BAXTER INTERNATIONAL

15aug – As expected BAX moved higher to $61.42 Expect peak around $61.50
Sold 60 puts and bought back 50 puts. Reduced leverage and max loss.
Will lock in $5.00 more profit to downside (sacrificing to upside) but at cost of 1.80
After this 99% chance of 12k gain on 241k margin, or 5 pct in 1 year.
Not great but should improve with further adjustments.

15aug_bax_gupta

Once BAX reaches its short term peak (probably around resistance at $62.15 level – determine by waning volume , rsi position , stochastics), consider developing position similar to client S.. as follows

15aug_bax_singler

This will involve selling some of the calls on which we’ve made a profit. Over time, these having negative Theta will lose value, and will drop in value as stock price drops.

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TJX – 28 August

As anticipated, TJX has moved to first level. Now further move up looks likely. We are adjusting
our position to be more bullish over next three weeks. The anticipated upside is around $1800.
So far with these trades we have gained $143 to date.

Status before adjustment:

tjx_snapshot_24aug

Status after adjustment:
tjx_adjust_28aug

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TJX – STATUS REPORT 24 AUG

TJX moved up according to our expectations.
fast_prognosis_24aug
We now expect a continue move up over the next week, so we will play to upside. We bought back our 67.50 short puts and sold short 70.00 puts, collecting $76 in premium. Do not consider this positive cash flow a gain! Our gain loss so far reflects a $34 loss, the difference in the transaction costs of our $67.50 put.

Our new risk profile looks like this:

tjx_snapshot_24aug

We now have positive theta (0.74), positive delta (14.24) and positive vega (6.88). This benefits from the passage of time and a rise in the stock price, but will suffer a bit if volatility decreases a lot. We don’t expect much of a drop in volatility, so this is acceptable.

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TJX Industries (TJX)

On August 15th, TJX companies announced slightly disappointing earnings, with earnings growth under 2% and sales growth of 6% projected for the next year. However, management announced slightly better prospects, as same day sales growth turned around and its full year outlook improved. The stock moved up a few points in heavy trading.

Here’s my technical read:
TJX_PROGNOSIS_WEEKLY

TJX_PROGNOSIS_MONTHLY

Today, on August 16th, volatility has already plunged, and is unlikely to fall much lower. Looking at the monthly and daily technical charts above, I foresee a temporary rise to between $75 and $77 over the next 2 weeks, then a move lower down to around $62 within 6 months.

My bet will be to the downside, despite the management prognosis. I don’t think the fundamentals are strong enough to reflect an already high p/e ratio and I expect technicals to overcome fundamentals. However, I will scale into the trade as I expect a temporary rise.

Ultimately I want to end up with a “married call” , namely shorting the shares and buying a deep in the money call as my insurance policy. If I were to do that immediately, it would provide me a credit of $6127. My call option is in the money by $8.28, so my time cost is only $1.43. My maximum loss in this scenario is $143.

If I am right, and the price moves down to $62, say by December, I’ll only be making around $240 or about 1/2 more than what I could lose. However there’s a possibility the price will move all the way down to $50, and this position would be worth about $1100 if that happened.

In and of itself, I usually like to target trades with a better than 1:3 risk reward ratio, which this one does not feature unless we have a large move downwards, which I do not expect either. However ,over the course of the next few weeks I will execute a series of trades around this “base” scenario that hopefully will bring my “risk” portion of the portfolio down to nothing, “bulletproofing” the trade.

tjx_married_call_target

One of these I’ll take right now. Since I first expect a short quick move up, I’m going to sell volatility and time short. Usually volatility remains low and sometimes drifts a bit lower after an earnings report’s initial volatility plunge. I’m going to collect about $1.13 cents per share by selling a short term $70 put, and collecting $113 right away.

tjx_scale1

I am now making money to a price rise all the way to $82.50, and will make money if the price drops moderately to the $70/$69 range at which time the sold call would get exercised. If that happened I would make about $100.

Of course, options trades always have their trade-offs. If the price moves down fast and quickly below the level of the $70 put, this setup does open me up to a bigger loss (around $750). But that is unlikely, and besides it has a simple solution. If the put is exercised and you are no long short the shares, short the shares again or sell your long call, whichever is more profitable. If it is not exercised, take steps to extract yourself from this position with minimum cost, probably by buying back the put with a loss of $30-#50.

Chances are, we won’t have this concern, but if it does, I need to be aware. I will set up an alert if the price drops to $70.

If the stock moves in the $70-$75 range over the next month, which I expect, I will reap that $113 premium,
lowering my overall risk to $30 maximum loss, while keeping my downside gains potential.

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FASTENAL (FAST)

This is a position origally entered into as a calendar spread after earnings

fast_after_adjustment

As you can see, I expected to make money anywhere between 37.50 and 47.50, with a 95% statistical probability of being the price range.

Unfortunately, volatility dropped far beyong what I expected, diminishing the values of my still active long calls and puts. Rather than close them at a small loss, I decided to adjust the trade, giving it a bullish bias.
The $37 profit I already booked is reflected in this graph by modifying the cost basis of the 45 calls we sold.

Here was my prognosis for the stock

prognosis

So in my adjustment, I kept the long puts for safety until I saw a breakout or volume confirming my upside bias.I converted the long call into a ratio spread, buying 1x 18sep 43 call selling 2x my position of 45 calls, and buying 1x of SEP 45 calls. This is long delta, benefitting from a price rise, and will only slightly lose from the passage of time and expected decrease in volatility.

My maintenance margin, per position is zero dollars, requiring no extra outlay, and my maximum loss per position is $38. At the price I reasonable expect the stock to reach by the expiry of the near term options, I stand to make about $100/position. This is a risk reward of about 1:3.

fast_15aug_status

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Summer Doldrums 2015


The last few weeks have seen the market give back all of its gains for 2015, causing a number of our clients to ask if this was “the big one”. My belief in short, is no, but I do expect a “normal” correction after 6 years of a steadily rising bull market.

The fundamental reasons are numerous:

  • China’s growth is lagging seriously, down from levels in the mid teens to levels of around 7%
  • China’s recent devalution is likely to set off a beggar-thy-neighbor currency war among raw-materials exporters in the emerging world, to the detriment of all.
  • 6 years of slow, painful recovery have still not brought US employment levels back to pre-recession levels, and the average middle class consumer is still “tapped out”.
  • Corporate profits among US companies are starting to decline. Most corporations prefer to invest cash in share buybacks and mergers and acquisitions, instead of investments in capital and technology. This is a sure sign of a lack of confidence in the robustness of consumer spending.
  • The glut of oil in the world has sent oil prices down 50%. While good for consumers, it has provoked a serious macro-economic and geopolitical re-shuffling of the deck, increasing market uncertainty.
  • The FED is considering raising interest rates to dampen hidden inflation, and this is scaring both bond and stock markets. Will they end up raising rates? The majority of economists think yes, but for me, the verdict is still out. I believe we will see a further dramatic decline in oil prices, which will lessen the risks of inflation.

So there are numerous real world reasons for this stock market to correct down.

But let’s also look at technical factors. Stocks do move on fundamental intrinsic values in the long run, but they move on mass psychology in the short term. This mass psychology tends to move in wave patterns that correspond eerily closely to the mathematics developed by 12th century mathematician Leonardo Bonacci, known more commonly as Fibonacci numbers.

So back in August I was expecting the SPY to peak at 197.08. The actual peak was 4 points higher at 201.90, or off by 2 percent. From there, a retracement of 23.6% occurs over 90 percent of the time, and a retracement of at least 38.2% occurs around 80% of the time. Stocks can drop lower than that but those are the most common levels.

Take a look at the following 2 graphs, one showing a monthly view (each candle represents one month), the other a weekly view, for more detail.

spy technical prognosis
click to enlarge

This graph shows that I’ve been expecting a correction for almost a year now, and in fact the peak on SPY extended 10% more than I expected. Now, however, I believe the bullish three year upwave is finally ending.

spy technical prognosis
click to enlarge

Elliot wave technicians will tell you that after the 5th Elliot wave pattern peaks, in this case at $217.92 , it is common to see a downward retracement in a zigzag formation (ABC pattern) that retraces down 61.8%. This would take us all the way down to a level of around $120.

That dramatic drop is certainly possible, but I do not believe it is likely to happen. Note how our price and RSI slopes only diverge on the short term but on the longer term (30 period) RSI chart they are both sloping upwards, in a pattern of bullish convergence. This leads me to conclude that the market will find ultimate support at $185 level. That would only be a retracement of about 18% off of the highs, which is very rare in Elliot wave patterns. Elliot wave theory would ascribe a minimum drop of 23.6% or around $175.

As we get closer to those levels, we will need to take a look at volume and rsi measurements, and make a new determination. And of course technical waves just measure probabilities, not certainties. But when bother the fundamentals and the technicals point down, the wise investor will take defensive measures.

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Power Up Your Portfolio with A Quick QQQ Scalp

At market close the POWERSHARES ETF (QQQ) was trending in a narrow range, having found support and bounced off the 99.68 level. My prognosis is that we will see QQQ bounce up to test the resistance at $103, then from there a move down over the next week to prices below $99.

qqq status
click to enlarge

Here’s a wonderful way to play that, using the banker’s money to finance a credit spread. If it never happens, and the stock stays stagnant, there is only a miniscule loss of about $5, and at bigger drops there is even a small maximum gain of $40. For every position you commit to this trade, you must have $2000 in margin. You have about a 1% chance of losing $5 and and 95% chance of making between $1 and $500. Those are odds anyone would like.

The Opportunity

  • Probability of success : greater than 95%
  • Risk : Reward : around 1 to 50
  • Duration: 2 day trade
  • Minimum Investment: -$40 (credit)
  • Maximum Investment: none
  • Margin Requirement: $2k per contract
  • Maximum Probable Loss : $5
  • Maximum Probable Gain : $250
  • Maximum Possible Loss : $5


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Disclosure: Options investing is inherently risky. This is not a solicitation to buy or sell. Please read our full disclosure on this site.

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How Low Will We Go?

The recent market drops have caused a number of my clients to inquire how severe a market drop I was expecting.
The chart below shows my thinking back on August 19, and not much has changed since then.

spy technical prognosis
click to enlarge

Stocks do move on fundamental intrinsic values in the long run, but they move on mass psychology in the short term. This mass psychology tends to move in wave patterns that correspond eerily closely to the mathematics developed by 12th century mathematician Leonardo Bonacci, known more commonly as Fibonacci numbers.

So back in August I was expecting the SPY to peak at 197.08. The actual peak was 4 points higher at 201.90, or off by 2 percent. From there, a retracement of 23.6% occurs over 90 percent of the time, and a retracement of at least 38.2% occurs around 80% of the time. Stocks can drop lower, than that but those are the most common levels. Accordingly, I would expect a minimum drop to the $165 (23.6% retracement) but more likely also down to $145. The first represents a correction of 18% off of the peak, the second a drop of 28%.

Of course, stock technicians know that after the 5th Elliot wave pattern peaks, in this case at $201 , it is common to see a downward retracement in a zigzag formation (ABC pattern) that retraces down 68.2%. This would take us all the way down to a level of around $112, or a 55% drop from the peak.

That dramatic drop is certainly possible, but I do not believe it is likely to happen. Note how our price and RSI slopes only diverge on the short term but on the longer term (30 period) RSI chart they are both sloping upwards, in a pattern of bullish convergence. This leads me to conclude that the market will find ultimate support at $145 level, then move higher from there.

Of course technical waves just measure probabilities, not certainties. But investors would be wise to batten down the hatches!

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Netflix Swoons As Apple Encroaches


Today, Netflix shares swooned badly after a Wall Street Journal report revealed secret talks between Apple and Comcast over a new streaming TV service. The two companies are reportedly in discussions to pursue the development of an Apple set-top box and special data treatment.

nflx technicals
click to enlarge

This presents the following opportunity for aggressive investors, based on a a bearish options bet. It will lose a limited amount of money if we are wrong, and could hit big if the stock drops.

The Opportunity

  • Probability : 60% (my subjective guesstimate)
  • Risk : Reward : around 1 to 4
  • Duration: 7 day trade
  • Minimum Investment:$130
  • Maximum Investment: limit to 2% of your overall portfolio


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Disclosure: Options investing is inherently risky. This is not a solicitation to buy or sell. Please read our full disclosure on this site.

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Cloud Computing Brews The Perfect Storm at Rackspace Hosting


Rackspace Hosting faces the perfect storm. This fast-growing cloud-computer technology stock just got hit by a double whammy. It has disappointed the market with less than stellar results in its most recent earnings report.
And its lost its CEO.

Management has admitted to difficulties competing with the bare-bones profit model of its chief competitor, Amazon Web Services, who is dead set on owning this industry sector. RAX management has already undertaken steps to cater to a more service-oriented, upscale corporate clientele, but this will probably be a bit of a learning curve, and growth and earnings may both suffer a bit along the way. At current market prices, around $31.50 at time of writing, a Reverse Cash Flow analysis reveals that the market projects an 18% growth rate over the next 10 years. I think that is too ambitious, given the competition.

To add insult to injury, RAX faces management upheaval, with its CEO Lanham Napier announced his retirement today, and no planned successor is on the horizon.

The market should punish this high-flier severely. It has already lost 33% of its value in just two days. But the damage may not be done. A glance at technical charts reveals that after a possible bounce at current prices, the stock may move much lower, possibly to $15, with a pause along the way at the $25 support level.

rax technicals
click to enlarge

This presents the following opportunity for aggressive investors, based on a a bearish options bet. It will lose a limited amount of money if we are wrong, and could hit big if the stock drops.

The Opportunity

  • Probability : 70% (my subjective guesstimate)
  • Risk : Reward : around 1 to 5
  • Duration: 7 day trade
  • Minimum Investment:$433
  • Maximum Investment: none


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