Wednesday, August 23, 2017  9:01:00 PM

Brinksmanship has Begun

by Jim Brown

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Review prior updates here: 2014  2015  2016  2017  2018 
The political brinksmanship has begun surrounding the budget and debt ceiling passage.

The president warned in his Tuesday even speech that he would shutdown the government if lawmakers do not pass a budget bill that contains funding for the border wall. That was in direct opposition to the democrat pledge last week to shut down the government if the budget did have that funding. Both sides are staking out their positions and there will be a highly visible battle in September. With everyone already drawing out the battle lines, the market is going to have trouble digesting these constant headlines.

In 2011 when the government was shut down over the budget the S&P lost -246 points in 11 days. While I do not expect that this year, I do expect the next six weeks to be rocky.

The S&P and Nasdaq are already in bearish formations and we have a good chance for those patterns to resolve to the downside. The S&P futures were down over 5 points early Wednesday evening as the political headlines roiled investor sentiment.

The S&P is almost guaranteed to retest 2380-2400 in the weeks ahead and I would not be surprised to see the 2,330 level tested for a 6% decline. I believe the potential for a September rally is nearly zero.

The Nasdaq has a similar pattern with 6,100 almost guaranteed and a potential dip to 5,800. If the big cap techs ever break support, and several are threatening, the Nasdaq could drop like the proverbial rock. Only a few stocks are holding up the index and should those roll over it would poison sentiment.

The Dow remains the strongest index thanks to several stocks that refuse to die. Boeing has added more than 450 Dow points since May. If investors in Boeing ever decide to capture that profit, it could be a serious decline.

The Dow can remain somewhat bullish until suddenly it is bearish. Because of the thin 30 stock index, a sudden bout of profit taking in only a handful of stocks can dramatically damage big cap sentiment and we have seen in the past how quickly the wheels can come off a rally. The Dow still has decent support at 21,300 and 21,500 so there should not be a vertical drop.

I am bearish on the market until as get past the budget/debt ceiling volatility. I do not recall in my 40 years of investing a period where the partisanship was so violent and so black and white. There is no chance of lawmakers from either side crossing over to vote with the others. This is going to be a major roadblock for the market unless something changes quickly.

Enter passively, exit aggressively!

Jim Brown

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Current Portfolio

The fourth column in the portfolio graphic is the earnings date. We will always exit a position before that date unless specifically mentioned otherwise in the play description.

Lines in blue were previously closed.

Current positions

Covered Calls

Leftover Stock

Current Position Changes

SHOP - Shopify (Call Spread)

Shopify has caught fire. The stock has rallied $7 in three days and $13 over the last two weeks. We were stopped out of out short call at $96.75 on Tuesday. If these gains continue we could profit from the long call.

Closed Sept $105 short call, entry $1.60, exit $1.50, +.10 gain.
Retain Sept $115 long call, entry .69, currently .70, stop loss $97.00.

PXD - Pioneed Natural Resources (Put Spread)

Pioneer moved more or less sideways for the last three weeks after the big post earnings decline. That changed on Monday when oil prices cratered and PXD stopped us out at $128.50.

Closed Sept $125 short put, entry $1.55, exit $2.46, -.91 loss.
Retain Sept $110 long put, entry .40, currently .10, no stop loss.

New Recommendations

WDC - Western Digital (Oct Put Spread)

WDC is finally on track to acquire a stake in the portion of the SanDisk/Toshiba memory business it does not own. Toshiba has agreed to negotiate with WDC in an effort to speed up the transaction as opposed to fighting with them over other bidders. It appears WDC has won the battle but the fight it not yet over. Shares are rising in anticipation of a deal.

Earnings Oct 26th.

Sell short Oct $77.50 put, currently $1.36, stop loss $81.35.
Buy long Oct $67.50 put, currently .35, no stop loss.
Net credit $1.00.

NVDA - Nvidia (Oct Short Put)

Nvidia shares continue to rebound even in the face of a weak market. Their multiple new offerings with speeds 10-12 times faster than their best offerings currently, suggests they are going to continue to dominate the sector.

Earnings Nov 7th.

Sell short Oct $140 put, currently $1.67, stop loss $152.65.

New Covered Call Recommendations

No Covered Calls

The market is not cooperating and the low dollar stocks are plunging rather than rising.

Other Potential Plays (Spreads, Covered Calls, Naked Puts)

These are not official plays but a good place to start if you are looking for something else to trade.

September expiration is the 15th. October expiration is the 20th.

Existing Positions (Alpha by Symbol)

THESE ARE NOT CURRENT RECOMMENDATIONS. These are prior recommendations that are still active in the portfolio. Do NOT act on the plays described in this section. This is the archive of prior recommendations in the current portfolio.

ADBE - Adobe Systems (Put Spread)

Adobe has a great chart except for the May/June Nasdaq declines. Shares are about to breakout to a new high.

Expected earnings September 19th.

Sell short Sept $140 put, currently $1.20, stop loss $144.65
Buy long Sept 130 put, currently .43, no stop loss.
Net credit 77 cents.

Update 8/2/17: The Nasdaq crash on Thursday knocked $6 off Adobe intraday and stopped us out of the short side on the put spread. I considered reinstating it but the continued Nasdaq weakness suggests the stock will decline further. This is a September position so we have plenty of time to watch it and sell a new put when the time is right.

Closed Sep $140 short put, entry $1.26, exit $2.46, -1.29 loss.
Retain Sep $130 long put, entry .51, currently .40, no stop loss.

BA - Boeing (Call Spread)

Boeing gained $34 last week alone and they are up $70 since May. While it is always possible for them to rise, there should be some profit taking very soon. If the market moves lower starting next week, the Dow stocks are going to be a big target because of their big gains.

Sell short Sept $250 call, currently $1.37, stop loss $245.
Buy long Sept $260 call, currently .36, no stop loss.
Net credit $1.01.

IWM - Russell 2000 ETF (Put Spread 7/26)

The Russell 2000 is slowly easing higher and closed at a new high on Tuesday. We need one more good day to really trigger a breakout and that could drag the other indexes higher.

Sell short Sep $135 put, currently .89, stop loss $138.85.
Buy long Sept $129 put, currently .40, no stop loss.
Net credit 49 cents.

Update 8/2/17: The monster intraday drop last Thursday killed both of our IWM put spreads. The ETF fell to 141.55 on Thursday and is still declining. If the typical August weakness appears we could see out long puts turn profitable.

Closed Sep $135 short put, entry .75, exit $1.03, -.38 loss.
Retain Sep $129 long put, entry .41, currently .54, Profit stop $136.

Update 8/20/17: The Russell 2000 has been the weakest index and the ETF declined to our profit stop at $136 on August 11th to take us out of the position. In retrospect, I wish it was still open but we exited with a profit and we should not complain.

Closed Sept $129 long put, entry .41, exit $1.13, +.72 gain.
Previously closed Sept $135 short put, entry .75, exit 1.03, -.28 loss.
Net gain 44 cents.

KITE - Kite Pharma (Oct Put Spread)

Kite closed at a new high on Friday and has a very strong chart. The put spread Iam recommending is $20 OTM. If the current rally continues even a few more days we should be comfortably safe for weeks to come.

Earnings Nov 7th.

Sell short Oct $110 put, currently $2.85, stop loss $119.35
Buy long Oct $100 put, currently $1.30, no stop loss.
Net credit $1.55.

NFLX - Netflix (Call Spread)

Netflix added $31 after earnings to hit $191.50. Shares have already declined $10 to close at $181 today. I am recommending a $200/$215 call spread because I expect the August weakness to appear. The Nasdaq has had a bad five days and it may get worse.

Sell short Sept $200 call, currently $1.54, stop loss $190.50.
Buy long Sept $215 call, currently .51, no stop loss.
Net credit $1.03.

NFLX - Netflix (Oct Short Put)

Netflix is currently fading from the $25 post earnings spike and is currently at $166. The recommend put is $130 and $36 OTM today. There is strong support at $158, $146 and $140.

Earnings Oct 17th. (3 days before expiration)

Sell short Oct $130 put, currently $1.09, stop loss $139.

NVDA - Nvidia (Oct Call Spread)

Nvidia's chart is showing a wide rounding top formation with solid resistance at $170. I do not think the stock is done going higher but I do believe it is going to rest over the next six weeks of normal market weakness. The $170 resistance gives us a good threshold to set our stop loss.

Earnings Nov 9th.

Sell short Oct $185 call, currently $2.80, stop loss $175.25.
Buy long Oct $195 call, currently $1.49, no stop loss.
Net credit $1.31.

PXD - Pioneer Natural Resources (Put Spread)

Pioneer disappointed on earnings by reducing guidance. They are going to spend more but defer 30 new wells from 2017 to 2018 and that impacted their production guidance and revenue. Shares fell more than $30 after earnings. This is a major buying opportunity so the worst should be over.

Earnings Oct 31st.

Sell short Sept $125 put, currently $1.40, initial stop loss $128.50.
Buy long Sept $110 put, currently .45, no stop loss.
Net credit 95 cents.

SHOP - Shopify (Call Spread)

SHOP posted blowout earnings and spiked to $104 but the post earnings depression period and the weak market is taking a toll. With August typically weak, we could see SHOP return to support at $90 and consolidate.

Earnings Oct 31st.

Sell short Sept $105 call, currently $2.05, initial stop loss $100.65.
Buy long Sept $115 call, currently .80, no stop loss.
Net credit $1.25.

SLCA - U.S. Silica Holdings (May Covered Call)

SLCA has found a bottom along with oil prices. Now that refineries are restarting and producing summer fuel blends, oil inventories will decline and prices should rise. This will continue to lift the energy sector. SLCA produces sand for fracking oil wells. Sand prices have doubled over the last 12 months and are expected to go up another 25% by fall. Some analysts are predicting a sand shortage late this year and early 2018. That will lift prices even higher.

Earnings May 24th.

SLCA has solid support at $43 when oil was crashing throughout March. If we are not called we will sell a new call.

Buy write SLCA May $50 call, currently $47.84-$2.25, no stop loss.
Net gain if called $4.41.

Update 4/17/17: SLCA shares imploded over the last week along with the price of oil. On Wednesday alone, crude prices fell -$1.83 to knock -$2.34 off the price of SLCA. I am not the least bit worried about SLCA long term. Sand prices have doubled over the last six months and they could double again over the next year. The decline in SLCA shares was directly related to the fall in oil prices and that trend is about over. Refiners are back at work and crude inventories are going to start declining rapidly as they gear up for summer blend fuels. I would not have any problem selling a call or put at this level at this point on the calendar.

We do not have a stop loss on the SLCA covered call because of the calendar bias for oil prices to rise starting in late April through July.

No change in the position.

Update 5/3/17: Covered Call Update: Silica shares have collapsed. The stock has declined $11 in the last two weeks despite strong earnings and stronger guidance. Making the situation worse was a big earnings miss by Emerge Energy Services (EMES) reporting a loss of 38 cents compared to estimates for 34 cents. EMES misses estimates 58% of the time so a miss is not uncommon. However, it does impact the other two stocks in the sector, SLCA and HCLP. Emerge said total sand volumes rose 185% to 1,251,000 tons. We know from other reports that sand prices have doubled over the last six months and are expected to double again over the next six months.

Also, Dan Loeb's hedge fund Third Point is shorting the frac sand distributors. Third Point said there could be a shift from northern white sand to abundant in-basin brown sand. They warned there were new sand reserves being developed and there were significant reserves on the sidelines that had been deactivated during the slump. SLCA debunked all those excuses in their earnings report. They said frac sand revenue rose 161% YoY and 41% from Q4.

Comments from the conference call: Our comments last quarter and other industry capacity expansion announcements have created questions for some investors over the potential future supply and demand balance of sand proppants and the implications for pricing and other industry dynamics. Let me take a few minutes this morning to share some thoughts on how we see this unfolding and why we believe that the sand proppant market fundamentals should say strong for the foreseeable future.

We believe our industry will remain tight in the near future due to 3 main factors: First, our industry must add capacity to meet customers' needs. Our internal estimates and current sell side reports estimate industry sand proppant demand to be about 75 million tons here in 2017, growing to over 100 million tons in 2018, with some estimates as high as 147 million tons.

Our industry will be short capacity and we cannot let sand become the bottleneck for the completions industry. Second, oil sand is not fungible within that 100-million-plus tons of projected 2018 demand. Unlike many industrial products, there is a lot of friction in the sand market for a variety of reasons, including logistics, quality differences and mesh sizes. Therefore, we're on average to see 20% to 25% more total supply than demand before our markets come into balance. So for example, if 2018 demand is 110 million tons, that implies that supply and demand balance around 135 million tons of effective capacity. Today, even after estimated reactivations of idle capacity, our industry will only have approximately 90 million tons of effective capacity, thus leaving a 45-million-ton shortfall versus projected 2018 needs. And third, even all the likely capacity additions that are being talked about are not enough. We think there could be an additional 10 million to 15 million tons of brownfield capacity added in the next 12 to 18 months, including our own expansions and perhaps as much as 20 million to 25 million tons of greenfield capacity being added locally in the Permian. All of which will be needed, if current demand estimates prove accurate. Even if our estimated 35 million tons of potential brownfield and greenfield additions come online, the market will still be short.

Full transcript HERE

I cannot fix the current covered call. I am recommending we close it but call premiums are depressed and I am not going to recommend selling a new $40 call today because that would lock in our loss on the first rebound. We need to wait for the rebound to inflate premiums then sell a new call in the $45 range.

We cannot buy a put to protect against further declines. The put premiums are too expensive. You could close the position, take the loss now and then buy back in when the stock rebounds.

Close May $50 short call, entry $2.40, currently .04, +$2.36 gain.
Retain SLCA shares.

Margin Requirements:

There are several different formulas for determining margin requirements for naked put writing. These are normally broker specific and some can require larger margin requirements than others.

Here is the most common margin calculation for naked puts.

100% of the option premium + ((20% of the Underlying Market Value) - (OTM Value))

For simplicity of calculation simply use 20% of the underlying stock price and you will always be safe. ($25 stock * 20% = $5 margin)

Prices Quoted in Newsletter

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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 the 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.