the market was expecting. We can plan for a bad jobs report, a Fed rate hike or even an earnings miss by Apple. What we cannot plan for is an out of the blue currency crisis that tanks the global markets.

I am sure there are some wonky currency traders out there who were accurately predicting the demise of the Lira and the resulting impact on other emerging market currencies. Unfortunately they were not telling us and we probably would not have believed them if they had.

Now we are faced with a new challenge in an already troubled market. The Lira tried to rally intraday but failed and closed at a new low of 7.6 to the dollar. If the currency does not rebound soon and by a lot, it will cause major economic headaches in Turkey's economic outlook. If you borrowed euros or dollars when the exchange rate was 4:1 to the dollar, then your debt just increased 75% because the Lira you are going to use to purchase dollars is now worth 75% less. This is a nightmare for business owners and governments all across Europe.

With roughly $3.7 in dollar/euro denominated debt held by emerging markets, the corresponding decline in their currencies, caused by contagion, is going to cause a severe economic slowdown.


The markets tried to shake off the early morning decline when the Lira rebounded slightly. Unfortunately, it was only a dead cat bounce and it quickly sank to a lower low. That caused the equity markets to roll over in the afternoon and close near the lows of the day.

The S&P lost another 11 points to put it 50 points away from a new high. There is strong support at 2,800 and decent resistance at 2,850. This should provide a solid trading range until investors are ready to go directional.


The Dow was mostly negative with banks getting hit on the currency crisis and oil prices falling to $65.71 intraday on the strong dollar before rebounding $1.50 at the close. With oil, financials and tariff related stocks all negative, I am surprised the sell off was not more pronounced. The Dow closed just below 24,200 with decent support back at 25,000.



The majority of the big cap tech stocks were negative but not by large amounts. Google and Netflix continue to disappoint FANG lovers and there is no light at the end of this tunnel. Analysts claim we are reaching a point in the market cycle where growth stocks are going to fall out of favor and value stocks will be the go to investment.



The Russell chart is setting up for a bearish pattern if the index closes before support. This would be a lower high, lower low and it could lead to bearish market consequences.


The earnings calendar is lackluster with the exception of the three Dow components, HD, CSCO and WMT possibly giving the index a minor boost.


The economic calendar is busy but should not move the markets.


I would continue to be cautious on longs. The S&P futures are positive +6 as I type this but there is a lot of darkness before the dawn. A currency crisis is not a 2-day event. These things tend to play out over a month as local administrations go though the various stages of denial before they actually take concrete steps to correct the problem. Turkey has not reached the action stage yet. They are still in the blame game rather than take any of the responsibility for their own actions.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email



NEW DIRECTIONAL Put PLAY

ON - On Semiconductor - Company Profile

ON Semiconductor Corporation manufactures and sells semiconductor components for various electronic devices worldwide. It operates through three segments: Power Solutions Group, Analog Solutions Group, and Image Sensor Group. The Power Solutions Group segment offers discrete, module, and integrated semiconductor products for various applications, such as power switching, power conversion, signal conditioning, circuit protection, signal amplification, and voltage reference. The Analog Solutions Group segment designs and develops analog, mixed-signal, and logic application specific integrated circuits and standard products, as well as power solutions for a range of end-users in the automotive, consumer, computing, industrial, communications, medical, and aerospace/defense markets. This segment also provides trusted foundry, trusted design, and manufacturing services, as well as integrated passive devices product technology. The Image Sensor Group segment offers complementary metal oxide semiconductors and charge-coupled device image sensors, as well as proximity sensors, image signal processors, and actuator drivers for autofocus and image stabilization for a range of customers in automotive, industrial, consumer, wireless, medical, and aerospace/defense markets. The company serves original equipment manufacturers, distributors, and electronic manufacturing service providers. ON Semiconductor Corporation was founded in 1999 and is headquartered in Phoenix, Arizona. Company description from FinViz.com.

ON reported Q2 earnings of 46 cents that narrowly beat estimates for 45 cents. Revenue of $1.46 billion beat estimates for $1.43 billion but that was also a narrow beat. Earnings rose 28% and revenue 9%. They guided for Q3 for revenue of $1.51 billion and analysts expected $1.48 billion. The margin guidanc eproduced implied earnings of 50 cents and analysts were expecting 48 cents. The problem with implied guidance is that it rarely works out.

Mizuho said the stock continued to be a top pick. However, Morgan Stanley cut the stock to a sell with a warning the stock is facing a multiple contraction and lowered the price target to $18.50. He said shares have meaningfully outperformed since the Fairchild acquisition and the strongese analog cycle since 2010. Given the strong multiple expansion in a positive market, he could see a major reversal if the chip sector begins to weaken further. Warnings of weak demand from Microchip and a downgrade to sell on Intel is going to keep the pressure on the chip stocks.

Earnings Oct 29th.

Shares closed at a 6-month low and I expect them to move lower. I am starting with a tight stop loss just in case the trend changes.

Buy Oct $20 put, currently $1.15, initial stop loss $21.85.





Current Portfolio


Open Positions

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


ANIK - Anika Therapeutics
The long position was entered at $2.00 on Wednesday.

MSFT - Microsoft
The long position was entered at the open on Tuesday.<


Original Play Recommendations (Alpha by Symbol)


AMBA - Ambarella - Company Profile

Comments:

No specific news. The earnings date changed to August 30th. We will have to make an exit decision next week. Shares finally started moving in our direction.

Original Trade Description: July 16th.

Ambarella, Inc. develops semiconductor processing solutions for video that enable high-definition (HD), video capture, analysis, sharing, and display worldwide. The company's system-on-a-chip designs integrated HD video processing, image processing, computer vision functionality, audio processing, and system functions onto a single chip for delivering video and image quality, differentiated functionality, and low power consumption. Its solutions enable the creation of video content for wearable cameras, automotive cameras, and professional and consumer Internet Protocol (IP) security cameras, as well as cameras incorporated into unmanned aerial vehicles in the camera market; and manage IP video traffic, broadcast encoding and transcoding, and IP video delivery applications in the infrastructure market. The company sells its solutions to original design manufacturers and original equipment manufacturers through its direct sales force and distributors. Ambarella, Inc. was founded in 2004 and is headquartered in Santa Clara, California. Company description from FinViz.com

Ambarella used to be the sweetheart of the semiconductor industry with their camera chips capturing a wide swath of the up and coming devices. Unfortunately, you cannot rest on past accomplishments.

Shares have declined almost 40% since January. The drop began when one of their customers reported weak sales and falling demand for that company's products. When they reported Q1 earnings they beat the street but lowered guidance and that caused another move lower.

Then GoPro said they would no longer sell the Karma drone, which had 12 cameras with Ambarella chips. Since GoPro accounted for roughly 20% of Ambarella's income that was a major blow. With their Q1 earnings Ambarella said GoPro income would be non-existent for the rest of the year. They said revenues would be "insignificant" in 2018 compared to $37 million in 2017. Analysts are cutting forecasts and trashing talking Ambarella's outlook.

The company is also facing new competition from Qualcomm and that will increase if they eventually acquire NXP Semiconductor as expected.

Earnings September 4th.

Ambarella shares closed at a two-year low on Monday and very close to a major breakdown. I am recommending we play that breakdown.

Position 7/17/18:
Long Nov $35 put @ $2.50, see portfolio graphic for stop loss.

We will exit in September or earlier.


ANIK - Anika Therapeutics - Company Profile

Comments:

Mp s[ecific news. We had a position in Anika using the August calls. We closed that last week and I recommended a new position using the December $45 calls. That position was entered with a limit order on Wednesday.

Original Trade Description: August 6th.

Anika Therapeutics, Inc., together with its subsidiaries, provides orthopedic medicines for patients with degenerative orthopedic diseases and traumatic conditions in the United States and internationally. The company develops, manufactures, and commercializes therapeutic products based on its proprietary hyaluronic acid (HA) technology. Its orthobiologics products comprise ORTHOVISC, ORTHOVISC mini, MONOVISC, and CINGAL for the treatment of osteoarthritis of the knee; HYALOFAST, a biodegradable support for human bone marrow mesenchymal stem cells used for cartilage regeneration and as an adjunct for microfracture surgery; HYALONECT, a resorbable knitted fabric mesh; HYALOSS used to mix blood/bone grafts to form a paste for bone regeneration; and HYALOGLIDE, an ACP gel used in tenolysis treatment. The company's dermal products include wound care products that comprise HYALOMATRIX and HYALOFILL for the treatment of complex wounds, such as burns and ulcers, and for use in connection with the regeneration of skin; and ELEVESS, an aesthetic dermatology product. Its surgical products comprise HYALOBARRIER, a post-operative adhesion barrier for use in the abdomino-pelvic area; INCERT, a HA product used for the prevention of post-surgical spinal adhesions; MEROGEL, a woven fleece nasal packing; and MEROGEL INJECTABLE, a viscous hydrogel. The company also offers ophthalmic products, including injectable HA products that are used as viscoelastic agents in ophthalmic surgical procedures, such as cataract extraction and intraocular lens implantation; and veterinary products, which include HYVISC, an injectable HA product for the treatment of joint dysfunction in horses. Anika Therapeutics, Inc. has a strategic collaboration with the Institute for Applied Life Sciences at the University of Massachusetts Amherst to develop a therapy for rheumatoid arthritis. Company description from FinViz.com

Anika has had several problems recently. They disappointed on earnings in early May and shares fell $11 the next morning. The stock rebounded and recovered all the loss then in mid June they reported weak results from a trial on Cingal, for osteoarthritis in the knee. The drug performed as advertised but did not generate a statistically significant reduction in pain. The trial has been extended. The drug is already approved overseas for this condition. Shares fell $18 on the news.

ANIK reported earnings of 68 cents on revenue of $30.5 million. Analysts were expecting $33 cents on revenue of $27.9 million. Shares spiked on the news and I am recommending we close the August position.

Anika announced an accelerated share buyback program for $30 million, 6% of the outstanding shares, to be completed in June. Shares are rebounding again. After two bouts of very sharp declines, this could be a major buying opportunity. Worst case we could see shares ease a little higher on the buyback program.

Position 8/7:
Long Dec $45 call @ $2.00, see portfolio graphic for stop loss.

We entered on a limit order and the option traded at 2:00 on Tuesday @ 10:00.




BAC - Bank of America - Company Profile

Comments:

No specific news. Shares crashed with the currency crisis in Turkey and the potential for contagion. I am recommending we close the position.

Original Trade Description: July 30th.

Bank of America is one of the world’s leading financial institutions, serving individual consumers, small and middle-market businesses and large corporations with a full range of banking, investing, asset management and other financial and risk management products and services. The company provides unmatched convenience in the United States, serving approximately 67 million consumer and small business clients with approximately 4,400 retail financial centers, approximately 16,100 ATMs, and award-winning digital banking with approximately 36 million active users, including 25 million mobile users. Bank of America is a global leader in wealth management, corporate and investment banking and trading across a broad range of asset classes, serving corporations, governments, institutions and individuals around the world. Bank of America offers industry-leading support to approximately 3 million small business owners through a suite of innovative, easy-to-use online products and services. The company serves clients through operations across the United States, its territories and more than 35 countries. Company description from Bank of America.

Booming economy, rising rates. That is really all you need to know about this recommendation. The 4% GDP should lift yields on the 10-year treasury to about 3.25% from the current 2.95%. With the Fed on a hike cycle and expected to hike again in Saptember and December, we would see real rates climb significantly over the next several months. Bank of America is positioned to benefit from this rise in rates.

Last week they increased their quarterly dividend by 25% to 15 cents per share. While that is not setting the world on fire, it is an added inducement for investors. The bank also announced it was buying back entire traunches of preferred shares.

After months of non performance the banking sector is rebounding on the high GDP and the prospects for the future. The higher interest rates allow them to earn more money and attract more deposits. It is a win-win scenario.

Shares are about to break out to a new five month high. BAC shares have been slow movers in 2018 but that may be about to change. The sector has shifted into rally mode and this could continue into 2019 as long as the expectations are not diminished for future Fed rate hikes.

Just because the options are cheap, don't back up the truck and open a large position. Until we have a "breakout" it is just a resistance test. If a breakout does occur it could generate an "all clear" signal for investors.

Position 7/31/18:
Long October $32 call @ 88 cents. No initial stop loss.




CHGG - Chegg Ing - Company Profile

Comments:

No specific news. Shares recovered about all of their post earnings loss to test resistance again at just under $30. A breakout could be huge if it ever happens.

Original Trade Description: May 29th

Chegg, Inc. operates direct-to-student learning platform that supports students on their journey from high school to college and into their career with tools designed to help them pass their test, pass their class, and save money on required materials. The company offers Chegg Services, which include digital products and services; and required materials that comprise its print textbooks and eTextbooks. Its digital products and services include Chegg Study, which helps students master challenging concepts on their own; Chegg Writing that enables automatically generate sources in the required formats, when students need to cite their sources in written work; Chegg Tutors that allow students find human help on its learning platform through a network of live tutors; Chegg Math, an adaptive math technology and developer of the math application; Brand Partnership, which offers various ways for student-relevant brands to reach and engage high school and college students; Test Prep that provides students with an online adaptive test preparation services; and internships services. The company rents and sells print textbooks and eTextbooks; and offers supplemental materials and textbook buyback services. The company has a strategic alliance with Ingram Content Group. Company description from FinViz.com

CHGG reported earnings of 10 cents on revenue of $77 million to beat estimates of 9 cents and $74 million for the fifth consecutive earnings beat. Cash on the balance sheet reached a record high of $500 million compared to $66 million in Q2 2017. Jefferies said the cash pile offered Chegg the opportunity to expand its business outside of its own organic growth.

Shares have been rising steadily since the earnings beat in February and closed at a new high on Tuesday in a very bad market.

Update 7/9: Chegg acquired StudyBlue for $20.8 million in an all cash transaction. There will be no change to 2018 earnings but they will take a $1 charge in 2019 for facility consolidation. The acquisition will add a significant number of subjects to their existing offerings. The new offerings will include online flash cards. In 2016 29% of students used online flashcards. That rose to 37% in 2017 and continues to rise. Fifty percent of students claimed that was their only method of study.

Update 7/30: I clearly did not have the stop loss tight enough. Shares tumbled from $29.50 to $25.50 over the last two days and did not trigger our stop loss at $25.25. Fortunately, they reported earnings after the close and shares rallied back to $27.50 in afterhours. They reported earnings of 12 cents that beat estimates for 8 cents. Revenue of $74.2 million rose 32% and beat estimates for $70.2 million. We may get lucky and have the post earnings rebound continue. I would not bet on it. However, rather than speculate tonight on an exit I would rather wait and see what happens the rest of this week.

Position 5/30/18:
Long Oct $30 call @ $1.95, see portfolio graphic for stop loss.



MSFT - Microsoft - Company Profile

Comments:

CEO Satya Nadella sold $36 million in stock or one third of his holdings. The reason given was diversification and estate planning. He still has $80 million plus a ton of options that will vest.

Original Trade Description: August 6th.

Microsoft Corporation develops, licenses, and supports software products, services, and devices worldwide. The company's Productivity and Business Processes segment offers Office 365 commercial products and services for businesses, including Office, Exchange, SharePoint, Skype for Business, and related Client Access Licenses (CALs); Office 365 consumer services, such as Skype, Outlook.com, and OneDrive; Dynamics business solutions, such as financial management, enterprise resource planning, customer relationship management, supply chain management, and analytics applications for small and mid-size businesses, large organizations, and divisions of enterprises; and LinkedIn online professional network. Its Intelligent Cloud segment licenses server products and cloud services, such as Microsoft SQL Server, Windows Server, Visual Studio, System Center, and related CALs, as well as Azure, a cloud platform; and enterprise services, such as Premier Support and Microsoft Consulting that assist in developing, deploying, and managing Microsoft server and desktop solutions, as well as provide training and certification to developers and IT professionals on Microsoft products. The company's More Personal Computing segment comprises Windows OEM, volume, and other non-volume licensing of the Windows operating system; patent licensing, Windows Internet of Things, MSN display advertising, and Windows Phone licensing system; devices, including Microsoft Surface, phones, and PC accessories; and search advertising, including Bing and Bing Ads. This segment also provides gaming platforms, including Xbox hardware, Xbox Live, video games, and third-party video games. The company markets and distributes its products through original equipment manufacturers, distributors, and resellers, as well as through online and Microsoft retail stores. Microsoft Corporation has a strategic partnership with CNH Industrial N.V. The company was founded in 1975 and is headquartered in Redmond, Washington. Company description from FinViz.com.

Microsoft has broken out after years of lethargy as a designer of Windows operating systems. Every couple of years they would release a new version and revenue would pop for the next 12 months as people upgraded. As the systems became more stable, the number of people upgrading began to decline. With the help of the new CEO that has changed.

Now they are moving to a subscription software as a service model on the Office products and versions of their new products. They moved into the cloud with Azure and a handful of cloud offerings. They are expanding into service relationship with enterprise customers. Their Windows Surface tablets have caught fire. The Xbox family of products continues to expand.

They are no longer just an operating system and database company. Twenty years ago you could always buy Microsoft and never go wrong because they always went up. After being dormant from 2001-2012 the stock has begun a multiyear rally but a lot of people are ignoring their newfound prosperity because they are remembering the 11 years of lethargy.

The company posted earnings of $1.13 that beat estimates for $1.08. Revenue rose to $30.09 billion and beat estimates for $29.21 billion. All of the good news was in the metrics. Each of the forecasts for the individual divisions for the current quarter was higher than analyst estimates. The Personal Computing forecast was $9.95-$10.25 billion and analysts were expecting $9.87 billion. Intelligent cloud forecasts were $8.15-$8.35 billion and analysts were expecting $8.15 billion. Overall, the company predicted revenue of $27.35-$28.05 billion and analysts were expecting $27.4 billion.

Office 365 revenue rose 35%, Azure cloud revenue rose 85%, gaming revenue rose 38% and Xbox and software revenue rose 35%. Reportedly, high value customers are moving away from Amazon's Web Services to the Azure Smart Cloud. Microsoft languished for years as just a software company but under new leadership, they are surging.

Earnings October 18th.

Shares declined post earnings but are rebounding with the market. Microsoft's market cap is $830 billion and they will be a trillion dollar company when the stock reached $130.31. Now that Apple has reached that threshold it is only a matter of time before Microsoft and Amazon join the club.

The post earnings decline gave us an entry point and now that the Nasdaq is rebounding I think it is safe to buy a big cap tech stock.

If the Nasdaq is going to overcome the normal Aug/Sep weakness there could be significant short covering from institutional traders already positioned for the decline.

We are going to use a November expiration to get us past the October earnings date. That earnings expectation is what supports the premium. We will not hold the position over the October 18th earnings.

Position 8/7:
Long Nov $115 call @ $2.32, see portfolio graphic for stop loss.




SKYY - Cloud Computing ETF - ETF Profile

Comments:

No specific news. The decline in several high profile cloud companies has been weighing on SKYY. We need this turkey problem to be over soon so the Nasdaq can continue its rebound.

Original Trade Description: July 9th.

The First Trust Cloud Computing ETF is an exchange-traded fund. The investment objective of the Fund is to seek investment results that correspond generally to the price and yield, before the Fund's fees and expenses, of an equity index called the ISE Cloud Computing Index. The index is a modified equal dollar weighted index designed to track the performance of companies actively involved in the cloud computing industry. To be included in the index, a security must be engaged in a business activity supporting or utilizing the cloud computing space, listed on an index-eligible global stock exchange and have a market capitalization of at least $100 million.

All securities are then classified according to the following three business segments: Pure Play Cloud Computing Companies: Companies that are direct service providers for "the cloud" (network hardware/software, storage, cloud computing services) or companies that deliver goods and services that utilize cloud computing technology. Non Pure Play Cloud Computing Companies: Companies that focus outside the cloud computing space but provide goods and services in support of the cloud computing space. Technology Conglomerate Cloud Computing Companies: Large broad-based companies that indirectly utilize or support the use of cloud computing technology.

The ETF was started in 2011 and now has $1.4 billion in assets. The ETF really took off in 2016 and has been rising steadily. There have been some hiccups recently as some major companies disappointed on earnings and when the Nasdaq corrected in February and March. The ETF has caught fire in the recent tech rebound and with the Nasdaq about to break out to a new high it should continue to do well.

With Q2 earnings over the next six weeks, picking a tech stock gives us a limited time for appreciation and there is always the risk of a disappointment in a stock in the same sector. By using the ETF we can benefit from the tech rally without having too much exposure to a single stock. The idea is to profit from appreciation while reducing volatility.

Shares appear poised to break out to a new high.

Position 7/10/18:
Long October $57 call at $1.25, see portfolio graphic for stop loss.


VXX - Volatility Index Futures - ETF Description

Comments:

Two days of large rebounds added $4 to the VXX and removed $4 fro our gains. Eventually this crisis in Turkey will pass but we could see further gains first.

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!

Position 2/13/18:
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.