Volatility appeared on schedule when September appeared and it is not over yet.
Monday's mixed market came on low volume and a flurry of story stock headlines. Apple was down on tariff worries. Boeing was down on worries they could be hit by tariffs. Home Depot was up on expectations for North Carolina to be devastated by Hurricane Florence. It was a lot of these types of headlines and nothing specifically that was market moving.
Florence is expected to make a direct hit on North Carolina and clear out any weak trees, weak power lines, weak bridges, etc.
Maybe our markets need a hurricane headline to clear out all of the weak holders and give everyone else a buying opportunity. Sometimes the market needs a sharp, unexpected drop to trigger all the stop losses and take out the weak positions. This is painful but it also gives us a new buying opportunity for the rebound.
About the only thing that could do this today would be news from the president that he was actually going to put the entire $427 billion of remaining tariffs on China. The leadership in China would then fire back with a list of draconian moves that would be guaranteed to cause the U.S. pain.
That is the kind of headline flurry that could send our markets reeling. I do not see anything else on the horizon but it is the events you do not see coming that cause the most damage.
The economic calendar is not expected to be market moving. The NFIB report on Tuesday is expected to be positive but even a decline would not be the end of the world. The price indexes are the most important reports but there are no signs of inflation in other reports so these are expected to be benign as well. That could be a market mover if they came in very hit.
Apple's iPhone announcement on Wednesday has the potential to damage the market because the three new phones are "feature light" meaning they do no thave any new must have feature that will make users rush out and buy a new phone. Apple normally declines after the announcement.
The earnings calendar is also empty of any material earnings until Thursday. Without earnings headlines, the political news will become more important.
There were no material moves in the market. The S&P gained 5 points and it was a real battle to hang on to the early morning gains. The index is still above support at 2,850 and back above resistance at 2,872. Today was just noise. There was nothing in the form of market direction to be determined from today's action.
The Dow opened higher, struggled to maintain its gains and finally closed at the lows for the day. BA, AAPL and UNH were the biggest drag and Home Depot was the biggest lift. The headline flow during the day was minimal and it was a case of a buyer boycott rather than an avalanche of sellers.
The Nasdaq posted an unremarkable gain of 21 points but since the Dow was down -59 the gain was a good counter balance for the broader market. The big cap techs were evenly mixed and the only notable move was the continued decline in Amazon since its brush with the $1 trillion in market cap. Shares have fallen back to $946 billion.
The chip sector was mildly positive but nothing to excite investors. This was a dead cat bounce and there were no takers.
The Russell failed to excite investors with only a 4-point gain and closing -6 points below the intraday high. There were a lot of bearish charts in the small caps tonight. The index may be close to a new high but the market breadth is fading.
I would continue to be cautious about new long positions until the markets find some traction. There is likely to be continued volatility over the next three weeks so there is no reason to rush headlong into the market. This is September and second half market bottoms are normally made in early October.
Enter passively and exit aggressively!
Send Jim an email
NEW DIRECTIONAL Call PLAY
NTNX - Nutanix - Company Profile
I have also recommended this position with a Jan 2020 LEAP in the Leaps newsletter.
Original Trade Description: Sept 9th.
Nutanix, Inc. develops and provides an enterprise cloud operating system software. It offers enterprise applications, virtual desktop infrastructure, virtualization and cloud, big data, remote and branch office IT, and data protection and disaster recovery solutions; and hardware platforms and software options; and support and services. The company's products include Acropolis, a hyperconverged infrastructure solution to run any application; Prism, an infrastructure management solution with one-click operations; Nutanix Calm, an application-centric IT automation solution; Xi cloud services; Nutanix Xpress that eliminates the need for clunky SANs, expensive hypervisor licensing, and complex data protection and management software; and tools and technologies. It serves education, energy and utilities, financial services, healthcare, retail, and service provider industries, as well as state and local government, and the United States federal government. Nutanix, Inc. was founded in 2009 and is headquartered in San Jose, California. Company description from FinViz.com.
The company reported a loss of 11 cents for Q2 compared to estimates for a loss of 22 cents. Revenue of $303.7 million rose 20% and beat estimates for $298.6 million. The problem came with the guidance. They expect a loss of 26-28 cents on revenue of $295-$310 million. Analysts were expecting a loss of 23 cents on $309 million. Shares had been near the recent highs and crashed back $13 to $50.
Nutanix is shifting from a hardware sales model at zero margins in order to get their software installed on a subscription basis to a software only model and exiting the hardware business. They can do this because they are over the consumer acceptance stage. They no longer have to "buy" accounts with sweetheart hardware deals. The evolution out of the hardware space is a drag on revenue but revenue at zero margins is not a plus. Getting out of the high revenue low margin business is a plus but it means the revenue numbers will be a challenge for the first year.
Multiple analysts came out in support of Nutanix saying the new long-term subscription offerings should trump the additional capex spending. Raymond James said they anticipate growth acceleration driven by new opportunities in multi-cloud as well as new products. RJ upped their price target from $64 to $74 and the stock is at $50. JMP Securities said the shares are undervalued and the higher capex and sales and marketing expenses were "prudent" due to the large market opportunity.
Stifel remained positive with a $64 target saying "We believe Nutanix will sustain strong double digit software growth in coming years given its expanding product set."
What was not shown in the bare earnings numbers was the 66% YoY growth in software and support billings and 49% YoY growth in software and support revenue. They also generated 78% adjusted gross margin in the shift to a Software-Defined business. Billings rose 37% to $395.1 million. Cash on hand rose 168% to $934.3 million.
They added more than 1,000 customers in the quarter to put their base over 10,000 and they signed their largest deal in history for more than $20 million.
For the current quarter they guided for revenue growth of 40-45% and billings growth of 50-55% with adjusted margins of 78-79%.
Any company would move the sun and moon to have those kinds of revenue and margin projections. This is why we need to buy Nutanix on the selloff.
Buy Jan 2019 $55 Call, currently $4.90, initial stop loss $47.50.
DLTR - Dollar Tree - Company Profile
Dollar Tree, Inc. operates discount variety retail stores in the United States and Canada. It operates through two segments, Dollar Tree and Family Dollar. The Dollar Tree segment offers merchandise at the fixed price of $1.00. It provides consumable merchandise, including candy and food, and health and beauty care products, as well as everyday consumables, such as household paper and chemicals, and frozen and refrigerated food; various merchandise comprising toys, durable housewares, gifts, stationery, party goods, greeting cards, softlines, and other items; and seasonal goods, which include Valentine's Day, Easter, Halloween, and Christmas merchandise. This segment operates 6,650 stores under the Dollar Tree and Dollar Tree Canada brands, as well as 11 distribution centers in the United States and 2 in Canada, and a store support center in Chesapeake, Virginia. The Family Dollar segment operates general merchandise discount retail stores that offer consumable merchandise, which comprise food, tobacco, health and beauty aids, household chemicals, paper products, hardware and automotive supplies, diapers, batteries, and pet food and supplies; and home products, including housewares, home decor, and giftware, as well as domestics, such as comforters, sheets, and towels. It also provides apparel and accessories merchandise comprising clothing, fashion accessories, and shoes; and seasonal and electronics merchandise, which include Valentine's Day, Easter, Halloween, and Christmas merchandise, as well as personal electronics that comprise pre-paid cellular phones and services, stationery and school supplies, and toys. This segment operates 8,185 stores under the Family Dollar brand, 11 distribution centers, and a store support center in Matthews, North Carolina. Dollar Tree, Inc. was founded in 1986 and is headquartered in Chesapeake, Virginia. Company description from FinViz.com.
Dollar Tree posted earnings with a minor hiccup and the stock was crushed. They reported earnings of $1.15 that missed estimates by a penny. Revenue of $5.525 billion narrowly missed estimates for $5.536 billion. Same store sales rose 1.8% to match estimates.
Guidance for the current quarter earnings was $1.11-$1.18 and estimates were $1.16 just barely over the midpoint of $1.15. They guided for revenue of $5.53-$5.64 billion and analysts were expecting $5.58 billon and right at the midpoint. Full year guidance narrowed from $4.80-$5.10 to $4.85-$5.05 and analysts were expecting $5.55. This was the major problem.
However, look at the companies guidance. They had previously $4.80-$5.10 and and they narrowed that same range. It is the analysts that got it wrong. When a company gives guidance and 3-months later reiterates that same guidance, analysts should not be trying to bid up estimates just to play the "mine are bigger than yours" game.
DLTR did what they said they were going to do and they are still forecasting decent earnings for the current quarter. I think they were unjustly the victim of analyst creep. We see this all the time.
There are no November options.
Buy Jan $90 call, currently $3.30, initial stop loss $78.65.
MNK - Mallinckrodt - Company Profile
No specific news. Shares have gapped higher at the open the last three days but each day they also closed at the lows. Somebody with size is sitting on the stock but support at $33 appears solid. I am leaving this recommendation open but I am going to lower the entry trigger to $35.
Original Trade Description: September 3rd.
Mallinckrodt public limited company develops, manufactures, markets, and distributes branded pharmaceutical products in Canada and the European Union, as well as in Latin American, the Middle Eastern, African, and the Asia-Pacific regions. The company markets branded pharmaceutical products for autoimmune and rare diseases in the specialty areas of neurology, rheumatology, nephrology, ophthalmology, and pulmonology; and immunotherapy and neonatal respiratory critical care therapies, as well as analgesics and gastrointestinal products. It offers H.P. Acthar Gel, an injectable drug for various indications, such as proteinuria, multiple sclerosis, infantile spasms, ophthalmic, neuromuscular disorders, dermatomyositis, polymyositis, rheumatology, and pulmonology; Inomax, a vasodilator to enhance oxygenation and reduce the need for extracorporeal membrane oxygenation; Ofirmev, an intravenous formulation of acetaminophen for pain management; Therakos, an immunotherapy treatment platform; and Amitiza for the treatment of chronic idiopathic constipation. The company is also developing StrataGraft, which is in Phase III and II clinical development for the treatment of burns; terlipressin for the treatment of hepatorenal syndrome; MNK-1411 for the treatment of Duchenne muscular dystrophy; Stannsoporfin, a heme oxygenase inhibitor for the treatment of jaundice; Xenon gas for inhalation; MNK-6105, an ammonia scavenger for the treatment of hepatic encephalopathy, a neuropsychiatric syndrome associated with hyperammonemia; VTS-270 that is in Phase III development for Niemann-Pick Type C, a neurodegenerative fatal disease; and CPP-1X/sulindac, which is in Phase III development for Familial Adenomatous Polyposis. Mallinckrodt public limited company markets its branded products to physicians, pharmacists, pharmacy buyers, hospital procurement departments, ambulatory surgical centers, and specialty pharmacies. The company is based in Staines-Upon-Thames, the United Kingdom. Company description from FinViz.com.
MNK reported earnings of $1.78 that beat estimates for $1.48. Revenue rose 5.3% to $631.7 million and beat estimates for $620 million. The raised full year earnings guidance from$6.00-$6.50 to $6.50-$6.90 and revenue growth guidance from 3%-6% to 4%-7%.
I will not bore you with all the different drug details but they have multiples that are growing recenue by double digits. Net sales for Acthar is expected to exceed $1 billion. They have sold off some non-core assets and acquired drugs, Amitiza and Rescula, which will produce about $200 million in 2018. This is going to be a transformational year with multiple drugs significantly through the pipeline process and involved in various trials.
Earnings November 6th.
As you can tell by their raised guidance they believe they are on the right path. Shares spiked from $24 to $36 on the earnings, a 50% gain. That post earnings rally peaked back on August 20th and shares have been trading sideways as they consolidate.
I do not want to buy a 50% gainer until it shows us it is going higher. I am going to recommend a $36.50 entry point on a rebound from the current $34.45 close. That puts us just about the perfect spot for a $40 call.
We have to buy January because there are no November or December options.
With a MNK trade at $35.00:
Buy Jan $40 call, currently $1.95, no initial stop loss.
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 closed at the open on Tuesday.
Original Play Recommendations (Alpha by Symbol)
AKAM - Akamai Technologies - Company Profile
DA Davidson upgraded Akamai from neutral to buy on Monday. Shares popped $2.24 on the upgrade. Last Thursday Gartner said Akamai was the leader in Web Application Firewalls for the second consecutive year. Resistance looming at $77.
Original Trade Description: August 13th.
Akamai Technologies, Inc. provides cloud services for delivering, optimizing, and securing content and business applications over the Internet in the United States and internationally. The company offers Web and mobile performance solutions, such as Ion, a situational performance solution; Dynamic Site Accelerator that helps in consistent Website performance; Image Manager that automatically optimizes online images; CloudTest to conduct load testing and other analysis of Websites in a pre-production environment; mPulse that provides real-time Website performance data to provide insight about end-user experiences on a Website; and Global Traffic Management, a fault-tolerant solution. It also provides cloud security solutions, including Web Application Protector to safeguard Web assets from Web application and distributed denial of service; Kona Site Defender, a cloud computing security solution; Bot Manager Premier to identify bots; Fast DNS, which translates human-readable domain names into numerical IP addresses; Prolexic Routed to protect Web- and IP-based applications; and Client Reputation for protection against DDoS and Web application attacks. In addition, the company offers enterprise security solutions, including Enterprise Application Access that enables remote access to applications; and Enterprise Threat Protector to enable enterprise security teams to identify, block, and mitigate targeted threats. Further, it provides network operator solutions, including Aura Licensed CDN, Aura Managed CDN, and Intelligent DNS solutions, as well as professional services and solutions; media delivery solutions, such as adaptive delivery, download delivery, infinite media acceleration, media services, and media analytics solutions; and NetStorage, a cloud storage solution. The company sells its solutions through direct sales and service organization; and channel partners. Akamai Technologies, Inc. was founded in 1998 and is headquartered in Cambridge, Massachusetts. Company description from FinViz.com.
Akamai reported earnings of 83 cents on revenue of $663 million. Analysts were expecting 80 cents on $661.9 million. The CEO was very positive on the 34% increase in earnings. He was more excited about the surging growth in their security portfolio. Akamai is getting away from simple caching and serving up websites around the world. For instance, if I had a video streaming site in Idaho that was attracting viewers in Singapore, Sydney, London, etc, I could pay Akamai a fee to maintain an exact copy of that website on multiple servers in high use areas around the world. This was originally Akamai's claim to fame.
Today they are moving rapidly into cloud security. Revenue in that division rose 33% in Q2 to more than $600 million annualized. Web division revenue rose 11% to $351 million. Median and Carrier revenue rose 8% to $312 million. Platform revenue, the caching of websites, declined -14% to $44 million and almost immaterial given the total revenue of $663 million. This shows how far Akamai has come from their roots.
The biggest take away from the earnings is the 33% growth in their cloud security division. This is where they are going and the business is booming with it now 25% of revenue. Their new Edge security product was recently named best in class by Forrester, Gardner and IDT.
Shares collapsed post earnings despite a 30% increase in the bottom line and raised guidance for the year. The stock was caught up in the Nasdaq volatility. That appears to have faded after shares found support at $71. With the Nasdaq weak for the last two weeks, it is about time for the sector to turn positive again. I believe Akamai will be a favorite because it has already corrected and has strong earnings and guidance.
Earnings Oct 30th.
Long Nov $77.50 @ $2.68, see portfolio graphic for stop loss.
ANIK - Anika Therapeutics - Company Profile
No specific news. Shares have flat lined after the earnings spike. I recommended we close the position at the open last Tuesday. Still no movement.
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.
Closed 9/4: Long Dec $45 call @ $2.00, exit $1.80, -.20 loss.
CHGG - Chegg Ing - Company Profile
No specific news in four weeks. Shares dipped sharply after making a new high and we were stopped out on Thursday.
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.
Closed 9/6: Long Oct $30 call @ $1.95, exit $1.85, -.10 loss.
SKYY - Cloud Computing ETF - ETF Profile
No specific news. Shares dropped with the Nasdaq but are trying to recover.
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.
Long October $57 call at $1.25, see portfolio graphic for stop loss.
SYMC - Symantec - Company Profile
No specific news. Shares have declined to support and they are holding at $19.75.
Original Trade Description: August 27th.
Symantec Corporation, together with its subsidiaries, provides cybersecurity solutions worldwide. It operates through two segments, Consumer Digital Safety and Enterprise Security. The Consumer Digital Safety segment provides Norton-branded services that provide multi-layer security services across desktop and mobile operating systems, public Wi-Fi connections, and home networks to defend against online threats to individuals, families, and small businesses. This segment also offers LifeLock-branded identity protection services, such as identifying and notifying users of identity-related and other events, and assisting users in remediating their impact; and digital safety platform designed to protect information across devices, customer identities, and the connected homes and families. The Enterprise Security segment provides endpoint protection products, endpoint management, messaging protection products, information protection products, cyber security services, Website security, and advanced Web and cloud security offerings. Its enterprise endpoint, network security, and management offerings supports evolving endpoints and networks, as well as provides an integrated cyber defense platform. This segment delivers its solutions through various methods, such as software, appliance, software-as-a-service, and managed services. The company serves individuals, households, and small businesses; small, medium, and large enterprises; and government and public sector customers. It markets and sells its products and related services through direct sales force, direct marketing and co-marketing programs, e-commerce and telesales platforms, distributors, Internet-based resellers, system builders, Internet service providers, employee benefits providers, wireless carriers, retailers, original equipment manufacturers, and retail and online stores. Symantec Corporation was founded in 1982 and is headquartered in Mountain View, California. Company description from FinViz.com.
Symantec reported earnings of 34 cents and analysts expected 33 cents. Revenue fell from $1.18 billion to $1.16 billion and barely beat estimates for $1.15 billion. The company guided for Q3 earnings of 31-35 cents and analysts were expecting 37 cents. The guided for revenue of $1.13-$1.16 billion and analysts expected $1.17 billion. The CEO said large multiplatform sales are taking longer to close. Several large deals had been expected to close and it would have lifted them to solid revenue growth. Those deals are still in the pipeline. They signed one deal in Q1 with more than 100,000 users in a single company and there are more to come.
Shares fell -15% on the report. After a minor rebound the shares rolled over again until Aug 16th when Starboard said they had taken a stake and nominated 5 directors. Shares rebounded back to $20 and should continue to creep higher on hopes that Starboard stirs up the board and turns the company around.
Analysts believe there is 30% upside in the stock after the post earnings decline. Having Starboard in the mix could increase that gain. Shares are easing higher after making a 2-year low at $18 in early August. There is limited downside and unlimited upside.
Earnings Nov 1st.
Long Jan $21 call @ $1.26, see portfolio graphic for stop loss.
VXX - Volatility Index Futures - ETF Description
The VIX/VXX has been reluctant to decline as we enter September, a month known for volatility. Buckle your seatbelt, we do not know what this September will bring.
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
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